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**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**
  Washington, D.C. 20549

FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended **January 31, 2007**

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number **0-18701**

POLYMET MINING CORP.(Formerly Fleck Resources Ltd.)(Exact name of Registrant as
specified in its charter)

**British Columbia, Canada**(Jurisdiction of incorporation or organization)

**Suite 1003  1177 West Hastings St., Vancouver,
British Columbia V6E 2K3**(Address of principal executive
offices)

Securities registered or to be registered pursuant to Section
12(b) of the Act: **Common Shares, without par value**
(Title of Class)

Securities registered or to be registered pursuant to Section
12(g) of the Act: **None**

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: **None**

Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close of the period
covered by the annual report. **121,378,876**

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. [  
] Yes  [X]  No

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If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 of 15(d) of the Securities Exchange Act of 1934. [   ]
Yes [X] No

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days. [X] Yes
[   ] No

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one)

Large accelerated filer [ 
 ]        Accelerated filer 
[X]          Non-accelerated filer
[   ]

Indicate by check mark which financial statement item the
registrant has elected to follow: [X]  Item
17        [   ]  Item 18

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
[   ] Yes [X]  No

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TABLE OF CONTENTS

|Part I                                                                                    
|------------------------------------------------------------------------------------------
|                                                                                          
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                             
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                           
|ITEM 3. KEY INFORMATION                                                                   
|ITEM 4. INFORMATION ON THE COMPANY                                                        
|ITEM 4A. UNRESOLVED STAFF COMMENTS                                                        
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                      
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                        
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                 
|ITEM 8. FINANCIAL INFORMATION                                                             
|ITEM 9. THE OFFER AND LISTING                                                             
|ITEM 10. ADDITIONAL INFORMATION                                                           
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
      MARKET RISK                  
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
      SECURITIES                     
|                                                                                          
|Part II                                                                                   
|                                                                                          
|ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES                                   
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY
      HOLDERS AND USE OF PROCEEDS
|ITEM 15. CONTROLS AND PROCEDURES                                                          
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                                
|ITEM 16B. CODE OF ETHICS                                                                  
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                          
|                                                                                          
|Part III                                                                                  
|                                                                                          
|ITEM 17. FINANCIAL STATEMENTS                                                             
|ITEM 18. FINANCIAL STATEMENTS                                                             
|ITEM 19. EXHIBITS                                                                         

Financial Statements:

Managements
      Responsibility for the Financial Statements
    F-1Report
      of Independent Registered Public Accounting Firm
    F-2Consolidated
      Balance Sheet
    F-3Consolidated
      Statements of Shareholders Equity
    F-4Consolidated
      Statements of Loss
    F-5Consolidated
      Statements of Cash Flows
    F-6Consolidated
      Schedules of Pre-Feasibility Costs
    F-7Notes
      to Consolidates Financial Statements
    F-8


i

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This Annual Report on Form 20-F contains statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
(the Exchange Act). These statements appear in a number of different places in
this Annual Report and can be identified by words such as "expects",
anticipates, "believes", "intends", "estimates", potential, possible,
"projects", "plans", and similar expressions, or statements that events,
conditions or results will, may, could, or should occur or be achieved
or their negatives or other comparable words. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements that may expressed or implied by
such forward-looking statements. The statements, including the statements
contained in Item 3D Risk Factors, Item 4B Business Overview, Item 5
Operating and Financial Review and Prospects and Item 11 Quantitative and
Qualitative Disclosures About Market Risk, are inherently subject to a variety
of risks and uncertainties that could cause actual results, performance or
achievements to differ significantly. Forward-looking statements include
statements regarding the outlook for our future operations, plans and timing for
our exploration and development programs, statements about future market
conditions, supply and demand conditions, forecasts of future costs and
expenditures, the outcome of legal proceedings, and other expectations,
intentions and plans that are not historical fact. You are cautioned that any
such forward-looking statements are not guarantees and may involve risks and
uncertainties. Our actual results may differ materially from those in the
forward-looking statements due to risks facing us or due to actual facts
differing from the assumptions underlying our predictions. Some of these risks
and assumptions include:

|- | general economic and business conditions, including
      changes in interest rates;                                            
|- | --------------------------------------------------------------------------------------------------------------------------------
|- | prices of natural resources, costs associated with
      mineral exploration and development, and other economic conditions;    
|- | natural phenomena;                                                                                                              
|- | actions by government authorities, including changes in
      government regulation;                                            
|- | uncertainties associated with legal proceedings;                                                                                
|- | changes in the resources market;                                                                                                
|- | future decisions by management in response to changing
      conditions;                                                        
|- | our ability to execute prospective business plans; and
      misjudgments in the course of preparing forward-looking statements.

We advise you that these cautionary remarks expressly qualify
in their entirety all forward-looking statements attributable to us or persons
acting on our behalf. We expressly disclaim any obligation to update publicly or
otherwise these statements, whether as a result of new information, future
events or otherwise except to the extent required by law. You should carefully
review the cautionary statements and risk factors contained in this and other
documents that we file from time to time with the Securities and Exchange
Commission (the SEC).

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS

Not required.

ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE

Not required.

1

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ITEM 3. KEY INFORMATION

A.        Selected
Financial Data

The following table presents selected financial information.
Our financial statements are prepared in accordance with Canadian Generally
Accepted Accounting Principles (GAAP); the application of which conforms in all
material respects for the periods presented with United States (US) GAAP,
except as disclosed in the footnotes to the financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements and other information included elsewhere in the Annual Report.

Selected Financial Data (US$ in 000s, except loss per share
and weighted average shares))

|                              | Year Ended               | Year                     | Year                     | Year                     | Year                     
|----------------------------- | ------------------------ | ------------------------ | ------------------------ | ------------------------ | -------------------------
|                              | 1/31/07                  | Ended                    | Ended                    | Ended                    | Ended                    
|                              |                          | 1/31/06                  | 1/31/05                  | 1/31/04                  | 1/31/03                  
|                              |                          | (as restated)            | (as restated)            |                          |                          
|Revenue                       | $              
        | $              
        | $              
        | $              
        | $              
        
|Income (loss) from Operations | $              
        | $              
        | $              
        | $              
        | $              
        
|Net Loss                      | $    (17,893)            | $     (15,929)           | $      (4,416)           | $        
      (147)    | $          (472)         
|US GAAP Net Loss              | $    (18,048)            | $     (15,976)           | $      (4,416)           | $        
      (147)    | $        
       (469)   
|Loss Per Share                | $        (0.16)          | $         (0.22)         | $        (0.09)          | $              
        | $        (0.01)          
|US GAAP Loss Per Share1       | $        (0.16)          | $         (0.22)         | $        (0.08)          | $              
        | $        (0.01)          
|Diluted Net Loss Per Share    | $        (0.16)          | $        
      (0.22)   | $        (0.09)          | $              
        | $        (0.01)          
|Dividends Per Share           | $              
        | $              
        | $              
        | $              
        | $              
        
|Weighted Average Shares1      | 114,754,213              | 73,484,490               | 51,946,290               | 32,452,000               | 32,658,000               
|Working Capital               | $         5,650          | $         9,070          | $         1,274          | $           
      424   | $           
      (73)  
|Total Assets                  | $       48,731           | $       26,034           | $         2,350          | $        
      1,025    | $             
       52 
|US GAAP Total Assets2         | $       48,731           | $       26,034           | $        
      2,350    | $        
      1,025    | $              
      52 
|Long-Term Debt                | $       11,853           | $        
      1,420    | $              
        | $              
        | $               
       
|Shareholders Equity          | $       29,938           | $       19,387           | $         2,019          | $           
      926   | $           
      (31)  
|US GAAP
      Shareholders   | $       29,736           | $       19,340           | $         2,019          | $           
      926   | $          
       (29)  
|Equity2                       |                          |                          |                          |                          |                          
|Capital Stock                 | $       72,923           | $       46,009           | $       19,027           | $       15,232           | $        14,183          
|                              |                          |                          |                          |                          |                          
|US GAAP Mineral Properties2   | $       37,854           | $      14,178            | $              
        | $              
        | $              
        

|1  | Under US GAAP, contingently-cancelable (and escrowed)
      common shares would not have been included in the calculation of the
      weighted average number of shares used to determine EPS. We have no such
      shares.                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|2  | Under US GAAP, exploration and development costs incurred
      on properties where mineralization has not been classified as proven and
      probable reserves under SEC rules are expensed as incurred. Accordingly,
      certain costs are capitalized for Canadian GAAP purposes, but expensed
      under US GAAP                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3. | During the year ended 31 January 2007, the Company
      re-examined its accounting for warrants and the share bonus program. As a
      result of this re-examination, the Company determined that share capital
      and contributed surplus were inappropriately measured and recognized
      during the year ended 31 January 2006. As a result, as at 31 January 2006,
      share capital was overstated by $3,653,000 and contributed surplus was
      understated by the same amount. Furthermore, the Company determined that
      consulting fees charged to the consolidated statement of loss for the

2

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year ended 31 January 2005 under the
  share bonus program were understated by $638,000.The Company has restated
  its consolidated financial statements for the years ended 31 January 2006 and
  2005 to reflect these items. As a result of the restatement, Loss per Share
  for the year ended 31 January 2005 increased by $0.02.

Unless otherwise indicated, all monetary amounts in this annual
report are expressed in United States dollars , the Companys reporting
currency.

D.        Risk
Factors

Factors that could cause our actual results to differ
materially from those described in the forward-looking statements contained in
this Annual report and other documents we file with the Securities and Exchange
Commission include the risks described below. You should also refer to the other
information in this Annual Report, including the financial statements and
accompanying notes thereto.

RISKS RELATING TO OUR BUSINESS

Our metals exploration and development efforts are highly
speculative in nature and may be unsuccessful.

As a development stage company, our work is speculative and
involves unique and greater risks than are generally associated with other
businesses.

The development of mineral deposits involves uncertainties,
which careful evaluation, experience, and knowledge cannot eliminate. Although
the discovery of an ore body may result in substantial rewards, few properties
explored are ultimately developed into producing mines. It is impossible to
ensure that the current development program we have planned will result in a
profitable commercial mining operation. Significant capital investment is
required to achieve commercial production from successful exploration
efforts.

We are subject to all of the
risks inherent in the mining industry, including, without limitation, the
following:

- Success in discovering and developing commercially viable quantities of
  minerals is the result of a number of factors, including the quality of
  management, the interpretation of geological data, the level of geological and
  technical expertise and the quality of land available for exploration;
- Exploration for minerals is highly speculative and involves substantial
  risks, even when conducted on properties known to contain significant
  quantities of mineralization, and most exploration projects do not result in
  the discovery of commercially mineable deposits of ore;
- Operations are subject to a variety of existing laws and regulations
  relating to exploration and development, permitting procedures, safety
  precautions, property reclamation, employee health and safety, air and water
  quality standards, pollution and other environmental protection controls, all
  of which are subject to change and are becoming more stringent and costly to
  comply with;
- A large number of factors beyond our control, including fluctuations in
  metal prices and production costs, inflation, the proximity and liquidity of
  precious metals and energy fuels markets and processing equipment, government
  regulations, including regulations relating to prices, taxes, royalties, land
  tenure, land use, importing and exporting of minerals and environmental
  protection, and other economic conditions, will affect the economic
  feasibility of mining;
- Substantial expenditures are required to construct mining and processing
  facilities; and

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- In the development stage of a mining operation, our mining activities
  could be subject to substantial operating risks and hazards, including metal
  bullion losses, environmental hazards, industrial accidents, labor disputes,
  encountering unusual or unexpected geologic formations or other geological or
  grade problems, encountering unanticipated ground or water conditions,
  cave-ins, pit-wall failures, flooding, rock falls, periodic interruptions due
  to inclement weather conditions or other unfavorable operating conditions and
  other acts of God. Some of these risks and hazards are not insurable or may be
  subject to exclusion or limitation in any coverage which we obtain or may not
  be insured due to economic considerations.

As a result of all of these factors, we may run out of money,
in which case we will have to suspend or cease operations.

We have had no production history and we do not know if we
will generate revenues in the future.

While we were incorporated in 1981, we have no history of
producing minerals. We have not developed or operated any mines, and we have no
operating history upon which an evaluation of our future success or failure can
be made. We currently have no mining operations of any kind. Our ability to
achieve and maintain profitable mining operations is dependent upon a number of
factors, including our ability to either attract a partner to operate, or to
successfully build and operate mines, processing plants and related
infrastructure ourselves.

We are subject to all the risks associated with establishing
new mining. We may not successfully establish mining operations or profitably
produce metals at any of our properties. As such, we do not know if we will ever
generate revenues.

We have a history of losses which we expect to continue into
the future. If we do not begin to generate revenues or find alternate sources of
capital, we will either have to suspend or cease operations.

As a development stage company with no holdings in any
producing mines, we continue to incur losses and expect to incur losses in the
future. As of January 31, 2007, we had an accumulated deficit of $52,599,000. We
may not be able to achieve or sustain profitability in the future. If we do not
begin to generate revenues or find alternate sources of capital, we may either
have to suspend or cease operations.

We may not be able to raise the funds necessary to develop
our mineral properties. If we are unable to raise such additional funds, we will
have to suspend or cease operations.

We will need to seek additional financing to complete our
development and construction of the NorthMet Project. Sources of such external
financing include future equity offerings, advance payments by potential
customers to secure long-term supply contracts, grants and low-cost debt from
certain state financial institutions, and commercial debt secured by the
NorthMet Project. The failure to obtain such additional financing could have a
material adverse effect on our results of operations and financial condition. We
may not be able to secure the financing necessary to sustain exploration and
development activities in the future. If we cannot raise the money necessary to
continue to explore and develop our property, we will have to suspend or cease
operations.

Our actual reserves and mineral resources may not conform to
our established estimates.

The figures for reserves and mineral resources stated in this
Annual Report are estimates and no assurances can be given that the anticipated
tonnages and grades will be achieved or that the indicated level of recovery
will be realized. Market fluctuations and the prices of metals may render
reserves and mineral resources uneconomic. Moreover, short-term operating
factors relating to the mineral deposits,

4

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such as the need for the orderly development of the deposits or
the processing of new or different grades of ore, may cause a mining operation
to be unprofitable in any particular accounting period.

There is no assurance that any of our mineral resources will
ever be classified as reserves under the disclosure standards of the SEC.

Item 4.D of this Annual Report discusses our mineral resources
in accordance with Canadian National Instrument 43-101. Resources are classified
as measured resources, indicated resources and inferred resources under NI
43-101. However, U.S. investors are cautioned that the SEC does not recognize
these resource classifications. There is no assurance that any of our mineral
resources will be converted into reserves under the disclosure standards of the
United States Securities and Exchange Commission.

Our future activities could be subject to environmental laws
and regulations which may have a materially adverse effect on our future
operations, in which case our operations could be suspended or terminated.

We, like other development stage companies doing business in
the United States and Canada, are subject to a variety of federal, provincial,
state and local statutes, rules and regulations designed to, among other things:

- protect the environment, including the quality of the air and water in the
  vicinity of exploration, development, and mining operations;
- remediate the environmental impacts of those exploration, development, and
  mining operations;
- protect and preserve wetlands and endangered species; and
- mitigate negative impacts on certain archeological and cultural sites.

We are required to obtain various governmental permits to
conduct exploration at our properties. Obtaining the necessary governmental
permits is often a complex and time-consuming process involving numerous U.S. or
Canadian federal, provincial, state, and local agencies. The duration and
success of each permitting effort is contingent upon many variables not within
our control. In the context of obtaining permits or approvals, we must comply
with known standards, existing laws, and regulations that may entail greater or
lesser costs and delays depending on the nature of the activity to be permitted
and the interpretation of the laws and regulations implemented by the permitting
authority. The failure to obtain certain permits or the adoption of more
stringent permitting requirements could have a material adverse effect on our
business, operations, and properties and we may be unable to proceed with our
exploration and development programs.

Federal legislation and implementing regulations adopted and
administered by the U.S. Environmental Protection Agency, Forest Service, Bureau
of Land Management, Fish and Wildlife Service, Mine Safety and Health
Administration, and other federal agencies, and legislation such as the Federal
Clean Water Act, Clean Air Act, National Environmental Policy Act, Endangered
Species Act, and Comprehensive Environmental Response, Compensation, and
Liability Act, have a direct bearing on U.S. exploration, development and mining
operations. Due to the uncertainties inherent in the permitting process, we
cannot be certain that we will be able to obtain required approvals for proposed
activities at any of our properties in a timely manner, or that our proposed
activities will be allowed at all.

The process of obtaining federal and local regulatory approvals
is increasingly cumbersome, time-consuming, and expensive, and the cost and
uncertainty associated with the permitting process could have a material adverse
effect on exploring, developing or mining our properties. Moreover, compliance
with statutory environmental quality requirements described above may require
significant capital outlays, significantly affect our earning power, or cause
material changes in our intended activities. Environmental

5

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standards imposed by federal, state, or local governments may
be changed or become more stringent in the future, which could materially and
adversely affect our proposed activities.

Because the price of metals fluctuate, if the prices of
metals in our ore body decrease below a specified level, it may no longer be
profitable to develop our NorthMet Project for those metals and we will cease
operations.

Prices of metals are determined by some of the following
factors:

- expectations for inflation;
- the strength of the United States dollar;
- global and regional supply and demand; and
- political and economic conditions and production costs in major metals
  producing regions of the world.

The aggregate effect of these factors on metals prices is
impossible for us to predict. In addition, the prices of metals are sometimes
subject to rapid short-term and/or prolonged changes because of speculative
activities. The current demand for and supply of various metals affect the
prices of copper, nickel, cobalt, platinum, palladium and gold, but not
necessarily in the same manner as current supply and demand affect the prices of
other commodities. The supply of these metals primarily consists of new
production from mining. If the prices of copper, nickel, cobalt, platinum,
palladium and gold are, for a substantial period, below our foreseeable costs of
production, we could cease operations.

We may not have adequate, if any, insurance coverage for
some business risks that could lead to economically harmful consequences to
us.

Our businesses are generally subject to a number of risks and
hazards, including:

- industrial accidents;
- railroad accidents;
- labor disputes;
- environmental hazards;
- electricity stoppages;
- equipment failure; and
- severe weather and other natural phenomena.

These occurrences could result in damage to, or destruction of,
mineral properties, production facilities, transportation facilities, or
equipment. They could also result in personal injury or death, environmental
damage, waste of resources or intermediate products, delays or interruption in
mining, production or transportation activities, monetary losses and possible
legal liability. The insurance we maintain against risks that are typical in our
business may not provide adequate coverage. Insurance against some risks
(including liabilities for environmental pollution or certain hazards or
interruption of certain business activities) may not be available at a
reasonable cost or at all. As a result, accidents or other negative developments
involving our mining, production or transportation facilities could have a
material adverse effect on our operations.

The mining industry is an intensely competitive industry,
and we may have difficulty effectively competing with other mining companies in
the future.

We face intense competition from other mining and producing
companies. In recent years, the mining industry has experienced significant
consolidation among some of our competitors, as a result these

6

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companies may be more diversified than us. We cannot assure you
that the result of current or further consolidation in the industry will not
adversely affect us.

In addition, because mines have limited lives we must
periodically seek to replace and expand our reserves by acquiring new
properties. Significant competition exists to acquire properties producing or
capable of producing copper, nickel and other metals.

We may experience delays, higher than expected costs,
difficulties in obtaining environmental permits and other obstacles when
implementing our capital expenditure projects.

We are investing heavily to further increase our production
capacity, logistics capabilities and to expand the scope of minerals we produce.
Our expansion and mining projects are subject to a number of risks that may make
them less successful than anticipated, including:

- we may encounter delays or higher than expected costs in obtaining the
  necessary equipment or services to build and operate our projects; and
- adverse mining conditions may delay and hamper our ability to produce the
  expected quantities of minerals.

If we are unable to successfully manage these risks, our growth
prospects and profitability may suffer.

RISKS RELATED TO THE OWNERSHIP OF OUR STOCK

We may experience volatility in our stock price.

Our common shares are listed for trading on the Toronto Stock
Exchange and on the American Stock Exchange. Our shareholders may be unable to
sell significant quantities of the common shares into the public trading markets
without a significant reduction in the price of the shares, if at all. The
market price of our common shares may be affected significantly by factors such
as changes in our operating results, the availability of funds, fluctuations in
the price of metals, the interest of investors, traders and others in
development stage public companies such as us and general market conditions. In
recent years the securities markets have experienced a high level of price and
volume volatility, and the market price of securities of many companies,
particularly small capitalization development companies similar to us, have
experienced wide fluctuations, which have not necessarily been related to the
operating performances, underlying asset values, or the future prospects of such
companies. There can be no assurance that future fluctuations in the price of
our shares will not occur.

A large number of shares will be eligible for future sale
and may depress our stock price.

Our shares that are eligible for future sale may have an
adverse effect on the price of our stock. As of January 31, 2007 there were
121,378,876 of our common shares outstanding. The average trading volume for the
three months prior to January 31, 2007 was approximately 51,000 shares per day
on the Toronto Stock Exchange and 133,000 shares per day on the American Stock
Exchange. Sales of substantial amounts of our common shares, or a perception
that such sales could occur, and the existence of options or warrants to
purchase common shares at prices that may be below the then current market price
of our common shares, could adversely affect the market price of our common
shares and could impair our ability to raise capital through the sale of our
equity securities.

Your ownership interest, voting power and the market price
of our common stock may decrease because we have issued, and may continue to
issue, a substantial number of securities convertible or exercisable into our
common stock.

We have issued common shares and options, and warrants to
purchase our common shares to satisfy our obligations and fund our operations
(see Item 5.A). In the future, because we currently do not have a source of
revenue, we will likely issue additional common shares, options, warrants,
preferred stock or other securities exercisable for or convertible into our
common shares to raise money for our continued operations or as non-cash
incentives to our own and our subsidiaries' directors, officers, insiders, and
key

7

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employees. If additional sales of equity occur, your ownership
interest and voting power in us will be diluted and the market price of our
common shares may decrease.

Under our rolling Stock Option Plan which was adopted on
October 3, 2003, approved by our shareholders on May 28, 2004, and accepted by
the TSX-Venture Exchange on June 29, 2004, options may be granted equal in
number to 10% of the issued and outstanding capital of the Company at the time
of grant of the stock option. As of January 31, 2007 we could issue options to
purchase up to 12,137,887 shares. Under our bonus share incentive plan (the
Bonus Plan) for our directors and key employees approved by the disinterested
shareholders at the Companys shareholders meeting held on May 28, 2004 we may
issue an additional 4,940,000 shares upon achieving certain milestones. On
November 4, 2004, the Company adopted, and the shareholders approved, a revised
Bonus Plan limiting the aggregate shares that may be issued under the Bonus Plan
and the Companys Amended Stock Option plan to not more than 20% of the
Companys issued and outstanding capital at the time of the issuance of options
and bonus shares.

Upon any issuances or exercise of options issued, the ownership
interests and voting power of existing shareholders may be further diluted.

We have a Shareholders Rights Plan Agreement and certain
employment and management contracts that contain provisions designed to
discourage a change of control.

A Shareholders Rights Plan between us and shareholders
effective as of December 3, 2003 and certain employment and management
agreements contain provisions that could discourage an acquisition or change of
control without our board of directors approval. Under the Shareholders Rights
Plan, if a shareholder individually or in concert with other shareholders
acquires 20% or more of our common shares outstanding without complying with the
Shareholder Rights Plan or without the approval of our Board of Directors, all
holders of record will have a right to one common share for each share owned.
Each right entitles the holder to a certain number of shares, as calculated
under the Rights Plan. We have also entered into agreements with certain key
employees and officers that contain severance provisions in the event of a
take-over bid. The Rights Plan and the preceding agreements may make it more
difficult for a third party to acquire control of us, even if such a change of
control is more beneficial to shareholders.

Because we believe that we will be classified as a passive
foreign investment company (a PFIC), U.S. holders of our common stock may be
subject to United States federal income tax consequences that are worse than
those that would apply if we were not a PFIC.

Because we believe that we will be classified as a passive
foreign investment company (a PFIC), U.S. holders of our common stock may be
subject to United States federal income tax consequences that are worse than
those that would apply if we were not a PFIC, such as ordinary income treatment
plus a charge in lieu of interest upon a sale or disposition of shares of our
common stock even if the shares were held as a capital asset. See Certain
United States Federal Income Tax Consequences.

8

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ITEM 4. INFORMATION ON THE COMPANY

A.        History and
Development of the Company

PolyMet Mining Corp. was incorporated in British Columbia,
Canada on March 4, 1981, under the name Fleck Resources Ltd., which we changed
to PolyMet Mining Corp. on June 10, 1998.

Our principal executive office is situated at Suite 1003 1177
West Hastings Street, Vancouver, B.C. V6E 2K3. Our phone number is (604)
669-4701. Our registered and records office is located at our legal counsels
offices situated at 2500  700 West Georgia Street, Vancouver, B.C. V7Y 1B3. Our
agent in the U.S. is Poly Met Mining, Inc. whose office is located at P.O. Box
475, County Road 666, Hoyt Lakes, Minnesota 55750-0475.

We are a reporting issuer in the following Canadian provinces:
Alberta, British Columbia, and Ontario. Our common shares have been listed on
the TSX Exchange (TSX) since February 1, 2007 and, formerly, on the TSX Venture
Exchange (TSX V) (formerly the Vancouver Stock Exchange) from April 13, 1984 to
January 31, 2007 under the symbol "POM" and since June 26, 2006 our common
shares have been listed on the American Stock Exchange (AMEX) under the symbol
PLM.

During the years ended January 31, 2007, 2006, and 2005 we
spent $13.015 million, $12.130 million and $1.623 million, respectively to
acquire property, and perform pre-feasibility work and perform work post
completion of our Definitive Feasibility Study primarily on our NorthMet Project
located in Minnesota, USA. In addition, during the years ended January 31, 2007,
2006, and 2005 we issued shares valued at $6.160 million, $7.564 million and
$0.229 million, respectively, in optioning and purchasing a nearby crushing and
grinding plant and associated infrastructure (the Erie Plant) and land.

All of these expenses were incurred at our NorthMet Project and
were funded from the proceeds of equity financings. With the exception of the
Erie Plant acquisition, until the completion of Definitive Feasibility Study,
these expenditures were expensed. Expenditures after the completion of the
Definitive Feasibility Study, have been capitalized.

B.        Business
Overview

We are a development stage company engaged in the exploration
and development of natural resource properties. Our primary mineral property is
the NorthMet Project, a polymetallic project located in northeastern Minnesota,
USA.

In the years ended January 31, 2007, 2006 and 2005, we
conducted exploration, development and acquisition activities only and did not
conduct any operations that generated revenues. Thus, we rely principally on
equity financings to fund our projects and expenditures.

Since 2003, we have focused on commencing commercial production
on our NorthMet Project. We have focused our efforts on four main areas:

| | 1. | Acquiring a large processing facility and associated
      infrastructure located approximately six miles west of our NorthMet
      deposit.Under an agreement dated February 14, 2004, we paid Cliffs
      Erie LLC, a subsidiary of Cleveland Cliffs, Inc. of Cleveland, Ohio
      (Cliffs), $500,000 and 1,000,000 of our common shares to acquire the
      exclusive option to purchase the Erie Plant, including certain property,
      plant and equipment from Cliffs at any time until June 30, 2006 subject to
      the payment of an additional $5.0 million within six months of completion
      of the Definitive Feasibility Study. During the fiscal year ended January
      31, 2006, we and Cliffs agreed to expand the scope of the assets to be
      acquired from Cliffs and on November 15, 2005, we exercised this revised
      option by paying Cliffs an additional 6,200,547 of our common shares, $1.0
      million in cash, and issuing a promissory note to Cliffs in the principal
      face amount of$2.4 million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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On December 20, 2006 we acquired
extensive additional infrastructure associated with our NorthMet Project from
Cliffs. We obtained a railroad connection linking the mine development site and
the existing crushing and grinding plant that was acquired from Cliffs in 2005
as well as a 120-railcar fleet, locomotive fueling and maintenance facilities,
water rights and pipelines, large administrative offices on site and
approximately 6,000 acres to the east and west of the mine development site and
contiguous to our existing tailing facilities.

The purchase price for this additional
infrastructure consisted of 2 million of our common shares and US$15 million in
cash to be issued and paid in four tranches:

| | • | 2 million of our common shares;                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | US$1 million in cash was paid at closing;                                                                                                                                                                                                                                                                            
| | • | US$7 million in cash is payable in quarterly installments
      of US$250,000 commencing December 31, 2006 with the balance payable upon
      receipt of commercial financing. Interest on the outstanding amount be
      payable quarterly from December 31, 2006 at the Wall Street Journal Prime
      Rate; and
| | • | US$7 million in cash is payable in quarterly installments
      of US$250,000 commencing on December 31, 2009. Interest will begin to
      accrue on the outstanding amount beginning on December 31, 2009 after
      which it will be payable quarterly at the Wall Street Journal Prime Rate.                    

| | 2. | Environmental permitting.To commence commercial
      production at NorthMet, various regulatory approvals are needed. Thus, on
      January 11, 2005, we submitted initial documentation to the Minnesota
      Department of Natural Resources (the Minnesota DNR), the United States
      Forest Service (the USFS) and the United States Army Corps of Engineers
      (the USACE). These documents and data provided the information required
      for preparation of a Draft Scoping Environmental Assessment Worksheet (the
      EAW).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On March 14, 2005, we reached an agreement with the
      Minnesota DNR, USFS and USACE who agreed to cooperate in preparing a
      single Environmental Impact Statement (the EIS) under state guidelines
      issued by the Minnesota DNR.                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On October 25, 2005, the Minnesota DNR issued the Final
      Scoping EAW and related Final Scoping Decision after a period of public
      review and comment. These documents define the scope of the EIS and were
      used to develop a request for proposal (the RFP) for third-party
      preparation of an EIS that will involve public participation. On April 3,
      2006 the Minnesota DNR selected the independent EIS contractor.                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | On May 16, 2007, the Minnesota DNR announced that the
      draft Environmental Impact Statement (EIS) is anticipated to be available
      by early November 2007. Once the draft EIS is published, non-government
      organizations, government agencies and the public will have an opportunity
      to comment. The final EIS will incorporate analysis and appropriate
      responses to comments, a process that can take several months.                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 3. | Engineering and feasibility.We retained Bateman
      Engineering Pty. of Brisbane, Australia (Bateman) as the coordinating
      consultant to complete a review of the Scoping Study for the NorthMet
      Project and prepare a Definitive Feasibility Study (the DFS). On
      September 25, 2006 we reported that the Definitive Feasibility Study (DFS)
      prepared by Bateman confirmed the economic and technical viability of our
      NorthMet Project.                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Bateman was responsible for:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

10

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| | • | Mine planning and scheduling of ore and waste, and
| | - | --------------------------------------------------
| | • | Assessing marketing of the metals to be mined.    

| |    | Bateman has sub-contracted some of the work to other
      specialist companies. In 2005, we received reports from Hellmann &
      Schofield, a geologic consulting firm, and Australian Mine Design
      Development Pty Ltd, a mine engineering firm, both of which are based in
      Australia, that provided a review of the geologic and mine model and mine
      planning.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | As part of the data assembly that was used to support the
      DFS, we conducted an extensive program of drilling including infill and
      geotechnical core drilling that enhanced the quality of our geologic
      analysis and understanding and has provided us with material that has been
      used in pilot plant testing to optimize the process design.               
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Since completion of the DFS we have conducted an infill
      drill program comprising approximately 19,000 feet in 47 holes designed to
      improve the classification of reserves.                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| | 4. | DFS Overview. The DFS established several milestones
      for the NorthMet Project:                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | i)                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | ii)                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | iii)                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                     
| |    | iv)                                                                                                                                                                                                                                                                                                                                                                                 

11

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| |    | of Minnesota has engaged Environmental Resource
      Management and Knight Piesold to complete the Environmental Impact
      Statement (EIS). The State has announced that it expects the draft EIS to
      be published by early November 2007.                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | v) | Capital Costs: Initial direct capital costs, including
      contingency, for this enlarged project are estimated at $312.1 million.
      Indirect costs including engineering and construction management, project
      insurance, the anticipated cost of environmental insurance related to
      reclamation and closure guarantees, and other owners costs are estimated
      at $67.5 million, for a total capital cost of $379.6 million. Sustaining
      capital is projected at $71.8 million for the first 20 years.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Approximately $52 million  or an increase of 22%  of
      the $140 million increase in initial direct costs compared with previous
      estimate in 2004 is related to inflation. The economic mine model also
      includes a total working capital requirement that peaks at approximately
      $22.0 million in full-scale production.                                                                                                                                                                                   

| | 5. | Financing and corporate development.During the
      fiscal year ended January 31, 2007, we received approximately $18.7
      million from the exercise of stock purchase warrants and stock options.
      Subsequent to the fiscal year end, we obtained approximately $41 million
      from a private placement financing of 15 million units, at US$2.75 per
      unit, with each unit comprising one common share and one-half of one
      warrant. Each, whole warrant is exercisable into a common share at a price
      of US$4.00 at any time until October 13, 2008 subject to an early trigger
      if the 20- day volume weighted average price of the common shares is
      US$6.00 or more.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have also continued to strengthen our management team at
both the corporate level and at our facilities in Minnesota. During the period
ended January 31, 2007, we appointed Joe Scipioni as Vice President  Operations
and Construction and Niall Moore as Corporate Secretary and Group Controller.
Subsequent to the fiscal year end we appointed William D. Corneliuson to the
Board, and we promoted Joe Scipioni to the position of Chief Operating Officer
and appointed Phillip Brodie-Hall as Group Vice President  Construction and
Andy Clark as Area Manager  Facilities. We also reported that Warren Hudelson
had decided to retire from his position as Executive Vice President and Director
of the US subsidiary, Poly Met Mining, Inc. but he will continue as an advisor
to the Company in connection with permitting.

C.        Organizational
Structure

We have two wholly owned subsidiaries: (1) Fleck Minerals Inc.,
incorporated in Ontario, Canada, and (2) Poly Met Mining, Inc., incorporated in
Minnesota, USA.

D.        Property, Plant
and Equipment

Plant

Our Erie Plant comprises a large crushing, grinding and milling
facility that was built by LTV Steel in the mid-1950s and processed low grade
iron ore known as taconite that was transported to the facility by railroad from
local mines. Since the mid-1960s the plant was operated by Cliffs on behalf of
LTV Steel and processed approximately 100,000 tons per day of taconite ore. The
plant was shut down in 2000 when LTV Steel filed for bankruptcy protection since
when it has been maintained initially by Cliffs and, since November 15, 2005, by
us. The plant did not operate during the period ended January 31, 2007. The
plant is located approximately six miles west of our NorthMet deposit, about
five miles north-northwest of the town of Hoyt Lakes, itself located about
fifteen miles west of Virginia, Minnesota. The plant covers approximately 6,400
acres, or approximately 10.0 square miles.

On December 20, 2006 we acquired from Cliffs a railroad
connection linking the mine development site and the Erie Plant as well as a
120-railcar fleet, locomotive fueling and maintenance facilities, water rights

12

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and pipelines, large administrative offices on site and
approximately 6,000 acres to the east and west of and contiguous to PolyMet's
existing tailing facilities.

Before 2000, Cliffs had undertaken numerous programs to update
and modernize control systems in the Erie Plant. The plant is generally in good
physical condition and was operating at or near full capacity prior to its
closure. We have examined the plant in detail and have restarted certain pieces
of equipment and believe it to be serviceable.

Equipment

All of our material fixed assets are located at the Erie Plant
and include: two rail dump pockets each with a 60 gyratory crusher, 3 x
seven-foot standard cone crushers, 6 x seven-foot short-head crushers, 30 mill
circuits each comprising one 12x 14' rod mill and one 12x 14' ball mill, 3 x
12'x 24' regrind mills, flotation cells, maintenance facilities and spare parts,
extensive conveyors, feeders, bins, auxiliary facilities and offices,
established infrastructure including a 250 MVA high voltage electrical
substation, water supply, roads, tailings basins, 120 rail cars, locomotive
fueling and maintenance facilities, water pipelines, and large administrative
offices.

We are currently in the environmental process to obtain all
necessary permits required to operate the Erie Plant and all the material fixed
assets, as listed above.

Property - NorthMet Project, Minnesota, USA

(a)        History

The NorthMet Project is located immediately south of the
historic Mesabi Iron Range in northeastern Minnesota. Mining in the Iron Range
dates back to the 1850s when high grade iron ore known as hematite was first
mined commercially. During the 1940s and 50s, with reserves of hematite
dwindling, the iron industry began to focus on taconite, a lower-grade iron ore.
Six large crushing, grinding, milling facilities were built by various iron and
steel companies to process the taconite, including the Erie Plant that we
acquired in November 2005.

Following the discovery of copper and nickel in the 1940s, in
the 1960s United States Steel Corporation (US Steel) staked ground at what was
then called Dunka Road, now called NorthMet. At that time, the market did not
recognize platinum group metals (PGMs) or gold and the market for PGMs was small
because there was no reliable method to assay low grades of these metals. US
Steel investigated the deposit as a high-grade, underground copper-nickel
resource, but considered it to be uneconomic based on its inability to produce
separate, clean nickel and copper concentrates with the metallurgical processes
available at that time.

In 1987, the Minnesota Natural Resources Research Institute
(NRRI) published data suggesting that a large resource of platinum group
minerals or PGMs may be in the base of the Duluth Complex. In 1989, we acquired
a 20-year renewable mining lease over the property from US Steel and commenced
an investigation into the potential for mining and recovery of copper, nickel,
and PGMs. We conducted a program to re-assay the previous drill core for PGMs.
We entered into joint venture agreements with Nerco and Argosy Mining, which
assisted in identifying and quantifying potential PGM values. However, the
challenge of producing separate concentrates of saleable copper and nickel
remained.

In the mid-90s, we began investigating the use of
hydrometallurgical processes, including bio-leaching and pressure oxidation. In
1998 we focused on a hydrometallurgical extractive technology, which led to the
development of the PlatSol Process. This process uses autoclaves, which are
high temperature, high pressure, oxygen-enriched vessels, to oxidize the
sulfidic ores and leach the metals therein. This technology has been used
commercially in the copper, nickel and precious metals industries since the
1980s.

13

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In July 2000, we entered into a joint venture arrangement with
North Limited (North), a major Australian mining company, to advance the
NorthMet Project to commercial production. Under the joint venture arrangement,
North had the opportunity to earn an 87.5% interest in the PolyMet Project by
producing a feasibility study and funding 100% of the total capital costs to
develop the project.

In August 2000, Rio Tinto Limited (Rio Tinto) completed an
on-market takeover of North. Subsequently, Rio Tinto decided not to proceed with
the NorthMet Project and we exercised our 30-day pre-emptive right, under a
change of control clause, to terminate the joint venture arrangement. As a
result, we regained a 100% interest in the NorthMet Project.

Following completion of the metallurgical pilot plant work in
November 2000, we commissioned a pre-feasibility study on the project that was
completed in April 2001. The pre-feasibility study included a 50,000 metric
tonne per day (55,000 short tpd) operation and assumed the construction of a
new, stand-alone processing plant including metal smelters to produce copper,
nickel and cobalt metals on site. The study found the economics of the NorthMet
Project were unacceptably low owing to the capital cost of building a new plant
facility combined with low metal prices prevailing at that time. No further work
was done until March 2003, when a new management team took over our company and
commenced a detailed review of the project.

The new management team believed that the Erie Plant had the
potential to substantially reduce the capital cost and to simplify the
permitting process which could improve the project economics.

As of January 31, 2007, we have expended $38.166 million
primarily on the acquisition of the Erie Plant and related infrastructure.
During the three years ended January 31, 2007 we expended and additional $21.587
million on pre-feasibility work at the deposit and plant. Since inception, we
have a cumulative deficit of $52.599 million, much of which has been incurred
directly and indirectly in connection with our NorthMet Project. These
expenditures supported drilling, sampling, assaying, environmental,
metallurgical testing, and the pre-feasibility studies.

The following diagram illustrates the location of the NorthMet
  Project.

Figure No. 1 
  NorthMet Project Map

|
|

14

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(b)       
Location/Access/Climate

The NorthMet Project land position covers a total of 16,600
acres or 25.9 square miles comprising two areas: the NorthMet mine site totaling
4,200 acres or 6.5 square miles of patented mineral rights and the Erie plant
site totaling 12,400 acres of freehold land located approximately six miles west
of the mine site. The property is located in St. Louis County in the Mesabi
Range District about 60 miles north of Duluth, Minnesota. The Project is easily
accessible via state and county roads. The surfaced Hoyt Road links the plant to
the town of Hoyt Lakes, itself approximately fifteen miles east of Virginia,
Minnesota which is located on State Highway 53. The mine site is accessible by
an all-season gravel road from the plant site and a private railroad crosses the
property immediately south of the deposit and runs to the plant site. There is a
high-voltage power line supplied by Minnesota Power that supplies the plant site
and there is ready access to industrial electric power at the mine site. Two
other railway lines are located within ten miles and connect with three ports on
Lake Superior and into the US national and Trans-Canadian railroad system.

The northern Minnesota climate is continental, characterized by
wide variations in temperature. The temperature in the nearby town of Babbit
averages -14oC (7oF) in January and 19oC (66oF) in July. The average annual
precipitation is 28 inches with approximately 30% during the months from
November to April and 70% from May through October.

(c)        Claims and
ownership

(i)        NorthMet Lease

Pursuant to an agreement dated January 4, 1989, subsequently
amended and assigned, we lease certain lands in covering 4,162 acres or 6.5
square miles located in St. Louis County, Minnesota, known as the NorthMet
Project, from RGGS Land & Minerals Ltd., L.P (RGGS). During the year ended
January 31, 2005, US Steel assigned the lease to RGGS. The current term of the
renewable lease is 20 years and calls for future annual lease payments of
$150,000 in January 2007 through 2009.

We can, at our option, terminate the lease at any time by
providing written notice to RGGS at least 90 days prior to the effective
termination date or can indefinitely extend the 20 year term by continuing to
making the annual lease payment of $150,000 on each successive anniversary date.

The lease payments are considered advance royalty payments and
will be deducted from future production royalties payable to RGGS, which range
from 3% to 5% based on the net smelter return that we receive. Our recovery of
the advance royalty payments is subject to the lessor receiving an amount not
less than the amount of the annual lease payment due for that year.

(ii)        The Erie Plant

By a Memorandum of Understanding dated December 5, 2003 and an
option agreement dated February 14, 2004, we obtained an option (Cliffs
Option) to acquire certain property, plant, and equipment (Cliffs Assets)
from Cleveland Cliffs of Cleveland, Ohio (Cliffs) located near our NorthMet
Project. As consideration for the exclusive Cliffs Option, we paid $500,000
prior to January 31, 2004 and issued to Cliffs 1,000,000 common shares on March
30, 2004, valued at $229,320 to maintain our exclusive rights until June 30,
2006. The option gave us exclusive rights until June 30, 2006 subject to the
payment of an additional $5 million to Cliffs with six months of completion of a
bankable feasibility study.

On September 15, 2005 we reached an agreement with Cliffs on
the terms for the early exercise of our option to acquire 100% ownership of
large portions of the former LTV Steel Mining Company ore processing plant in
northeastern Minnesota (the Asset Purchase Agreement).

On November 15, 2005, we consummated the Asset Purchase
Agreement and completed the acquisition thereunder. The property, plant, and
equipment assets we now own include land, crushing, milling, and

15

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flotation capacity, complete spare parts, plant site buildings,
real estate, tailings impoundments and mine work shops, as well as access to
extensive mining infrastructure.

The consideration for the Asset Purchase Agreement was $1.0
million in cash, the issuance of 6,200,547 of our common shares (issued on
November 15, 2005, at fair market value of $7,564,444), and a note in the
aggregate principal amount of $2.4 million plus interest at 4% a year that will
be paid in quarterly installments of $250,000 commencing March 31, 2006. As of
March 31, 2007 the first five payments have been made. As of January 31, 2007,
$169,000 of accrued interest has been capitalized as part of the cost of the
NorthMet Project assets.

On September 14, 2006, we announced that our wholly-owned US
  subsidiary Poly Met Mining, Inc. had entered into an agreement with Cliffs whereby
  we would acquired property and associated rights (Cliffs II.) We closed the
  transaction on December 20, 2006. The transaction provides us with a railroad
  connection linking the mine development site and the existing crushing and the
  Erie Plants well as a 120-railcar fleet, locomotive fueling and maintenance
  facilities, water rights and pipelines, large administrative offices on site
  and approximately 6,000 acres to the east and west of and contiguous to our
  existing tailing facilities.

The purchase price for this additional infrastructure consisted
of 2 million of our common shares and US$15 million in cash to be issued and
paid in four tranches:

- 2 million shares of PolyMet;
- US$1 million in cash paid at closing;
- US$7 million in cash payable in quarterly installments of US$250,000
  commencing December 31, 2006 with the balance payable upon receipt of
  commercial finance. Interest will be payable quarterly from December 31, 2006
  at the Wall Street Journal Prime Rate; and
- US$7 million payable in quarterly installments of US$250,000 commencing on
  December 31, 2009. There will be no interest accrued until December 31, 2009
  after which it will be payable quarterly at the Wall Street Journal Prime
  Rate.

PolyMet also assumed certain liabilities associated with the
property.

As of March 31, 2007 we had paid the first two quarterly
installments of the loan plus interest.

The Erie PlantAs set forth under the Asset Purchase
Agreement, we have assumed certain ongoing site-related environmental and
reclamation obligations of Cliffs in connection with the Erie Plant. Once we
obtain our permit to mine and Cliffs is released from its obligations by certain
state agencies, we will be directly obligated to comply with applicable
environmental and reclamation obligations. Prior to Cliffs acquisition of the
plant from LTV Steel and prior to our acquisition of the plant from Cliffs, both
Cliffs and we undertook environmental assessments and concluded that there were
no material liabilities other than the ultimate closure and reclamation of the
site. Until operating permits are granted to us, Cliffs remains the named party
of record for such obligations although, as part of the Asset Purchase
Agreement, we have indemnified Cliffs for such costs. As of January 31, 2007 we
estimate that liability to be approximately $23.4 million and, based on the
expected timing of such payments, our cost of capital, and anticipated inflation
rates, we made a provision of $3.4 million in our financial statements at that
date.

Under the terms of the agreement Cliffs will have the right to
participate on a pro-rata based on their ownership of 6.7% of our outstanding
common shares in future cash equity financings. We have a 20 business day first
right to either buy or place some or all of our shares owned by Cliffs should
Cliffs decide to sell.

As of January 31, 2007, we do not have any producing mines,
thus, we are not yet utilizing the Erie Plant.

The Erie Plant comprises a large crushing, grinding and million
facility that was built by LTV Steel in the mid-1950s and processed low grade
iron ore known as taconite that was transported to the facility by railroad from
local mines. Since the mid-1960s the plant was operated by Cliffs on behalf of
LTV Steel

16

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and processed approximately 100,000 tons per day of taconite
ore. The plant was shut down in 2000 when LTV Steel filed for bankruptcy
protection since when it has been maintained initially by Cliffs and, since
November 15, 2005, by us. The plant did not operate during the period ended
January 31, 2007.

The plant is located approximately six miles west of our
NorthMet deposit, about five miles north-northwest of the town of Hoyt Lakes,
itself located about fifteen miles west of Virginia, Minnesota. The plant covers
approximately 12,400 acres, or approximately 19.4 square miles, and is powered
by electricity from local power lines.

The total plant facilities include two rail dump pockets, each
with a 60 gyratory crusher, 3 x seven-foot standard cone crushers, 6 x
seven-foot short-head crushers, 30 mill circuits each comprising one 12x 14'
rod mill and one 12x 14' ball mill, 3 x 12'x 24' regrind mills, flotation
cells, maintenance facilities and spare parts, extensive conveyors, feeders,
bins, auxiliary facilities and offices, established infrastructure including a
250 MVA high voltage electrical substation, water supply, roads, tailings basins
and rail facilities.

With the completion of Cliffs II, we also own a 120-railcar
fleet, locomotive fueling and maintenance facilities, water rights and
pipelines, and large administrative offices on site.

Until the plant was closed in 2000, Cliffs had undertaken
numerous programs to update and modernize control systems. The plant is
generally in good physical condition and was operating at or near full capacity
prior to its closure. We have examined the plant in detail and have restarted
certain pieces of equipment and believe it to be serviceable.

We plan to use less than one third of the historic productive
capacity to crush and grind material that we expect to mine from the NorthMet
deposit. We intend to construct new facilities to recover copper metal, nickel
and cobalt concentrates, and precious metal precipitates. These new facilities
replace the equivalent facilities used historically to recover iron from the
taconite, which are not applicable to our anticipated metal products.

(d)        Permitting and
Environmental

The environmental review process in the State of Minnesota is
reasonably well-defined. Various permits from state and federal authorities will
be necessary. An Environmental Impact Statement will be required, with the
Minnesota Department of National Resources as the lead agency.

Two winter wildlife studies, wetland and plant species
evaluations, and preliminary geohydrology and rock geochemistry studies were
completed in 1999, 2000, and 2001. These environmental studies are important to
future permitting efforts.

We commenced the permitting process in early 2004. As of
January 31, 2007, we had spent approximately $6.5 million on environmental and
permitting activities and we anticipate spending an additional $5.0 million to
complete this work.

(e)        History of
Exploration

Prospectors first discovered copper and nickel near Ely,
Minnesota about 20 miles north of NorthMet in the 1940s. Subsequently, the Bear
Creek Mining Company conducted a regional exploration program resulting in the
discovery of the Babbitt deposit (northeast of NorthMet). US Steel staked an
exploration program in the Duluth Complex in the late 1960s and over the next
few years drilled 112 core holes into the NorthMet property (then called Dunka
Road).

In 1987, the Minnesota NRRI published data suggesting the
presence of a large resource of PGMs in the base of the Duluth Complex and, in
1989 we commenced an investigation into the potential for mining

17

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and recovery of copper, nickel, and PGMs. We re-assayed pulps
and rejects from the previous US Steel drilling to obtain data on the PGMs.

In the early 1990s we leased the NorthMet property first to
Nerco Minerals and later to Argosy Mining which continued to delineate the
contained PGMs and drilled a few additional core holes.

From 1998 to present, we have conducted four drilling programs
totaling 243 holes for approximately 146,000 ft. of core and reverse circulation
drilling. The latest campaign comprising 47 holes totaling 19,000 feet was
completed subsequent to the fiscal year ended January 31, 2007 and, combined
with earlier drilling, brings the total to 357 diamond and reverse circulation
holes aggregating to approximately 280,000 feet. In addition, we have
meticulously recompiled all prior work started by US Steel in 1969.

Cautionary Note to United States Investors Concerning
      Estimates of Measured, Indicated and Inferred Resources
      This section uses the terms measured resources, indicated
      resources, and inferred resources. We advise United States investors
      that while these terms are recognized and required by Canadian regulations
      (under National Instrument 43-101 Standards of Disclosure for Mineral
      Projects), the SEC does not recognize them. United States investors are
      cautioned not to assume that any part or all of the mineral deposits in
      these categories will ever be converted to reserves.In
      addition, inferred resources have a great amount of uncertainty as to
      their existence and economic and legal feasibility. It cannot be assumed
      that all or any part of an Inferred Mineral Resource will ever be upgraded
      to a higher category. Under Canadian Rules, estimates of Inferred Mineral
      Resources may not form the basis of Feasibility or Pre-Feasibility
      Studies, or economic studies except for a Preliminary Assessment as
      defined under 43-101. United States investors are cautioned not to
      assume that part or all of an inferred resource exists, or is
      economically or legally mineable. Important Notes and
      Assumptions Throughout.
      1. **The terms Mineral Resources and Reserves as used herein conform to the
      definitions** contained in National Instrument 43-101.
      2. **Reserves are contained within the envelope of Measured & Indicated
      Mineral Resource.** Mineral Resources are not Reserves and do
      not have demonstrated economic viability.
      3.Mineral Resources and Reserves have been calculated using the
      following metal prices: Copper - $1.25/lb, Nickel - $5.60 per
      pound, Cobalt - $15.25/lb, Palladium - $210 per ounce, Platinum -
      $800 per ounce and Gold - $400 per ounce.
      4.Base Case economics for the purpose of the Technical Report to NI
      43-101standards are the weighted average of the three-year trailing
      (60%) and two-year forward (40%) market prices using July 31, 2006
      as a reference for the three-year trailing price and average forward
      prices during July 2006 for forward prices. Specifically, these
      prices are: Copper - $2.25/lb, Nickel - $7.80 per pound, Cobalt -
      $16.34/lb, Palladium - $274 per ounce, Platinum - $1,040 per ounce and
      Gold - $540 per ounce.
      5.
      The copper equivalent grade is calculated by multiplying the grade of
      each metal by the metal price (in the same units) used in reserve
      and resource modeling (see note 3) and dividing the product by the
      copper price.
      6. **The Net Metal Value (NMV) is calculated by summing the product of the
      grade of each metal,** the metal price (in the same units) used
      in reserve and resource modeling (see note 3), the expected metal
      recovery, and the expected payment terms.


Mineral Resources and Reserves

The NorthMet deposit has been extensively drilled during
several campaigns starting with US Steel Corporations work in the late 1960s
and culminating in PolyMets 2005 program. Within the overall

18

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mineralized envelope, PolyMet has defined measured and
indicated mineral resources above the 500-foot elevation (approximately 1,060
feet below surface.)

In addition to inferred mineral resources, the resource
envelope remains open along strike and down dip. The DFS observes that, in
addition to the measured, indicated and inferred mineral resources, there is
another 75-100 million tons of potential material above the 500-foot elevation
captured by extending the area of influence assumed for each sample and that
historic drilling as much as 2,500 feet below surface (nearly 1,500 feet below
the 500-foot elevation) has encountered mineralization with a grade comparable
to or better than nearer-surface resources.

Within the mineral resource, PolyMet has established an initial
proven and probable reserve.

July 2006 Mineral Resource and Reserve Estimate

Category
      Short Tons(millions)
    **Copper**  (%)
    Nickel(%)
    Cobalt (%)
    Palladium ppb
    **Platinum**
      ppb
    Gold ppb
    Total
      precious metals (oz/st)
    Net Metal
      Value (US$/st)


Mineral Resources

Measured (M)
    133.7
    0.298
    0.087
    0.007
    269
    67
    35
    0.011
    15.11Indicated (I)
    288.4
    0.266
    0.078
    0.007
    231
    66
    33
    0.010
    13.54M+I
    422.1
    0.276
    0.081
    0.007
    243
    66
    34
    0.010
    14.04Inferred
    120.6
    0.247
    0.074
    0.007
    243
    65
    33
    0.009
    12.72


Reserves

Proven
    80.4
    0.32
    0.09
    0.0076
    292
    75
    39
    0.012
    16.60Probable
    101.3
    0.3
    0.08
    0.0074
    268
    79
    38
    0.011
    15.45Total
    181.7
    0.31
    0.09
    0.0075
    279
    77
    39
    0.012
    16.34


**f)****Geology and Mineralization**

The geology of northeastern Minnesota is predominantly
Precambrian in age. Approximately 1.1 billion years ago, intra-continental
rifting resulted in mafic volcanics and associated intrusions along a portion of
the Midcontinent Rift System, which extends through the Lake Superior Region to
Kansas. The Midcontinent Rift consists of three parts: thick lava flows,
intrusive rock and overlying sedimentary rock. There are three major intrusive
complexes: the Coldwell Complex of Ontario, the Mellen Complex along the south
shore of Lake Superior and the Duluth complex along the north shore.

The Duluth Complex hosts the NorthMet mineralization. The
Complex extends in an arcuate belt from Duluth to the northeastern tip of
Minnesota. Emplacement of the intrusion appears to have been along a system of
northeast-trending normal faults that form half-grabens stepping down to the
southeast. The magma was intruded as sheet-like bodies along the contact between
the Early Proterozoic sedimentary rocks of the Animikie Group and the basaltic
lava flows of the North Shore Volcanic Group.

The Duluth Complex is represented by the Partridge River
Intrusion which overlays the Biwabik Iron Formation  the Partridge River
Intrusion can be sub-divided into seven lithologic units:

- Unit 7 and Unit 6  texturally homogeneous plagioclase-rich troctolite,
  each with a persistent ultramafic base. Unit 6 contains a mineralized horizon
  in the southwestern portion of NorthMet which is relatively enriched in PGMs
  relative to copper. Units 6 and 7 are each about 400 ft. thick and form the
  shallowest units.
- Unit 5  coarse grained anorthositic troctolite (300 ft.) grading down to
  Unit 4.
- Unit 4  homogeneous augite troctolite and troctolite, with a less
  persistent ultramafic horizon. The contact between 4 and 5 is difficult to
  establish and the two units may actually be a single unit.

19

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- Unit 3  the most easily recognized unit because of its mottled appearance
  due to olivine oikocrysts. It is fine grained troctolitic anorthosite to
  anorthositic troctolite. Average thickness is 250 ft. but locally can be up to
  500 ft.
- Unit 2  homogeneous troctolite with abundant ultramafic units and a
  generally persistent basal ultramafic. This unit shows the most variation in
  thickness and may be absent entirely.
- Unit 1  the most heterogeneous unit, both texturally and compositionally.
  Grain size is generally coarser at the top of the unit and fines downward. The
  unit contains abundant inclusions of the footwall rock and is noritic towards
  the base. This is the main sulfide bearing unit. Two ultramafic layers are
  generally present. Unit 1 is probably the result of multiple pulses of magma
  injection. Average thickness is about 450 ft.

The general trend of the sedimentary rocks at the NorthMet
deposit is to strike to the east-northeast and to dip to the southeast about
15-25°, and the Partridge River Intrusion appears to follow this general trend.
Two east-northeast trending faults have been identified through the construction
of cross sections. The faults are steeply dipping and normal in character;
offset ranges from negligible to 600 ft. down to the southeast. A third major
fault has been identified in the western portion of the area and can be traced
to the Northshore Mine in the north. Movement on this fault is down to the east.
Numerous other faults can be identified in the cross-sections, but offset is
small and they lack continuity. The cross-sectional view shows considerable
offset in the more southerly fault, and less offset on the more northerly fault.
This relationship can vary over the strike of the deposit.

There are two types of mineralization related to the rift
system: hydrothermal and magmatic. The hydrothermal deposits include native
copper in basalts and sedimentary interbeds, such as on the Keewenaw Peninsula,
sediment-hosted copper sulfide and native copper, represented by the White Pine
Mine of Michigan, copper sulfide veins in volcanics and polymetallic veins
(silver-nickel-cobalt) in volcanics. The magmatic deposits include
copper-nickel-PGM mineralization and titanium-iron mineralization in the Duluth
complex, uranium and rare earth elements in carbonatites and Cu-Mo in breccia
pipes. More locally the magmatic deposits lie along the northwestern contact of
the Duluth Complex with the underlying sediments and Giants Range Batholith.
NorthMet and the Babbit (or Minnamax) deposits are the largest of the
copper-nickel- PGM mineralization.

The majority of the rock at NorthMet is unaltered, with a minor
alteration found along fractures and micro-fractures, consisting of serpentine,
chlorite and magnetite replacing olivine, uralite and biotite replacing
pyroxene, and sausserite and sericite replacing plagioclase. Sulfide
mineralization does not appear to be directly related to the alteration.

The metals of interest at NorthMet are copper, nickel, cobalt,
platinum, palladium, gold and lesser amounts of rhodium and ruthenium. In
general, the metals are positively correlated with copper mineralization, cobalt
being the main exception. Mineralization occurs in four horizons throughout the
NorthMet property. Three of these horizons are within basal Unit 1 and in some
drill holes the horizons are indistinguishable from each other. The thickness of
each of the three horizons varies from 5 to more than 200 feet. Unit 1
mineralization is found throughout the deposit. A less extensive mineralization
zone is found in Unit 6 and it is relatively enriched in PGMs compared to Unit
1.

Sulfide mineralization consists of chalcopyrite, cubanite,
pyrrhotite and pentlandite with minor bornite, violarite, pyrite, sphalerite,
galena, talnakhite, mackinawite and valleriite. Sulfide minerals occur mainly as
blebs interstitial with plagioclase, olivine and augite grains, but also occur
within plagioclase and augite grains, as intergrowths with silicates, or as fine
veinlets. The percentage of sulfides varies from trace to about 5%. Palladium,
platinum and gold are associated with the sulfides.

The NorthMet deposit has been identified over a length of approximately
  2.5 miles, has been found to a depth of more than 1,000 feet, and is several
  hundred feet thick. It is covered by a thin layer of glacial till but otherwise
  reaches to the subsurface.

20

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(g)       Development Plans

Since the previous Technical Report was published in July 2004,
there have been numerous changes to the scope of the project. Most notably, the
processing rate has been expanded by nearly 20% to 32,000 tons of ore per day.
In addition, PolyMet is commitment to exceeding Minnesotas environmental
standards, which are amongst the most stringent in the world, resulting in
additional costs.

Other scope changes, including construction of additional
facilities to house the hydrometallurgical and metallurgical plants, have added
to project capital. Total scope changes, including the expanded processing rate,
account for approximately $90 million of the increase in capital costs since the
previous estimate in 2004.

Capital Cost Estimate ($000)

Initial
    SustainingDirect CostsMine & Mine Site Infrastructure
    18,489
    24,354Railroad
    8,464
    33,344Beneficiation Plant
    62,992
    0Hydromet Plant
    191,996
    3,170Tailings & Residue Disposal
    3,134
    7,949Total Direct Costs
    285,075
    68,817Contingency
    27,070Total
    312,145Indirect CostsTotal Indirect, including contingencies
    67,495
    2,970Total Capital
    379,640
    71,787


Saleable Products The DFS describes three products from
NorthMet:

- High grade copper cathode that can be sold on the LME or COMEX markets or
  shipped directly to copper fabricators. Such product could potentially capture
  a premium price that has not been included in the economic analysis.
- A mixed hydroxide of nickel and cobalt that will be shipped to a
  third-party processor to produce nickel and cobalt metals. PolyMet is in
  advanced discussions with potential buyers for the product. In conjunction
  with these negotiations, PolyMet is continuing to analyze the economics of
  producing separate nickel- and cobalt-hydroxides at site.
- A precious metals precipitate that will be shipped to a third-party
  refiner for production of palladium, platinum and gold  PolyMet is in
  advanced discussions with potential buyers.

The copper metal will be electrowon from a copper sulfate
solution from the hydrometallurgical plant  electrowinning is a well
established, low-cost and low-energy process that eliminates the need for
traditional smelting of sulfidic concentrates. Other metals will be shipped off
site for final processing.

Key Data and Economic Analysis The economics reported in
the DFS reflect the initial mine plan which in turn is based on the permit
application for a processing rate of 32,000 tons per day for an initial period
of 20 years. As previously described, the pit plan is not fully optimized and
the 20-year permit application covers significantly less than half of the
measured and indicated resources already defined.

21

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The table below sets out Base Case metal price assumptions and
process recovery and key operating data for the average of the first five years
of full-scale production. These data comprise metal content of the three
products described above, the contribution to net revenue after third-party
processing costs, estimates of cash costs for each metal using a co-product
basis whereby total costs are allocated to each metal according to that metals
contribution to the net revenue, cash costs on a by-product basis whereby
revenues from other metals are offset against total costs and those costs
divided by production  this analysis is included for copper and for nickel. The
final columns show the increase or decrease in the EBITDA with a change in the
price of each metal.

Base Case Price and Operating Assumptions and Key Production
Numbers



Note: Costs are for Low Case metal price assumptions The
final table sets out key financial statistics  the internal rate of return on
the future capital investment and the present value of the future cash flow
(including capital costs) using a 5% and 7.5% discount rate on both a pre-tax
and an after-tax basis. The bottom section of the table shows the average over
the first five years of full-scale production for gross revenue (before
royalties and third-party processing fees), net revenues (after those costs) and
EBITDA.

The price assumptions include recent actual prices (July 2006),
our Base Case described previously, and a Low Case that is comparable to but
slightly more conservative than the SEC-standard for reserve calculation, namely
the three-year trailing average to the end of July 2006. Finally, the table
shows a sensitivity analysis of a ± 10% change in the Base Case metal price
assumptions.

Economic Projections on a Range of Metal Price Assumptions

Price AssumptionsAverageJuly 2006
      Main
        Cases
      SensitivityBase Case
      Low Case3-year trailing plus2-year forward
      
      Base -10%
      Base +10%Metal PricesCopper
      $/lb
      3.50
      2.25
      1.50
      2.03
      2.48Nickel
      $/lb
      12.06
      7.80
      6.50
      7.02
      8.58Cobalt
      $/lb
      14.52
      16.34
      15.25
      14.71
      17.97Palladium
      $/oz
      322
      274
      225
      247
      301Platinum
      $/oz
      1,241
      1,040
      900
      936
      1,144Gold
      $/oz
      634
      540
      450
      486
      594Financial SummaryPre-taxIRR
      %
      n/a
      34.2%
      17.4%
      28.2%
      40.9%PV discounted
        at 5%
      $'000
      n/a
      1,210,792
      450,643
      908,842
      1,522,091PV discounted
        at 7.5%
      $'000
      n/a
      910,978
      298,807
      668,940
      1,162,218Post-taxIRR
      %
      n/a
      26.7%
      13.4%
      21.9%
      31.9%PV discounted
        at 5%
      $'000
      n/a
      873,022
      295,515
      644,220
      1,109,633PV discounted
        at 7.5%
      $'000
      n/a
      595,358
      161,924
      424,674
      773,362First 5 years:Average gross
        revenue
      $'000
      504,438
      341,417
      259,111
      307,275
      375,559Average net
        revenue
      $'000
      440,257
      303,147
      228,067
      273,310
      332,908Average EBITDA
      $'000
      312,382
      175,273
      100,193
      145,435
      205,033 22


---

We believe that we have completed exploration work required for
the initial phases of production at NorthMet, however, we may need to conduct
further in-fill drilling during the anticipated life of the project. The
exploration work is being compiled in the DFS which is considering the
commercial viability of an open-pit mine. The DFS is contemplating construction
of a project mining an average of approximately 70,000 tons of rock per day and
processing approximately 32,000 tons per day through the Erie Plant. The finely
ground material from the Erie Plant would then be processed through a new
hydrometallurgical plant to produce copper metal, nickel-cobalt concentrates,
and a precious metals precipitate.

(h)       Regulations and
Government Rules

The mining industry has been subject to increasing government
controls and regulations in recent years. We have obtained all necessary permits
for exploration work performed to date and anticipate no material problems
obtaining the necessary permits to proceed with further development.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

(a)       Operating Results

This discussion and analysis should be read in conjunction with
our consolidated financial statements. Our functional currency is the United
States dollar and our financial statements are prepared in accordance with
Canadian Generally Accepted Accounting Principles (GAAP); however, there are no
material differences between U.S. GAAP and Canadian GAAP with regard to our
financial statements. All amounts in this discussion and in the consolidated
financial statements are expressed in United States dollars, unless identified
otherwise.

Summary of Events During the Fiscal Year Ended January 31,
2007

During the year ended January 31, 2007, and through the date of
the filing of this Annual Information Form / Annual Report on Form 20-F, the
Company continued to advance its NorthMet Project including the activities noted
below.

The Company reported the results of its pilot plant testing of
flotation and hydrometallurgical extraction of metals from NorthMet ore samples.
The test program was completed at SGS Lakefield Research (Canada) under the
supervision of Bateman Engineering (Australia). The pilot plant program
confirmed the technical feasibility of the NorthMet flotation and
hydrometallurgical treatment process. Copper, nickel, cobalt, gold, platinum and
palladium were successfully concentrated from three ore composites and extracted
via the autoclave process. The extracted precious metals were recovered in a
precipitate for off-site delivery to a refinery for treatment. Copper was
recovered as LME grade-A copper cathode by conventional solvent extraction and
electro-winning. Nickel and cobalt were recovered as either a combined "mixed
hydroxide precipitate" or as separate purified nickel and cobalt hydroxide
precipitate products for off-take/refinery treatment. The pilot plant provided
engineering data for completion of the Definitive Feasibility Study. The pilot
plant also provided environmental data for permitting of the NorthMet
metallurgical facility.

On 25 September 2006 PolyMet announced that the Definitive
Feasibility Study (DFS) prepared by Bateman Engineering (Pty) Ltd. (Bateman)
confirms the economic and technical viability of the Companys NorthMet
copper-nickel-precious metals project. The executive summary of the DFS has

23

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been summarized in a Technical Report that confirms to National
Instrument 43-101 and has been filed on PolyMets website
(www.polymetmining.com) and on SEDAR.

The DFS describes measured and indicated mineral resources of
422.1 million tons grading 0.28% copper, 0.08% nickel and 0.01 ounces per ton
(opt) of precious metals (palladium, platinum and gold). In addition, the DFS
reports inferred mineral resources of 120.6 million tons grading 0.25% copper,
0.07% nickel, and 0.01 opt of precious metals. Mineral resources are not
reserves and do not have demonstrated economic viability.

The DFS also established proven and probable mineral reserves.
This material, contained within the measured and indicated mineral resources,
totals 181.7 million tons grading 0.31% copper, 0.09% nickel, and 0.01 opt of
precious metals. These mineral reserves are based on copper at $1.25 per pound,
nickel at $5.60 per pound, and precious metal prices of $210, $800, and $400 per
ounce respectively for palladium, platinum and gold.

The DFS is based on processing of 32,000 tons of ore per day,
which is the size of operation being permitted.

Initial direct capital costs, including contingency, are
estimated at approximately $312 million. Indirect costs including engineering
and construction management, project insurance, the anticipated cost of
environmental insurance related to reclamation and closure guarantees, and other
owners costs are estimated at $68 million, for a total capital cost of
approximately $380 million. Sustaining capital is projected at $72 million for
the first 20 years.

The DFS estimates that the project will provide full-time
employment for at least 400 people.

On 20 December 2006 we acquired extensive additional
infrastructure associated with our NorthMet Project from Cliffs. We obtained a
railroad connection linking the mine development site and the existing crushing
and grinding plant that we acquired from Cliffs in 2005 as well as a 120-railcar
fleet, locomotive fueling and maintenance facilities, water rights and
pipelines, large administrative offices on site and approximately 6,000 acres to
the east and west of the mine development site and contiguous to our existing
tailing facilities.

The purchase price for this additional infrastructure consisted
of 2 million of our common shares and US$15 million in cash to be issued and
paid in four tranches:

- 2 million shares of PolyMet;
- US$1 million in cash was paid at closing;
- US$7 million in cash is payable in quarterly installments of US$250,000
  commencing 31 December 2006 with the balance payable upon receipt of
  commercial financing. Interest on the outstanding amount is payable quarterly
  from 31 December 2006 at the Wall Street Journal Prime Rate; and
- US$7 million in cash is payable in quarterly installments of US$250,000
  commencing on 31 December 2009. Interest will begin to accrue on the
  outstanding amount beginning on 31 December 2009 after which it will be
  payable quarterly at the Wall Street JournalPrime Rate.

PolyMet has indemnified Cliffs for ongoing reclamation and
remediation associated with the property.

With a total of 9,200,547 shares, Cliffs is now the beneficial
owner of approximately 7.6% of the Companys issued and outstanding common
shares. Cliffs continues to have the right to participate on a pro-rata basis in
future equity financings. PolyMet has the first right of refusal to place or
acquire Cliffs shares should Cliffs wish to dispose of its interest.

In January 2007, the Company submitted its NorthMet Project
Description to state and federal regulators. The Project Description lays out
the Companys development plans and proposed environmental safeguards.
Independent environmental contractors are preparing the Environmental Impact
Statement (EIS) for the project. PolyMet and the regulatory authorities are
discussing a revised schedule for

24

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completion and publication of the draft EIS. All parties
recognize that it is imperative that the published document fully reflects
PolyMets commitment to meet or exceed Minnesotas environmental regulations and
that a thorough and complete draft EIS should properly address concerns of
interested parties. In view of these considerations, the draft EIS will not be
published during the second quarter of 2007 as previously expected. PolyMet will
report a revised schedule as soon as it becomes available.

Following publication of the draft EIS there will be a public
comment period following which the final EIS is expected to be published for
public comment. The issuance of a final EIS would allow PolyMet to apply for
environmental and operating permits. Prior to receipt of these permits, the
Company intends to secure production debt financing that would be available upon
receipt of key permits, with construction slated to start upon availability of
finance.

The final operational mine plan is currently being developed
and is expected to include the results from a highly selective drill campaign
which is focused on converting mineral resources into proven and probable
mineral reserves as well as completion of pit optimization that is expected to
reduce the strip (waste:ore) ratio, optimize equipment selection and mine
scheduling and lower the mining costs. The optimized mine plan is scheduled for
completion in the third quarter of 2007.

In March 2007, PolyMet appointed key operating and construction
staff for the development of the NorthMet Project. The Company also engaged URS
Corporation (URS) as lead contractor for the Engineering, Procurement and
Construction Management of the NorthMet Project. PolyMet expects to benefit from
URS International purchasing group as well as its project control systems that
will provide cost and schedule monitoring for the Company and the anticipated
project finance lenders. It is planned that Bateman will continue as the Owners
Engineer and the DFS team will remain as the Process Design group. To optimize
the construction phase of the project, Bateman has commenced developing detailed
process packages in conjunction with the completion of the DFS.

Since completing the DFS in 2006, PolyMets construction team
has been focused on optimizing the construction timeline and logistics,
including assessing the possibility of achieving earlier sales of some products,
as well as deferring substantial capital expenditures. Should this be
practicable, PolyMet would not anticipate any significant change in the schedule
for achieving initial revenues in late 2008 or early 2009.

Construction of NorthMet is expected to be made up of four
major components:

|1. | Refurbishment of the existing Erie Plant
    facilities;                                 
|-- | -----------------------------------------------------------------------------------------
|2. | Construction of a new hydrometallurgical plant;                                          
|3. | Construction of the mine and reactivation of some
      existing mine infrastructure; and
|4. | Implementation of environmental
  safeguards.                                            

In addition to the aforementioned developments relating to the
NorthMet Project, PolyMet completed the following corporate related activities.

On 10 April 2006 the Company announced that it was accelerating
the expiry of all of the then outstanding share purchase warrants raising $14.31
million.

In June 2006, PolyMet commenced trading on the American Stock
Exchange under the symbol PLM.

On 31 October 2006 the Company entered into an agreement with
BNP Paribas (BNPP) whereby BNPP will advise and assist the Company in all
aspects of preparation for construction financing. BNPP was issued warrants to
purchase 600,000 common shares of PolyMet at $4.00 per share at any time prior
to October 30, 2010 and, upon delivering a bona fide offer of project financing,
warrants to purchase an additional 500,000 common shares of PolyMet at $4.00 per
share at any time prior to October 30, 2010 will vest. In March 2007, BNPP,
acting in its construction financing advisor capacity, retained Micon
International Limited (Micon) as Independent Engineer in connection with
construction finance for the NorthMet Project. Micon is undertaking a detailed
review of the DFS.

25

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In February 2007, PolyMet graduated from the TSX Venture
Exchange to the Toronto Stock Exchange (TSX) and commenced trading on the TSX
under the symbol POM.

On 8 March 2007, the Company announced that William D.
Corneliuson had agreed to join its Board of Directors.

On 17 April 2007, PolyMet announced that it had closed a
private placement financing of 15 million units, at US$2.75 per unit with each
unit comprising one common share and one-half of one warrant. Each, whole
warrant is exercisable into a common share at a price of US$4.00 at any time
until October 13, 2008 subject to an early trigger if the 20-day volume weighted
average price of the common shares is US$6.00 or more. After paying cash
finders fees totaling US$1.43 million, the financing raised $39.82 million.

Summary of Operating Results

As of January 31, 2007, we operated in one segment, the
exploration and development of the base and precious metals at its NorthMet
Project in Minnesota, United States. Head office comprises general and
administrative costs, stock based compensation expense, financing expenses,
foreign exchange interest income, assets, purchase of property, plant and
equipment and amortization reported by the Canadian head office.

|                                            |   | NorthMet   |  |   | Head Office |  |   |              | 
|------------------------------------------- | - | ---------- |  | - | ----------- |  | - | ------------ | 
|                                            |   | Project in |  |   |             |  |   |              | 
|2007                                        |   | U.S.       |  |   |             |  |   | Consolidated | 
|                                            |   |            |  |   |             |  |   |              | 
|Segment operating
      loss                | $ | 9,069,000  |  | $ | 8,824,000   |  | $ | 17,893,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Mineral property,
      plant and equipment | $ | 38,056,000 |  | $ | 110,000     |  | $ | 38,166,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Other assets                                | $ | 830,000    |  | $ | 9,735,000   |  | $ | 10,565,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Identifiable
      assets                   | $ | 38,886,000 |  | $ | 9,845,000   |  | $ | 48,731,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|2006                                        |   |            |  |   |             |  |   |              | 
|                                            |   |            |  |   |             |  |   |              | 
|Segment operating
      loss                | $ | 11,406,000 |  | $ | 4,523,000   |  | $ | 15,929,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Mineral property,
      plant and equipment | $ | 14,225,000 |  | $ | 22,000      |  | $ | 14,247,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Other assets                                | $ | 156,000    |  | $ | 11,631,000  |  | $ | 11,787,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|Identifiable
      assets                   | $ | 14,381,000 |  | $ | 11,653,000  |  | $ | 26,034,000   | 
|                                            |   |            |  |   |             |  |   |              | 
|2005                                        |   |            |  |   |             |  |   |              | 
|                                            |   |            |  |   |             |  |   |              | 
|Segment operating
      loss (restated)     | $ | 1,856,000  |  | $ | 2,560,000   |  | $ | 4,416,000    | 
|                                            |   |            |  |   |             |  |   |              | 
|MIneral property,
      plant and equipment | $ | 12,000     |  | $ | 4,000       |  | $ | 16,000       | 
|                                            |   |            |  |   |             |  |   |              | 
|Other assets                                | $ | 974,000    |  | $ | 1,360,000   |  | $ | 2,334,000    | 
|                                            |   |            |  |   |             |  |   |              | 
|Identifiable
      assets                   | $ | 986,000    |  | $ | 1,364,000   |  | $ | 2,350,000    | 

26

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Year ended January 31, 2007 compared with the year ended
January 31, 2006

Overall.Our focus for the fiscal year ended January 31,
2007 was to complete the Definitive Feasibility Study, complete our drill
program and pilot plant testing and further advance the environmental and
permitting process at the NorthMet Project. We continued to expand our
operations in Minnesota by retaining more key consultants to assist in the
environmental impact statement and permitting work as well as plan for the
development of the project.

Loss for the year. We recorded a loss in the year ended
January 31, 2007 of $17.893 million ($0.16 loss per share) compared to a loss of
$15.929 million ($0.22 loss per share) in 2006 and $4.416 million ($0.09 loss
per share) in 2005. The increase in the net loss for the year was primarily
attributable to: the increased level of work; and an increase in general and
administrative costs including non-cash stock compensation expense of $4.723
million (2006 - $3.523 million) and non-cash consulting fees expense of $1.289
million (2006 - $Nil). This was partially offset by lower pre-feasibility costs
as the DFS was completed effective October 1, 2006 and site costs from that date
were capitalized.

During 2007 we expended $8.844 million in exploration,
pre-feasibility and lease payments compared to $11.120 million in 2006 and
$1.623 million in 2005. The decrease in 2007 was a result of the completion of
the DFS during the third quarter and the subsequent capitalizing of site costs.

General and Administrative expense for the year ended 31
January 2007 excluding non-cash stock based compensation expenses was $4.251
million compared with $1.655 million for the year ended 31 October 2006. The
Company reported an increase in expenditures for:

- Consulting fees were $1,621,000 (2006 - $388,000) as a result of increased
  activity at both the corporate and project level and the issuance of bonus
  shares for successful completion of Milestone 3 (completion of a DFS which
  indicates that commercial production from the NorthMet Project is viable);
- Professional fees totaled $790,000 (2006 - $151,000) owing to increased
  legal, audit and other advisory fees as a result of increased corporate
  activity; and
- Transfer agent and filing fees were $272,000 (2006 - $65,000) as a result
  of listing on the Toronto Stock Exchange and the American Stock Exchange
  during the period.

Net interest income during the year ended 31 January 2007 was
$428,000 compared with $148,000 in the year ended 31 January 2006. This increase
was the result of higher cash balances on deposit and higher interest rates.
Foreign exchange translation losses were $536,000 for the year ended 31 January
2007 (2006  gain of $221,000). This increase was the result of changes in
exposure and fluctuations in foreign exchange rates.

During the year, the Company re-examined its accounting for
warrants and the share bonus program. As a result of this re-examination, the
Company determined that share capital and contributed surplus were
inappropriately measured and recognized during the year ended 31 January 2006.
Furthermore, the Company determined that consulting fees charged to the
consolidated statement of loss for the year ended 31 January 2005 under the
share bonus program were understated by $638,000.

27

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The company has restated its financial statements for the items
above and the impacts on certain line items of the financial statements with
significant changes were as follows:

| | Line Item           |  | 31 January 2006 |  |  | 31 January 2005 | 
| | ------------------- |  | --------------- |  |  | --------------- | 
| |                     |  |                 |  |  |                 | 
| |                     |  | As Previously   |  |  | Revised         | 
| |                     |  | Reported        |  |  |                 | 
| | Consulting fees     |  |                 |  |  |                 | 
| | Loss for the year   |  |                 |  |  |                 | 
| | Deficit             |  | 34,068,000      |  |  | 34,706,000      | 
| |                     |  |                 |  |  |                 | 
| | Loss per share      |  |                 |  |  |                 | 
| | Share capital       |  | 49,022,000      |  |  | 46,009,000      | 
| |                     |  |                 |  |  |                 | 
| | Contributed surplus |  | 4,431,000       |  |  | 8,084,000       | 

Year ended January 31, 2006 compared with the year ended
January 31, 2005 (restated)

Overall. Our focus for the fiscal year ended January 31,
2006, was to advance the feasibility study, to complete a drill program, conduct
pilot plant testing, and advance the environmental and permitting process at the
NorthMet Project. We expanded our operations in Minnesota by retaining several
key consultants to assist in the completion of the environmental study and
permitting requirements of the project. We raised $22.2 million in new equity
and we acquired the Cliffs Assets from Cliffs.

Loss for the year. We recorded a loss for the fiscal
year ended January 31, 2006 of $15,929,000 ($0.22 loss per share) compared to a
loss of $4,416,000 ($0.09 loss per share) in 2005. The increase in the net loss
for the year was primarily attributable to the increased level of work, the
Companys accounting policy of expensing the costs of pre-feasibility work
related to the NorthMet Project of $11,120,000 (2005  $1,623,000), and an
increase in general and administrative costs including non-cash stock
compensation expense of $3,523,000 (2005 -$993,000) and non-cash consulting fees
expense of $nil (2005  $872,000).

During 2006 we expended $11,120,000 in exploration,
pre-feasibility and lease payments compared to $1,623,000 in 2005. The
substantial increase was a result of our direct participation in the
environmental and permitting advancement at the NorthMet Project.

Stock-based compensation expense for the year ended January 31,
2006 was $3,523,000 representing an increaseof approximately 255%
compared to stock-based compensation expense of $993,000 for the year ended
January 31, 2005. The stock-based compensation expense incurred during the
fiscal year ended January 31, 2006 is the result of issuing 3,580,000 options to
directors, officers, consultants, and employees, which is 1,035,000 more options
than the 2,545,000 options issued during the year ended January 31, 2005,
combined with a greater value per option based on the Black-Scholes calculation.
These additional incentive options were part of our overall plan to align
corporate development and shareholder value.

(b)       Liquidity And
Capital Resources

Financing Activities

During the year ended 31 January 2007 the Company issued:

- 14,662,703 common shares upon the exercise of warrants for proceeds of
  $14.310 million;

28

---

- 2,193,000 common shares upon the exercise of options for proceeds of
  $765,000, and
- 2,350,000 common shares under the Companys Bonus Share Plan for deemed
  proceeds of $1,289,000.

During the year ended January 31, 2006, we completed:

- a non-brokered private placement for 3,544,657 units at a price of CDN$1.40
  per unit. Each unit consisted of one common share and one half of one share
  purchase warrant. One full warrant entitles the holders, on exercise, to
  purchase one additional common share of ours at a price of CDN$2.00 per
  warrant share at any time until the close of business on the day which is 18
  months from the date of closing, provided that if the closing price of the our
  shares as traded on the Toronto Stock Exchange (the Exchange) is over
  CDN$2.50 per share for 20 consecutive trading days, the Warrants will
  terminate 30 days thereafter;
- a non brokered private placement for 6,672,219 units at a price of CDN$0.90
  per unit. Each unit consisted of one common share and one half of one share
  purchase warrant. One full warrant entitles the holders, on exercise, to
  purchase one additional common share of ours at a price of CDN$1.25 per
  warrant share at any time until the close of business on the day which is 30
  months from the date of closing, provided that if the closing price of our
  shares as traded on the Exchange is over CDN$2.50 per share for 20 consecutive
  trading days, the warrants will terminate 30 days thereafter;
- a brokered private placement for 9,277,777 units at a price of CDN$0.90 per
  unit. Each unit consisted of one common share and one half of one share
  purchase warrant. One full warrant entitles the holders, on exercise, to
  purchase one additional common share of ours at a price of CDN$1.25 per
  warrant share at any time until the close of business on the day which is 30
  months from the date of closing, provided that if the closing price of our
  shares as traded on the Exchange is over CDN$2.50 per share for 20 consecutive
  trading days, the warrants will terminate 30 days thereafter; and
- a non brokered private placement for 9,000,000 units at a price of CDN$0.55
  per unit. Each unit consisted of one common share and one half of one share
  purchase warrant. One full warrant entitles the holders, on exercise, to
  purchase one additional common share of ours at a price of $0.70 per warrant
  share at any time until the close of business on the day which is 24 months
  from the date of closing, provided that if the closing price of the our shares
  as traded on the Exchange at or exceed $1.00 per share for 30 consecutive
  trading days, the Warrants will terminate 30 days thereafter.

In addition to the financings during the year ended January 31,
2006, we also issued:

- 5,700,628 common shares pursuant to the exercise of 5,700,628, share
  purchase warrants for total proceeds of $3,296,143; and
- 1,795,852 common shares pursuant to the exercise of stock options for total
  proceeds of $196,988.

During the year ended January 31, 2005, we issued:

- 5,277,574 common share purchase warrants were exercised at exercise prices
  between CDN$0.10 - CDN$0.25 for proceeds of $828,554;

29

---

- stock options in the amount of 1,088,400 were exercised at prices between
  CDN$0.08 - CDN$0.13 per share for proceeds of $81,383; and
- a private placement for 1,550,000 units at a price of CDN$0.80 per unit and
  a private placement for 1,250,000 units at a price of CDN$0.80 per unit for
  total proceeds of $1,733,984.

Year Ended January 31, 2007

Our operating activities used cash of $12,228,000 during the
fiscal year ended January 31, 2007 as compared to using cash of $10,846,000
during the fiscal year ended January 31, 2006 and $2,576,000 in the fiscal year
ended January 31, 2005. The cash used for operations during the fiscal year
ended January 31, 2007 was primarily due to our loss of $17,893,000, consulting
fees of $1,289,000 paid with bonus shares and stock-based compensation paid of
$4,723,000.

Cash used in investing activities was $4,171,000 the fiscal
year ended January 31, 2007 as compared to using cash of $203,000 during the
fiscal year ended January 31, 2006 and $823,000 in the fiscal year ended January
31, 2005. The cash used for investing activities during the fiscal year ended
January 31, 2007 was primarily due to capitalization of site related costs
subsequent to the completion of the DFS late in September 2006 and a payment of
$1,000,000 made to Cliffs in connection with the acquisition of the additional
property and associated rights near the Erie Plant.

We generated cash of $13,625,000 in financing activities during
the fiscal year ended January 31, 2007 as compared to generating cash of
$22,209,000 during the fiscal year ended January 31, 2006 and $3,414,000 in the
fiscal year ended January 31, 2005. Cash from financing activities for the year
ended January 31, 2007 was from the exercise of options, and share purchase
warrants, partially offset by scheduled debt repayments. Cash from financing
activities for the year ended January 31, 2006 was from the proceeds of four
private placements, the exercise of share purchase warrants and stock options,
and proceeds from share subscriptions.

Total cash for the year ended 31 January 2007 decreased by
$2.774 million for a balance of $8.897 million compared to the year ended 31
January 2006 where cash increased $11.160 million to a balance of $11.671
million.

Substantially all cash and equivalents are held in Canadian
currency.

As at 31 January 2007 the Company had working capital of $5.650
million compared with $9.070 million at 31 January 2006 consisting primarily of
cash of $8.897 million (31 January 2006 - $11.671 million), accounts payable of
$1.518 million (31 January 2006 - $1.717 million) and the current portion of the
notes to Cliffs of $2.000 million (31 January 2006 - $1.000 million). The
Company expects to pay the remaining balance of $11.853 million (31 January 2006
- $1.420 million) long term notes to Cliffs from working capital, additional
financing and funds from operations once commercial production has commenced.

On 17 April 2007, the Company closed a non-brokered private
placement financing of 15 million units at US$2.75 per unit, with each unit
comprising one common share and one-half of one warrant. Each whole warrant is
exercisable into a common share at a price of US$4.00 at any time until 13
October 2008, subject to an early trigger if the 20-day volume weighted average
price of the common shares is US$6.00 or more. In connection with the private
placement, the Company has paid finders fees totaling US$1.43 million in cash,
150,000 shares and 520,000 broker warrants having the same terms as the warrants
described above.

As a result of the private placement as described above, the
Company is able to meet its current obligations through to permitting and to
service and repay its debt to Cliffs due in the next year.

Should the Company wish to continue to further advance the
NorthMet Project to commercial production PolyMet will require additional funds.
As the Company has no operating revenues, the only source of

30

---

liquidity consists primarily of cash flows from proceeds of
equity issues and eventual project financing. The Company has entered into an
agreement with BNP Paribas (BNPP) whereby BNPP will advise and assist PolyMet
in all aspects of preparation for construction finance. As part of this
agreement, BNPP was issued warrants, subject to regulatory approval, to purchase
600,000 shares of PolyMet common stock at $4.00 at any time prior to October 30,
2010 and, upon delivering a bona fide offer of project financing, warrants to
purchase an additional 500,000 shares of PolyMet at $4.00 at any time prior to
October 30, 2010 will vest.

There can be no assurance that the Company will be able to
continue to raise funds, in which case it may be unable to continue to advance
the NorthMet Project. Should PolyMet be unable to realize on its assets and
discharge its liabilities in the normal course of business, the realizable value
of its assets may be materially less than the amounts recorded on the balance
sheets. See Risk Factors.

Debt

Pursuant to Asset Purchase Agreements the Companys wholly
owned subsidiary Poly Met Mining, Inc. signed three notes payable to Cliffs in
the amounts of $2,400,000, $7,000,000 and $7,000,000, respectively. The first
note is interest bearing at the annual simple rate of four percent (4%) and
shall be paid in quarterly instalments equal to $250,000 for total repayment of
$2,500,000. The second note is interest bearing at the Wall Street JournalPrime Rate and shall be paid in quarterly instalments equal to $250,000
commencing 31 December 2006, with the balance repayable upon receipt of
commercial financing, for total repayment of $7,000,000. The third note is
interest bearing at the Wall Street JournalPrime Rate and shall be paid
in quarterly instalments equal to $250,000 commencing on 31 December 2009 for
total repayment of $7,000,000. No interest will be payable on the third note
until 31 December 2009, accordingly it has been fair valued, for balance sheet
purposes, by discounting it at the Wall Street JournalPrime Rate. As at
31 January 2007 the outstanding long term debt was as follows:

| |                      |   | 31 January 2007 |   |   | 31 January 2006 |  
| | -------------------- | - | --------------- | - | - | --------------- | -
| |                      |   |                 |   |   |                 |  
| | Notes Payable        | $ | 13,768          |   | $ | 2,400           |  
| | Accrued interest     |   | 85              |   |   | 20              |  
| | Total debt           |   | 13,853          |   |   | 2,420           |  
| | Less current portion |   | (2,000          | ) |   | (1,000          | )
| |                      |   |                 |   |   |                 |  
| | Long term debt       | $ | 11,853          |   | $ | 1,420           |  

We anticipate using working capital, additional financing and
funds from operations once commercial production has commenced to meet the above
payment obligations to Cliffs

(c)       Research and
Development, Patents and Licenses, Etc.

Not applicable.

(d)       Trend Information

Not applicable.

(e)       Off-Balance Sheet
Arrangements

Not applicable.

(f)       Tabular Disclosure
of Contractual Obligations

The following table lists as of 31 January 2007 information
with respect to the Companys known contractual obligations:

31

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Payments due by periodTotal
      
      
      Less than 1
      
      
      1  3 years
      
      
      3  5 years
      
      
      More than 5Contractual Obligations
      
      
      
      
      year
      
      
      
      
      
      
      
      
      yearsAccounts payable and
      $
      1,518,000
      
      $
      1,518,000
      
      $
      -
      
      $
      -
      
      $
      -accrued liabilitiesLong-term debt obligations
      
      17,890,000
      
      
      2,571,000
      
      
      8,163,000
      
      
      2,808,000
      
      
      4,348,000Asset retirement
        obligation
      
      23,412,000
      
      
      429,000
      
      
      1,235,000
      
      
      393,000
      
      
      21,355,000Total
      $
      42,820,000
      
      $
      4,518,000
      
      $
      9,398,000
      
      $
      3,201,000
      
      $
      25,703,000


Long-term debt obligations (including the current portion) are
set out in this table on an undiscounted basis and include anticipated interest.
Asset retirement obligation represents the undiscounted obligation at 31 January
2007.

(g)       Critical Accounting
Policies

The consolidated financial statements of the Company. have been
prepared in accordance with accounting principles generally accepted in Canada
that require management to make assumptions and estimates that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as at the date of the financial statements. Significant
estimates used in the preparation of these consolidated financial statements
include, amongst other things, expected economic lives of plant and equipment,
anticipated costs of asset retirement obligations including the reclamation of
mine site, valuation of options and share purchase warrants, and the assessment
of impairment in value of long lived assets.

Mineral Property, Plant and Equipment

Mineral property costs, aside from mineral property
acquisitions costs, incurred prior to determination of the DFS are expensed as
incurred and expenditures incurred subsequent to the DFS and mineral property
acquisition costs are deferred/capitalized until the property is placed into
production, sold, allowed to lapse or abandoned.

Acquisition costs include cash and fair market value of common
shares.

As a result of the Definitive Feasibility Study on the NorthMet
Project, the Company has now entered the development stage and has elected to
defer mineral property development expenditures related to the NorthMet Project
effective 1 October 2006.

Plant and equipment are recorded at cost and depreciated over
the estimated life of the related assets calculated on a unit of production or
straight-line basis, as appropriate. Mineral property, plant and equipment
related to the NorthMet Project will begin to be amortized at the time the
project commences operations.

Stock-Based Compensation and Share Purchase Warrants

All stock-based awards made to employees and non-employees are
measured and recognized using a fair value based method. For employees, the fair
value of the options is measured at the date of the grant. For non-employees,
the fair value of the options is measured on the earlier of the date at which
the counterparty performance is complete or the date the performance commitment
is reached or the date at which the equity instruments are granted if they are
fully vested and non-forfeitable. For employees and non-employees, the fair
value of the options is accrued and charged to operations, with the offsetting
credit to contributed surplus, on a straight-line basis over the vesting period.
If and when the stock options are ultimately exercised, the applicable amounts
of contributed surplus are transferred to share capital.

32

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The Company issues share purchase warrants in connection with
certain equity transactions. The fair value of the warrants, as determined using
the Black-Scholes option pricing model, is credited to contributed surplus. The
recorded value of share purchase warrants is transferred to share capital upon
exercise.

Asset Retirement Obligations

The recommendations of Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3110, Asset Retirement Obligations(CICA 3110), became effective on 1 February 2004. This section requires
the recognition of a legal liability for obligations relating to the retirement
of property, plant and equipment and obligations arising from the acquisition,
construction, development, or normal operation of those assets. Such asset
retirement costs must be recognized at fair value, when a reasonable estimate of
fair value can be estimated, in the year in which the liability is incurred. A
corresponding increase to the carrying amount of the related asset, where one is
identifiable, is recorded and amortized over the life of the asset. Where a
related asset is not easily identifiable with a liability, the change in fair
value over the course of the year is expensed. The amount of the liability is
subject to re-measurement at each reporting year-end. The estimates are based
principally on legal and regulatory requirements. It is possible that the
Companys estimates of its ultimate reclamation and closure liabilities could
change as a result of changes in regulations, changes in the extent of
environmental remediation required, changes in the means of reclamation or
changes in cost estimates.

The operations of the Company may in the future be affected
from time to time in varying degrees by changes in environmental regulations,
including those for future removal and site restoration costs. Both the
likelihood of new regulations and their overall effect upon the Company may vary
greatly and are not predictable.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES

A.       Directors and Senior
Management

Each Director serves until the next annual general meeting of
shareholders or until his/her successor is duly elected, unless his/her office
is vacated in accordance with our Certificate of Incorporation.

Vacancies on the Board of Directors are filled by election from
nominees chosen by the remaining Directors and the persons filling those
vacancies will hold office until the next annual general meeting of
shareholders, at which time they may be re-elected or replaced. (For more
details on the process for nominating directors, see our Nominations Committee
Charter, attached hereto as Exhibit 11.2. )

The following is a list of the names and ages of our directors
and executive officers:

Name
    
    Age
    
    PositionWilliam Murray
    
    58
    
    Director,
      President, and Chief Executive OfficerDouglas J. Newby
    
    48
    
    Chief Financial OfficerJoseph Scipioni
    
    53
    
    Chief Operating
      OfficerNiall Moore
    
    45
    
    Corporate Secretary and Group
      ControllerDavid Dreisinger
    
    49
    
    DirectorW. Ian L. Forrest
    
    68
    
    Director, Chairman of the BoardGeorge Molyviatis
    
    44
    
    DirectorJames Swearingen
    
    63
    
    DirectorWilliam Corneliuson
    
    64
    
    Director


William Murrayhas served as our President and Chief
Executive Officer and as director since March 2003. Mr. Murray is an engineer in
the mining industry with 37 years of experience in construction

33

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management and project evaluation in North America and Africa.
  He became involved with our operations in March 2003 as a principal of Optimum
  Project Services Ltd., a consulting firm whose work with us led to technical
  improvements and large capital cost reductions on the NorthMet Project. Prior
  to that, Mr. Murray was employed by at Fluor Daniel, a large U.S. Engineering
  & Construction contractor, as the Director of New Business from October
  1989 to April 1993. From September 1981 to May 1987, Mr. Murray was a Director
  of Project Services at Denison Mines where he participated in the construction
  of the $1.2 billion Quintette Coal project. From September 1970 to August 1981,
  Mr. Murray held a number of positions at Anglo American Corp in South Africa,
  principally in the Gold Division, where he was eventually promoted to the rank
  of Chief Engineer. Mr. Murray is also a Director of Baja Mining Corp. Mr. Murray
  resides in Canada.

Douglas J. Newbyhas served as our Chief Financial
Officer since November 2005. Mr. Newby has approximately 26 years of experience
in the evaluation and financing of mining companies and projects around the
world. Before coming to PolyMet, Mr. Newby served variously as a Director,
Executive Vice President, interim Chairman, President and Chief Executive
Officer Western Goldfields, Inc. a US-based gold mining company. Mr. Newby has
also been President of Proteus Capital Corp., a corporate advisory firm that
specializes in the natural resource industries, since July 2001. Mr. Newby
served as Managing Director of Proteus Consultants Ltd. from January 1991 to
July 2001 and Managing Partner of Moyes Newby & Co., Inc. from April 1994 to
December 1998, both of which provided corporate advisory services primarily to
the international energy and mining industries. Since January 2004, Mr. Newby
has served as Vice-President of Cadence Resources Corporation, an oil and gas
exploration and development company. Before forming Proteus Consultants Ltd.,
Mr. Newby held senior positions with the investment banking firms of S.G.
Warburg & Co., Inc., Morgan Grenfell & Co., and James Capel & Co.
His primary responsibility with us is to structure and arrange financing to
place our NorthMet Project into production.

Joseph Scipionihas served as Vice-President  Operations
  and Construction since July 2006 and as Chief Operating Officer since March
  2007. Mr. Scipioni has more than 30 years experience with United States Steel
  Corporation where he worked in a number of progressively senior positions in
  operations. His last position was Plant Manager at the Keewatin Taconite plant
  in Minnesota. In addition, Mr. Scipioni has served in leadership positions with
  the Iron Mining Association of Minnesota, Central Iron Range Initiative, United
  Way of Northeastern Minnesota and Hibbing Chamber of Commerce.

Niall Moore has served as our Corporate Secretary since
December 2006 and as our Group Controller since September 2007. Mr. Moore has
over 20 years of experience with public companies in the resource sector. Most
recently, he worked fulltime as Director, Corporate Reporting for Placer Dome
Inc. and as a consultant to Barrick Gold, Inc. Prior to that was an audit
partner at Ernst & Young LLP. He has extensive experience in financial
reporting, compliance and valuation work. His primary responsibilities with the
Company include legal and regulatory compliance, financial reporting and
internal controls.

Dr. David Dreisingerhas served as a member of our board
of directors since October 2003. Dr. Dreisinger also serves on our audit,
compensation, and corporate governance committees. Dr. Dreisinger is currently a
member of the faculty at the University of British Columbia in the Department or
Metal and Material Engineering. He has published over 100 papers and has been
extensively involved as a process consultant in industrial research programs
with metallurgical companies. Dr. Dreisinger has participated in 11 U.S. patents
for work in areas such as pressure leaching, ion exchange removal of impurities
from process solutions, use of thiosulfate as an alternative to cyanide in gold
leaching, and leach-electrolysis treatment of copper recovery from sulfide ores
and the Sepon Copper Process for copper recovery from sulfidic-clayey ores. He
will work closely with our feasibility consultant to design and complete all
aspects of the testwork.

W. Ian L. Forresthas served as a member of our board of
directors since October 2003. Mr. Forrest also serves on our audit,
compensation, and corporate governance committees. Mr. Forrest is a members of
the Institute of Chartered Accountants of Scotland and continues to practice as
a public accountant in Geneva, Switzerland. Mr. Forrest has 30 years of
experience with public companies in the resource sector. His experience
encompasses the areas of promotion, financing, exploration, production and
company management. He has also participated in several notable projects
including Gulfstream's

34

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North Dome gas discovery, Qatar, Reunion Mining's Scorpion zinc,
  Namibia, which was subsequently developed by Anglo American, and Ocean Diamond
  Mining which pioneered the independent diamond dredging industry off the west
  coast of southern Africa. He also serves as a director on the boards two Canadian
  public companies, Caledonian Mining Corporation and Mengold Resources Inc. Having
  played an important role in the revival of PolyMet Mining Corporation in 2003,
  he was appointed Chairman in May 2004. Mr. Forrest resides in Switzerland.

George Molyviatis has served as a member of our board
  of directors since March 2003. Mr. Molyviatis also serves on our audit and compensation
  committees. Mr. Molyviatis has approximately 20 years experience as an investment
  banker and businessman. He started his career with BNP Paribas in Geneva in
  1986 where held increasingly senior positions, ultimately becoming a Senior
  Vice-President. In 1994 he joined the Credit Suisse group as a Senior Vice-President
  and left in 1996 to join Pegasus Securities, S.A., a Greek investment bank that
  he ran until 1999, when it was sold. Since then Mr. Molyviatis has been a private
  investor in several natural resource companies and owns several large forestry
  and timber processing facilities in Georgia and Russia. Mr. Molyviatis resides
  in Greece.

James Swearingenhas served as a member of our board of
directors since January 2005. Mr. Swearingen formerly managed the largest mining
operation in North America, US Steel's Minntac mine and plant along Minnesota's
Mesabi Iron Range, serving as General Manager of Minnesota Ore Operations. He
currently serves as co-chair of the Governor's Committee on Minnesota's Mining
Future. Mr. Swearingen is also active with other groups that bring new
technology to northeastern Minnesota to develop non-ferrous mines and new, value
added, projects in steel making. He is also an active advisor to the University
of Minnesota's Natural Resources Research Institute based in Duluth, Minnesota.
Mr. Swearingen resides in the United States.

William Corneliusonhas served as a member of our board
of directors since March 2007.Mr. Corneliuson is founder, President and
Chief Investment Officer of B.C. Holdings. He has over 30 years of investment
experience in a range of asset management positions including managing large
institutional portfolios, mutual funds and a private investment fund. Prior to
founding B.C. Holdings, Mr. Corneliuson co-founded Strong Capital Management in
1976, which became Strong/Corneliuson Capital Management, where he served as the
firm's president and raised and managed several billion dollars of institutional
assets and a variety of mutual funds that achieved superior ratings. Mr.
Corneliuson received a B.A. in Political Science and subsequently an MBA from
Michigan State University. He served in the U.S. Marine Corps where he achieved
the rank of Captain.

B.       Statement of
Executive Compensation

During the fiscal year ended January 31, 2007, the Company had
two Named Executive Officers (for the purposes of applicable securities
legislation), namely:

| | (a) | William Murray, President and Chief Executive Officer,
      and
| | --- | ----------------------------------------------------------------
| |     |                                                                 
| | (b) | Douglas Newby, Chief Financial
Officer.                         

The following table sets forth, for the periods indicated, the
compensation of the Named Executive Officers.

35

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|                            |      | Annual Compensation | Long Term Compensation |             
|--------------------------- | ---- | ------------------- | ---------------------- | ------------
|                            |      |                     |                        |             
|                            |      |                     |                        |             
|                            |      |                     |                        |             
|                            |      |                     |                        |             
|                            |      |                     |                        | Other Annual
|Named Executive Officer and | Year | Salary              | Bonus                  | Compensation
|Principal Position          | (1)  | (US$)               | (US$)(1)               | (US$)(3)    
|                            |      |                     |                        |             
|                            |      |                     |                        |             
|William Murray              | 2007 | 232,610             | 274,388                | nil         
|President                   | 2006 | 179,280(7)          | nil                    | nil         
|                            | 2005 | 141,270(6)          | 93,519(8)              | nil         
|                            |      |                     |                        |             
|Douglas Newby (5)           | 2007 | 162,750             | 109,755                | nil         
|Chief Financial Officer     | 2006 | 18,750              | nil                    | nil         
|                            | 2005 | n/a                 | n/a                    | n/a         

(1) February 1 to January 31.

(2) Includes the dollar value (net of consideration paid by the
NEO) calculated by multiplying the closing market price of the Companys freely
trading shares on the date of grant by the number of stock or stock units
awarded.

(3) Perquisites and other personal benefits, securities or property
  for the three most recently completed financial years do not exceed the lesser
  of CDN $50,000 and 10% of the total annual salary and bonus.

(4) Including, but not limited to, amount paid, payable or accrued
  upon resignation, retirement or other termination of employment or change in
  control and insurance premiums with respect to term life insurance.

(5) On November 14, 2005 Douglas Newby replaced Terese
Gieselman as the Companys CFO.

(6) Comprising of management fees payable to Group 4 Ventures
Ltd. (Group 4), a non-reporting company owned by William Murray in the amount
of CDN $11,000 per month for the period February 1, 2005 to September 30, 2005
and thereafter at a rate of CDN $17,000 per month and management fees paid to
William Murray in the amount of CDN $5,000 per month, commencing February 1,
2005.

(7) Comprising of management fees payable to Group 4 in the
amount of CDN $17,000 per month and management fees paid to William Murray in
the amount of CDN $5,000 per month.

(8) Pursuant to the Bonus Share Incentive Plan, 600,000 common
shares were accrued at a deemed price of (CDN) $0.19 per share. By treasury
order dated March 8, 2005 and amended March 23, 2005, the shares were issued to
Group 4.

(9) 250,000 of these options are held in the name of Proteus
Capital Corp. a non-reporting company owned by Douglas Newby.

36

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Option/SAR Grants During the Most Recently Completed Financial
  Year

Name
    Securities
      Under Options/ SARs Granted
      (#)
    % of Total
      Options/SARs Granted to Employees in
      Financial Year(1)
    Exercise or
      Base Price (CDN$/Security)
    Market Value of
      Securities Underlying Options/SARs on the
      Date of Grant (CDN$/Security)
    Expiration DateW. Murray
    450,000
    10%
    $2.76
      $2.76
    March 20, 2011D. Newby
    500,000
    11.1%
    $2.76
      $2.76
    March 20, 2011


(1) Reflected as a percentage of the total number of options to
purchase common shares granted (4,500,000) during the Financial Period.

Aggregate Option/SAR Exercises During the Most Recently
Completed Financial Year and

Financial Year-End Option/SAR Values

NEO Name
    Securities
      Acquired on Exercise
    Aggregate Value
      Realized (CDN $)(2)
    Unexercised Options/SARs
      at Jan. 31, 2007 (#) Exercisable/
      Unexercisable
    Value of Unexercised in-
      the- money(1)Options/SARs
      at Jan. 31, 2007 (CDN $) Exercisable/
      UnexercisableW. Murray
      300,000
      $1,281,000
    700,000/0
    $1,405,000/0


(1) "In-the-money" means the excess of the market value of the
  common shares of the Company on January 31, 2007 (CDN$3.58), over the base price
  of the options. In the case of Mr. Murray, the base price was $0.13 with respect
  to the above exercised options.

(2) Aggregate Value Realized" means the market value at
exercise less the exercise price at the date of exercise.

Pension Plan

The Company does not have a pension plan.

Compensation of Directors

During the Financial Period, no compensation was paid or is payable
  by the Company to the directors of the Company, other than the Named Executive
  Officers (the Other Directors), or the Companys subsidiaries,
  if any, for their services:

(a) in their capacity as directors, including any amounts payable
  for committee participation or special assignments pursuant to any standard
  or other arrangements; or

(b) as consultants or experts, except to David Dreisinger and
  James Swearingen.

37

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The Company has no pension plan or other arrangement for
non-cash compensation to the Other Directors, except as follows:

Name of Director
    Consulting FeesGeorge Molyviatis
    137,194 (1)W. Ian L. Forrest
    137,194 (1)James Swearingen
    196,813 (1)(2)David Dreisinger
    199,394 (1)(2)


(1)Pursuant to the Bonus Plan, 250,000 common
shares were issued to each of the above directors at a deemed price of Cdn$0.75
per share.

(2) Consulting Fees paid in connection with the
Companys NorthMet Project During the most recently completed financial year
(February 1, 2006 to January 31, 2007) (the "Financial Period"), the Company
granted the following incentive stock options to its Other Directors and
insiders:

Name of Optionee
    Date of Grant
    No. of Shares
    Exercise Price Per
      Share
    Expiry DateWilliam Murray
    March 20, 2006
    450,000
    CDN $2.76
    March 20, 2011W. Ian L. Forrest
    March 20, 2006
    250,000
    CDN $2.76
    March 20, 2011David Dreisinger
    March 20, 2006
    250,000
    CDN $2.76
    March 20, 2011James Swearingen
    March 20, 2006
    250,000
    CDN $2.76
    March 20, 2011George Molyviatis
    March 20, 2006
    250,000
    CDN $2.76
    March 20, 2011Douglas Newby
    March 20, 2006
    500,000
    CDN $2.76
    March 20, 2011Joseph Scipioni
    June 19, 2006 January 5, 2007
    200,000 300,000
    CDN $2.97 CDN $3.30
    June 19, 2011 January 5, 2012Niall Moore
    September 1, 2006 January 5, 2007
      275,000
        175,000
    CDN $3.82 CDN $3.30
    September 1, 2011 January 5, 2012Warren Hudelson
    March 20, 2006
    400,000
    CDN $2.76
    March 20, 2011


Reference is made to the section captioned "Election of
Directors" for further details with respect to the present positions of the
aforesaid persons and number of shares held in the Company.

The following are particulars of incentive stock options exercised
  by the Other Directors and insiders of the Company during the Financial Period:

No. of Shares
    Exercise Price Per
      Share
    Date of Exercise
    Closing Price per Share on
      Exercise Date
    Aggregate Net Value(1)150,000
    CDN $0.40
    February 7, 2006
    CDN $2.60
    CDN $330,000150,000
    CDN $0.65
    February 7, 2006
    CDN $2.60
    CDN $292,50040,000
    CDN $0.65
    February 22, 2006
    CDN $2.36
    CDN $68,40020,000
    CDN $1.36
    March 17, 2006
    CDN $2.76
    CDN $28,00060,000
    CDN $1.36
    March 29, 2006
    CDN $3.00
    CDN $98,400150,000
    CDN $0.65
    May 12, 2006
    CDN $5.20
    CDN $682,500300,000
    CDN $0.13
    May 29, 2006
    CDN $4.40
    CDN $128,100328,000
    CDN $0.10
    August 4, 2006
    CDN $3.00
    CDN $951,200150,000
    CDN $0.13
    August 4, 2006
    CDN $3.00
    CDN $430,500


(1) Aggregate net value represents the market value
at exercise less the exercise price at the date of exercise.

38

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Summary of Bonus Plan

On November 5, 2003, we adopted a bonus share incentive plan
(the Bonus Plan) for our directors and key employees. The Bonus Plan was
initially approved at our Annual General and Special Meeting held on May 28,
2004. Thereafter the Bonus Plan was submitted in a revised form in response to
comments received from the TSX-VE and approved thereafter by our shareholders at
their Extraordinary General Meeting held on November 4, 2004.

The issuance of bonus shares is seen to be a true incentive to
key members of the management team as opposed to the granting of more
conventional stock options. If the milestones are not accomplished, the bonus
shares are not granted.

We have determined to limit the aggregate number of shares that
  may be issued under the Bonus Plan and our incentive stock option plan to not
  more than 20% of our issued shares from time to time. Accordingly, we received
  approval for the issuance of up to a total of 2,890,000 shares of our common
  stock with respect to Milestones 1 and 2 as per the following:

Milestone 1: Execution of an option agreement with Cleveland
  Cliffs for the use or purchase of what is referred to as the Cliffs-Erie Facility.
  This consists of real property located near Hoyt Lakes, Minnesota (the Erie
  Site), on which are located various ore processing facilities formerly
  operating by LTV Steel Mining Company as part of that companys taconite
  mining and processing operations (the Property). The Property will
  be used to process mineral products from our NorthMet property, in nearby Babbitt,
  Minnesota. This Milestone was negotiated in September 2003 and a final agreement
  was signed in February 2004. Accordingly, the number of shares issuable was
  1,590,000 shares of which 1,500,000 were issued to the following directors on
  March 15, 2005:

Name of Director
    No. of Common SharesWilliam Murray
    600,000P. Terry OKane
    300,000George Molyviatis
    300,000W. Ian L. Forrest
    300,000


Milestone 2:Negotiation and completion of an off-take
agreement with one or more senior metals producers for the purchase of the
nickel hydroxide concentrate produced from the NorthMet Property, and/or an
equity investment in us by such a producer or producers.

Upon achievement of the Milestone, 1,300,000 shares will be
issued, of which 900,000 have been designated to the following directors:

Name of Director
    No. of Common SharesWilliam Murray
    300,000James Swearingen
    150,000George Molyviatis
    150,000W. Ian L. Forrest
    150,000David Dreisinger
    150,000


and an additional 400,000 shares will be issued to certain Key
Employees as more fully set forth below:

Name of Employee
    No. of Common SharesDouglas Newby
    100,000Gaston Reymenants
    125,000Warren Hudelson
    50,000Jim Scott
    125,000TOTAL
    400,000


39

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Gaston Reymenants has been retained as a specialist in metal
sales to assist with off-take negotiations and project financing.

As at January 31, 2007, Warren Hudelson was a director of our
U.S. subsidiary, Poly Met Mining, Inc., and was involved in the permitting
process. Subsequent to that date, he retired from his full-time capacity and
continues as a consultant to the president of the Company.

Jim Scott is responsible for the permitting process and is involved
  in the project environmental statement.

Don Hunter was the project manager for the NorthMet Project and
  was responsible for the overall completion of the bankable feasibility study.
  Mr. Hunter is now Area Manager  Geology & Mining for the Company.

As at the date of this Annual Report the Bonus Shares under
Milestone 2 have been allotted but have not been earned or issued.

We received approval of Milestones 3 and 4 of the Bonus Plan
  at our Annual and Special Meeting held on June 24, 2005 which provides for the
  issuance of up to a total of 5,990,000 shares as outlined below:

Milestone 3: Completion of a bankable feasibility study
  which indicates that production from the NorthMet Property is commercially feasible.
  The milestone was achieved on September 25, 2006 and therefore, during the year
  ended January 31, 2007, the Company issued 2,350,000 shares as to Directors
  and Key Employees as follows:

Name of Director
    No. of Common SharesWilliam Murray
    500,000George Molyviatis
    250,000James Swearingen
    250,000W. Ian L. Forrest
    250,000Dave Dreisinger
    250,000TOTAL
    1,500,000


Name of Employee
    No. of Common SharesDouglas Newby
    200,000Gaston Reymenants
    200,000Warren Hudelson
    125,000Jim Scott
    125,000Don Hunter
    200,000TOTAL
    850,000


Gaston Reymenants has been retained as a specialist in metal
sales to assist with off-take negotiations and project financing.

As at January 31, 2007, Warren Hudelson was a director of our
U.S. subsidiary, Poly Met Mining, Inc., and was involved in the permitting
process. Subsequent to that date, he retired from his full-time capacity and
continues as a consultant to the president of the Company.

Jim Scott is responsible for the permitting process and involved
  in the project environmental statement.

Don Hunter was the project manager for the NorthMet Project
  and was responsible for the overall completion of the bankable feasibility study.
  Mr. Hunter is now Area Manager  Geology & Mining for the Company.

40

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Milestone 4: Commencement of Commercial Production of
the NorthMet Property.

Upon the achievement of Milestone 4, 2,400,000 shares will be
issued to the Directors as follows:

Name of Director
    No. of Common SharesWilliam Murray
    800,000George Molyviatis
    400,000James Swearingen
    400,000W. Ian L. Forrest
    400,000Dave Dreisinger
    400,000TOTAL
    2,400,000


and an additional 1,240,000 shares will be issued to certain
Key Employees as follows:

Name of Employee
    No. of Common SharesGaston Reymenants
    400,000Warren Hudelson
    240,000Jim Scott
    200,000Don Hunter
    400,000TOTAL
    1,240,000


As of the date of this Annual Report the Bonus Shares under
Milestone 4 have been allotted but have not been earned or issued.

We have a formalized stock option plan for the granting of
incentive stock options to the employees, officers, and directors. The purpose
of granting such options is to assist in compensating, attracting, retaining and
motivating our directors and to closely align the personal interests of such
persons to that of the shareholders.

C.       Board Practices

Term

All of our directors hold office until the next annual meeting
of shareholders and until their successors have been elected and qualified. Our
officers are elected by the shareholders at each annual meeting of shareholders
and hold office until death, resignation, removal from office, or upon a
successor having been elected. For the periods each person has served in his
respective office, see Item 6(A) Directors and Senior Management.

Employment Agreements

Under an employment agreement between us and Mr. William
Murray, dated February 1, 2005, Mr. Murray has the right to receive a severance
allowance in the event of a take-over bid as defined in Section 13 of the
Securities Act(British Columbia), and where the rule requires that the
offeror take up and pay for more than 50% of our issued shares. The severance
allowance was based on our implied market capitalization under the
take-over-bid, calculated by multiplying the number of shares outstanding on a
fully diluted basis by the take-over bid price per share. This severance
allowances have been terminated pursuant to an oral amendment to this contract
and will be replaced by a termination agreement representing three times the
average annual compensation, including cash bonuses, if any, in the three years
prior to change of control.

41

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Notwithstanding the aforementioned provisions, if we terminate
the employment agreement with Mr. Murray for any reason other than cause, under
the terms of the agreement, Mr. Murray will be entitled to receive 200% of all
compensation to be paid for the remaining balance of the term of the agreement
which expired on January 31, 2007.

Under an employment agreement between us and Mr. Douglas Newby,
  dated October 28, 2006, which superseded a prior agreement dated November 22,
  2005, Mr. Newby has the right to receive a severance allowance in the event
  of a take-over bid as defined in Section 13 of the Securities Act(British
  Columbia), and where the rule requires that the offeror take up and pay for
  more than 50% of our issued shares, representing three times the average annual
  compensation in the three years prior to change of control.

Under an employment agreement between us and Mr. Joseph
Scipioni, Mr. Scipioni has the right to receive a severance allowance in the
event of a take-over bid as defined in Section 13 of the Securities Act(British Columbia), and where the rule requires that the offeror take up and
pay for more than 50% of our issued shares, representing three times the average
annual compensation in the three years prior to change of control.

Under an employment agreement between us and Mr. Niall Moore,
dated September 1, 2006, Mr. Moore has the right to receive a severance
allowance in the event of a take-over bid as defined in Section 13 of the
Securities Act(British Columbia), and where the rule requires that the
offeror take up and pay for more than 50% of our issued shares, representing
three times his annual compensation.

Audit Committee

Our audit committee consists of George Molyviatis, W. Ian L.
Forrest, and David Dreisinger, all of whom are independent under AMEX
guidelines. The audit committee oversees our audit procedures, reviews the
audited and unaudited financial statements and disclosures, oversees our
internal systems of accounting and management controls, makes recommendations to
our board of directors as to the selection and appointment of our auditors, and
ensures an open outlet to protect individuals who report concerns from
retaliatory action. Our Audit Committee Charter is attached as Appendix 1 of the
attached Exhibit 12.1.

Compensation Committee

The Compensation Committee, consisting of George Molyviatis and
W. Ian L. Forrest, recommends to the board, compensation levels of our executive
officers. See Report on Executive Compensation below for further details.

Report on Executive CompensationAs part of its
responsibilities, the compensation committee reviews our overall compensation
plan and the policies to ensure they are consistent with our goals of attracting
and retaining the best available personnel, align employees interests with
ours, and suitably pay for performance. In establishing remuneration levels and
in granting stock options, the compensation committee evaluates an executives
performance, level of expertise, responsibilities, length of service with us,
and comparable levels of remuneration paid to executives of other companies of
comparable size and development within the industry.

Statement of Corporate Governance Practices

Corporate governance relates to the activities of the board,
the members of which are elected by and are accountable to the shareholders, and
takes into account the role of the individual members of management who are
appointed by the board and who are charged with managing our day-to-day
business. Our board is committed to sound corporate governance practices, which
are in the interests of our shareholders and contribute to effective and
efficient decision-making. As a company listed on the TSX, we are required to
comply with the guidelines for improved corporate governance in Canada as

42

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adopted by the TSX (the Exchange Guidelines). Our approach to
corporate governance in the context of 14 specific Exchange Guidelines is set
out in the attached Exhibit 11.2.

D.       Employees

As of January 31, 2007 we had three full-time employees, our
president and chief executive officer, corporate secretary and group controller
and an office manager, all located in our Vancouver office.None of our
employees are covered by a collective bargaining agreement.

During the fiscal year ended January 31, 2007, we employed an
average of 10 consultants working out of our Vancouver and Minnesota offices.

E.       Share Ownership

For the shareholdings of our directors and executive officers
see Item 7(A).

We have two arrangements by which we encourage our employees to
acquire ownership interests in us: (1) the Stock Option Plan, and (2) the Bonus
Share Plan. For a description, see footnote 1, under Item 6B.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       Major Shareholders

****The
following table sets forth, as of May 23, 2007, certain information regarding
the ownership of our voting securities by each stockholder known to our
management to be (i) the beneficial owner of more than 5% of our outstanding
common stock, (ii) our directors, (iii) our current executive officers
identified under Item 6(A), and (iv) all executive officers and directors as a
group. We believe that, except as otherwise indicated, the beneficial owners of
the common stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares.

|                                                                       |  |                      |  | Percent of        
|---------------------------------------------------------------------- |  | -------------------- |  | ------------------
|Name and Address of                                                    |  | Amount and Nature of |  | Outstanding Shares
|Beneficial Owner(1)                                                    |  | Beneficial Ownership |  | of Common Stock   
|William Murray (2)                                                     |  | 2,647,276            |  | 1.9%              
|                                                                       |  |                      |  |                   
|Douglas J. Newby (3)                                                   |  | 1,050,000            |  | *                 
|                                                                       |  |                      |  |                   
|Joseph Scipioni (4)                                                    |  | 750,000              |  | *                 
|                                                                       |  |                      |  |                   
|Niall Moore (5)                                                        |  | 450,000              |  | *                 
|                                                                       |  |                      |  |                   
|David Dreisinger (6)                                                   |  | 1,126,300            |  | *                 
|                                                                       |  |                      |  |                   
|W. Ian L. Forrest (7)                                                  |  | 3,105,380            |  | 2.2%              
|                                                                       |  |                      |  |                   
|George Molyviatis (8)                                                  |  | 8,584,920            |  | 6.2%              
|                                                                       |  |                      |  |                   
|James Swearingen (9)                                                   |  | 910,000              |  | *                 
|                                                                       |  |                      |  |                   
|William D. Corneliuson (10)                                            |  | 760,000              |  | *                 
|                                                                       |  |                      |  |                   
|All executive officers and
      directors as a group (9 persons) (11) |  | 19,383,876           |  | 14.1%             

43

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|                            |  |                      |  | Percent of        
|--------------------------- |  | -------------------- |  | ------------------
|Name and Address of         |  | Amount and Nature of |  | Outstanding Shares
|Beneficial
      Owner(1)   |  | Beneficial Ownership |  | of Common Stock   
|5% or more shareholders:    |  |                      |  |                   
|                            |  |                      |  |                   
|Cleveland-Cliffs, Inc. (12) |  | 9,200,547            |  | 6.7%              
|1100 Superior Avenue        |  |                      |  |                   
|Cleveland, OH 44114-2589    |  |                      |  |                   

|* | Less than 1%.
|- | -------------

|1. | The address of each person, unless otherwise noted, is
      c/o PolyMet Mining Corp., Suite 1003- 1177 West Hastings Street,
      Vancouver, British Columbia V6E 2K3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2. | 100,000 shares of common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.66 per share
      set to expire on July 5, 2009, 300,000 shares of common stock issuable
      upon exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2010, and 450,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2011. Mr.
      Murray directly owns 1,000,576 common shares and has voting and
      dispositive control over 796,700 common shares owned in the name of Group
      4 Ventures of which he is the sole stockholder.                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3. | Includes 200,000 common shares held in the name of
      Proteus Capital Corp. of which he is the President and controlling
      shareholder, 100,000 common shares issuable upon exercise of currently
      exercisable options, at an exercise price of CDN$1.15 per share set to
      expire on December 5, 2010, 500,000 common shares issuable upon exercise
      of currently exercisable options, at an exercise price of CDN$2.76 per
      share set to expire on March 20, 2011 held in Mr. Newbys name; and 40,000
      common shares issuable upon exercise of currently exercisable options, at
      an exercise price of CDN$0.94 per share set to expire on June 15, 2010,
      and 210,000 common shares issuable upon exercise of currently exercisable
      options, at an exercise price of CDN$1.36 per share set to expire on
      September 19, 2010 held in the name of Proteus Capital Corp. of which he
      is the President and controlling shareholder.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4. | Includes 200,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$2.97 per share
      set to expire on June 19, 2011 and 300,000 common shares issuable upon
      exercise of currently non-exercisable options, at an exercise price of
      CDN$3.30 per share set to expire on January 5, 2012 held in Mr. Scipionis
      name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|5. | Includes 275,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$3.82 per share
      set to expire on September 1, 2011 and 175,000 common shares issuable upon
      exercise of currently non-exercisable options, at an exercise price of
      CDN$3.30 per share set to expire on January 5, 2012 held in Mr. Moores
      name.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|6. | Includes 300,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.66 per share
      set to expire on July 5, 2009, 150,000 common shares issuable upon
      exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2010, and 250,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2011. Dr.
      Dreisinger directly owns 426,300 common shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|7. | Includes 350,000 common shares issuable upon exercise of
        currently exercisable options, at an exercise price of CDN$0.66 per share
        set to expire on July 5, 2009, 150,000 common shares issuable upon exercise
        of currently exercisable options, at an exercise price of CDN$1.36 per
        share set to expire on September 19, 2010, and 250,000 common shares issuable
        upon exercise of currently exercisable options, at an exercise price of
        CDN$2.76 per share set to expire on March 20, 2011. Mr. Forrest has voting
        and dispositive control with respect to 1,028,000 common shares owned
        in the name of Micor Trading SA of which he is a director,                                                                                                                                                                                                                                                                       

44

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|    | 375,000 common shares owned in the name of Panares Resources
        Inc. of which he is a director, and Catherine L. Forrest, Mr. Forrests
        wife, directly owns 952,380 common shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|8.  | Includes 150,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$1.36 per share
      set to expire on September 19, 2010, and 250,000 common shares issuable
      upon exercise of currently exercisable options, at an exercise price of
      CDN$2.76 per share set to expire on March 20, 2011. Mr. Molyviatis
      directly owns 8,184,920 common shares.                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|9.  | Includes 150,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of CDN$0.65 per share
      set to expire on March 30, 2010, 150,000 common shares issuable upon
      exercise of currently exercisable options, at an exercise price of
      CDN$1.36 per share set to expire on September 19, 2010, and 250,000 common
      shares issuable upon exercise of currently exercisable options, at an
      exercise price of CDN$2.76 per share set to expire on March 20, 2011. Mr.
      Swearingen directly owns 360,000 common shares and Sandra J. Swearingen,
      Mr. Swearingens wife, directly owns 900 common shares.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10. | Includes 400,000 common shares issuable upon exercise of
      currently exercisable options, at an exercise price of US$2.88 per share
      set to expire on March 8, 2012, held in Mr. Corneliusons name. Mr.
      Corneliuson directly owns 360,000 common shares.                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|11. | Includes 5,700,000 common shares issuable upon exercise
      of currently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12. | This shareholder held 1,000,000 shares as of January 31,
      2005, 7,200,547 as of January 31, 2006 and 9,200,547 as of January 31,
      2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Our shareholders who beneficially own more than 5% of our
common shares outstanding do not have voting rights different from any other
shareholders of common shares.

As of May 23, 2007, there were 379 holders of record of our
common shares of which 278 were U.S. residents owning 40,662,475 (29.78%) of our
outstanding common shares.

B. Related Party Transactions

The Company has conducted transactions with officers, directors
and persons or companies related to directors and paid or accrued amounts as
follows:

|                                                   |   | 2007   |  |   | 2006   |  |   | 2005   | 
|-------------------------------------------------- | - | ------ |  | - | ------ |  | - | ------ | 
|                                                   |   |        |  |   |        |  |   |        | 
|Rent and office charges paid to a company
      of |   |        |  |   |        |  |   |        | 
|which the president is a director                  | $ | 62,000 |  | $ | 25,000 |  | $ | 20,000 | 

The amounts charged to the Company for the services provided
have been determined by negotiation among the parties and, in certain cases, are
covered by signed agreements. These transactions were in the normal course of
operations and were measured at the exchange value, which is the amount of
consideration established and agreed to by the related parties.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

See Item 17.

Legal Proceedings

GARY K. NORGAARD, AS ASSIGNEE OF THE ASSETS OF CROWN HOLDINGS,
  INC. AND CROWN FINANCIAL GROUP INC. has filed suit in the UNITED STATES DISTRICTCOURT,
  DISTRICT OF NEW JERSEY against us claiming that it held 225,000 options to acquire
  our stock. We believe that this claim has no merit and do not believe we have
  any liability in the matter.

45

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Dividend Policy

Since its incorporation, we have not declared or paid, and have
no present intention to declare or to pay in the foreseeable future, any cash
dividends with respect to our common shares. Earnings will be retained to
finance further growth and development of our business. However, if the board of
directors declares dividends, all common shares will participate equally, and,
in the event of liquidation, in our net assets.

B.       Significant Changes

Subsequent to January 31, 2007:

On 17 April 2007, the Company closed a non-brokered private
placement financing of 15 million units at US$2.75 per unit, with each unit
comprising one common share and one-half of one warrant. Each whole warrant is
exercisable into a common share at a price of US$4.00 at any time until 13
October 2008, subject to an early trigger if the 20-day volume weighted average
price of the common shares is US$6.00 or more. In connection with the private
placement, the Company has paid finders fees totalling US$1.43 million in cash,
150,000 shares and 520,000 broker warrants having the same terms as the warrants
described above.

The Company granted 1,950,000 stock options to directors,
officers, consultants and employees at prices ranging from US$2.88 to $2.99. Of
these options, 475,000 vested immediately and 1,475,000 are scheduled to vest at
future dates or upon future events.

On 25 April 2007, the Companys agreement with Minnesota Power,
whereby Minnesota Power will provide all of PolyMets electric service needs at
its NorthMet Project through 2018 was approved by the Minnesota Public Utilities
Commission.

ITEM 9. THE OFFER AND LISTING

A.       The Offer and Listing
Details

The following table outlines the annual high and low market
prices for the five most recent fiscal years:

Fiscal Year Ended
      Toronto Stock Exchange1/
        TSX-Venture Exchange
      American Stock Exchange2/
        Over- the-Counter Bulletin BoardHigh
      Low
      High
      LowJanuary 31, 2007
      CDN$5.34
      CDN$2.58
      US$4.21
      US$2.25January 31, 2006
      CDN$2.74
      CDN$0.51
      US$2.42
      US$0.42January 31, 2005
      CDN$1.20
      CDN$0.27
      US$0.90
      US$0.20January 31, 2004
      CDN$0.30
      CDN$0.05
      US$0.30
      US$0.04January 31, 2003
      CDN$0.80
      CDN$0.04
      US$0.22
      US$0.02


The following table outlines the high and low market prices for
each fiscal financial quarter for the two most recent fiscal periods and any
subsequent period:

Fiscal Quarter Ended
      Toronto Stock Exchange1/
        TSX-Venture Exchange
      American Stock Exchange2/
        Over- the-Counter Bulletin BoardHigh
      Low
      High
      LowApril 30, 20073
      CDN$4.61
      CDN$3.25
      US$4.15
      US$2.74January 31, 2007
      CDN$4.00
      CDN$3.10
      US$3.53
      US$2.67October 31, 2006
      CDN$4.15
      CDN$2.60
      US$3.74
      US$2.25July 31, 20061
      CDN$5.34
      CDN$2.58
      US$4.85
      US$2.30April 30, 2006
      CDN$4.00
      CDN$2.29
      US$3.56
      US$2.00


46

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January 31, 2005
    CDN$2.74
    CDN$1.31
    US$2.42
    US$1.12October 31, 2004
    CDN$1.91
    CDN$0.87
    US$1.62
    US$0.72July 31, 2004
    CDN$1.03
    CDN$0.82
    US$0.85
    US$0.65April 30, 2005
    CDN$0.85
    CDN$0.51
    US$0.68
    US$0.42


The following table outlines the high and low market prices for
each of the most recent six months:

Month Ended
      Toronto Stock Exchange1/
        TSX-Venture Exchange
      American Stock ExchangeHigh
      Low
      High
      LowApril 30, 2007
      CDN$4.61
      CDN$3.27
      US$4.15
      US$2.90March 31, 2007
      CDN$3.42
      CDN$3.25
      US$3.00
      US$2.74February 28, 20073
      CDN$3.80
      CDN$3.35
      US$3.26
      US$2.88January 31, 2007
      CDN$3.75
      CDN$3.10
      US$3.15
      US$2.67December 31, 2006
      CDN$4.00
      CDN$3.52
      US$3.53
      US$3.05November 30, 2006
      CDN$3.85
      CDN$3.25
      US$3.41
      US$2.81


|1. | On January 31, 2007 we ceased trading on the TSX Venture
      Exchange and on February 1, 2007, we commenced trading on the Toronto
      Stock Exchange.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|2. | On June 26, 2006, we began trading on the American Stock
      Exchange.                                                                                  

C.       Markets

In April 1984, our common shares commenced trading on the TSX
Venture Exchange in British Columbia, Canada under the symbol "POM. On February
1, 2007, our common shares graduated to trading on the TSX Exchange in British
Columbia under the symbol POM. In August 2000, our common shares began trading
on the OTCBB under the symbol POMGF. On June 26, 2006, our common shares
commenced trading on the American Stock Exchange under the symbol PLM.

ITEM 10. ADDITIONAL INFORMATION

B.       Memorandum and
Articles of Association

Incorporation

We incorporated under the name Fleck Resources Ltd. pursuant to
the Corporation Act (British Columbia) by registration of its memorandum in
British Columbia, Canada, under Certificate of Incorporation #BC0228310 on March
4, 1981. We changed our name to PolyMet Mining Corp. on June 10, 1998. We do not
have any stated objects or purposes as such are not required by the
corporate laws of the Province of British Columbia. Rather, we are, by such
corporate laws, entitled to carry on any activities whatsoever that are not
specifically precluded by other statutory provisions of the Province of British
Columbia.

Powers and Functions of the Directors

The powers and functions of the directors are set forth in our
Articles, the current version of which were adopted on October 6, 2004, and in
the Business Corporations Act (British Columbia). They provide that:

|(a) | a director who holds office or possesses any property,
      right, or interest that could result, directly or indirectly, in the
      creation of a duty of interest that materially conflicts with his duty or
      interest as a director must disclose the nature and extent of the conflict
      and abstain from voting on the
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47

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|    | approval of the proposed contract or transaction, unless
      all the directors have a disclosable interest, in which case the director
      may vote on such resolution, and moreover, may be liable to account to us
      for any profit that accrued under such an interest contract or
      transaction;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                 
|(b) | a director is not deemed to be interested in a proposed
      contract or transaction merely because it relates to the remuneration of a
      director in that capacity. The directors may, in the absence of an
      independent quorum, vote compensation to themselves;                                    
|    |                                                                                                                                                                                                                                                                                                                 
|(c) | there are no specific limitations on the exercise by the
      directors of our borrowing powers;                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                 
|(d) | there are no provisions for the retirement or
      non-retirement of directors under an age limit; and                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                 
|(e) | there is no requirement for a director to hold any shares
      in us.                                                                                                                                                                                                                                          

Rights and Restrictions Attached to the Shares

As all of our authorized and issued shares are of one class of
common shares, there are no special rights or restrictions of any nature or kind
attached to any of the shares, including any dividend rights. All authorized and
issued shares rank equally in respect to the declaration and receipt of
dividends and rights to share in any profits or surplus upon our liquidation,
dissolution or winding-up. Each share has attached to it one non-cumulative
vote. Shareholders are not liable to further capital calls made by us. There is
no specific sinking fund provision or any provision discriminating against any
existing or prospective holder of shares as a result of such shareholder owning
a substantial number of shares.

Alteration of Share Rights

The rights of holders of our issued common shares may be
altered by special resolution, which requires the approval of the holders of
two-thirds or more of the votes cast at a meeting of our shareholders called and
held in accordance with applicable law.

Annual General Meetings

Annual General Meetings are called and scheduled upon decision
by the Board of Directors. Pursuant to the Business Corporations Act(British Columbia), we are required to hold an annual meeting in each year,
not more than 15 months after the date of the most recent annual meeting. The
directors may call a meeting of the shareholders whenever they see fit. All
meetings of the shareholders may be attended by registered shareholders or
persons who hold powers of attorney or proxies given to them by registered
shareholders.

Foreign Ownership Limitations

Our Articles and charter documents do not contain limitations
prohibiting non-residents, foreigners or any other group from holding or voting
shares.

Change of Control

There are no provisions in our Articles or charter documents
that currently have the effect of delaying, deferring or preventing a change in
the control in us, or that would operate with respect to any proposed merger,
acquisition or corporate restructuring involving us or any of our subsidiaries.

Share Ownership Reporting Obligations

There are no provisions in our Articles requiring share
ownership to be disclosed.

Securities legislation in Canada requires that shareholder
ownership must be disclosed once a person owns beneficially or has control or
direction over greater than 10% of the issued shares of a corporation,

48

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such as us. This threshold is higher than the 5% threshold
under U.S. securities legislation at which shareholders must report their share
ownership.

C.       Material Contracts

Asset Purchase Agreements

For a complete description of the acquisition of the mine site
lease, see Item 4(D)(c)(i).

For a complete description of the acquisition of the Erie Plant
and associated infrastructure acquired in the Asset Purchase Agreements I and
II, see Item 4(D)(c)(ii).

D.       Exchange Controls

There are no governmental laws, decrees or regulations in
Canada relating to restrictions on the export or import of capital, or affecting
remittance of interest, dividends or other payments to non-resident holders of
common shares of the Corporation. Any remittances of dividends to United States
residents are, however, subject to a 15% withholding tax (5% if the shareholder
is a company owning at least 10% of the outstanding common shares) pursuant to
the reciprocal tax treaty between Canada and the United States. See the section
of this Form 20-F entitled Taxation.

Except as provided in the Investment Canada Act (the ICA),
which has provisions which govern the acquisition of a control block of voting
shares by a person who is not a Canadian resident (a non-Canadian) of a
company carrying on a Canadian business, there are no limitations specific to
the rights of non-Canadians to hold or vote the common shares under the laws of
Canada or the Province of British Columbia or in the charter documents of the
Corporation.

E.       Taxation

The following summary of the material Canadian federal income
tax considerations generally applicable to our common shares reflects our
opinion. The tax consequences to any particular holder of common shares will
vary according to the status of that holder as an individual, trust,
corporation, or member of a partnership, the jurisdiction in which that holder
is subject to taxation, the place where that holder is resident and, generally,
according to that holders particular circumstances. This summary is applicable
only to holders who are residents of the United States, have never been a
resident of Canada, deal at arms length with us, hold their common shares as
capital property, and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this summary, may
apply to a United States holder that is an issuer that carries on business in
Canada and elsewhere.

This summary is based upon the provisions of the Income Tax Act
of Canada and the regulations thereunder (collectively, the Tax Act, or ITA)
and the Canada-United States Tax Convention as amended by the Protocols thereto
(the Tax Convention) as of the date of the Annual Report and the current
administrative practices of Revenue Canada, Customs, Excise and Taxation. This
summary does not take into account Canadian provincial income tax consequences.

This summary is not exhaustive of all possible income tax
consequences. It is not intended as legal or tax advice to any particular holder
of common stock and should not be so construed. Each holder should consult his
own tax advisor with respect to the income tax consequences applicable to him in
his own particular circumstances.

North American Free Trade Agreement (Canada). The Investment
  Act was amended with the North American Free Trade Agreement (NAFTA) to provide
  for special review thresholds for Americans (including American-controlled
  entities as defined in the Investment Act). Under the Investment
  Act, as amended, an investment in our common shares by an American would be
  reviewable only if it was an investment to acquire control of us and the value
  of our assets was equal to or greater than a specified amount (the Review
  Threshold), which increases in stages. The Review Threshold is currently
  $150 million.

49

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Disposition of Common Shares. If a non-resident of Canada
  were to dispose of our common shares to a Canadian corporation which deals or
  is deemed to deal on a non-arms length basis with the non-resident and
  that, and immediately after the disposition is connected with us (i.e., holds
  shares representing more than 10% of the voting power and more than 10% of the
  market value of all of our shares issued and outstanding), the amount by which
  the fair market value of any consideration (other than any shares of the purchaser
  corporation) exceeds the paid-up capital of the common shares sold will be deemed
  to be taxable as a dividend paid by the purchasing corporation, either immediately
  or eventually by means of a deduction in computing the paid-up capital of the
  purchasing corporation, and subject to withholding taxes as described below.

Under the Tax Act, a gain from the sale of common shares by a
non-resident will not be subject to Canadian tax, provided the shareholder
(and/or persons who do not deal at arms length with the shareholder) has not
held a substantial interest in us (25% or more of the shares of any class of
our stock) at any time in the five years preceding the disposition. Generally,
the Tax Convention will exempt from Canadian taxation any capital gain realized
by a resident of the United States, provided that the value of the common shares
is not derived principally from real property situated in Canada.

Dividend. In the case of any dividends paid to
non-residents, we withhold the Canadian tax and remit only the net amount to the
shareholder. By virtue of Article X of the Tax Convention, the rate of tax on
dividends paid to residents of the United States is generally limited to 15% of
the gross dividend (or 5% in the case of certain corporate shareholders owning
at least 10% of our voting shares upon ratification of the Protocol amending the
treaty. In the absence of the Tax Convention provisions, the rate of Canadian
withholding tax imposed on non-residents is 25% of the gross dividend. Stock
dividends received by nonresidents from us are taxable by Canada as ordinary
dividends and therefore the withholding tax rates will be applicable.

Where a holder disposes of common shares to us (unless we
acquired the common shares in the open market in the manner in which shares
would normally be purchased by any member of the public), this will result in a
deemed dividend to the U.S. holder equal to the amount by which the
consideration we paid by exceeds the paid-up capital of such stock. The amount
of such dividend will be subject to withholding tax as described above.

Capital Gains. A non-resident of Canada is not subject
to tax under the ITA in respect of a capital gain realized upon the disposition
of a share of a class that is listed on a prescribed stock exchange unless the
share represents taxable Canadian property to the holder thereof. Our common
shares will be taxable Canadian property to a non-resident holder if, at any
time during the period of five years immediately preceding the disposition, the
non-resident holder, persons with whom the non-resident holder did not deal at
arms length, or the non-resident holder and persons with whom he/she did not
deal at arms length owned 25% or more of our issued shares of any class or
series. In the case of a nonresident holder to whom our shares represent taxable
Canadian property and who is resident of the United States, no Canadian tax will
be payable on a capital gain realized on such shares by reason of the Tax
Convention unless the value of such shares is derived principally from real
property situated in Canada or the non-resident holder previously held the
shares while resident in Canada. We believe that the value of our common shares
is not derived from real property situated inside Canada.

Certain United States Federal Income Tax Consequences.
  The following is a discussion of certain possible United States Federal income
  tax consequences, under the law, generally applicable to a U.S. Holder (as defined
  below) of our common shares. This discussion does not address all potentially
  relevant Federal income tax matters and it does not address consequences peculiar
  to persons subject to special provisions of Federal income tax law, such as
  tax-exempt organizations, qualified retirement plans, financial institutions,
  insurance companies, real estate investment trusts, regulated investment companies,
  broker-dealers, and shareholders who acquired their stock through the exercise
  of employee stock options or otherwise as compensation. In addition, this discussion
  does not cover any state, local or foreign tax consequences.

50

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The following discussion is based upon the sections of the Internal
  Revenue Code of 1986, as amended (the Code), Treasury Regulations,
  published Internal Revenue Service (IRS) rulings, published administrative
  positions of the IRS and court decisions that are currently applicable, any
  or all of which could be materially and adversely changed, possibly on a retroactive
  basis, at any time. In addition, the discussion does not consider the potential
  effects, both adverse and beneficial, of possible legislation which, if enacted,
  could be applied, possibly on a retroactive basis, at any time. The following
  discussion is for general information only and is not intended to be, nor should
  it be construed to be, legal or tax advice to any holder or prospective holder
  of our common shares and no opinion or representation with respect to the United
  States Federal income tax consequences to any such holder or prospective holder
  is made. Accordingly, holders and prospective holders of our common shares should
  consult their own tax advisors about the federal, state, local, and foreign
  tax consequences of purchasing, owning and disposing of our common shares.

U.S. Holders. As used herein, the term U.S. Holder
means a beneficial owner of our common shares that is, for U.S. federal income
tax purposes, (i) a citizen or resident of the United States, (ii) a corporation
(or other entity taxable as a corporation for United States federal income tax
purposes) created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate the income of which is
includible in gross income subject to United States federal income tax
regardless of its source, or (iv) a trust (a) the administration of which is
subject to the primary supervision of a court in the United States and for which
one or more U.S. persons have the authority to control all substantial decisions
or (b) that has a valid election in effect under applicable Treasury regulations
to be treated as a U.S. person. If a partnership is a beneficial owner of our
common shares, the tax treatment of a partner in the partnership will generally
depend upon the status of the partner and the activities of the partnership. If
you are a partner in a partnership that owns our common shares, you should
consult your own tax advisor.

Distributions on Our Common Shares. Except as set forth
below with regard to excess distributions, U.S. Holders receiving dividend
distributions (including constructive dividends) with respect to our common
shares are required to include in gross income for United States Federal income
tax purposes the gross amount of such distributions when received, to the extent
that we have current or accumulated earnings and profits, without reduction for
any Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be credited, subject to certain limitations, against the U.S.
Holders United States Federal Income tax liability or, alternatively, may be
deducted in computing the U.S. Holders United States Federal taxable income by
those who itemize deductions. (See more detailed discussion at Foreign Tax
Credit below). To the extent that distributions exceed our current or
accumulated earnings and profits, they will be treated first as a return of
capital up to the U.S. Holders adjusted basis in the common shares and
thereafter as gain from the sale or exchange of the common shares. Preferential
tax rates for long-term capital gains are currently applicable to a U.S. Holder
that is an individual, estate or trust. Dividends paid on our common shares will
not generally be eligible for the dividends received deduction provided to
corporations receiving dividends from certain United States corporations.

Classification As a Passive Foreign Investment Company.
A non-U.S. corporation is classified as a passive foreign investment company (a
PFIC) for a taxable year if either: (i) at least 75% or more of its gross
income is passive income or (ii) at least 50% of the value of its assets (based
on an average of the quarterly values of the assets during the taxable year) is
attributable to passive assets (which includes cash and any assets that produce,
or are held for the production of, passive income). For at least as long as we
do not generate income from our operations, we believe that we will be
classified as a PFIC for United States federal income tax purposes. As a result,
a U.S. Holder of our common shares will be subject to special tax rules with
respect to any excess distribution that it receives and any gain it realizes
from a sale or other disposition (including a pledge) of our common shares,
unless it makes either a mark-to-market or qualified electing fund election
as discussed below. Distributions a U.S. Holder receives in a taxable year that
are greater than 125% of the average annual distributions such U.S. Holder
received during the shorter of the three preceding taxable years or the U.S.
Holders holding

51

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period for the common shares will be treated as an excess
distribution. In addition, a step-up in the tax basis of stock in a PFIC may not
be available upon the death of an individual U.S. Holder.

Under these special tax rules: (i) the excess distribution or
gain will be allocated ratably over the U.S. Holders holding period for the
common shares, (ii) the amount allocated to the current taxable year, and any
taxable year prior to the first taxable year in which we were a PFIC, will be
treated as ordinary income, and (iii) the amount allocated to each other year
will be subject to the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be imposed on the
resulting tax attributable to such year.

The tax liability for amounts allocated to years prior to the
year of disposition or excess distribution cannot be offset by any net
operating losses for such years and gains (but not losses) realized on the sale
of common shares cannot be treated as capital, even if the U.S Holder holds the
common shares as capital assets.

Alternatively, a U.S. Holder of marketable stock (as defined
below) in a PFIC may make a mark-to-market election for stock of a PFIC to elect
out of the tax treatment discussed in the two preceding paragraphs. If a U.S.
Holder makes a mark-to-market election for common shares, the U.S. Holder will
include in income each year an amount equal to the excess, if any, of the fair
market value of the common shares as of the close of its taxable year over its
adjusted basis in such common shares. A U.S. Holder is allowed a deduction for
the excess, if any, of the adjusted basis of common shares over their fair
market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on common shares
included in the U.S. Holders income for prior taxable years. Amounts included
in a U.S. Holders income under a mark-to-market election, as well as gains on
the actual sale or other disposition of common shares, are treated as ordinary
income. Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on common shares, as well as to any loss realized on the
actual sale or disposition of common shares, to the extent that the amount of
such loss does not exceed the net mark-to-market gains previously included for
such common shares. A U.S. Holders basis in common shares will be adjusted to
reflect any such income or loss amounts.

The mark-to-market election is available only for marketable
stock, which is stock that is traded in other than de minimis quantities on at
least 15 days during each calendar quarter on a qualified exchange, including
the American Stock Exchange, or other market, as defined in applicable U.S.
Treasury regulations. Our common shares are listed on the American Stock
Exchange and, consequently, the mark-to-market election should be available to a
U.S. Holder, provided that our common shares are traded in sufficient
quantities.

In general, if a non-U.S. corporation is a PFIC, a holder of
shares in that corporation may avoid taxation under the rules described above by
making a qualified electing fund (QEF) election to include in income its
share of the corporations income on a current basis, or a deemed sale
election once the corporation no longer qualifies as a PFIC. However, a U.S.
Holder may make a qualified electing fund election with respect to common shares
only if we furnish certain tax information to the U.S. Holder annually, and we
do not currently intend to prepare or provide such information.

Foreign Tax Credit. A U.S. Holder that pays (or has
withheld from distributions) Canadian income tax with respect to the ownership
of our common shares may be entitled, at the option of the U.S. Holder, to
either a deduction or a tax credit for such foreign tax paid or withheld.
Generally, it will be more advantageous to claim a credit because a credit
reduces United States Federal income taxes on a dollar-for-dollar basis, while a
deduction merely reduces the taxpayers income subject to tax. This election is
made on year-by-year basis and applies to all foreign income taxes (or taxes in
lieu of income tax) paid by (or withheld from) the U.S. Holder during the year.
There are significant and complex limitations which apply to the credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holders United States income tax liability that the U.S.
Holders foreign source income bears to his/her or its worldwide taxable income.
In the determination of the application of this limitation, the various items of
income and deduction must be classified into foreign and domestic sources.

52

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Complex rules govern this classification process. The
availability of the foreign tax credit and the application of the limitations on
the credit are fact specific and holders and prospective holders of our common
shares should consult their own tax advisors regarding their individual
circumstances.

H.       Documents on Display

All documents referred to in this Form 20-F are available for
inspection at our office, listed below, during normal office hours.

PolyMet Mining Corp. #1003 - 1177
West Hastings Street Vancouver, British Columbia V6E 2K3 Canada

We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, we file reports and other information with the SEC. These
materials, including this annual report on Form 20-F and its exhibits, may be
inspected and copied at the SECs Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 and at the SECs regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the Commission at 100 F. Street,
N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain
information on the operation of the Commissions Public Reference Room by
calling the Commission in the United States at 1-800-SEC-0330.

Our reports, registration statements and other information can
also be inspected on EDGAR available on the SECs website at www.sec.gov.

53

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK

We may be subject to foreign currency exchange rate risk,
because we hold funds and financial instruments in Canadian dollars but report
our financial information using the U.S. dollar. If we hold onto funds obtained
from financings, currently our only means to obtain funds, in Canadian dollar
accounts and the Canadian dollar depreciates in comparison to the U.S. the fair
value of our funds will decrease and will be reported on our financial
statements at this depressed conversion rate. If the Canadian dollar appreciates
as compared to the U.S. dollar, however, fair value of any financial instruments
or funds held will increase and be reported on our financial statements based on
this favorable conversion rate. Our current exposure, however, is not sufficient
to have a material effect on our results of operations and financial
condition.

Moreover, we periodically access the capital markets with the
issuance of new shares to fund operating expenses, and we do not maintain
significant cash reserves over periods of time that could be materially affected
by fluctuations in interest rates or foreign exchange rates.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.

ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND
DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY
HOLDERS AND USE OFPROCEEDS

Shareholder Rights Plan

Effective December 4, 2003, we adopted a Shareholder Rights
Plan (Rights Plan), ratified by our shareholders on May 28, 2004. Under the
Rights Plan, all common shares that we issued during the term of the Rights Plan
will receive one right for no consideration for each share of common stock held,
to holders of record on December 4, 2003. The term of the Rights Plan is 10
years, unless the rights are earlier redeemed or exchanged. The rights issued
under the Rights Plan become exercisable only if a party acquires 20% or more of
our common shares without complying with the Rights Plan or without the approval
of our board of directors.

Each right entitles the registered holder thereof to purchase
from us, on the occurrence of certain events, one common share at the price of
CDN$50 per share, subject to adjustment (the Exercise Price). However, if a
Flip-in Event (as defined in the Rights Plan) occurs, each Right would then
entitle the registered holder to receive, upon payment of the Exercise Price,
that number of common shares that have a market value at the date of that
occurrence equal to twice the Exercise Price. The rights are not exercisable
until the Separation Time as defined in the Rights Plan.

The Shareholder Rights Plan is filed as Exhibit 4.2.

ITEM 15. CONTROLS AND PROCEDURES

A. Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report, an
evaluation was performed under the supervision and with the participation of our
management, including the chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 of the Exchange Act, as amended). Based on
that evaluation, our management, including the chief executive officer and chief
financial officer, concluded that at 31 January 2007 the Companys disclosure
controls and procedures were effective in providing reasonable

54

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assurance that material information required to be disclosed by
us in the reports that we file or submit under the Exchange Act, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. In reaching this conclusion, the Company
recognizes two factors that must be and are present:

| | a) | the Company is dependent upon its advisors and
      consultants (primarily legal counsel) to assist in recognizing,
      interpreting and understanding and complying with the various securities
      regulations disclosure requirements, and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | an active board of Directors and Management with open
      lines of communication.                                                                                                                                                               

During the year ended 31 January 2007 the Company determined
that the accounting for share purchase warrants in its financial statements for
the year ended 31 January 2006 and its share bonus program in its financial
statements for the year ended 31 January 2005 was incorrect. The Company has
restated its financial statements for the years ended 31 January 2006 and 2005
to reflect these items. As a result, the Company has concluded that its
disclosure controls and procedures for the years ended 31 January 2006 and 31
January 2005 were ineffective. Recognizing the increasing complexity of the
regulatory environment, the Company hired a new Controller on September 1, 2006
and established new internal controls in order to address the above noted
weaknesses.

B. Management's Annual Report on Internal Control over
Financial Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, as a process designed 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 and 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 its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal
control over financial reporting as of January 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control
 Integrated Framework."

Based on its assessment, management believes that, as of
January 31, 2007,our internal control over financial reporting is effective.

This annual report does not include an attestation report of
the company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.

C. Changes in Internal Controls

55

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The CEO and CFO have assessed the effectiveness of the
Companys internal controls over financial reporting as at 31 January 2007 in
accordance with Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, the Companys CEO and CFO determined that the Companys internal
control over financial reporting was effective as of 31 January 2007.

As a result of the restatements due to accounting for the share
bonus plan and share purchase warrants, management has designed a more
comprehensive set of controls over equity transactions and has increased its
internal resources.

The term internal control over financial reporting is defined
as a process designed by, or under the supervision of, the our principal
executive and principal financial officers, or persons performing similar
functions, and effected by the our 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 and
includes those policies and procedures that:

| | (1) | Pertain to the maintenance of records that in reasonable
      detail accurately and fairly reflect our transactions and dispositions of
      assets;                                                                                                                                                                                                     
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                            
| | (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 our
      receipts and expenditures are being made only in accordance with
      authorizations of management and directors of the registrant;
and
| |     |                                                                                                                                                                                                                                                                                                                                                            
| | (3) | Provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use or disposition of our
      assets that could have a material effect on the financial
    statements.                                                                                                                                         

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

As of January 31, 2007, the audit committee consisted of three
directors. The Board of Directors has determined that the following two audit
committee members are deemed financial experts, both of whom are independent as
defined under the American Stock Exchange Listing Standards.

W. Ian L. Forrest Mr. Forrest is a Chartered
Accountant practicing in Geneva and specializes in finance, banking and tax
consulting. He is a director of two Canadian public companies, Caledonian Mining
Corporation and Mengold Resources Inc.

George Molyviatis Mr. Molyviatis has approximately
sixteen years experience as an investment banker and businessman. He started his
career with BNP Paribas in Geneva in 1986 and held increasingly senior
positions, ultimately becoming Senior Vice-President. In 1994 he joined Credit
Suisse as Senior Vice-President and left in 1996 start-up Pegasus Securities,
S.A., a Greek investment bank that he ran until 1999, when it was sold. Since
then Mr. Molyviatis has been a private investor in several natural resource
companies.

ITEM 16B. CODE OF ETHICS

We have adopted Code of Ethics, effective April 5, 2006, which
applies to all our employees, including our directors and executive officers.
The Code of Ethics covers areas of professional and business conduct, and is
intended to promote honest and ethical behavior, including fair dealing and the
ethical handling of conflicts of interest, support full, fair, accurate, and
timely disclosure in reports and documents we file with, or submit to, the SEC
and other governmental authorities, and in its other public communications;
deter wrongdoing; encourage compliance with applicable laws, rules, and
regulations;

56

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and to ensure the protection of our legitimate business
interests. We also encourage our directors, officers, employees and consultants
to promptly to report any violations of the Code of Ethics.

The Code is filed as Exhibit 11.1.

57

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ITEM 16C.       
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following outlines the expenditures for accounting fees for
the last two fiscal periods ended:

Financial YearEnding
      Audit Fees
      Audit RelatedFees
      Tax Fees1
      All Other FeesJanuary 31, 2007
    CDN $91,600
    CDN$43,600
    CDN $Nil
    CDN $NilJanuary 31, 2006
    CDN $22,600
    Nil
    CDN $3,725
    CDN $588


| | 1 | Audit-related fees consist of fees to perform an
      auditors review of the Companys quarterly interim financial
      statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| | 2 | Represents the fees billed for U.S. and Canadian tax
      returns prepared by Staley, Okada & Partners.                              

Pre-Approval Policies and Procedures

All of the fees paid to our auditors, PricewaterhouseCoopers
LLP, were pre-approved by our Audit Committee. This pre-approval involved a
submission by our auditors to our Audit Committee of a scope of work to complete
the audit and prepare tax returns, an estimate of the time involved, and a
proposal for the fees to be charged for the audit. The Audit Committee reviewed
this proposal with our management and after discussion with our auditors,
pre-approved the scope of work and fees.

PART III

ITEM 17. FINANCIAL STATEMENTS

Our financial statements are stated in United States Dollars
(US$) and are prepared in accordance with Canadian Generally Accepted Accounting
Principles; the application of which, in our case, conforms in all material
respects for the periods presented with U.S. GAAP, except as disclosed in
footnotes to the financial statements.

Index to Financial Statements

Description
      
      PageManagements Responsibility for the Financial Statements
      
      F-1Report of Independent Registered Public Accounting Firm
      
      F-2Consolidated Balance Sheet
      
      F-3Consolidated Statements of Shareholders Equity
      
      F-4Consolidated Statements of Loss
      
      F-5Consolidated Statements of Cash Flows
      
      F-6Consolidated Schedules of Pre-Feasibility Costs
      
      F-7Notes to Consolidates Financial Statements
      
      F-8


ITEM 18. FINANCIAL STATEMENTS

Not Applicable.

58

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ITEM 19. EXHIBITS

|            |                                                                                                                                                  | Footnote
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | --------
|Exhibit No. | Description                                                                                                                                      | Ref.    
|            |                                                                                                                                                  |         
|1.1         | Certificate of Incorporation.                                                                                                                    | (1)     
|            |                                                                                                                                                  |         
|1.2         | Certificate of Change of Name.                                                                                                                   | (1)     
|            |                                                                                                                                                  |         
|1.3         | Articles of Incorporation of PolyMet
      Mining Corp.                                                                                          | (1)     
|            |                                                                                                                                                  |         
|4.1         | Incentive Stock Option Plan.                                                                                                                     | (1)     
|            |                                                                                                                                                  |         
|4.2         | Shareholder Rights Plan Agreement.                                                                                                               | (1)     
|            |                                                                                                                                                  |         
|4.3         | Contract for Deed between us and
      Cleveland Cliffs, Ohio, dated November 15, 2005.                                                          | (1)     
|            |                                                                                                                                                  |         
|4.4         | Contract
      for Deed between us and Cleveland Cliffs, Ohio, dated December 20, 2006                                                           | *       
|            |                                                                                                                                                  |         
|8.1         | List of Subsidiaries.                                                                                                                            | (1)     
|            |                                                                                                                                                  |         
|11.1        | Code of Ethics.                                                                                                                                  | (2)     
|            |                                                                                                                                                  |         
|11.2        | Statement of Corporate Governance
      Practices, including Audit Mandate and Charter.                                                          | (3)     
|            |                                                                                                                                                  |         
|12.1        | Certification
      of Principal Executive Officer pursuant to 17 C.F.R. 240.13a- 14(a).                                                         | *       
|            |                                                                                                                                                  |         
|12.2        | Certification
      of Principal Financial Officer pursuant to 17 C.F.R. 240.13a- 14(a).                                                         | *       
|            |                                                                                                                                                  |         
|13.1        | Certification
      of Principal Executive Officer and Principal Financial Officer pursuant
      to 17 C.F.R. 240.13a-14(b) and 18 U.S.C. 1350. | *       
|            |                                                                                                                                                  |         
|15.1        | Technical Report on NorthMet Project
      by P. Downey and Associates, dated July 2004                                                          | (4)     
|            |                                                                                                                                                  |         
|15.2        | Subscription Agreement dated as
      of July 19, 2004, between us and certain investor(s).                                                      | (1)     
|            |                                                                                                                                                  |         
|15.3        | Subscription Agreement dated as
      of February 11, 2005, between us and certain investor(s).                                                  | (1)     
|            |                                                                                                                                                  |         
|15.4        | Subscription Agreement closing
      on August 29, 2005, between us and certain investor(s).                                                     | (1)     
|            |                                                                                                                                                  |         
|15.5        | Subscription Agreement dated as
      of September 21, 2005, between us and certain investor(s).                                                 | (1)     
|            |                                                                                                                                                  |         
|15.6        | Form
      of Canadian Subscription Agreement between us and certain investor (s).                                                               | *       
|            |                                                                                                                                                  |         
|15.7        | Form
      of U.S. Subscription Agreement between us and certain investor(s).                                                                    | *       
|            |                                                                                                                                                  |         
|15.8        | Lease Agreement between us and
      U.S. Steel Corporation, dated January 4, 1989.                                                              | (1)     
|            |                                                                                                                                                  |         
|15.9        | Notice of Assignment of the Lease
      Agreement from U.S. Steel Corporation to RGGS Land and Minerals, Ltd. L.P.                               | (1)     
|            |                                                                                                                                                  |         
|15.10       | Nominating Committee Charter.                                                                                                                    | (1)     
|            |                                                                                                                                                  |         
|15.11       | Technical Report on NorthMet Project
      by P.J. Hunter C. Eng. CP dated October 2006.                                                         | (5)     

59

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FootnoteRef.
    Description*
    Filed herewith.(1)
    Incorporated by reference to our Annual Report on Form
      20-F/A for the fiscal year ended January 31, 2006, filed on July 31 2006.(2)
    Incorporated by reference to our Annual Report on Form
      20-F/A for the fiscal year ended January 31, 2004, filed on July 7, 2005.(3)
    Incorporated by reference to our Annual Report on Form
      20-F for the fiscal year ended January 31, 2005, filed on July 25, 2005.(4)
    Incorporated by reference to our Annual Report on Form
      20-F for the fiscal year ended January 31, 2004, filed on June 30, 2004.(5)
    Incorporated by reference to our Report on Form 6-K,
      filed on November 13, 2006.


60

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SIGNATURES

The Registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.

|Dated: May 31, 2007 |                                 
|------------------- | --------------------------------
|                    | POLYMET MINING CORP.            
|                    |                                 
|                    | /s/ William Murray              
|                    | Name: William Murray            
|                    | Title:   Chief Executive Officer

61

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POLYMET MINING CORP.

CONSOLIDATED FINANCIAL STATEMENTS

31 January 2007, 2006 and 2005

U.S. Funds



---

| | POLYMET MINING CORP.
| | --------------------





MANAGEMENTS RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

The financial statements of PolyMet Mining Corp. have been prepared
  by management in accordance with Canadian generally accepted accounting principles.
  The financial information contained elsewhere in this report has been reviewed
  to ensure consistency with the financial statements.

Management maintains systems of internal control designed to
  provide reasonable assurance that the assets are safeguarded. All transactions
  are authorized and duly recorded, and financial records are properly maintained
  to facilitate the preparation offinancial statements in a timely manner.
  The Board of Directors is ultimately responsible for reviewing and approving
  the financial statements. The Board carries out this responsibility principally
  through its Audit Committee.

The Audit Committee of the Board of Directors has reviewed the
  financial statements with management and external auditors. PricewaterhouseCoopers,
  an independent firm of chartered accountants, appointed as external auditors
  by the shareholders, have audited the financial statements and their report
  is included herein.



William Murray(signed) 
  ________________________________________
  William Murray 
  President and Chief Executive Officer

Douglas Newby (signed) 
  ________________________________________
  Douglas Newby 
  Chief Financial Officer

Vancouver, Canada 
  27 April 2007

---





Auditors Report

To the Shareholders of PolyMet Mining Corp.:

We have audited the consolidated balance sheet of PolyMet Mining
  Corp. (the Company) as at 31 January 2007 and the consolidated statements
  of loss, changes in shareholders' equity and cash flows for the year ended 31
  January 2007. 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 audit.

We conducted our audit in accordance with the Canadian generally
  accepted auditing standards and standards of the Public Company Accounting Oversight
  Board (United States). Those standards require that we plan and perform an audit
  to obtain reasonable assurance 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.

In our opinion, these financial statements present fairly, in
  all material respects, the financial position of the Company as at 31 January
  2007 and the results of its operations and its cash flows for the year ended
  31 January 2007, in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements as at 31 January 2006 and
  2005, and for the years then ended, prior to the restatement of share bonus
  plan and warrants (as described in Note 2), were audited by other auditors who
  expressed an opinion without reservation on those financial statements in their
  report dated 4 April 2006. We have audited the restatements in the 31 January
  2006 and 2005 consolidated financial statements and, in our opinion, such adjustments,
  in all material respects, are appropriate and have been properly applied.



|              | PricewaterhouseCoopers
|------------- | ------------------------
|              |                         
|              |                         
|Vancouver, BC |                         
|27 April 2007 | CHARTERED ACCOUNTANTS   
|              |                         

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PolyMet Mining Corp.

Consolidated Balance Sheets

As at January 31All figures in Thousands of U.S. Dollars

|                                                           |   |         |   |   | 2006               |  
|---------------------------------------------------------- | - | ------- | - | - | ------------------ | -
|ASSETS                                                     |   | 2007    |   |   | (restated  Note 2 | )
|Current                                                    |   |         |   |   |                    |  
|Cash                                                       | $ | 8,897   |   | $ | 11,671             |  
|Accounts receivable and
      advances                     |   | 61      |   |   | 41                 |  
|Prepaid expenses                                           |   | 210     |   |   | 75                 |  
|                                                           |   | 9,168   |   |   | 11,787             |  
|Deferred Financing Costs(Note 13d))                        |   | 1,397   |   |   | -                  |  
|Mineral Property, Plant and Equipment(Notes
      4 and 5) |   | 38,166  |   |   | 14,247             |  
|                                                           | $ | 48,731  |   | $ | 26,034             |  
|                                                           |   |         |   |   |                    |  
|LIABILITIES                                                |   |         |   |   |                    |  
|Current                                                    |   |         |   |   |                    |  
|Accounts payable and accrued liabilities                   | $ | 1,518   |   | $ | 1,717              |  
|Current portion of long
      term debt (Note 6)           |   | 2,000   |   |   | 1,000              |  
|                                                           |   | 3,518   |   |   | 2,717              |  
|                                                           |   |         |   |   |                    |  
|Long term                                                  |   |         |   |   |                    |  
|Long term debt (Note
      6)                              |   | 11,853  |   |   | 1,420              |  
|Asset retirement obligation (Note 7)                       |   | 3,422   |   |   | 2,510              |  
|                                                           |   | 18,793  |   |   | 6,647              |  
|                                                           |   |         |   |   |                    |  
|SHAREHOLDERS EQUITY                                       |   |         |   |   |                    |  
|Share Capital- (Note 8)                                    |   | 72,923  |   |   | 46,009             |  
|Contributed Surplus (Note
      8d)                       |   | 9,614   |   |   | 8,084              |  
|Deficit                                                    |   | (52,599 | ) |   | (34,706            | )
|                                                           |   | 29,938  |   |   | 19,387             |  
|                                                           | $ | 48,731  |   | $ | 26,034             |  

Contingent Liabilities and Commitments (Notes 5 and
  13)

ON BEHALF OF THE BOARD:

|William
      Murray | , Director
|---------------------- | ----------
|                       |           
|David Dreisinger     | , Director

  See Accompanying Notes 

---

PolyMet Mining Corp.

Consolidated Statements of Loss

For the Years Ended 31 JanuaryAll figures in Thousands of U.S. Dollars, except per share amounts

|                                           |   |             |   |   |            |   |   | 2005        |  
|------------------------------------------ | - | ----------- | - | - | ---------- | - | - | ----------- | -
|                                           |   |             |   |   |            |   |   | (restated  |  
|                                           |   | 2007        |   |   | 2006       |   |   | Note 2      | )
|Pre-feasibility Costs                      |   |             |   |   |            |   |   |             |  
|See Schedule 1                             |   | 8,844       |   |   | 11,120     |   |   | 1,623       |  
|                                           |   |             |   |   |            |   |   |             |  
|                                           |   |             |   |   |            |   |   |             |  
|General and Administrative                 |   |             |   |   |            |   |   |             |  
|Administration fees and wages              |   | 272         |   |   | 208        |   |   | 105         |  
|Amortization                               |   | 7           |   |   | 4          |   |   | 2           |  
|Conferences                                |   | 24          |   |   | 26         |   |   | -           |  
|Consulting fees                            |   | 1,621       |   |   | 388        |   |   | 1,010       |  
|Insurance                                  |   | 37          |   |   | 30         |   |   | 31          |  
|Investor relations and
      financing     |   | 218         |   |   | 90         |   |   | 95          |  
|Management fees                            |   | 181         |   |   | 129        |   |   | 141         |  
|Office and telephone                       |   | 154         |   |   | 101        |   |   | 47          |  
|Professional fees                          |   | 790         |   |   | 151        |   |   | 99          |  
|Rent                                       |   | 68          |   |   | 62         |   |   | 59          |  
|Shareholders information                  |   | 125         |   |   | 53         |   |   | 35          |  
|Stock-based compensation
      (Note 8c))  |   | 4,723       |   |   | 3,523      |   |   | 993         |  
|Transfer agent and filing fees             |   | 272         |   |   | 65         |   |   | 25          |  
|Travel                                     |   | 482         |   |   | 348        |   |   | 221         |  
|                                           |   | 8,974       |   |   | 5,178      |   |   | 2,863       |  
|                                           |   |             |   |   |            |   |   |             |  
|Other Expenses (Income)                    |   |             |   |   |            |   |   |             |  
|Interest income, net                       |   | (428        | ) |   | (148       | ) |   | (2          | )
|Loss (gain) on foreign exchange conversion |   | 536         |   |   | (221       | ) |   | (68         | )
|Rental income                              |   | (33         | ) |   | -          |   |   | -           |  
|                                           |   | 75          |   |   | (369       | ) |   | (70         | )
|                                           |   |             |   |   |            |   |   |             |  
|                                           |   |             |   |   |            |   |   |             |  
|Loss for the Year                          | $ | 17,893      |   | $ | 15,929     |   | $ | 4,416       |  
|                                           |   |             |   |   |            |   |   |             |  
|Deficit Beginning of the Year              |   | 34,706      |   |   | 18,777     |   |   | 14,361      |  
|                                           |   |             |   |   |            |   |   |             |  
|Deficit End of Year                        |   | 52,599      |   |   | 34,706     |   |   | 18,777      |  
|                                           |   |             |   |   |            |   |   |             |  
|Loss per Share                             | $ | (0.16       | ) | $ | (0.22      | ) | $ | (0.09       | )
|                                           |   |             |   |   |            |   |   |             |  
|Weighted Average Number of Shares          |   | 114,754,213 |   |   | 73 484 490 |   |   | 51,946,290  |  

  See Accompanying Notes 

---

PolyMetMiningCorp.

**Consolidated Statements of Changes in Shareholders
  Equity***All figures in Thousands of U.S. Dollars, except for Shares*

|                                                             | Common Shares (Note 8)*(restated
       Note 2)* |  |             |  |   |        |   |   |                     |   |   |                     |   |  
|------------------------------------------------------------ | ------------------------------------------------- |  | ----------- |  | - | ------ | - | - | ------------------- | - | - | ------------------- | - | -
|                                                             | Authorized                                        |  |             |  |   |        |   |   | Share Subscriptions |   |   | Contributed Surplus |   |  
|                                                             | Shares                                            |  | Shares      |  |   | Amount |   |   | Received            |   |   | (restated  Note 2) |   |  
|Balance  31 January 2004                                    | 1,000,000,000                                     |  | 44,992,054  |  | $ | 15,232 |   | $ | -                   |   | $ | 55                  |   | $
|Loss for the year                                            | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | -                   |   |  
|Shares issued for cash:                                      |                                                   |  |             |  |   |        |   |   |                     |   |   |                     |   |  
|Private placements                                           | -                                                 |  | 2,800,000   |  |   | 1,734  |   |   | -                   |   |   | -                   |   |  
|Share subscriptions
      received                           | -                                                 |  | -           |  |   | -      |   |   | 763                 |   |   | -                   |   |  
|Share issuance costs                                         | -                                                 |  | -           |  |   | (19    | ) |   | -                   |   |   | -                   |   |  
|Exercise
      of warrants                                   | -                                                 |  | 5,277,573   |  |   | 829    |   |   | -                   |   |   | -                   |   |  
|Exercise of options                                          | -                                                 |  | 1,088,400   |  |   | 81     |   |   | -                   |   |   | -                   |   |  
|Shares issued for finders
      fee                         | -                                                 |  | 155,626     |  |   | 96     |   |   | -                   |   |   | -                   |   |  
|Non-cash share issuance costs                                | -                                                 |  | -           |  |   | (96    | ) |   | -                   |   |   | -                   |   |  
|Shares issued for property                                   | -                                                 |  | 1,000,000   |  |   | 229    |   |   | -                   |   |   | -                   |   |  
|Stock-based compensation                                     | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | 993                 |   |  
|Fair value of stock options
      exercised                  | -                                                 |  | -           |  |   | 42     |   |   | -                   |   |   | (42                 | ) |  
|Balance  31 January 2005  Shares issued                    | Unlimited                                         |  | 55,313,653  |  |   | 18,128 |   |   | 763                 |   |   | 1,006               |   |  
|Shares allotted for exercise
      of warrants               | -                                                 |  | 224,925     |  |   | 26     |   |   | -                   |   |   | -                   |   |  
|Shares allotted for bonus                                    | -                                                 |  | 1,590,000   |  |   | 873    |   |   | -                   |   |   | -                   |   |  
|Balance  31 January 2005  Shares
      issued and allotted |                                                   |  |             |  |   |        |   |   |                     |   |   |                     |   |  
|(issued in fiscal 2006)                                      | Unlimited                                         |  | 57,128,578  |  |   | 19,027 |   |   | 763                 |   |   | 1,006               |   |  
|Loss for the year                                            | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | -                   |   |  
|Shares issued for cash:                                      |                                                   |  |             |  |   |        |   |   |                     |   |   |                     |   |  
|Private
      placements                                     | -                                                 |  | 28,494,653  |  |   | 17,302 |   |   | (763                | ) |   | 3,653               |   |  
|Share issuance costs                                         | -                                                 |  | -           |  |   | (1,475 | ) |   | -                   |   |   | -                   |   |  
|Exercise
      of warrants                                   | -                                                 |  | 5,700,628   |  |   | 3,296  |   |   | -                   |   |   | -                   |   |  
|Exercise of options                                          | -                                                 |  | 1,795,852   |  |   | 197    |   |   | -                   |   |   | -                   |   |  
|Shares issued for finders
      fee                         | -                                                 |  | 852,915     |  |   | 617    |   |   | -                   |   |   | -                   |   |  
|Non-cash share issuance costs                                | -                                                 |  | -           |  |   | (617   | ) |   | -                   |   |   | -                   |   |  
|Shares issued for property                                   | -                                                 |  | 6,200,547   |  |   | 7,564  |   |   | -                   |   |   | -                   |   |  
|Stock-based compensation                                     | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | 3,523               |   |  
|Fair value of stock options
      exercised                  | -                                                 |  | -           |  |   | 98     |   |   | -                   |   |   | (98                 | ) |  
|Balance  31 January 2006                                    | Unlimited                                         |  | 100,173,173 |  |   | 46,009 |   |   | -                   |   |   | 8,084               |   |  
|Loss for the year                                            | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | -                   |   |  
|Issuance of shares for bonus (Note 13)                       | -                                                 |  | 2,350,000   |  |   | 1,289  |   |   | -                   |   |   | -                   |   |  
|Shares issued for cash:                                      |                                                   |  |             |  |   |        |   |   |                     |   |   |                     |   |  
|Exercise of warrants                                         | -                                                 |  | 14,662,703  |  |   | 17,963 |   |   | -                   |   |   | (3,653              | ) |  
|Exercise
      of options                                    | -                                                 |  | 2,193,000   |  |   | 765    |   |   | -                   |   |   | -                   |   |  
|Shares issued for property (Note 5)                          | -                                                 |  | 2,000,000   |  |   | 6,160  |   |   | -                   |   |   | -                   |   |  
|Stock-based compensation                                     | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | 4,723               |   |  
|Warrants issued for deferred financing
      costs           | -                                                 |  | -           |  |   | -      |   |   | -                   |   |   | 1,197               |   |  
|Fair value of stock options
      exercised                  | -                                                 |  | -           |  |   | 737    |   |   | -                   |   |   | (737                | ) |  
|Balance  31 January 2007                                    | Unlimited                                         |  | 121,378,876 |  | $ | 72,923 |   | $ | -                   |   | $ | 9,614               |   | $

  See Accompanying Notes 

---

PolyMet Mining Corp.

Consolidated Statements of Cash Flows

For the Years Ended 31 JanuaryAll figures in Thousands of U.S. Dollars

|                                                |   |         |   |   |         |   |   | 2005        |  
|----------------------------------------------- | - | ------- | - | - | ------- | - | - | ----------- | -
|                                                |   |         |   |   |         |   |   | (restated  |  
|                                                |   | 2007    |   |   | 2006    |   |   | Note 2)     |  
|Operating Activities                            |   |         |   |   |         |   |   |             |  
|Loss for the year                               | $ | (17,893 | ) | $ | (15,929 | ) | $ | (4,416      | )
|Items not involving
      cash                  |   |         |   |   |         |   |   |             |  
|Consulting fees (note 13a))                     |   | 1,289   |   |   | -       |   |   | 872         |  
|Amortization                                    |   | 7       |   |   | 4       |   |   | 2           |  
|Stock-based compensation                        |   | 4,723   |   |   | 3,523   |   |   | 993         |  
|Changes in non-cash
      working capital items |   |         |   |   |         |   |   |             |  
|Accounts receivable
      and advances          |   | (20     | ) |   | 4       |   |   | (23         | )
|Prepaid
      expenses                          |   | (135    | ) |   | 166     |   |   | (236        | )
|Accounts payable and
      accrued liabilities  |   | (199    | ) |   | 1,386   |   |   | 232         |  
|Net cash used in operating
      activities     |   | (12,228 | ) |   | (10,846 | ) |   | (2,576      | )
|                                                |   |         |   |   |         |   |   |             |  
|Financing Activities                            |   |         |   |   |         |   |   |             |  
|Share capital - for cash                        |   | 15,075  |   |   | 22,209  |   |   | 2,651       |  
|Long-term debt repayment                        |   | (1,250  | ) |   | -       |   |   | -           |  
|Deferred financing costs                        |   | (200    | ) |   | -       |   |   | -           |  
|Share subscriptions received                    |   | -       |   |   | -       |   |   | 763         |  
|Net cash provided by financing activities       |   | 13,625  |   |   | 22,209  |   |   | 3,414       |  
|                                                |   |         |   |   |         |   |   |             |  
|Investing Activities                            |   |         |   |   |         |   |   |             |  
|Term deposit                                    |   | -       |   |   | 807     |   |   | (807        | )
|Mineral property, plant and equipment           |   | (4,171  | ) |   | (1,010  | ) |   | (16         | )
|Net cash used in investing
      activities     |   | (4,171  | ) |   | (203    | ) |   | (823        | )
|                                                |   |         |   |   |         |   |   |             |  
|Net Increase (Decrease) in Cash Position        |   | (2,774  | ) |   | 11,160  |   |   | 15          |  
|Cash Position - Beginning of Year               |   | 11,671  |   |   | 511     |   |   | 496         |  
|Cash Position - End of Year                     | $ | 8,897   |   | $ | 11,671  |   | $ | 511         |  

  See Accompanying Notes 

---

|PolyMet Mining Corp.                            | Schedule 1
|----------------------------------------------- | ----------
|                                                |           
|Consolidated Schedules of Pre-Feasibility Costs |           
|                                                |           
|For the Years Ended 31 January                  |           
|All figures in Thousands of U.S. Dollars        |           

|                                     |   | 2007  |  |   | 2006   |  |   | 2005  | 
|------------------------------------ | - | ----- |  | - | ------ |  | - | ----- | 
|                                     |   |       |  |   |        |  |   |       | 
|Direct                               |   |       |  |   |        |  |   |       | 
|Camp and general                     | $ | 187   |  | $ | 101    |  | $ | 5     | 
|Consulting fees                      |   | 819   |  |   | 690    |  |   | 337   | 
|Drilling                             |   | 94    |  |   | 3,075  |  |   | -     | 
|Engineering                          |   | 642   |  |   | 578    |  |   | 221   | 
|Environmental                        |   | 3,303 |  |   | 2,421  |  |   | 406   | 
|Geological and geophysical           |   | 55    |  |   | 75     |  |   | 173   | 
|Land lease, taxes
      and licenses |   | 127   |  |   | 187    |  |   | 79    | 
|Metallurgical                        |   | 303   |  |   | 1,894  |  |   | 67    | 
|Mine planning                        |   | 2,236 |  |   | 1,312  |  |   | 49    | 
|Permitting                           |   | 2     |  |   | 137    |  |   | 182   | 
|Plant maintenance
      and repair   |   | 681   |  |   | 44     |  |   | -     | 
|Sampling                             |   | 395   |  |   | 606    |  |   | -     | 
|Scoping study                        |   | -     |  |   | -      |  |   | 104   | 
|                                     |   |       |  |   |        |  |   |       | 
|Total Costs for the Year (note 1)    | $ | 8,844 |  | $ | 11,120 |  | $ | 1,623 | 

  See Accompanying Notes 

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | PolyMet Mining Corp. (the Company) was incorporated
        in British Columbia, Canada on 4 March 1981 under the name Fleck Resources
        Ltd. The Company changed its name from Fleck Resources to PolyMet Mining
        Corp. on 10 June 1998. The Company is engaged in the exploration and development,
        when warranted, of natural resource properties. The Companys primary
        mineral property is the NorthMet Project, a polymetallic project in northeastern
        Minnesota, USA. The realization of the Companys investment in the
        NorthMet Project and other assets is dependant upon various factors, including
        the existence of economically recoverable mineral reserves, the ability
        to obtain the necessary financing to complete the exploration and development
        of the NorthMet Project, future profitable operations, or alternatively
        upon disposal of the investment on an advantageous basis.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On 25 September 2006, the Company received the results
        of a Definitive Feasibility Study (DFS) prepared by Bateman
        Engineering (Pty) Ltd. (Bateman) that confirms the economic
        and technical viability of the NorthMet Project and, as such, the project
        has moved from the exploration stage to the development stage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The consolidated financial statements of PolyMet Mining
        Corp. have been prepared in accordance with accounting principles generally
        accepted in Canada that require management to make assumptions and estimates
        that affect the reported amounts of assets and liabilities and disclosures
        of contingent assets and liabilities as at the date of the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Significant estimates used in the preparation of these
        consolidated financial statements include, amongst other things, expected
        economic lives of plant and equipment, anticipated costs of asset retirement
        obligations including the reclamation of mine site, valuation of options
        and share purchase warrants, and the assessment of impairment in value
        of long lived assets. Actual results could differ from these estimates.
        Significant differences from United States generally accepted accounting
        principles are disclosed in Note 14.                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The consolidated financial statements include the accounts
        of the Company and its wholly-owned subsidiaries. Inter-company balances
        and transactions have been eliminated on consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company considers cash and cash equivalents to include
        amounts held in banks and highly liquid debt investments with remaining
        maturities at point of purchase of three months or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Significant Accounting Policies- Continued                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Mineral Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Mineral property                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Mineral property costs, aside from mineral property
        acquisitions costs, incurred prior to determination of the DFS are expensed
        as incurred and expenditures incurred subsequent to the DFS and mineral
        property acquisition costs are deferred or capitalized until the property
        is placed into production, sold, allowed to lapse or abandoned.                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Acquisition costs include cash and fair market value
        of common shares.                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Upon commencement of commercial production, mineral
        properties and acquisition costs relating to mines are amortized over
        the estimated life of the proven and probable mineral reserves to which
        they relate, calculated on a unit of production basis.                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | As a result of the Definitive Feasibility Study on
        the NorthMet Project, the Project has now entered the development stage
        and the Company has elected to defer mineral property development expenditures
        related to the NorthMet Project effective 1 October 2006.                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Ownership in mineral interests involves certain inherent
        risks due to the difficulties of determining the validity of certain claims
        as well as the potential for problems arising from the frequently ambiguous
        conveyance history characteristic of many mineral interests. The Company
        has investigated ownership of its mineral interests and, to the best of
        its knowledge, ownership of its interests are in good standing.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Plant and equipment are recorded at costs and depreciated
        over the estimated life of the related assets calculated on a unit of
        production or straight-line basis, as appropriate.                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Depreciation of plant and equipment is provided on
        a straight-line basis over the estimated economic life of the assets as
        follows:                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Leasehold improvements  Straight-line over the
        term of the lease 
        Furniture and equipment - Straight-line over 10 years 
        Computers - Straight-line over 5 years                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Mineral property, plant and equipment related to the
        NorthMet Project will begin to be amortized at the time the project commences
        operations.                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Loss per share is computed by dividing the loss for
        the year by the weighted average number of common shares outstanding during
        the year. Basic and diluted losses per share are the same for the periods
        reported, as the effect of potential issuances of shares under warrant
        or share option agreements would be anti-dilutive.                                                                                                      

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Significant Accounting Policies- Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Foreign Currency Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The United States (U.S.) dollar is the
        functional currency of the Companys business. Accordingly, amounts
        in these consolidated financial statements are expressed in U.S. dollars
        unless otherwise stated. The Companys non-U.S. operations are integrated
        and have been translated into U.S. dollars using the temporal method.
        Under this method, monetary assets and liabilities are translated at the
        rate of exchange in effect at the balance sheet dates and non-monetary
        assets and liabilities are translated at the exchange rate in effect at
        the times of the transactions. Revenue and expense items are translated
        at rates approximating the exchange rate in effect at the time of the
        transactions, except for amortization which is translated at historical
        rates. Translation gains and losses are reflected in the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Stock-Based Compensation and Share Purchase Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | All stock-based awards made to employees and non-employees
        are measured and recognized using a fair value based method. For employees,
        the fair value of the options is measured at the date of the grant. For
        non-employees, the fair value of the options is measured on the earlier
        of the date at which the counterparty performance is complete or the date
        the performance commitment is reached or the date at which the equity
        instruments are granted if they are fully vested and non- forfeitable.
        For employees and non-employees, the fair value of the options is accrued
        and charged to operations, with the offsetting credit to contributed surplus,
        on a grade method over the vesting period. If and when the stock options
        are ultimately exercised, the applicable amounts of contributed surplus
        are transferred to share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company issues share purchase warrants in connection
        with certain equity transactions. The fair value of the warrants, as determined
        using the Black-Scholes option pricing model, is credited to contributed
        surplus. The recorded value of share purchase warrants is transferred
        to share capital upon exercise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Asset Retirement Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The recommendations of Canadian Institute of Chartered
        Accountants (CICA) Handbook Section 3110, Asset Retirement
        Obligations(CICA 3110), became effective on 1 February
        2004. This section requires the recognition of a legal liability for obligations
        relating to the retirement of property, plant and equipment and obligations
        arising from the acquisition, construction, development, or normal operation
        of those assets. Such asset retirement costs must be recognized at fair
        value, when a reasonable estimate of fair value can be estimated, in the
        year in which the liability is incurred. A corresponding increase to the
        carrying amount of the related asset, where one is identifiable, is recorded
        and amortized over the life of the asset. Where a related asset is not
        easily identifiable with a liability, the change in fair value over the
        course of the year is expensed. The estimates are based principally on
        legal and regulatory requirements. It is possible that the Companys
        estimates of its ultimate reclamation and closure liabilities could change
        as a result of changes in regulations, changes in the extent of environmental
        remediation required, changes in the means of reclamation or changes in
        cost estimates.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The operations of the Company may in the future be
        affected from time to time in varying degrees by changes in environmental
        regulations, including those for future removal and site restoration costs.
        Both the likelihood of new regulations and their overall effect upon the
        Company may vary greatly and are not predictable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|1. | Nature of Business and Significant Accounting Policies- Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company has adopted CICA Section 3063 Impairment
        of Long-Lived Assets. This statement establishes standards for the
        recognition, measurement and disclosure of the impairment of non- monetary
        long-lived assets, including mineral property, plant and equipment, intangible
        assets with finite useful lives, deferred pre-operating costs and long-term
        prepaid assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | In 2006, the CICA issued EIC 160  Accounting for
        Deferred Stripping Costs in the Mining Industry. The abstract requires
        that overburden stripping costs incurred in the production phase of a
        mining operation be accounted for as variable production costs and be
        included in the costs of inventory produced during the period that the
        stripping costs are incurred. However, overburden stripping costs should
        be capitalized if the stripping activity can be shown to represent a betterment
        to the mineral property. Capitalized overburden stripping costs should
        be amortized in a rational and systematic manner over the mineral reserves
        that directly benefit from the specific stripping activity. This abstract
        should be applied to overburden stripping costs incurred in fiscal years
        beginning on or after 1 July 2006, and may be applied retroactively. As
        at 31 January 2007, the Companys financial statements do not include
        any deferred stripping costs.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Commencing with the next fiscal year, the Company will
        adopt the new CICA Handbook Section 1530  Accounting for comprehensive
        income. The concept of other comprehensive income for purposes of Canadian
        GAAP will be to include changes in shareholders equity arising primarily
        from unrealized changes in the values of financial instruments or assets.
        Comprehensive income as prescribed by US GAAP is largely aligned with
        comprehensive income as proposed by the new Canadian standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Commencing with the 2007 fiscal year, the Company will
        also adopt the new CICA Handbook Sections of Equity, Section 3251, Financial
        Instruments  Recognition and Measurement, Section 3855, Financial
        Instruments  Disclosures, Section 3862, Financial Instruments 
        Presentation, Section 3863, Hedges, Section 3865 and Capital Disclosures,
        Section 1535. The Company is currently evaluating the potential impact,
        if any, on the Companys financial statements, but has determined
        that financial statement note disclosure will be increased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Comparative Figures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Certain of the comparative figures have been reclassified
        to conform with the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|2. | Restatements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | During the year, the Company re-examined its accounting
        for warrants as presented in note 8e) and the share bonus program presented
        in note 13. As a result of this re-examination, the Company determined
        that share capital and contributed surplus were inappropriately measured
        and recognized during the year ended 31 January 2006. Furthermore, the
        Company determined that consulting fees charged to the consolidated statement
        of loss for the year ended 31 January 2005 under the share bonus program
        were understated by $638,000.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The company has restated its financial statements for
        the items above and the impacts on certain line items of the financial
        statements with significant changes were as follows:                                                                                                                                                                                                                                                                                                                                                                                                      

| | Line Item           |  | 31 January 2006 |  |  | 31 January 2005 | 
| | ------------------- |  | --------------- |  |  | --------------- | 
| |                     |  |                 |  |  |                 | 
| |                     |  | As Previously   |  |  | Revised         | 
| |                     |  | Reported        |  |  |                 | 
| | Consulting fees     |  |                 |  |  |                 | 
| | Loss for the year   |  |                 |  |  |                 | 
| | Deficit             |  | 34,068          |  |  | 34,706          | 
| | Loss per share      |  |                 |  |  |                 | 
| | Share capital       |  | 49,022          |  |  | 46,009          | 
| | Contributed surplus |  | 4,431           |  |  | 8,084           | 

|   |                      
|-- | ---------------------
|3. | Financial Instruments
|   |                      
|   | a)                   
|   |                      
|   |                      
|   |                      
|   | b)                   
|   |                      
|   |                      
|   |                      

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|4. | Resource Property Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | NorthMet, Minnesota, U.S.A. - Lease                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | By an agreement dated 4 January 1989 and a subsequent
        amendment and assignment, the Company leases certain lands in St. Louis
        County, Minnesota from RGGS Land & Minerals Ltd., L.P. The current
        term of the renewable lease is 20 years and calls for total lease payments
        of $1,475,000. All lease payments have been paid or accrued to 31 January
        2007. The agreement requires future annual lease payments of $150,000
        from 4 January 2006 to 2009.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company can, at its option, terminate the lease
        at any time by giving written notice to the lessor not less than 90 days
        prior to the effective termination date or can indefinitely extend the
        20-year term by continuing to make $150,000 annual lease payments on each
        successive anniversary date.                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The lease payments are considered advance royalty payments
        and shall be deducted from future production royalties payable to the
        lessor, which range from 3% to 5% based on the net smelter return received
        by the Company. The Companys recovery of the advance royalty payments
        is subject to the lessor receiving an amount not less than the amount
        of the annual lease payment due for that year.                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

5.         Mineral
  Property, Plant and Equipment

Details are as follows:

| |                         |   |        |  |   | Accumulated  |  |   | Net Book | 
| | ----------------------- | - | ------ |  | - | ------------ |  | - | -------- | 
| | 31 January 2007         |   | Cost   |  |   | Amortization |  |   | Value    | 
| | NorthMet Project        | $ | 38,056 |  | $ | -            |  | $ | 38,056   | 
| | Leasehold improvements  | $ | 41     |  | $ | -            |  | $ | 41       | 
| | Computers               | $ | 17     |  | $ | 5            |  | $ | 12       | 
| | Furniture and equipment | $ | 63     |  | $ | 6            |  | $ | 57       | 
| |                         | $ | 38,177 |  | $ | 11           |  | $ | 38,166   | 

| |                                   |   |        |  |   | Accumulated  |  |   | Net Book | 
| | --------------------------------- | - | ------ |  | - | ------------ |  | - | -------- | 
| | 31 January 2006                   |   | Cost   |  |   | Amortization |  |   | Value    | 
| | NorthMet Project                  | $ | 14,225 |  | $ | -            |  | $ | 14,225   | 
| | Computers                         | $ | 18     |  | $ | 4            |  | $ | 14       | 
| | Furniture, equipment and vehicles | $ | 10     |  | $ | 2            |  | $ | 8        | 
| |                                   | $ | 14,253 |  | $ | 6            |  | $ | 14,247   | 

Erie Plant, Minnesota, U.S.A.

By a Memorandum of Understanding dated
  5 December 2003 and an option agreement dated 14 February 2004, the Company
  obtained an option (Cliffs Option) to acquire certain property,
  plant and equipment (Cliffs Assets) from Cleveland Cliffs of Cleveland,
  Ohio (Cliffs) located near the Companys NorthMet Project.

As consideration for the exclusive Cliffs
  Option, the Company paid $500,000 prior to 31 January 2004 as required and issued
  to Cliffs 1,000,000 common shares on 30 March 2004, valued at $229,320 to maintain
  the exclusive rights until 30 June 2006.

On 14 September 2005 the Company reached
  an agreement in principle with Cliffs on the terms for the early exercise of
  the Cliffs option and the scope of the plant and equipment to be acquired. On
  15 November 2005, the Company exercised this extended option and acquired 100%
  ownership of large portions of the former LTV Steel Mining Company ore processing
  plant in northeastern Minnesota under the Asset Purchase Agreement.

The consideration for the Asset Purchase
  was $3.4 million in cash ($1,896,000 paid) and the issuance of 6,200,547 common
  shares (at fair market value of $7,564,444) in the capital stock of the Company.
  The remaining cash component will be paid in quarterly instalments of US$250,000
  plus interest (Note 6). Interest accrued in the amount of $169,000 has been
  capitalized as part of the cost of the NorthMet Project assets.

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|5. | Mineral Property, Plant and Equipment-
        Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | On 20 December 2006, the Company closed a
        transaction (the Asset Purchase Agreement II) in which it
        acquired, from Cliffs, property and associated rights sufficient to provide
        it with a railroad connection linking the mine development site and the
        Erie Plant. The transaction also included a 120-railcar fleet, locomotive
        fuelling and maintenance facilities, water rights and pipelines, large
        administrative offices on site and an additional 6,000 acres to the east
        and west of and contiguous to its existing tailing facilities.                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The purchase price totalling 2 million shares
        and $15 million in cash and debt is in four tranches:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company has assumed certain ongoing site-related
        environmental and reclamation obligations as a result of the above purchases.
        These environmental and reclamation obligations are presently contracted
        under the terms of the purchase agreements with Cliffs. Once the Company
        obtains its permit to mine and Cliffs is released from its obligations
        by the State agencies, the environmental and reclamation obligations will
        be direct with the governing bodies. The present value of the asset retirement
        obligation in the amount of $3,422,000 (Note 7) has been recorded as an
        increase in the carrying amount of the NorthMet Project assets and will
        be amortized over the life of the asset.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Under the terms of the agreement Cliffs has
        the right to participate on a pro-rata basis in future cash equity financings.
        The Company has a 20 business day first right to acquire or place any
        shares of PolyMet that Cliffs may chose to sell from time-to-time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | As the above assets are not in use no amortization
        of these assets has been recorded to 31 January 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|6. | Long Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Pursuant to the Asset Purchase Agreements (Note 5) the
        Companys wholly owned subsidiary Poly Met Mining, Inc. signed three
        notes payable to Cliffs in the amounts of $2,400,000, $7,000,000 and $7,000,000,
        respectively. The first note is interest bearing at the annual simple
        rate of four percent (4%) and shall be paid in quarterly instalments equal
        to $250,000 for total repayment of $2,500,000. The second note is interest
        bearing at the Wall Street JournalPrime Rate and shall be paid
        in quarterly instalments equal to $250,000 commencing 31 December 2006,
        with the balance repayable upon receipt of commercial financing, for total
        repayment of $7,000,000. The third note is interest bearing at the Wall
        Street JournalPrime Rate and shall be paid in quarterly instalments
        equal to $250,000 commencing on 31 December 2009 for total repayment of
        $7,000,000. No interest will be payable on the third note until 31 December
        2009, accordingly it has been fair valued, for balance sheet purposes,
        by discounting it at the Wall Street JournalPrime Rate. As at
        31 January 2007 the outstanding long term debt was as follows:

| |                      |   | 31 January 2007 |   |   | 31 January 2006 |  
| | -------------------- | - | --------------- | - | - | --------------- | -
| |                      |   |                 |   |   |                 |  
| | Notes Payable        | $ | 13,768          |   | $ | 2,400           |  
| | Accrued interest     |   | 85              |   |   | 20              |  
| | Total debt           |   | 13,853          |   |   | 2,420           |  
| | Less current portion |   | (2,000          | ) |   | (1,000          | )
| |                      |   |                 |   |   |                 |  
| | Long term debt       | $ | 11,853          |   | $ | 1,420           |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. | Asset Retirement Obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | As part of the consideration for the Cliffs Purchase
        Agreements (Note 5), the Company indemnified Cliffs for the liability
        for final reclamation and closure of the mine and acquired property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Federal, state and local laws and regulations concerning
        environmental protection affect the Companys operations. Under current
        regulations, the Company is contracted to indemnify Cliffs requirement
        to meet performance standards to minimize environmental impact from operations
        and to perform site restoration and other closure activities. The Companys
        provisions for future site closure and reclamation costs are based on
        known requirements. It is not currently possible to estimate the impact
        on operating results, if any, of future legislative or regulatory developments.
        The Companys estimate of the present value of the obligation to
        reclaim the NorthMet Project is based upon existing reclamation standards
        at 31 January 2007 and Canadian GAAP. Once the Company obtains its permit
        to mine the environmental and reclamation obligations will be direct with
        the governing bodies.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Companys estimate the fair value of the asset
        retirement obligation was $3,422,000 (2006 - $2,510,000). These were based
        upon a 31 January 2007 undiscounted future cost of $21.6 million for the
        first Cliffs transaction and $1.8 million for Cliffs II, an annual inflation
        rate of 3.00%, and a credit- adjusted interest rate of 12.00% and a mine
        life of 20 years, commencing in late-2008 and a reclamation period of
        5 years. During the year ended 31 January 2007, the Company increased
        the credit-adjusted interest rate from 9% to 12% to reflect the Companys
        expected borrowing rates. Accretion of the liability of $280,000 (2006
        - $47,000) until the commencement of commercial production will be capitalized
        to the NorthMet Project assets.                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital
|-- | -------------
|   |              
|   | a)           
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   |              
|   | b)           

31
      
      
      Weighted
      
      
      31 January
      
      
      Weighted
      
      
      31
      
      
      WeightedJanuary
      
      
      Average
      
      
      2006
      
      
      Average
      
      
      January
      
      
      Average2007
      
      
      Exercise
      
      
      Options
      
      
      Exercise
      
      
      2005
      
      
      ExerciseOptions
      
      
      Price
      
      
      
      
      
      Price
      
      
      Options
      
      
      Price(CDN$)
      
      
      
      
      
      (CDN$)
      
      
      
      
      
      (CDN$)Outstanding -Beginning of year
      
      6,783,700
      
      
      0.80
      
      
      4,999,552
      
      
      0.32
      
      
      3,542,952
      
      
      0.11Granted
      
      4,500,000
      
      
      2.93
      
      
      3,580,000
      
      
      1.13
      
      
      2,545,000
      
      
      0.52Cancelled
      
      (700
      )
      
      (0.10
      )
      
      -
      
      
      -
      
      
      -
      
      
      -Exercised
      
      (2,193,000
      )
      
      (0.39
      )
      
      (1,795,852
      )
      
      0.13
      
      
      (1,088,400
      )
      
      0.10Outstanding -End of year
      
      9,090,000
      
      
      1.95
      
      
      6,783,700
      
      
      0.80
      
      
      4,999,552
      
      
      0.32


---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------
|   |                         
|   | b)                      
|   |                         
|   |                         

| |                   |  |                |  |  |                |  |  | Number of   | 
| | ----------------- |  | -------------- |  |  | -------------- |  |  | ----------- | 
| |                   |  | Exercise Price |  |  | Exercise Price |  |  | options     | 
| | Expiry Date       |  | (US$)          |  |  | (CDN$)         |  |  | outstanding | 
| | 9 March 2009      |  | 0.34           |  |  | 0.40           |  |  | 225,000     | 
| | 28 April 2009     |  | 0.63           |  |  | 0.75           |  |  | 150,000     | 
| | 5 July 2009       |  | 0.56           |  |  | 0.66           |  |  | 1,125,000   | 
| | 18 October 2009   |  | 0.67           |  |  | 0.79           |  |  | 50,000      | 
| | 30 March 2010     |  | 0.55           |  |  | 0.65           |  |  | 425,000     | 
| | 1 May 2010        |  | 0.72           |  |  | 0.85           |  |  | 350,000     | 
| | 15 June 2010      |  | 0.80           |  |  | 0.94           |  |  | 40,000      | 
| | 19 September 2010 |  | 1.15           |  |  | 1.36           |  |  | 1,690,000   | 
| | 24 October 2010   |  | 1.02           |  |  | 1.20           |  |  | 280,000     | 
| | 5 December 2010   |  | 0.97           |  |  | 1.15           |  |  | 255,000     | 
| | 20 March 2011     |  | 2.33           |  |  | 2.76           |  |  | 3,200,000   | 
| | 19 June 2011      |  | 2.51           |  |  | 2.97           |  |  | 325,000     | 
| | 1 September 2011  |  | 3.23           |  |  | 3.82           |  |  | 325,000     | 
| | 22 September 2011 |  | 2.97           |  |  | 3.51           |  |  | 75,000      | 
| | 5 January 2012    |  | 2.79           |  |  | 3.30           |  |  | 575,000     | 
| |                   |  | 1.65           |  |  | 1.95           |  |  | 9,090,000   | 

| |    | As at 31 January 2007 all options, except for the 575,000
        expiring 5 January 2012, had vested and were exercisable. These options
        have vesting periods over 12 to 18 months.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                             
| | c) | Stock-Based Compensation                                                                                                                                                                    

| | i) | During the year ended 31 January 2007, the Company issued
        4,500,000 options to directors, officers, consultants and employees with
        exercise prices of CDN$2.76  CDN$3.82 (US$2.33  US$3.23) per
        option.                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                   
| |    | The fair value of stock-based compensation in the amount
        of $4,723,000 has been recorded in the accounts of the Company as an expense
        with the offsetting entry to contributed surplus. This value is estimated
        at the date of grant using the Black-Scholes Option Pricing Model with
        the following weighted average assumptions:

| | Risk-free interest
      rate       | 3.89% to 4.09%  
| | ----------------------------------- | ----------------
| | Expected dividend
      yield       | Nil             
| | Expected stock price volatility     | 59.91% to 83.01%
| | Expected option life
      in years | 2.33            

The weighted fair value of options granted
  was Cdn$1.36 (US$1.15)

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------

| | c) | Stock-Based Compensation- Continued
| | -- | -----------------------------------

| |     | Option pricing models require the input of highly subjective
        assumptions including the estimate of the share price volatility. Changes
        in the subjective input assumptions can materially affect the fair value
        estimate, and therefore, the existing models do not necessarily provide
        a reliable single measure of the fair value of the Companys stock
        options.                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ii) | During the year ended 31 January 2006, the Company issued
        3,580,000 options to directors, officers, consultants and employees with
        exercise prices ranging from CDN$0.65 - CDN$1.36 per option. The fair
        value of stock-based compensation in the amount of $3,523,324 has been
        recorded in the accounts of the Company as an expense with the offsetting
        entry to contributed surplus. This value is estimated at the date of grant
        using the Black-Scholes Option Pricing Model with the following weighted
        average assumptions:

| | Risk-free interest
      rate       | 3.66%
| | ----------------------------------- | -----
| | Expected dividend
      yield       | Nil  
| | Expected stock price volatility     | 131% 
| | Expected option life
      in years | 5.00 

| | iii) | During the year ended 31 January 2005, the Company issued
        2,545,000 options to directors, officers, consultants and employees with
        exercise prices ranging from CDN$0.21 - CDN$0.79 per option. The fair
        value of stock-based compensation in the amount of $992,658 has been recorded
        in the accounts of the Company as an expense with the offsetting entry
        to contributed surplus. This amount includes the expense for the 950,000
        options at CDN$0.13, granted on 3 October 2003, which were approved by
        the Companys shareholders on 24 May 2004. This value is estimated
        at the date of grant using the Black- Scholes Option Pricing Model with
        the following weighted average assumptions:
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Risk-free interest
      rate       | 3.25%
| | ----------------------------------- | -----
| | Expected dividend
      yield       | Nil  
| | Expected stock price volatility     | 143% 
| | Expected option life
      in years | 4.78 

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------
|   |                         
|   | d)                      
|   |                         
|   |                         
|   |                         
|   |                         

| |                                                                 |   | January 31 |   |   | January 31          |  
| | --------------------------------------------------------------- | - | ---------- | - | - | ------------------- | -
| |                                                                 |   | 2007       |   |   | 2006                |  
| |                                                                 |   |            |   |   | (restated  note 2) |  
| | Balance  Beginning of year                                     | $ | 8,084      |   | $ | 1,006               |  
| | Current year fair value of stock-based compensation             |   | 4,723      |   |   | 3,523               |  
| | Fair value of warrants issued in unit financings                |   | -          |   |   | 3,653               |  
| | Fair value of warrants exercised during the year and            |   |            |   |   |                     |  
| | transferred to share capital                                    |   | (3,653     | ) |   | -                   |  
| | Fair value of warrants issued for deferred financing costs      |   | 1,197      |   |   | -                   |  
| | Fair value of stock options exercised during
      the year and |   |            |   |   |                     |  
| | transferred
      to share capital                              |   | (737       | ) |   | (98                 | )
| | Balance  End of year                                           | $ | 9,614      |   | $ | 8,084               |  

| | e) | Share Purchase Warrants                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                 
| |    | The Companys share purchase warrants as at 31
        January 2007 and 2006 and the changes during the years then ended are
        as follows:

| |                                 |  | 2007        |   |  | 2006     |  
| | ------------------------------- |  | ----------- | - |  | -------- | -
| |                                 |  |             |   |  | Weighted |  
| |                                 |  |             |   |  | Average  |  
| |                                 |  |             |   |  | Exercise |  
| |                                 |  | Warrants    |   |  | Price    |  
| |                                 |  |             |   |  | (CDN$)   |  
| | Warrants outstanding and        |  |             |   |  |          |  
| | exercisable - beginning of year |  | 14,663,000  |   |  | 1.07     |  
| | Issued                          |  | 1,100,000   |   |  | 4.53     |  
| | Exercised                       |  | (14,663,000 | ) |  | (1.07    | )
| | Expired                         |  | -           |   |  | -        |  
| |                                 |  |             |   |  |          |  
| | Warrants outstanding and        |  |             |   |  |          |  
| | exercisable 
      end of year |  | 1,100,000   |   |  | 4.53     |  

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------
|   |                         
|   | e)                      
|   |                         
|   |                         

| |                  |  | Exercise |  |  | Number
      of Shares | 
| | ---------------- |  | -------- |  |  | ---------------------- | 
| | Expiry Date      |  | Price    |  |  | 2007                   | 
| |                  |  | (CDN$)   |  |  |                        | 
| | 1 March 2006     |  | 1.20     |  |  | -                      | 
| | 16 November 2006 |  | 0.20     |  |  | -                      | 
| | 28 February 2008 |  | 1.25     |  |  | -                      | 
| | 22 March 2008    |  | 1.25     |  |  | -                      | 
| | 9 May 2007       |  | 2.00     |  |  | -                      | 
| | 6 September 2007 |  | 1.25     |  |  | -                      | 
| | 31 October 2006  |  | 4.53     |  |  | 1,100,000              | 
| |                  |  |          |  |  |                        | 
| |                  |  |          |  |  | 1,100,000              | 

On 31 October 2006, the Company issued
  600,000 warrants to BNP Paribas Loan Services as partial consideration under
  the agreement described in Note 13d). These warrants have an exercise price
  of US$4.00 per share and expire on 30 October 2010. The fair value of these
  warrants was $1,197,000. Further, upon delivering a bona fide offer of project
  financing, warrants to purchase an additional 500,000 shares of the Company
  at a price of US$4.00 per share at any time prior to 30 October 2010 will vest.

During the year ended 31 January 2007,
  aside from the above warrant and option exercises, the Company did not enter
  into any financings.

During the year ended 31 January 2006
  the Company completed the following financings (for accounting purposes, the
  value of the units was not originally bifurcated between share capital and warrants).
  The 31 January 2006 figures were restated in these financial statements to reflect
  this requirement.

| | (i) | A non-brokered private placement for 9,000,000 units
        at a price of CDN$0.55 per unit. Each unit consisted of one common share
        and one half of one share purchase warrant. One full Warrant entitles
        the holders, on exercise, to purchase one additional common share of the
        Company at a price of CDN$0.70 per Warrant Share at any time until the
        close of business on the day which is 24 months from the date of Closing,
        provided that if the closing price of the Issuers shares, as traded
        on the Exchange, trade at or exceed CDN$1.00 per share for 30 consecutive
        trading days, the Warrants will terminate 30 days thereafter.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|8. | Share Capital- Continued
|-- | ------------------------
|   |                         
|   | e)                      
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         
|   | f)                      
|   |                         
|   |                         
|   |                         
|   |                         
|   |                         

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|9. | Supplemental Disclosure With Respect To Statements
        of Cash Flows                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           
|   | During the years ended 31 January 2007, 2006 and 2005,
        the Company entered into the following non-cash investing and financing
        activities:

| |                                                    |   | 2007   |  |   | 2006  |  |   | 2005 | 
| | -------------------------------------------------- | - | ------ |  | - | ----- |  | - | ---- | 
| | Issued 2,000,000 (2006  6,200,547; 2005
         |   |        |  |   |       |  |   |      | 
| | 1,000,000) shares to Cliffs pursuant to the        |   |        |  |   |       |  |   |      | 
| | Companys exercise of the Cliffs Option
      to   |   |        |  |   |       |  |   |      | 
| | purchase the Cliffs Assets                         | $ | 6,160  |  | $ | 7,564 |  | $ | 229  | 
| | Issued promissory notes payable to Cliffs          |   |        |  |   |       |  |   |      | 
| | pursuant to the Companys exercise of the Cliffs   |   |        |  |   |       |  |   |      | 
| | Option to purchase the Cliffs Assets               | $ | 12,518 |  | $ | 2,400 |  | $ | -    | 
| | Recorded an Asset Retirement Obligation and a      |   |        |  |   |       |  |   |      | 
| | corresponding increase in Cliffs Assets pursuant   |   |        |  |   |       |  |   |      | 
| | to the Companys exercise of the Cliffs Option to  |   |        |  |   |       |  |   |      | 
| | purchase the Cliffs Assets                         | $ | 911    |  | $ | 2,511 |  | $ | -    | 
| | Transfer from contributed surplus to capital stock |   |        |  |   |       |  |   |      | 
| | on exercise of stock options                       | $ | 737    |  | $ | 98    |  | $ | 42   | 
| | Transfer from share subscriptions to share capital |   |        |  |   |       |  |   |      | 
| | on issuance of the related shares                  | $ | -      |  | $ | 763   |  | $ | -    | 
| | Capitalized accrued interest on the promissory     |   |        |  |   |       |  |   |      | 
| | note payable to Cliffs                             | $ | 165    |  | $ | 21    |  | $ | -    | 
| | Issued nil (2006  852,915; 2005  155,626)        |   |        |  |   |       |  |   |      | 
| | shares for finders fees on private placements     | $ | -      |  | $ | 617   |  | $ | 96   | 

|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | Related Party Transactions                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                             
|    | In addition to transactions disclosed elsewhere in these
        financial statements, the Company has conducted transactions with officers,
        directors and persons or companies related to directors and paid or accrued
        amounts as follows:

| |                                                        |   | 2007 |  |   | 2006 |  |   | 2005 | 
| | ------------------------------------------------------ | - | ---- |  | - | ---- |  | - | ---- | 
| |                                                        |   |      |  |   |      |  |   |      | 
| | Rent and office charges paid to a company of
      the |   |      |  |   |      |  |   |      | 
| | which the president is a director                      | $ | 62   |  | $ | 25   |  | $ | 20   | 

The amounts charged to the Company for
  the services provided have been determined by negotiation among the parties
  and, in certain cases, are covered by signed agreements. These transactions
  were in the normal course of operations and were measured at the exchange value,
  which is the amount of consideration established and agreed to by the related
  parties.

---

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|11. | Income Taxes                                                                                                                                                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                   
|    | The Companys provision for income taxes differs
        from the amounts computed by applying the combined Canadian federal and
        provincial income tax rates to the net loss as a result of the following:

| |                                                          |   | 2007   |   |   | 2006   |  
| | -------------------------------------------------------- | - | ------ | - | - | ------ | -
| | Provision for recovery of taxes at statutory
      rates | $ | (6,105 | ) | $ | (5,553 | )
| | Tax benefit not recognized on current year losses        |   | 2,156  |   |   | 1,174  |  
| | Differences in foreign tax rates                         |   | (426   | ) |   | (358   | )
| | Non-deductible items and other                           |   | 4,375  |   |   | 4,737  |  
| |                                                          |   |        |   |   |        |  
| |                                                          | $ | -      |   | $ | -      |  

Future income taxes reflect the net effects
  of temporary differences between the carrying amounts of assets and liabilities
  for financial reporting purposes and the amounts used for income tax purposes.
  The significant components of the Company's future tax assets as at 31 January
  2007 are as follows:

| |                                      |   | 2007    |   |   | 2006    |  
| | ------------------------------------ | - | ------- | - | - | ------- | -
| | Non-capital loss carry forwards      | $ | 5,916   |   | $ | 4,114   |  
| | Unutilized exploration expenses      |   | 8,422   |   |   | 6,439   |  
| | Capital assets                       |   | (8      | ) |   | (7      | )
| | Total gross future income tax assets |   | 14,330  |   |   | 10,546  |  
| | Less: valuation allowance            |   | (14,330 | ) |   | (10,546 | )
| |                                      |   |         |   |   |         |  
| | Net future income tax allowance      | $ | -       |   | $ | -       |  

The Company has income tax loss carry
  forwards of approximately $7.4 million in Canada, which may be used to reduce
  future income taxes otherwise payable and which expire in the years 2008 to
  2027.

The Company has income tax loss carry
  forwards of approximately $9.8 million in the United States, which may be used
  to reduce future income taxes otherwise payable and which expire in the years
  2008 to 2027. Virtually all of the unutilized exploration expenses are in the
  United States.

The tax benefit of the above noted tax
  assets have been offset by recognition of a valuation allowance in these financial
  statements.

---

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**12.** | Segmented Information                                                                                                                                                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                              
|        | The Company is in the feasibility
        stage of developing its mineral properties in the U.S. and provides for
        its financing and administrative functions at the head office located
        in Canada. Segmented information on a geographic basis is as follows:

| | 2007                   |   | Canada |  |   | U.S.   |  |   | Consolidated | 
| | ---------------------- | - | ------ |  | - | ------ |  | - | ------------ | 
| | Segment operating loss | $ | 8,824  |  | $ | 9,069  |  | $ | 17,893       | 
| | Identifiable assets    | $ | 9,845  |  | $ | 38,886 |  | $ | 48,731       | 
| |                        |   |        |  |   |        |  |   |              | 
| | 2006                   |   |        |  |   |        |  |   |              | 
| | Segment operating loss | $ | 4,523  |  | $ | 11,406 |  | $ | 15,929       | 
| | Identifiable assets    | $ | 11,653 |  | $ | 14,381 |  | $ | 26,034       | 

|    |                                       
|--- | --------------------------------------
|13. | Contingent Liabilities and Commitments
|    |                                       
|    | a)                                    
|    |                                       
|    |                                       

Bonus SharesMilestone 1
      1,590,000
      (i) issuedMilestone 2
      1,300,000
      (ii)Milestone 3
      2,400,000
      (iii) issuedMilestone 4
      3,240,000
      (iv)


| | (i)  | Milestone 1 Completion of an agreement with Cliffs-Erie
        LLC for the option to purchase of Cliffs-Erie facility to be used as a
        part of mining and processing operations for the NorthMet Project. This
        milestone was achieved on 16 February 2004 and therefore, during the year
        ended 31 January 2005, the Company expensed a CDN$1,192,500 (US$872,552)
        bonus as consulting fees and allotted 1,590,000 shares. These shares were
        issued in March 2005.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (ii) | Milestone 2  Negotiation and completion of an
        off-take agreement with a senior metals producer for the purchase of raw
        materials to be produced from the NorthMet Project.                                                                                                                                                                                                                                                                                                               

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|13. | Contingent Liabilities and Commitments- Continued
|--- | -------------------------------------------------

| | (iii) | Milestone 3 Completion of a bankable feasibility
        study which indicates that commercial production from the NorthMet
        Project is viable. This milestone was achieved on 25 September 2006 and
        therefore, during the year ended 31 January 2007, the Company expensed
        a C$1,762,500 ($1,289,621) bonus as consulting fees and allotted 2,350,000
        shares. These shares were issued in October 2006.                                                                                                                                                       
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (iv)  | Milestone 4  Commencement of commercial production
        at the NorthMet Project at a time when the company has not less than 50%
        ownership interest.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (v)   | At the Annual General Meeting of shareholders of the
        Company, held on 21 June 2006, the shareholders approved the issuance
        of shares under Milestone 3. Shareholders also approved accelerated vesting
        of bonus shares whereby, in the event the Company is the subject of a
        take-over bid, all shares that remain subject to issuance under Milestones
        2 and 4 shall be vested and issued provided that no individual will benefit
        from both accelerated vesting and terminated severance allowances as described
        in paragraph b) below.

| | b) | As a part of certain employment and management contracts,
        the Company had agreed to severance allowances for key employees and management
        in the event of a take-over bid. These allowances were based upon the
        Companys implied market capitalization at the time of the take-over
        bid, calculated by multiplying the number of shares outstanding on a fully
        diluted basis by the take-over bid price per share. These severance allowances
        have been terminated pursuant to oral or written amendments to these contracts
        and will be replaced by termination agreement representing up to three
        times the average annual compensation in the three years prior to change
        of control.                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | c) | Pursuant to the Companys Asset Purchase Agreement
        with Cliffs (Note 5), for as long as Cliffs owns 1% or more of the Companys
        issued shares, Cliffs will have the right to participate on a pro-rata
        basis in future cash equity financings. This agreement will also include
        a first right of refusal in favour of the Company should Cliffs wish to
        dispose of its interest.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | d) | On 31 October 2006 the Company entered into an agreement
        with BNP Paribas Loan Services (BNPP) whereby BNPP will advise
        and assist PolyMet in all aspects of preparation for construction finance.
        As part of this agreement, BNPP was issued warrants to purchase 600,000
        shares of the Companys common stock at a price of US$4.00 per share
        at any time prior to 30 October 2010. The fair value of these warrants
        was $1,197,000. Further, upon delivering a bona fide offer of project
        financing, warrants to purchase an additional 500,000 shares of the Company
        at a price of US$4.00 per share at any time prior to 30 October 2010 will
        vest. As part of the agreement, PolyMet will also pay BNPP $50,000 per
        month for its advice and assistance.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**14.** | Differences Between Canadian and United States
      Generally Accepted Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | These consolidated financial
        statements are prepared in accordance with Canadian generally accepted
        accounting principles (GAAP). The U.S. Securities and Exchange
        Commission requires that financial statements of foreign registrants contain
        a reconciliation presenting the statements on the basis of accounting
        principles generally accepted in the U.S. Any differences in accounting
        principles as they pertain to the accompanying consolidated financial
        statements are not material except as follows:

| | a) | Under Canadian GAAP, the Company capitalizes accretion
        relating to its asset retirement obligations to mineral property, plant
        and equipment. Under US GAAP, this amount is expensed for the period prior
        to the DFS and debited to the Mineral property, plant and equipment asset.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The effects of the differences in accounting
  principles on accretion of asset retirement obligation on net loss and comprehensive
  loss are as follows:

| |                                                              |   | 2007        |   |   | 2006       |   |   | 2005       |  
| | ------------------------------------------------------------ | - | ----------- | - | - | ---------- | - | - | ---------- | -
| | Net Loss and Comprehensive Loss:                             |   |             |   |   |            |   |   |            |  
| | Net loss - Canadian GAAP basis                               | $ | 17,893      |   | $ | 15,929     |   | $ | 4,416      |  
| | Adjustment of accretion to asset retirement
      obligation |   | 155         |   |   | 47         |   |   | -          |  
| | Net loss and comprehensive loss - U.S. GAAP basis            | $ | 18,048      |   | $ | 15,976     |   | $ | 4,416      |  
| | Weighted average number of shares computed
      under U.S.  |   |             |   |   |            |   |   |            |  
| | GAAP                                                         |   | 114,754,213 |   |   | 73,484,490 |   |   | 53,784,877 |  
| | Loss per share following U.S. GAAP                           | $ | (0.16       | ) | $ | (0.22      | ) | $ | (0.08      | )

| | b) | Recent U.S. Accounting Pronouncements, which relate
        to the Companys current operations are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In May 2005, the FASB issued SFAS 154, Accounting
        Changes and Error Corrections,which replaces APB Opinion No.
        20, Accounting Changes,and supersedes FASB Statement
        No. 3, Reporting Accounting Changes in Interim Financial Statements
         an amendment of APB Opinion No. 28.SFAS 154 requires
        retrospective application to prior periods financial statements
        of changes in accounting principle, unless it is impracticable to determine
        either the period-specific effects or the cumulative effect of the change.
        When it is impracticable to determine the period- specific effects of
        an accounting change on one or more individual prior periods presented,
        SFAS 154 requires that the new accounting principle be applied to the
        balances of assets and liabilities as of the beginning of the earliest
        period for which retrospective application is practicable and that a corresponding
        adjustment be made to the opening balance of retained earnings for that
        period rather than being reported in an income statement. When it is impracticable
        to determine the cumulative effect of applying a change in accounting
        principle to all prior periods, SFAS 154 requires that the new accounting
        principle be applied as if it were adopted prospectively from the earliest
        date practicable. The adoption of this standard did not result in a material
        impact to the Companys consolidated financial statements.

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|**14.** | Differences Between Canadian
        and United States Generally Accepted Accounting Principles- Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 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.
        The Company expects that the adoption of FIN 48 will not have a material
        effect on its financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | In September 2006, the FASB
        issued SFAS No. 157, "Fair Value Measurement" ("SFAS 157"). The
        Statement provides guidance for using fair value to measure assets and
        liabilities. The Statement also expands disclosures about the extent to
        which companies measure assets and liabilities at fair value, the information
        used to measure fair value, and the effect of fair value measurement on
        earnings. This Statement applies under other accounting pronouncements
        that require or permit fair value measurements. This Statement does not
        expand the use of fair value measurements in any new circumstances. Under
        this Statement, fair value refers to the price that would be received
        to sell an asset or paid to transfer a liability in an orderly transaction
        between market participants in the market in which the entity transacts.
        SFAS 157 is effective for the Company for fair value measurements and
        disclosures made by the Company in its fiscal year beginning on 1 February
        2008. The Company is currently reviewing the impact of this statement.                                                                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | In September 2006, the FASB
        issued SFAS No. 158, Employers Accounting for Defined Benefit
        Pension and Other Postretirement Plans  an amendment of FASB
        Statements No. 87, 88, 106 and 132(R) (SFAS 158).
        SFAS 158 requires an employer that sponsors one or more single- employer
        defined benefit plans to (a) recognize the overfunded or underfunded status
        of a benefit plan in its statement of financial position, (b) recognize
        as a component of other comprehensive income, net of tax, the gains or
        losses and prior service costs or credits that arise during the period
        but are not recognized as components of net periodic benefit cost pursuant
        to SFAS 87, Employers Accounting for Pensions, or SFAS
        106, Employers Accounting for Postretirement Benefits Other
        Than Pensions, (c) measure defined benefit plan assets and obligations
        as of the date of the employers fiscal year-end, and (d) disclose
        in the notes to financial statements additional information about certain
        effects on net periodic benefit cost for the next fiscal year that arise
        from delayed recognition of the gains or losses, prior service costs or
        credits, and transition asset or obligation. The adoption of this standard
        did not result in a material impact to the Companys consolidated
        financial statements.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | In February 2007, the Financial
        Accounting Standards Board (the FASB) issued SFAS No. 159,
        The Fair Value Option for Financial Assets and Financial Liabilities
        (SFAS 159). SFAS 159 allows the company to choose to measure many financial
        assets and financial liabilities at fair value. Unrealized gains and losses
        on items for which the fair value option has been elected are reported
        in earnings. SFAS 159 is effective for fiscal years beginning after 15
        November 2007. The Company is currently evaluating the requirements of
        SFAS 159 and the potential impact on the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

---

|PolyMet Mining Corp.                                                                             
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|For the years ended 31 January 2007, 2006 and 2005                                               
|Tabular amounts in Thousands of U.S. Dollars except for
      price per share, shares and options
|                                                                                                 

|14. | Differences Between Canadian and United States Generally
        Accepted Accounting Principles-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In a recent continuous disclosure review, the SEC determined
        that for US GAAP purposes it is generally not possible to treat as equity,
        warrants whose exercise price is denominated in a currency different from
        the functional currency of the entity. The SEC's view is that for US GAAP
        purposes such warrants are derivative instruments and should be recorded
        as liabilities and carried at fair value, with changes in fair value recorded
        in earnings. A recent meeting of the FASB considered the SECs view
        and the FASB have recommended that Companies be allowed to implement this
        accounting in a future year, as an accounting change. The Company intends
        to adopt this accounting in the period the FASB recommends and to treat
        the adjustments as an accounting change.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|**15.** | Subsequent Events                                                                                                                                              
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                
|        | In addition to items disclosed
        elsewhere in these financial statements, the Company conducted the following
        transactions after 31 January 2007:

| | a) | On 17 April 2007, the Company closed a non-brokered
        private placement financing of 15 million units at US$2.75 per unit, with
        each unit comprising one common share and one-half of one warrant. Each
        whole warrant is exercisable into a common share at a price of US$4.00
        at any time until 13 October 2008, subject to an early trigger if the
        20-day volume weighted average price of the common shares is US$6.00 or
        more. In connection with the private placement, the Company has paid finders
        fees totalling US$1.43 million in cash, 150,000 shares and 520,000 broker
        warrants having the same terms as the warrants described above.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | b) | The Company granted 1,950,000 stock options to directors,
        officers, consultants and employees at prices ranging from US$2.88 to
        $2.99. Of these options, 475,000 vested immediately and 1,475,000 are
        scheduled to vest at future dates or upon future events.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | c) | On 25 April 2007, the Companys agreement with
        Minnesota Power, whereby Minnesota Power will provide all of PolyMets
        electric service needs at its NorthMet project through 2018 was approved
        by the Minnesota Public Utilities Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

---