Auditors' Report

To
the Shareholders of North American Palladium Ltd.

We
have audited the consolidated balance sheets of North American Palladium Ltd. ("the Company") as at December 31, 2008 and 2007 and the consolidated statements of operations,
comprehensive loss and deficit, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the year ended December 31, 2008 and 2007,
we also conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in accordance with Canadian generally accepted accounting principles.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 23, 2009 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

GRAPHIC

KPMG LLP
Chartered Accountants, Licensed Public Accountants

Toronto,
Canada,
February 23, 2009.

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Consolidated Balance Sheets (expressed in thousands of Canadian dollars)

|                                                                          
|--------------------------------------------------------------------------
|December 31                                                               
|                                                                          
|ASSETS                                                                    
|Current Assets                                                            
|Cash and cash equivalents                                                 
|Concentrate awaiting settlement, net  Note 3                             
|Taxes recoverable                                                         
|Inventories  Note 4                                                      
|Other assets  Note 5                                                     
|                                                                          
|                                                                          
|Mining interests, net  Note 6                                            
|Mine restoration deposit  Note 7                                         
|                                                                          
|                                                                          
|                                                                          
|LIABILITIES AND SHAREHOLDERS' EQUITY                                      
|Current Liabilities                                                       
|Accounts payable and accrued liabilities                                  
|Future mining tax liability  Note 21                                     
|Current portion of obligations under capital leases  Note 8              
|Convertible notes payable  Note 9                                        
|Current portion of long-term debt  Note 10                               
|                                                                          
|                                                                          
|Mine restoration obligation  Note 7                                      
|Obligations under capital leases  Note 8                                 
|Long-term debt  Note 10                                                  
|Future mining tax liability  Note 21                                     
|                                                                          
|                                                                          
|Shareholders' Equity                                                      
|Common share capital and purchase warrants  Note 13                      
|Stock options                                                             
|Equity component of convertible notes payable, net of issue costs  Note 9
|Contributed surplus                                                       
|Deficit                                                                   
|                                                                          
|Total shareholders' equity                                                
|                                                                          
|                                                                          
|                                                                          

Commitments  Notes 1 and 17
Contingencies  Note 7 and 20

See accompanying notes to the consolidated financial statements

On
Behalf of the Board

|GRAPHIC                   |  | GRAPHIC                        
|------------------------- |  | -------------------------------
|André J. DouchaneDirector |  | Gregory J. Van StaverenDirector

27

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Consolidated Statements of Operations,
Comprehensive Loss and Deficit (expressed in thousands of Canadian dollars, except share and per share amounts)

|                                                                              
|------------------------------------------------------------------------------
|Year ended December 31                                                        
|                                                                              
|Revenue  before pricing adjustments                                          
|Pricing adjustments:                                                          
|                                                                              
|                                                                              
|                                                                              
|Revenue  after pricing adjustments Note 18                                  
|                                                                              
|Operating expenses                                                            
|Production costs                                                              
|Inventory pricing adjustment  Note 4                                         
|Smelter treatment, refining and freight costs                                 
|Amortization  Note 6(b)                                                      
|Asset impairment charge  Note 6(c)                                           
|Insurance recovery  Note 14                                                  
|Loss on disposal of equipment                                                 
|Asset retirement costs                                                        
|                                                                              
|Total operating expenses                                                      
|                                                                              
|Income (loss) from mining operations                                          
|                                                                              
|Other expenses                                                                
|General and administration                                                    
|Exploration                                                                   
|Interest and other financing costs  Note 19                                  
|Foreign exchange loss (gain)                                                  
|                                                                              
|Total other expenses                                                          
|                                                                              
|Loss before taxes                                                             
|Income and mining tax recovery  Note 21                                      
|                                                                              
|Net loss and comprehensive loss for the year                                  
|Deficit, beginning of year, as previously reported                            
|Adoption of new accounting standards for inventory  Note 2                   
|                                                                              
|Deficit, end of year                                                          
|                                                                              
|Net loss per share                                                            
|                                                                              
|                                                                              
|Weighted average number of shares outstanding  basic and diluted  Note 13(f)
|                                                                              

See accompanying notes to the consolidated financial statements

28

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Consolidated Statements of Cash Flows (expressed in thousands of Canadian dollars)

|                                                                           
|---------------------------------------------------------------------------
|Year ended December 31                                                     
|                                                                           
|Cash provided by (used in)                                                 
|Operations                                                                 
|Net loss for the year                                                      
|Operating items not involving cash                                         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Changes in non-cash working capital  Note 22(a)                           
|                                                                           
|                                                                           
|                                                                           
|Financing Activities                                                       
|Issuance of common shares and warrants, net of issue costs  Note 12 and 13
|Repayment of long-term debt                                                
|Repayment of obligations under capital leases                              
|Mine restoration deposit                                                   
|Issuance of convertible notes                                              
|Increase in long-term debt and credit facility                             
|Deferred financing costs                                                   
|                                                                           
|                                                                           
|                                                                           
|Investing Activities                                                       
|Additions to mining interests                                              
|Proceeds on disposal of mining interests                                   
|                                                                           
|                                                                           
|                                                                           
|Increase (decrease) in cash and cash equivalents                           
|Cash and cash equivalents, beginning of year                               
|                                                                           
|Cash and cash equivalents, end of year                                     
|                                                                           
|Cash and cash equivalents consisting of:                                   
|Cash                                                                       
|Short-term investments                                                     
|                                                                           
|                                                                           
|                                                                           

Supplementary information  Note 22(b), (c) (d) and (e)

See
accompanying notes to the consolidated financial statements

29

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Consolidated Statements
of Shareholders' Equity (expressed in thousands of Canadian dollars, except share amounts)

|                                                                   |                                                       | Number of shares |           |   | Capital stock |        |   | Shares issuable |       |   | Stock options |   |   | Warrants |     |   | Equity component of convertible notes payable |        |   | Contributed surplus |       |   | Deficit  |   |   | Total shareholders' equity |        |  
|------------------------------------------------------------------ | ----------------------------------------------------- | ---------------- | --------- | - | ------------- | ------ | - | --------------- | ----- | - | ------------- | - | - | -------- | --- | - | --------------------------------------------- | ------ | - | ------------------- | ----- | - | -------- | - | - | -------------------------- | ------ | -
|                                                                  
|Balance, December 31, 2007                                         |                                                       | 75,770,570       |           | $ | 430,793       |        | $ |                |       | $ | 1,673         |   | $ | 13,193   |     | $ | 6,044                                         |        | $ | 6,292               |       | $ | (222,044 | ) | $ | 235,951                    |        |  
|Transitional adjustment on adoption of inventory standard  Note 2 |                                                       |                 |           |   |              |        |   |                |       |   |              |   |   |         |     |   |                                              |        |   |                    |       |   | (403     | ) |   | (403                       | )      |  
|Common shares issued/issuable  Note 9:                            |                                                       |                  |           |   |               |        |   |                 |       |   |               |   |   |          |     |   |                                               |        |   |                     |       |   |          |   |   |                            |        |  
|                                                                   | For principal repayments on convertible notes payable |                  | 6,111,869 |   |               | 28,270 |   |                 | 2,062 |   |               |  |   |          |    |   |                                               | (6,044 | ) |                     | 6,044 |   |          |  |   |                            | 30,332 |  
|                                                                   | For interest payments on convertible notes payable    |                  | 165,185   |   |               | 714    |   |                 | 18    |   |               |  |   |          |    |   |                                               |       |   |                     |      |   |          |  |   |                            | 732    |  
|                                                                   | Tax effect of flow-through shares                     |                  |          |   |               | (1,452 | ) |                 |      |   |               |  |   |          |    |   |                                               |       |   |                     |      |   |          |  |   |                            | (1,452 | )
|                                                                   | Pursuant to unit offering, net of issue costs         |                  | 2,800,000 |   |               | 9,575  |   |                 |      |   |               |  |   |          |    |   |                                               |       |   |                     |      |   |          |  |   |                            | 9,575  |  
|Warrants issued:                                                   |                                                       |                  |           |   |               |        |   |                 |       |   |               |   |   |          |     |   |                                               |        |   |                     |       |   |          |   |   |                            |        |  
|                                                                   | Pursuant to unit offering, net of issue costs         |                  |          |   |               |       |   |                 |      |   |               |  |   |          | 899 |   |                                               |       |   |                     |      |   |          |  |   |                            | 899    |  
|                                                                   | Warrants exercised                                    |                  | 100       |   |               | 1      |   |                 |      |   |               |  |   |          |    |   |                                               |       |   |                     |      |   |          |  |   |                            | 1      |  
|Stock-based compensation expense                                   |                                                       | 311,251          |           |   | 1,313         |        |   |                |       |   | 632           |   |   |         |     |   |                                              |        |   |                    |       |   |         |   |   | 1,945                      |        |  
|Net loss for the year ended December 31, 2008                      |                                                       |                 |           |   |              |        |   |                |       |   |              |   |   |         |     |   |                                              |        |   |                    |       |   | (160,679 | ) |   | (160,679                   | )      |  
|                                                                  
|Balance, December 31, 2008                                         |                                                       | 85,158,975       |           | $ | 469,214       |        | $ | 2,080           |       | $ | 2,305         |   | $ | 14,092   |     | $ |                                              |        | $ | 12,336              |       | $ | (383,126 | ) | $ | 116,901                    |        |  
|                                                                  

See accompanying notes to consolidated financial statements.

30

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Consolidated Statements
of Shareholders' Equity (expressed in thousands of Canadian dollars, except share amounts)

|                                              |                                                       | Number of shares |            |   | Capital stock |        |   | Stock options |   |   | Warrants |       |   | Equity component of convertible notes payable |        |   | Contributed surplus |       |   | Deficit  |   |   | Total shareholders' equity |        |  
|--------------------------------------------- | ----------------------------------------------------- | ---------------- | ---------- | - | ------------- | ------ | - | ------------- | - | - | -------- | ----- | - | --------------------------------------------- | ------ | - | ------------------- | ----- | - | -------- | - | - | -------------------------- | ------ | -
|                                             
|Balance, December 31, 2006                    |                                                       | 52,947,693       |            | $ | 331,705       |        | $ | 1,269         |   | $ | 8,038    |       | $ | 12,336                                        |        | $ |                    |       | $ | (193,364 | ) | $ | 159,984                    |        |  
|Common shares issued:                         |                                                       |                  |            |   |               |        |   |               |   |   |          |       |   |                                               |        |   |                     |       |   |          |   |   |                            |        |  
|                                              | For principal repayments on convertible notes payable |                  | 3,120,997  |   |               | 26,180 |   |               |  |   |          |      |   |                                               | (6,292 | ) |                     | 6,292 |   |          |  |   |                            | 26,180 |  
|                                              | For interest payments on convertible notes payable    |                  | 341,528    |   |               | 2,644  |   |               |  |   |          |      |   |                                               |       |   |                     |      |   |          |  |   |                            | 2,644  |  
|                                              | Private placement of flow-through shares (net)        |                  | 550,000    |   |               | 5,686  |   |               |  |   |          |      |   |                                               |       |   |                     |      |   |          |  |   |                            | 5,686  |  
|                                              | Tax effect of flow-through shares                     |                  |           |   |               | (1,114 | ) |               |  |   |          |      |   |                                               |       |   |                     |      |   |          |  |   |                            | (1,114 | )
|                                              | Pursuant to unit offering, net of issue costs         |                  | 18,666,667 |   |               | 64,461 |   |               |  |   |          |      |   |                                               |       |   |                     |      |   |          |  |   |                            | 64,461 |  
|Warrants issued:                              |                                                       |                  |            |   |               |        |   |               |   |   |          |       |   |                                               |        |   |                     |       |   |          |   |   |                            |        |  
|                                              | Pursuant to unit offering, net of issue costs         |                  |           |   |               |       |   |               |  |   |          | 5,155 |   |                                               |       |   |                     |      |   |          |  |   |                            | 5,155  |  
|Stock options exercised                       |                                                       | 5,000            |            |   | 17            |        |   |              |   |   |         |       |   |                                              |        |   |                    |       |   |         |   |   | 17                         |        |  
|Fair value of stock options exercised         |                                                       |                 |            |   | 10            |        |   | (10           | ) |   |         |       |   |                                              |        |   |                    |       |   |         |   |   |                           |        |  
|Stock-based compensation expense              |                                                       | 138,685          |            |   | 1,204         |        |   | 414           |   |   |         |       |   |                                              |        |   |                    |       |   |         |   |   | 1,618                      |        |  
|Net loss for the year ended December 31, 2007 |                                                       |                 |            |   |              |        |   |              |   |   |         |       |   |                                              |        |   |                    |       |   | (28,680  | ) |   | (28,680                    | )      |  
|                                             
|Balance, December 31, 2007                    |                                                       | 75,770,570       |            | $ | 430,793       |        | $ | 1,673         |   | $ | 13,193   |       | $ | 6,044                                         |        | $ | 6,292               |       | $ | (222,044 | ) | $ | 235,951                    |        |  
|                                             

See accompanying notes to consolidated financial statements.

31

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Notes to the Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006(expressed in thousands of Canadian dollars, except per share
 amounts and metal prices)

1.  NATURE OF OPERATIONS

North American Palladium Ltd. ("NAP" or "the Company") is a Canadian company in the business of exploring and mining Platinum Group Metals ("PGMs") and certain base and
precious metals. The Company operates in one operating segment, mining. Its principal asset is the Lac des Iles mine, located in the Thunder Bay District in Ontario, which has been in continuous
operations since 1993.

The
Company's financial position and operating results are directly affected by the market price of the PGMs in relation to the Company's production costs. The prices of PGMs (palladium
and platinum) and by-product metals (gold, nickel and copper) fluctuate widely and are affected by numerous factors beyond the Company's control. On October 21, 2008, the Company
announced that, due to declining metal prices, it was temporarily placing its Lac des Iles mine on a care and maintenance basis effective October 29, 2008. The closure resulted in the layoff of
approximately 350 employees.

The
Lac des Iles mine consists of an open pit mine, an underground mine and two processing plants (one of which was decommissioned in June 2001). The primary deposits on the property are
the Roby Zone and the Offset High Grade Zone ("Offset Zone"). The Company began mining the Roby Zone in 1993 using open pit mining methods. In April 2006, an underground mine went into
commercial production to access a higher grade portion of the Roby Zone.

The
Offset Zone located on the Lac des Iles property was discovered by the Company's exploration team in 2001. The Offset Zone is considered to be the fault-displaced continuation of the Roby Zone
mineralization and is located below and approximately 250 meters to the west of the Roby Zone. An updated mineral resource estimate was prepared by Scott Wilson Roscoe Postle
Associates Inc. ("Scott Wilson RPA") in January 2009. The report showed that the Offset Zone has significantly more mineral resources than the current underground mine of the Roby Zone
at similar grades, and remains open along strike to the north, south and at depth. A detailed prefeasibility report is underway with the objectives of converting indicated resources to probable
reserves, and assessing the optimal mining and milling configuration and economics of developing the upper portion of the Offset Zone. The report is expected to be completed by the end of the second
quarter of 2009.

In
addition to mining, development and exploration activities around the Lac des Iles property, the Company has historically conducted grassroots exploration activities within the Province of Ontario
and elsewhere as opportunities are identified. In 2008, the primary projects were the Shebandowan West Project and the Arctic Platinum Project.



32

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2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are in Canadian dollars unless
otherwise noted. The more significant accounting policies are summarized as follows:

Basis of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Lac des Iles Mines Ltd. ("LDI") and North American
Palladium Arctic Services Ltd. ("NAPFS"), and also reflect the transfer of the Company's interest in North American Palladium Finland Ltd. ("NAPFL") to Gold Fields
Exploration B.V. for a nominal amount following the lapse of the Company's option over the Arctic Platinum Project. All inter-company balances and transactions have been eliminated.

Revenue and Concentrate Awaiting Settlement

Revenue from the sale of palladium and by-product metals is recognized net of royalties upon the delivery of concentrate to the smelter, which is when title
transfers and the rights and obligations of ownership pass. The Company's metals are sold under contracts that provide for final prices that are determined by quoted market prices in a period
subsequent to the date of sale. Variations from the provisionally priced sales are recognized as revenue adjustments as they occur until the price is finalized. Provisional pricing is based upon
market prices in the month of recognition. Concentrate awaiting settlement at the smelter is net of estimated treatment and refining costs which are subject to final assay adjustments.

Although
the Company sold its metals during 2008 to a limited number of customers, it is not economically dependent upon them as there are other markets throughout the world for the Company's metals.

Concentrate, Crushed and Broken Ore Stockpiles and Supplies Inventories

Concentrate and crushed and broken ore stockpiles are valued at the lower of average production cost (including an allocation of the amortization of production related assets)
and net realizable value. Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. Stockpile tonnages are verified by
periodic surveys. The amount of stockpiled ore that is not expected to be processed within one year is shown as a long-term asset. Supplies inventory is valued at the lower of average
direct acquisition cost and net realizable value.

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Mining Interests

Plant and equipment are recorded at cost with amortization generally provided either on the unit-of-production method over the proven and probable
reserves to which they relate or on a straight-line basis over their estimated useful lives, ranging from three to seven years. The Company capitalizes interest on major projects where
direct indebtedness has occurred.

The
Company leases certain equipment under capital leases. These leases are capitalized based on the lower of fair market value and the present value of future minimum lease payments. The
corresponding liabilities are recorded as obligations under capital leases. This equipment is being amortized on the same basis as described above.

Mining
leases and claims and royalty interests are recorded at cost and are amortized on the unit-of-production method over the proven and probable reserves.

Exploration
costs relating to properties are charged to earnings in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of
established proven and probable reserves, future development and exploration expenditures are capitalized. Determination as to reserve potential is based on the results of feasibility studies, which
indicate whether production from a property is economically feasible. Upon commencement of commercial production of a development project these costs are amortized using the
unit-of-production method over the proven and probable reserves. Capitalized exploration costs, net of salvage values, relating to a property that is later abandoned or
considered uneconomic for the foreseeable future, are written off in the period the decision is made.

Impairment of Long-lived Assets

Each year, the Company reviews mining plans for the remaining life of each property. Significant changes in the mine plan can occur as a result of mining experience, new
discoveries, changes in mining methods and rates, process changes, investments in new equipment and technology and other factors. Based on year-end ore reserves and the current mine plan,
the Company reviews annually its accounting estimates and makes adjustments accordingly.

The
Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When the carrying value
of a long-lived asset is less than its net recoverable value as determined on an undiscounted basis, an impairment loss is recognized to the extent that its fair value, measured as the
discounted cash flows over the life of the asset is less than the carrying value. Future cash flows are estimated based on quantities of recoverable minerals, expected palladium and other commodity
prices and expected foreign exchange rates (considering current, historical and expected future prices and foreign exchange rates and related factors), production levels and cash costs of production
and capital and reclamation expenditures, all based on detailed life-of-mine plans and projections. The term "recoverable minerals" refers to the estimated amount of palladium
and other commodities that will be obtained from proven and probable reserves after taking into account losses during mining, ore processing and concentrate treatment. Assumptions underlying future
cash flow estimates are subject to risk and uncertainty. Any differences between significant assumptions and market conditions such as metal prices, exchange rates, recoverable metal, and/or the
Company's operating performance could have a material effect on the Company's ability to recover the carrying amounts of its long-lived assets resulting in possible additional impairment
charges.

Asset Retirement Obligations

Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The amount of the liability is subject to re-measurement at each
reporting period. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement obligation is capitalized as part of mining interests and amortized over
the estimated life of the mine. Total undiscounted cash flows required to settle the obligations are estimated to be approximately $8,400 the majority of which is to be

34

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paid
at the end of the mine life, which is currently expected in 2010. A credit adjusted risk-free rate of 3% has been utilized to determine the obligation recorded on the balance sheet.
The estimated asset retirement obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.

Stock-Based Compensation Plans

The Company has a stock-based compensation plan which is described in note 13 (e) and a Restricted Share Unit Plan ("RSU") which is described in note 13
(g). The Company recognizes as an expense the cost of stock-based compensation based on the estimated fair value of new stock options granted to employees and directors. The fair value of each RSU,
being the fair market value of the Company's common shares at the grant date, is recorded as a liability on the Company's consolidated balance sheet over the vesting period. The value of the RSU
liability is adjusted to reflect changes in the market value of the Company's common shares at each period end.

Translation of Foreign Currency

The reporting and functional currency of the Company is the Canadian dollar. Accordingly, the Company translates monetary assets and liabilities denominated in foreign currency
at the rate of exchange prevailing at the consolidated balance sheet dates, non-monetary assets and liabilities denominated in foreign currency at the rate in effect at the date the
transaction occurred and revenues and expenses denominated in foreign currency at the exchange rate in effect during the applicable accounting period. All resulting foreign exchange gains and losses
are recorded in the consolidated statements of operations, comprehensive loss and deficit.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The effect on future tax liabilities and assets of a change in tax rates is recognized in income in the period that the change
occurs. The Company provides a valuation allowance for future tax assets when it is more likely than not that some portion or all of the future tax assets will not be realized.

Cash and Cash Equivalents

Cash and cash equivalents are stated at fair value and include cash on account less outstanding cheques, demand deposits and short-term guaranteed investments with
original maturities of three months or less.

Deferred Financing Costs

Deferred financing costs represent the costs of negotiating and securing the Company's long-term debt facilities. Effective January 1, 2007, the Company
records all transaction costs for financial assets and financial liabilities as a reduction of the related asset or liability and the effective interest rate method is now used to amortize these costs
to operations. As at January 1, 2007, the Company adjusted the carrying value of the related long-term debt and the convertible note payable using the effective interest method. The
impact in 2007 was a decrease in the carrying value of the convertible notes payable of $855 and a decrease in the long-term debt of $107 and a decrease in deferred financing costs
of $962.

Basic and Diluted Loss Per Share

Basic loss per common share is computed by dividing the loss for the period by the weighted average number of common shares outstanding during the reporting period. Diluted loss
per common share is computed using the treasury stock method whereby the weighted average number of shares outstanding is increased to include additional common shares from the assumed exercise of
stock options, convertible notes and common share purchase warrants (equity instruments), if dilutive. The number of additional common shares is calculated by assuming that outstanding equity
instruments were exercised and that proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. These common equivalent shares are
not included in the calculation of the

35

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weighted
average number of shares outstanding for diluted loss per common share when the effect would be anti-dilutive.

Flow-Through Shares

The Company finances a portion of its exploration activities through the issue of flow-through shares. The Company renounces the deductions to investors and
accordingly records share issue costs related to the future tax liability of the temporary difference arising from the renunciation. As a result, share capital is reduced and future income tax
liabilities are increased by the estimated tax benefits when renounced by the Company to the investors, except to the extent that the Company has unused tax benefits on loss carry-forwards and tax
pools in excess of book value available for deduction against which a valuation allowance has been provided. In these circumstances, the future tax liability reduces the valuation allowance, if any,
and the reduction is recognized in earnings.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to
recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

Derivative Financial Instruments

From time to time the Company may enter into forward commodity sales contracts to hedge the effect on revenues of changes in the price of metals it produces. Gains and losses on
derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal sales over the term of the hedging contract. The Company had no outstanding forward commodity
sales contracts as at December 31, 2008.

From
time to time the Company may enter into foreign exchange forward sales contracts to manage the effect of fluctuations in the value of committed U.S. dollar denominated revenues. The
Company had no outstanding foreign exchange forward sales contracts as at December 31, 2008.

The
Company does not hold financial instruments or derivative financial instruments for trading purposes.

Adoption of New Accounting Standards

Inventories

The Canadian Institute of Chartered Accountants Handbook (CICA Handbook) Section 3031 establishes standards for the determination of inventory cost and its subsequent
recognition as an expense, including any write-down to net realizable value. In addition in certain circumstances, write-downs of inventory previously recognized may be reversed. The
Company adopted this standard prospectively in accordance with the transitional provisions. On adoption of the new standard on January 1, 2008, an adjustment to supplies inventory of $3,529 was
recognized to reclassify items not meeting the definition of inventory, including major spare parts and insurance spares, to property, plant and equipment. A related increase to opening deficit of
$403, net of taxes was recognized to adjust for accumulated amortization.

Further
upon adoption of this standard, the Company changed its valuation of supplies inventory from the lower of cost and replacement cost to the lower of cost and net realizable value. The change in
valuation had no impact on the Company's financial statements.

Prior
periods presented have not been restated as a result of the adoption of the standard.

Financial Instruments  Recognition and Measurement

On January 1, 2008 the Company adopted CICA Handbook Section 3862, "Financial Instruments  Disclosures" and
Section 3863, "Financial Instruments  Presentation". These sections require the disclosure of information with regards to the significance of financial
instruments for the Company's financial position and performance, the nature and extent of risks arising from financial instruments to

36

---



which
the Company is exposed during the period and at the balance sheet date, and how the company manages those risks. These standards replace CICA Handbook Section 3861, "Financial
Instruments". The additional disclosures required as a result of adopting these standards are included in note 15.

Capital Disclosures

On January 1, 2008, the Company adopted CICA Handbook Section 1535, "Capital Disclosures". This section establishes standards for disclosing information about an
entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital. The additional disclosures required as
a result of adopting these standards are included in note 16.

Future Accounting Standards

In February 2008, the CICA issued Handbook Section 3064, "Goodwill and Intangible Assets", replacing Handbook Section 3062, "Goodwill
and Other Intangible Assets", and Handbook Section 3450, "Research and Development Costs". This section established standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. The new section is effective for years beginning on or after October 1,
2008. The Company is in the process of assessing the impact of this new section on its consolidated financial statements.

The
Accounting Standards Board (AcSB) announced in April 2008 that Canada will adopt International Financial Reporting Standards (IFRS) for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. The adoption of IFRS will be first reflected in the Company's financial statements for the quarter ending March 31, 2011.

The
transition to IFRS could have a material impact on the Company's financial position and reported results; however, it is not possible to quantify the impact at this time.

3.  CONCENTRATE AWAITING SETTLEMENT

Concentrate awaiting settlement is comprised of:

|                                       |  |   | 2008   |   |   | 2007   |   | 
|-------------------------------------- |  | - | ------ | - | - | ------ | - | 
|                                      
|Concentrate awaiting settlement, gross |  | $ | 46,984 |   | $ | 85,869 |   | 
|Refining and smelter treatment charges |  |   | (3,933 | ) |   | (6,782 | ) | 
|                                      
|Concentrate awaiting settlement, net   |  | $ | 43,051 |   | $ | 79,087 |   | 
|                                      

The gross value of concentrate awaiting settlement represents the value of all PGMs and base metals from production shipped to and received by the
third-party smelters between March and December 2008, including 115,786 ounces of palladium which were provisionally valued at the December 31, 2008 London Metal Exchange ("LME")
afternoon price fix of US$183 (2007  including 125,802 ounces of palladium valued at US$364), and 9,961 ounces of palladium that were valued at the
realized price of US$206. The LME afternoon price fix as at February 23, 2009 was US$204.

All
of the concentrate awaiting settlement is due from two domestic customers at December 31, 2008 (2007  one domestic customer). A reserve for doubtful
accounts has not been established, as in the opinion of management, the amount due will be fully realized.

37

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4.  INVENTORIES

Inventories consist of the following:

|                                  |  |   | 2008   |  |   | 2007   | 
|--------------------------------- |  | - | ------ |  | - | ------ | 
|                                 
|Supplies                          |  | $ | 12,363 |  | $ | 14,847 | 
|Crushed and broken ore stockpiles |  |   | 4,227  |  |   | 8,447  | 
|Concentrate                       |  |   |       |  |   | 3,026  | 
|                                 
|                                  |  | $ | 16,590 |  | $ | 26,320 | 
|                                 

The Company adopted the new CICA Handbook Section 3031, "Inventories," effective January 1, 2008, resulting in the prospective reclassification of
$3,529 in major spare parts and insurance spares from inventories and supplies to property, plant and equipment. Prior periods presented have not been restated as a result of the adoption of
this standard.

In
addition, Section 3031 of the CICA Handbook also requires the Company to disclose the amount of inventories expensed and any inventory write-downs recognized as an expense in
the period.

For
the year ended December 31, 2008, supplies inventory of $31,247 (2007  $28,895) were expensed.

For
the year ended December 31, 2008, the Company recognized write-downs of obsolete supplies inventories of $296 (2007  $533).

For
the year ended December 31, 2008, the Company recognized write-downs of concentrate inventory of $241 (2007  $144) due to declining commodity prices.

For
the year ended December 31, 2008, the Company recognized write-downs of crushed and broken ore stockpiles of $3,634 (2007  $Nil) due to declining
commodity prices.

5.  OTHER ASSETS

Other assets consist of the following:

|                |  |   | 2008  |  |   | 2007  | 
|--------------- |  | - | ----- |  | - | ----- | 
|               
|Investments*    |  | $ | 850   |  | $ | 9     | 
|Prepaids        |  |   | 839   |  |   | 779   | 
|GST recoverable |  |   | 1,475 |  |   | 1,203 | 
|Other           |  |   | 29    |  |   | 572   | 
|               
|                |  | $ | 3,193 |  | $ | 2,563 | 
|               

38

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6.  MINING INTERESTS

|                                                                     |  |   | 2008     |   |   | 2007     |   | 
|-------------------------------------------------------------------- |  | - | -------- | - | - | -------- | - | 
|                                                                    
|Plant and equipment, at cost                                         |  | $ | 380,913  |   | $ | 368,339  |   | 
|Underground mine development, at cost                                |  |   | 55,486   |   |   | 52,174   |   | 
|Accumulated amortization and impairment charges                      |  |   | (414,824 | ) |   | (319,388 | ) | 
|                                                                    
|                                                                     |  |   | 21,575   |   |   | 101,125  |   | 
|                                                                    
|Equipment under capital lease, at cost                               |  |   | 11,158   |   |   | 14,076   |   | 
|Accumulated amortization and impairment charges                      |  |   | (5,819   | ) |   | (7,022   | ) | 
|                                                                    
|                                                                     |  |   | 5,339    |   |   | 7,054    |   | 
|                                                                    
|Mining leases and claims, royalty interest, and development, at cost |  |   | 82,561   |   |   | 82,561   |   | 
|Accumulated amortization and impairment charges                      |  |   | (77,835  | ) |   | (76,276  | ) | 
|                                                                    
|                                                                     |  |   | 4,726    |   |   | 6,285    |   | 
|                                                                    
|Mining interests, net                                                |  | $ | 31,640   |   | $ | 114,464  |   | 
|                                                                    

|                                                                                  |  |   | 2008   |  |   | 2007   |  |   | 2006   | 
|--------------------------------------------------------------------------------- |  | - | ------ |  | - | ------ |  | - | ------ | 
|                                                                                 
|Capital assets (including plant and equipment, and equipment under capital lease) |  | $ | 34,466 |  | $ | 44,430 |  | $ | 28,422 | 
|Mining leases and claims, royalty interest, and development costs                 |  |   | 1,560  |  |   | 2,478  |  |   | 1,681  | 
|                                                                                 
|                                                                                  |  | $ | 36,026 |  | $ | 46,908 |  | $ | 30,103 | 
|                                                                                 



7.  MINE RESTORATION OBLIGATION AND DEPOSIT

The Company, in conjunction with the Ontario Ministry of Northern Development and Mines (the "Ministry"), has established a trust fund (the "Fund") pursuant to the
Company's mine closure plan for eventual clean-up and restoration of the mine site and the Shebandowan West Property. The mine closure plan calls for a total amount of $8,400 to be
accumulated in the Fund.

Commencing
in February 2001, the Fund, controlled by the Ministry, started to accumulate through monthly deposits of $100. At December 31, 2008, the Company had $8,724
(2007  $8,272) on deposit with the Ministry including accrued interest of $872. All current amounts required have been contributed as at December 31,
2008. The funds on deposit bear interest at current short-term deposit rates and will be returned to the Company once the mine closure is completed. The estimated asset retirement
obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.

39

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At
December 31, the asset retirement and the related mine restoration deposit are as follows:

|                                                      |  |   | 2008  |   |   | 2007  |   | 
|----------------------------------------------------- |  | - | ----- | - | - | ----- | - | 
|                                                     
|Mine restoration obligation, beginning of the year    |  | $ | 8,878 |   |   | 8,211 |   | 
|Change in estimated closure costs                     |  |   | (527  | ) |   |      |   | 
|Accretion expense (recovery)                          |  |   | 104   |   |   | 667   |   | 
|                                                     
|Mine restoration obligation, end of the year  Note 2 |  | $ | 8,455 |   | $ | 8,878 |   | 
|Mine restoration deposit                              |  |   | 8,724 |   |   | 8,272 |   | 
|                                                     
|Excess (shortfall) of deposit over obligation         |  | $ | 269   |   | $ | (606  | ) | 
|                                                     

8.  OBLIGATIONS UNDER CAPITAL LEASES

The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments:

|                                                        |  |   | 2008   |   |   | 2007   |   | 
|------------------------------------------------------- |  | - | ------ | - | - | ------ | - | 
|                                                       
|2008                                                    |  | $ |       |   | $ | 1,830  |   | 
|2009                                                    |  |   | 2,122  |   |   | 1,499  |   | 
|2010                                                    |  |   | 766    |   |   | 402    |   | 
|2011                                                    |  |   | 268    |   |   |       |   | 
|2012                                                    |  |   | 157    |   |   |       |   | 
|                                                       
|Total minimum lease payments                            |  |   | 3,313  |   |   | 3,731  |   | 
|Amounts representing interest at rates from 2.8%  3.6% |  |   | (191   | ) |   | (235   | ) | 
|                                                       
|Present value of minimum lease payments                 |  |   | 3,122  |   |   | 3,496  |   | 
|Less current portion                                    |  |   | (1,992 | ) |   | (1,672 | ) | 
|                                                       
|                                                        |  | $ | 1,130  |   | $ | 1,824  |   | 
|                                                       

9.  CONVERTIBLE NOTES PAYABLE

|                                                       |  |   | 2008 |  |   | 2007    |   | 
|------------------------------------------------------ |  | - | ---- |  | - | ------- | - | 
|                                                      
|Series I convertible notes  matured August 1, 2008    |  | $ |     |  | $ | 17,011  |   | 
|Series II convertible notes  matured December 1, 2008 |  |   |     |  |   | 8,699   |   | 
|                                                      
|                                                       |  |   |     |  |   | 25,710  |   | 
|Less current portion                                   |  |   |     |  |   | (25,710 | ) | 
|                                                      
|                                                       |  | $ |     |  | $ |        |   | 
|                                                      

As at December 31, 2008, the principal amount outstanding on the Series I and Series II convertible notes was US$Nil (December 31,
2007  US$17,500) and US$Nil (December 31, 2007  US$9,000) respectively. The Company recorded accretion expense of
$3,372 (2007  $12,947), of which $815 (2007  $3,245) represented the accretion relating to the Equity Premium which was
included in the carrying value of the convertible notes payable. The convertible notes were fully repaid on December 1, 2008.

The
issue costs of $2,364 have been allocated pro-rata to the debt ($1,398) and equity components ($589) of the Series I and II Notes and to the associated warrants ($377) on
a relative fair value basis. The financing costs related to the debt components are being amortized over the term of the convertible notes using the effective interest method.

On
January 13, 2009, 1,501,638 shares were issued relating to the final December 1, 2008 convertible note principal and interest payment.

40

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10.  LONG-TERM DEBT

|                                                                                                               |  |   | 2008   |   |   | 2007   |   | 
|-------------------------------------------------------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | 
|                                                                                                              
|Equipment finance company credit facility consisting of $2,000 and US$2,000 (2007  $4,000 and US$6,000) loans |  | $ | 4,448  |   | $ | 9,928  |   | 
|Less: financing costs (net of amortization)                                                                    |  |   | (18    | ) |   | (53    | ) | 
|                                                                                                              
|                                                                                                               |  |   | 4,430  |   |   | 9,875  |   | 
|Less current portion                                                                                           |  |   | (4,430 | ) |   | (5,918 | ) | 
|                                                                                                              
|                                                                                                               |  | $ |       |   | $ | 3,957  |   | 
|                                                                                                              

The Company's long-term debt is comprised of a senior credit facility with an equipment finance company. The interest rate under the Canadian loan
facility is Canadian LIBOR plus 2.50%, or 4.55% at December 31, 2008 (7.05%  2007). The interest rate under the US loan facility is US LIBOR plus 2.50%,
or 2.94% at December 31, 2008 (7.10%  2007). The senior credit facility is repayable in equal quarterly installments over a five-year period
with a final maturity of November 24, 2009. In return for granting the loan, the lender received a first priority security in all of the Company's existing and future assets excluding its
production leases and claims. The credit facility allows in certain circumstances, full repayment of outstanding loans at any time during the term of the facility.

11.  KAISER-FRANCIS CREDIT FACILITY

On October 12, 2006 the Company closed a transaction with Kaiser-Francis for a US$5,000 short term working capital loan maturing December 31, 2006. On
December 13, 2006, the maturity date was extended to March 31, 2007. Interest on this new facility was based on the 30-day US LIBOR plus 2.5% and the standby fee was 0.125%
per annum. This facility was repaid on March 7, 2007.

12.  RELATED PARTY TRANSACTIONS AND COMMITMENTS

Kaiser-Francis is the major shareholder of the Company. In addition to the related party transactions with Kaiser-Francis disclosed in note 11, the Company had the
following related party transactions:

13.  SHAREHOLDERS' EQUITY



41

---





2008

2007Shares


Amount

Shares


AmountBalance beginning of year

12,089,998

$
13,193

1,990,969


8,038Issued pursuant to unit offering, net of issue costs

1,400,000


899

9,333,333


5,155Increase pursuant to anti-dilution provisions






765,696


Warrants exercised

(100
)






Balance, end of year

13,489,898

$
14,092

12,089,998

$
13,193




Number of Warrants

Exercise Price

Expiry Date1,805,016

US$10.73

March 29, 2010951,649

US$7.85

June 23, 2010




Number of Warrants

Exercise Price

Expiry Date10,733,233

US$5.05

December 13, 2009






42

---







2008

2007Shares


Weighted-Average Exercise Price

Shares


Weighted-Average Exercise PriceOutstanding, beginning of year

356,433

$
9.89

360,133

$
10.24Granted

1,110,000


3.60

132,500


9.05Exercised






(5,000
)

3.42Cancelled

(5,333
)

10.82

(131,200
)

10.25Outstanding, end of year

1,461,100


5.10

356,433

$
9.89Options exercisable at end of year

263,099

$
10.23

191,600

$
10.76


43

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Exercise Price

Expiry Dates

Options Outstanding at Dec. 31, 2008

Options Exercisable at Dec. 31, 2008$  2.20

September 30, 2016

750,000

$  4.75

February 27, 2011

7,500

7,500$  4.83

July 20, 2016

20,000

$  5.22

June 9, 2016

40,000

$  6.47

May 21, 2016

265,000

$  7.85

August 26, 2014

30,000

20,000$  8.12

October 8, 2015

15,000

5,000$  8.40

June 20, 2014

35,000

23,333$  8.45

April 1, 2015

40,000

13,333$  8.83

December 14, 2013

10,000

10,000$  8.87

January 14, 2015

7,500

2,500$  9.03

March 1, 2015

7,000

2,333$  9.21

February 24, 2016

35,000

$10.00

November 27, 2012

50,000

50,000$10.18

April 15, 2015

30,000

10,000$11.90

June 23, 2012

119,100

119,1001,461,100

263,099




2008


2007


2006Net loss available to common shareholders

$
(160,679
)
$
(28,680
)
$
(34,109
)Weighted average number of shares outstanding


82,839,706


55,792,203


52,562,939Effect of dilutive securities stock options








Weighted average diluted number of shares outstanding


82,839,706


55,792,203


52,562,939Diluted net loss per share

$
(1.94
)
$
(0.51
)
$
(0.65
)




44

---





14.  INSURANCE RECOVERY

The Company previously filed a claim with its insurance company relating to losses incurred in connection with the failure of the primary crusher in 2002. During 2004, the
Company received $7,148 as in interim payment against this claim and in July 2008 a settlement in the amount of $14,500 was received for the remainder of this claim. The amount of $13,800 has
been included as income from mining operations and $700 received for legal costs has been included as a reduction of general and administration expenses.

15.  FINANCIAL INSTRUMENTS

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, currency risk, interest rate risk, commodity price risk and
liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation. The Company's exposure
arises principally from its short term investments and concentrate awaiting settlement. Historically, the Company has not experienced any losses related to individual customers. All of the Company's
concentrate awaiting settlement is due from two domestic customers at December 31, 2008 (2007  one domestic customer). A reserve for doubtful accounts has
not been established, as in the opinion of management, the amount due will be fully realized.

The
carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

|                                 |  |   | 2008   |  |   | 2007    | 
|-------------------------------- |  | - | ------ |  | - | ------- | 
|                                
|Cash and cash equivalents        |  | $ | 2,532  |  | $ | 4,444   | 
|Short term investments           |  |   | 40,536 |  |   | 70,162  | 
|Concentrate awaiting settlement* |  |   | 43,051 |  |   | 79,087  | 
|                                
|                                 |  | $ | 86,119 |  | $ | 153,693 | 
|                                

Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of
currency, interest rate, and commodity price risk.

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk is
related to the portion of the Company's business transactions denominated in currencies other than Canadian dollars. The Company is exposed to fluctuations in exchange rates due to certain of its
foreign-based suppliers, long-term debt, capital leases,

45

---



and
revenues being in foreign currencies. The Company's primary exposure is based upon the movements of the US dollar against the Canadian dollar. The Company's foreign exchange risk management
includes from time to time the use of foreign currency forward contracts to fix exchange rates on certain foreign currency exposures. As at December 31, 2008, the Company had not entered into
any foreign exchange contracts.

For
the Company's foreign exchange transactions, fluctuations in the respective exchange rates relative to the Canadian dollar will create volatility in the Company's cash flows and the reported
amounts for revenue, production, and exploration costs on a year-to-year basis. Additional earnings volatility arises from the translation of monetary assets and liabilities
denominated in currencies other than Canadian dollars at the rates of exchange at each balance sheet date, the impact of which is reported as a separate component of revenue or foreign exchange gain
or loss.

The
Company is exposed to the following currency risk on revenues, purchases and borrowings at December 31, 2008.

|                                         |  | US$ |        |  
|---------------------------------------- |  | --- | ------ | -
|                                        
|Cash                                     |  | $   | 151    |  
|Concentrate awaiting settlement          |  |     | 35,171 |  
|Accounts payable and accrued liabilities |  |     | (160   | )
|Obligations under capital leases         |  |     | (1,834 | )
|Long-term debt                           |  |     | (2,000 | )
|                                        
|                                         |  | $   | 31,328 |  
|                                        

A 1% strengthening or weakening of the Canadian dollar against the US dollar, assuming that all other variables remained the same, would have resulted in an
approximate $313 decrease or increase, respectively, in the Company's net income for the year ended December 31, 2008.

The
following summary illustrates the fluctuations in the exchange rates during the year ended December 31, 2008, as compared to the Canadian dollar.

|                                                            |  | US$     |  | Euro € | 
|----------------------------------------------------------- |  | ------- |  | ------ | 
|                                                           
|Exchange rates as at March 31, 2008                         |  | US$1.00 |  | €0.66  | 
|Exchange rates as at June 30, 2008                          |  | US$0.98 |  | €0.62  | 
|Exchange rates as at September 30, 2008                     |  | US$0.95 |  | €0.68  | 
|Exchange rates as at December 31, 2008                      |  | US$0.82 |  | €0.59  | 
|Average exchange rates for the year ended December 31, 2008 |  | US$0.94 |  | €0.64  | 
|                                                           

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does
not enter into derivative financial instruments for speculative purposes. It is exposed to interest rate risk due to its variable-rate long-term debt. Although the Company does
not hold any specific hedging instruments, it does hold certain short term investments. Interest rate fluctuations may have an effect on the interest income the Company derives from its short term
investments and which will favourably offset changes in the interest on debt instruments.

Management
does not believe that the net impact of interest rate fluctuations on the current level of borrowings and short term investments will be significant and, therefore, has not provided a
sensitivity analysis of this impact on net earnings.

46

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The
following table summarizes the interest rates which the Company had exposure to as at December 31, 2008.

|               |  | 2008  |  | 2007  | 
|-------------- |  | ----- |  | ----- | 
|              
|US LIBOR       |  | 0.44% |  | 4.60% | 
|Canadian LIBOR |  | 2.05% |  | 4.55% | 
|US prime rate  |  | 3.25% |  | 7.25% | 
|              

Commodity Price Risk

Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. The Company is
particularly exposed to fluctuations in commodity prices for its various metal sales. From time to time the Company may enter into forward commodity sales contracts to hedge the effect on revenues of
changes in the price of metals it produces. Gains and losses on derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal sales over the term of the
hedging contract. The Company had no outstanding forward commodity sales contracts as at December 31, 2008.

As
at December 31, 2008, assuming that all other variables remain the same, a strengthening or weakening of selling prices as shown in the table below, would have had an approximate favourable
or unfavourable impact on earnings as follows:

|Metal     | Price variability |  | Impact    | 
|--------- | ----------------- |  | --------- | 
|         
|Palladium | +/- $10 per oz    |  | +/-$1,400 | 
|Platinum  | +/- $10 per oz    |  | +/- $70   | 
|Gold      | +/- $10 per oz    |  | +/- $80   | 
|Nickel    | +/- $1 per lb     |  | +/- $550  | 
|Copper    | +/- $0.25 per lb  |  | +/- $250  | 
|         

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to monitor
the sales pipeline, to ensure sufficient cash flows are generated from operations to meet the current debt requirements. Where insufficient liquidity exists, the Company may pursue various debt and
equity instruments for short-term financing of its operations.

The
table below analyzes the Company's financial liabilities which will be settled into relevant maturity groupings based on the remaining balances at December 31, 2008 to the contractual
maturity date.

|                                 |  |   | Total |  |   | In less than 1 year |  |   | Between 1 year and 2 years |  |   | Between 2 years and 5 years | 
|-------------------------------- |  | - | ----- |  | - | ------------------- |  | - | -------------------------- |  | - | --------------------------- | 
|                                
|Obligations under capital leases |  | $ | 3,122 |  | $ | 1,992               |  | $ | 976                        |  | $ | 154                         | 
|Long-term debt                   |  |   | 4,430 |  |   | 4,430               |  |   |                           |  |   |                            | 
|                                
|                                 |  | $ | 7,552 |  | $ | 6,422               |  | $ | 976                        |  | $ | 154                         | 
|                                

Management monitors consolidated cash flow, in detail, on a daily basis, monthly through month-end reporting, quarterly through forecasting and
yearly through the budget process. Based on the financial liabilities due and noted above, the Company expects to have sufficient operating cash flow exceeding the amounts due.

47

---



Fair Values

The Company's financial instruments consist of cash and cash equivalents, concentrate awaiting settlement, accounts payable and accrued liabilities, obligations under capital
leases and long-term debt.

Cash
and cash equivalents are stated at fair value. The carrying value of concentrate awaiting settlement and accounts payable approximate their fair values due to the immediate or
short-term maturity of these financial instruments.

The
fair value of the obligations under capital leases approximate their carrying value due to the interest rate implicit in the leases approximating interest rates available at this time for similar
lease terms. The fair value of the variable-rate debt approximates the carrying value of such debt since the variable interest rates are market-based, and the Company believes such debt
could be refinanced on materially similar terms.

16.  CAPITAL DISCLOSURE

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management
defines capital as the Company's outstanding debt and total shareholder's equity. The board of directors does not establish quantitative return on capital criteria for management but rather
promotes year over year sustainable profitable growth.

In
order to maintain or adjust the capital structure, the Company may issue new shares, issue new debt, and issue new debt to replace existing debt with different characteristics.

There
were no changes in the Company's approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

17.  COMMITMENTS





48

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18.  REVENUE FROM METAL SALES

|                                     |  |   | Total   |   | Palladium |   | Platinum |   | Gold   |   | Nickel |   | Copper |   | Other Metals |   | 
|------------------------------------ |  | - | ------- | - | --------- | - | -------- | - | ------ | - | ------ | - | ------ | - | ------------ | - | 
|                                    
|2008                                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Year ended December 31               |  | $ | 148,428 |   | 71,989    |   | 24,598   |   | 12,442 |   | 23,466 |   | 13,326 |   | 2,607        |   | 
|Revenue  before pricing adjustments |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Pricing adjustments:                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Commodities                          |  |   | (38,633 | ) | (23,992   | ) | (7,296   | ) | (93    | ) | (4,765 | ) | (2,076 | ) | (411         | ) | 
|Foreign exchange                     |  |   | 15,696  |   | 8,291     |   | 2,840    |   | 2,017  |   | 1,419  |   | 907    |   | 222          |   | 
|                                    
|Revenue  after pricing adjustments  |  | $ | 125,491 |   | 56,288    |   | 20,142   |   | 14,366 |   | 20,120 |   | 12,157 |   | 2,418        |   | 
|                                    
|2007                                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Year ended December 31               |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Revenue  before pricing adjustments |  | $ | 201,367 |   | 95,146    |   | 29,183   |   | 12,315 |   | 46,862 |   | 15,589 |   | 2,272        |   | 
|Pricing adjustments:                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Commodities                          |  |   | 8,756   |   | 3,443     |   | 4,516    |   | 1,825  |   | (1,621 | ) | 180    |   | 413          |   | 
|Foreign exchange                     |  |   | (14,191 | ) | (6,783    | ) | (2,723   | ) | (1,177 | ) | (2,653 | ) | (765   | ) | (90          | ) | 
|                                    
|Revenue  after pricing adjustments  |  | $ | 195,932 |   | 91,806    |   | 30,976   |   | 12,963 |   | 42,588 |   | 15,004 |   | 2,595        |   | 
|                                    
|2006                                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Year ended December 31               |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Revenue  before pricing adjustments |  | $ | 145,819 |   | 70,645    |   | 23,438   |   | 8,970  |   | 27,930 |   | 13,984 |   | 852          |   | 
|Pricing adjustments:                 |  |   |         |   |           |   |          |   |        |   |        |   |        |   |              |   | 
|Commodities                          |  |   | 11,674  |   | 4,133     |   | 821      |   | 769    |   | 4,964  |   | 697    |   | 290          |   | 
|Foreign exchange                     |  |   | 1,707   |   | 866       |   | 177      |   | 105    |   | 406    |   | 144    |   | 9            |   | 
|                                    
|Revenue  after pricing adjustments  |  | $ | 159,200 |   | 75,644    |   | 24,436   |   | 9,844  |   | 33,300 |   | 14,825 |   | 1,151        |   | 
|                                    

Generally, the Company delivers all of its concentrate to one customer (2007  one customer) under the terms of an
agreement. The customer has agreed to smelt and refine all of the Company's concentrate to March 31, 2010, with an option by mutual agreement to extend for a further two years to
March 31, 2012. During the year ended December 31, 2008, due to a maintenance shutdown at the primary customer, temporary arrangements were made to smelt and refine the Company's
concentrate at another customer.

49

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19.  INTEREST AND OTHER FINANCING COSTS

|                                                                |  |   | 2008   |   |   | 2007   |   |   | 2006   |   | 
|--------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | - | 
|                                                               
|Interest on convertible notes payable, Note 9                   |  | $ | 672    |   | $ | 2,763  |   | $ | 2,519  |   | 
|Accretion expense relating to convertible notes payable, Note 9 |  |   | 3,372  |   |   | 12,947 |   |   | 10,090 |   | 
|                                                               
|                                                                |  |   | 4,044  |   |   | 15,710 |   |   | 12,609 |   | 
|Interest on long term debt, Note 10                             |  |   | 456    |   |   | 1,094  |   |   | 1,505  |   | 
|Interest on capital leases, Note 8                              |  |   | 173    |   |   | 379    |   |   | 404    |   | 
|Interest on Kaiser Francis credit facility, Note 11             |  |   |       |   |   | 90     |   |   | 569    |   | 
|Interest on advance purchase facility                           |  |   | 64     |   |   | 446    |   |   | 148    |   | 
|Other interest and financing costs                              |  |   | 1,157  |   |   | 837    |   |   | 123    |   | 
|Deferred financing costs                                        |  |   | 193    |   |   | 751    |   |   | 1,090  |   | 
|                                                               
|                                                                |  |   | 6,087  |   |   | 19,307 |   |   | 16,448 |   | 
|Interest income                                                 |  |   | (2,644 | ) |   | (674   | ) |   | (801   | ) | 
|                                                               
|                                                                |  | $ | 3,443  |   | $ | 18,633 |   | $ | 15,647 |   | 
|                                                               

20.  CONTINGENCIES

21.  INCOME TAXES

The provision for income and mining taxes differs from the amount that would have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of
approximately 33.5% (2007  36.1%, 2006  36.1%).

|                                                     |                                                            |   | 2008    |        |   | 2007    |        |   | 2006    |        |  
|---------------------------------------------------- | ---------------------------------------------------------- | - | ------- | ------ | - | ------- | ------ | - | ------- | ------ | -
|                                                    
|Income tax recovery using statutory income tax rates |                                                            | $ | (54,574 | )      | $ | (10,692 | )      | $ | (12,822 | )      |  
|Increase (decrease) in taxes resulting from:         |                                                            |   |         |        |   |         |        |   |         |        |  
|                                                     | Resource allowance deemed income                           |   |         | 4,335  |   |         | 77     |   |         | 133    |  
|                                                     | Non-taxable portion of capital losses (gains)              |   |         | 491    |   |         | (1,196 | ) |         | (76    | )
|                                                     | Losses not tax benefited                                   |   |         | 47,922 |   |         | 9,968  |   |         | 10,790 |  
|                                                     | Non-deductible expenses                                    |   |         | 362    |   |         | 158    |   |         | 212    |  
|                                                     | Losses incurred in foreign entities, taxed at a lower rate |   |         | 8      |   |         | 569    |   |         | 701    |  
|                                                     | Ontario mining taxes                                       |   |         | (778   | ) |         | 177    |   |         | (195   | )
|                                                     | Other                                                      |   |         | 4      |   |         | 2      |   |         | (152   | )
|                                                    
|Income and mining tax recovery                       |                                                            | $ | (2,230  | )      | $ | (937    | )      | $ | (1,409  | )      |  
|                                                    

50

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The details of the Company's income and mining tax recovery are as follows:

|                                       |  |   | 2008   |   |   | 2007   |   |   | 2006   |   | 
|-------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | - | 
|                                      
|Current income tax expense (recovery): |  |   |        |   |   |        |   |   |        |   | 
|Income taxes                           |  | $ |       |   | $ |       |   | $ | (360   | ) | 
|Mining taxes                           |  |   | (109   | ) |   |       |   |   | (310   | ) | 
|                                      
|                                       |  |   | (109   | ) |   |       |   |   | (670   | ) | 
|                                      
|Future income tax expense (recovery):  |  |   |        |   |   |        |   |   |        |   | 
|Income taxes                           |  |   | (1,452 | ) |   | (1,114 | ) |   | (854   | ) | 
|Mining taxes                           |  |   | (669   | ) |   | 177    |   |   | 115    |   | 
|                                      
|                                       |  | $ | (2,121 | ) | $ | (937   | ) | $ | (739   | ) | 
|                                      
|                                       |  | $ | (2,230 | ) | $ | (937   | ) | $ | (1,409 | ) | 
|                                      

Future tax assets (liabilities) consist of the following temporary differences:

|                                           |                                                     |   | 2008 |         |   | 2007  |         |  
|------------------------------------------ | --------------------------------------------------- | - | ---- | ------- | - | ----- | ------- | -
|                                          
|Long-term future income tax asset:         |                                                     |   |      |         |   |       |         |  
|                                           | Mining interests, net                               |   | $    | 58,370  |   |       | 38,476  |  
|                                           | Deferred financing costs                            |   |      | 1,664   |   |       | 2,004   |  
|                                           | Mine restoration obligation                         |   |      | 2,185   |   |       | 2,235   |  
|                                           | Future mining tax liability                         |   |      | 6       |   |       | 106     |  
|                                           | Other assets                                        |   |      | 217     |   |       | 141     |  
|                                           | Non-capital loss carry-forwards                     |   |      | 22,369  |   |       | 10,556  |  
|                                           | Ontario corporate minimum tax credits               |   |      | 327     |   |       | 327     |  
|                                           | Capital loss carry-forwards                         |   |      | 233     |   |       | 533     |  
|                                           | Valuation allowance for capital loss carry-forwards |   |      | (85,334 | ) |       | (52,941 | )
|                                          
|Net future income tax asset, long-term     |                                                     |   | 37   |         |   | 1,437 |         |  
|                                          
|Future income tax liability, long-term:    |                                                     |   |      |         |   |       |         |  
|                                           | Long-term debt                                      |   |      | (36     | ) |       | (300    | )
|                                           | Convertible notes payable                           |   |      |        |   |       | (447    | )
|                                           | Obligations under capital leases                    |   |      | 5       |   |       | (122    | )
|                                          
|Net future income tax liability, long term |                                                     |   | (31  | )       |   | (869  | )       |  
|                                          
|Net future income tax asset, long-term     |                                                     | $ | 6    |         | $ | 568   |         |  
|                                          
|Future income tax liability, current:      |                                                     |   |      |         |   |       |         |  
|                                           | Crushed and broken ore stockpiles                   |   |      |        |   |       | (564    | )
|                                           | Deferred financing costs                            |   |      | (6      | ) |       | (4      | )
|                                          
|Future tax liability, current              |                                                     |   | (6   | )       | $ | (568  | )       |  
|                                          
|Future income tax assets (liabilities)     |                                                     | $ |     |         | $ |      |         |  
|                                          
|Future mining tax liability, current:      |                                                     |   |      |         |   |       |         |  
|                                           | Inventories                                         |   | $    | 38      |   |       |        |  
|                                           | Crushed and broken ore stockpiles                   |   |      |        |   |       | (168    | )
|                                           | Valuation allowance                                 |   |      | (38     | ) |       |        |  
|                                          
|Future mining tax liability, current       |                                                     |   |     |         |   | (168  | )       |  
|                                          
|Future mining tax liability, long-term:    |                                                     |   |      |         |   |       |         |  
|                                           | Mining interests, net                               |   |      | 8,953   |   |       | (1,742  | )
|                                           | Provision for mine closure costs                    |   |      | 496     |   |       | 449     |  
|                                           | Mine restoration obligation                         |   |      | 719     |   |       | 754     |  
|                                           | Valuation allowance                                 |   |      | (10,168 | ) |       |        |  
|                                          
|Future mining tax liability, long-term     |                                                     | $ |     |         | $ | (539  | )       |  
|                                          

51

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At December 31, 2008, the Company had capital loss carry-forwards of approximately $1,600 (2007  $3,700), which are
available to reduce capital gains of future years.

At
December 31, 2008, the Company and its subsidiary had non capital losses of approximately $85,900 (2007  $30,900), of which $12,200 expires in 2015,
$8,800 expires in 2026, $44,700 expires in 2027, and $20,200 expires in 2028. The tax benefit of these losses has not been recognized in the financial statements.

At
December 31, 2008, the Company and its subsidiary had undepreciated capital cost allowance of approximately $256,000 (2007  $254,000) available to
offset future taxable income.

22.  STATEMENT OF CASH FLOWS

2008


2007


2006Cash provided by (used in):Concentrate awaiting settlement

$
13,134

$
(12,113
)
$
(38,042
)Inventories and stockpiles


2,326


(4,629
)

(3,727
)Other assets


(806
)

20


(258
)Accounts payable and accrued liabilities


(6,761
)

(769
)

5,009Taxes recoverable


(576
)

83


(531
)$
7,317

$
(17,408
)
$
(37,549
)


2008


2007


2006Interest paid on long-term debt

$
446

$
1,249

$
2,319Interest paid on obligations under capital leases

$
173

$
393

$
592Income and mining taxes paid

$
143

$
263

$
291


23.  COMPARATIVE FIGURES

Certain of the prior years' figures have been reclassified to conform to the presentation adopted in 2008.

52

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