<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM 40-F

            [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2005       Commission File Number 1-15142

                            ------------------------

                          NORTH AMERICAN PALLADIUM LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            CANADA                                              1099
(PROVINCE OR OTHER JURISDICTION                     (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR ORGANIZATION)                    CLASSIFICATION CODE NUMBER)

                                 NOT APPLICABLE
                                (I.R.S. EMPLOYER
                              IDENTIFICATION NO..)

                            130 ADELAIDE STREET WEST
                          SUITE 2116, TORONTO, ONTARIO
                                     M5H 3P5
                                 (416) 360-7590
   (ADDRESS AND TELEPHONE NUMBER OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)

                              CT CORPORATION SYSTEM
                                111 EIGHTH AVENUE
                               NEW YORK, NY 10011
                                 (212) 894-8940
            (NAME, ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER
        (INCLUDING AREA CODE) OF AGENT FOR SERVICE IN THE UNITED STATES)
       ------------------------------------------------------------------

 Securities registered or to be registered pursuant to Section 12(b) of the Act.

                                                NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                    ON WHICH REGISTERED:
    -------------------------------          ----------------------------
      COMMON SHARES, NO PAR VALUE              AMERICAN STOCK EXCHANGE


              Securities registered or to be registered pursuant to
                           Section 12(g) of the Act.

                                      NONE

        Securities for which there is a reporting obligation pursuant to
                           Section 15(d) of the Act.

                                      NONE

        For annual reports, indicate by check mark the information filed with
this Form:

   [X]  Annual information form       [X]  Audited annual financial statements

        Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by this
annual report.

                   THE REGISTRANT HAD 52,197,217 COMMON SHARES
                       OUTSTANDING AS AT DECEMBER 31, 2005

        Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to
the registrant in connection with such Rule.

             Yes        82-                       No    X
                -------    -------                   -------

        Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.

             Yes   X                              No
                -------                             -------

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                           <C>
                                             DOCUMENTS FILED UNDER COVER OF THIS FORM

Document No. 1:      Annual Information Form for the fiscal year ended December 31, 2005, dated March 29, 2006.

Document No. 2:      Audited Comparative Consolidated Financial Statements for the fiscal year ended December 31, 2005, prepared
                     in accordance with Canadian generally accepted accounting principles, and reconciled to United States
                     generally accepted accounting principles in accordance with Item 18 of Form 20-F, and the notes thereto.

Document No. 3:      Management's Discussion and Analysis of Operations and Financial Position for the fiscal year ended
                     December 31, 2005.
</TABLE>

<PAGE>

                                                                  DOCUMENT NO. 1

<PAGE>







                          NORTH AMERICAN PALLADIUM LTD.



                             ANNUAL INFORMATION FORM




                      FOR THE YEAR ENDED DECEMBER 31, 2005


                              DATED MARCH 29, 2006

<PAGE>

                               TABLE OF CONTENTS
                                                                            PAGE

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS..............................3
OTHER INFORMATION..............................................................4
CORPORATE STRUCTURE............................................................5
GENERAL DEVELOPMENT OF THE BUSINESS AND DESCRIPTION OF BUSINESS................5
    Overview...................................................................5
    Lac des Iles Mine..........................................................8
    Open Pit Mining Operations.................................................8
    Underground Mining Operations..............................................9
    Milling Operations........................................................10
    Facilities Infrastructure.................................................11
    Metal Sales Agreements....................................................12
    Royalty Agreement.........................................................12
    Smelting and Refining Agreements..........................................13
    Financing.................................................................13
    Collective Agreement and Hourly Workers...................................15
    Mineral Properties .......................................................16
    Lac des Iles..............................................................16
    Regional Geology..........................................................16
    Mineralization - Mine Block Intrusion Geology.............................16
    Exploration...............................................................17
    Mineral Reserve and Resource Estimates....................................17
    Environmental Matters.....................................................21
    Other Properties..........................................................21
DIVIDENDS.....................................................................23
CAPITAL STRUCTURE.............................................................23
MARKET FOR SECURITIES.........................................................23
DIRECTORS AND OFFICERS........................................................24
    Cease Trade Orders, Bankruptcies, Penalties or Sanctions..................26
    Conflicts of Interest.....................................................26
LEGAL PROCEEDINGS.............................................................27
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS...................27
TRANSFER AGENT................................................................28
MATERIAL CONTRACTS............................................................28
INTERESTS OF EXPERTS..........................................................28
RISK FACTORS..................................................................28
ADDITIONAL INFORMATION........................................................35
AUDIT COMMITTEE CHARTER.......................................................38
GLOSSARY OF TERMS.............................................................42


                                       2
<PAGE>

                             METRIC CONVERSION TABLE

          --------------------------- -- ----------------------------
          IMPERIAL                       METRIC
          --------------------------- -- ----------------------------

          --------------------------- -- ----------------------------
          1 troy ounce                   31.103 grams
          --------------------------- -- ----------------------------
          1 ton, short                   0.907 tonnes
          --------------------------- -- ----------------------------
          1 troy ounce per ton           34.286 grams per tonne
          --------------------------- -- ----------------------------
          1 foot                         0.305 metres
          --------------------------- -- ----------------------------
          1 mile                         1.609 kilometres
          --------------------------- -- ----------------------------
          1 acre                         0.405 hectares
          --------------------------- -- ----------------------------

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual information form ("AIF") contains forward-looking statements within
the meaning of the U.S. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Forward-looking statements are necessarily made based on estimates and
assumptions made by the Corporation in light of its experience and perception of
historical trends, current conditions and expected future developments, as well
as other factors it believes are appropriate in the circumstances. These
estimates and assumptions are inherently subject to significant business,
economic and competitive uncertainties, many of which, with respect to future
events, are subject to change. These uncertainties and contingencies can affect
actual results and could cause actual results to differ materially from those
expressed or implied in any forward-looking statements made by the Corporation,
or on its behalf.

In making the forward-looking statements in this AIF, the Corporation has
applied numerous material factors and assumptions, including, but not limited
to:

        o       the assumption that the plans for the development of its
                underground mine (including the designs, budgets and schedules
                relating thereto) and its expectations for the operation of, and
                production and processing from, the underground mine in
                conjunction with the open pit mine are viable operationally and
                economically;

        o       the assumption that the advice the Corporation has received from
                its consultants and advisors relating to matters such as mineral
                reserves and mineral resources, environmental requirements and
                certain legal proceedings is reliable and correct and, in
                particular, that the models, dilution strategies and mining
                recovery estimates used to calculate mineral reserves and
                mineral resources are appropriate and accurate;

        o       the assumption that the Corporation will be able to negotiate
                the renewal of its mining leases, the renewal or entering into
                of new smelting and refining agreements, and the entering into
                of a new collective bargaining agreement; and

        o       the assumption that the Corporation's plans for sustainable
                recoveries from the Lac des Iles mine, for further exploration
                at the Lac des Iles mine and for exploration in Finland can
                proceed as expected.

The words "expect," "anticipate," "estimate," "may," "will," "should," "intend,"
"believe," "target," "budget," "plan," "projection", "strategy" and similar
expressions are intended to identify forward-looking statements in this AIF.
Information concerning mineral reserve and mineral resource estimates also may
be considered forward-looking statements, as such information constitutes a
prediction of what mineralization might be found to be present if and when a
project is actually developed.

In light of the risks and uncertainties inherent in all forward-looking
statements, the inclusion or incorporation by reference of forward-looking
statements in this AIF should not be considered as a representation by the
Corporation or any other person that its objectives or plans will be achieved.
Numerous factors could cause the Corporation's actual results to differ
materially from those in the forward-looking statements, including the
following, which are discussed in greater detail under the "Risk Factors"
section herein:

        o       inability to meet production or operating cost goals;
        o       inaccurate resource and reserve estimates;
        o       inherent risks associated with mining and processing operations;
        o       failure to successfully develop the underground mining
                operations or to achieve projected production levels;
        o       unexpected problems and delays in the construction of the
                underground mining operations;
        o       inability to obtain additional funding for operations, if
                required;
        o       failure of the exploration program to increase reserves;
        o       interruption of operations at the Lac des Iles Mine;
        o       termination or failure to renew smelting agreement(s);

                                       3
<PAGE>

        o       volatility in metal prices;
        o       changes in the United States/Canadian dollar exchange rate;
        o       costs of complying with current and future environmental
                regulation;
        o       costs of complying with other current and future governmental
                regulation;
        o       competition from other suppliers of platinum group metals;
        o       development of new technology leading to reduced demand for
                palladium;
        o       loss of key personnel;
        o       failure to renew mining leases;
        o       defaults under credit facilities; and
        o       hedging activities.

These factors should be considered carefully, and readers should not place undue
reliance on the Corporation's forward-looking statements. The Corporation
undertakes no obligation to release publicly the results of any future revisions
it may make to forward-looking statements to reflect events or circumstances
after the date of this AIF or to reflect the occurrence of unanticipated events,
except as required by law.

                                OTHER INFORMATION

All dollar amounts referred to herein are in Canadian dollars unless stated
otherwise. Unless otherwise indicated, all financial information included herein
has been prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"), which may differ from United States generally
accepted accounting principles ("U.S. GAAP"). See note 19 to the audited
consolidated financial statements for a reconciliation of financial results from
Canadian GAAP to U.S. GAAP.

Descriptions of mineral reserve and mineral resource estimates included herein
under Canadian standards may not be comparable to similar information made
public by U.S. companies subject to reporting and disclosure requirements of the
United States Securities and Exchange Commission. See "Mineral Reserve and
Resource Estimates - Note to U.S. Shareholders" herein.

The information is this AIF is presented as at March 29, 2005 unless otherwise
indicated.

                               CORPORATE STRUCTURE

North American Palladium Ltd. (the "Corporation") is the successor to Madeleine
Mines Ltd., a company incorporated under the QUEBEC MINING COMPANIES ACT by
letters patent dated February 2, 1968. In January 1992: (i) Madeleine Mines Ltd.
was amalgamated with a wholly owned Quebec subsidiary of 2750538 Canada Inc., a
company incorporated under the CANADA BUSINESS CORPORATIONS ACT by articles of
incorporation dated September 12, 1991; (ii) the amalgamated company was wound
up into 2750538 Canada Inc.; and (iii) 2750538 Canada Inc. changed its name to
"Madeleine Mines Ltd." By articles of amendment dated July 24, 1993, Madeleine
Mines Ltd. changed its name to "North American Palladium Ltd." The Corporation
has one operating subsidiary, Lac des Iles Mines Ltd., incorporated under the
CANADA BUSINESS CORPORATIONS ACT, and wholly owned by the Corporation. Unless
otherwise indicated, all references in this AIF to the "Corporation" include
North American Palladium Ltd., together with its wholly-owned subsidiary, Lac
des Iles Mines Ltd. The Corporation has one additional subsidiary, North
American Palladium Finland Oy, a Finnish corporation, which is wholly-owned (see
"Mineral Properties - Other Properties")

The Corporation's registered office is at Suite 2116, 130 Adelaide Street West,
Toronto, Ontario M5H 3P5, telephone: (416) 360-7590, fax: (416) 360-7709. The
Corporation's mining operations are situated

                                       4
<PAGE>

approximately 85 kilometres northwest of Thunder Bay at Lac des Iles, in
northern Ontario. The postal address is P.O. Box 10547, Station P, Thunder Bay,
Ontario P7B 6T9, telephone: (807) 448-2000, fax: (807) 448-2001.

                       GENERAL DEVELOPMENT OF THE BUSINESS
                         AND DESCRIPTION OF THE BUSINESS

The following description of the Corporation's business includes many geological
terms that may not be familiar to the reader. For a description of the meaning
of some of these terms, please see the "Glossary of Terms" included in this AIF.

                                    OVERVIEW

The following contains forward-looking statements about the Corporation's
business. Reference should be made to "Special Note Regarding Forward-Looking
Statements" on page 3 and for a description of material factors that could cause
the Corporation's actual results to differ materially from the forward-looking
statements in the following, please see "Risk Factors" at page 28.


The Corporation owns and operates an open pit mine known as the Lac des Iles
Mine and processing plant with a design capacity of 15,000 tonnes per day. The
mining and processing operation produces by flotation a palladium rich
concentrate that also contains platinum, gold, copper and nickel. The
concentrate is delivered to the Sudbury operations of Falconbridge Limited
("Falconbridge"), and prior to November 30, 2005, the Sudbury operations of Inco
Limited ("Inco"), and then further processed at their respective European
operations for refining.

In late 2003 the Corporation commissioned a full feasibility study in response
to scoping studies and a pre-feasibility study that indicated a higher grade
sub-vertical ore body located directly beneath the open pit was viable as an
underground mine. The feasibility study confirmed that an underground operation
is economically viable operating concurrently with the open pit to provide a
blended higher grade mill feed. The Corporation commenced the development of an
underground mine at its Lac des Iles operations in the second quarter of 2004.
The underground mine development is focused on the Main High Grade Zone below
the ultimate pit depth. Capital costs for the underground development are
estimated at $40 million for direct and indirect costs and working capital.
Mining equipment accounts for an additional $12 million of capital costs which
the Corporation is financing through a vendor lease program. By December 31,
2005 the main ramp had been advanced 1,111 metres, the first two mining levels
established, and was advancing towards the next mining block. Full production of
the underground mine is expected begin by the end of the first quarter 2006.

Maintaining access to the original mine portal was difficult for both the open
pit and underground mining operations during 2005, as a result of pit blasts
that obstructed the open pit ramp, and ultimately limited the underground
access. After modifications to the mine plan, the main underground ramp was
extended in order to provide continuous access to the underground operation that
is above the open pit's mining activities, resolving issues for both mining
operations.

In 2005, total tonnes mined amounted to 15.3 million tonnes or an average of
42,000 tonnes per day, containing 3.7 million tonnes of ore grading 1.72 grams
of palladium per tonne.

Palladium production from the Lac des Iles mill in 2005 was 177,167 ounces
compared to 308,931 ounces in 2004. Other metal production in 2005 included
18,833 ounces of platinum, 14,308 ounces of gold,

                                       5
<PAGE>

5,514,670 pounds of copper and 2,353,227 pounds of nickel compared to 2004
production of 25,128 ounces of platinum, 25,679 ounces of gold, 7,836,183 pounds
of copper and 4,320,970 pounds of nickel.

During 2005, the mill processed 4.8 million tonnes of ore or an average of
13,098 tonnes per day compared to 5,298,544 tonnes or an average of 14,477
tonnes per day in 2004. In 2005 the average palladium head grade was 1.66 grams
per tonne compared to 2.41 grams per tonne in 2004. For 2005 the recoveries were
69.6% compared to 75.2% in 2004. The lower recovery was a result of lower head
grade and a change in mineralogy of the ore reflective of the open pit mining
plan.

In 2004 the Corporation decided to proceed with a secondary crusher installation
for the mill designed to increase the throughput rate and reduce processing
costs in the mill circuit. The secondary crushing circuit was completed at a
capital cost of approximately $10.6 million and commenced operation in December
2004.

SGS Lakefield Research Limited was involved in the metallurgical process review
and refinement during the first eight months of 2005 to complete the plant work
that commenced in mid-2004. Test work in the milling circuit is expected to
continue in 2006, with the objective of increasing sustainable recoveries.

Reference is made to the section entitled "Mining Operations" for further
information about the Corporation's operations.

The Corporation had a palladium sales contract (the "Palladium Sales Contract")
with a major automotive manufacturer (the "Automotive Manufacturer"), whereby
the Corporation hedged the price of 100% of the palladium it was entitled to
receive from its smelter customers. The price of the palladium under the
Palladium Sales Contract was the average monthly London Metal Exchange afternoon
fixing price minus a modest specified discount; however, the price for palladium
could not be less than US$325 per ounce for all production delivered in each
month under the Palladium Sales Contract. The contract expired on June 30, 2005.
For 2005 all palladium production (except 6,403 ounces delivered under the
Palladium Sales Contract) was delivered into a sales contract with either a
leading catalytic converter manufacturer or an international bank that purchased
the metal for further sale to an end-user of palladium. These contracts provided
for pricing of the palladium at either the average monthly London Metal Exchange
afternoon fixing price in the month prior to delivery or the spot price on the
day of delivery. These contracts expired on December 31, 2005 and currently the
Corporation is selling its production into the spot market.

The Corporation enters into forward commodity sales contracts from time to time
to hedge the effect of changes in certain metal prices on the Corporation's
revenues.

Reference is made to the section entitled "Metal Sales Agreements" for further
information about the metal sales agreements.

The Corporation entered into agreements with Inco and Falconbridge providing for
the sale of the Corporation's concentrates produced at the Lac des Iles Mine
and, ultimately, the smelting and refining of the principal metals contained in
the concentrates. The agreement with Inco expired on November 30, 2005 and the
agreement with Falconbridge expires on September 30, 2006. (See "Smelting and
Refining Agreements")

In June 2004, the Corporation entered into a US$20 million and $10 million
senior credit facility with a leading equipment finance company which were fully
drawn. Each of the credit facilities is repayable in equal quarterly instalments
over a five-year term. The credit facilities have an interest margin of 2.5%
over

                                       6
<PAGE>

LIBOR or Bankers Acceptances. As at December 31, 2005, US$14 million and $8
million were outstanding under the respective facilities.

The Corporation also has a US$20 million non-revolving credit facility provided
by Kaiser-Francis Oil Company ("Kaiser-Francis") to finance the Corporation's
working capital requirements. In the second quarter of 2004, the Kaiser-Francis
credit facility was extended to June 30, 2006 as part of a debt restructuring
plan. Interest is based upon the 30-day LIBOR plus 2.50% and there is a stand-by
fee of 0.125% per annum. As at December 31, 2005, US$11.5 million was drawn on
the Kaiser-Francis credit facility. Additional amounts were drawn on the
facility in the first quarter 2006. The Kaiser-Francis credit facility matures
on June 30, 2006. Kaiser-Francis holds approximately 50% of the common shares of
the Corporation.

On March 24, 2006, the Corporation finalized the definitive documentation for
the private placement to Kaiser-Francis and an institutional investor (the
"Purchasers")of up to US$58.5 million principal amount of convertible notes (the
"Notes") together with warrants to purchase, for four years from the date of
their issuance, 50% of the number of common shares underlying the Notes (the
"Warrants"), including the placement of up to US$41 million of the Notes and
related Warrants with Kaiser-Francis. On March 29, 2006, the Corporation issued
US$35 million principal amount of Notes and related Warrants to the Purchasers
equally.

The Corporation, at its option, has the right to sell to Kaiser-Francis up to
US$13.5 million principal amount of Notes on or before June 30, 2006, the
proceeds of which will be used to repay the amount drawn on the KFOC credit
facility. KFOC has granted to the other Purchaser an option to acquire up to 50%
of such Notes.

The Purchasers will have the option to acquire an additional US$10 million
principal amount of Notes on or before December 31, 2006, with each Purchaser
entitled to acquire one-half. If either Purchaser does not acquire its entire
allotment of the additional US$10 million in Notes, the other Purchaser may
purchase the balance.

Reference is made to the section entitled "Financing" for further information
about the financing agreements.

                                LAC DES ILES MINE

The Lac des Iles Mine property consists of four mining leases from the
Government of Ontario numbered 104108 to 104111, inclusive, comprising 85 single
unit mining claims and covering an aggregate of 1,468 hectares. The mining
leases are dated August 16, 1985 and are set to expire on August 31, 2006. If an
application is made within 90 days of expiry of the leases, and the terms and
conditions of the leases have been complied with, the leases are renewable for a
further term of 21 years. The Corporation has complied with the terms and
conditions of the leases in all material respects. In addition to the mining
leases, the Corporation holds mining claims covering approximately 19,698
hectares within a 425 kilometer radius of the Lac des Iles Mine

The Lac des Iles Mine and surrounding property are located approximately 85
kilometres northwest of the city of Thunder Bay, Ontario. Paved road access is
provided by Ontario Provincial Highway 527, followed by 15 kilometres of an all
weather gravel road, maintained by the Corporation. Approximately 90% of the
employees reside in the Thunder Bay area.

                                       7
<PAGE>

OPEN PIT MINING OPERATIONS

The Corporation mines ore and waste from the open pit using conventional
hydraulic 23 cubic meter and 19 cubic meter shovels, 190 tonne trucks, 229
millimeter blast hole drills and a fleet of conventional ancillary equipment.
Mine waste is stockpiled outside of design pit limits.

In 2005, total tonnes mined from the Lac des Iles open pit amounted to 15.3
million tonnes or approximately 42,000 tonnes per day of ore and waste combined
compared to 16.9 million tonnes or 46,038 tonnes per day in 2004. Ore production
for 2005 totaled 3.7 million tonnes grading 1.72 grams per tonne of palladium
compared to 4.6 million tonnes grading 2.60 grams of palladium per tonne in
2004.

During 2005 the waste strip ratio increased throughout the year to 3.14:1
compared to 2.68:1 in 2004 due to development of the Phase 4 pit. The waste to
ore strip ratio is scheduled to decrease in 2006 to less than 2.5:1.

At the end of 2005, the broken ore stockpile consisted of 714,589 tonnes grading
1.78 grams of palladium per tonne containing approximately 41,000 ounces of
palladium compared to 1.4 million tonnes grading 1.76 grams of palladium per
tonne containing approximately 79,000 ounces of palladium at the end of 2004.

Mine production in 2005 was negatively impacted by the integration of the new
underground mine with the open pit. Sequencing the blasting in the open pit with
integration of the underground operations resulted in pit blasts that obstructed
the Phase 3 open pit ramp. After modifications to the mine plan, the main
underground ramp has been extended in order to provide continuous access to the
underground operation, resolving access to the underground mine. The new portal
is above active open pit areas.

The following table sets forth information concerning the production from the
Lac des Iles Mine for each of the five years ended December 31, 2005:

<TABLE>
<CAPTION>
------------------------------------- -------------- --------------- --------------- --------------- ---------------
                Year                       2005            2004           2003             2002            2001
------------------------------------- -------------- --------------- --------------- --------------- ---------------
<S>                                       <C>             <C>             <C>             <C>             <C>
Ore Mined (Tonnes)                        3,705,555       4,574,134       4,396,847       7,250,963       5,768,157
------------------------------------- -------------- --------------- --------------- --------------- ---------------
Waste Mined (Tonnes)                     11,619,658      12,275,889      10,164,806       9,828,552      19,174,635
------------------------------------- -------------- --------------- --------------- --------------- ---------------
Total Mined (Tonnes)                     15,325,213      16,850,023      14,561,653      17,079,515      24,942,792
------------------------------------- -------------- --------------- --------------- --------------- ---------------
Stripping Ratio                              3.14:1          2.68:1          2.31:1          1.36:1          3.32:1
------------------------------------- -------------- --------------- --------------- --------------- ---------------
Average Daily Production (Tonnes)            41,987          46,038          39,895          46,793          68,336
------------------------------------- -------------- --------------- --------------- --------------- ---------------
</TABLE>


                                       8
<PAGE>

UNDERGROUND MINING OPERATIONS

The following contains forward-looking statements about the Corporation's
underground operations. Reference should be made to "Special Note Regarding
Forward-Looking Statements" on page 3 and for a description of material factors
that could cause the Corporation's actual results to differ materially from the
forward-looking statements in the following, please see "Risk Factors" at page
28.

The underground portion of the Roby deposit is a continuation to depth of the
Roby High Grade Zone that forms the core of the Roby Pit reserves. The
underground deposit lies below the ultimate pit bottom of the Roby Pit at an
elevation of 209 metres above sea level, and extends to a depth of 170 metres
below sea level, for a total dip length of 444 metres.

In late 2003 the Corporation commissioned a full feasibility study in response
to scoping studies and a pre-feasibility study that indicated a higher grade
sub-vertical ore body located directly beneath the open pit was viable as an
underground mine. The feasibility study confirmed that an underground operation
is economically viable operating concurrently with the open pit to provide a
blended higher grade mill feed.

The Corporation commenced the development of an underground mine at its Lac des
Iles operations in the second quarter of 2004. The underground mine development
is focused on the Main High Grade Zone below the ultimate pit depth. Capital
costs for the underground development are estimated at $40 million for direct
and indirect costs and working capital. Mining equipment accounts for an
additional $12 million of capital costs which the Corporation is financing
through a vendor lease program.

As stated above, maintaining access to the original mine portal was difficult
for the underground mining operations during 2005, as a result of pit blasts
that obstructed the Phase 3 open pit ramp and ultimately limited the underground
access. The main underground ramp has been extended in order to provide
continuous access to the underground operation that is above the active open pit
areas, resolving the access issue for the underground mine.

By December 31, 2005 the main ramp had been advanced 1,111 metres, the first two
mining levels has been established, and the ramp was advancing towards the next
mining block. Full production of the underground mine is expected to begin by
the end of the first quarter 2006. Once in full production the underground mine
is expected to produce 2,000 tonnes of ore per day at an average head grade of
6.62 grams of palladium per tonne. This will be combined with 13,000 tonnes of
ore per day from the open pit operations, to feed the mill ore with an
approximate grade of 2.33 grams per tonne.

Mobile equipment for the mine includes two electric hydraulic drill jumbos, one
longhole drill, one emulsion truck, two 8 cubic yard scooptrams and one 11 cubic
yard scooptram, and three 60 tonne trucks, and two loaders along with other
service and support equipment.

The chosen mining method is sublevel retreat longitudinal longhole stoping with
no fill. The mining block interval is 70 metres floor to floor including a 15
metre to 25 metre sill pillar below each haulage level. Stopes will be 45 metres
to 55 metres high by the width of the orebody. Total intake ventilation for the
mine is designed to be 425,000 cubic feet per minute. There will be one intake
ventilation raise/secondary egress situated outside the ultimate open pit limits
and air will exhaust up the main ramp.

Work is currently being conducted using the Corporation's workforce and
contractors. The Corporation will endeavour to replace contractors with its own
employees; however, there is significant competition for skilled underground
miners and the Corporation may continue to use contractors for production mining
as it continues to attract underground miners to the operation. Infill drilling
and underground development work will continue to be conducted by contractors.

                                       9
<PAGE>

Local Thunder Bay engineering firms have been engaged to complete the details
for ventilation, heating, electrical services and water supply for the
underground mine.

Construction and development of the underground mine is expected to be within
budget.

MILLING OPERATIONS

The Company decided to proceed with the secondary crusher installation for the
mill in 2004. The secondary crusher is designed to increase the throughput rate
and reduce processing costs in the mill circuit. The secondary crushing circuit
was completed at a capital cost of $10.6 million and commenced operation in
December 2004. Contractor crushing was significantly reduced by the end of 2004
and was eliminated in early 2005.

The concentrator facility used at the mine has a design capacity of 15,000
tonnes per day. Ore is crushed in a gyratory crusher and conveyed to a coarse
ore stockpile. With the commissioning of the new secondary crusher all of the
coarse ore was crushed in the secondary crusher and the finer material was fed
to the SAG mill. The mill did not meet expected throughput levels and
modifications were made to the secondary crusher in 2005, including the
installation of a grizzly to enable the operators to control the amount of
coarse ore processed by the secondary crusher. The ore is ground to a nominal
P80 (the size of an opening through which 80% of the product will pass) of 74
microns in a conventional semi-autogenous mill/ball mill/pebble crusher (SABC)
circuit. The ground ore feeds a flotation circuit that is comprised of
rougher/scavengers, four stages of cleaning and includes a regrind circuit. The
flotation circuit in the old concentrator is currently connected to the new
concentrator to provide additional cleaner flotation capacity. The final
concentrate is thickened and dewatered using two pressure filters. Tailings are
contained in the existing tailings impoundment facility which is required to be
expanded on an annual basis, for the life of the mine.

The concentrator processed 4,780,599 tonnes of ore or 13,098 tonnes per calendar
day in 2005 at an average palladium head grade of 1.66 grams per tonne and an
average palladium recovery of 69.6%. The concentrator throughput was 5,298,544
tonnes of ore in 2004 at an average palladium grade of 2.41 grams per tonne and
an average palladium recovery of 75.2%. The Corporation produced 177,167 ounces,
308,931 ounces and 288,703 ounces of palladium in 2005, 2004 and 2003,
respectively.

Palladium production decreased in 2005 primarily as a result of lower recovery
and decreased mill throughput. Recoveries were affected primarily by lower head
grade, as well as a change in the mineralogy of the ore reflective of the open
pit mine plan. Mill throughput was affected primarily by reduced mill
availability due to unscheduled repairs and power outages caused by severe
weather. Further impacting the grade and the throughput were the unscheduled
repairs to the primary crusher in the latter part of 2005 which required that
material be fed to the mill from the stock piles and auxiliary crushing sources
and the difficulties of feeding frozen material from the live stockpile to the
mill.

Production costs per tonne of ore milled were $20.78 in 2005, $19.43 in 2004 and
$20.09 in 2003. Cash costs, which include direct and indirect operating costs,
smelting, refining, transportation and sales costs, royalties, net of credits
for by-products, were US$359 per ounce in 2005, US$159 per ounce in 2004 and
US$175 per ounce in 2003. The increase in the unit cash costs was caused by a
combination of lower ore grades and metal recoveries, which led to a 43%
decrease in palladium production and a 31% decrease in revenue from by-product
metals in 2005 compared to 2004. In addition, throughout the year there was an
increased waste to ore strip ratio of 3.14:1 in 2005, compared to 2.68:1 in 2004
and continuing pressure on costs, particularly steel, tires, power, diesel fuel
and ongoing mill repairs.

                                       10
<PAGE>

SGS Lakefield Research Limited was involved in the metallurgical process review
and refinement during the first eight months of 2005 to complete the plant work
that commenced in mid-2004. In addition, process control equipment for automated
reagent addition and flow regulation was installed in the first half of 2005.
These additions will allow for further control advancements in the flotation
circuit as a part of the action plan for improving the palladium recovery. Test
work in the milling circuit is expected to continue in 2006, with the objective
of increasing sustainable recoveries.

The concentrator produces a palladium rich concentrate that is shipped off-site
for final processing. See "Smelting and Refining Agreements". The following
table set forth the tonnes milled and the metal production of the concentrate
for each of the five years ended December 31, 2005:

<TABLE>
<CAPTION>
                Milled      Concentrate     Palladium      Platinum        Gold       Copper       Nickel
   Year        (tonnes)       (tonnes)      (troy ozs)    (troy ozs)    (troy ozs)     (lbs)        (lbs)
-------------------------------------------------------------------------------------------------------------
<C>            <C>             <C>            <C>            <C>          <C>        <C>           <C>
2005           4,780,599       30,698         177,167        18,833       14,308     5,514,670     2,353,227
-------------------------------------------------------------------------------------------------------------
2004           5,298,544       45,652         308,931        25,128       25,679     7,836,183     4,320,970
2003           5,159,730       36,869         288,703        23,742       23,536     7,142,674     4,070,785
2002           4,851,621       27,179         219,325        19,180       16,030     5,295,486     2,763,654
2001           2,662,240       21,697         123,281        10,073        9,603     3,123,763     1,595,179
</TABLE>

A leak from the tailings management facility on February 4, 2006 led to flooding
of the milling and primary crusher areas and resulted in a shutdown of these
operations. To facilitate production, the mill was restarted within a few days,
with portable crushing units in combination with the stockpile providing ore for
processing in the mill. The primary crusher, following necessary repairs to the
electrical switchgear, was restarted on February 13, 2006.

FACILITIES AND INFRASTRUCTURE

The mining operation includes, in addition to the concentrator, an assay
laboratory, a warehouse, electrical shop, a three bay truck shop to service the
larger haul trucks, an operations camp, a water treatment plant, a propane
storage facility, a fuel storage area and an electrical substation. Power is
delivered to the site by a 65 kilometer power line, which ties directly into the
northwestern Ontario power grid.

The present tailings management facility ("TMF") has been operating since 1990.
Until 1998, the dams were primarily constructed as water retaining dams,
comprising rock fill, filters and glacial till or high density polyethylene
facing. In 1998 and 1999, dams at the north end of the facility were raised
using rock fill and tailings. Further TMF expansion commenced in 2000 and is
designed to accommodate successive lifts when required to store the tailings
produced over the current 5.5 year mine life. The dams have been raised and are
constructed of non-reactive rock fill, filters and geotextile. The TMF is a
stable impoundment, where erosion is minimized, runoff is managed, water is
returned to the concentrator as needed and excess water is stored until it can
be treated and released. The design of the operation provides for closure and
reclamation of the facility.

METAL SALES AGREEMENTS

The Corporation had a palladium sales contract (the "Palladium Sales Contract")
with a major automotive manufacturer (the "Automotive Manufacturer"), whereby
the Corporation hedged the price of 100% of the palladium it received from its
smelter customers until the contract's expiry on June 30, 2005. Under the
Palladium Sales Contract, the Automotive Manufacturer purchased all of the
refined palladium that

                                       11
<PAGE>

the Corporation received from the smelters. The actual amount purchased depended
on how much palladium was delivered, less the amount due under a royalty
agreement with the Sheridan Platinum Group Inc. and John Patrick Sheridan. See
"Royalty Agreement".

The price of the palladium under the Palladium Sales Contract was the average
monthly London Metal Exchange afternoon fixing price minus a modest specified
discount; however, the price for palladium could not be less than US$325 per
ounce for all production delivered in each month under the Palladium Sales
Contract.

For 2005 all palladium production (except 6,403 ounces delivered under the
Palladium Sales Contract) was delivered into a sales contract with either a
leading catalytic converter manufacturer or an international bank that purchased
the metal for further sale to an end-user of palladium. These contracts provided
for pricing of the palladium at either the average monthly London Metal Exchange
afternoon fixing price in the month prior to delivery or the spot price on the
day of delivery. These contracts expired on December 31, 2005 and currently the
Corporation is selling its production into the spot market.

The Corporation enters into forward commodity sales contracts from time to time
to hedge the effect of changes in certain metal prices on the Corporation's
revenues.

ROYALTY AGREEMENT

The Corporation entered into a royalty agreement with The Sheridan Platinum
Group Inc. and John Patrick Sheridan (together referred to as the "Sheridan
Group"). Under the agreement, the Corporation is obligated to pay to the
Sheridan Group a royalty equal to 5% of "net cash proceeds" received from
concentrates and other products produced at the Lac des Iles Mine. The term "net
cash proceeds" is defined in the royalty agreement generally as the net proceeds
of sale receivable by Lac des Iles Mines Ltd. from the production and sale of
concentrates from the Lac des Iles Mine, after deducting the costs of sampling,
assaying, transporting and insuring the concentrate; smelter, processing and
refining charges and penalties (excluding Lac des Iles Mines Ltd.'s own
processing costs) and all applicable taxes and royalties that must be paid in
respect of the mining operations. Under the royalty agreement, the Sheridan
Group may elect, and has elected, to receive payment of the royalty, in respect
of palladium and platinum, in kind rather than in cash and, in respect of other
metals, the Sheridan Group has elected to receive cash. All mining operations at
the Lac des Iles Mine are on the mining leases and are covered by the royalty
agreement.

SMELTING AND REFINING AGREEMENTS

In 2000 the Corporation entered into agreements with Falconbridge and Inco
providing for the sale of the Corporation's concentrates produced at the Lac des
Iles Mine and, ultimately, the smelting and refining of the principal metals
contained in the concentrates.

The agreement with Falconbridge expires on September 30, 2006. Under the
agreement, Falconbridge purchases the Corporation's concentrates and, will
settle in cash or, at the Corporation's discretion, make available to the
Corporation the refined palladium, platinum and gold at Falconbridge's refining
facilities in Kristiansand, Norway. In certain circumstances, such as default of
performance, insolvency or ceasing to carry on business, the agreement can be
terminated by the party not in default, insolvent or ceasing to carry on
business. The agreement can be suspended in the event of a force majeure.

The agreement with Inco expired on November 30, 2005. Under the terms of the
agreement, Inco purchased the Corporation's concentrates and settled in cash or,
at the Corporation's discretion, made

                                       12
<PAGE>

available to the Corporation the refined palladium and platinum at Inco's Acton
Refinery in London, England.

The Corporation is in discussions with Falconbridge and with other
smelters/refiners and expects to renew the contract with Falconbridge and/or
enter into a contract with another smelter/refiner prior to the expiry of the
contract with Falconbridge.

FINANCING

SENIOR CREDIT FACILITIES

On June 28, 2004, the Corporation entered into a US$20 million and $10 million
senior credit facility (the "Senior Credit Facility") with a leading equipment
finance company which were fully drawn. The US$20 million credit facility is
repayable in equal quarterly instalments of US$1 million which commenced on
September 30, 2004 and has a final maturity on June 30, 2009. The $10 million
credit facility is repayable in equal quarterly instalments of $500,000 which
commenced February 24, 2005 and has a final maturity of November 24, 2009. The
credit facility has an interest margin of 2.5% over LIBOR or Bankers
Acceptances. In return for granting the loan the lender received a first
priority security in all of the Corporation's existing and future assets
excluding its production leases and claims. The Senior Credit Facility allows,
in certain circumstances, full repayment of outstanding amounts drawn.

KAISER-FRANCIS CREDIT FACILITY

In December 2001, Kaiser-Francis Oil Company ("Kaiser-Francis") provided a US$20
million non-revolving credit facility to finance the Corporation's working
capital requirements. In the second quarter of 2004, the Kaiser-Francis credit
facility was extended to June 30, 2006 as part of a debt restructuring plan.
Interest is based upon the 30-day LIBOR plus 2.50% and there is a stand-by fee
of 0.125% per annum. The amount payable to Kaiser-Francis for interest, standby
fee and guarantee fee was $836,000 in 2005 compared to $585,000 in 2004. As at
December 31, 2005, US$11.5 million was drawn on the facility. Kaiser-Francis
holds approximately 50% of the outstanding common shares of the Corporation.

MARCH 2006 PRIVATE PLACEMENT

On March 3, 2006 the Corporation announced a private placement offering (the
"Offering") of up to US$58.5 million principal amount of Notes together with
Warrants to purchase, for four years from the date of their issuance, 50% of the
number of common shares underlying the Notes. The offering is to Kaiser-Francis
and an institutional investor (the "Purchasers").

The Offering is governed by a securities purchase agreement dated March 24, 2006
(the "Securities Purchase Agreement") among the Corporation and the Purchasers.
Under the terms of the Securities Purchase Agreement, the Corporation agreed to
issue US$35 million principal amount of Notes (the "First Tranche"), 50% to each
of the Purchasers.

The Corporation, at its option, has the right to sell to Kaiser-Francis up to
US$13.5 million principal amount of Notes (the "Second Tranche") on or before
June 30, 2006, the proceeds of which will be used to repay the loan under the
existing Kaiser-Francis credit facility. Kaiser-Francis has granted to the other
Purchaser an option to acquire up to 50% of such Notes.

The Purchasers will have the option to acquire an additional US$10 million
principal amount of Notes (the Third Tranche") on or before December 31, 2006,
with each Purchaser entitled to acquire one-half.

                                       13
<PAGE>

If either Purchaser does not acquire its entire allotment of the additional
US$10 million in Notes, the other Purchaser may purchase the balance.

The First Tranche of Notes was issued on March 29, 2006 and will be convertible
into 2,873,563 common shares of the Corporation (the "Common Shares")
representing an effective price of US$12.18 per share. The conversion price is
equal to 113% of the Initial Market Price (the "Conversion Price"). For the
purposes of the Notes, the Initial Market Price is US$10.78 being the 5 day
weighted average trading price of the Common Shares on the American Stock
Exchange (the "AMEX") immediately preceding March 24, 2006. Warrants exercisable
to purchase 1,436,782 Common Shares were issued with the Notes, each Warrant
being exercisable to purchase one Common Share at an exercise price of US$13.48.
The exercise price of the Warrants is equal to 125% of the Initial Market Price.

The Second Tranche and Third Tranche of Notes (collectively the "Additional
Notes"), if issued, will be convertible into Common Shares at the Conversion
Price, provided that the Conversion Price for the Additional Notes cannot be
less than the maximum applicable discount, permitted by the Toronto Stock
Exchange (the "TSX"), from the weighted average trading price of the Common
Shares for the five consecutive trading days immediately prior to the date of
issuance of each tranche (converted into US dollars). The exercise price of
Warrants issued in connection with the Additional Notes cannot be less than the
weighted average trading price of the Common Shares on the TSX for the five
consecutive trading days immediately prior to the date of issuance of such
Warrants (converted into US dollars).

The Notes will bear interest at a rate of 6.5% per annum payable bi-monthly,
commencing, in the case of the First Tranche, on June 1, 2006. Each Note will be
repaid in nine equal instalments commencing on the first interest payment date
that is at least twelve months after the date of issuance of such Note. The
interest payments and/or repayment amounts may be paid to each Purchaser, at
such Purchaser's option, in any combination of cash and/or Common Shares. Common
Shares issued for interest payments or in repayment of Notes will be issued at a
10% discount from the weighted average trading price of the Common Shares on the
AMEX for the five consecutive trading days immediately prior to the applicable
payment date.

Commencing 15 months after the date of issuance of each tranche of Notes, if the
weighted average trading price of the Common Shares on the AMEX for each of any
25 consecutive trading days is 150% of the Conversion Price, the Corporation
will have the right to force the Purchasers to convert all or any of the
outstanding principal amount of the Notes at the Conversion Price.

The Notes contain customary covenants, including restrictions on the Corporation
incurring debt or obligations for or involving the payment of money in excess of
certain restricted amounts. The Notes contain customary anti-dilution protection
as well as adjustments in the event that the Corporation issues Common Shares or
securities convertible into Common Shares at a purchase price (the "Effective
Price") per Common Share less than the Conversion Price. In such event, the
Conversion Price will be reduced to the Effective Price, provided that the
adjusted Conversion Price cannot be less than the maximum applicable discount,
permitted by the TSX, from the weighted average trading price of the Common
Shares on the TSX for the five consecutive trading days immediately prior to
date of issuance of each tranche of Notes (converted into US dollars). The
Warrants will contain similar anti-dilution protection. In addition, in the
event that the Corporation issues Common Shares or securities convertible into
Common Shares at a an Effective Price per Common Share less than the exercise
price of the Warrants, the exercise price will be reduced to the Effective Price
provided that the adjusted exercise price cannot be less than the weighted
average trading price of the Common Shares on the TSX for the five consecutive
trading days immediately prior to date on which each of the Warrants was issued
(converted into US dollars).

                                       14
<PAGE>

A maximum of 10,391,137 Common Shares can be issued pursuant to any feature of
the Notes, together with the Common Shares underlying the Warrants, without the
prior consent of the shareholders of the Corporation ("Shareholder Approval").
Further, a maximum of 5,221,677 Common Shares can be issued pursuant to any
feature of the Notes, together with the Common Shares underlying the Warrants,
to Kaiser-Francis without the prior consent of the shareholders of the Company,
excluding the votes attached to the Common Shares beneficially held directly or
indirectly by Kaiser-Francis, and its associates, affiliates and insiders (as
applicable)(as such terms are defined in the ONTARIO SECURITIES
ACT)("Disinterested Shareholder Approval").

Under the Securities Purchase Agreement, the Corporation is required to seek
Shareholder Approval to issue in excess of 10,391,137 Common Shares in
connection with the features of the Notes and Warrants and to seek Disinterested
Shareholder Approval to issue in excess of 5,221,677 Common Shares in connection
with the features of the Notes and Warrants to be issued to Kaiser-Francis.

If a Purchaser elects to receive interest payments or principal repayments on
the Notes in Common Shares and the Corporation is unable to issue such Common
Shares, the interest payment or principal repayment will be made in cash. If a
Purchaser is restricted in its ability to receive Common Shares upon conversion
of the Notes, the Purchaser may require the Corporation to pay cash to such
Purchaser in an amount equal to the number of Common Shares which such Purchaser
was not permitted to receive (the "Excess Shares") multiplied by the average of
the weighted average trading price of the Common Shares on the AMEX for each of
the five trading days immediately prior to the date of the payment, upon which
the Corporation will have no further obligation to issue such Excess Shares.

If a Purchaser is restricted in its ability to receive Common Shares upon
exercise of the Warrants, the Corporation will be required to pay to the
Purchaser an amount equal to the binomial option pricing model value of the
Warrant with respect to the portion of the Warrant which was unexercisable.

COLLECTIVE AGREEMENT WITH HOURLY WORKERS

The Corporation's six year contract with United Steelworkers of America, Local
9422, expired on March 3, 2006. The parties are continuing to negotiate with a
view to entering into a new collective agreement and have requested the
assistance of a mediator who has now been appointed. Mediation is scheduled for
April 4 and 5, 2006.

                               MINERAL PROPERTIES

LAC DES ILES

REGIONAL GEOLOGY

The Lac des Iles area is underlain by Archean-age rocks of the Superior Province
of the Canadian Shield which are overlain and intruded by rocks of the
Proterozoic-age Southern Province. The Superior Province can be subdivided into
areas of plutonic, granite-greenstone, metasedimentary and gneissic rocks. The
Southern Province consists of a blanket of sedimentary rocks extensively
intruded by gabbroic magma.

In the Archean, mafic to ultramafic intrusions scattered throughout
north-western Ontario host, or have the potential to host, platinum group metal
mineralization. Platinum group metal mineralization of Proterozoic age is also
known to occur in north-western Ontario.

                                       15
<PAGE>

In the Lac des Iles area, the Lac des Iles Intrusive Complex is one of many
platinum group metal-bearing, mafic to ultramafic, intrusions that define a
circular feature (of speculative origin) with a diameter of 30 kilometres. The
30-square kilometre Lac des Iles Intrusive Complex consists of three separate
magma chambers partially separated by tonalite septum. The ultramafic North Lac
des Iles Intrusive Complex is centered on Lac des Iles. The gabbroic Mine Block
Intrusion and Camp Lake Intrusion occur south of Lac des Iles. The Camp Lake
Intrusion is a relatively homogeneous hornblende gabbro and contains minor base
metal sulphides and platinum group metals. The Mine Block Intrusion to the north
is complex in structure, texture and composition, and contains abundant platinum
group metal mineralization. The most significant zones of platinum group metal
mineralization are in the Mine Block Intrusion and are the Roby, Twilight, and
Baker zones. The Roby and Twilight zones are the only defined areas of economic
mineralization on the Lac des Iles property.

MINERALIZATION - MINE BLOCK INTRUSION GEOLOGY

The Roby zone is a breccia zone, currently measuring 950 metres long, 815 metres
wide and 1500 metres deep, and remains open at depth. Platinum group metal
mineralization is associated with pyroxenite, gabbronorite and gabbro in areas
that have been invaded and brecciated by copper-nickel-platinum group metal
bearing melanogabbro, which also generated abundant pegmatitic gabbro. The ore
typically contains from a trace to 5% pyrrhotite, chalcopyrite, pyrite and
pentlandite. The platinum group metals include vysotskite, isomerticite,
kotulskite, sperrylite, merenskyite and palladium arsenide. Similar breccia
mineralization occurs at other locations within the intrusive complex.

The Roby zone contains two distinct types of mineralization separated by a zone
of sheared and mineralized pyroxenite that trends north-northwest. North of the
shear zone, the North Roby ore is hosted by varitextured gabbro and gabbronorite
that strikes northeast and dips to the east-southeast variably at 45 to 60
degrees. This mineralization tends to be sulphide-poor. Southwest of the shear
zone the breccia ore (the "Breccia Ore") is hosted by a heterolithic gabbro
breccia with abundant pegmatitic and varitextured gabbro. From the pyroxenite
contact, the grades diminish gradually to the west. This zone typically contains
2% to 5% sulphides. The pyroxenite is well mineralized and contains high grade
ore associated with intense alteration. The Main High Grade Zone occurs at the
eastern boundary of the central portion of the Roby Zone and extends below the
economic limits of the Roby pit. This near vertical planar zone has a strike
length exceeding 350 metres with thickness averaging 12 metres and is ideal for
exploitation by underground mining. It is continuous to a depth of 675 metres
where it is truncated and offset to the west by a fault. Below this fault, the
Offset High Grade zone has been traced to a depth of 1,200 metres, over a strike
length of 600 metres, and remains open down plunge and to a large degree down
dip.

The Twilight zone lies 50 to 70 metres east of the east boundary of the Roby
zone. The Baker zone is located one kilometre east of the Roby zone and the
Creek Zone is located less than two kilometres from the Roby Zone.

EXPLORATION

In 2005, exploration drilling on the Offset High Grade Zone totalled 18,230
metres in 15 holes. The drilling was conducted Bradley Brothers Limited and
supervised by employees of the Corporation. The Offset High Grade Zone has now
been intersected over a 700 metre vertical height and approximately 600 metres
along strike. Assays results from this program included: 136.70 metres at 5.56
grams per tonne palladium, 0.37 grams per tonne platinum, 0.34 grams per tonne
gold, 0.09% copper, and 0.12% nickel from hole 05-016.

                                       16
<PAGE>

In late 2005 the Corporation engaged Roscoe Postle Associates Inc. ("RPA"), an
independent geological mining engineering consulting firm, to carry out an
updated resource estimate and scoping study on the Offset High Grade Zone.

Drill hole data were used to develop the resource model using Gemcom modeling
software under the direction of Richard E. Routledge, M.Sc., P.Geol. of RPA an
"Independent Qualified Person" in conjunction with Bruce W. Mackie, M.Sc., P.
Geol. Vice President of Exploration, the designated Qualified Person for the
project.

Tonnages were calculated using a bulk density of 2.89. Grade blocks were modeled
at 10 metre by 10 metre by 10 metre blocks with inverse distance squared (ID2)
with variable percentage block inclusion to accurately represent model volumes.
The preliminary resource estimate used an incremental cut-off grade of 3.2 grams
per tonne palladium equivalent. The mineral resource estimate for the Offset
High Grade Zone is set out in the section entitled "Mineral Reserves and Mineral
Resources".

Exploration for 2006 at Lac des Iles is expected to focus on resource
development of the Offset High Grade Zone. Infill core drilling will be
conducted on the Offset High Grade Zone to further define the inferred mineral
resource. The drilling program is expected to commence in the second quarter of
2006. The Corporation will also continue grass roots exploration on recently
acquired properties.

MINERAL RESERVE AND MINERAL RESOURCE ESTIMATES

The following contains forward-looking statements about the Corporation's
mineral reserve and mineral resource estimates. Reference should be made to
"Special Note Regarding Forward-Looking Statements" on page 3 and for a
description of material factors that could cause the Corporation's actual
results to differ materially from the forward-looking statements in the
following, please see "Risk Factors" at page 28.

The resource and reserve model developed by the Corporation utilizes the
classification system and definitions set forth in National Instrument 43-101
Standards Of Disclosure For Mineral Projects ("National Instrument 43-101")
which classifies resources into measured, indicated and inferred confidence
categories and classifies reserves as proven and probable. The standards applied
by the Corporation conform to the definitions adopted by the Canadian Institute
of Mining, Metallurgy and Petroleum (the "CIM") Standards on Mineral Resources
and Reserves - Definitions and Guidelines adopted by the CIM Council on August
20, 2000.

Graham G Clow, P. Eng., James W. Hendry, P. Eng., and Luke Evans, M.Sc., P. Eng.
of Roscoe Postle Associates Inc., an independent geological mining engineering
consulting firm, are Qualified Persons under NI 43-101. Messrs. Clow, Hendry and
Evans prepared the open pit and underground reserve estimate.

Resources are in addition to reserves. Mineral reserves are presently defined on
a palladium-only basis. The deposit is polymetallic by nature, with economically
recoverable credits for platinum, gold, copper, nickel and cobalt. A significant
portion of revenue is derived from palladium, averaging about 47% of revenues in
2005.

The reserve estimates are diluted and based upon a cut off grade of 1.1 grams
and 4.5 grams of palladium per tonne for the open pit and the underground,
respectively, assuming a long-term palladium metal price of US$275 per troy
ounce and including by-product metal prices.

                                       17
<PAGE>

NOTE TO U.S. SHAREHOLDERS

The Corporation is required under Canadian law (National Instrument 43-101of the
Canadian securities administrators) to report mineral reserves and resources
using the classification system set out in the CIM standards. These guidelines
establish definitions for the reporting of exploration information, mineral
resources and mineral reserves in Canada. These definitions have not been
adopted for use in the United States by the Securities and Exchange Commission
(the "SEC").

The CIM definitions of proven and probable reserves are substantially similar to
the definitions of proven and probable reserves as set out Industry Guide No. 7
under the U.S. Securities Act of 1933, as amended. In addition, Canadian law
requires disclosure of mineral resources be classified as measured, indicated
and inferred resources if such resources are material to the company. While the
terms "mineral resource", "measured mineral resource", "indicated mineral
resource" and "inferred mineral resource" are recognized by Canadian securities
administrators, they are not defined terms under the standards in the United
States. As such, the information contained in this AIF (and in particular the
sections entitled "Mineral Reserves" and "Mineral Resources") concerning
descriptions of mineralization and resources under Canadian standards may not be
comparable to similar information made public by U.S. companies subject to
reporting and disclosure requirements of the SEC. "Indicated mineral resource"
and "inferred mineral resource" have a great amount of uncertainty as to their
existence and a great uncertainty as to their economic and legal feasibility. It
cannot be assumed that all or any part of an "indicated mineral resource" or
"inferred mineral resource" will ever be upgraded to a higher category.
Investors are cautioned not to assume that all or any part of the mineralization
classified in these categories will ever be reclassified as reserves.

MINERAL RESERVES

The following table sets forth the estimated OPEN PIT reserves at the Lac des
Iles Mine as at December 31, 2005:

<TABLE>
<CAPTION>
   RESERVES       TONNES      PALLADIUM    PLATINUM       GOLD        COPPER      NICKEL      PALLADIUM    PLATINUM
                   (000)        (G/T)        (G/T)        (G/T)        (%)          (%)       (000 OZ.)    (000 OZ.)
----------------------------------------------------------------------------------------------------------------------
<S>               <C>           <C>          <C>          <C>          <C>         <C>             <C>           <C>
Proven             8,584        2.03         0.22         0.16         0.07        0.06            560           60
Probable           4,970        2.31         0.23         0.17         0.07        0.07            369           37
----------------------------------------------------------------------------------------------------------------------
Total             13,554        2.13         0.22         0.16         0.07        0.06            929           97
======================================================================================================================
</TABLE>

A basic dilution strategy is applied on a selective basis to the reserve model.
With the higher grade Roby High Grade and gabbronorite rock types, grades are
diluted by 10%. Within the other ore-bearing rock units, material is diluted by
10% with the diluting material assumed at a 0.4 g/t palladium grade (the average
grade of the surrounding waste material). Mining recovery in all cases is
assumed at 90%.

                                       18
<PAGE>

The following table sets forth the estimated UNDERGROUND reserves at the Lac des
Iles Mine as at December 31, 2005:

<TABLE>
<CAPTION>
   RESERVES       TONNES      PALLADIUM    PLATINUM       GOLD        COPPER      NICKEL      PALLADIUM    PLATINUM
                   (000)        (G/T)        (G/T)        (G/T)        (%)          (%)       (000 OZ.)    (000 OZ.)
----------------------------------------------------------------------------------------------------------------------
<S>                <C>          <C>          <C>          <C>          <C>         <C>           <C>             <C>
Probable           3,542        6.62         0.40         0.34         0.07        0.08          754             46
======================================================================================================================
</TABLE>

Notes:
1.      CIM definitions for mineral reserves were used to estimate the Lac des
        Iles mineral reserves.
2.      Mineral reserves are calculated at a cut-off grade of 1.1 grams and 4.5
        grams of palladium per tonne for the open pit and for the underground
        respectively, assuming an average long-term palladium price of US$275
        per ounce and includes by-product metal credits.
3.      Graham G Clow, P. Eng., James W. Hendry, P. Eng. and Luke Evans, M.Sc.,
        P. Eng. of Roscoe Postle Associates Inc., an independent geological
        mining engineering consulting firm, are qualified persons under NI
        43-101. Messrs. Clow, Hendry and Evans prepared the open pit and
        underground reserve estimate.
4.      As of December 31, 2004 the RGO Stockpile was classified as Proven
        Mineral Reserves. As of December 31, 2005 the RGO Stockpile is being
        classified as Measured Mineral Resources. At a grade of 0.97 grams per
        tonne palladium, it is below the current open pit cut-off grade of 1.1
        grams per tonne palladium.
5.      Approximately 5.0 million tonnes averaging 1.94 grams per tonne
        palladium was reclassified from Proven and Probable Mineral Reserves to
        Measured and Indicated Mineral Resources due to a change in the ultimate
        pit design. The ultimate pit design used in 2004 has been changed to an
        interim ultimate pit design that addresses south pit slope instability
        concerns. The Corporation is currently investigating alternative designs
        and expects to complete a final ultimate pit design later in 2006.

A basic dilution strategy is applied on a selective basis to the reserve model.
Overall dilution is 16% on average, at a palladium grade of 1.1 gram per tonne.
Mining recovery in all cases is assumed at 83 %.

See "Note to U.S. Shareholders".

MINERAL RESOURCES

The following table sets forth the estimated OPEN PIT resources at the Lac des
Iles Mine as at December 31, 2005:

<TABLE>
<CAPTION>
  RESOURCES       TONNES     PALLADIUM     PLATINUM      GOLD        COPPER      NICKEL      PALLADIUM    PLATINUM
                  (000)        (G/T)        (G/T)        (G/T)        (%)          (%)       (000 OZ.)    (000 OZ.)
---------------------------------------------------------------------------------------------------------------------
<S>               <C>           <C>          <C>         <C>          <C>         <C>           <C>          <C>
Measured          21,375        1.38         0.17        0.10         0.05        0.06          948          117
Indicated         7,626         1.86         0.21        0.13         0.06        0.05          456          51
---------------------------------------------------------------------------------------------------------------------
Total             29,001        1.51         0.18        0.11         0.05        0.06         1,404         168
=====================================================================================================================
Inferred           185          2.72         0.18        0.13         0.05        0.04          16            1
=====================================================================================================================
</TABLE>

                                       19
<PAGE>

The following table sets forth the estimated UNDERGROUND resources at the Lac
des Iles Mine as at December 31, 2005:

<TABLE>
<CAPTION>
  RESOURCES       TONNES     PALLADIUM     PLATINUM      GOLD        COPPER      NICKEL      PALLADIUM    PLATINUM
                  (000)        (G/T)        (G/T)        (G/T)        (%)          (%)       (000 OZ.)    (000 OZ.)
---------------------------------------------------------------------------------------------------------------------
<S>                <C>          <C>          <C>         <C>          <C>         <C>           <C>           <C>
Indicated          333          7.46         0.42        0.37         0.08        0.08          80            4
=====================================================================================================================
Inferred            41          7.85         0.37        0.15         0.02        0.03          10            0
=====================================================================================================================
</TABLE>
Notes:
1.      CIM definitions for mineral resources were used to estimate the Lac des
        Iles mineral resources.
2.      Resources are in addition to the reserves. Resources which are not
        reserves do not have demonstrated economic viability.
3.      Mineral resources are calculated at a cut-off grade of 1.1 grams and 4.5
        grams of palladium per tonne for the open pit and underground
        respectively, assuming an average long-term palladium price of US$275
        per ounce and includes by-product metal credits.
4.      Graham G. Clow, P. Eng., James W. Hendry, P. Eng. and Luke Evans, M.Sc.,
        P. Eng. of Roscoe Postle Associates Inc., an independent geological
        mining engineering consulting firm, are qualified persons under NI
        43-101. Messers. Clow, Hendry and Evans prepared the open pit and
        underground resource estimate.

THE RESOURCES IN THE FOREGOING TABLES ARE IN ADDITION TO RESERVES. The resources
were estimated using a cut-off grade of 1.1 grams and 4.5 grams of palladium per
tonne for the open pit and underground, respectively, assuming an average
long-term palladium price of US$275 per ounce and including by-product metal
credits. The cut-off grade used in the resource estimates reflect the current
estimated life-of-mine costs of mining and processing, in conjunction with
smelting and transportation costs consistent with current contracts. The metal
ounces listed in the table above are on a contained basis without adjustment for
processing or smelting recoveries. Resources which are not reserves do not have
demonstrated economic viability.

The following table sets forth the estimated OFFSET HIGH GRADE ZONE resources at
the Lac des Iles Mine as at December 31, 2005:

<TABLE>
<CAPTION>
  RESOURCES       TONNES     PALLADIUM     PLATINUM      GOLD        COPPER      NICKEL      PALLADIUM    PLATINUM
                  (000)        (G/T)        (G/T)        (G/T)        (%)          (%)       (000 OZ.)    (000 OZ.)
---------------------------------------------------------------------------------------------------------------------
<S>               <C>           <C>          <C>         <C>          <C>         <C>          <C>           <C>
Inferred          14,590        5.24         0.36        0.35         0.10        0.12         2,455         170
=====================================================================================================================
</TABLE>

Notes:
1.      CIM definitions for mineral resources were used to estimate the Lac des
        Iles mineral resources.
2.      Resources are in addition to the reserves. Resources which are not
        reserves do not have demonstrated economic viability.
3.      Mineral resources are calculated at a cut-off grade of 3.2 grams of
        palladium per tonne for the Offset High Grade Zone, assuming an average
        long-term palladium price of US$275 per ounce and includes by-product
        metal credits.
4.      Richard E. Routledge, M.Sc., P. Geol. of Roscoe Postle Associates Inc.,
        an independent geological mining engineering consulting firm, is a
        qualified person under NI 43-101. Mr. Routledge prepared the Offset High
        Grade Zone resource estimate.

See "Note to U.S. Shareholders".

                                       20
<PAGE>

ENVIRONMENTAL MATTERS

The expansion of operations at the Lac des Iles Mine in 2000 and 2001 involved
amending the then existing closure plan under the Ontario MINING ACT, which
included an increase in the amount of financial assurance required by the
Ministry of Northern Development and Mines ("MNDM"). The closure plan and
financial assurance agreement was submitted to the MNDM in April 2001. Under
this agreement, the Corporation will provide financial assurance of $7.8 million
payable in installments of $100,000 per month over six years. As at December 31,
2005, the Corporation had approximately $7.2 million on deposit with the MNDM.

The Corporation has designed the expanded operations so as not to infringe on
any navigable waters or fish habitat. Consequently, management believes no
federal approvals or permits are required pursuant to either the NAVIGABLE
WATERS PROTECTION ACT or the FISHERIES ACT. In addition, because federal
approvals are not required, an environmental assessment under the Canadian
ENVIRONMENTAL ASSESSMENT ACT should not be necessary. However, if production
increases beyond 15,000 tonnes per day, federal permits may be necessary which
would trigger an environmental assessment which may be in the form of a
comprehensive study.

Permitting and approvals for the underground mine are minimal as the underground
mine is an extension of the much larger and higher impact open pit operations.
The current Land Use Permit was expanded by the Ministry of Natural Resources to
accommodate the additional parking lot and camp facilities. The Corporation has
submitted the following applications in connection with operations: notices of
material change regarding the extension of the mine underground and the east
waste dump were submitted to the MNDM; and an amendment to the Certificate of
Approval (Air) for the secondary crusher and underground operations were
submitted and approved by the Ministry of the Environment.

The amendment to the closure plan for the extension of the mine underground was
submitted to the MNDM on December 7, 2005. The closure costs for the combined
open pit and underground mine were reviewed by an independent engineering firm
which determined that the estimate of $7.8 million is sufficient.

OTHER PROPERTIES

In 2005, the Corporation continued to pursue properties beyond the Lac des Iles
Mine, with a focus on those with established base and platinum group metals
resources.

HAINES-CONACHER PROPERTIES

The Corporation continued its exploration activities on the Haines and Conacher
properties, which are the subject of an option joint venture agreement with
Inco, located approximately 80 kilometres southwest of Thunder Bay and are
contiguous with the Corporation's Haines property.

The Haines and Conacher properties surround Inco's former Shebandowan mine. In
order to earn a 60% interest in the property the Corporation must make cash
payments of $100,000 and incur exploration expenditures of $2,000,000 on or
before December 3, 2007. To date, the Corporation has spent $575,000 on
exploration on the property and made payments of $75,000. Inco retains the right
to increase its interest from 40% to 60%, exercisable in the event that a
feasibility study on the property defines a significant nickel deposit, by
funding the feasibility study implementation costs equal to 200% of the
Corporation's total expenditures.

                                       21
<PAGE>

The Corporation's had options on two properties in the Shebandowan Lake area but
results of the exploration work conducted on these properties in 2005 did not
warrant further exploration. In addition, the Legris Lake Option which is
adjacent to the Lac des Iles Mine was similarly terminated due to lack of
encouraging results.

SHAKESPEARE PROPERTY

In July 2005 the Corporation and Ursa Major Minerals Corporation executed a
definitive option joint venture agreement to evaluate and explore a nickel,
copper and PGE property known as the Shakespeare property located 120 kilometres
west of the city of Sudbury. The property is hosted within the Nipissing aged
Shakespeare Intrusive.

The Corporation can acquire a 60% undivided interest in URSA's interest in the
Shakespeare property and become the operator by making payments aggregating $1.5
million to URSA, making a product decision and securing the project financing
for commercial production. The $1.5 million was used for expenditures incurred
in connection with the Shakespeare feasibility program that was completed in
early 2006. The Corporation is currently reviewing the Shakespeare feasibility
study.

ARCTIC PLATINUM PROJECT

On March 24, 2006, the Corporation entered into an agreement (the "Acquisition
Agreement") with Gold Fields Exploration B.V. ("GFBV") and Gold Fields Finland
Oy ("GFF") providing for the acquisition by the Corporation of approximately 50%
of GFF and in certain circumstances a 60% interest in GFF and settled the terms
of a shareholders agreement (the "Shareholders Agreement") under which the
Corporation and GFBV will hold their shares GFF if the Corporation acquires an
interest in GFF. The Corporation will be the project operator. GFF owns platinum
group metal properties in Finland known as the Arctic Platinum Project ("APP").
During the option period the Corporation will further explore and develop a
mining operation at the APP.

In order to exercise the option, on or before August 31, 2008 the Corporation
must: (i) complete a re-scoping and exploration program; (ii) complete a
feasibility study; (iii) make a production decision and prepare the initial
formal development proposal and associated budget based on the feasibility
study; (iv) incur expenditures of US$12.5 million on the APP; and (v) issue
7,381,636 Common Shares to GFBV in order to earn a 50% interest (9,227,033
Common Shares for a 60% interest). The Corporation will advance the earn-in
expenditures to the APP through North American Palladium Finland Oy, its
wholly-owned subsidiary.

The APP covers several advanced stage exploration properties including the
Konttijarvi and Ahmavaara open pit projects, together known as the Suhanko
Project that were the subject of a feasibility study (the "2005 Feasibility
Study") completed by Gold Fields in 2005. The exploration target at Suhanko is
for bulk tonnage, disseminated to locally semi massive base metals and platinum
group elements occurring near the base of the Konttijarvi-Suhanko Intrusive.

The APP also includes the nearby Narkaus and the Penikat Projects both of which
host significant platinum group and base metal mineralization.

For 2006 the Corporation plans to re-evaluate the Suhanko Project at a higher
cut-off value than what was used in the 2005 Feasibility Study. In 2006 the
Corporation also intends to begin drilling selected targets within the Narkaus
and Penikat Projects as well as commence preliminary mineralogical and
metallurgical test work. Drilling is expected to continue through the first half
of 2006 after which mineral

                                       22
<PAGE>

resources will be calculated to be incorporated into the larger re-coping study
currently scheduled to be completed in early to mid 2007.

                                   DIVIDENDS

The Corporation has not paid any dividends to date on its Common Shares. In
addition, the payment of dividends on the Common Shares is restricted under the
Corporation's credit facility with Kaiser-Francis and under the terms of the
Securities Purchase Agreement (see "Financing"). Accordingly, it is not
anticipated that the Corporation will pay any dividends on its Common Shares in
the near future. The actual timing, payment and amount of any dividends will be
determined by the board of directors from time to time based upon, among other
things, cash flow, results of operations and financial condition, the need for
funds to finance ongoing operations and such other business considerations as
the board of directors may consider relevant.

                                CAPITAL STRUCTURE

The authorized share capital of the Corporation consists of an unlimited number
of special shares, issuable in series and an unlimited number of Common Shares.
There are no special shares outstanding.

The special shares may be issued in series. The Corporation's directors may, by
resolution, fix the number of shares in, the designation of, and determine the
rights, privileges, restrictions and conditions attaching to, each series of
special shares. The special shares of each series rank on a parity with the
special shares of any other series in respect of dividends or the return of
capital. The holders of special shares are entitled to receive, in priority to
the holders of common shares and the shares of any other class ranking junior to
the special shares, as and when declared by the directors, dividends in the
amounts specified or determinable in accordance with the provisions of the
series of which such special shares form a part. In the event of the
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary, before any amount is paid to the holders of Common Shares or shares
of any other class ranking junior to the special shares, the holders of special
shares shall be entitled to receive, to the extent provided for with respect to
such series, an amount equal to the price at which such shares were issued, such
premium, if any, as has been provided for with respect to such series, and all
unpaid cumulative dividends or declared and unpaid non-cumulative dividends. The
special shares of any series may also be given such other preferences over the
Common Shares and any other class of shares ranking junior to the special shares
as may be determined in the case of such series. The holders of special shares
are not entitled to vote separately as a class and the holders of any series of
special shares are not entitled to vote separately as a series except as
required by the CANADA BUSINESS CORPORATIONS ACT.

Each Common Share entitles the shareholder to one vote at all meetings of
shareholders other than meetings at which only the holders of another class or
series of shares are entitled to vote. Each Common Share entitles the holder
thereof, subject to the prior rights of the holders of the special shares, to
receive any dividends declared by the board of directors and the remaining
property of the Corporation upon dissolution.

The Corporation has not issued any debt securities or preferred shares to the
public and accordingly is not rated by any commercial rating organization.

                              MARKET FOR SECURITIES

The Common Shares are listed on the Toronto Stock Exchange under the symbol
"PDL" and on the American Stock Exchange under the symbol "PAL".

                                       23
<PAGE>

The following table sets out the reported high and low closing prices and
aggregate trading volume of the common shares on the TSX for the periods
indicated:

                                                         TSX
                                        ---------------------------------------
                                            HIGH          LOW        VOLUME
                                        ---------------------------------------
2005
   January                                   10.06         9.05        758,994
   February                                  10.59         8.90      1,044,894
   March                                     10.79         8.78        958,482
   April                                      9.25         6.47        798,827
   May                                        7.25         4.92        909,712
   June                                       6.70         5.62        887,656
   July                                       6.15         5.02        895,659
   August                                     7.10         5.24        756,233
   September                                  6.57         5.60        470,473
   October                                    7.75         5.24      1,133,399
   November                                  10.50         7.13      2,317,006
   December                                  11.50         8.72      1,768,753
2006
   January                                   13.00         9.70      1,505,791
   February                                  14.60        10.90      2,140,121
   March 1 - March 29                        14.24        10.82      1,705,237

No unlisted securities were issued by the Corporation during the year ended
December 31, 2005. On March 29, 2006, the Corporation issued convertible notes
in the aggregate principal amount of US$35 million and 1,436,782 common share
purchase warrants (see "Financing - March 2006 Private Placement")

                        DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the directors
and executive officers of the Corporation.

<TABLE>
<CAPTION>
<S>                                                                           <C>
----------------------------------------------- ------------------------------------- ------------------------------
       NAME, RESIDENCE AND POSITION(S)
          HELD WITH THE CORPORATION                     PRINCIPAL OCCUPATION                 DIRECTOR SINCE
----------------------------------------------- ------------------------------------- ------------------------------
 Michael P. Amsden, P.Eng. (1) (4)               Retired senior mining executive       April 1995
 Director
 Oakville, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Steven R. Berlin, C.P.A.(1) (2)(3)              Part-time Consultant                  February 2001
 Director
 Tulsa, Oklahoma, USA
----------------------------------------------- ------------------------------------- ------------------------------
 C. David A. Comba                               Graduate geologist and retired        March 2006
 Director                                        executive
 Toronto, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Andre J. Douchane(4)                            Consultant                            April 2003
 Chairman
 Toronto, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
</TABLE>

                                       24
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                           <C>
----------------------------------------------- ------------------------------------- ------------------------------
       NAME, RESIDENCE AND POSITION(S)
          HELD WITH THE CORPORATION                     PRINCIPAL OCCUPATION                 DIRECTOR SINCE
----------------------------------------------- ------------------------------------- ------------------------------
 Louis J. Fox, Esquire(2)(3)                     Private Businessman                   June 2000
 Director
 Fort Lauderdale, Florida, USA
----------------------------------------------- ------------------------------------- ------------------------------
 Gregory J. Van Staveren, C.A., C.P.A.(1)(3)     Strategic Financial Consultant        February 2003
 Director
 Toronto, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 James D. Excell                                 Officer of the Corporation                          -
 President and Chief Executive Officer
 Kelowna, British Columbia, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Ian M. MacNeily, C.A.                           Officer of the Corporation                          -
 Vice President Finance and Chief Financial
 Officer
 Toronto, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Raymond J. Mason, B.Sc.                         Officer of the Corporation                          -
 General Manager
 Thunder Bay, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Bruce W. Mackie, P.Geo.                         Officer of the Corporation                          -
 Vice President, Exploration and Corporate
 Development
 Oakville, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Michael C. Thompson, F.C.C.A.                   Officer of the Corporation                          -
 Manager Administration and Senior Controller
 Thunder Bay, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
 Mary D. Batoff, LL.B.                           Officer of the Corporation                          -
 Vice President, Legal and Secretary
 Toronto, Ontario, Canada
----------------------------------------------- ------------------------------------- ------------------------------
</TABLE>
(1)     Member of the Audit Committee
(2)     Member of the Compensation Committee
(3)     Member of the Governance and Nominating Committee
(4)     Member of the Technical Committee

The term of office for each director expires at each annual meeting of
shareholders.

Each director or officer listed above has held the same principal occupation
during the past five years except as described below:

Mr. Berlin, prior to January 2006, was a Vice President of Kaiser-Francis Oil
Company ("Kaiser-Francis"), the Corporation's principal shareholder. Prior to
January 30, 2004, he was also Chief Financial Officer and Treasurer of PetroCorp
Incorporated, an oil and natural gas company. Mr. Berlin is the nominee of
Kaiser-Francis, the Corporation's principal shareholder, which has advised the
Corporation that it intends to vote the Common Shares which it owns in favour of
his re-election as a director at the 2006 annual meeting of shareholders.

                                       25
<PAGE>

Mr. Comba, prior to May 2005, was an industry assoication executive

Mr. Douchane, prior to January 2006, was President and Chief Executive Officer
of the Corporation and prior to April 2002 was President of Management Inc., a
management consulting firm. Prior to April 2002, he was President and Chief
Operating Officer of Chief Consolidated Mining Co., a mineral resources company
and prior to June 2001 he was Vice-President Operations of Franco-Nevada Mining
Corporation Limited., a mining and metals royalty company.

Mr. Van Staveren, prior to September 2001, was Vice President Finance and Chief
Financial Officer of Martinrea International (formerly Royal Laser Tech
Corporation), an automotive parts manufacturer.

Mr. Excell, prior to December 31, 2005, was President Narego Solutions Inc. a
consulting company that provides strategic planning services to junior mining
companies and prior to January 2004, was President and Chief Operating Officer
of EKATI Diamond Mine, operated by BHP Billiton Diamonds Inc. BHP Billiton
Diamonds Inc., a diamond mining company, is part of the BHP Billiton Group, a
diversified resource company.

Mr. MacNeily, prior to December 2005, was the Chief Financial Officer of Tiomin
Resources Inc., a natural resource company.

Mr. Mason was resident manager of Wabush Mines, Labrador prior to July 2001.

Mr. Mackie was an independent consultant providing services to junior mining
companies prior to February 2004. Prior to 2002 he was the senior
geologist/analyst for Battle Mountain Canada Ltd., a gold and silver mining
company.

Ms. Batoff was a consultant prior to November 2004, serving as legal counsel and
corporate secretary to certain public companies, including the Corporation, in
the mining and mineral exploration sector.

The number of Common Shares beneficially owned, directly or indirectly, or over
which control or direction is exercised, by all directors and senior officers of
the Corporation is 37,840, less than 1% of the common shares issued and
outstanding.

CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS

Mr. Steven R. Berlin was a director of Ozark Airlines, Inc., doing business as
Great Plains Airlines, Inc. ("Great Plains"), which filed a voluntary Bankruptcy
Petition under Chapter 11 of the United States Bankruptcy Code in an Oklahoma
court on January 23, 2003. Mr. Berlin resigned from the board of directors of
Ozark Airlines on December 14, 2004. Ozark Airlines filed a motion to convert
the bankruptcy to Chapter 7, which was granted by the Court on March 11, 2005.

CONFLICTS OF INTEREST

There are potential conflicts to which the directors of the Corporation are
subject in connection with the business and operations of the Corporation. The
individuals concerned are governed in any conflicts or potential conflicts by
applicable law. As of the date hereof, the following directors and officers of
the Corporation hold positions with other companies that explore for or produce
platinum group metals or have other business interests which may potentially
conflict with the interests of the Corporation.

Mr. Comba is a director of First Nickel Inc., a company listed on the Toronto
Stock Exchange, which operates the Lockerby Mine in Sudbury, Ontartio, a nickel,
copper and cobalt producer with platinum group credits. First Nickel Inc. is
actively exploring for nickel deposits in Sudbury and Timmins, Ontario.


                                       26
<PAGE>

Mr. Berlin is the nominee of Kaiser-Francis, the Corporation's principal
shareholder, on the board of directors of the Corporation. Kaiser-Francis is
also a lender to the Corporation (see "Financings").

                                LEGAL PROCEEDINGS

The Corporation, along with J. Patrick Sheridan, Minerales De Copan and two
other individuals, are defendants in an action brought by Cambridge Resources
Corp. ("Cambridge"), in the Superior Court of Justice (Ontario). In its amended
statement of claim dated September 27, 1991 Cambridge claims damages in the
amount of $20 million, punitive and exemplary damages in the amount of $5
million, a declaration that the defendants hold any interest in an unidentified
mining concession located in Honduras, about forty miles southeast of
Tegucigalpa (defined therein as the "Mining Property") on constructive trust for
Cambridge, a mandatory order requiring the defendants to deliver up all
proceeds, equity interest, security or debenture interest in whatever form
relating to the Mining Property, pre-judgment and post-judgment interest and
costs. The Corporation filed a statement of defense dated February 7, 1992 which
states, among other things, that the Mining Property was previously known to one
of the individual defendants to be of insufficient quality to merit commercial
development and that, accordingly, the Corporation had declined to proceed any
further with the investigation or purchase of the Mining Property. Partial
discoveries of certain of the parties were conducted on October 6, 7 and 8,
1993. There have been no further proceedings in the action. This action has been
dormant for 10 years. No provision in the financial statements has been made in
respect of any possible loss from the action as management believes that the
Corporation has a valid defense and the Sheridan Group has indemnified the
Corporation.

From time to time, the Corporation is involved in other litigation,
investigations or proceedings related to claims arising out of its operations in
the ordinary course of business. In the opinion of the Corporation's management,
these claims and lawsuits in the aggregate, even if adversely settled, will not
have a material effect on the consolidated financial statements of the
Corporation.

           INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

Other than as described below, no director, executive officer, shareholder
owning, directly or indirectly, or exercising control or direction over, 10% or
more of the voting securities of the Corporation or any associate or affiliate
of any of the foregoing has or had a material interest, direct or indirect in
any transaction since January 1, 2003 that has materially affected or will
materially affect the Corporation.

In November 1999, the Corporation entered into a services agreement with Mr. Fox
pursuant to which Mr. Fox was engaged to provide services in connection with the
negotiation of palladium end-user supply contracts, project capital financing,
smelting and refining agreements, metals price forecasting and marketing other
metals. The services agreement was negotiated at arms-length prior to Mr. Fox
becoming a director of the Corporation and was terminated in March 2001. During
2005, 2004 and 2003 Mr. Fox received payments of $218,000, $581,000 and
$400,000, respectively, pursuant to the agreement which were non-discretionary
in nature. The payments terminated on June 30, 2005 with the expiry of the
Palladium Sales Contract.

See "Financings - March 2006 Private Placement" for a description of
Kaiser-Francis interest in the transaction.

                                 TRANSFER AGENT

Computershare Investor Services Inc. is the registrar and transfer agent of the
Common Shares in Toronto, Canada and Computershare Trust Company, Inc. is the
registrar and co-transfer agent for the Common Shares in the Golden, Colorado,
United States.

                                       27
<PAGE>

                               MATERIAL CONTRACTS

The Senior Credit Facility, the Kaiser-Francis credit facility, and the
Securities Purchase Agreement described in the section titled "Financings", and
the Acquisition Agreement described in "Mineral Properties - Other Properties"
are the only contracts that are material to the Corporation and are still in
effect.

                              INTERESTS OF EXPERTS

RPA was engaged to prepare the mineral reserve and resource estimate for the
open pit and underground mine and the mineral resource estimate for the Offset
High Grade Zone as at December 31, 2005. None of Messrs. Clow, Hendry, Evans and
Routledge and RPA owned securities of the Corporation when the services were
provided and no securities of the Corporation were issued to Messrs. Clow,
Hendry, Evans and Routledge or to RPA as compensation for their services in
connection with the mineral reserve and resource estimates.

KPMG LLP, the external auditors of the Corporation, prepared the "Auditor's
Report to the Shareholders of North American Palladium Ltd." with respect to the
consolidated financial statements of the Corporation as at December 31, 2004 and
December 31, 2005 and for the years then ended. KPMG LLP is independent in
accordance with the auditors' rules of professional conduct of Ontario, and has
complied with the Securities and Exchange Commission's rules on auditor
independence.

                                  RISK FACTORS

The Corporation's securities are subject to the following risks. If any of the
risks occur, the Corporation's business, operating results and financial
condition could be materially adversely affected, the trading price of the
Common Shares could decline and all or part of any investment may be lost.

THE CORPORATION CANNOT ASSURE THAT IT WILL MEET ITS GOALS FOR PRODUCTION AND
OPERATING COSTS AND IF IT DOES NOT, ITS OPERATING RESULTS WILL BE ADVERSELY
AFFECTED.

Planned production levels and operating costs are estimated based on the
Corporation's experience in operating its mine. These estimates are subject to
numerous uncertainties, many of which are beyond the Corporation's control. The
Corporation cannot make assurances that its actual production levels will not be
substantially lower than its estimates or that its operating costs will not be
materially higher than anticipated.

IF RESERVE ESTIMATES ARE NOT ACCURATE, PRODUCTION MAY BE LESS THAN ESTIMATED
WHICH WOULD ADVERSELY AFFECT THE CORPORATION'S FINANCIAL CONDITION AND RESULT OF
OPERATIONS.

Reserve estimates are imprecise and depend on geological analysis based partly
on statistical inferences drawn from drilling, which may prove unreliable, and
assumptions about operating costs and metal prices. The Corporation cannot be
certain that the reserve estimates are accurate and cannot guarantee that it
will recover the indicated quantities of metals. Future production could differ
dramatically from such estimates for the following reasons:

        o       mineralization or formations at the mine could be different from
                those predicted by drilling, sampling and similar examinations;
        o       declines in the market price of palladium may render the mining
                of some or all of the reserves uneconomic; and

                                       28
<PAGE>

        o       the grade of ore may vary significantly from time to time and
                the Corporation cannot give any assurances that any particular
                quantity of metal will be recovered from the reserves.

The occurrence of any of these events may cause the Corporation to adjust the
reserve estimates or change its mining plans, which could negatively affect the
Corporation's financial condition and results of operation. Moreover, short-term
factors, such as the need for additional development of the ore body or the
processing of new or different grades, may impair its profitability in any
particular accounting period.

THE RISKS AND HAZARDS ASSOCIATED WITH MINING AND PROCESSING MAY INCREASE COSTS
AND REDUCE PROFITABILITY IN THE FUTURE.

Mining and processing operations involve many risks and hazards, including among
others:

        o       environmental hazards;
        o       mining and industrial accidents;
        o       metallurgical and other processing problems;
        o       unusual and unexpected rock formations;
        o       pit slope failures;
        o       flooding and periodic interruptions due to inclement or
                hazardous weather conditions or other acts of nature;
        o       mechanical equipment and facility performance problems; and
        o       unavailability of materials, equipment and personnel.

These risks could result in:

        o       damage to, or destruction of, the Corporation's properties or
                production facilities;
        o       personal injury or death;
        o       environmental damage;
        o       delays in mining;
        o       increased production costs;
        o       asset write downs;
        o       monetary losses; and
        o       possible legal liability.

The Corporation cannot be certain that its insurance will cover the risks
associated with mining or that it will be able to maintain insurance to cover
these risks at affordable premiums. The Corporation might also become subject to
liability for pollution or other hazards against which it cannot insure or
against which the Corporation may elect not to insure because of premium costs
or other reasons. Losses from such events may increase costs and decrease
profitability.

IF THE CORPORATION FAILS TO DEVELOP ITS UNDERGROUND MINING OPERATIONS AT A
REASONABLE COST, OR AT ALL, OR TO ACHIEVE PROJECTED PRODUCTION LEVELS FOR ITS
UNDERGROUND MINING OPERATIONS, ITS ABILITY TO GENERATE REVENUE AND PROFITS WILL
BE ADVERSELY AFFECTED.

The Corporation's future prospects will be negatively affected if the
underground mine fails to achieve projected production levels. Due to the
complexity and uncertainty involved in developing an underground mine, it is
difficult to provide reliable time and cost estimates for completion. Unforeseen
conditions or developments could arise during the development and construction
of the underground mine

                                       29
<PAGE>

which could delay or prevent its completion or substantially increase the cost
of such project, adversely affecting the Corporation's ability to generate
revenue and profits. These events may include, among others:

        o       delays or difficulties in obtaining required permits;
        o       shortages of equipment, materials or labor;
        o       delays in delivery of equipment or materials;
        o       labor disruptions;
        o       local or political opposition;
        o       adverse weather conditions or natural disasters;
        o       unanticipated increases in costs of labor, supplies and
                equipment;
        o       accidents; and
        o       unforeseen engineering, design, environmental or geological
                problems.

THE CORPORATION MAY EXPERIENCE HIGHER COSTS AND LOWER REVENUES THAN ESTIMATED
DUE TO UNEXPECTED PROBLEMS AND DELAYS.

New mining operations often experience unexpected problems during the
development and start-up phases and such problems can result in substantial
delays in reaching commercial production. Delays in construction or reaching
commercial production in connection with the Corporation's development of its
underground mine would increase its operating costs and delay revenue growth.

IF THE COSTS OF COMPLETING THE UNDERGROUND MINE ARE GREATER THAN ANTICIPATED,
THE CORPORATION MAY NEED TO OBTAIN ADDITIONAL FUNDS WHICH MAY NOT BE AVAILABLE
ON FAVOURABLE TERMS OR AT ALL.

The costs of developing the underground mine are subject to many uncertainties
which may cause such costs to be higher than anticipated. In such event, the
Corporation may need to obtain additional capital to pursue its mining plan.
There is no assurance that the Corporation will be able to obtain such capital
on favourable terms, if at all. If additional capital is raised by incurring
debt, the Corporation will be obligated to make greater interest payments which
will reduce funds available for the mining operations. If capital is raised
through the sale of equity securities, shareholders may experience substantial
dilution. If the Corporation is unable to raise additional funds when and if
required, it may have to delay or abandon its development of the underground
mine or restrict its operations.

FUTURE EXPLORATION AT LAC DES ILES MINE OR ELSEWHERE MAY NOT RESULT IN INCREASED
RESERVES, WHICH WOULD PREVENT THE CORPORATION FROM SUSTAINING ITS TARGETED
PRODUCTION LEVELS.

This AIF contains reserve estimates as at December 31, 2005 based on exploration
to that date. The Corporation conducts exploration programs at and surrounding
the Lac des Iles Mine with the objective of increasing reserves. Mineral
exploration involves significant risks over a substantial period of time, which
even a combination of careful evaluation, experience and knowledge may not
eliminate. Even if the Corporation discovers a valuable deposit of minerals, it
may be several years before production is possible and during that time it may
become economically unfeasible to produce those minerals. There is no assurance
that current or future exploration programs will result in any new economically
viable mining operations or yield new reserves to replace and expand current
reserves at the Lac des Iles Mine. In the event that new reserves are not
discovered, the Corporation may not be able to sustain production beyond 2010.

THE CORPORATION FACES STRONG COMPETITION FROM OTHER MINING COMPANIES FOR THE
ACQUISITION OF NEW PROPERTIES.

                                       30
<PAGE>

Mines have limited lives and, as a result, the Corporation continually seeks to
replace and expand its reserves through the acquisition of new properties. In
addition, there is a limited supply of desirable mineral lands available in
areas where the Corporation would consider conducting exploration and/or
production activities. Because the Corporation faces strong competition for new
properties from other mining companies, some of which have greater financial
resources than it, the Corporation may be unable to acquire attractive new
mining properties on terms acceptable to it.

THE CORPORATION DEPENDS ON A SINGLE MINE TO GENERATE REVENUES AND, IF MINING
OPERATIONS ARE INTERRUPTED, THE CORPORATION'S BUSINESS WILL SUFFER.

All of the Corporation's revenues are derived from its mining operations at the
Lac des Iles Mine, which is the Corporation's only mine and the only place it
has reserves. If there is an interruption in operations at the Lac des Iles
Mine, or if the Corporation can no longer extract ore from this mine for any
reason, the Corporation's business will suffer significantly. In addition, any
adverse condition affecting mining conditions at the Lac des Iles Mine could
have a material adverse effect on the Corporation's financial performance and
results of operations until such time as the condition is remedied.

THE CORPORATION IS DEPENDENT ON THIRD PARTIES FOR SMELTING AND REFINING ITS
PALLADIUM AND IF THEY ARE UNABLE TO ACCOMMODATE THE CORPORATION'S SMELTING AND
REFINING REQUIREMENTS OR THE EXISTING CONTRACTS ARE TERMINATED OR NOT RENEWED
THE CORPORATION'S ABILITY TO GENERATE REVENUES COULD BE HARMED.

The Corporation has a smelter agreement and Falconbridge which provide for the
smelting and refining of the principal metals contained in the concentrates
produced at Lac des Iles Mine. The existing agreement with Falconbridge expires
on September 30, 2006. The agreement with Falconbridge can be terminated in
certain circumstances, such as default of performance. The inability to renew
this agreement under similar terms or the termination of the Falconbridge
agreement could have a material adverse affect on the Corporation's financial
performance and results of operations until such time as alternative smelting
and refining arrangements can be made or alternative purchasers of the
Corporation's concentrates can be found.

THE CORPORATION'S VULNERABILITY TO CHANGES IN METAL PRICES MAY CAUSE ITS SHARE
PRICE TO BE VOLATILE AND MAY AFFECT THE CORPORATION'S OPERATIONS AND FINANCIAL
RESULTS..

The Corporation's primary source of revenue is the sale of palladium. In fiscal
2005, sales of palladium accounted for approximately 47% of the Corporation's
revenues. Historically, changes in the market price of palladium have
significantly impacted the Corporation's profitability and share price. The
financial results are very sensitive to external economic criteria related to
the palladium price. A major risk will arise if there is a significant weakening
of the U.S. dollar combined with a prolonged period of lower palladium prices.
Many factors beyond the Corporation's control influence the market price of
palladium. These factors include:

        o       global supply and demand;
        o       availability and costs of metal substitutes;
        o       speculative activities;
        o       international political and economic conditions; and
        o       production levels and costs in other platinum group
                metal-producing countries, particularly Russia and South Africa.

Economic and political events in Russia could result in declining market prices.
If Russia disposes of substantial amounts of palladium, platinum, rhodium,
ruthenium, osmium and iridium, which are referred to as platinum group metals,
from stockpiles or otherwise, the increased supply could reduce the market

                                       31
<PAGE>

prices of palladium and platinum and adversely affect the Corporation's
profitability and share price. Russia's economic problems make Russian
stockpiles difficult to predict and the risk of sales from stockpiles more
significant.

SINCE THE CORPORATION'S REVENUES ARE IN UNITED STATES DOLLARS AND EXPENDITURES
ARE IN CANADIAN DOLLARS, THE CORPORATION IS SUBJECT TO FLUCTUATIONS IN EXCHANGE
RATES BETWEEN THE UNITED STATES AND CANADIAN DOLLARS.

Currency fluctuations may affect cash flow since the Corporation's production
currently is sold in United States dollars, whereas the Corporation's
administration, operating and exploration costs are incurred in Canadian
dollars. Significant long term fluctuations in relative currency values could
adversely affect the Corporation's results of operations. In particular, the
Corporation may be adversely affected by a significant strengthening of the
Canadian dollar against the United States dollar. In addition, the financial
results are sensitive to fluctuations in the exchange rate. A major risk will
arise if there is a significant weakening of the U.S. dollar combined with a
prolonged period of lower palladium spot prices.

THE CORPORATION'S COLLECTIVE AGREEMENT WITH ITS EMPLOYEES EXPIRED IN MARCH 2006
AND THE INABILITY TO RENEW THE COLLECTIVE AGREEMENT ON SIMILAR TERMS COULD HAVE
A MATERIAL ADVERSE AFFECT ON THE CORPORATION.

The Corporation's collective agreement with the United Steel Workers of America,
the union representing the employees at the Lac des Iles Mine (other than
employees at or above the rank of foreman, safety co-ordinator, surveyors,
dispatchers, technical staff and office, clerical and security personnel),
expired in March 2006. The inability to renew the agreement on similar terms
could have a material adverse affect on the Corporation, including the affect of
work stoppages or strikes on the results of operations and financial performance
of the Corporation.

THE CORPORATION IS SUBJECT TO EXTENSIVE ENVIRONMENTAL LEGISLATION AND THE COSTS
OF COMPLYING WITH THESE REGULATIONS MAY BE SIGNIFICANT.

Environmental legislation relating to land, air and water affects nearly all
aspects of the Corporation's operations. This legislation requires the
Corporation to obtain various operating licenses and also imposes standards and
controls on activities relating to the exploration, development and production
of palladium and associated metals. The cost of obtaining operating licenses and
abiding by standards and controls on its activities may be significant. Further,
if the Corporation fails to obtain or maintain such operating licenses or
breaches such standards or controls imposed on its activities, it may not be
able to continue its operations in its usual manner, or at all, or the
Corporation may be subject to fines or other claims for remediation which may
have a material adverse impact on its operations or financial results.

The Corporation will be responsible for all costs of closure and reclamation at
the Lac des Iles Mine. Under applicable environmental legislation, the
Corporation was required to establish a trust fund to prepare for closure and
reclamation. The current amended mine closure plan requires $7.8 million for
clean-up and restoration of the mine site. The trust fund, maintained by the
Ontario Ministry of Northern Development and Mines, is designed to collect $7.8
million through instalments of $100,000 per month. The money in the trust fund
will become available to the Corporation when the mine closure is completed. At
December 31, 2005, approximately $7.2 million was on deposit in the trust fund.
Development of the underground mine as planned will require an amendment to the
existing closure plan and will result in an increase in the amount of financial
assurance required by the Ontario Ministry of Northern Development and Mines.
The actual amount needed for the closure of the Lac des Iles Mine may be
materially more than the original estimate. Recent changes in the Province of
Ontario mining regulations may require the Corporation to provide a letter of
credit or other financial instrument as security for the closure of the Lac des
Iles Mine.

                                       32
<PAGE>

CHANGES IN ENVIRONMENTAL LEGISLATION COULD INCREASE THE COSTS OF COMPLYING WITH
APPLICABLE REGULATIONS AND REDUCE LEVELS OF PRODUCTION.

Changes in environmental laws, new information on existing environmental
conditions or other events may increase future compliance expenditures or
otherwise have a negative effect on the Corporation's financial condition and
results of operations. In addition to existing requirements, it is expected that
other environmental regulations will likely be implemented in the future with
the objective of further protecting human health and the environment. Some of
the issues currently under review by environmental agencies include reducing or
stabilizing air emissions, mine reclamation and restoration, and water quality.
Other changes in environmental legislation could have a negative effect on
production levels, product demand, product quality and methods of production and
distribution. The complexity and breadth of these issues make it difficult for
the Corporation to predict their impact. The Corporation anticipates capital
expenditures and operating expenses will increase as a result of compliance with
the introduction of new and more stringent environmental regulations. Failure to
comply with environmental legislation may result in the issuance of clean up
orders, imposition of penalties, liability for related damages and the loss of
operating permits. The Corporation cannot give assurances that it will at all
future times be in compliance with all federal and provincial environmental
regulations or that steps to bring the Corporation into compliance would not
have a negative effect on its financial condition and results of operations.

COMPLIANCE WITH CURRENT AND FUTURE GOVERNMENT REGULATIONS MAY CAUSE THE
CORPORATION TO INCUR SIGNIFICANT COSTS AND SLOW ITS GROWTH.

The Corporation's activities are subject to extensive Canadian federal and
provincial laws and regulations governing matters relating to mine safety,
occupational health, labor standards, prospecting, exploration, production,
exports and taxes. Compliance with these and other laws and regulations could
require the Corporation to make significant capital outlays which may slow its
growth by diverting its financial resources. The enactment of new adverse
regulations or regulatory requirements or more stringent enforcement of current
regulations or regulatory requirements may increase costs, which could have a
harmful effect on the Corporation. The Corporation cannot give assurances that
it will be able to adapt to these regulatory developments on a timely or cost
effective basis. Violations of these regulations and regulatory requirements
could lead to substantial fines, penalties or other sanctions.

THE CORPORATION IS REQUIRED TO OBTAIN AND RENEW GOVERNMENTAL PERMITS IN ORDER TO
CONDUCT MINING OPERATIONS, WHICH IS OFTEN A COSTLY AND TIME-CONSUMING PROCESS.

In the ordinary course of business, the Corporation is required to obtain and
renew governmental permits for the operation and expansion of existing
operations or for the commencement of new operations. Obtaining or renewing the
necessary governmental permits is a complex and time-consuming process. The
duration and success of the Corporation's efforts to obtain and renew permits
are contingent upon many variables not within its control including the
interpretation of applicable requirements implemented by the permitting
authority. The Corporation may not be able to obtain or renew permits that are
necessary to its operations, or the cost to obtain or renew permits may exceed
what the Corporation expects. Any unexpected delays or costs associated with the
permitting process could delay the development or impede the operation of a
mine, which could adversely affect the Corporation's revenues and future growth.

THE CORPORATION FACES COMPETITION WITH OTHER LARGER SUPPLIERS OF PLATINUM GROUP
METALS AND FROM POTENTIAL NEW SOURCES OF PLATINUM GROUP METALS.

                                       33
<PAGE>

The Corporation competes with other suppliers of platinum group metals, some of
which are significantly larger than it is and have access to greater mineral
reserves and financial resources than it does. In addition, new mines may open
which would increase supply of palladium and platinum. Furthermore, in certain
industrialized countries an industry has developed for the recovery of platinum
group metals from scrap sources, mostly from spent automobile and industrial
catalysts. The Corporation may not be successful in competing with these
existing and emerging platinum group metal producers.

THE DEVELOPMENT OF NEW TECHNOLOGY OR NEW ALLOYS COULD REDUCE THE DEMAND FOR
PALLADIUM AND PLATINUM.

The development of a substitute alloy or synthetic material which has catalytic
characteristics similar to platinum group metals would result in a decrease in
demand for palladium and platinum. Furthermore the development by the automobile
industry of automobiles that do not use catalytic converters could reduce the
demand for palladium and platinum. Demand might also be reduced by manufacturers
in such industries as automobiles, electronics and dentistry finding substitutes
for palladium. The dentistry and electronics industries have already experienced
advances in new technology which use base metals as a substitute for palladium
in certain component parts. High prices for palladium would create an incentive
for the development of substitutes. Any such developments could have a material
adverse effect on the Corporation's financial condition and results of
operations.

IF THE CORPORATION LOSES KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, THE CORPORATION'S MINING OPERATIONS AND PROSPECTS COULD BE
HARMED.

The Corporation is dependent upon the services of a small number of members of
senior management including James D. Excell, the President and Chief Executive
Officer, and Ian M. MacNeily, the Chief Financial Officer. The Corporation's
current mining operations, its successful development of the underground mine
and its future prospects depends on the experience and knowledge of these
individuals. The loss of one or more of these individuals could have a material
adverse affect on the Corporation's mining operations.

THE MINING LEASES CONSTITUTING THE LAC DES ILES MINE EXPIRE IN 2006 AND MAY NOT
BE RENEWED.

The Lac des Iles Mine consists of four mining leases issued by the Government of
Ontario. The mining leases are dated August 16, 1985 and have a 21 year term,
which is the term of all mining leases granted by the Government of Ontario.
These leases expire on August 31, 2006 and are renewable for a further term of
21 years if the terms and conditions of the leases have been complied with. If
the leases expire and are not renewed, the Corporation will not be able to
continue its mining operations.

THE CORPORATION'S CREDIT FACILITIES HAVE EVENTS OF DEFAULT, SOME OF WHICH ARE
BEYOND THE CORPORATION'S CONTROL.

The Corporation has borrowed funds under its credit facilities to finance its
operations. The credit facilities contain certain events of default, some of
which are beyond the Corporation's control, the occurrence of which could
require the Corporation to pay back immediately all amounts borrowed under the
credit facilities.

THE CORPORATION'S PRINCIPAL SHAREHOLDER HAS THE ABILITY TO DIRECT THE
CORPORATION'S AFFAIRS AND BUSINESS AND, BECAUSE IT OWNS APPROXIMATELY 50.4% OF
THE COMMON SHARES, THIRD PARTIES MAY BE DETERRED FROM ACQUIRING THE CORPORATION.

To the best of the Corporation's knowledge, Kaiser-Francis, a privately-held oil
and gas company based in Tulsa, Oklahoma, owns common shares, representing
approximately 50% of the total number of

                                       34
<PAGE>

common shares outstanding. Kaiser-Francis therefore has the ability to direct
the affairs and business of the Corporation. This concentration of ownership may
have the effect of delaying or preventing a change in control of the
Corporation, which may deprive the Corporation's shareholders of a control
premium that might otherwise be realized in connection with an acquisition of
the Corporation.

THE CORPORATION'S HEDGING ACTIVITIES OR ITS DECISION NOT TO HEDGE COULD EXPOSE
IT TO LOSSES.

From time to time, the Corporation may engage in hedging activities in
connection with the metals it produces, such as forward sales contracts and
commodity put and call option contracts, to partially offset the risk of
declines in metal prices on its operating results. While these hedging
activities may protect the Corporation against low metal prices, they may also
limit the price it can receive on hedged products. As a result, the Corporation
may be prevented from realizing possible revenues in the event that the market
price of a metal exceeds the price stated in a forward sale or call option
contract. In addition, the Corporation may experience losses if a counterparty
fails to purchase under a contract when the contract price exceeds the spot
price of a commodity.

                           AUDIT COMMITTEE INFORMATION

AUDIT COMMITTEE CHARTER

The Audit Committee charter is set out below.

COMPOSITION OF THE AUDIT COMMITTEE

The Committee is comprised of Gregory J. Van Staveren (Chairman), Steven R.
Berlin and Michael P. Amsden. Mr. James Excell was a member of the Audit
Committee until December 31, 2005 when he resigned from the board of directors
of the Corporation to take the position of President and Chief Executive Officer
of the Corporation. Messrs. Van Staveren and Amsden are independent as such term
is defined in Multilateral Instrument 52-110 - Audit Committees ("MI 52-110").
Mr. Excell during his tenure as a director was independent as such term is
defined in MI 52-110 - Audit Committees. Prior to January 1, 2006, Mr. Berlin
was an executive officer of the principal shareholder of the Corporation and is
not considered independent by virtue of such relationship. Mr. Berlin was a
non-voting member of the Audit Committee from May 25, 2005, the date of the
Corporation's annual shareholder meeting, until the vacancy arose from Mr.
Excell's resignation. Mr. Berlin was appointed a voting member of the Audit
Committee as permitted by section 3.5 of MI 52-110 and may remain a voting
member of the Audit Committee until the next annual meeting of shareholders. Mr.
Berlin is a certified public accountant and has considerable experience in
finance and accounting. The board of directors determined that it was in the
best interests of shareholders to appoint Mr. Berlin to the Audit Committee.

RELEVANT EDUCATION AND EXPERIENCE

Each of the members of the Committee is financially literate. Each of Mr. Van
Staveren and Mr. Berlin satisfies the criteria required for the financial expert
and Mr. Van Staveren is designated as the audit committee financial expert. Mr.
Van Staveren is a chartered accountant and a certified public accountant. He was
Chief Financial Officer of Martinrea International Inc. an automotive parts
manufacturer from February 1998 to September 2001 and currently provides
strategic financial services to companies. Prior to February 1998, Mr. Van
Staveren was a partner with KPMG LLP.

                                       35
<PAGE>

Mr. Berlin is a certified public accountant and, prior to January 1, 2006, was a
Vice President of Kaiser-Francis and prior to December 2004 was Co-Chief
Financial Officer of Kaiser-Francis. Mr. Berlin also served as Chief Financial
Officer and Treasurer of PetroCorp Incorporated, an oil and gas company prior to
January 2004.

Mr. Amsden has been a director of the Corporation since April 1995. He has also
extensive management experience throughout his career. Mr. Amsden retired from
Falconbridge Ltd. in 1993. During his tenure at Falconbridge, which began in
1986, Mr. Amsden was Vice President and General Manager of the Kidd Creek
Division until 1990 when he became Vice President Environmental Services, which
included being President of Lakefield Research. In 1992 he became General
Manager of Falconbridge, Chile S.A.

Mr. Excell also has extensive management experience serving three decades with
BHP Billiton, including President and Chief Operating Officer of BHP Billiton
Diamonds Inc.

RELIANCE ON CERTAIN EXEMPTIONS

As noted above, the Corporation is relying on the exemption contained in section
3.5 (DEATH, DISABILITY OR RESIGNATION OF AUDIT COMMITTEE MEMBER) of MI 52-110 in
connection with Mr. Berlin's current membership on the Audit Committee.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

All audit and non-audit services performed by the Corporation's external
auditors are pre-approved by the Audit Committee.

EXTERNAL AUDITOR SERVICE FEES

AUDIT FEES

The aggregate fees billed by KPMG LLP ("KMPG"), the Corporation's external
auditors for the fiscal years ended December 31, 2004 and 2005, for professional
services that are normally provided by the external auditors in connection with
statutory and regulatory filings or engagements for that year were $210,000 and
$329,640, respectively.

AUDIT-RELATED FEES

The aggregate fees billed by KPMG for the fiscal years ended December 31, 2004
and 2005 for assurance and related services rendered by it that are reasonably
related to the performance of the audit or review of the Registrant's financial
statements engagements for that year were $nil and $30,820, respectively.

TAX FEES

The aggregate fees billed by KPMG for the fiscal years ended December 31, 2004
and 2005 for professional services rendered by it for tax compliance, tax
advice, tax planning and other services were $79,000 and $12,075, respectively.
Tax services provided included preparation of corporate tax returns and review
of tax provisions.

                                       36
<PAGE>

ALL OTHER FEES

Other products and services provided included accounting support. The aggregate
fees billed by KPMG for the fiscal years ended December 31, 2004 and 2005 for
products and services provided by KPMG, other than the services reported in the
preceding three paragraphs, were $nil and $nil, respectively.

                             ADDITIONAL INFORMATION

Additional information relating to the Corporation may be found on SEDAR at
www.sedar.com. Additional information, including directors' and officers'
remuneration and indebtedness, principal holders of the Corporation's securities
and securities authorized for issuance under equity compensation plans, is
contained in the Corporation's management proxy circular. As well, additional
financial information is provided in the Corporation's annual financials
statements for the year ended December 31, 2005 and management's discussion and
analysis of operations and financial results.





                                       37
<PAGE>

                             AUDIT COMMITTEE CHARTER

1.      COMPOSITION

a)      The Audit Committee shall consist of a minimum of three directors of the
        Corporation.

        The Audit Committee shall be comprised entirely of independent
        directors, as such term is defined by applicable laws and related rules
        and regulations, and rules of relevant stock exchanges (collectively
        referred to as "Applicable Laws"). For clarity, US Applicable Laws means
        those applicable to foreign private issuers.

        Notwithstanding the foregoing sentence, a member is exempt from the
        independence requirements if permitted by Applicable Laws. The
        appointment of the non-independent director shall be disclosed in the
        next proxy circular mailed to shareholders. If there is reliance on
        curing provisions, notice shall be given to the stock exchanges
        immediately upon learning of the circumstances that resulted in the
        non-compliance.

b)      A quorum for the transaction of business at all meetings of the Audit
        Committee shall be a majority of members.

2.      QUALIFICATIONS AND EXPERIENCE

        At the time of appointment or within a reasonable period of time
        following appointment, each member of the Committee must be financially
        literate, having the ability to read and understand a set of financial
        statements that present the breadth and level of complexity or
        accounting issues that are generally comparable to the breadth and
        complexity of the issues that can be reasonably be expected to be raised
        by the Corporation's financial statements.

a)      At least one member (the "financial expert") of the Committee must have:

        i.      An understanding of financial statements and accounting
                principles used by the Corporation to prepare its financial
                statements;

        ii.     The ability to assess the general application of such accounting
                principles in connection with the accounting for estimates,
                accruals and reserves;

        iii.    Experience preparing, auditing, analyzing or evaluating
                financial statements that present a breadth and level of
                complexity of accounting issues that are generally comparable to
                the breadth and complexity of issues that can reasonably be
                expected to be raised by the Corporation's financial statements,
                or experience actively supervising one or more persons engaged
                in such activities;

        iv.     An understanding of internal controls and procedures for
                financial reporting; and

        v.      An understanding of audit committee functions.

b)      The financial expert must have acquired the foregoing attributes through
        one or more of the following:

                                       38
<PAGE>

        i.      Education and experience as a principal financial officer,
                principal accounting officer, controller, public accountant or
                auditor or experience in one or more positions that involve the
                performance of similar functions;

        ii.     Experience actively supervising a principal financial officer,
                principal accounting officer, controller, public accountant,
                auditor or person performing similar functions;

        iii.    Experience overseeing or assessing the performance of companies
                or public accountants with respect to the preparation, auditing
                or evaluation of financial statements; or

        iv.     Other relevant experience.

3.      MANDATE AND RESPONSIBILITIES

        The Audit Committee shall:

a)      Review and assess the adequacy of the Audit Committee Charter on an
        annual basis;

b)      Meet with the Corporation's external auditors as necessary and before
        the submission of the audited annual financial statements to the Board
        and communicate to external auditors that they are ultimately
        accountable to the Board and the Audit Committee as representatives of
        shareholders;

c)      Review the annual financial statements of the Corporation and
        "management's discussion and analysis" and recommend the financial
        statements for approval to the Board;

d)      Review and approve interim financial statements of the Corporation and
        "management's discussion and analysis" prior to filing with the
        securities regulatory authorities and delivery to shareholders;

e)      Obtain explanations from management on all the significant variances
        between comparative reporting periods and, in respect the annual
        financial statements, question management and the external auditor
        regarding the significant financial reporting issues discussed during
        the fiscal period and the method of resolution;

f)      Be responsible for:

        i.      Ensuring that a written statement is obtained from the external
                auditor describing all relationships between the external
                auditor and the Corporation;

        ii.     Discussing with the external auditor any disclosed relationships
                or services that may impact the objectivity and independence of
                the external auditor; and

        iii.    Determining that the external auditors have a process in place
                to address the rotation of the lead partner and other audit
                partners serving the account as required under Canadian
                independence standards and the SEC independence rules, as
                applicable to foreign private issuers;

g)      Assess the performance of the external auditors and recommend to the
        Board annually or as they may otherwise determine a duly qualified
        external auditor to be nominated (for appointment or retention) for the
        purpose of preparing or issuing an audit report or performing other
        audit, review or attest services for the Corporation;

h)      Review the plan and scope of the audit to be conducted by the internal
        (if any) and external auditors of the Corporation;

                                       39
<PAGE>

i)      Approve, or recommend to the Board for approval, the compensation of the
        external auditors;

j)      Directly oversee the work of the external auditors, including reviewing
        the Corporation's critical accounting policies and practices, material
        alternative accounting treatments and material written communications
        between the external auditors and management, and the resolution of
        disagreements between management and the external auditor regarding
        financial reporting;

k)      Pre-approve all audit and permitted non-audit services to be provided to
        the Corporation or its subsidiary entities by its external auditors or
        the external auditors of the Corporation's subsidiary, in accordance
        with Applicable Laws;

l)      Review all post-audit or management letters containing the
        recommendations of the external auditor and management's response or
        follow-up of any identified weakness;

m)      Meet separately, periodically, with management, with internal auditors
        (or other personnel responsible for the internal audit function) and
        with external auditors;

n)      Review all annual and interim earnings press releases;

o)      Determine that adequate procedures are in place for the review of the
        Corporation's disclosure of financial information extracted or derived
        from the Corporation's financial statements, other than disclosure in
        the Corporation's financial statements, management's discussion and
        analysis and earnings press releases, and periodically assess the
        adequacy of these procedures;

p)      Establish procedures for:

        i.      The receipt, retention and treatment of complaints received by
                the Corporation regarding accounting, internal accounting
                controls, or auditing matters; and

        ii.     The confidential, anonymous submission by employees of the
                Corporation of concerns regarding questionable accounting or
                auditing matters;

q)      Enquire as to the adequacy of the Corporation's system of internal
        controls;

r)      Review and approve all related party transactions;

s)      Review and approve the Corporation's hiring policies regarding employees
        and former employees of the present and former external auditors of the
        Corporation;

t)      Have such other duties, powers and authorities, consistent with the
        provisions of the CANADA BUSINESS CORPORATIONS ACT, as the Board may, by
        resolution, delegate to the Audit Committee from time to time.

4.      AUTHORITY

        The Audit Committee shall have the authority:

a)      For the purpose of performing their duties, of inspecting all of the
        books and records of the Corporation and its affiliates and of
        discussing such accounts and records and any matters relating to the
        financial position or condition of the Corporation with the officers and
        internal (if any) and external auditors of the Corporation and its
        affiliates;

                                       40
<PAGE>

b)      To engage independent counsel and other advisors as it determines
        necessary to carry out its duties;

c)      To set and pay the compensation for any advisors employed by the Audit
        Committee, including without limitation, compensation to any public
        accounting firm engaged for the purpose of preparing or issuing and
        audit report or performing other audit, review or attest services for
        the Corporation;

d)      To set and pay the ordinary administrative expenses of the Audit
        Committee that are necessary or appropriate in carrying out its duties;
        and

e)      To communicate directly with the internal (if any) and external
        auditors.

5.      PROCEEDINGS

        The following shall apply to the proceedings of the Audit Committee.

a)      The business of the Audit Committee shall be transacted either at
        meetings thereof or by conference telephone or other communications
        facilities that permit all persons participating in the meeting to hear
        each other, or by resolution in writing. All questions at a meeting
        shall be decided in accordance with the vote of a majority of those
        present and the Chairman of the meeting shall not have a second or
        casting vote.

b)      A resolution in writing signed by all members of the Audit Committee
        entitled to vote on that resolution at a meeting of the Audit Committee
        shall be as valid as if it had been passed at a duly called and
        constituted meeting. Such resolutions in writing may be in one or more
        counterparts, all of which, when taken together, shall be deemed to
        constitute one resolution.

c)      The Audit Committee Chairman shall periodically report to the Board of
        Directors on the activities of the Audit Committee.

d)      The external auditor of the Corporation shall, at the expense of the
        Corporation, be entitled to attend and be heard at or may be invited to
        any meeting of the Audit Committee.

e)      The external auditor and senior management shall have the opportunity or
        may be invited to meet separately with the Audit Committee.

f)      The minutes of the proceedings of the Audit Committee and any
        resolutions in writing shall be kept in a book provided for that purpose
        which shall always be open for inspection by any director of the
        Corporation.


                                       41
<PAGE>

                                GLOSSARY OF TERMS

The following is a glossary of certain terms used in this document.

"BALL MILL" means a rotary grinding mill which uses metal balls to reduce ore to
a fine particle size.

"BRECCIA" means a textural description of a rock which is composed of angular
rock fragments.

"CATALYST" is a substance which, when present in small amounts, modifies the
rate or efficiency of a chemical reaction of other substances without being
consumed in the process.

"CATALYTIC CONVERTER" means a pollution control device, fitted to the exhaust
systems of vehicles powered by internal combustion engines. This device contains
platinum, palladium and sometimes rhodium, which assist in the conversion
(oxidation) of carbon monoxide and hydrocarbons into carbon dioxide and water.

"CONCENTRATE" means a product containing the valuable metal and from which most
of the waste material in the ore has been removed.

"CONCENTRATOR OR PROCESSING PLANT" means a plant or facility which processes ore
brought from the mine and removes most of the valuable mineral or metal from the
ore and discards most of the barren portion of the ore as tailings.

"CUT-OFF GRADE" is determined by the following formula parameters: estimates
over the relevant period of mining costs, ore treatment costs, general and
administrative costs, refining costs, royalty expenses, process and refining
recovery rates and PGMs prices.

"DIAMOND DRILLING" means rotary drilling using diamond impregnated bits to
produce a solid continuous core sample of the underlying rock.

"FEASIBILITY STUDY" means a program to establish whether a mineral deposit can
be successfully mined considering technical and economic parameters.

"FLOTATION CIRCUIT" means a series of flotation tanks or cells which recover
metal by means of flotation. Flotation is a milling process by which some
mineral particles are induced to float and others to sink. The valuable minerals
are thereby concentrated and separated from the worthless waste.

"GABBRO" means a dark, course-grained intrusive rock usually composed of angular
rock fragments.

"GABBRONORITE" means a type of gabbro which contains the mafic minerals
clinopyroxene (Ca-Mg rich silicate) and orthopyroxene (Mg-rich silicate).

"GRADE" means a particular quantity of ore or mineral relative to other
constituents, in a specified quantity of rock.

"HEAD GRADE" means the quantity of valuable mineral or metal contained in each
ton of ore delivered to the concentrator.

"INDICATED MINERAL RESOURCE" means that part of a mineral resource for which
quantity, grade or quality, densities, shape and physical characteristics, can
be estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support mine planning and
evaluation of the economic viability of the deposit. The estimate is based on
detailed and reliable

                                       42
<PAGE>

exploration and testing information gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes that are
spaced closely enough for geological and grade continuity to be reasonably
assumed. See "Note to U.S. Shareholders".

"INFERRED MINERAL RESOURCE" means that part of a mineral resource for which
quantity and grade or quality can be estimated on the basis of geological
evidence and limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on limited information
and sampling gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes. See "Note to U.S.
Shareholders".

"INTRUSION/INTRUSIVE" means a mass of igneous rock that was injected and
solidified within the earth's crust.

"IRIDIUM" means hard, brittle, silver-white platinum group metal used for pen
tips, jewelery, resistance wiring, electronic contacts and electrodes.

"MAFIC ROCKS" means rocks composed of 40 to 90% mafic minerals. (PGM deposits
are usually hosted in mafic and untramafic intrusive rocks).

"MEASURED MINERAL RESOURCE" means that part of a mineral resource for which
quantity, grade or quality, densities, shape, physical characteristics are so
well established that they can be estimated with confidence sufficient to allow
the appropriate application of technical and economic parameters, to support
production planning and evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration, sampling and testing
information gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes that are spaced closely
enough to confirm both geological and grade continuity. See "Note to U.S.
Shareholders".

"MINERAL RESERVE" means the economically mineable part of a measured or
indicated resource demonstrated by at least a preliminary feasibility study.
This study must include adequate information on mining, processing,
metallurgical, economic and other relevant factors that demonstrate, at the time
of reporting, that economic extraction can be justified. A mineral reserve
includes diluting materials and allowances for losses that may occur when the
material is mined. See "Note to U.S. Shareholders".

"MINERAL RESOURCE" means a concentration or occurrence of natural, solid,
inorganic or fossilized organic material in or on the Earth's crust in such form
and quantity and of such a grade or quality that it has reasonable prospects for
economic extraction. The location, quantity, grade, geological characteristics
and continuity of a mineral resource are known, estimated or interpreted from
specific geological evidence and knowledge. See "Note to U.S. Shareholders".

"MINERALIZATION" means the concentration of metals and their chemical compounds
within a body of rock.

"NET SMELTER RETURN ROYALTY" means a royalty based on the gross proceeds
received from the sale of minerals less the cost of smelting, refining, freight
and other related costs.

"OPEN PIT" means a mine worked at the surface.

"ORE" means a mixture of valuable and worthless minerals from which at least one
of the minerals can be mined and processed at an economic profit.

"OSMIUM" means a rare, hard white metal.

                                       43
<PAGE>

"OUNCE" or "OZ." is a unit of weight measure. In the precious metals industry a
troy ounce is equal to one-twelfth part of a pound or 31.103 grams.

"OVERBURDEN" means unconsolidated material that overlies a mineral deposit and
must be removed prior to mining.

"PALLADIUM" means a white, ductile, malleable precious metal that does not
tarnish at normal temperatures. Wide applications range from electronics,
dentistry, jewelry and automotive catalytic converters.

"PGMS" means "PLATINUM GROUP METALS". Platinum Group Metals include platinum,
palladium, rhodium, ruthenium, osmium and iridium. All PGMs have catalytic
qualities and resist corrosion and are chemically inert over a wide range of
temperatures.

"PROBABLE MINERAL RESERVE" means the economically mineable part of an indicated,
and in some circumstances a measured mineral resource demonstrated by at least a
preliminary feasibility study. This study must include adequate information on
mining, processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction can be
justified. See "Note to U.S. Shareholders".

"PROFESSIONAL ASSOCIATION", for the purposes of the definition of a qualified
person below, means a self-regulatory organization of engineers, geoscientists
or both engineers and geoscientists that

        (a)     has been given authority or recognition by statute;

        (b)     admits members primarily on the basis of their academic
                qualifications and experience;

        (c)     requires compliance with the professional standards of
                competence and ethics established by the organization; and

        (d)     has disciplinary powers, including the power to suspend or expel
                a member.

"PROVEN MINERAL RESERVE" means the economically mineable part of a measured
mineral resource demonstrated by at least a preliminary feasibility study. This
study must include adequate information on mining, processing, metallurgical,
economic, and other relevant factors that demonstrate, at the time of reporting,
that economic extraction is justified. See "Note to U.S. Shareholders".

"PYROXENITE" means an ultramafic rock which predominantly contains the mafic
mineral pyroxene (Mg-rich silicate).

"QUALIFIED PERSON" means an individual who

        (a)     is an engineer or geoscientist with at least five years of
                experience in mineral exploration, mine development or operation
                or mineral project assessment, or any combination of these;

        (b)     has experience relevant to the subject matter of the mineral
                project and the technical report; and

        (c)     is a member in good standing of a professional association.

                                       44
<PAGE>

"RHODIUM" means a silver-white metal of the platinum family resistant to
tarnishing and used as an electrode posit, or alloyed with platinum to
manufacture thermocouples.

"SAG MILL" means a semi-autogenous grinding mill. A SAG mill is one in which
steel balls are added to the mill charge to supplement the grinding capabilities
of the larger pieces of ore.

"STRIP RATIO" means the ratio of units of waste material required to be removed
to facilitate the mining of one unit of economic material.

"TAILINGS" means that portion of the ore which remains after the valuable
minerals have been extracted.

"TAILINGS IMPOUNDMENT" means a containment area constructed to hold tailings.

"TON" means a short ton, equivalent to 2,000 pounds.

"TONNE" means a metric measure consisting of 2,204.6 pounds or 1,000 kilograms.

"ULTRAMAFIC" means rocks composed of greater than 90% mafic minerals. (PGM
deposits are usually hosted in mafic and ultramafic intrusive rocks.)

"WASTE" means barren rock in a mine, or mineralized material that is too low in
grade to be mined and milled at a profit.




                                       45

<PAGE>

                                                                  DOCUMENT NO. 2

<PAGE>


MANAGEMENT'S RESPONSIBILITY


The accompanying consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted accounting principles
(GAAP). Financial statements include certain amounts based on estimates and
judgments. When an alternative method exists under Canadian GAAP, management has
chosen that which it deems most appropriate in the circumstances in order to
ensure that the consolidated financial statements are presented fairly, in all
material respects, in accordance with Canadian generally accepted accounting
principles. The financial information presented elsewhere in the annual report
is consistent with that in the consolidated financial statements.

The Company maintains adequate systems of internal accounting and administrative
controls. Such systems are designed to provide reasonable assurance that
transactions are properly authorized and recorded, the Company's assets are
appropriately accounted for and adequately safeguarded and that the financial
information is relevant and reliable.

The Board of Directors of the Company is responsible for ensuring that
management fulfills its responsibilities for financial reporting, and is
ultimately responsible for reviewing and approving the consolidated financial
statements and the accompanying management's discussion and analysis. The Board
of Directors carries out this responsibility principally through its Audit
Committee.

The Audit Committee is appointed by the Board of Directors and all of its
members are non-management directors. The Audit Committee meets periodically
with management and the external auditors to discuss internal controls, auditing
matters and financial reporting issues, and to satisfy itself that each party is
properly discharging its responsibilities. The Audit Committee also reviews the
consolidated financial statements, management's discussion and analysis, the
external auditors' report, examines the fees and expenses for audit services,
and considers the engagement or reappointment of the external auditors. The
Audit Committee reports its findings to the Board of Directors for its
consideration when approving the consolidated financial statements for issuance
to the shareholders. KPMG LLP, the external auditors, have full and free access
to the Audit Committee.


/s/ James D. Excell                             /s/ Ian M. MacNeily
-------------------                             -------------------
James D. Excell                                 Ian M. MacNeily
PRESIDENT AND                                   VICE PRESIDENT, FINANCE AND
CHIEF EXECUTIVE OFFICER                         CHIEF FINANCIAL OFFICER


Toronto, Canada
March 29, 2006

<PAGE>


AUDITORS' REPORT


TO THE SHAREHOLDERS OF NORTH AMERICAN PALLADIUM LTD.

We have audited the consolidated balance sheets of North American Palladium Ltd.
as at December 31, 2005 and 2004 and the consolidated statements of earnings
(loss) and deficit and cash flows for each of the years in the two-year period
ended December 31, 2005. 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. 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, 2005
and 2004 and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2005, in accordance with
Canadian generally accepted accounting principles.

The consolidated financial statements as at and for the year ended December 31,
2003, were audited by another firm of chartered accountants, who expressed an
opinion without reservation on those statements in their auditors' report dated
February 20, 2004.




/s/ KPMG LLP
------------
KPMG LLP
CHARTERED ACCOUNTANTS


Toronto, Canada,
March 29, 2006.


North American Palladium Ltd.                                               {13}

<PAGE>


Auditors' Report

TO THE SHAREHOLDERS OF NORTH AMERICAN PALLADIUM LTD.

We have audited the consolidated statements of earnings and deficit and cash
flows of North American Palladium Ltd. for the year ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 2003 in accordance with Canadian generally accepted
accounting principles.

/s/ Ernst & Young LLP

Chartered Accountants


Toronto, Canada
February 20, 2004


<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)


----------------------------------------------------------------------------------------------------------
December 31                                                                       2005              2004
----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                  $    15,031       $    65,755
Concentrate awaiting settlement, net - NOTE 3                                   37,453            68,259
Inventories - NOTE 4                                                             8,599             8,954
Crushed and broken ore stockpiles                                                7,267             9,256
Other assets                                                                     2,344             1,615
----------------------------------------------------------------------------------------------------------
                                                                                70,694           153,839

Mining interests, net - NOTE 5                                                 159,523           136,009
Mine restoration deposit - NOTE 7                                                7,247             5,973
Crushed and broken ore stockpiles                                                  239             1,379
Deferred financing costs - NOTE 6                                                  654               697
----------------------------------------------------------------------------------------------------------
                                                                           $   238,357       $   297,897
----------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities                                   $    16,392       $    20,231
Taxes payable                                                                      386               521
Current portion of obligations under capital leases - NOTE 8                     2,323             1,481
Current portion of long-term debt - NOTE 9                                       6,664             6,815
Kaiser-Francis credit facility - NOTE 10                                        13,407                --
----------------------------------------------------------------------------------------------------------
                                                                                39,172            29,048

Mine restoration obligation                                                      7,894             7,592
Obligations under capital leases - NOTE 8                                        6,218             3,182
Long-term debt - NOTE 9                                                         17,660            24,851
Kaiser-Francis credit facility - NOTE 10                                            --            13,842
Future mining tax liability - NOTE 17                                              202             1,549
----------------------------------------------------------------------------------------------------------
                                                                                71,146            80,064

SHAREHOLDERS' EQUITY
Capital stock - NOTE 12                                                        325,592           322,904
Contributed surplus                                                                874               573
Deficit                                                                       (159,255)         (105,644)
----------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                     167,211           217,833
----------------------------------------------------------------------------------------------------------
                                                                           $   238,357       $   297,897
==========================================================================================================
</TABLE>
Commitments - NOTES 1, 14 Contingencies - NOTE 16, Subsequent Events - NOTE 20
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


On behalf of the Board:


/s/ Andre J. Douchane                           /s/ Greg Van Staveren
---------------------                           ---------------------
Andre J. Douchane                               Greg Van Staveren
DIRECTOR                                        DIRECTOR

{14}

<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND DEFICIT
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)


----------------------------------------------------------------------------------------------------------------------
Year ended December 31                                                        2005            2004              2003
----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>              <C>
REVENUE FROM METAL SALES - NOTE 15                                     $    92,606     $   185,204      $    192,141

OPERATING EXPENSES
Production costs, excluding amortization and asset retirement costs         99,322         102,936           103,654
Smelter treatment, refining and freight costs - NOTE 1                      15,777          23,602            19,048
Insurance recovery - NOTE 16(b)                                                 --          (7,148)               --
Amortization - NOTE 5(b)                                                    18,340          36,710            28,590
Administrative                                                               6,616           5,557             3,788
Exploration expense                                                          7,927           2,479             1,942
Loss on disposal of capital assets                                              --             277               788
Asset retirement costs                                                         476             905               921
Write-down of mining interests - NOTE 5(c)                                      --         108,000             2,315
----------------------------------------------------------------------------------------------------------------------
Total operating expenses                                                   148,458         273,318           161,046
----------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM MINING OPERATIONS                                       (55,852)        (88,114)           31,095
----------------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSES)
Interest on long-term debt - NOTES 9 AND 10                                 (2,509)         (1,756)           (3,158)
Write off of deferred financing costs                                           --            (788)               --
Foreign exchange gain (loss)                                                   268            (340)           18,138
Interest income                                                              1,641             494               474
Derivative income                                                               --             213                --
Interest expense                                                               (41)            (29)              (17)
----------------------------------------------------------------------------------------------------------------------
Total other income (expenses)                                                 (641)         (2,206)           15,437
----------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) BEFORE INCOME TAXES                                          (56,493)        (90,320)           46,532
Provision for income taxes - NOTE 17                                        (2,882)          1,790             8,154
----------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS) FOR THE YEAR                                             (53,611)        (92,110)           38,378
Deficit, beginning of year                                                (105,644)        (13,534)          (51,912)
----------------------------------------------------------------------------------------------------------------------
Deficit, end of year                                                   $  (159,255)    $  (105,644)     $    (13,534)
----------------------------------------------------------------------------------------------------------------------


Net income (loss) per share
        Basic                                                          $     (1.03)    $     (1.79)     $      0.76
----------------------------------------------------------------------------------------------------------------------
        Diluted - NOTE 12(b)                                           $     (1.03)    $     (1.79)     $      0.75
----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding - basic                   52,006,548      51,379,542       50,763,566
----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding - diluted - NOTE 12(b)    52,006,548      51,379,542       50,832,904
======================================================================================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

North American Palladium Ltd.                                               {15}

<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

----------------------------------------------------------------------------------------------------------------------
Year ended December 31                                                        2005            2004              2003
----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>              <C>
CASH PROVIDED BY (USED IN)
OPERATIONS
Net income (loss) for the year                                         $   (53,611)    $   (92,110)     $     38,378
Operating items not involving cash
   Future income tax expense - NOTE 17                                      (3,286)            643             7,392
   Amortization                                                             18,340          36,710            28,590
   Accrued interest on mine closure deposit                                    (74)            (40)              (63)
   Unrealized foreign exchange gain                                         (1,433)         (3,687)          (18,519)
   Provision for asset retirement costs                                        476             905               921
   Write off of deferred financing costs                                        --             788                --
   Write-down of mining interests                                               --         108,000             2,315
   Loss on disposal of capital assets                                           --             277               788
   Stock based compensation                                                    588             573                --
----------------------------------------------------------------------------------------------------------------------
                                                                           (39,000)         52,059            59,802
Changes in non-cash working capital - NOTE 18(a)                            29,587          29,731            (5,235)
----------------------------------------------------------------------------------------------------------------------
                                                                            (9,413)         81,790            54,567
----------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of long-term debt                                                 (6,798)        (44,290)          (45,134)
Issuance of common shares                                                    4,340           9,415             1,506
Mine restoration deposit                                                    (1,200)         (1,200)           (1,200)
Repayment of obligations under capital leases                               (2,253)         (1,751)           (1,046)
Deferred financing costs                                                        --            (504)               --
Increase in long-term debt                                                      --          36,809                --
----------------------------------------------------------------------------------------------------------------------
                                                                            (5,911)         (1,521)          (45,874)
----------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to mining interests                                              (35,415)        (28,728)          (11,707)
Proceeds on disposal of mining interests                                        15             451               114
Restricted cash equivalents                                                     --           1,813             3,314
----------------------------------------------------------------------------------------------------------------------
                                                                           (35,400)        (26,464)           (8,279)
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                           (50,724)         53,805               414
Cash and cash equivalents, beginning of year                                65,755          11,950            11,536
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                 $    15,031     $    65,755      $     11,950
======================================================================================================================
Supplementary information - NOTE 18(b) AND (c)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>


{16}

<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)


NOTE 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. Its principal asset is the Lac des Iles mine located
in the Thunder Bay District in Ontario. The Company also has a number of base
metal exploration projects located in Canada and an advanced PGM exploration
project located in Finland in which it is earning an interest in under an
executed letter of intent to form a joint venture agreement. The Company
operates in one operating segment, mining.

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, platinum) and by-product metals (gold, copper and
nickel) fluctuate widely and are affected by numerous factors beyond the
Company's control.

During 2000, the Company entered into a long-term palladium sales agreement with
a major automotive manufacturer for the sale of all of its palladium production
for deliveries of metal up to June 30, 2005 (note 14(a)). Commencing with the
first quarter of 2005, palladium production which was available for delivery
after June 30, 2005 was not subject to the palladium sales agreement under which
the Company's palladium sales had a floor price of US$325 per ounce. In 2005,
the Company's revenue included only 6,403 ounces of palladium sold under this
palladium sales contract floor price. For palladium delivered after June 30,
2005, the Company entered into palladium sales contracts that provided for the
delivery of palladium at the monthly average price in the month prior to
delivery based on the London PM fix price or spot price on the day of delivery.
These contracts expired on December 31, 2005 and currently the Company is
selling its monthly palladium production into the spot market.

ARCTIC PLATINUM PROJECT
On October 18, 2005, the Company announced that it had entered into a letter of
intent to form a Joint Venture with Gold Fields Limited to further explore and
develop a mining operation at the Arctic Platinum Project ("APP") located in
Finland. The APP includes several advanced stage PGM Projects. The Company has
been granted an option to earn up to a 50% interest and, in certain
circumstances, a 60% interest in APP. The Company will become the project
operator. In order to exercise the option, the Company must spend US$12.5
million, complete a feasibility study and make a production decision as well as
paying Gold Fields US$36 million for a 50% interest or US$45 million for a 60%
interest through the issuance of the Company's common shares on or before August
31, 2008. The transaction is subject to certain conditions including the
executing of a formal agreement and receipt of all necessary regulatory
approvals, which is expected during the first quarter of 2006.

NOTE 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 and, except as discussed in
note 19, conform in all material respects with United States generally accepted
accounting principles. The more significant accounting policies are summarized
as follows:


North American Palladium Ltd.                                               {17}

<PAGE>

BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Lac des Iles Mines Ltd. ("LDI"). All intercompany
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. The affect of hedging instruments is also
included in revenue. Concentrate awaiting settlement at the smelter is net of
estimated treatment and refining costs.

Although the Company sold its metals during 2005 to a limited number of
customers, the Company is not economically dependent upon them as there are
other markets throughout the world for the Company's metals.

DERIVATIVE FINANCIAL INSTRUMENTS
From time to time the Company enters into forward commodity sales contracts to
hedge the affect of changes in the prices of metals it produces on the Company's
revenues (note 14 (c)). Gains and losses on derivative financial instruments
used to mitigate metal price risk are recognized in revenue from metal sales
(note 15) over the term of the hedging contract.

From time to time the Company enters into foreign exchange forward sales
contracts to manage the affect of fluctuations in the value of committed US
dollar denominated revenues. For those forward exchange contracts designated by
the Company as hedges, the related revenue is recorded at the forward contract
rate. Those foreign exchange forward sales contracts not designated by the
Company as hedges are marked-to-market as at the balance sheet date and the
resultant gains or losses are included in earnings for the period. The fair
value of the Company's derivative financial instruments is determined based on
forward prices supplied by knowledgeable, independent third parties.

The Company has from time to time used electricity swap contracts to hedge the
affects of price fluctuations in its electricity purchase requirements in
Ontario. The net swap settlements are recognized in the same period as the hedge
transaction.

The Company does not hold financial instruments or derivative financial
instruments for trading purposes. Cash flows arising in respect of hedging
transactions are recognized under cash flows from operating activities.

The Company does not consider the credit risk associated with its financial
instruments to be significant. Foreign currency contracts and commodity hedge
contracts are maintained with high-quality counter-parties, and the Company does
not anticipate that any counter-party will fail to meet its obligations.

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 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 replacement cost.


{18}

<PAGE>

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 for certain equipment 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.
During 2005, $307 (2004 - $36) interest was capitalized.

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. Initial
feasibility studies are optimized once drilling has confirmed the shape, grades
and continuity of the mineralization. Upon commencement of the commercial
production of a development project these costs are amortized using the
unit-of-production method over the proven and probable reserves. Deferred
expenditures, net of salvage values, relating to a property that is abandoned or
considered uneconomic for the foreseeable future, are written off.

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 recoverability whenever indicators of
impairment exist. 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 affect on the
Company's ability to recover the carrying amounts of its long-lived assets
resulting in possible additional impairment charges (note 5(c)).

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


North American Palladium Ltd.                                               {19}

<PAGE>

are estimated to be approximately $7.8 million, the majority of which is to be
paid at the end of the mine life, which is currently expected to end in 2012. A
credit adjusted risk-free rate of 4% 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.

The following is a reconciliation of the changes in the asset retirement
obligation during the year:

--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------

Balance, beginning of the year                     $     7,592    $     7,300
Accretion expense                                          302            292
Balance at the end of year                         $     7,894    $     7,592
--------------------------------------------------------------------------------

STOCK-BASED COMPENSATION PLANS
The Company has a stock-based compensation plan which is described in note 12(a)
and a Restricted Share Unit Plan ("RSU") which is described in note 12(c).
Effective January 1, 2003, the Company prospectively changed its method of
accounting for stock options from the intrinsic value method to one that
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 at the rate
of exchange prevailing at the consolidated balance sheet dates, non-monetary
assets and liabilities at the rate in effect at the date the transaction
occurred and revenues and expenses 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 earnings (loss) and deficit.

INCOME TAXES
The Company follows the asset and liability method of tax allocation for
accounting for income taxes. Under the asset and liability method of tax
allocation, 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 affect
on future tax liabilities and assets of a change in tax rates is recognized in
income in the period that the change occurs.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on account, demand deposits and
short-term guaranteed investments with original maturities of three months or
less and are stated at cost.

DEFERRED FINANCING COSTS
Deferred financing costs represents the costs of negotiating and securing the
Company's long-term debt facilities and share issue costs in connection with the
filing of a shelf prospectus. The amortization of the costs of securing the
long-term debt facilities is included in amortization expense on a straight-line
basis over the term of the debt facility. The share issue costs will be offset
against share proceeds at the time an equity financing is completed and if an
equity financing is not completed before the expiration of the shelf prospectus,
the share issue costs will be written off.


{20}

<PAGE>

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing earnings (loss)
for the period by the weighted average number of common shares outstanding
during the reporting period. Diluted earnings (loss) per common share is
computed similarly to basic earnings (loss) per common share, except that the
weighted average number of shares outstanding is increased to include additional
shares from the assumed exercise of stock options, if dilutive. The number of
additional shares is calculated by assuming that outstanding stock options 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 weighted
average number of shares outstanding for diluted earnings (loss) per common
share when the affect would be anti-dilutive.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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
that also affect the reported amounts of revenues and expenses during the
reported year. Actual results could differ from those estimates.

NOTE 3.
CONCENTRATE AWAITING SETTLEMENT
Concentrate awaiting settlement is comprised of:

--------------------------------------------------------------------------------
                                                          2005            2004
--------------------------------------------------------------------------------

Concentrate awaiting settlement, gross             $    41,819    $     76,491
Refining and smelter treatment charges                  (4,366)         (8,232)
Concentrate awaiting settlement, net               $    37,453    $     68,259
--------------------------------------------------------------------------------

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 June and December, 2005, including 65,905 ounces of palladium
(2004 - including 114,186 ounces of palladium).

All of the concentrate awaiting settlement is from two domestic customers at
December 31, 2005 (2004 - two domestic customers). No reserves for doubtful
accounts have been established. In the opinion of management, full realization
will occur on all such receivables.

NOTE 4.
INVENTORIES
Inventories consist of the following:

--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------

Concentrate                                        $       502    $       587
Supplies                                                 8,097          8,367
--------------------------------------------------------------------------------
                                                   $     8,599    $     8,954
--------------------------------------------------------------------------------


North American Palladium Ltd.                                               {21}

<PAGE>

NOTE 5.
MINING INTERESTS
(a) Mining interests are comprised of the following:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                               2005               2004
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                <C>
Plant and equipment, at cost                                                          $     355,532      $     344,412
Underground mine development, at cost                                                        30,784              6,920
Accumulated amortization and impairment charges                                             249,043            232,339
-------------------------------------------------------------------------------------------------------------------------
                                                                                            137,273            118,993
-------------------------------------------------------------------------------------------------------------------------

Equipment under capital lease, at cost                                                       14,076              7,493
Accumulated amortization and impairment charges                                               2,245              2,030
-------------------------------------------------------------------------------------------------------------------------
                                                                                             11,831              5,463
-------------------------------------------------------------------------------------------------------------------------

Mining leases and claims, royalty interest, and development, at cost                         82,561             82,537
Accumulated amortization and impairment charges                                              72,142             70,984
-------------------------------------------------------------------------------------------------------------------------
                                                                                             10,419             11,553
-------------------------------------------------------------------------------------------------------------------------

Mining interests, net                                                                 $     159,523      $     136,009
-------------------------------------------------------------------------------------------------------------------------

(b) Amortization expense is comprised of:

-------------------------------------------------------------------------------------------------------------------------
                                                                            2005               2004               2003
-------------------------------------------------------------------------------------------------------------------------

Capital assets (including plant and equipment, and equipment
  under capital lease)                                               $    17,384      $      32,149      $      24,746
Mining leases and claims, royalty interest, exploration and
  development costs                                                          913              4,147              3,054
Deferred financing costs                                                      43                414                790
-------------------------------------------------------------------------------------------------------------------------
                                                                     $    18,340      $      36,710      $      28,590
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(c)  During the fourth quarters of 2005 and 2004, the Company tested its
     long-lived assets, including tangible mineral interests and plant and
     equipment for impairment, and reflected an impairment charge of nil in 2005
     and a charge of $108,000 in 2004. The impairment charge recorded in 2004
     related to the Lac des Iles mine and has been recorded in mining interests
     on the consolidated balance sheet.

     The impairment charge recorded in 2004 was substantially the result of the
     continued low prices for palladium, the primary metal produced at LDI.
     During 2004, the Company continued to negotiate potential new sales
     contracts to replace the long-term palladium sales agreement with a major
     manufacturer for the sale of all of its palladium production for deliveries
     of metal up to June 30, 2005. As the Company was unable to secure a
     replacement sales contract, the Company reassessed the expected long-term
     average sales price of palladium in an impairment test which was completed
     in the fourth quarter of 2004.

     In accordance with the Company's accounting policy, the Company recorded
     the 2004 impairment as the difference between the carrying value of the
     mineral interests and the fair value of the mineral interests measured
     using a discounted cash flow analysis over the remaining life of LDI. The
     key assumptions utilized by the Company in its life-of-mine discounted cash
     flow model were: expected long-term average price of palladium of $275 per
     ounce, gold of $375 per ounce; platinum of $650 per ounce, copper of $0.90
     per pound and nickel of $3.50 per pound; life-of-mine discount rate of 5%;
     expected additional capital expenditures of $56,000; and an average
     life-of-mine foreign exchange rate of CDN$1.34 to US$1.00.


{22}

<PAGE>

     In 2003, the Company recorded a write-down of $2,315 pertaining to the
     retirement of a damaged primary crusher.

(d)  Mining interests in the amount of $30,784 (2004 - $6,920) are not subject
     to amortization as these costs relate to underground mine development work
     currently in progress.

NOTE 6.
DEFERRED FINANCING COSTS

--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------
Financing costs                                   $        716    $       716
Accumulated amortization                                    62             19
--------------------------------------------------------------------------------
                                                  $        654    $       697
--------------------------------------------------------------------------------

NOTE 7.
MINE RESTORATION 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. The mine closure plan calls for a total amount of $7,802 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, 2005, the Company
had $7,247 (2004 - $5,973) on deposit with the Ministry including accrued
interest of $317. 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.

NOTE 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:

--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------

2005                                              $         --    $     1,632
2006                                                     2,709          1,223
2007                                                     2,380            951
2008                                                     2,138            763
2009                                                     1,761            452
2010                                                       472             --
--------------------------------------------------------------------------------
Total minimum lease payments                             9,460          5,021

Amounts representing interest at
  rates from 3.5% - 8.3%                                   919            358
--------------------------------------------------------------------------------
Present value of minimum lease payments                  8,541          4,663
Less current portion                                     2,323          1,481
--------------------------------------------------------------------------------
Long-term liabilities                             $      6,218    $     3,182
--------------------------------------------------------------------------------


North American Palladium Ltd.                                               {23}

<PAGE>

NOTE 9.
LONG-TERM DEBT

--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------

Equipment finance company credit facility
  consisting of Cdn$8,000 and US$14,000
  (2004 - Cdn$10,000 and US$18,000) loans         $     24,324    $    31,666
  Less: current portion                                  6,664          6,815
--------------------------------------------------------------------------------
                                                  $     17,660    $    24,851
--------------------------------------------------------------------------------

On June 28, 2004, the Company entered into a US$20,000 and Cdn$10,000 senior
credit facility with an equipment finance company. The US$20,000 credit facility
is repayable in equal quarterly installments of US$1,000 commencing on September
30, 2004 and has a final maturity on June 30, 2009. The Cdn$10,000 credit
facility is repayable in equal quarterly installments of Cdn$500 commencing
February 24, 2005 and has a final maturity of November 24, 2009. The credit
facility has an interest margin of 2.5% over 30 day LIBOR rate. 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.

NOTE 10.
KAISER-FRANCIS CREDIT FACILITY
At the time the Company entered into the new senior credit facility, certain
terms under the US$20,000 non-revolving credit facility with Kaiser-Francis Oil
Company ("Kaiser-Francis") were amended. The final maturity date was extended to
June 30, 2006 from May 31, 2005 and the interest rate was reset based upon the
30 day LIBOR rate plus 2.50%. Amounts not drawn under the loan are subject to a
standby fee payable quarterly at 0.125% per annum. The Company paid on closing a
commitment fee of 0.75% of the total commitment (US$150). In connection with the
loan, the Company has granted Kaiser-Francis a security interest in all of the
assets of the Company and a pledge of the LDI shares. The security interests in
all of the assets of the Company are subordinated to the security interests of
the senior credit facility (note 9). As at December 31, 2005, the outstanding
loan was US$11,500 (2004 - US$11,500).

The loan agreement includes customary representations, warranties and covenants,
including a covenant by the Company not to pay dividends or make any other
payment to shareholders while the loan is outstanding. The loan agreement also
provides for customary events of default.

NOTE 11.
RELATED PARTY TRANSACTIONS AND COMMITMENTS
Kaiser-Francis is the controlling shareholder of the Company. In addition to the
related party transactions with Kaiser-Francis disclosed in note 10, the Company
has the following related party transaction:

In 2005, a director of the Company received a fee of $218 (2004 - $581, 2003 -
$400) in connection with the negotiations related to the Palladium Sales
Contract entered into by the Company in 2000 (note 14(a)). The contract was
negotiated at arms-length prior to such person becoming a director of the
Company. The Palladium Sales Contract expired on June 30, 2005, and no further
fees are payable in connection with this contract.


{24}

<PAGE>

NOTE 12.
CAPITAL STOCK
The authorized capital stock of the Company consists of an unlimited number of
common shares and an unlimited number of special shares, issuable in series,
including 10,000,000 Series "A" preferred shares.

(a)  Common Shares:

     The changes in issued common share capital for the year are summarized
     below:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                         2005                              2004
                                            ------------------------------------------------------------------
                                                  SHARES         AMOUNT             Shares             Amount
--------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>                <C>                <C>
Common shares issued, beginning of year       51,709,075     $  322,904         50,895,338         $  313,489
Common shares issued:
Pursuant to stock options exercised              118,759            697            459,380              4,637
Fair value of stock options exercised                 --            287                 --                 --
To Group Registered Retirement Savings
  Plan participants                              156,383          1,140             84,357                956
Private placement (net)                          213,000          2,503            270,000              3,822
Tax affect of flow-through shares                     --         (1,939)                --                 --
--------------------------------------------------------------------------------------------------------------
Common shares issued, end of year             52,197,217     $  325,592         51,709,075         $  322,904
--------------------------------------------------------------------------------------------------------------
</TABLE>

GROUP REGISTERED RETIREMENT SAVINGS PLAN
The Company has a group registered retirement savings plan, which all employees
can participate in at their option. The Company is required to make matching
contributions to a maximum of $5 per employee per annum. The Company's matching
contribution can be made either in cash or treasury shares of the Company.
During 2005 the Company contributed 156,383 shares with a fair value of $1,140
(2004 - 84,357 shares with a fair value of $956).

PRIVATE PLACEMENT
On April 21, 2005, the Company completed a private placement of 213,000
flow-through common shares. The gross proceeds of $2,503 must be spent on
Canadian exploration expenses as defined in Section 66 of the Income Tax Act
(Canada) by December 31, 2006.

On July 9, 2004, the Company completed a private placement of 270,000
flow-through common shares. The gross proceeds of $4,050 were spent on Canadian
exploration expenses prior to December 31, 2005.

Under the terms of the flow-through common share issues, the tax attributes of
the related expenditures will be renounced to investors and the share capital
will be reduced and future income tax liabilities will be increased by the
estimated income tax benefits renounced by the Company to the investors. The tax
attributes for the 2003 and 2004 expenditures were renounced in 2005.

CORPORATE STOCK OPTION PLAN
The Company has adopted, and the shareholders have approved, the ongoing 1995
Corporate Stock Option Plan (the "Plan"), under which eligible directors,
officers, employees and consultants of the Company are entitled to receive
options to acquire common shares. The Plan is administered by the Compensation
Committee, a subcommittee of the Board of Directors, which determines the number
of options to be issued, the exercise price (which may not be lower than the
closing price of the Company's common shares on the Toronto Stock Exchange
("TSX") on the day prior to


North American Palladium Ltd.                                               {25}

<PAGE>

the date of grant) and expiration dates of each option, the extent to which each
option is exercisable provided that the term of an option shall not exceed 10
years from the date of grant, as well as establishing a limited time period
should the optionee cease to be an "Eligible Person" as set forth in the
conditions of the Plan. Options granted since December, 2001, vest as to 1/3 on
each of the first three anniversary dates of the date of grant. Prior to
December, 2001, options granted under the Plan vested as to 1/3 on the date of
grant and 1/3 on each of the first two anniversary dates.

The maximum number of common shares subject to option shall not exceed
2,700,000, being approximately 5.2% of the outstanding common shares or such
greater number of common shares as may be determined by the Board of Directors,
and approved if required, by the shareholders of the Company and by any relevant
stock exchange or other regulatory authority. As at December 31, 2005, 461,308
options were available to be granted under the Plan.

The following summary sets out the activity in outstanding common share purchase
options:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                        2005                                    2004
                                      -----------------------------------------------------------------------------
                                                             WEIGHTED-AVERAGE                    Weighted-Average
                                                SHARES         EXERCISE PRICE        Shares        Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>                <C>              <C>
Outstanding, beginning of year                 825,610         $         9.88     1,038,857        $         9.24
Granted                                        100,000                   9.75       316,800                 11.87
Exercised                                     (118,759)                  5.87      (459,380)                10.10
Cancelled                                     (243,213)                 10.51       (70,667)                 7.96
-------------------------------------------------------------------------------------------------------------------
Outstanding, end of year                       563,638         $        10.43       825,610        $         9.88
-------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year             265,571         $        11.09       389,265        $        10.08
-------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about the Company's stock options
outstanding at December 31, 2005:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                             Options Outstanding             Options Exercisable
Exercise Price                    Expiry Dates              at December 31, 2005            at December 31, 2005
-------------------------------------------------------------------------------------------------------------------
<S>                          <C>                                    <C>                              <C>
$       3.42                     April 7, 2011                            45,088                          18,921
$       3.70                     April 1, 2011                            16,700                              33
$       4.75                 February 27, 2011                             7,500                           5,000
$       7.89                 December 12, 2009                            22,500                          22,500
$       8.83                 December 14, 2013                            10,000                              --
$       9.67                 November 30, 2013                            40,000                              --
$       9.76                  November 1, 2012                            15,000                           5,000
$      10.00                 November 27, 2013                            50,000                              --
$      10.01                      June 6, 2010                            48,000                          48,000
$      11.90                     June 23, 2012                           214,100                          71,367
$      13.55                      June 6, 2006                            76,250                          76,250
$      14.44                 February 13, 2006                            18,500                          18,500
-------------------------------------------------------------------------------------------------------------------
                                                                         563,638                         265,571
-------------------------------------------------------------------------------------------------------------------
</TABLE>


{26}

<PAGE>

(a)  Prior to January 1, 2003, the Company did not recognize compensation
     expense for stock options. Had compensation expense for options granted in
     2002 under the Company's stock option plan been determined based on the
     fair value at the grant dates consistent with the fair value based method
     of accounting for stock-based compensation, the Company's net income and
     earnings per share would have been reduced to the pro forma amounts
     indicated below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                        2005               2004              2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>              <C>
Net income (loss) as reported                                   $    (53,611)       $   (92,110)     $     38,378
Stock-based compensation                                                  --                160               160
-------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss)                                     $    (53,611)       $   (92,270)     $     38,218
-------------------------------------------------------------------------------------------------------------------
Pro forma basic and diluted income (loss) per share             $      (1.03)       $     (1.80)     $       0.75
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     The fair value of options granted in 2005 has been estimated at the date of
     grant using the Black-Scholes option pricing model with the following
     weighted average assumptions: risk free interest rate of 3.78 % (2004
     -3.7%; 2003 - 4%), expected dividend yield of nil (2004 - nil; 2003 - nil),
     expected volatility of 55% (2004 -55%; 2003 - 48%), and expected option
     life of 4 years (2004 - 4 years; 2003 - 3 years). The estimated fair value
     of the options is expensed over the option's vesting period, which is 3
     years. The weighted average fair market value of options granted in 2005
     was $4.51 (2004 - $5.43; 2003 - $2.13). Compensation expense related to the
     Plan for the year ended December 31, 2005 was $582 (2004 - $573; 2003 -
     $nil).

(b)  Reconciliation of the diluted number of shares outstanding:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                        2005               2004              2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>              <C>
Net income (loss) available to common shareholders              $    (53,611)       $   (92,110)     $     38,378
-------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding                     52,006,548         51,379,542        50,763,566
Effect of dilutive securities stock options                               --                 --            69,338
-------------------------------------------------------------------------------------------------------------------
Weighted average diluted number of shares outstanding             52,006,548         51,379,542        50,832,904
-------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share                             $      (1.03)       $     (1.79)     $       0.75
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     The effect of stock options has not been included in the determination of
     diluted loss per share for 2005 or 2004, because to do so would be
     antidilutive.

(c)  Other Stock-Based Compensation - Restricted Share Unit Plan
     Effective December 14, 2005, the Company adopted a RSU plan under which
     eligible directors, officers and key employees of the Company are entitled
     to receive awards of restricted share units. Each restricted share unit
     means a unit equivalent in value to the fair market value of a common share
     of the Company on the date of the award. The RSU plan is administered by
     the Board of Directors, which will determine, after considering
     recommendations made by the Compensation Committee, the number and timing
     of restricted share units to be awarded and their vesting periods, not to
     exceed three years. On each relevant full vesting date of awarded
     restricted share units, the participant will receive a lump sum cash
     payment equivalent to the market value of the equivalent number of common
     shares. The value of each award is charged to compensation expense over the
     period of vesting and a corresponding liability is established on the
     balance sheet. The compensation expense and liability are adjusted to
     reflect the changes in market value of the equivalent number of common
     shares during the vesting period.

     As at December 31, 2005, 25,000 restricted share units have been granted
     and are outstanding at a weighted average value of $9.64 per unit and $6
     has been charged to compensation expense for the year ended December 31,
     2005. The market value of the restricted share units as at December 31,
     2005 is $9.81 per unit.


North American Palladium Ltd.                                               {27}

<PAGE>

NOTE 13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
     The carrying amounts of all financial instruments on the balance sheet
     approximate fair value due to their short-term maturities or variable
     interest rates. 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. As at December 31, 2005, the unrealized loss on the fair value
     of the Company's outstanding forward commodity sales contracts was US$240
     (2004 - US$624).

NOTE 14.
COMMITMENTS

(A)  PALLADIUM SALES CONTRACT
     In 2000, the Company entered into a contract (the "Palladium Sales
     Contract") whereby the Company hedged the price of 100% of its palladium
     production. Under the Palladium Sales Contract the sales price was based on
     the monthly average spot price for palladium, as determined by the London
     Metal Exchange P.M. Fix, for the month prior to the month that the metal
     was received by the customer, but the price was no less than US$325 per
     ounce for 100% of the metal received and no more than US$550 per ounce for
     50% of the metal received. For the remaining 50% of the metal received,
     there was no maximum price. The Palladium Sales Contract's term commenced
     effective July 1, 2000 and expired on June 30, 2005, and was not renewed.

(B)  SHERIDAN PLATINUM GROUP OF COMPANIES ("SPG") COMMITMENT
     The Company is required to pay a royalty to SPG equal to 5% of the Net Cash
     Proceeds, as defined in the agreement from mining operations until the
     expiration of the Lac des Iles leases.

(C)  COPPER SWAP CONTRACTS
     As at December 31, 2005, the Company had swap contracts for 330,693 lbs. of
     copper at an average fixed price of US$1.29 per lb. maturing at various
     dates through March, 2006. The fair value of these swap contracts was below
     their carrying value by $240 as at December 31, 2005.

(D)  OPERATING LEASES AND OTHER PURCHASE OBLIGATIONS
     As at December 31, 2005, the Company had outstanding operating lease
     commitments and other purchase obligations of $1,053 and $5,175,
     respectively (2004 - $1,818 and $4,222) all of which had maturities of less
     than four years.

(E)  FLOW-THROUGH SHARES
     To satisfy its commitments pursuant to the issuance of flow-through shares,
     the Company is required to expense $2,503 of qualifying Canadian
     exploration expenses as defined in the Income Tax Act (Canada) by December
     31, 2006.


{28}

<PAGE>

NOTE 15.
REVENUE FROM METAL SALES

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                        2005               2004              2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>              <C>
Palladium (a)                                                   $     38,621        $   112,879      $    109,443
Palladium forward contracts (b)                                           --                 --            20,437
Adjustments for mark-to-market                                         4,777                909            (1,163)
-------------------------------------------------------------------------------------------------------------------
                                                                                         25,735            26,010
Nickel                                                                16,041             25,735            26,010
Platinum                                                              17,144             21,476            18,847
Gold                                                                   6,568             10,665             9,826
Copper                                                                 8,284             10,945             7,722
Other metals                                                           1,171              2,595             1,019
-------------------------------------------------------------------------------------------------------------------
                                                                $     92,606        $   185,204      $    192,141
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  Palladium revenues include the effect of the Palladium Sales Contract (note
     14(a)).

(b)  The Company entered into palladium forward contracts in 2001 for 100,800
     ounces of palladium at an average price of US$922 per ounce, the revenue
     from which was fully recognized by June 30, 2003. The effect of palladium
     forward contracts represents the difference between the fixed price
     realized under the palladium forward contracts and the palladium price at
     the time of revenue recognition.

NOTE 16.
CONTINGENCIES
(a)  The Company is a defendant in an action by another mining company claiming
     damages in the amount of $20,000, punitive and exemplary damages in the
     amount of $5,000 and a declaration that the Company held the Compania
     Minerales de Copan, S.A. de C.V. ("Copan") property in trust for the
     plaintiff. This action relates to a predecessor company of the Company and
     has been inactive for some time. No provision has been made in the accounts
     as at December 31, 2005 or 2004 for any possible loss from this action as
     management of the Company believes it has a valid defense and it has been
     indemnified by SPG regarding this action. In addition, certain stock
     options are claimed to be held by employees of Copan. These options have
     not been included in note 12(a) as the Company has been indemnified by SPG
     regarding such matters.

(b)  The Company has 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 an interim payment against this
     claim and has included this amount in income from mining operations. The
     Company is pursuing the balance of its insurance claim and will record any
     additional recovery in income if and when received.

(c)  From time to time, the Company is involved in other litigation,
     investigations, or proceedings related to claims arising out of its
     operations in the ordinary course of business. In the opinion of the
     Company's management, these claims and lawsuits in the aggregate, even if
     adversely settled, will not have a material affect on the consolidated
     financial statements.


North American Palladium Ltd.                                               {29}

<PAGE>

NOTE 17.
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 38%.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                          2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Income tax provision using statutory income tax rates               $  (21,524)     $   (35,406)     $    18,147
Increase (decrease) in taxes resulting from:
  Write down of mining interests not tax benefited                          --           35,694               --
  Resource allowance                                                     3,354            6,439           (3,342)
  Non-taxable portion of capital gains                                    (162)              (2)          (2,908)
  Losses not tax benefited                                              16,556              389               --
  Increase in valuation allowance on assets previously recognized           --            2,525               --
  Changes in income tax rates and laws                                      --               --           (3,546)
  Benefit of income tax losses not previously recognized                    --             (437)            (811)
  Federal large corporations taxes                                         339              465              837
  Ontario mining taxes                                                  (1,654)          (7,979)             983
  Other                                                                    209              102           (1,206)
-------------------------------------------------------------------------------------------------------------------
Income tax expense                                                  $   (2,882)     $     1,790      $     8,154
-------------------------------------------------------------------------------------------------------------------
</TABLE>

The details of the Company's income tax expense are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                          2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Current income tax expense:
  Income taxes                                                      $      (15)     $       102      $      (550)
  Mining taxes                                                              80              580              475
  Federal large corporations tax                                           339              465              837
-------------------------------------------------------------------------------------------------------------------
                                                                    $      404      $     1,147      $       762
-------------------------------------------------------------------------------------------------------------------

Future income tax expense:
  Income taxes                                                          (1,552)           9,202            6,884
  Mining taxes                                                          (1,734)          (8,559)             508
-------------------------------------------------------------------------------------------------------------------
                                                                    $   (3,286)     $       643      $     7,392
-------------------------------------------------------------------------------------------------------------------
                                                                    $   (2,882)     $     1,790      $     8,154
-------------------------------------------------------------------------------------------------------------------
</TABLE>


{30}

<PAGE>

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


--------------------------------------------------------------------------------
                                                          2005           2004
--------------------------------------------------------------------------------

Current future income tax asset:
  Cash and cash equivalents                        $       526      $     389
  Valuation allowance                                     (346)          (274)
--------------------------------------------------------------------------------
  Net future income tax asset, current             $       180      $     115
--------------------------------------------------------------------------------

Long-term future income tax asset:
  Mining interests, net                                 42,238         34,090
  Deferred financing costs                                  26             43
  Mine restoration obligation                            2,780          2,251

  Future mining tax liability                               45            343
  Other assets                                             213            235
  Non-capital loss carry-forwards                       10,413             --
  Ontario corporate minimum tax credits                    327            327
  Capital loss carry-forwards                              927            927
  Valuation allowance                                  (55,565)       (37,059)
--------------------------------------------------------------------------------
  Net future income tax asset, long-term                 1,404          1,157
--------------------------------------------------------------------------------

Future income tax liability, long-term:
  Long-term debt                                          (441)          (420)
  Kaiser-Francis credit facility                          (859)          (737)
  Obligations under capital leases                        (104)            --
--------------------------------------------------------------------------------
                                                        (1,404)        (1,157)
--------------------------------------------------------------------------------
  Net future income tax asset, long-term           $        --      $      --
--------------------------------------------------------------------------------

Current future tax liability:
  Other assets                                              --            (61)
  Deferred financing costs                                (180)           (54)
--------------------------------------------------------------------------------
  Future tax liability, current                    $      (180)     $    (115)
--------------------------------------------------------------------------------

Future mining tax liability, long-term:
  Mining interests, net                            $      (202)     $  (1,549)
--------------------------------------------------------------------------------
  Future mining tax liability, long-term           $      (202)     $  (1,549)
--------------------------------------------------------------------------------

At December 31, 2005, the Company had capital loss carry-forwards of
approximately $5,100 (2004 - $5,100), which are available to reduce capital
gains of future years.

At December 31, 2005, the Company and its subsidiary had noncapital losses of
approximately $31,300 (2004 - nil), which expire in 2015. None of the benefit
from these losses has been recognized in the financial statements.


North American Palladium Ltd.                                               {31}

<PAGE>

NOTE 18.
STATEMENT OF CASH FLOWS
(a)  The net changes in non-cash working capital balances related to operations
     are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                          2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Cash provided by (used in):
Concentrate awaiting settlement                                     $   30,806      $    26,351      $    (9,298)
Inventories and stockpiles                                               3,484            1,786            3,179
Accounts receivable and other assets                                      (729)            (229)             296
Accounts payable and accrued liabilities                                (3,839)           2,613            1,218
Taxes payable                                                             (135)            (790)            (630)
-------------------------------------------------------------------------------------------------------------------
                                                                    $   29,587      $    29,731      $    (5,235)
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(b)  Cash outflows during the year for interest and income taxes were as
     follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                          2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Interest paid on long-term debt                                     $    2,509      $     1,929      $     3,433
Income and mining taxes paid                                        $      699      $       436      $        --
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(c)  During 2005, mining interests were acquired at an aggregate cost of $41,998
     (2004 - $33,058; 2003 -$12,687) of which $6,583 (2004 - $4,330; 2003 -
     $980) were acquired by means of capital leases.

NOTE 19.
RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES

These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles, which differ in some respects
from those in the United States. The following table presents amounts that would
have been reported had the Company's consolidated financial statements been
prepared on the basis of accounting principles generally accepted in the United
States ("U.S. GAAP"):

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(Canadian funds in thousands of dollars,
except share and per share amounts)                                       2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Statements of earnings (loss) and deficit:
  Net income (loss) under Canadian GAAP                             $  (53,611)     $   (92,110)     $    38,378
  Capitalized interest (a)                                               1,089
  Amortization of capitalized interest (a)                                 (62)             (95)             (39)
  Concentrates and crushed and broken ore stockpiles (b)                (2,944)             295           (1,702)
  Derivative financial instruments (c)                                     475            2,041           (2,867)
  Tax liability on flow through financing (e)                           (1,116)              --               --
  Tax effect of differences                                                 --               --            1,459
-------------------------------------------------------------------------------------------------------------------
  Net income (loss) and comprehensive income under U.S. GAAP
    before cumulative impact of change in accounting policy         $  (56,169)     $   (89,869)     $    35,229
  Cumulative impact of change in accounting policy for asset
    retirement obligations (f)                                              --               --             (375)
-------------------------------------------------------------------------------------------------------------------
  Net income (loss) and comprehensive income under U.S. GAAP        $  (56,169)     $   (89,869)     $    34,854
  Basic and diluted income (loss) per share under U.S. GAAP
    before cumulative impact of change in accounting policy         $    (1.08)     $     (1.75)     $      0.69
-------------------------------------------------------------------------------------------------------------------
  Basic and diluted income (loss) per share under U.S. GAAP         $    (1.08)     $     (1.75)     $      0.69
-------------------------------------------------------------------------------------------------------------------
</TABLE>


{32}

<PAGE>

BALANCE SHEETS:

--------------------------------------------------------------------------------
                                                           2005           2004
--------------------------------------------------------------------------------
Current assets (b) and (c)                           $   70,417    $   155,842
Mining interests (a)                                 $  161,108    $   136,567
Crushed and broken ore stockpiles - long-term (b)    $      239    $     1,568
Capital stock (d)                                    $  331,137    $   329,002
Deficit                                              $ (165,161)   $  (108,992)
--------------------------------------------------------------------------------

(a)  The Company capitalizes interest on major projects where direct
     indebtedness has occurred. Under U.S. GAAP, interest is capitalized as it
     arises from indebtedness incurred, directly or indirectly, to finance
     development and construction activities on assets that are not yet subject
     to amortization or depletion. For the current year interest of $1,089, has
     been capitalized related to the investment in the underground development,
     which is expected to reach commercial production during the first quarter
     of 2006. The current year amortization adjustment relates to the
     amortization of amounts previously capitalized under U.S. GAAP.

(b)  The cost of the Company's concentrate inventory and crushed and broken ore
     stockpiles is determined using the average production costs including an
     allocation of the amortization of production related assets. At December
     31, 2005, the Company recorded its concentrate inventory and crushed and
     broken ore stockpiles at their net realizable value and consequently any
     allocation of amortization of production related assets to these
     inventories was written off immediately. Amounts deducted under U.S. GAAP
     for the year ended December 31, 2005, include amounts previously included
     in the cost of these inventories under U.S. GAAP for periods prior to
     January 1, 2004, the date the Company commenced including amortization in
     the cost of inventories under Canadian GAAP.

(c)  Under U.S. GAAP, the Company has chosen not to designate its derivative
     financial instruments as hedging instruments and thus they are carried on
     the balance sheet at their fair value and any changes in fair value are
     being recorded to earnings in the period of the change.

(d)  Canadian GAAP allows for the reduction of the stated capital of outstanding
     common shares with a corresponding offset to deficit. This
     reclassification, which the Company made in 1991, is not permitted by U.S.
     GAAP and would result in an increase in both capital stock and deficit of
     $6,098 at December 31, 2005 and 2004.

(e)  Under U.S. GAAP, the renunciation of tax deductions to holders of
     flow-through shares is treated as a future tax expense rather than as a
     cost of issuing equity as required by Canadian GAAP.

(f)  Effective January 1, 2003, the Company adopted FAS 143, "Accounting for
     Asset Retirement Obligations" which requires that the fair value of
     liabilities for asset retirement obligations be recognized in the period in
     which they occur. A corresponding increase to the carrying amount of the
     related asset is generally recorded and depreciated over the life of the
     asset. The amount of the liability is subject to re-measurement at each
     reporting period. The cumulative effect of the change through January 1,
     2003 was to increase mining assets by $6,489, increase the mine closure
     obligation to $7,019 and a one time after-tax charge to net earnings of
     $375.

(g)  U.S. GAAP requires that amounts totaling 5% or more of accounts payable and
     accrued liabilities be identified separately. As at December 31, 2005,
     these amounts were as follows: trade payables and accruals - $14,606 (2004
     - $15,235); other accruals - $1,786 (2004 - $4,996).


North American Palladium Ltd.                                               {33}

<PAGE>

(h)  U.S. GAAP does not permit the disclosure of subtotal of cash from
     operations before changes in non-cash working capital.

(i)  Effective January 1, 2003, the Company prospectively adopted FAS No. 123
     "Accounting for Stock-based Compensation" as amended by FAS No. 148,
     whereby compensation expense for options granted after January 1, 2003 is
     measured at fair value at the grant date using the Black-Scholes valuation
     model and recognized over the remaining vesting period of the options
     granted. Previously, the Company, for purposes of preparing financial
     information in accordance with U.S. GAAP, accounted for its stock-based
     compensation plan under Accounting Principles Board Opinion 25 "Accounting
     for Stock Issued to Employees" (APB No. 25) which did not result in the
     recognition of compensation expense. Under FAS no. 148, pro forma
     disclosure is still required for those options granted prior to January 1,
     2003, as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                          2005             2004             2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>              <C>
Net income (loss) as reported under U.S. GAAP                       $  (56,169)     $   (89,869)     $     34,854
Stock-based compensation                                                    --             (168)            1,000
-------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) under U.S. GAAP                         $  (56,169)     $   (90,037)     $     35,854
-------------------------------------------------------------------------------------------------------------------
Pro forma basic and diluted income (loss) per share                 $    (1.08)     $     (1.75)     $       0.71
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(j)  Impact of recently issued United States accounting pronouncements.
     In November, 2004, the Financial Accounting Standards Board ("FASB") issued
     FAS No. 151, which clarifies the accounting for abnormal amounts of idle
     facility expense, freight, handling costs and wasted material as they
     relate to inventory costing and requires these items to be recognized as
     current period expenses. Additionally, the allocation of fixed production
     overheads to the cost of inventory should be based on the normal capacity
     of the production facilities. FAS No. 151 is effective for inventory costs
     incurred during fiscal years beginning after June 15, 2005. The Company
     does not believe that the application of FAS No. 151 will have a material
     impact on the consolidated statements under U.S. GAAP.

     In December, 2004, FAS No. 123 (revised) "Share-Based Payment", was issued.
     This statement requires an entity to recognize the grant date fair value of
     stock options and other equity-based compensation issued to employees. In
     the income statement, FAS No. 123 (revised) eliminates the ability to
     account for share-based compensation transactions using the intrinsic value
     method in APB No. 25. The Company will adopt FAS No. 123 (revised) in 2006
     in accordance with the appropriate transition options and adoption period
     prescribed in the statement. The Company does not expect that the adoption
     of this standard will have a material impact on the consolidated financial
     statements.

     In May, 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
     Corrections, a Replacement of APB Opinion No. 20 and FAS No. 3". FAS No.
     154 requires retrospective application of changes in accounting principle
     to prior periods' financial statements, rather than the use of the
     cumulative effect of a change in accounting principle, unless
     impracticable. If impracticable to determine the impact on prior periods,
     then the new accounting principle should be applied to the balances of
     assets and liabilities as of the beginning of the earliest period for which
     retrospective application is practicable, with a corresponding adjustment
     to equity, unless impracticable for all periods presented, in which case
     prospective treatment should be applied. FAS No. 154 applies to all
     voluntary changes in accounting principle as well as those required by the
     issuance of new accounting pronouncements if no specific transition
     guidance is provided. FAS No. 154 does not change the previously issued
     guidance for reporting a change in accounting estimate or correction of an
     error. FAS No. 154 becomes effective for accounting changes and corrections
     of errors made in fiscal years


{34}

<PAGE>

     beginning after December 15, 2005. The Company does not expect this policy
     to have a material impact on the consolidated financial statements. The
     Company will adopt FAS No. 154 on January 1, 2006.

     In March, 2005, the FASB ratified EITF 04-06 "Accounting for Stripping
     Costs in the Mining Industry". The consensus reached is that stripping
     costs incurred during the production phase of a mine are variable
     production costs that should be included in the costs of the inventory
     produced during the period that the stripping costs are incurred. EITF
     04-06 is effective for the first reporting period in fiscal years beginning
     after December 15, 2005, with early adoption permitted. The Company will
     adopt EITF 04-06 on January 1, 2006. The Company believes the adoption of
     this standard will not have a material impact on the consolidated financial
     statements.

NOTE 20.
SUBSEQUENT EVENTS
On March 3, 2006, the Company announced it had entered into an arranged private
placement of convertible notes and common share purchase warrants. This offering
consists of up to US$58.5 million aggregate principal amount of convertible
notes of which US$13.5 million will be used to repay the outstanding credit
facility with Kaiser-Francis. The notes are convertible into common shares of
the Company at a premium of 13% to the market price of the common shares on the
date of closing. The notes will bear an interest rate of 6.5% per annum. Upon
issuing the notes to the investors, the Company shall issue common share
purchase warrants equal to 50% of the common shares issuable if such convertible
notes were converted by the holders immediately following the closing of the
transaction. The holder of the warrants shall be entitled for a period of four
years following the date of issuance, to purchase one common share for each
warrant held at an exercise price equal to 125 percent of the market price. The
convertible notes will contain customary covenants, including certain
restrictions on the Company incurring debt, obligations or involving the payment
of money in excess of certain restricted amounts. The convertible notes will
contain full-ratchet anti-dilution protection, subject to the restrictions
pursuant to the rules of the TSX. The transaction closed on March 29, 2006, with
the initial offering providing US $35 million in gross proceeds to the Company.

NOTE 21.
COMPARATIVE FIGURES
Certain of the prior years' figures have been reclassified to conform to the
presentation adopted in 2005.

North American Palladium Ltd.                                               {35}

<PAGE>

Forward-Looking Statements - Certain statements included in this 2006 annual
report, financial statements for the year ended December 31, 2005 and
management's discussion and analysis are forward-looking statements which are
made pursuant to the "safe harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995. They include estimates and statements
that describe the Company's future plans, objectives and goals, including words
to the effect that the Company or management expects a stated condition or
result to occur. When used herein, words such as "continue", "proposed",
"appears", "indicating", "predicting", "estimate", "expect", "plan", "should",
"may", "will" and other similar expressions are intended to identify
forward-looking statements. In particular statements relating to the estimated
future metal prices, cash flows, expenses, capital costs, ore production, mine
life, financing, construction and commissioning, and exploration prospects are
forward-looking statements. Such forward-looking statements involve inherent
risks and uncertainties and are subject to factors, many of which are beyond our
control, that may cause actual results or performance to differ materially from
those currently anticipated in such statements. Important factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include among others: metal price volatility,
changes in the US/CDN dollar exchange rate, economic and political events
affecting metal supply and demand, fluctuations in ore grade, ore tonnes milled,
geological, technical, mining or processing problems, recoverability of metals,
future profitability and production, availability of financing on acceptable
terms and unexpected problems during the development, construction and start-up
phases of the underground mine. For a more comprehensive review of risk factors,
please refer to the Company's most recent Annual Report under "Management's
Discussion and Analysis of Financial Results" and Annual Information Form under
"Risk Factors" on file with the U.S. Securities and Exchange Commission and
Canada provincial securities regulatory authorities. The Company disclaims any
obligation to update or revise any forward-looking statements whether as a
result of new information, events or otherwise. Readers are cautioned not to put
undue reliance on these forward-looking statements.

<PAGE>

                                                                  DOCUMENT NO. 3


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS


The following is Management's Discussion and Analysis of the financial condition
and results of operations to enable a reader to assess material changes in
financial condition and results of operations for the year ended December 31,
2005, compared to those of the respective periods in prior years. This
Management's Discussion and Analysis has been prepared as of March 29, 2006.
This Management's Discussion and Analysis is intended to supplement and
complement the audited consolidated financial statements and notes thereto for
the year ended December 31, 2005 (collectively, the "Financial Statements"). You
are encouraged to review the Financial Statements in conjunction with your
review of this Management's Discussion and Analysis.

OVERVIEW AND STRATEGIC ACTIVITIES
North American Palladium Ltd. (the "Company") operates the Lac des Iles mine
located 85 km northwest of Thunder Bay, Ontario. The mine is Canada's only
primary producer of platinum group metals ("PGM") and contains one of the
largest open pit bulk mineable palladium reserves in the world. In addition to
palladium, the Company earns substantial revenue from by-product nickel,
platinum, gold and copper. Palladium's primary use continues to be in the auto
industry where it is an important component in controlling exhaust emissions as
mandated by stringent hydrocarbon emission standards for cars, light trucks and
SUVs, particularly in the United States, Europe and Japan. In addition,
palladium is consumed in the dental, electronics, jewellery and chemical
sectors.

Based on a positive feasibility study, the Company commenced the development of
an underground mine at its Lac des Iles operation in the second quarter of 2004.
The underground mine development is focused on the Main High Grade Zone below
the ultimate open pit depth. Capital costs for the underground development are
estimated at $40 million for direct and indirect costs and working capital.
Mining equipment accounts for an additional $12 million of capital costs and the
Company is financing this equipment through a vendor lease program. By the end
of the year 2005, the main ramp had been advanced 1,111 metres. The underground
development is progressing toward production of 2,000 tonnes per day at the end
of the first quarter of 2006.

At Lac des Iles, the Company continues to receive positive results from the
ongoing exploration program on the deep Offset High Grade Zone. The 2005
exploration program successfully extended the zone to a total of 600 metres
along strike and 700 metres down dip. An updated resource estimate was completed
in February, 2006, by Roscoe Postle Associates Inc. indicating an inferred
mineral resource of 2,455,000 ounces of palladium at a cutoff grade of 3.2 grams
per tonne.

On October 18, 2005, the Company announced that it had entered into a letter of
intent to form a Joint Venture with Gold Fields Limited to further explore and
develop a mining operation at the Arctic Platinum Project ("APP") located in
Finland. The APP includes several advanced stage PGM Projects. The Company has
been granted an option to earn up to a 50% and, in certain circumstances, a 60%
interest in APP and will become the project operator. In order to exercise the
option, the Company must spend US$12.5 million, complete a feasibility study and
make a production decision as well as paying Gold Fields US$36 million or US$45
million to earn a 50% or 60% interest, respectively, through the issuance of the
Company's common shares (approximately 7.3 million shares or 9.2 million shares
as the case may be) on or before August 31, 2008. The transaction is subject to
certain conditions including the executing of a formal agreement and receipt of
all necessary regulatory approvals, which is expected during the first quarter
of 2006.

The Company announced on September 29, 2005, that the shareholders of URSA Major
Minerals Incorporated ("URSA") approved the option and joint venture agreement
on the Shakespeare nickel, copper, PGM property located near Sudbury, Ontario
and the Company paid $1.5 million to URSA to complete its option earn-in. The
property is proposed to be a 60% North American Palladium, 40% URSA Joint
Venture with the Company becoming the operator upon successful completion of a
viable feasibility study and arranging financing for commercial production. In
January, 2006, URSA announced the results of the feasibility study and will now
proceed with permitting of the project and reviewing development options to
further improve the economics of the project.

In prior periods the Company hedged the price of its palladium production under
a contract with a major automotive manufacturer (the "Palladium Sales
Contract"). The hedge price was based on the monthly average spot price for
palladium with a floor price of US$325 per ounce for 100% of production. The
Palladium Sales Contract for


North American Palladium Ltd.                                                {1}

<PAGE>

physical deliveries expired on June 30, 2005. For 2005 all palladium production
(except 6,403 ounces delivered under the Palladium Sales Contract) was delivered
into either a sales contract with a leading catalytic converter manufacturer or
a global commodity dealer. These contracts provided for pricing at either the
monthly average price in the month prior to delivery of palladium or the spot
price on the day of delivery. Without the benefit of the floor price under the
Palladium Sales Contract, the Company's profitability in 2005 was significantly
impacted by the depressed spot palladium price evident for much of the year.

The Company does expect the recent improvement in the palladium price to
continue (4th quarter 2005 average price of US$239, in comparison to US$189 per
ounce average during the first three quarters of the year), and is optimistic
that the fundamentals for palladium demand will improve with the expected
draw-down of surplus inventories held by automotive manufacturers; the wide
market price spread between platinum and palladium and increasing demand for
palladium jewellery, all of which should accelerate consumption of palladium.

In 2004, the Company commenced a hedging strategy for a portion of its
by-product metal production that it implements from time to time. The objective
of this hedging strategy is to reduce the variability of cash flow associated
with revenues derived from the sale of nickel, platinum, gold and copper. The
Company uses fixed-price forward platinum contracts and cash settled gold,
nickel and copper price swap contracts to insulate its earnings and cash flows
from changes in these metal prices. These contracts allow the Company to sell
its platinum production to credit-worthy metal dealers at a fixed price under
the forward sales contract. In the case of gold, nickel and copper, the Company
receives a fixed metal price in exchange for paying the floating price received
under its physical sales contracts to acceptable counterparts under the metal
price swap contracts. In October, 2005, the Company made a decision to unwind
various by-product metal hedges: namely, platinum, gold, and nickel through the
buy-back of forward sales or cash settled metal price swaps. This decision was
taken to reposition the Company's exposure to its by-product metals in advance
of the expected increase in metal production at Lac des Iles in 2006.

<TABLE>
<CAPTION>

PRODUCTION STATISTICS

-------------------------------------------------------------------------------------------------------------
Year Ended December 31                                   2005                   2004                  2003
-------------------------------------------------------------------------------------------------------------
<S>                                         <C>                    <C>                   <C>
Palladium (oz)                                        177,167                308,931               288,703
Payable palladium (oz)                                161,469                281,743               261,247
Platinum (oz)                                          18,833                 25,128                23,742
Gold (oz)                                              14,308                 25,679                23,536
Copper (lbs)                                        5,514,670              7,836,183             7,142,674
Nickel (lbs)                                        2,353,227              4,320,970             4,070,785
-------------------------------------------------------------------------------------------------------------
Ore tonnes milled                                   4,780,599              5,298,544             5,159,730
Ore tonnes mined                                    3,705,555              4,574,134             4,396,847
Waste tonnes mined                                 11,619,658             12,275,889            10,164,806
-------------------------------------------------------------------------------------------------------------
Waste strip ratio                                      3.14:1                 2.68:1                2.31:1
-------------------------------------------------------------------------------------------------------------

SELECTED ANNUAL INFORMATION

-------------------------------------------------------------------------------------------------------------
(thousands of dollars)                                   2005                   2004                  2003
-------------------------------------------------------------------------------------------------------------

Revenue from metal sales                       $       92,606         $      185,204         $      192,141
Net income (loss)                                     (53,611)               (92,110)                38,378
Basic net income (loss) per share (dollars)             (1.03)                 (1.79)                  0.76
Cash dividends declared                                   NIL                    nil                    nil
Operating cash flow                                   (39,000)                52,059                 59,802
Total Assets                                          238,357                297,897                393,692
Long-term debt, including current portion      $       46,272         $       50,171         $       58,761
-------------------------------------------------------------------------------------------------------------
</TABLE>

{2}

<PAGE>
<TABLE>
<CAPTION>

SUMMARY OF QUARTERLY RESULTS

-------------------------------------------------------------------------------------------------------------
                                             2004                                    2005
-------------------------------------------------------------------------------------------------------------
(thousands of dollars except
per share amounts)                      Q1      Q2        Q3       Q4       Q1       Q2       Q3        Q4
-------------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>      <C>   <C>        <C>     <C>      <C>       <C>
Revenue from metal sales            53,156   51,712   45,154   35,182   26,206   23,544   17,247    25,609
Net income (loss)                    6,121    2,834    6,598 (107,663)  (7,736) (15,228) (19,610)  (11,037)
Net income (loss) per share           0.11     0.06     0.13    (2.09)   (0.15)   (0.29)   (0.37)    (0.21)
Fully diluted net income (loss)
  per share                           0.11     0.06     0.13    (2.09)   (0.15)   (0.29)   (0.38)    (0.21)
-------------------------------------------------------------------------------------------------------------
</TABLE>

RESULTS OF OPERATIONS
The Company generated gross revenue from metal sales of $92.6 million in 2005,
compared to $185.2 million in 2004. Revenue in 2005 from the sale of palladium
before the mark-to-market effect of price changes was $38.6 million compared to
$112.9 million in 2004. This revenue decrease was due to a 43% decrease in
palladium production with similar volume impact from by-product metals. In
addition, without the benefit of the floor price under the Palladium Sales
Contract (US$325), production for 2005 was sold into the spot market (except for
6,403 ounces which was recognized at the floor price) and revenue was
significantly impacted by the depressed palladium prices evident for much of the
year, as well as further weakening in the US dollar. For 2005, revenue from
palladium sales was realized at an average of US$230 per ounce in comparison to
2004 in which all of the revenue was at the floor price under the Palladium
Sales Contract. In both 2005 and 2004, improved by-product metal pricing offset
some of the negative impact experienced from lower spot palladium prices.

Palladium production sold to third-party smelters takes up to six months from
time of receipt at the smelter to settle the final delivery and pricing. The
price adjustment relating to palladium settled and awaiting settlement for 2005
was a positive adjustment of $4.8 million compared to a small positive
adjustment of $0.9 million in 2004. Revenue from by-product metal sales
decreased by 31% to $49.2 million in 2005 compared to $71.4 million in 2004
reflecting decreased production, partially offset by improved price levels for
nickel, gold and copper. Realized prices for by-product metals in 2005 compared
to 2004, were platinum at US$815 per ounce (2004 - US$831), nickel at US$6.60
per lb (2004 - US$6.11), gold at US$442 (2004 - US$417) and copper at US$1.50
per lb (2004 - US$1.24) partially offsetting the higher realized metal prices
was a strengthening Canadian dollar, which averaged US$0.83 in 2005, compared to
US$0.77 in 2004.

During 2005, the mill processed 4,780,599 tonnes of ore or an average of 13,098
tonnes per day compared to 5,298,544 tonnes of ore or an average of 14,477
tonnes per day in 2004. In 2005, the average palladium head grade was 1.66 grams
per tonne compared to 2.41 grams per tonne in 2004. For 2005, the palladium
recoveries were 69.6% as compared to 75.2% in 2004. The lower recovery in 2005
was a result of the lower head grade, as well as a change in the mineralogy of
the ore reflective of the open pit mining plan. Also contributing to the lower
recoveries were intermittent operating difficulties at the mill during the year.
While palladium production decreased 43% from the prior year, a drop in
concentrate grade resulted in an increase in the ratio of tonnes of concentrate
treated, resulting in higher charges for smelter treatment, refining and freight
costs as compared to 2004. As a result of ongoing flotation circuit
improvements, enhanced preventative maintenance programs, changes made to the
mill flow sheet, reagent mix and the quality of recycled water, recoveries and
concentrate grade improved in the fourth quarter and are anticipated to continue
to improve in 2006.

Total production costs for 2005 of $99.3 million were comparable to $102.9
million in the prior year, however, unit cash costs to produce palladium
(production costs including overhead and smelter treatment, refining and freight
costs), net of by-product metal revenues and royalties, increased to US$359 per
ounce in 2005 compared to US$159 per ounce in 2004. The increase in unit cash
costs was caused by a combination of lower ore grades and


North American Palladium Ltd.                                                {3}

<PAGE>

metal recoveries, which led to a 43% decrease in palladium production to 177,167
ounces in 2005 compared to 308,931 ounces in 2004, combined with a 31% decrease
in revenue from by-product metals. In addition, throughout the year there was an
increased waste to ore strip ratio of 3.14:1 in 2005, compared to 2.68:1 in 2004
and continuing pressure on costs, particularly steel, tires, power, diesel fuel
and ongoing mill repairs.

In 2004, the Company included in income from mining operations $7.1 million it
received as an interim payment against a claim filed with its insurance company
relating to losses incurred in connection with the failure of the primary
crusher in 2002. There were no further settlements received in 2005, however the
Company is continuing to pursue the balance of the insurance claim and will
record any additional recovery in income if and when received.

The Company reviews and evaluates its long-lived assets for impairment when
events or changes in circumstances indicate that the related carrying amounts
may not be recoverable. Impairment is considered to exist if total estimated
future undiscounted cash flows are less than the carrying amount of the asset.
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 future capital and reclamation expenditures, all based on
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.

The Company performed an impairment test as at December 31, 2005, and decided
that a write-down of mining assets was unnecessary. The impairment test
completed during the fourth quarter of 2004, resulted in a non-cash charge of
$108.0 million (net of tax - $103.4 million or $2.01 per share) to write down
the carrying value of mining interests. An assessment of impairment was required
as a result of changes in key assumptions (refer to note 5 to the Financial
Statements) which were primarily affected by a continuation of low palladium
prices and a weakening US dollar.

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.

Non-cash amortization decreased to $18.3 million in 2005 compared to $36.7
million in 2004. The lower amortization amount is attributable to the 43%
decrease in palladium production and the reduction in the unit of production
amortization rate to approximately C$68 per palladium ounce compared to
approximately C$133 per palladium ounce in 2004 as a result of the asset
impairment charge recorded in 2004, which lowered the book value of mining
interests.

For 2005, there was a $55.9 million loss from mining operations compared to an
$88.1 million loss from mining operations in 2004, after allowing for the $108.0
million impairment charge. This decrease in earnings was mainly attributable to
the 43% reduction in production, as well as the reduced palladium revenue as a
result of not having the benefit of the floor price of US$325 under the
Palladium Sales Contract and having to sell into the spot market (except for
6,403 ounces) with its depressed palladium prices evident for much of the year,
as well as a further weakening in the US dollar.

Other income and expense, which includes interest income and expense, and
foreign exchange gains and losses, was an expense of $0.6 million in 2005
compared to $2.2 million in 2004. In the current year there was a foreign
exchange gain of $0.3 million compared to a loss of $0.3 million in 2004. The
foreign exchange gain relates primarily to the Company's US dollar denominated
credit facilities which have benefited from the strengthening of the Canadian
dollar compared to the US dollar.


{4}

<PAGE>

In 2005, the Company incurred interest expense on long-term debt of $2.5 million
compared to $1.8 million in 2004. The increased interest expense in the current
year reflects the increase in interest rates year-over-year.

In 2005, the Company had a tax recovery of $2.9 million as a result of losses
and allowing for the recovery of future mining tax liability from previous
years. The Company's 2004 provision for income tax expense of $1.8 million was
significantly lower than the statutory income tax rate of approximately 39%, due
to the fact that no tax benefit or tax asset has been recorded on the impairment
charge of $108.0 million.

For the year ended December 31, 2005, the Company reported a net loss of $53.6
million or $1.03 per share compared to net loss of $92.1 million or $1.79 per
share for the year ended December 31, 2004.

After adjusting for the impairment charge, the insurance recovery, and foreign
exchange, the adjusted net income was $7.3 million ($0.14 per share) for the
year ended December 31, 2004, compared to the net loss of $53.6 million ($1.03
per share) for the year ended December 31, 2005.

LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations (prior to changes in non-cash working capital) was $39.0
million in 2005, compared to cash provided by operations of $52.1 million in
2004. The $91.1 million decrease in operating cash flow was mainly attributable
to the 43% reduction in palladium production, as well as the reduced palladium
revenue as a result of not having the benefit of the floor price of US$325 under
the Palladium Sales Contract, combined with a 31% decrease in revenue from
by-product metals, as well as a further weakening in the US dollar. In addition,
throughout the year there was an increase in operating costs from an increase in
the waste to ore strip ratio 3.14:1 in 2005, compared to 2.68:1 in 2004 and
continuing pressure on costs, particularly steel, tires, power, diesel fuel and
ongoing mill repairs. Changes in non-cash working capital provided $29.6 million
of cash in the current year as compared to $29.7 million in 2004. Palladium
awaiting settlement declined to 65,905 ounces at December 31, 2005, compared to
114,186 ounces at December 31, 2004. The reduction in the physical quantity of
metal in the concentrate awaiting settlement combined with the lower palladium
price and a weaker US dollar all used to value the concentrate awaiting
settlement resulted in a 45% reduction in the value of concentrate awaiting
settlement. After allowing for non-cash working capital changes, cash used by
operations was $9.4 million in 2005 compared to cash provided of $81.8 million
in 2004.

Investing activities required $35.4 million of cash in 2005. Two major projects
were undertaken during the year, the upgrade of the tailings management facility
for $5.8 million and the ongoing underground mine development, which commenced
in mid 2004 and will extend into early 2006, required $23.9 million excluding
$6.5 million of mining equipment purchased under capital leases. This compares
with $26.5 million of net investing activities in 2004.

The Company's debt position was reduced to $46.3 million at December 31, 2005,
compared to $50.2 million at December 31, 2004 and the year-end cash and cash
equivalents balance were reduced to $15.0 million compared to $65.8 million for
the prior year.

The Company will require additional funding in 2006 to meet its ongoing
obligations. Management has been successful in the past in securing financing in
the capital markets and has no reason to believe it will be unable to continue
to do so in the near future, but cannot guarantee that this will occur.

On March 3, 2006, the Company announced it had entered into an arranged private
placement of convertible notes and common share purchase warrants. This offering
consists of up to US$58.5 million aggregate principal amount of convertible
notes convertible into common shares of the Company at a premium of 13% to the
market price of the common shares on the date of closing. The notes will bear an
interest rate of 6.5% per annum. Upon issuing the notes to the investors, the
Company shall issue common share purchase warrants equal to 50% of the common
shares issuable if such convertible notes were converted by the holders
immediately following the closing of the transaction. The holder of the warrants
shall be entitled for a period of four years following the date of issuance,


North American Palladium Ltd.                                                {5}

<PAGE>

to purchase one common share for each warrant held at an exercise price equal to
125 percent of the market price. The convertible notes will contain customary
covenants, including certain restrictions on the Company incurring debt,
obligations or involving the payment of money in excess of certain restricted
amounts. The convertible notes will contain full-ratchet anti-dilution
protection, subject to the restrictions pursuant to the rules of the TSX. The
the transaction closed on March 29, 2006.

<TABLE>
<CAPTION>

CONTRACTUAL OBLIGATIONS

-------------------------------------------------------------------------------------------------------------
                                                                         Payments Due by Period
As at December 31, 2005
(thousands of dollars)                            Total          1 Year         1-3 Years         4-5 Years
-------------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>               <C>
Senior credit facility                       $   24,324      $    6,664      $     13,328      $      4,332
Kaiser-Francis credit facility                   13,407          13,407               --                 --
Capital lease obligations                         8,541           2,323             4,069             2,149
Operating leases                                  1,053             675               375                 3
Other purchase obligations                        5,175           5,175                --                --
                                             $   52,500      $   28,244      $     17,772      $      6,484
-------------------------------------------------------------------------------------------------------------
</TABLE>

There are no payments due after five years.

<TABLE>
<CAPTION>

FIXED-PRICE COPPER SWAP CONTRACTS (THE "C OPPER HEDGE POSITION")
<S>                                             <C>
-------------------------------------------------------------------------------------------------------------
As of December 31, 2005
-------------------------------------------------------------------------------------------------------------
Copper tonnes hedged                            150 (or approximately 5% of 2006's expected production)
-------------------------------------------------------------------------------------------------------------
Maturity date of copper swap contracts          March, 2006
-------------------------------------------------------------------------------------------------------------
Weighted-average estimated fixed copper         US$2,851 per tonne (US$1.29 per lb.)(1)
  price up to maturity date
-------------------------------------------------------------------------------------------------------------
Payment obligations                             The Company will pay on a monthly basis the floating copper
                                                price (average monthly LME 3-month copper price) for the
                                                respective volume of copper metal swapped and receive a
                                                fixed price from the counterpart for the period up to the
                                                maturity date
-------------------------------------------------------------------------------------------------------------
Unrealized mark-to-market loss at
  December 31, 2005                             US$240,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
1    Weighted-average estimated copper price is based on the aggregate value of
     contracted fixed prices for the expected copper volumes for each respective
     delivery month divided by the total volume of copper under the swap
     contract.

The Company entered into a Master Swap Agreement with a counterpart, which
governs the term of its forward fixed price swap. The counterpart has a
long-term credit rating assigned by Standard & Poor's of "A" or better, or
equivalent rating from other international credit rating agencies.

RELATED PARTY TRANSACTIONS
The Company engaged Louis J. Fox in November, 1999, to provide services in
connection with the negotiation of palladium end-user supply contracts, project
capital financing, smelting and refining agreements, metals price forecasting
and marketing other metals. The services agreement was negotiated at arms-length
prior to Mr. Fox becoming a director of the Company. Mr. Fox received a fee in
connection with the negotiations related to the Palladium Sales Contract. The
amount paid to Mr. Fox in 2005 was $218,000 compared to $581,000 in 2004. The
Palladium Sales Contract expired on June 30, 2005 and no further fees are
payable to Mr. Fox in connection with this contract.


{6}

<PAGE>

In December 2001, Kaiser-Francis provided a US$20 million non-revolving credit
facility to finance the Company's working capital requirements. In the second
quarter of 2004, the Kaiser-Francis credit facility was extended to June 30,
2006. Interest is based on the 30-day LIBOR plus 2.50% and the stand-by fee is
0.125% per annum. The amount paid to Kaiser-Francis for interest and standby fee
was $836,000 in 2005 compared to $585,000 in 2004. Kaiser-Francis holds
approximately 50% of the common shares of the Company.

FOURTH QUARTER AND MANAGEMENT'S OUTLOOK
There is no apparent pattern of variability or seasonality affecting the
Company's operations. The principal drivers of the Company's performance are its
monthly production of PGM and by-product metals from its Lac des Iles mine and
the corresponding world spot prices of such metals.

Production for the fourth quarter 2005 was approximately 37,000 ounces of
palladium with an average palladium head grade of 1.47 g/t. This was a reduction
from the third quarter's palladium production of 39,500 ounces and the previous
year's production of 63,000 ounces during the same period. Intermittent
operating disruptions with the primary crusher led to a decrease in mill
throughput, availability, and head grade as the Company utilized the crushed ore
stockpile which was of lower grade than the forecasted run of mine ore. Mill
availability during the fourth quarter lowered to 80.8% from 91.7% during the
third quarter and from 84.9% in the comparative period in 2004. Overall, the net
loss in the fourth quarter was $11.0 million, lower than the third quarter's
loss of $19.6 million, primarily due to increased revenue being realized from
higher average prices of palladium experienced during the last quarter, and
higher than the fourth quarter 2004's small profit of $0.3 million (prior to the
non-cash write down of mining assets), mainly due to lower realized palladium
revenue because of palladium sales in 2004 being done under the Palladium Sales
Contract floor price of US$325/oz. During 2005, the spot price of palladium per
ounce ranged from a high of US$295/oz to a low of US$172/oz and averaged
US$201/oz compared to an average of US$230/oz during 2004.

During 2005, North American Palladium continued to develop the underground mine.
The underground mine is expected to commence commercial production at the end of
March, 2006, providing 2,000 tonnes per day in combination with the open pit
production of 13,000 tonnes per day. Palladium production in 2006 is expected to
be approximately 280,000 ounces with a cash cost, net of by-product credits, in
the US$200/oz ounce range as the expected average blended head grade in 2006
increases to 2.33g/tonne, in line with the historical averages of the mine.

The Company's aggressive exploration program will continue in 2006, with
approximately $15.0 million being allocated to exploration activities. The main
focus will be on the APP in Finland. Drilling is due to commence in late
February with the drilling results to be incorporated into a scoping study
scheduled to begin later in 2006. The Company will focus on the further
definition of the Offset High Grade Zone at Lac des Iles and grassroots projects
such as the Shebandowan project. In addition, a key strategy moving forward will
be to continue the pursuit of quality Ni/PGM opportunities.

The PGM markets continue to benefit from strong global fundamentals,
particularly from the expectation of further economic growth in China, India,
Brazil and the United States. The Company strongly believes that the
fundamentals are in place for increased metal demand, which will ultimately lead
to higher palladium prices.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

1. CHANGE IN ACCOUNTING POLICY
HEDGING RELATIONSHIPS
In 2003, the CICA finalized amendments to Accounting Guideline AcG-13, "Hedging
Relationships" that clarified certain of the requirements in AcG-13 and provided
additional documentation and application guidance. AcG-13 is applicable for the
Company's 2004 fiscal year. As a result of the adoption of AcG-13, the Company
has marked-to-market its forward foreign exchange contracts beginning January 1,
2004. The impact of this change was an


North American Palladium Ltd.                                                {7}

<PAGE>

increase to derivative income of $0.2 million in the first six months of 2004.
Commencing July 1, 2004, these foreign exchange contracts were designated as a
hedge of US dollar revenue and are accounted for in revenue as realized.

2. CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates represent estimates that are highly uncertain and
for which changes in those estimates could materially impact the Company's
financial statements. The following accounting estimates are critical:

(A) IMPAIRMENT ASSESSMENTS OF LONG-LIVED ASSETS
Each year, the Company reviews the mining plan for the remaining life of mine.
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, metal prices 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 recoverability on an annual basis.
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.

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 affect on the Company's
ability to recover the carrying amounts of its long-lived assets resulting in
possible additional impairment changes.

(B) AMORTIZATION OF MINING INTERESTS
The Company amortizes a large portion of its mining interests using the unit of
production method based on proven and probable reserves. As a result of the
asset impairment charge recorded in 2004, the unit of production amortization
rate in 2005 reduced by approximately 49%. Changes in reserves as at June 30,
2003, caused amortization rates to increase by approximately 25%. Changes in
reserve estimates are calculated periodically and could affect amortization
expense prospectively.

(C) FORWARD METAL SALES AND METAL PRICE SWAP CONTRACTS
In the fourth quarter of 2003, North American Palladium updated its hedge policy
to allow for managing the Company's exposure to market metal prices,
particularly its platinum, gold, nickel and copper price exposure. With the
adoption of this policy and from time to time, the Company will enter into
forward metal sales or cash settled swaps to establish fixed metal prices in
order to manage metal price volatility.

North American Palladium uses fixed-price forward platinum sales contracts and
cash settled gold, nickel and copper price swap contracts to insulate its
earnings and cash flows from changes in these metal prices. These contracts
allow the Company to sell its platinum to credit-worthy metal dealers at a fixed
price under the forward sales contract. In the case of gold, nickel and copper,
the Company receives a fixed metal price in exchange for paying the floating
price received under its physical sales contracts to acceptable counterparts
under the metal price swap contracts. In October, 2005, the Company made a
decision to unwind various by-product metal hedges namely, platinum, gold, and
nickel through the buy-back of forward sales or cash settled metal price swaps.
This decision was taken to reposition the Company's exposure to its by-product
metals in advance of the expected increase in metal production at Lac des Iles
in 2006.

RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
FINANCIAL INSTRUMENTS - RECOGNITION AND MEASUREMENT
In January 2005, the CICA released new Handbook Section 3855, "Financial
Instruments - Recognition and Measurement", effective for annual and interim
periods beginning on or after October 1, 2006. This new section establishes
standards for the recognition and measurement of all financial instruments,
provides a characteristics-based definition of a derivative financial
instrument, provides criteria to be used to determine when a financial


{8}

<PAGE>

instrument should be recognized, and provides criteria to be used when a
financial instrument is to be extinguished. The Company has not yet determined
the affect these new standards will have on its financial position and results
of operations.

COMPREHENSIVE INCOME AND EQUITY
In January 2005, the CICA released new Handbook Section 1530, "Comprehensive
Income", and Section 3251, "Equity", effective for annual and interim periods
beginning on or after October 1, 2006. Section 1530 establishes standards for
reporting comprehensive income. These standards require that an enterprise
present comprehensive income and its components, in a separate financial
statement that is displayed with the same prominence as other financial
statements. Section 3251 establishes standards for the presentation of equity
and changes in equity during the reporting period. The requirements in Section
3251 are in addition to Section 1530. The Company has not yet determined the
affect these new standards will have on its financial position and results of
operations.

HEDGES
In January 2005, the CICA released new Handbook Section 3865, "Hedges",
effective for annual and interim periods beginning on or after October 1, 2006.
This new section establishes standards for when and how hedge accounting may be
applied. Hedge accounting is optional. The Company does not expect the adoption
of this standard to have a material impact on its financial position and results
of operations.

NON-GAAP MEASURE
North American Palladium has included in this document a non-GAAP performance
measure for cash cost per ounce. This non-GAAP measure does not have any
standardized meaning nor is it necessarily comparable with similar measures
presented by other companies. North American Palladium believes that certain
investors use this information to evaluate the Company's performance. This data
is intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP.

<TABLE>
<CAPTION>

RECONCILIATION OF CASH COST PER OUNCE TO FINANCIAL STATEMENTS

-------------------------------------------------------------------------------------------------------------
Year ended December 31
(thousands of dollars except per ounce amounts)                                    2005               2004
-------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>
Production costs including overhead                                      $       99,322       $    102,936
Smelter treatment, refining and freight costs                                    15,777             23,602
-------------------------------------------------------------------------------------------------------------
                                                                                115,099            126,538
Less: by-product metal revenue                                                  (49,208)           (71,416)
-------------------------------------------------------------------------------------------------------------
                                                                                 65,891             55,122
-------------------------------------------------------------------------------------------------------------

Divided by ounces of palladium                                                  154,196            270,448
-------------------------------------------------------------------------------------------------------------

Cash cost per ounce (C$)                                                            427                204
-------------------------------------------------------------------------------------------------------------
C$ exchange rate                                                                1.19062             1.2795
-------------------------------------------------------------------------------------------------------------
Cash cost per ounce (US$)                                                $          359       $        159
-------------------------------------------------------------------------------------------------------------
</TABLE>

RECONCILIATION BETWEEN NET INCOME IN ACCORDANCE WITH CANADIAN GAAP AND ADJUSTED
NET INCOME
The adjusted net income reported in this analysis has not been calculated in
accordance with Canadian GAAP, the accounting principles under which our
consolidated financial statements are prepared, and there is no standard
definition in such principles for such adjusted net income or loss. Accordingly,
it is unlikely that comparisons can be made among different companies in terms
of such adjusted results reported by them.


North American Palladium Ltd.                                                {9}

<PAGE>

The following table provides a reconciliation between our adjusted net income
and net income (loss) as reported in accordance with Canadian GAAP for the years
ended December 31, 2005 and December 31, 2004:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                          Net Income             Basic Net Income Per Share
                                                    Year Ended December 31         Year Ended December 31
-------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share amounts)        2005            2004            2005            2004
-------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>              <C>             <C>
Canadian GAAP net income (loss) as reported     $   (53,611)    $   (92,110)     $    (1.03)     $    (1.79)
Impairment charge net of tax                             --         103,376              --            2.01
Foreign exchange (gain) loss net of tax                (268)            340           (0.01)           0.01
Insurance recovery net of tax                            --          (4,352)             --           (0.09)
-------------------------------------------------------------------------------------------------------------
Adjusted net income                             $   (53,879)    $     7,254      $    (1.04)     $     0.14
-------------------------------------------------------------------------------------------------------------
</TABLE>

OTHER INFORMATION
Additional information regarding the Company is included in the Company's Annual
Information Form and Annual Report on Form 40-F which are filed with the
Canadian securities regulators and the United States Securities and Exchange
Commission, respectively. A copy of the Company's Annual Information Form is
posted on the SEDAR website at www.sedar.com. A copy of the Annual Report or
Form 40-F can be obtained from the United States Securities and Exchange
Commission's website at www.sec.gov.

OUTSTANDING SHARE DATA
As of February 21, 2006, there were 52,216,770 common shares of the Company
outstanding and options outstanding pursuant to the 1995 Corporate Stock Option
Plan entitling holders thereof to acquire 544,085 common shares of the Company
at an average strike price of $10.43.

RISKS AND UNCERTAINTIES
The price of palladium is the most significant factor influencing the
profitability of the Company. In 2005, sales of palladium accounted for
approximately 47% of the Company's revenue. Many factors influence the price of
palladium, including global supply and demand, speculative activities,
international political and economic conditions and production levels and costs
in other PGM producing countries, particularly Russia and South Africa. The
possible development of a substitute alloy or synthetic material, which has
catalytic characteristics similar to platinum group metals, may result in a
future decrease in demand for palladium and platinum.

Currency fluctuations may affect cash flow since production currently is sold in
United States dollars, whereas the Company's administration, operating and
exploration expenses are incurred in Canadian dollars. As a result, changes in
the exchange rate between Canadian and United States dollars can affect revenue
and profitability.

The Company is dependent on one mine for its metal production. The business of
mining is generally subject to risks and hazards, including environmental
hazards, industrial accidents, metallurgical and other processing problems,
unusual and unexpected rock formations, pit slope failures, flooding and
periodic interruptions due to inclement weather conditions or other acts of
nature, mechanical equipment and facility performance problems and the
availability of materials and equipment. These risks could result in damage to,
or destruction of, the Company's properties or production facilities, personal
injury or death, environmental damage, delays in mining, monetary losses and
possible legal liability. Although the Company maintains insurance in respect of
the mining operations that is within ranges of coverage consistent with industry
practice, such insurance may not provide coverage of all the risks associated
with mining. Currently the Company sells all of its concentrate to one smelting
firm under a contract that expires on September 30, 2006. Management believes it
will be successful in negotiating an extension and/or new agreement with the
smelting firm, but cannot guarantee that this will occur.

Disclosure Controls and Procedures
Management is responsible for the information disclosed in this management's
discussion and analysis and has in place the appropriate information systems,
procedures and controls to ensure that information used internally by
management and disclosed externally is, in all material respects, complete and
reliable. As of the financial year ended December 31, 2005, an evaluation was
carried out under the supervision of, and with the participation of, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, on the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective as of December 31, 2005 to provide
reasonable assurance that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities.

{10}

<PAGE>

Forward-Looking Statements - Certain statements included in this 2006 annual
report, financial statements for the year ended December 31, 2005 and
management's discussion and analysis are forward-looking statements which are
made pursuant to the "safe harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995. They include estimates and statements
that describe the Company's future plans, objectives and goals, including words
to the effect that the Company or management expects a stated condition or
result to occur. When used herein, words such as "continue", "proposed",
"appears", "indicating", "predicting", "estimate", "expect", "plan", "should",
"may", "will" and other similar expressions are intended to identify
forward-looking statements. In particular statements relating to the estimated
future metal prices, cash flows, expenses, capital costs, ore production, mine
life, financing, construction and commissioning, and exploration prospects are
forward-looking statements. Such forward-looking statements involve inherent
risks and uncertainties and are subject to factors, many of which are beyond our
control, that may cause actual results or performance to differ materially from
those currently anticipated in such statements. Important factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include among others: metal price volatility,
changes in the US/CDN dollar exchange rate, economic and political events
affecting metal supply and demand, fluctuations in ore grade, ore tonnes milled,
geological, technical, mining or processing problems, recoverability of metals,
future profitability and production, availability of financing on acceptable
terms and unexpected problems during the development, construction and start-up
phases of the underground mine. For a more comprehensive review of risk factors,
please refer to the Company's most recent Annual Report under "Management's
Discussion and Analysis of Financial Results" and Annual Information Form under
"Risk Factors" on file with the U.S. Securities and Exchange Commission and
Canada provincial securities regulatory authorities. The Company disclaims any
obligation to update or revise any forward-looking statements whether as a
result of new information, events or otherwise. Readers are cautioned not to put
undue reliance on these forward-looking statements.


North American Palladium Ltd.                                               {11}

<PAGE>

A.      DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed by North American Palladium Ltd. (the
"Registrant") in reports filed or submitted by it under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. The Registrant's Chief Executive Officer and Chief Financial Officer have
evaluated the Registrant's disclosure controls and procedures as of the end of
the period covered by this Annual Report on Form 40-F and have determined that
such disclosure controls and procedures are effective.

B.      CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Since the most recent evaluation of the Registrant's internal control over
financial reporting, there has not been any significant change in the
Registrant's internal control over financial reporting that has materially
affected or is reasonably likely to materially affect, the Registrant's internal
control over financial reporting.

C.      NOTICE OF PENSION FUND BLACKOUT PERIOD

The Registrant was not required by Rule 104 of Regulation BTR to send any notice
to any of its directors or executive officers during the fiscal year ended
December 31, 2005.

D.      AUDIT COMMITTEE FINANCIAL EXPERT

The Registrant's board of directors has determined that Mr. Gregory J. Van
Staveren, an individual serving on the audit committee of the Registrant's board
of directors, is an audit committee financial expert, as that term is defined in
General Instruction B8(a) of Form 40-F. The Registrant's board of directors has
also determined that Mr. Van Staveren is independent.

The Registrant discovered an inadvertent violation of Section 121 of the
American Stock Exchange ("AMEX") Company Guide in 2006. Mr. Van Staveren, has a
brother who is a partner at KPMG LLP ("KPMG"), the Company's outside auditor. As
a result of Mr. Van Staveren's brother's affiliation with KPMG, Mr. Greg Van
Staveren is not independent within the meaning of Section 121A(f) of the AMEX
Company Guide, which provides that a director who is, or has an immediate family
member who is, a current partner of a listed company's outside auditor is not
independent.

Note 5 to the Commentary to Section 121 of the AMEX Company Guide provides that
foreign companies are permitted to follow home country practice in lieu of the
audit committee requirements specified in Section 121 in accordance with the
provisions of Section 110, provided that such companies comply with Rule 10A-3
under the Exchange Act. The fact that Mr. Greg Van Staveren's brother is a
partner at KPMG does not impair his independence under Rule 10A-3. Further, the
Registrant was not in violation of the director independence and audit committee
requirements under applicable Canadian requirements.

The Registrant made application to the AMEX for a waiver of the requirements of
Section 121 of the AMEX Company Guide is this regard. The waiver was granted on
March 10, 2006.

E.      CODE OF ETHICS

The Registrant's board of directors has adopted a code of ethics that applies to
all directors, officers and employees. The Registrant will provide a copy of the
code of ethics without charge to any person that requests a copy by contacting
the Corporate Secretary, at the address that appears on the cover of this Annual
Report on Form 40-F.

F.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

        AUDIT FEES

The aggregate fees billed by KPMG LLP ("KPMG"), the Registrant's external
auditors for the fiscal year ended December 31, 2004 and 2005, for services that
are normally provided by the external auditors in connection with statutory and
regulatory filings or engagements for such years were Cdn$210,000 and
Cdn$329,640, respectively.

<PAGE>

        AUDIT-RELATED FEES

The aggregate fees billed by KPMG for the fiscal years ended December 31, 2004
and 2005 for assurance and related services rendered by it that are reasonably
related to the performance of the audit or review of the Registrant's financial
statements for such years were Cdn$nil and Cdn$30,820, respectively.

        TAX FEES

The aggregate fees billed by KPMG for the fiscal years ended December 31, 2004
and 2005 for professional services rendered by it for tax compliance, tax
advice, tax planning and other services were Cdn$79,000 and Cdn$12,075,
respectively. Tax services provided included preparation of corporate tax
returns and review of tax provisions.

        ALL OTHER FEES

The aggregate fees billed by KPMG for the fiscal years ended December 31, 2004
and 2005 for products and services provided by KPMG, other than the services
reported in the preceding three paragraphs, were Cdn$nil and Cdn$nil,
respectively.

        AUDIT COMMITTEE PRE-APPROVAL POLICIES

All audit and non-audit services performed by the Registrant's auditor are
pre-approved by the audit committee of the Registrant.

G.      OFF-BALANCE SHEET ARRANGEMENTS

The Registrant is not a party to any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.

H.      TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table sets out the Registrant's known contractual obligations for
its long-term liabilities and lease commitments as of the fiscal year ended
December 31, 2005

<TABLE>
<CAPTION>
(CANADIAN DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------
                                               Payments due by period
------------------------------------------------------------------------------------------------------------------
                                                                 Less than      1 to  3      4 to 5
                                                        Total      1 year        years       years     Thereafter
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>           <C>          <C>         <C>
SENIOR CREDIT FACILITY                                $ 24,324    $  6,664      $ 13,328     $ 4,332     $     -
KAISER-FRANCIS CREDIT FACILITY                          13,407      13,407             -           -           -
CAPITAL LEASE OBLIGATIONS                                8,541       2,323         4,069       2,149           -
OPERATING LEASES                                         1,053         675           375           3           -
OTHER PURCHASE OBLIGATIONS                               5,175       5,175             -           -           -
------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL OBLIGATIONS                         $ 52,500    $ 28,244      $ 17,772     $ 6,484     $     -
==================================================================================================================
</TABLE>

I.      IDENTIFICATION OF AUDIT COMMITTEE

The Registrant has an audit committee comprised of three individuals: Mr. Greg
Van Staveren, Mr. Michael Amsden and Mr. Steven Berlin. Mr. Amsden is
independent as that term is defined under the rules and regulations of the AMEX.
Mr. Berlin is not independent, as that term is defined under the rules and
regulations of the AMEX, as, prior to December 31, 2005, he served as an
executive officer of Kaiser Francis Oil Company, which owns approximately 50% of
the outstanding common shares of the Registrant. Mr. Berlin does satisfy the
requirements of Rule 10A-3 under the Exchange Act. Further, Mr. Berlin is a
certified public accountant and has considerable experience in corporate
finance. Pursuant to Section 121B(2)(b) of the AMEX Company Guide, the board of
directors has determined it in the best interests of the Registrant and its
shareholders that Mr. Berlin be appointed to the audit committee in this
exceptional and limited circumstance because of his qualifications and
experience. He will not serve on the audit committee in excess of two
consecutive years. As described above in Item D, Mr. Van

<PAGE>

Staveren is not independent as that term is defined under the rules and
regulations of the AMEX.

J.      CRITICAL ACCOUNTING POLICIES

A discussion of the Registrant's critical accounting policies can be found in
its Management's Discussion and Analysis for the year ended December 31, 2005
filed with the Commission as Document 3 herein.

<PAGE>

                  UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.      UNDERTAKING

The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.

B.      CONSENT TO SERVICE OF PROCESS

The Registrant has previously filed with the Commission a Form F-X in connection
with its Common Shares, no par value.


<PAGE>

                                   SIGNATURE

        Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this annual report to be signed on its behalf by the undersigned,
thereto duly authorized.


                                         NORTH AMERICAN PALLADIUM LTD.



Dated: March 29, 2006                    By: /s/ Ian M. MacNeily
                                            ------------------------------------
                                         By: Ian M. MacNeily
                                         Title: Vice President, Finance and
                                                Chief Financial Officer

<PAGE>

                                  EXHIBIT INDEX


NUMBER      DOCUMENT


   1.       Consent of KPMG LLP
   1.       Consent of Ernst & Young LLP
  31.       Certification of CEO and CFO pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002
  32.       Certification of CEO and CFO pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002