**Exhibit 1.2**

 

**Management’sDiscussion and Analysis**

 

The following is management’sdiscussion and analysis (“MD&A”) of the financial condition and results ofoperations to enable a reader to assess material changes in financial conditionand results of operations for the year ended December 31, 2007, comparedto those of the respective periods in the prior years. This MD&A has beenprepared as of March 18, 2008 and is intended to supplement and complementthe audited consolidated financial statements and notes thereto for the yearended December 31, 2007 (collectively, the “Financial Statements”). Youare encouraged to review the Financial Statements in conjunction with yourreview of this MD&A and the most recent Form 40-F/Annual Information Form onfile with the US Securities and Exchange Commission and Canadian provincialsecurities regulatory authorities. All amounts are in Canadian dollars unlessotherwise noted.

 

**INDUSTRY OVERVIEW**

 

**Platinum Group Metals**

 

Palladium is one of the six platinum groupmetals (“PGMs”), along with platinum, rhodium, ruthenium, iridium and osmium.Economically, the three most significant PGMs are palladium, platinum andrhodium. The primary use for palladium is in the manufacture of catalyticconverters in the automotive industry. It is also used in the manufacture ofjewellery and electronics, and in dental and chemical applications.

 

**Supply**

 

Palladium is typically produced as aby-product metal from platinum mines. According to the CPM Group, most of theworld’s palladium is produced in Russia (35%), the Republic of South Africa(34%) and North America (12%). Global supply of palladium increased byapproximately 3% in 2006 (the last year for which data is available) to8,437,000 ounces. Of this total, mine production accounted forapproximately 7,030,000 ounces (an increase of 3% from the prioryear) and secondary recovery of palladium accounted for approximately1,407,000 ounces.

 

**Demand**

 

Global fabrication demand for palladium(excluding investor demand) increased by 11.0% in 2006 to approximately7,722,000 ounces, primarily as a result of the strong performance of theindustries that use palladium and the relative attractiveness and affordabilityof palladium compared to substitutes (such as platinum, rhodium and gold). Theyear 2006 represented the third consecutive year of double-digit growth inpalladium demand, and the fifth consecutive year of growth in palladiumdemand overall.

 

Approximately 50% of the global demand forpalladium in 2006 stemmed from the automotive industry. The majority of thebalance of palladium demand in 2006 stemmed from electronics (16%), jewellery(4%), Chinese demand for electronics and jewellery (10%), dental applications(13%) and other chemical applications (5%).

 

The primary use for palladium in theautomotive industry is in the manufacture of catalytic converters, which reduceharmful vehicle exhaust emissions by converting them into less harmful carbondioxide, nitrogen and water vapour. Palladium, platinum and rhodium are theprimary components in catalytic converters. The demand for palladium in theautomotive industry has more than doubled in the last ten years due to thelarger number of vehicles being manufactured and the tightening of emissionsstandards that require the use of catalytic converters. Catalytic convertersare now included in over 96 percent of new cars. With the palladium pricecurrently substantially below that of platinum, automakers have a strongfinancial incentive to switch their catalyst formulations for gasoline vehiclesfrom those based on platinum to palladium.

 

Palladium is also used in the manufacture ofjewellery and may be used either on its own or as an alloy in “white gold”. Inthe electronics industry, palladium is used mainly in the production ofmulti-layer ceramic capacitors, which are used in electrical components forcellular telephones, personal and notebook computers, fax machines and homeelectronics. In the dental industry, palladium is widely used in alloys fordental restoration. Additionally, various chemical applications use palladium,including the 

 

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manufacture of paints, adhesives, fibers andcoatings. Palladium is also used in the manufacture of polyester.

 

An important macroeconomic trend has beenincreased investor demand for palladium by virtue of its association with otherprecious metals (e.g., platinum and rhodium). Strong investor sentimentfor these precious metals has provided support for a favorable palladiumpricing environment.

 

**COMPANY OVERVIEW**

 

**Overview of North American Palladium’sBusiness**

 

North American Palladium is Canada’s onlyprimary producer of PGMs, producing an estimated 4% of annual global palladiumproduction. While the bulk of the Company’s revenue is derived from the sale ofpalladium, the Company also generates a considerable portion of its revenuefrom the sale of platinum, nickel, gold, and copper, all of which areby-products of the Company’s palladium mining operations. North AmericanPalladium’s principal properties and projects are the Lac des Iles property(including the Lac des Iles mine and the Offset High Grade Zone (“OHGZ”)), theShebandowan West Project and the Arctic Platinum Project (“APP”).

 

**Lac des Iles Property**

 

*Lac des Iles mine*

 

The Company owns and operates the Lac desIles mine located 85 kilometers from Thunder Bay, Ontario, Canada. The Lacdes Iles mine consists of an open pit mine, an underground mine and twoprocessing plants (one of which is currently idle). The primary deposit onthe property is the Roby Zone, a PGM deposit. The Company began mining the RobyZone in 1993 using open pit mining methods. In April 2006, an undergroundmine went into commercial production to access a higher grade portion of theRoby Zone.

 

*Offset High Grade Zone*

 

The OHGZ is located on the Lac des Ilesproperty and was discovered by the Company’s exploration team in 2001. The OHGZis believed to be the fault-displaced continuation of the Roby Zonemineralization and is located below and approximately 250 meters to the westof the Roby Zone. A mineral resource estimate prepared by Scott Wilson RoscoePostle Associates Inc. (“Scott Wilson RPA”) in October 2007 estimatedthat the OHGZ has more than three times the mineral resources of the currentunderground mine at the Roby Zone at similar grades, while still being openalong strike to the north, south and at depth.

 

**Shebandowan West Project**

 

On December 10, 2007, the Company earneda 50% interest in the former producing Shebandowan mine and the surroundingHaines and Conacher properties pursuant to an option and joint ventureagreement with Vale Inco. The Shebandowan West Project contains a series ofnickel-copper-PGM mineralized bodies and is located approximately100 kilometers southwest of the Company’s Lac des Iles mine. On October 25,2007, the Company announced the completion of a NI 43-101 compliantmineral resource estimate for the Shebandowan West Project by an independentQualified Person. Management is considering a mine development scenario thatwould entail excavation of the Shebandowan West Project by means oframp-accessed underground mining methods at a rate of 500 to 1,000 tonnesper day, crushing the material on site and transporting it by truck to the Lacdes Iles property for processing at the original mill on the Lac des Ilesproperty. If plans proceed as expected, production at the Shebandowan WestProject could commence in 2009.

 

**Arctic Platinum Project**

 

The APP is comprised of a series ofadvanced-stage nickel-copper-PGM exploration projects located approximately60 kilometers south of the city of Rovaniemi, Finland. The Company isparty to an agreement with subsidiaries of Gold Fields Limited of South Africa(“Gold Fields”) entitling it to earn up to a 60% interest in the APP.Management believes that the Company will satisfy the conditions of its earn-inright by August 31, 2008, which will include completion of a re-scopingstudy and exploration 

 

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program, completion of a feasibility study,and the preparation of the initial form of development proposal and associatedbudget.

 

To date, three areas of the APP have beenexplored by North American Palladium: (i) the Suhanko deposits, (ii) theNarkaus deposits, and (iii) the Penikat deposits. At Suhanko, the Companyis studying a development scenario consisting of two open pit mines at twodeposits located three kilometers from each other. Under this scenario, thenickel-copper-PGM bearing material would be processed through acentrally-located concentrator at a nominal throughput rate of five milliontonnes per year. Additionally, management believes that the economics of thedevelopment scenario might be enhanced by the development of two higher gradedeposits at Narkaus. A scoping study on the Suhanko deposits completed by AkerKvaerner in October 2007 indicated that the mineral resources couldpotentially support a 20-year mine life at 7.5 million tones per annum. Tothis end, the Company has retained Aker Kvaerner to prepare a feasibility studyfor the Suhanko deposits.

 

**Year Ended December 31, 2007 Highlights**

 

•**                 **Revenue forthe year ended December 31, 2007 of $195.9 million increased by$36.7 million (23%).

 

•                  Operatingcash flow for the year (before changes in non-cash working capital)(1) improvedby $36.9 million to $46.8 million compared to operating cash flow of$9.9 million in 2006.

 

•                  Thenet loss for the year ended December 31, 2007 was $28.7 million or$0.51 per share compared to a net loss of $34.1 million or $0.65 per sharein 2006. The net loss for the year includes a net negative impact of$19.0 million (2006 – negative impact of $3.7 million) due toforeign exchange gains and losses.

 

•                  Palladiumproduction of 286,334 ounces increased 21% compared to last year.

 

•                  Palladiumsales for the year were recorded at an average price of US$356 per ouncecompared to US$319 per ounce last year. The Company’s performance is highlycorrelated to prevailing palladium and by-product metal prices as it continuesto sell all its metal production into the spot markets.

 

•                  Palladiumaccounted for 47% of the year’s total revenues while platinum and nickelcontinued to be important sources of revenue, at 16% and 22% of the year’stotal revenue respectively.

 

•                  Cashcost per ounce of palladium produced,(1) net of by-product metal revenuesand royalties, was US$164 for 2007 compared to US$201 the previous year,primarily due to the increased production volumes and stronger by-productprices, partially offset by the impact of the strengthening Canadian dollar onboth costs and by-product revenue realized.

 

•                  OnDecember 10, 2007, the Company earned a 50% interest in the formerproducing Shebandowan mine and the surrounding Haines and Conacher propertiespursuant to an option and joint venture agreement with Vale Inco.

 

•                  TheCompany’s debt position at December 31, 2007 was $39.1 million andreflects a reduction of $35.8 million (48%) compared to the debt positionat December 31, 2006 of $74.9 million.

 

•                  InDecember 2007 the Company completed an equity offering of 18.7 millionunits at a price of US$4.00 per unit. In connection with the offering theCompany granted the underwriter’s an over-allotment option of 15% at the sameprice. This option was subsequently exercised in January 2008, increasingthe gross proceeds of the offering to US$85.9 million.

* *

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(1)          Non-GAAP measure. Reference should be made to footnote1 at the end of this MD&A.

 

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**Key Results**

 
| **Operating Results  Year Ended December 31** | ** ** | **2007**      | ** ** | **2006*** | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|-----------|------------|------------|------------|
| **Palladium (oz)**                                                | ** ** | **286,334**   |       | 237,338   |       | 177,167    |       |
| Payable Palladium (oz)                                            | ** ** | **263,046**   |       | 217,022   |       | 161,469    |       |
| Platinum (oz)                                                     | ** ** | **24,442**    |       | 22,308    |       | 18,833     |       |
| Gold (oz)                                                         | ** ** | **20,092**    |       | 17,237    |       | 14,308     |       |
| Copper (lbs)                                                      | ** ** | **5,536,044** |       | 5,155,588 |       | 5,514,670  |       |
| Nickel (lbs)                                                      | ** ** | **3,066,973** |       | 2,721,042 |       | 2,353,227  |       |
| Ore Tonnes Milled                                                 | ** ** | **5,006,383** |       | 4,570,926 |       | 4,780,599  |       |
| Ore Tonnes Mined – Underground                          | ** ** | **768,841**   |       | 721,179   |       | —     |       |
| Ore Tonnes Mined – Open Pit                             | ** ** | **4,374,225** |       | 3,926,911 |       | 3,705,555  |       |
| Waste Tonnes Mined – Open Pit                           | ** ** | **7,231,026** |       | 8,888,037 |       | 11,619,658 |       |
| Waste Strip Ratio                                                 | ** ** | **1.65:1**    |       | 2.26:1    |       | 3.14:1     |       |

 

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*                 Metal production,tonnes milled and underground ore tonnes mined include pre-productionactivities from the underground mine that was not recorded as revenue butrather offset against the underground mine’s capital development costs. Metalproduction from the underground pre-production included 9,004 oz ofpalladium and other associated by-product metals.

 

**Selected Annual Information**

 
| **(thousands of dollars)**                                    | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Revenue after pricing adjustments                                       | ** ** | **$**       | **195,932** |     | $          | 159,200  |       | $ | 92,606 |   |
| Net loss                                                                | ** ** | **(28,680** | )           | (34,109  | )          | (53,611  | )          |
| Add back (deduct):                                                      |       |        |        |     |       |     |       |
| Exploration costs                                                       | ** ** | **12,138**  |        | 11,831   |       | 7,927    |       |
| Non-Cash Items:                                                         |       |        |        |     |       |     |       |
| – Amortization                                                | ** ** | **46,908**  |        | 30,103   |       | 18,297   |       |
| – Accretion of convertible notes                              | ** ** | **12,947**  |        | 10,090   |       | —   |       |
| – Other non-cash items(1)                                     | ** ** | **15,653**  |        | 3,828    |       | (1,146   | )          |
| Net income (loss) before exploration and  non-cash items(1)             | ** ** | **$**       | **58,966**  |     | $          | 21,743   |       | $ | (28,533 | ) |
| Net loss per share (dollars)                                            |       |        |        |     |       |     |       |
| ·  Basic                                                           | ** ** | **$**       | **(0.51**   | )        | $          | (0.65    | )          | $ | (1.03 | ) |
| ·  Fully diluted                                                   | ** ** | **$**       | **(0.51**   | )        | $          | (0.65    | )          | $ | (1.03 | ) |
| Cash dividends declared                                                 | ** ** | **Nil**     |        | Nil      |       | Nil      |       |
| Cash flow from operations prior to changes  in non-cash working capital | ** ** | **46,828**  |        | 9,912    |       | (36,460  | )          |
| Total Assets                                                            | ** ** | **305,374** |        | 265,157  |       | 238,357  |       |
| Total Long-term debt, including current  portion                        | ** ** | **39,081**  |        | 74,906   |       | 46,272   |       |

 

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(1)                                  Non-GAAP measure.Reference should be made to footnote 1 at the end of this MD&A.

 

**RESULTS OF OPERATIONS**

 

***Revenue***

 

For the year ended December 31, 2007 theCompany had revenue of $195.9 million compared to revenue of$159.2 million in 2006. The loss from mining operations for the year endedDecember 31, 2007 was $19.4 million, an increase of $1.3 million(7%), compared to the loss of $18.1 million last year.

 

Revenue is affected by sales volumes,commodity prices and currency exchange rates. Sales of metals in concentrateare recognized in revenue when concentrate is delivered to a third partysmelter for treatment, however, final pricing is not determined until therefined metal is sold, which can be up to six months later. Accordingly,revenue in the year is based on current US dollar denominated commodity 

 

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prices and foreign exchange rates for salesoccurring in the year and ongoing pricing adjustments from prior sales that arestill subject to final pricing. These final pricing adjustments result inadditional revenues in a rising commodity price environment and reductions torevenue in a declining commodity price environment. Similarly, a weakening inthe Canadian dollar relative to the US dollar will result in additionalrevenues and a strengthening in the Canadian dollar will result in reducedrevenues. Effective April 1, 2007, the amount of the final pricingadjustments recognized on any commodity price changes will also be reduced byany price participation deductions as provided for in the Company’s smeltingand refining agreement. The Canadian dollar strengthened by 17% against theUS dollar to $1.01 at December 31, 2007 compared to $0.86 at December 31, 2006.

 

**Recorded Metal Prices and Average ExchangeRates**

 
| ** **                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Palladium – US$/oz              | ** ** | **$**    | **356**    |     | $          | 319      |       | $ | 230 |   |
| Platinum – US$/oz               | ** ** | **$**    | **1,364**  |     | $          | 1,140    |       | $ | 815 |   |
| Gold – US$/oz                   | ** ** | **$**    | **726**    |     | $          | 610      |       | $ | 442 |   |
| Nickel – US$/lb                 | ** ** | **$**    | **15.58**  |     | $          | 11.68    |       | $ | 6.60 |   |
| Copper – US$/lb                 | ** ** | **$**    | **3.30**   |     | $          | 3.02     |       | $ | 1.50 |   |
| US/C$ exchange rate (Bank of Canada) | ** ** | **US$**  | **0.93**   |     | US$        | 0.88     |       | US$ | 0.83 |   |
|                                           |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

For the year ended December 31, 2007,revenue before pricing adjustments of $201.4 million increased$55.5 million (38%) from 2006, reflecting higher volumes and improvedpricing of $68.7 million, partially offset by the impact of unfavourableforeign exchange rates of $13.2 million. Negative pricing adjustments fromsettlements and the mark-to-market of concentrate awaiting settlement for theyear ended December 31, 2007 reduced revenue by $5.4 million($14.2 million negative foreign exchange adjustment, partially offset by a$8.8 million favourable commodity price adjustment). This compares withfavourable adjustments for the year ended December 31, 2006 of$13.4 million ($11.7 million favourable commodity price adjustmentand a $1.7 million positive foreign exchange adjustment). For the yearended December 31, 2007, revenue after pricing adjustments was$195.9 million, an increase of $36.7 million (23%), compared torevenue of $159.2 million last year.

 

For the year ended December 31, 2007,palladium sales were recorded at US$356 per ounce, up 12% compared to US$319 inthe 2006. Revenue in 2007 from the sale of palladium before pricing adjustmentsincreased to $95.1 million from $70.6 million, and after pricingadjustments increased by 21% to $91.8 million (47% of total revenue)compared to $75.6 million (48% of total revenue) in 2006.

 

For the year ended December 31, 2007,total by-product revenues after pricing adjustments increased by 25% to$104.1 million, as compared to $83.6 million in 2006. In particular,platinum, gold and nickel sales saw strong growth of 27%, 32% and 28%respectively, reflecting increased sales volumes and higher commodity prices.

 

***Operations***

 

For the year ended December 31, 2007,palladium ounces produced increased by 21%. The mill processed5,006,383 tonnes of ore or an average of 13,716 tonnes per day,producing 286,334 ounces of palladium compared to 4,570,926 tonnes ofore or an average of 12,523 tonnes per day, producing 237,338 ouncesof palladium in 2006. In 2007, the average palladium head grade was2.39 grams per tonne compared to 2.18 grams per tonne in 2006. Theimproved head grade can be attributed in part to a full year of production fromthe underground mine, which commenced commercial production in April 2006.For the year ended December 31, 2007, 768,841 tonnes of ore wasextracted from the underground mine, with an average palladium grade of5.79 grams per tonne. During the nine months ended December 31, 2006,617,634 tonnes of ore was extracted from the underground mine, with anaverage palladium grade of 5.96 grams per tonne. For 2007 the palladiumrecoveries were 74.8%, compared to 74.0% in 2006.

 

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In the Lac desIles open pit, for the year ended December 31, 2007, 4,374,225 tonnesof ore were extracted with an average palladium grade of 1.79 grams pertonne compared to 3,926,911 tonnes at an average palladium grade of1.63 grams per tonne the previous year. For the year ended December 31,2007 the strip ratio improved to 1.65 compared to 2.26 in 2006.

 

The mill’sincreased results reflect continued improvement to the throughput andavailability due to Company personnel identifying and systematically resolvingissues.

 

***Operating Expenses***

 

For the yearended December 31, 2007, total production costs of $125.1 millionincreased by $12.6 million (11%) compared to 2006, mainly due to theinclusion of the underground mine production costs for the three months ended March 31,2007 of $8.1 million, which for the corresponding period in 2006, werecapitalized as pre-production costs. Unit cash costs(1) to producepalladium (production costs including overhead and smelter treatment, refiningand freight costs), net of by-product metal revenues and royalties, decreasedto US$164 per ounce for the year ended December 31, 2007 compared toUS$201 per ounce in 2006. The decrease in unit cash costs was primarily due tothe impact of increased production and improved pricing for by-products,partially offset by the strengthening Canadian dollar on both costs andby-product revenue realized.

 

Smeltertreatment, refining and freight charges for the year ended December 31,2007 of $22.4 million increased by $7.0 million (45%) compared to2006. The increase is attributable to higher sales volumes ($2.1 million)and higher costs associated with the Company’s new smelter agreement($4.9 million) that came into effect April 1, 2007.

 

Non-cashamortization increased by $16.8 million (56%) to $46.9 million forthe year ended December 31, 2007 compared to $30.1 million last year.The higher amortization is attributable to the 21% increase in palladiumproduction ($3.8 million), the adjusted mine plan, effective from thefourth quarter of 2006, which resulted in an increase in the unit of productionamortization rate ($9.1 million), and the inclusion of the amortization ofthe underground mine development costs for the first quarter of 2007($3.9 million), which commenced commercial production in April 2006.

 

The Companyreviews and evaluates its long-lived assets for impairment annually. Impairmentis considered to exist if total estimated future undiscounted cash flows areless than the carrying amount of the asset. During 2007, the Company engagedScott Wilson RPA an independent geotechnical consulting company to complete aMineral Resource and Mineral Reserve audit and to prepare an independent TechnicalNI 43-101 Report on the Lac des Iles mine as of June 2007. Thiswas updated by a senior geologist with Lac des Iles Mines Ltd.(a qualified person) to December 31, 2007. As a result of theseevents the Company completed a detailed review of its life-of-mine operatingplan for the Lac des Iles mine, the Company’s only operating mine, and comparedthe carrying value of the Company’s mining interests to the estimatedrecoverability.The Company’s management believes an impairment charge and acorresponding reduction in the carrying value of its mining interests is notrequired. Assumptions underlying future cash flow estimates are subject to riskand uncertainty. Any differences between significant assumptions and marketconditions such as metal prices, exchange rates, recoverable metal, and/or theCompany’s operating performance could have a material effect on the Company’sability to recover the carrying amounts of its long-lived assets resulting inpossible impairment charges.

 

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(1)                                  Non-GAAP measure.Reference should be made to footnote 1 at the end of this MD&A.

 

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Administrative expenses for the year ended December 31, 2007 of$7.8 million increased by $1.1 million (15%) compared to 2006. Theincrease is due primarily to increased director’s fees and expenses($0.5 million), increased staff costs ($0.3 million) and highercapital taxes ($0.3 million).

 

Explorationexpense for the year ended December 31, 2007 of $12.1 million was up$0.3 million (3%) compared to last year’s expenditure of$11.8 million. Included in the 2007 expenditure is $5.9 million($6.8 - 2006) spent on the APP as the Company continues itsevaluation activities in Finland. Costs associated with the APP project arebeing charged to exploration expense as incurred until it is determined whetherthe project can be economically developed, at which time the costs will becapitalized. In addition, the Company continued its exploration of the OHGZ atthe Lac des Iles mine. Diamond drilling commenced in the second quarter of 2007and the goal of this program is to provide detailed information as to themetals distribution for the upper portion of the OHGZ.

 

Work continueson the Shebandowan West nickel-copper-PGM project and drill results from itsPhase II drill campaign were announced in a press release on May 1,2007. A technical report prepared in compliance with the requirements ofNational Instrument 43-101 disclosing the results of the mineralresource estimate was press released on October 26, 2007. On December 10,2007, the Company announced that it has exercised its option to form anoperating joint venture with Vale Inco Limited over the Shebandowan property.

 

Assetretirement costs for the year ended December 31, 2007 of $1.0 millioncompared to a charge of $0.6 million last year with the increasereflecting the increased palladium production.

 

For the yearended December 31, 2007, the result of the revenue and operating expenseperformance described above was a loss from mining operations of$19.4 million, an increase of $1.3 million (7%) compared to last year’sloss of $18.1 million.

 

***Other Income(Expenses)***

 

For the yearended December 31, 2007, other income and expenses was a net expense of$10.2 million, down by $7.2 million compared to a net expense of$17.4 million last year. The decrease in 2007 is due mainly to a$8.4 million foreign exchange gain (2006 – $1.8 million foreignexchange loss), which relates primarily to the translation of the Company’s USdollar denominated convertible notes and credit facilities, offset partially bya $3.0 million increase in interest and other financing charges. Theincreased interest and other financing charges are due primarily to a full yearinterest and accretion expense (increase of $3.1 million) relating to theconvertible notes payable that were issued in March and June 2006.

 

***Net Income (Loss)***

 

For the yearended December 31, 2007, there was a tax recovery of $0.9 million(2006 recovery of $1.4 million). For the year ended December 31, 2007the net loss was $28.7 million or $0.51 per share compared to a net lossof $34.1 million or $0.65 per share the previous year.

 

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**Summary of Quarterly Results**

 
| ** **                                                                    | ** ** | **2006*** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **(thousands of dollars  except per share  amounts)**          | ** ** | **Q1**    | ** ** | **Q2**   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1*** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| **Revenue – before pricing adjustments**                            |       | $         | 24,356     |     | $          | 36,698 |   | $ | 38,704 |   | $ | 46,061 | ** ** | **$** | **60,305** | ** ** | **$** | **53,450** | ** ** | **$** | **42,674** | ** ** | **$** | **44,938** | ** ** |
| Pricing adjustments:                                                          |       |      |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commodities                                                                   |       | 6,952     |       | 566      |       | 2,927 |   | 1,229 | ** ** | **9,141** | ** ** | **(2,421** | **)** | **237** | ** ** | **1,799** | ** ** |
| Foreign exchange                                                              |       | 184       |       | (1,745   | )          | (200 | ) | 3,468 | ** ** | **(1,007** | **)** | **(6,534** | **)** | **(6,419** | **)** | **(231** | **)** |
| **Revenue – after pricing adjustments**                             |       | $         | 31,492     |     | $          | 35,519 |   | $ | 41,431 |   | $ | 50,758 | ** ** | **$** | **68,439** | ** ** | **$** | **44,495** | ** ** | **$** | **36,492** | ** ** | **$** | **46,506** | ** ** |
| Cash flow from operations(1), prior to  changes in non-cash working capital** |       | (260      | )          | (965     | )          | 2,716 |   | 8,421 | ** ** | **23,037** | ** ** | **12,865** | ** ** | **4,068** | ** ** | **6,858** | ** ** |
| Exploration expense                                                           |       | 2,024     |       | 2,659    |       | 2,576 |   | 4,572 | ** ** | **3,228** | ** ** | **798** | ** ** | **2,933** | ** ** | **5,179** | ** ** |
| Net income (loss)                                                             |       | (4,141    | )          | (11,325  | )          | (11,247 | ) | (7,396 | ) | **5,507** | ** ** | **(9,066** | **)** | **(14,033** | **)** | **(11,088** | **)** |
| Net income (loss) per share                                                   |       | $         | (0.08      | )        | $          | (0.22 | ) | $ | (0.21 | ) | $ | (0.14 | ) | **$** | **0.10** | ** ** | **$** | **(0.17** | **)** | **$** | **(0.25** | **)** | **$** | **(0.19** | **)** |
| Fully diluted net income (loss) per share                                     |       | $         | (0.08      | )        | $          | (0.22 | ) | $ | (0.21 | ) | $ | (0.14 | ) | **$** | **0.10** | ** ** | **$** | **(0.17** | **)** | **$** | **(0.25** | **)** | **$** | **(0.19** | **)** |

 

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*                                         Certain priorperiod amounts have been reclassified to conform to a classification adopted inthe current period.

 

**                                  Includesexploration expense

 

**FOURTH QUARTER**

 

**Fourth Quarter Highlights**

 

•**                 **Palladiumproduction for the three months ended December 31, 2007 was71,595 ounces, a decrease of 2% compared to the same periodlast year.

 

•                  Revenueafter pricing adjustments for the fourth quarter of 2007 of $46.5 milliondecreased $4.3 million (8%) compared to the same period last year.

 

•                  Operatingcash flow for the quarter (before changes in non-cash working capital)(1) declinedby $1.5 million to $6.9 million compared to operating cash flow of$8.4 million in 2006.

 

•                  Thenet loss for the three months ended December 31, 2007 was$11.1 million or $0.19 per share compared to a net loss of$7.4 million or $0.14 per share in the same period last year.

 

•                  Palladiumsales in the quarter were recorded at US$364 per ounce compared to US$322 perounce in the comparable quarter last year, while by-product metal prices, withthe exception of nickel, also realized considerable gains. Palladium accountedfor 51% of the quarter’s total revenues while platinum and nickel continued tobe important sources of revenue, at 17% and 15% of the quarter’s total revenuerespectively.

 

•                  Cashcost per ounce of palladium produced,(1) net of by-product metal revenuesand royalties, was US$223 for the fourth quarter 2007 compared to US$108 in thesame period last year, primarily due to the lower production in 2007 and theimpact of the strengthening Canadian dollar on both costs and by-productrevenue realized.

 

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(1)                                  Non-GAAP measure.Reference should be made to footnote 1 at the end of this MD&A.

 

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** **

**FourthQuarter Financial Results**

 

***Revenue***

 

The Companyearned revenue of $46.5 million for the three months ended December 31,2007 compared to revenue of $50.8 million for the corresponding period in2006. The loss from mining operations for the three months ended December 31,2007 was $8.2 million, compared to income from mining operations of$0.5 million in the same period last year.

 

Revenue beforepricing adjustments for the fourth quarter of 2007 decreased $1.1 millioncompared to the fourth quarter of 2006 and reflects a $7.0 milliondecrease due to a lower US$ exchange rate, offset partially by the net increasedue to improved commodity prices and sales volumes of $5.9 million.Positive pricing adjustments from the mark-to-market of concentrate awaitingsettlement in the fourth quarter of 2007 increased revenue in the quarter by$1.6 million ($1.8 million favourable commodity price adjustmentoffset partially by a $0.2 million negative foreign exchange adjustment).This compares to positive pricing adjustments in the fourth quarter of 2006 of$4.7 million ($3.5 million positive foreign exchange adjustment and a$1.2 million positive commodity price adjustment).

 

For the threemonths ended December 31, 2007, palladium sales were recorded at US$364per ounce, up 13% compared to US$322 in the same period last year. Revenue frompalladium sales before pricing adjustments in the fourth quarter of 2007 of$22.0 million increased by $0.5 million (2%) compared to the sameperiod last year, but after pricing adjustments was lower by $0.4 million($1.9 million negative foreign exchange adjustment offset partially bypositive commodity price adjustments of $1.0 million).

 

Revenue fromby-product metal sales after pricing adjustments in the three months ended December 31,2007 decreased by $3.9 million (15%) to $22.7 million compared to$26.6 million in the same period last year.

 

**Recorded Metal Prices and Average ExchangeRates**

 
| ** **                             | ** ** | **Q4 2007** | ** ** | **Q4 2006** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|
| Palladium – US$/oz           | ** ** | **$**            | **364**    |             | $          | 322 |   |
| Platinum – US$/oz            | ** ** | **$**            | **1,530**  |             | $          | 1,115 |   |
| Gold – US$/oz                | ** ** | **$**            | **836**    |             | $          | 635 |   |
| Nickel – US$/lb              | ** ** | **$**            | **11.70**  |             | $          | 15.11 |   |
| Copper – US$/lb              | ** ** | **$**            | **3.03**   |             | $          | 2.85 |   |
| US/CDN.$exchange rate (Bank of Canada) | ** ** | **US$**          | **1.02**   |             | US$        | 0.88 |   |
|                                        |            |                  |            |                  |            |  |  |  |  |

 

***Operations***

 

During thethree months ended December 31, 2007, the mill processed1,165,769 tonnes of ore at an average of 12,671 tonnes per day,producing 71,595 ounces of palladium. During the same period in 2006, themill processed 1,179,644 tonnes of ore at an average of 12,822 tonnesper day, producing 73,242 ounces of palladium. The average palladium headgrade was 2.58 grams per tonne in the fourth quarter of 2007, compared to2.52 grams per tonne in the corresponding period of 2006. In the fourthquarter of 2007, palladium recoveries were 75.2% as compared to 76.9% in fourthquarter of 2006, while mill availability in the period was 86.9% compared to89.5% last year. The slight (2%) reduction in ounces produced in the fourthquarter of 2007 can be attributed to lower mill tonnage reflecting increasedscheduled maintenance downtime in 2007 in order to reline the SAG and ballmills. The higher tonnage throughput for the year ended December 31, 2007resulted in a rescheduling of planned maintenance activities.

 

During thethree months ended December 31, 2007, 202,230 tonnes of ore wereextracted from the Lac des Iles underground mine, with an average palladiumgrade of 5.98 grams per tonne, compared to 222,519 tonnes with anaverage palladium grade of 6.42 grams per tonne during the same periodlast year. In the Lac des Iles open pit operation for the three months ended December 31,2007, 994,152 tonnes of ore were extracted with an average palladium gradeof 1.92 grams per tonne compared 

 

9

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to924,529 tonnes of ore extracted at an average palladium grade of1.63 grams per tonne in the same period last year. Over this period, thestrip ratio substantially improved to 1.74, compared to 2.13 in the sameperiod for 2006.

 

***Operating Expenses***

 

Totalproduction costs for the three months ended December 31, 2007 of$30.5 million reflected a $0.9 million (3%) increase over the$29.6 million in same period of 2006. Unit cash costs(1) to producepalladium (production costs including overhead and smelter treatment, refiningand freight costs), net of by-product metal revenues and royalties, increasedto US$223 per ounce in the fourth quarter of 2007 compared to US$108 per ouncein the corresponding period in 2006. The increase in unit cash costs wasprimarily due to the higher production costs, reduced nickel revenue (price perlb. US$11.70 in 2007 vs. US$15.11 in 2006) and the impact of the strengtheningCanadian dollar on both costs and by-product revenue.

 

Smeltertreatment, refining and freight charges for the three months ended December 31,2007 of $5.9 million increased by $1.5 million (32%) compared to2006. The increase is attributable to higher sales volumes ($0.4 million)and higher costs associated with the Company’s new smelter agreement that cameinto effect on April 1, 2007 ($1.1 million.)

 

Non-cashamortization increased to $10.9 million in the fourth quarter of 2007compared to $10.0 million in the corresponding period in 2006. The higheramortization is attributable to the adjustment in the mine plan that waseffective from the fourth quarter of 2006, which resulted in an increase in theunit of production amortization rate.

 

Administrativeexpenses for the three months ended December 31, 2007 of $2.1 millionincreased by $0.6 million (37%) compared to 2006, as a result of higher staff costs.

 

Explorationexpense was $5.2 million in the fourth quarter of 2007 compared to$4.6 million in the corresponding period last year, an increase of$0.6 million (13%). The increase is due mainly to the ongoing explorationat Shebandowan and the APP.

 

For the threemonths ended December 31, 2007, the loss from mining operations was$8.2 million, a decline of $8.7 million compared to last year’sprofit of $0.5 million, and reflects the revenue and operating expenseissues described above.

 

***Other Income(Expenses)***

 

For the threemonths ended December 31, 2007, other income and expense was an expense of$2.9 million compared to an expense of $8.0 million in thecorresponding period of 2006, a decrease of $5.1 million. The decrease in2007 reflects a favourable foreign exchange impact compared to last year of$2.6 million, which relates primarily to the translation of the Company’sUS dollar denominated convertible notes and credit facilities, and a reductionof interest and other financing charges of $2.5 million. The reducedinterest and other financing charges are due primarily to lower interest andaccretion expenses of $2.1 million relating to the convertible notespayable and reflects the scheduled repayment of the notes.

 

***Net Income (Loss)***

 

The Companyreported a net loss of $11.1 million or $0.19 per share compared to netloss of $7.4 million or $0.14 per share for the three months ended December 31, 2006.

 

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(1)                                  Non-GAAP measure.Reference should be made to footnote 1 at the end of this MD&A.

 

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**LIQUIDITY**

 

**Sources and Uses of Cash**

 
| **Year ended December 31**                               | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|------------|------------|----------|------------|
| Cash generated (consumed) by operations  before working capital changes | ** ** | **$**       | **46,828** |       | $          | 9,912    |       | $ | (36,460 | ) |
| Changes in non-cash working capital                                     | ** ** | **(21,352** | **)**      | (43,701    | )          | 28,187   |       |
| Cash generated (consumed) by operations                                 | ** ** | **25,476**  | ** ** | (33,789    | )          | (8,273   | )          |
| Cash provided (used) by financing                                       | ** ** | **61,323**  | ** ** | 41,295     |       | (7,051   | )          |
| Cash used in investing                                                  | ** ** | **(15,346** | **)**      | (19,384    | )          | (35,400  | )          |
| Increase (decrease) in cash and cash  equivalents                       | ** ** | **$**       | **71,453** | ** ** | $          | (11,878  | )          | $ | (50,724 | ) |

 

Cash providedby operations(1) (prior to changes in non-cash working capital) for theyear ended December 31, 2007 was $46.8 million, compared to cashprovided by operations of $9.9 million in 2006. The $36.9 millionimprovement was mainly attributable to increased non-cash amortization expense($16.8 million), the impact of an unrealized foreign exchange loss($11.6 million), a decreased net loss ($5.4 million) and a highernon-cash add back for accretion expense relating to the convertible notespayable ($2.9 million). For the year ended December 31, 2007,non-cash working capital required $21.4 million compared to$43.7 million in 2006, a reduction of $22.3 million. The highernon-cash working capital requirement in 2006 reflected the build up ofconcentrate awaiting settlement from increased production, which included thegrade improvement from the commercial start up of the underground mine in April 2006.In 2007, while production continued to increase, this was partially offset bythe lower foreign exchange rate.

 

Palladiumawaiting settlement decreased to 125,802 ounces at December 31, 2007compared to 129,496 ounces at December 31, 2006. The decrease in thephysical quantities of metal in the concentrate awaiting settlement, combinedwith the higher prices used to value the concentrate awaiting settlement,offset by the strengthening Canadian dollar resulted in a $3.0 million(4%) decrease in the value of concentrate awaiting settlement as at December 31,2007, compared to December 31, 2006. After allowing for non-cash workingcapital changes, cash provided by operations was $25.5 million for theyear ended December 31, 2007 compared to cash usage of $33.8 millionin 2006.

 

Financing activitiesfor the year ended December 31, 2007 provided cash of $61.3 millionand reflects equity financings of $75.3 million less the scheduledrepayment of debt. On February 27, 2007, the Company completed a privateplacement of 550,000 flow-through common shares at $11.00 per share forgross proceeds of $6.0 million. These proceeds are being used to expeditework on the Shebandowan Project. In December 2007 the Company completed anequity offering of 18.7 million units at a price of US$4.00 per unit. Inconnection with the offering the company granted the underwriter’s an overallotment option of 15% at the same price. This option was subsequentlyexercised in January 2008, increasing the gross proceeds of the offeringto US$85.9 million.

 

The Company’stotal debt position reduced to $39.1 million at December, 2007 compared to$74.9 million at December 31, 2006. During 2007, five principalpayments related to Tranche I convertible notes totalingUS$17.5 million and three principal payments related to the Tranche IIconvertible note totaling US$4.5 million were made. At the noteholder’soption, these payments were settled in a non-cash transaction by the issuanceof 3,120,997 common shares which, in accordance with the terms of theconvertible notes loan agreement, are valued at 90% of the five day volumeweighted average price on the

 

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(1)                                  Non-GAAP measure.Reference should be made to footnote 1 at the end of this MD&A.

 

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AMEX exchange immediately prior to the payment date. As at December 31,2007, US$26.5 million of principal amount of the convertible notesremained outstanding. The Company expects that the noteholders will continue toelect to receive interest and principal payments in common shares, however,should noteholders call for cash payments the Company has the right to deferpayment of principal to the Series I and Series II note due dates of August 1,and December 1, 2008 respectively. The reduction in debt also includesscheduled long term debt repayments ($6.2 million), scheduled capitallease repayments ($2.0 million) and the repayment of the Kaiser-FrancisOil Company (“Kaiser-Francis”) credit facility ($5.8 million) from thefirst advance under the Auramet palladium and platinum advance purchaseagreement (see Capital Resources below).

 

In addition,the strengthening of the Canadian dollar resulted in an unrealized foreignexchange translation gain on US dollar denominated debt at December 31,2007 of $8.4 million.

 

On October 12,2006 the Company closed a transaction with Kaiser-Francis for aUS$5.0 million short term working capital loan maturing December 31,2006. The interest rate under the loan was the 30-day LIBOR plus 2.5% perannum. The Company paid a commitment fee of US$37,000 and amounts not drawnunder the loan were subject to a standby fee of 0.125% per annum. In connectionwith the loan, the Company granted to Kaiser-Francis a first priority securityinterest on the inventory and receivables of the Company. On December 13,2006 the maturity date was extended to March 31, 2007, with no otherchange in terms. The Company paid a commitment fee of US$25,000 for theextension. In accordance with the terms of the Auramet palladium and platinumadvance purchase agreement, the first advance received from Auramet on March 7,2007 was used to repay this loan to Kaiser-Francis.

 

Investingactivities required $15.3 million of cash in 2007, the majority of whichwas attributable to the ongoing lateral development and sustaining capital forthe underground mine ($9.2 million) and the 2007 expansion of the tailingsmanagement facilities ($4.3 million). This compares with$19.4 million of net investing activities last year, which was mainlyrelated to the underground mine development and sustaining capital($12.1 million) and the 2006 expansion of the tailings managementfacilities ($4.7 million).

 

**CAPITAL RESOURCES**

 

As at December 31,2007 the Company had cash and cash equivalents of $74.6 million comparedto $3.2 million at the same time last year.

 

To meetworking capital requirements and lateral development of the underground mine,the Company entered into a palladium and platinum advance purchase facilitywith Auramet Trading, LLC on January 19, 2007 pursuant to which theCompany may, at its election, receive advance payments not exceeding anaggregate maximum amount of US$25.0 million. The Company is required topay a monthly commitment fee of 0.5% per annum, on the unused portion of theAuramet facility. As at December 31, 2007, the Company had no advancesoutstanding under this facility and the maximum amount of US$25.0 millionwas available. Under the current agreement with Auramet no advances can bereceived after June 2008 and any amounts advanced must be repaid by December 2008.

 

The Companyanticipates that current capital resources are sufficient to meet the needs ofthe existing operations at the Lac des Iles mine as well as the development ofthe Shebandowan West project, Phase I of the OHGZ project and furtherevaluation of APP. The Company is currently pursuing options for the renewal orreplacement of the Auramet working capital facility together with financingoptions to provide funding for the development of the APP projectin Finland.

 

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**Contractual Obligations**

 
| **As at December, 2007** | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **(thousands of dollars)**    | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years(2)** | ** ** |
| Senior credit facility                  |       | $                                         | 9,875      |   | $ | 5,918 |   | $ | 3,957 |   | $ | — |   |
| Capital lease obligations               |       | 3,496                                     |       | 1,672 |   | 1,824 |   | — |   |
| Convertible notes payable(1)            |       | 25,710                                    |       | 25,710 |   | — |   | — |   |
| Interest obligations                    |       | 1,421                                     |       | 1,158 |   | 263 |   | — |   |
| Operating leases                        |       | 3,257                                     |       | 1,224 |   | 2,008 |   | 25 |   |
| Other purchase obligations              |       | 10,808                                    |       | 10,808 |   | — |   | — |   |
|                                    |       | $                                         | 54,567     |   | $ | 46,490 |   | $ | 8,052 |   | $ | 25 |   |

 

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(1)                                  To date noteholdershave elected to receive principal and interest payments in common stock.

 

(2)                                  There are nopayments due after five years.

 

**RELATED PARTY TRANSACTIONS**

 

On June 23,2006, the Company repaid the balance of a US$20.0 million non-revolving creditfacility that had been extended by Kaiser-Francis in December 2001 tofinance the Company’s working capital requirements. This facility bore interestbased on the 30-day LIBOR plus 2.50% and was subject to a standby fee of 0.125%per annum. The amount paid to Kaiser-Francis for interest and standby fee onthis facility in 2006 was $0.6 million. Repayment of this facility wasmade pursuant to the terms of the Series II convertible note issued on June 23, 2006.

 

On October 12,2006 the Company closed a transaction with Kaiser-Francis for aUS$5.0 million short term working capital loan maturing December 31,2006. On December 13, 2006, the maturity date was extended to March 31,2007. Interest on this new facility was based on the 30-day LIBOR plus 2.5% andthe standby fee was 0.125% per annum. This facility was repaid on March 7,2007. As of February 22, 2008 Kaiser-Francis reported that it heldapproximately 41% of the issued and outstanding common shares ofthe Company.

 

On December 13,2007 the Company completed a public offering of 18,666,667 units at aprice of US$4.00 per unit ($4.04 per unit) for total gross proceeds ofapproximately US$74.7 million. Each unit consisted of one common share andone half of a common share purchase warrant of the Company. Each whole warrantwill entitle the holder to purchase one common share at a price of US$5.05 pershare at any time on or prior to December 13, 2009. Pursuant to the termsof the securities purchase agreement dated March 24, 2006 between theCompany, Kaiser-Francis and IP Synergy Finance Inc. (“IP Synergy”)relating to the Company’s convertible notes due 2008, Kaiser-Francis and IPSynergy each had a right to subscribe at the public offering price for up to12.5% of the total securities being offered by the Company in this offering. Ifeither Kaiser-Francis or IP Synergy subscribed for less than its 12.5% share,the unused right was to be offered to the non-declining party, Kaiser-Francisor IP Synergy, as the case may be. IP Synergy elected not to participate inthis offering pursuant to its pre-existing participation right, and, inaccordance with the terms of the securities purchase agreement, Kaiser-Franciselected to subscribe for 25% of this offering.

 

On January 9,2008, the Company issued an additional 2,800,000 units under a 30-dayoverallotment option granted to the underwriters at an exercise at a price ofUS$4.00 per unit, for total gross proceeds of US$11.2 million.Kaiser-Francis also exercised its pre-existing right under the securities purchaseagreement to subscribe for 25% of the overallotment units.

 

**REVIEW OF OPERATIONS AND PROJECTS**

 

**Lac des Iles Property**

 

The Lac desIles mine consists of an open pit mine, an underground mine, a processing plantwith a nominal capacity of approximately 15,000 tonnes per day, and theoriginal mill (which is currently idle) 

 

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with acapacity of approximately 2,400 tonnes per day. The primary deposit on theproperty is the Roby Zone, a disseminated magmatic nickel-copper-PGM deposit.

 

***Mining Operations***

 

The Companybegan mining the Roby Zone in 1993 using open pit mining methods. Ore and wastefrom the open pit is mined using conventional hydraulic 27 cubic meter and23 cubic meter shovels, 190 tonne trucks, 187 millimeter blasthole drills and a fleet of conventional ancillary equipment. Mine waste isstockpiled outside of design pit limits.

 

Development ofthe underground mine commenced in the second quarter of 2004 in order to accessthe higher grade portion of the Roby Zone. The underground deposit lies belowthe ultimate pit bottom of the open pit and extends to a depth of approximately660 meters below the surface where it is truncated by an offset fault.Commercial production from the underground mine commenced on April 1,2006. For the year ended December 31, 2007, the underground mine had anaverage head grade of 5.79 grams per tonne palladium compared to5.96 grams per tonne in 2006.

 

The chosenmining method for the underground mine is sublevel retreat longitudinallonghole stoping with no fill. The mining block interval is 70 metersfloor to floor including a 15 meter to 25 meter sill pillar beloweach haulage level. Stopes are 45 meters to 55 meters high by thewidth of the ore body. Total intake ventilation for the mine is designed to be205 cubic meters per minute. There is one intake ventilationraise/secondary egress situated outside the ultimate open pit limits and airexhausts up the main ramp.

 

 

The open pithas a remaining mine life of less than two years at the current rate ofproduction. In light of favourable PGM market conditions, management iscurrently assessing the economic viability of a southern extension of the openpit, which could prolong the mine life of the open pit by an additional two tothree years. The Company is contemplating commencing production from the upperportion of the OHGZ as the current underground mine ceases operations.

 

***Milling Operations***

 

In 2001, a newconcentrator facility was commissioned which utilizes a conventional flotationtechnology to produce a palladium rich concentrate that also contains platinum,nickel, gold and copper.

 

Ore is firstcrushed in a gyratory crusher and conveyed to a coarse ore stockpile. With thecommissioning of the secondary crusher in 2004, the coarse ore stream can besplit so that a portion is crushed in the secondary crusher producing a finematerial feed which is then combined with the coarse feed. This mixture ofcoarse and fine material feeds to the SAG mill to increase mill throughput. In2005, modifications were made to the secondary crusher, including theinstallation of a slide gate and better control feed distribution. The ore isground to a nominal P80 (the size of an opening through which 80% of theproduct will pass) of 74 microns in a conventional semi-autogenousmill/ball mill/pebble crusher (SABC) circuit. The ground ore then feeds aflotation circuit that is comprised of rougher/scavengers and four stages ofcleaning. The flotation circuit in the old concentrator is currently connectedto the new concentrator to provide additional cleaner flotation capacity. Thefinal concentrate is thickened and dewatered using two pressure filters.

 

In 2007, theconcentrator processed 5,006,383 tonnes of ore or 13,716 tonnes percalendar day at an average palladium head grade of 2.39 grams per tonneand an average palladium recovery of 74.8%. In 2006, the concentrator processed4,570,926 tonnes of ore or 12,523 tonnes per calendar day at anaverage palladium head grade of 2.18 grams per tonne and an averagepalladium recovery of 74.0%. In 2007, the Company produced286,334 ounces of palladium compared to 237,338 ounces in 2006.

 

Productioncosts per tonne of ore milled were $24.98 in 2007 compared to $24.60 in 2006.Cash costs, which include direct and indirect operating costs, smelting,refining, transportation and sales costs and royalties, net of credits forby-products, were US$164 per ounce of palladium in 2007 as compared to US$201per ounce of palladium in 2006

 

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***Offset High GradeZone***

 

The OHGZ islocated on the Lac des Iles property and was discovered by the Company’sexploration team in 2001. The OHGZ is believed to be the fault-displacedcontinuation of the Roby Zone mineralization and is located below andapproximately 250 meters to the west of the Roby Zone. A mineral resourceestimate prepared by Scott Wilson RPA in October 2007 estimated that theOHGZ has more than three times the mineral resources of the current undergroundmine at the Roby Zone at similar grades, while still being open along strike tothe north, south and at depth.

 

From May toOctober 2007, the Company completed approximately 18,000 meters ofinfill drilling in the upper 300 meters of the OHGZ, with the objective ofupgrading that portion of the mineral resources to the measured and indicatedcategories. The Company has begun to receive assay results and anticipatesupdating its mineral resources estimate for the OHGZ in the second quarter of2008. The Company’s objective is to commence production from the OHGZ as thecurrent underground mine reaches the end of its mine life in 2010.

 

In September 2007,the Company engaged two consulting firms, Micon International Limited andNordmin Engineering Ltd., to prepare a scoping study. The scoping studywill examine the economic viability of several exploitation scenarios for theOHGZ, including a continuation of the ramp from the current underground mineand shaft options. A report on the results of this preliminary economicassessment is nearing completion and the Company anticipates releasing theresults during the second quarter of 2008.

 

An explorationdrilling program is also currently in progress to search for the deep limits ofthe OHGZ. To date, the OHGZ has been traced to a depth of 1,300 metersbelow surface, and along a strike length of approximately 600 meters.

 

**Shebandowan West Project**

 

On December 10,2007, the Company earned a 50% interest in the former producing Shebandowanmine and the surrounding Haines and Conacher properties pursuant to an optionand joint venture agreement with Vale Inco. In order to earn its 50% interest,the Company incurred $3.0 million in exploration expenditures and made$0.2 million in cash payments. The properties contain a series ofnickel-copper-PGM mineralized bodies and the land package totals approximately7,842 hectares. These properties are located 90 kilometers west ofThunder Bay, Ontario, and approximately 100 kilometers southwest from theCompany’s Lac des Iles mine. Vale Inco retains an option to increase itsinterest from 50% to 60%, exercisable in the event that a feasibility study onthe properties results in a mineral reserve and mineral resource estimate ofthe equivalent of 200 million pounds of nickel and other metals. Ascurrently envisaged, the Shebandowan West Project will not trigger Vale Inco’sback-in right.

 

TheShebandowan West Project encompasses three shallow mineralized zones known asthe West, Road and “D” zones, all of which are located at shallow depthsimmediately to the west of the former Shebandowan mine in an area known as theShebandowan West district. The Shebandowan West Project’s nickel-copper-PGMmineralization is believed by management to represent the western extension ofthe Shebandowan mine orebody. The former Shebandowan mine, which was inoperation from 1972 to 1998, produced 8.7 million tonnes of ore at gradesof 2.07% nickel, 1.00% copper and approximately 3.0 g/t PGM and gold.

 

Management isconsidering a mine development scenario that would entail excavation of theShebandowan West Project by means of ramp-accessed underground mining methodsat a rate of 500 to 1,000 tonnes per day, crushing the material on siteand transporting it by truck to the Lac des Iles property for processing at theoriginal mill on the Lac des Iles property. The original mill at Lac des Ileshas been idle since 2001 and the Company believes that it could be refurbishedquickly and at a relatively low cost. Preliminary metallurgical testingsupports the possibility of producing a bulk sulphide concentrate from theShebandowan West Project at the original mill.

 

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A TechnicalReport in compliance with National instrument 43-101 disclosing theresults of a mineral resource estimate by an independent Qualified Person wasfiled on October 26, 2007. In December 2007, the Company retained SRKConsulting to prepare a preliminary economic assessment of the ramp-accessedmine scenario. The results of this report are expected in the second quarterof 2008.

 

Communityconsultations and baseline environmental sampling are ongoing and completion ofbulk sampling, process and design are expected to be completed during the firsthalf of 2008. If plans proceed as expected, production at the Shebandowan WestProject could commence in 2009.

 

**Arctic Platinum Project**

 

The Company isparty to an agreement with Gold Fields entitling it to earn up to a 60%interest in a series of mining licenses and claims known as the APP. The agreementis subject to a back-in right in favor of Gold Fields which, if exercised,would decrease the Company’s interest to a 50% share. Upon satisfaction of theearn-in requirements, North American Palladium will have a casting vote atmeetings of the joint venture partners, other than with respect to mattersrequiring a special majority vote.

 

In order toexercise the option, on or before August 31, 2008, the Company must: (i) completea re-scoping and exploration program; (ii) complete a feasibility study; (iii) makea production decision and prepare the initial formal development proposal andassociated budget based on the feasibility study; (iv) incur expendituresof US$12.5 million on the APP; and (v) issue 7,381,636 CommonShares to Gold Fields BV in order to earn a 50% interest or9,227,033 Common Shares to earn a 60% interest. To date, the Company hascompleted the re-scoping study, incurred over US$11.6 million inexpenditures and has commissioned a feasibility study. The Company believesthat it will satisfy the conditions of the earn-in on or before August 31, 2008.

 

The APP is anadvanced-stage PGM-nickel-copper exploration project located approximately60 kilometers south of the city of Rovaniemi, Finland. To date, threeareas of the APP have been explored by North American Palladium: the Suhankodeposits, the Narkaus deposits and the Penikat deposits.

 

***The Suhanko Deposits***

 

The Suhankodeposits are located approximately 60 kilometers south of the city ofRovaniemi, which has a population of approximately 4,400 and, as the capital ofthe Province of Lapland, is a major regional centre. The town is serviced byrail, road and air with multiple flights daily to and from Helsinki. The portof Kemi on the Gulf of Bothnia is kept open throughout the winter and islocated 120 kilometers southwest of Rovaniemi.

 

Suhanko iscomprised of several deposits over a total strike length of approximately17 kilometers that have been demonstrated by Gold Fields to contain anumber of nickel-copper-PGM deposits. Since the discovery of nickel-copper-PGMmineralization at the Yli-Portimo deposit in 1964, exploration in the Suhankoproject area in the intervening years has resulted in the discovery of thefollowing other deposits: Konttijarvi, Little Suhanko, Vaaralampi, Niittilampi,Ahmavaara, Suhanko North, and Tuumasuo. Exploration and delineation work inconnection with the Company’s preparation of a feasibility study has focused ononly the Konttijarvi and Ahmavaara deposits, with the total sizes of theremaining deposits being essentially undetermined.

 

***The Narkaus Deposits***

 

The Narkausdeposits are located approximately 30 kilometers northeast of the Suhankodeposits and contains a sequence of favorable rocks that have been demonstratedto be present along an aggregate strike length of approximately20 kilometers. To date, significant nickel-copper-PGM mineralization hasbeen discovered at a number of deposits, including the Siika-Kama, Kuohunki,Nutturalampi and Kilvenjärvi deposits. The Company continues to explore depositsin the Narkaus deposit area with a view to potentially improving the overalleconomics of the larger Suhanko deposit area.

 

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** **

***The Penikat Deposits***

 

The Penikat deposits are a separate intrusion located approximately35 kilometers to the southwest of the Suhanko deposits. Traditionalreef-style nickel-copper-PGM mineralization has been discovered in threedistinct reefs over a strike length of approximately 27 kilometers. Todate, exploration has concentrated on evaluating the shallow portions(essentially above a depth of 100 meters from surface) of one of thesereefs where significant concentrations of nickel-copper-PGM mineralizationlocated in the northern portion of the intrusion have been discovered. Theexploration potential of the remaining two reefs, along with the depthextensions of the explored reef, remains essentially untested.

 

***The Suhanko Deposits***

 

Management has been examining a development scenario consisting of twonickel-copper-PGM open pit mines at two of the deposits that comprise theSuhanko area, the Ahmavaara and Konttijarvi deposits, which are located threekilometers from each other. The nickel-copper-PGM bearing material would beprocessed through a centrally-located concentrator at a nominal throughput rateof 5.0 million tonnes per year. PGM-nickel-copper bearing concentratewould be transported 125 kilometers by truck to a port facility located atKemi, Finland and shipped to smelting and refining facilities for finalextraction of the contained metals.

 

On October 30, 2007, the Company released the results of a scopingstudy by Aker Kvaerner on the two main mineral deposits in the Suhanko area,Ahmavaara and Konttijarvi, which indicated that the mineral resources couldpotentially support a 20-year mine life at approximately 7.5 milliontonnes per annum. The Company has retained Aker Kvaerner to prepare adefinitive feasibility study for the Suhanko project to build upon therecommendations in the scoping study. The Company has also contracted with a30-year veteran of the mining industry to oversee the feasibility study andother work at the APP as the Company moves closer to satisfying its earn-in conditions.

 

An infill drilling campaign at the Ahmavaara deposit was completedearlier in 2007 and the assay results of the final 26 holes of the 83-holedrilling program were reported on October 22, 2007. Micon InternationalLimited has now been engaged to conduct the update of the mineral resourceestimates, which will include the results from the Ahmavaara infill drillingcampaign. Micon will also conduct the open pit designs and optimization.

 

Bulk sampling of the Ahmavaara and Konttijarvi deposits was alsocompleted in October 2007 in advance of pilot plant test work. A programof bench-scale metallurgical testing has been completed in support of a pilotplant test that commenced in December 2007 and was completed in February 2008.The pilot plant test provided samples that will be tested by smelters that havebeen identified for the concentrate marketing strategy and will allow theCompany to pilot a flowsheet. In October 2007, the Company commenceddiscussions with various smelters, and follow-up meetings are planned now thatsamples are available. Initial smelting proposals in support of the feasibilitystudy are anticipated by May 2008.

 

**Grassroots Exploration Properties**

 

In addition to its operating mine and three advanced explorationprojects, the Company is constantly examining PGM and nickel opportunities,particularly in the areas surrounding the Company’s Lac des Iles mine.

 

Management believes that the Company is well positioned to partner withother PGM and nickel exploration companies in Canada, given the existinginfrastructure at the Lac des Iles mine and the Company’s years of experiencein mining PGM-nickel deposits. From time to time, the Company enters intoconfidentiality agreements with junior mining companies or individualprospectors to assess the prospective nature of their land holdings. Inaddition, management believes that the consolidation in the nickel industry mayresult in joint venture or acquisition opportunities for the Company as themajor nickel companies seek to shed non-core assets.

 

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The Company is also active in grassroots exploration and recentlystaked 39 claims containing 632 claim units at the Company’s ShawmereProject, located approximately 110 kilometers southwest of Timmins,Ontario, Canada. The Company intends to conduct a grassroots explorationprogram to assess the area’s potential for hosting PGM-nickel-coppermineralization similar to that found at its Lac des Iles mine.

 

**Metal Sales**

 

In 2007, the Company sold palladium both into the spot market and toAuramet Trading, LLC, a precious metals merchant (“Auramet”), under apalladium and platinum advance purchase facility that the Company entered intoin January 2007. The facility provides for the sale, at the Company’soption, of an average of 10,000 ounces of palladium and 500 ounces ofplatinum per month. Under the terms of the facility, the Company may receiveadvance payments not exceeding, at any time, an aggregate maximum ofUS$25 million. The purchase price may be fixed or provisional. For fixedpricing, the Company may price at either: (i) Auramet’s current market bidprice at the time of the transaction, or (ii) market limit orders, asdefined under the terms of the agreement. In the case of provisional pricing,it is determined based on the afternoon fixing of the London Bullion MarketingAssociation immediately preceding the purchase. In each case, such pricing willreflect the forward value corresponding to the scheduled delivery date. Eachadvance payment is subject to a discount and, upon the delivery of the preciousmetals to Auramet, the Company is paid the difference between the advancepayment and the purchase price. To secure the obligations of the Company underthe agreement, the Company has granted to Auramet a security interest in theconcentrates mined at the Lac des Iles mine, together with the proceeds arisingfrom the sale of the concentrate, and, by way of security, an assignment of itssmelting and refining agreement.

 

In 2006, all palladium production was sold into the spot market withone or more commodity dealers and manufacturers. From January 2000 to June 2005,the Company sold all of its palladium production to an automotive manufacturerunder a contract with a US$325 per ounce floor price for 100% of its palladiumproduction and a US$550 per ounce ceiling price on 50% of its palladiumproduction.

 

For the year ended December 31, 2007, the Company recorded aweighted average cash price of US$356 per ounce on its physical deliveries ofpalladium into the spot market. The Company expects that palladium prices willcontinue to trade higher in 2008 than in 2007. The average spot price wasUS$360 per ounce for the fourth quarter of 2007 (reaching a high of US$379),compared to an average price of US$321 per ounce for same period last year.Since January 1, 2005, the price of palladium has shown strong growth as aresult of strong demand, most notably in the automotive industry, as indicatedin the chart below from Johnson Matthey.

 

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Source: Johnson Matthey

 

**MANAGEMENT’S OUTLOOK**

 

There is no significant pattern of variability or seasonality affectingthe Company’s operations. The principal drivers of the Company’s performanceare its monthly production of PGM and by-product metals from its Lac des Ilesmine, the corresponding world spot prices of such metals and the prevailing US$exchange rate.

 

Production for the year ended December 31, 2007 was286,334 ounces of palladium with an average palladium head grade of2.39 grams per tonne, and represents a 21% increase over the previous year’sproduction of 237,338 ounces, with a head grade of 2.18 grams pertonne. This continues the trend of improved volumes and head grade year overyear reflecting the impact of the underground mine which has been in commercialproduction since the second quarter of last year. The Company’s 2008 yearend production target is approximately 300,000 ounces of palladium.The proportion of by-product metals produced is, in aggregate, expected toincrease in tandem with palladium production.

 

The Company’s intensive core exploration program will continue in 2008,with an important component being the continuation of activities on the APP inFinland. In addition, the Company continues to focus on the further definitionof the OHGZ at Lac des Iles and the development of the Shebandowan WestProject. A key strategy moving forward will be to continue the pursuit ofopportunities to acquire good quality PGM-Ni-Cu projects.

 

**Recorded Metal Prices**

 
| ** **                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **YTD 2008*** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|--------------------|------------|
| Palladium – US$/oz |       | $        | 230        |     | $          | 319      |       | $                  | 356        | ** ** | **$** | **462** | ** ** |
| Platinum – US$/oz  |       | $        | 815        |     | $          | 1,140    |       | $                  | 1,364      | ** ** | **$** | **1,903** | ** ** |
| Gold – US$/oz      |       | $        | 442        |     | $          | 610      |       | $                  | 726        | ** ** | **$** | **941** | ** ** |
| Nickel – US$/lb    |       | $        | 6.60       |     | $          | 11.68    |       | $                  | 15.58      | ** ** | **$** | **13.18** | ** ** |
| Copper – US$/lb    |       | $        | 1.50       |     | $          | 3.02     |       | $                  | 3.30       | ** ** | **$** | **3.48** | ** ** |

 

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*      Basedon the average month end London Metal Exchange (“LME”) afternoon price fix forthe two months ended February 29, 2008.

 

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The Company believes that the surplus pressures of the early 2000’shave abated and that there is evidence to support the view that the palladiummarket is moving towards more of a demand-driven pricing environment. This isbeing evidenced by increasing global catalytic demand, fueled by growing lowtolerance emission legislation, and technological advances which could exploitpricing differentials between palladium and platinum. Electrical power supplyproblems in South Africa that produces approximately 35% of the world’s supplyof palladium is another catalyst for higher palladium and platinum prices.

 

**Critical Accounting Policies and Estimates**

 

Critical accounting policies generally include estimates that arehighly uncertain and for which changes in those estimates could materiallyimpact the Company’s financial statements. The following accounting policiesare considered critical:

 

**(a)****          ****Impairmentassessments of long-lived assets**

 

Eachyear, the Company reviews the mining plan for the remaining life of mine. Significantchanges in the mine plan can occur as a result of mining experience, mineralreserve estimates based on assessed geological and engineering analysis, newdiscoveries, changes in mining methods and production rates, process changes,investments in new equipment and technology, metal prices, estimates of futureproduction costs and other factors. Based on year-end mineral reserves and thecurrent mine plan, the Company reviews annually its accounting estimates andmakes adjustments accordingly.

 

TheCompany assesses long-lived assets for recoverability on an annual basis. Whenthe carrying value of a long-lived asset is less than its net recoverablevalue, as determined on an undiscounted basis, an impairment loss is recognizedto the extent that its fair value, measured as the discounted cash flows overthe life of the asset.

 

Assumptionsunderlying future cash flow estimates are subject to risk and uncertainty. Anydifferences between significant assumptions and market conditions such as metalprices, exchange rates, recoverable metal, and/or the Company’s operatingperformance could have a material effect on the Company’s ability to recoverthe carrying amounts of its long-lived assets resulting in possible additionalimpairment charges.

 

**(b)****          ****Amortizationof mining interests**

 

TheCompany amortizes a large portion of its mining interests using the unit ofproduction method based on proven and probable reserves to which they relate oron a straight-line basis over their estimated useful lives, ranging from threeto seven years.

 

**(c)****          ****RevenueRecognition**

 

Revenuefrom the sale of palladium and by-product metals is recognized net of royaltiesupon the delivery of concentrate to the smelter, which is when title transfersand the rights and obligations of ownership pass. The Company’s metals are soldunder contracts that provide for final prices that are determined by quotedmarket prices in a period subsequent to the date of sale. Variations from theprovisionally priced sales are recognized as revenue adjustments as they occuruntil the price is finalized. Provisional pricing is based upon market pricesin the month of recognition. Concentrate awaiting settlement at the smelter isnet of estimated treatment and refining costs which are subject to finalassay adjustments.

 

**(d)****          ****MineRestoration Obligation**

 

Assetretirement obligations are recognized when incurred and recorded as liabilitiesat fair value. The amount of the liability is subject to re-measurement at eachreporting period. The liability is accreted over time through periodic chargesto earnings. In addition, the asset retirement obligation is capitalized aspart of mining interests and amortized over the estimated life of the mine. Theestimated asset retirement obligation may change materially based on futurechanges in operations, costs of reclamation and closure activities, andregulatory requirements.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED**

 

**(a)****          ****FinancialInstruments – Recognition and Measurement**

 

InDecember 2006, the CICA released new Handbook sections 3862, “FinancialInstruments – Disclosures”, and 3863, “Financial Instruments –Presentation”, effective for fiscal years beginning on or after October 1,2007. Section 3862, describes the required disclosures related to thesignificance of financial instruments on the Company’s financial position andperformance and the nature and extent of risks arising for financialinstruments to which the entity is exposed and how the entity manages thoserisks. This section complements handbook sections 3855, “FinancialInstruments – Recognition and Measurements”; 3863, “FinancialInstruments – Presentation; and 3865, “Hedges”. Section 3863,establishes standards for presentation of financial instruments and nonfinancial derivatives. This section complements handbook section 3861, “FinancialInstruments – Disclosure and Presentation”. The Company has not yetdetermined the effect these new standards will have on its financial position andresults of operations.

 

**(b)****          ****CapitalDisclosures**

 

InDecember 2006, the CICA released new Handbook section 1535, “CapitalDisclosures”, which establishes standards for disclosing information about aCompany’s capital and how it is managed, to enable users of financialstatements to evaluate the Company’s objectives, policies and procedures formanaging capital. This section will apply to interim and annual financialstatements relating to fiscal years beginning on or after January 1, 2008.The Company has not yet determined the effect these new standards will have onits financial position and results of operations.

 

**(c)****          ****Inventories**

 

InJune 2007, the CICA released new handbook section 3031, “Inventories,”effective for interim and annual financial statements beginning on or after January 1,2008. Section 3031 supersedes the existing CICA section 3030, “Inventories,”and provides additional guidance on the determination of cost and itssubsequent recognition as an expense, including any write-down to net realizablevalue, and disclosures made within the financial statements. The Company hasnot yet determined the effect these new standards will have on its financialposition and results of operations.

 

**OUTSTANDING SHARE DATA**

 

As of March 18, 2008, there were 80,633,812 common shares of theCompany outstanding and options outstanding pursuant to the 1995 CorporateStock Option Plan entitling holders thereof to acquire 391,433 common shares ofthe Company at an average strike price of $9.82. As of the same date, therewere also 12,724,202 warrants outstanding each warrant entitling the holderthereof to purchase one common share at an average strike price of US$5.81.

 

**RISKS AND UNCERTAINTIES**

 

The price of palladium is the most significant factor influencing the profitabilityof the Company. In the twelve months ended December 31, 2007, sales ofpalladium accounted for approximately 47% (December 31, 2006 –approximately 48%) of the Company’s revenue. Many factors influence the priceof palladium, including global supply and demand, speculative activities,international political and economic conditions and production levels and costsin other PGM producing countries, particularly Russia and South Africa. Thepossible development of a substitute alloy or synthetic material, which hascatalytic characteristics similar to platinum group metals, may result in afuture decrease in demand for palladium and platinum.

 

Currency fluctuations will affect financial results since the prices ofthe Company’s products are denominated in United States dollars, whereasthe Company’s administration, operating and exploration expenses are incurredmainly in Canadian dollars. As a result, any strengthening of the Canadiandollar relative to the United States dollar has a negative impact on theCompany’s revenue and profitability.

 

The Company is dependent on one mine for its metal production. Thebusiness of mining is generally subject to risks and hazards, includingenvironmental hazards, industrial accidents, metallurgical and 

 

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other processing problems, unusual and unexpected rock formations, pitslope failures, flooding and periodic interruptions due to inclement weatherconditions or other acts of nature, mechanical equipment and facilityperformance problems and the availability of materials and equipment. Theserisks could result in damage to, or destruction of, the Company’s properties orproduction facilities, personal injury or death, environmental damage, delaysin mining, monetary losses and possible legal liability. Although the Companymaintains insurance in respect of the mining operations that is within rangesof coverage consistent with industry practice, such insurance may not providecoverage of all the risks associated with mining. Currently the Company sellsall of its concentrate to one smelting firm under a contract that wasrenegotiated during the second quarter of 2007 for a three year term thatexpires on March 31, 2010. This agreement may be extended on an annualbasis for an additional two years by mutual agreement of both parties if suchagreement is reached no later than six months prior to the anniversary date of March 31, 2010.

 

**DISCLOSURE CONTROLS AND PROCEDURES**

 

Management is responsiblefor the information disclosed in this management’s discussion and analysis andhas in place the appropriate information systems, procedures and controls toensure that information used internally by management and disclosed externallyis, in all material respects, complete and reliable.

 

For the twelve months ended December 31,2007, the President and Chief Executive Officer and Vice President, Finance andChief Financial Officer certify that they have designed, or caused to bedesigned under their supervision, disclosure controls and procedures to providereasonable assurance that material information relating to the Company and itsconsolidated subsidiaries would be made known to them by others withinthose entities.

 

The disclosure controls andprocedures are evaluated annually through regular internal reviews which arecarried out under the supervision of, and with the participation of, theCompany’s management, including the President and Chief Executive Officer andVice President, Finance and Chief Financial Officer. Based on thatevaluation, the President and Chief Executive Officer and Vice President,Finance and Chief Financial Officer concluded that the design and operation ofthese disclosure controls and procedures were effective as of December 31, 2007.

 

**INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

For the year ended December 31,2007, the President and Chief Executive Officer and Vice President,Finance and Chief Financial Officer certify that they have designed, or causedto be designed under their supervision, internal controls over financialreporting to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of the financial statements forexternal purposes in accordance with Canadian GAAP and including areconciliation to U.S. GAAP.

 

There have been no changesin the Company’s internal controls over the financial reporting that occurredduring the most recent interim period ended December 31, 2007 that havematerially affected or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

Management is responsiblefor establishing and maintaining adequate internal controls over financialreporting. Internal control over financial reporting, no matter how welldesigned, has inherent limitations and can only provide reasonable assurancewith respect to the preparation and fair presentation of published financialstatements. Under the supervision and with the participation of the Presidentand Chief Executive Officer and the Vice President, Finance and Chief FinancialOfficer, management conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in InternalControl – Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission. Based on that evaluation, the President and ChiefExecutive Officer and Vice President, Finance and Chief Financial Officerconcluded that the design and operation of these internal controls overfinancial reporting were effective as at December 31, 2007.

 

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**OTHER INFORMATION**

 

Additional informationregarding the Company is included in the Company’s Annual Information Form andAnnual Report on Form 40-F which are filed with the Canadian securitiesregulators and the United States Securities and Exchange Commission,respectively. A copy of the Company’s Annual Information Form is posted onthe SEDAR website at www.sedar.com. A copy of the Annual Report or Form 40-Fcan be obtained from the United States Securities and Exchange Commission’swebsite at www.sec.gov.

 

**(1) Non-GAAP Measures**

 

This management’s discussionand analysis refers to cash cost per ounce and operating cash flow which arenot recognized measures under Canadian GAAP. Such non-GAAP financial measuresdo not have any standardized meaning prescribed by Canadian GAAP and aretherefore unlikely to be comparable to similar measures presented by otherissuers. Management uses these measures internally. The use of these measuresenables management to better assess performance trends. Management understandsthat a number of investors and others who follow the Company’s performanceassess performance in this way. Management believes that these measures betterreflect the Company’s performance for the current period and are a betterindication of its expected performance in future periods. This data is intendedto provide additional information and should not be considered in isolation oras a substitute for measures of performance prepared in accordance withCanadian GAAP. The following tables reconcile these non-GAAP measures to themost directly comparable Canadian GAAP measure:

 

**(a)****          ****Reconciliationof Cash Cost per Ounce to Financial Statements**

 
| ** **                                    | ** ** | **Three months ended** | ** ** | **Twelve months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| **(thousands of dollars**           | ** ** | **December 31**             | ** ** | **December 31**              | ** ** |
| **except per ounce amounts)**  | ** ** | **2007**                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Production costs including overhead           | ** ** | **$**                            | **30,530** |                              | $          | 29,553 | ** ** | **$** | **125,065** |   | $ | 112,458 |   |
| Smelter treatment, refining and freight costs | ** ** | **5,939**                        |       | 4,487                             | ** ** | **22,444** |   | 15,438 |   |
| ** **                                    |       | **36,469**                       |       | 34,040                            | ** ** | **147,509** |   | 127,896 |   |
| Less by-product metal revenue                 | ** ** | **(22,701**                      | **)**      | (26,574                           | )          | **(104,126** | **)** | (83,556 | ) |
| ** **                                    |       | **13,768**                       |       | 7,466                             | ** ** | **43,383** |   | 44,340 |   |
| Divided by ounces of palladium                | ** ** | **62,446**                       |       | 59,333                            | ** ** | **251,531** |   | 193,067 |   |
| Cash cost per ounce (C$)                      | ** ** | **220**                          |       | 126                               | ** ** | **172** |   | 230 |   |
| C$exchange rate                               | ** ** | **0.988**                        |       | 1.165                             | ** ** | **1.050** |   | 1.141 |   |
| Cash cost per ounce (US$)                     | ** ** | **$**                            | **223**    |                              | $          | 108 | ** ** | **$** | **164** |   | $ | 201 |   |

 

**(b)****          ****Reconciliationof Cash Flow from Operations, Prior to Changes in Non-Cash Working Capital(Operating Cash Flow) to Financial Statements***

 
| ** **                            | ** ** | **Three months ended   December 31** | ** ** | **Twelve months ended   December 31** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                                 | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating cash flow                   | ** ** | **$**                                                    | **6,858**  |                                                      | $          | 8,421 | ** ** | **$** | **46,828** |   | $ | 9,912 |   |
| Changes in non-cash working capital   | ** ** | **3,663**                                                |       | (13,995                                                   | )          | **(21,352** | **)** | (43,701 | ) |
| Cash provided by operating activities | ** ** | **$**                                                    | **10,521** |                                                      | $          | (5,574 | **)** | **$** | **25,476** |   | $ | (33,789 | ) |

 

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*      Certainprior period amounts have been reclassified to conform to the classificationadopted in the current period

 

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CAUTIONARYSTATEMENT ON FORWARD-LOOKING INFORMATION

 

Certain information includedin this MD&A, including any information as to our future financial oroperating performance and other statements that express management’s expectationsor estimates of future performance, constitute ‘forward-looking statements’within the meaning of the ‘safe harbor’ provisions of the United StatesPrivate Securities Litigation Reform Act of 1995 and Canadian securities laws.The words ‘expect’, ‘believe’, ‘will’, ‘intend’, ‘estimate’ and similarexpressions identify forward-looking statements. Forward-looking statements arenecessarily based upon a number of estimates and assumptions that, whileconsidered reasonable by management, are inherently subject to significantbusiness, economic and competitive uncertainties and contingencies. Thesestatements are based on certain factors and assumptions, including but notlimited to, the assumption that market fundamentals will result in increased palladiumdemand and prices and sustained by-product metal demand and prices; theintegrated operation of the Company’s underground mine and the open pit mineremain viable operationally and economically; financing is available onreasonable terms; expectations for blended mill feed head grade and millperformance will proceed as expected; new mine plan scenarios will be viableoperationally and economically; and plans for mill production, sustainablerecoveries from the Lac des Iles mine, exploration at Lac des Iles andelsewhere will all proceed as expected.

 

The Company cautions thereader that such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause the actual financial results,performance or achievements of North American Palladium to be materiallydifferent from the Company’s estimated future results, performance orachievements expressed or implied by those forward-looking statements and thatthe forward-looking statements are not guarantees of future performance. Theserisks, uncertainties and other factors include, but are not limited to: metalprice volatility; economic and political events affecting metal supply anddemand; changes in the regulatory environment; fluctuations in ore grade or oretonnes milled; geological, technical, mining or processing problems; futureproduction; changes in the life-of-mine plan or the ultimate pit design;availability and increasing costs associated with mining inputs and labour; thespeculative nature of exploration and development, including the risks ofdiminishing quantities or grades of mineral reserves; adverse changes in ourcredit rating; and the risks involved in the exploration, development andmining business. These factors are discussed in greater detail in the Company’smost recent Form 40-F/Annual Information Form on file with theU.S. Securities and Exchange Commission and Canadian provincial securitiesregulatory authorities. The Company disclaims any obligation to update orrevise any forward-looking statements, whether as a result of new information,events or otherwise except as required by law. Readers are cautioned not to putundue reliance on these forward-looking statements.

 

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