##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 WASHINGTON, D.C.
    20549
  FORM
    10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007   OR
  o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number: 000-51686
  NUCRYST Pharmaceuticals
    Corp.
 (Exact name of registrant as
    specified in its charter)
  Alberta, Canada(State or other jurisdiction
    of
    incorporation or organization)

Not Applicable(I.R.S. Employer
    Identification No.)50 Audubon Road, Suite B
    Wakefield, Massachusetts(Address of principal
    executive offices)

01880(Zip Code)   (781) 224-1444
 (Registrants telephone number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class:

Name of Exchange on which registered:Common shares, no par value

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
   Large accelerated
    filer  o

Accelerated
    filer  o

Non-accelerated
    filer  o

Smaller Reporting
    Company  þ(Do not check if a smaller
    reporting
    company)   Rule 12b-2 o þ
      Class

Outstanding at February 11, 2008Common Shares, no par value

18,367,563 shares   Documents
    incorporated by reference: None.




---



##### 





TABLE OF
    CONTENTS
  Part IItem 1.

Business


4Item 1A.

Risk Factors


20Item 2.

Properties


39Item 3.

Legal Proceedings


39Item 4.

Submission of Matters to a Vote of Security
    Holders


39Part IIItem 5.

Market for the Registrants Common Equity;
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


40Item 6.

Selected Financial Data


42Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


44Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


59Item 8.

Financial Statements and Supplementary Data


60Item 9.

Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


78Item 9A.

Controls and Procedures


78Item 9B.

Other Information


78Part IIIItem 10.

Directors and Executive Officers and
    Corporate Governance


79Item 11.

Executive Compensation


82Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


94Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


97Item 14.

Principal Accountant Fees and Services


99Part IVItem 15.

Exhibits, Financial Statements Schedules


100Signatures


105Index to ExhibitsExhibit 10.27Exhibit 10.44Exhibit 10.45Exhibit 10.46Exhibit 10.47Exhibit 10.48Exhibit 10.49Exhibit 10.50Exhibit 10.51Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2      Form 10-K, Form 10-K,
  Year Ended December 31,

Period End Rate


Period Average Rate


High Rate


Low Rate2003


1.2923



1.4008



1.5750



1.29232004


1.2034



1.3017



1.3970



1.1775  2




---



##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
    
    our ability to succeed in the initiation, timing, progress and
    results of our preclinical and clinical trials, research and
    development programs;
    our reliance on and ability to succeed in maintaining our
    relationship with Smith & Nephew, plc
    (Smith & Nephew);
    our reliance on sales of
    Acticoattm
    products with our
    SILCRYSTtm
    coatings by Smith & Nephew;
    our ability to achieve cost savings sufficient to substantially
    or to completely offset the manufacturing cost rebate we have
    agreed to pay Smith & Nephew;
    our ability to successfully implement our business model,
    strategic plans for our business, product candidates and
    technology;
    our ability to successfully file supplementary 510(k)
    applications to broaden the indications cleared for our
    NPI 32101 barrier cream and obtain clearance from the U.S.
    Food and Drug Administration (FDA) as well as other
    applicable filings with the European Union and Canadian
    authorities;
    our ability to succeed at establishing a successful
    commercialization program for our NPI 32101 barrier cream
    through corporate collaborations or otherwise;
    the scope of protection we are able to establish and maintain
    for intellectual property rights covering our product candidates
    and technology;
    our ability to operate our business without infringing the
    intellectual property rights of others;
    estimates of our expenses, future revenues, capital requirements
    and our needs for additional financing;
    our ability to comply with applicable governmental regulations
    and standards;
    the timing or likelihood of regulatory filings and approvals;
    our financial performance;
    competitive companies, technologies, products and our industry;
    changes in regulation or tax laws applicable to us;
    changes in accounting policies or practices;
    changes in general economic conditions;
    other risks and uncertainties that have not been identified at
    this time; and
    managements response to these factors.   3




---



##### Table of Contents



Form 10-K
  INDUSTRY
    AND MARKET DATA
   PART I ITEM 1.  BUSINESS  Overview
    and Current Years Developments
  tm
  tm tm tm tm tm tm tm tm tm
  tm
 4




---



##### Table of Contents



tm
  tm
  tm tm tm tm tm tm
      in vitro in vivo tm tm tm
 5




---



##### Table of Contents



tm
    Company
    Information
  (781) 224-1444.
    Our
    Nanocrystalline Technology
     6




---



##### Table of Contents



tm tm
        Market
    Overview
  Wound
    Care Market
  tm tm difficult-to-heal
       7




---



##### Table of Contents



tm tm tm tm
  tm
  Pharmaceutical
    Market
      mild-to-moderate 5-ASAs 5-ASAs,
  in vivo 5-ASA.
  Clostridium difficile C difficile
 8




---



##### Table of Contents



difficile
  ActicoattmProducts With Our
    SILCRYSTtmCoatings
  tm tm tm tm tm tm tm
  tm tm tm Staphylococcus aureus, tm tm tm
  tm tm
  Acticoattm3/ActicoattmBurn Dressings
  tm tm tm tm tm tm
  Acticoattm7 Dressings
  tm tm tm tm tm tm
 9




---



##### Table of Contents



ActicoattmAbsorbent Dressings
  tm tm tm tm
  ActicoattmMoisture Control Dressings
  tm tm tm tm tm tm
  tm
  ActicoattmSite
  tm
  ActicoattmPost-Op
  tm tm tm
  New
    ActicoattmProducts
  tm tm tm tm tm
  tm tm tm tm
  Our Other
    Products
  tm
 10




---



##### Table of Contents



Topical
    Formulation with NPI 32101
  in vitro Pseudomonas
    aeruginosa Staphyloccocus aureus,
  Our
    Pre-Clinical Programs
    Our
    Clinical Development Program
    Smith &
    Nephew Agreements
  tm tm tm tm tm tm
  tm
  Amended
    License and Development Agreement
  tm tm tm
 11




---



##### Table of Contents



tm
  tm tm tm
  tm tm tm 3/Acticoat tm tm
  tm tm tm
  tm tm tm tm tm tm
   12




---



##### Table of Contents



tm
  Supply
    Agreement
  tm tm tm tm
  tm tm tm tm
  tm tm tm
  out-of-pocket
  tm tm
 13




---



##### Table of Contents



Manufacturing
    and Technology Escrow Agreement
  tm tm tm
  Security
    Trust Agreement and Trust Indenture
  tm tm
  Indemnities
  tm tm
  Marketing
  tm tm tm tm tm
  Manufacturing
  tm tm
   14




---



##### Table of Contents



tm
    Intellectual
    Property
                Competition
  tm
 15




---



##### Table of Contents



tm tm tm tm tm tm
  tm
  tm tm
  Third-Party
    Reimbursement and Pricing Controls
  tm
    tm
  Government
    Regulation
   16




---



##### Table of Contents



United
    States
    Medical Device Regulation.
  tm tm tm tm
    New Drug Approval Process.
     17




---



##### Table of Contents



Manufacturing cGMP Requirements.
    European
    Union Regulation
  Marketing Authorizations for Drugs.
      European GMP.
 18




---



##### Table of Contents



Medical Devices. tm
    tm
  Environmental
    and Occupational Safety and Health Regulations
      Employees
   19




---



##### Table of Contents



Financial
    Information by Business Segment and Geographic Data
  Segmented Information Form 10-K.
 ITEM
    1A.  RISK FACTORS  If any of the following risks materialize, then our business,
    financial condition, results of operations and future prospects
    would likely be materially and adversely affected.
  Risks
    Related to Our Business and Industry
  We have a
    history of net losses and negative cash flow from operations;
    this will likely continue in the future and our cash may not be
    adequate to accomplish our objectives.
    Prior to
    our initial public offering in December 2005, we were wholly
    dependent upon Westaim for financial support, and must now rely
    on third parties for financing.
    We are
    dependent on our relationship with Smith &
    Nephew.
  tm
 20




---



##### Table of Contents



tm tm tm tm tm tm tm
    Smith &
    Nephew is our only customer for all of our existing
    products.
  tm tm tm tm tm tm tm
  tm tm
  tm
  tm
  tm
 21




---



##### Table of Contents



We may be
    unable to sell our existing products to other parties, even if
    our agreements with Smith & Nephew expire or
    terminate.
  tm tm tm tm tm
  tm
  tm tm tm tm tm tm
  We may be
    unable to achieve the cost savings required to offset the
    manufacturing cost rebate we agreed to pay Smith &
    Nephew in 2007, 2008 and 2009.
    We are
    required to manufacture
    Acticoattmproducts according to Smith & Nephews forecasts and,
    if we suffer a material difficulty supplying
    Acticoattmproducts, Smith & Nephew would have the right to
    manufacture or cause a third party to manufacture
    Acticoattmproducts using our technology and facilities.
  tm tm tm tm
  tm tm
 22




---



##### Table of Contents



tm tm tm tm
  tm tm tm tm
  tm tm tm tm tm
  We rely
    on Smith & Nephew for regulatory filings for
    Acticoattmproducts and our results would be adversely affected if they do
    not fully comply with regulatory requirements.
  tm
  Our
    agreements with Smith & Nephew may limit our ability
    to enter into agreements to transfer certain of our assets or to
    collaborate with third parties in new product
    development.
  tm
 23




---



##### Table of Contents



We have
    agreed to indemnify Smith & Nephew for claims under
    our agreements, which could result in significant costs to
    us.
  tm
  Our
    ability to develop and sell future products, particularly our
    gastrointestinal and future wound care products, is critical to
    our success, and if we fail to do so, our business and financial
    condition will suffer.
  tm
    
    our ability to develop safe and effective products;
    our ability to obtain regulatory approval in the United States,
    the European Union and other markets and the scope of such
    approval;
    our ability to add sufficient manufacturing capacity and
    capability at an acceptable cost and in compliance with
    regulatory requirements;
    our ability to generate commercial sales of our products;
    acceptance of the product by the medical community and by
    patients and third-party payors;
    inherent development risks, such as the product proving to be
    unsafe or unreliable, or not having the anticipated
    effectiveness; 24




---



##### Table of Contents




    preclusion or obsolescence resulting from third parties
    proprietary rights or superior or equivalent products;
    our ability to enter into favorable and effective marketing and
    distribution agreements, or to be able to effectively market and
    distribute on our own;
    our ability to develop repeatable processes to manufacture new
    products in sufficient quantities;
    our ability to raise on acceptable terms the substantial
    additional capital expected to be necessary to successfully
    develop and commercialize such products; and
    general economic conditions.    We may
    face increased risk of product liability due to the
    nanocrystalline nature of our technology. If product liability
    lawsuits are brought against us, they could result in costly
    litigation and significant liabilities.
        The
    market for advanced wound care and pharmaceutical products is
    intensely competitive and many of our competitors have
    significantly more resources and experience than we do, which
    may limit our commercial opportunities and revenues.
  tm
 25




---



##### Table of Contents



tm tm
  tm
  tm
  
    are more effective;
    have fewer or less severe adverse side effects;
    have better patient compliance;
    receive better reimbursement terms;
    are accepted by more physicians;
    have better distribution channels;
    are easier to administer;
    are less expensive; or
    are more cost effective.      Smith &
    Nephew, who previously was restricted by a non-competition
    clause, may now introduce other silver based products that
    compete with
    Acticoattmproducts.
  tm tm tm tm tm tm tm
  tm tm
 26




---



##### Table of Contents



tm tm tm tm tm tm tm tm tm
  tm tm
  If we are
    unable to effectively manage our expected future growth, we may
    develop too much production capacity resulting in too high of a
    cost structure to continue to produce
    Acticoattmproducts cost effectively or we may develop production capacity
    too slowly and be unable to meet demand for
    Acticoattmproducts with our
    SILCRYSTtmcoatings and, in either event, we may be unable to develop or
    commercialize future products successfully.
  tm tm tm
  tm tm
   27




---



##### Table of Contents



We depend
    on our executive officers and scientific and technical
    personnel, and if we are not able to retain them or recruit
    additional qualified personnel, we may be unable to successfully
    develop or commercialize future products.
        We
    currently purchase most of our raw materials from single
    suppliers. If we are unable to obtain raw materials and other
    products from our suppliers that we depend on for our
    operations, our ability to deliver our products to market may be
    impeded.
    tm tm
  If we are
    not successful in establishing collaborations with prominent
    health care companies, we may not be able to grow our
    business.
   28




---



##### Table of Contents



If a
    natural or man-made disaster strikes one or more of our
    facilities, or facilities upon which we depend, we may be unable
    to manufacture certain products for a substantial amount of time
    and our revenue could decline.
    We have
    historically had internal controls and accounting processes in
    place and have modified these controls and processes over time
    as the need has arisen. However, if our internal controls and
    accounting processes are insufficient, we may not detect in a
    timely manner misstatements that could occur in our financial
    statements in amounts that could be material.
      We will
    incur significant expenses as a result of being a public
    company.
   29




---



##### Table of Contents



We may
    incur losses associated with currency fluctuations and may not
    be able to effectively hedge our exposure.
    Risks
    Related to Regulatory Matters
  Smith &
    Nephew may be unable to maintain existing regulatory approvals
    or obtain new regulatory approvals for the
    Acticoattmproducts that it currently sells, which would negatively affect
    our results of operations. Our future products may not be
    approved by the regulatory agencies, and any failure or delay
    associated with our product development and clinical trials or
    the agencies approval would increase our product
    development costs and time to market.
  tm tm
    
    delays in obtaining regulatory approvals, including approvals by
    the competent institutional review board, or IRB, or ethics
    committee, or EC, to commence or continue a study;
    delays in identifying and reaching agreement on acceptable terms
    with prospective clinical trial sites;
    insufficient quantities of the study product;
    scheduling conflicts with participating clinicians and clinical
    institutions;
    slower than expected rates of patient recruitment and enrollment
    or the inability to reach full enrollment;
    improper enrollment practices resulting in protocol management
    problems and statistical analysis problems;
    inconclusive or negative interim results during clinical trials,
    including lack of effectiveness or unforeseen safety issues;
    death of, or serious adverse effects experienced by, one or more
    patients during a clinical trial even if the reasons are not
    related to the study product candidate, including the advanced
    stage of the patients disease or medical condition;
    uncertain dosing issues; 30




---



##### Table of Contents




    inability to monitor patients adequately during and after
    treatment;
    inability or unwillingness of contract laboratories to follow
    good laboratory practices or of our clinical investigators and
    us to follow good clinical practices;
    the occurrence of adverse events during the clinical trials;
    inability or unwillingness of clinical investigators to follow
    our clinical protocols or good clinical practices generally;
    inability or unwillingness of patients to follow our clinical
    protocols; and
    inability or unwillingness of other third parties to perform
    data collection and analysis in a timely or accurate manner.    
    delay or prevent the commercialization of any product that we
    develop for new indications or any product within an already
    approved indication for which the submission of additional
    clinical trial data is required;
    in the case of delays, materially and adversely increase the
    cost of completing the development of such product and obtaining
    regulatory approval to market it;
    diminish any competitive advantages; and
    adversely affect our ability to attract new collaborators.  Completion
    of clinical trials does not guarantee successful
    commercialization of future products.
    
    clinical trials can have negative or inconclusive results;
    regulators may not agree with our results or our analysis of the
    safety or the efficacy of our products;
    there is a risk of unsuccessful commercialization even after a
    product has been launched into the market, for example due to
    unexpected side effects of the product which were not discovered
    during clinical trials; and
    the market may fail to respond positively to a product for a
    variety of factors outside our control, including but not
    limited to inadequate or unsuccessful marketing efforts by third
    parties on which we depend but cannot control, competition from
    other products, cost, reimbursement policies of third-party
    payors or the buying decisions of consumers for a variety of
    unforeseen reasons, including those unrelated to efficacy.  In the
    case of products that have already received regulatory approval
    or products for which we may receive regulatory approval in the
    future, we, Smith & Nephew and any companies with which we
    may collaborate in the future may still face development and
    regulatory difficulties that may delay or impair future
    sales.
  tm tm
  
    delays in commercialization;
    refusal by the FDA or other regulatory agencies to review
    pending applications or supplements to approved applications; 31




---



##### Table of Contents




    product recalls or seizures; warning letters; suspension of
    manufacturing;
    withdrawals of previously approved marketing applications;
    fines and other civil penalties;
    injunctions, suspensions or revocations of marketing licenses;
    refusals to permit products to be imported to or exported from
    the United States and other countries; and
    civil litigation and criminal prosecutions.    If
    government and third-party payors fail to provide coverage and
    adequate reimbursement rates for
    Acticoattmproducts or our future products, our revenues and potential for
    profitability will be reduced.
  tm tm tm
        Our
    business involves the use, handling, storage and disposal of
    hazardous materials and may subject us to environmental
    liability, and any future environmental liability could
    seriously harm our financial condition. We do not maintain
    insurance covering these risks.
     32




---



##### Table of Contents



We
    perform and manage our clinical trials rather than relying on
    third-party clinical research organizations, or CROs, and since
    we do not have extensive experience in this area, there may be
    delays in completing, or a failure to complete, clinical trials
    that comply with regulatory requirements.
        Failure
    to comply with workplace safety legislation could seriously harm
    our financial condition.
    Risks
    Related to Intellectual Property
  The
    protection of our intellectual property rights is critical to
    our success and any failure on our part to adequately protect
    those rights would materially adversely affect our
    business.
  Patents.
         33




---



##### Table of Contents



Trade Secrets and Proprietary Know-how.
  Trademarks. tm tm
    The
    ability to market
    Acticoattmproducts and any other products we develop is subject to the
    intellectual property rights of third parties.
  tm
   34




---



##### Table of Contents



We may be
    subject to damages resulting from claims that we or our
    employees have wrongfully used or disclosed alleged trade
    secrets of their former employers.
    We may
    become involved in expensive intellectual property litigation or
    other proceedings related to intellectual property
    rights.
          Risks
    Related to Our Common Shares
  There has
    been limited trading in our common shares and, as a result, our
    common share price may be highly volatile.
     35




---



##### Table of Contents




    variations in our operating performance and the performance of
    our competitors or companies that are perceived to be similar to
    us;
    actual or anticipated fluctuations in our quarterly or annual
    operating results;
    results of pre-clinical and clinical trials by us and our
    competitors;
    matters relating to our agreements with Smith &
    Nephew, including fluctuations in sales of Smith &
    Nephews
    Acticoattm
    products;
    assertions that our intellectual property infringes on the
    intellectual property rights of others or other matters calling
    into question our intellectual property;
    changes in estimates or recommendations by securities analysts;
    publication of research reports by securities analysts about us
    or our competitors or our industry;
    our failure or the failure of our competitors to meet
    analysts projections or guidance that we or our
    competitors may give to the market;
    additions and departures of key personnel;
    strategic decisions by us or our competitors, such as
    acquisitions, divestitures, spin-offs, joint ventures, strategic
    collaborations or investments or changes in business strategy;
    the passage of legislation or other regulatory developments
    affecting us or our industry;
    speculation in the media or investment community;
    changes in accounting principles;
    litigation;
    terrorist acts, acts of war or periods of widespread civil
    unrest; and
    changes in general market and economic conditions.    Future
    sales of currently restricted shares could cause the market
    price of our common shares to decrease significantly, even if
    our business is doing well.
     36




---



##### Table of Contents



Westaim
    controls and will continue to control us and may have conflicts
    of interest with us or you in the future.
      The
    amount of our net operating loss carryovers may be
    limited.
    If we are
    classified as a passive foreign investment company, it could
    have adverse tax consequences to investors.
    We do not
    intend to pay dividends, which may adversely affect the market
    price of our common shares.
   37




---



##### Table of Contents



As a
    foreign private issuer, we are subject to different United
    States securities laws and rules than a domestic United States
    issuer, which may limit the information publicly available to
    our shareholders.
    You may
    be unable to enforce actions against us or certain of our
    directors and officers under United States federal securities
    laws.
    We have
    outstanding share options that have the potential to dilute
    shareholder value and cause the price of our common shares to
    decline.
    Our
    articles and certain Canadian laws could delay or deter a change
    of control.
       38




---



##### Table of Contents



ITEM
    2.  PROPERTIES    tm tm
   ITEM
    3.  LEGAL PROCEEDINGS   ITEM
    4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS   39




---



##### Table of Contents



PART II  ITEM
    5.
    MARKET
    FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Price
    NASDAQ


TSXHigh


Low


High


Low(U.S.$)


(U.S.$)


(CDN$)


(CDN$)2007First Quarter

$
5.58


$
3.15


$
6.50


$
3.67Second Quarter

$
3.62


$
1.95


$
5.92


$
1.99Third Quarter

$
5.84


$
1.91


$
5.92


$
2.01Fourth Quarter

$
2.95


$
1.40


$
2.96


$
1.412006First Quarter

$
11.72


$
8.88


$
13.87


$
10.39Second Quarter

$
16.88


$
10.56


$
18.75


$
12.25Third Quarter

$
16.03


$
6.60


$
18.25


$
7.41Fourth Quarter

$
7.78


$
3.76


$
8.00


$
4.36   Number of
    Shareholders
    Dividends
    Recent
    Sales of Unregistered Securities
    Repurchases
    of Equity Securities
    Regulation S-K  Securities
    Authorized for Issuance Under Equity Compensation
    Plans.
 40




---



##### Table of Contents



Share
    Price Performance Graph
    NASDAQDate

Healthcare Index


NASDAQ


NCST2005


100.00



100.00



100.002006


100.09



109.52



47.162007


111.01



109.81



29.54
    
  Information
    about our Annual Meeting
  1 3
 41




---



##### Table of Contents



ITEM
    6.  SELECTED FINANCIAL DATA      Year Ended December 31,2007


2006


2005


2004


2003Results of Operations Data:Revenue:Wound care product revenue


$20,092



$ 24,369



$18,636



$14,682



$ 8,404Milestone
    revenue(1)


10,000







5,000



10,000



3,000Total revenue


30,092



24,369



23,636



24,682



11,404Costs:Manufacturing


14,477



16,053



10,015



7,141



4,430Research and development


6,303



11,162



8,520



8,971



5,704General and administrative


9,067



6,723



3,945



3,901



2,797Depreciation and amortization


355



430



300



221



158Write down of capital assets


1,173



1,049











(Loss) income from operations


(1,283
)


(11,048
)


856



4,448



(1,685
)Other income (expenses):Foreign exchange (losses) gains


(3,283
)


(298
)


193



82



(230
)Interest income


685



1,123



12



66



47Interest
    expense(2)






(310
)


(3,540
)


(3,229
)


(414
)(Loss) income before income taxes and cumulative effect of a
    change in accounting principle


(3,881
)


(10,533
)


(2,479
)


1,367



(2,282
)Current income tax (expense)
    recovery(3)


(140
)


41



(162
)


(19
)


(19
)(Loss) income before cumulative effect of a change in accounting
    principle


(4,021
)


(10,492
)


(2,641
)


1,348



(2,301
)Cumulative effect of a change in accounting principle






(7
)










Net (loss) income


$(4,021
)


$(10,499
)


$(2,641
)


$ 1,348



$ (2,301
)Net (loss) income per common share  basic and diluted


$ (0.22
)


$  (0.58
)


$ (0.27
)


$  0.14



$  (0.24
)Weighted average number of common shares outstanding basic


18,333,810



17,964,332



9,764,486



9,727,500



9,727,500 diluted


18,333,810



17,964,332



9,764,486



9,905,464



9,727,500    (1)
    Certain milestone revenue may relate in part to sales activity
    in prior periods.(2)
    Prior to our initial public offering, Westaim provided all of
    the external funding necessary to operate our business, and all
    of the indebtedness reflected on our consolidated balance sheets
    for periods through December 31, 2005 reflects funding from
    Westaim. In 2003, Westaim did not charge interest on
    substantially all of our indebtedness to Westaim. Accordingly,
    interest expense for the years ended December 31, 2003 is
    substantially less than the interest expense that would have
    been incurred had we been charged interest on all of our
    indebtedness. 42




---



##### Table of Contents



(3)
    Although we are currently a majority owned subsidiary of
    Westaim, Canadian tax laws do not allow for the filing of a
    consolidated income tax return with Westaim. Accordingly, we
    have filed our own tax returns and the income tax expenses
    reflected in the above financial data reflect our actual
    consolidated income tax expense for the applicable periods.  As of December 31,2007


2006


2005


2004


2003Consolidated Balance Sheet Data:Cash and cash equivalents

$
17,841


$
18,926


$
35,901


$
948


$
201Current assets


37,618



33,591



48,992



8,002



4,655Total assets


51,299



45,892



59,460



15,597



10,042Current
    liabilities(1)


3,828



2,306



45,691



37,181



31,273Working capital (deficiency)


33,790



31,285



3,301



(29,179
)


(26,618
)Common shares


82,776



82,672



42,629



3,534



3,534Accumulated other comprehensive income (loss)


557



(5,490
)


(5,281
)


(4,180
)


(2,479
)Accumulated deficit


(38,099
)


(34,078
)


(23,579
)


(20,938
)


(22,286
)Total shareholders equity (deficit)


46,745



43,586



13,769



(21,584
)


(21,231
)    (1)
    Includes indebtedness to Westaim of $0, $0, $39,642, $33,482,
    $29,612 as of December 31, 2007, 2006, 2005, 2004, and 2003
    respectively.  Year Ended December 312007


2006


2005


2004


2003Wound care product revenue

$
24,592


$
24,369


$
18,636


$
14,682


$
8,404Manufacturing cost rebate


(4,500
)














Net wound care product revenue

$
20,092


$
24,369


$
18,636


$
14,682


$
8,404Milestone
    revenue(1)


10,000







5,000



10,000



3,000Total revenue

$
30,092


$
24,369


$
23,636


$
24,682


$
11,404Manufacturing costs

$
14,477


$
16,053


$
10,015


$
7,141


$
4,430Gross margin excluding milestone
    revenue(2)

$
5,615


$
8,316


$
8,621


$
7,541


$
3,974Gross margin percent excluding milestone
    revenue(2)


27.9%



34.1%



46.3%



51.4%



47.3%    (1)
    Certain milestone revenue may relate in part to sales activity
    in prior periods.(2)
    Gross margin excluding milestone revenue is equal to wound care
    product revenue minus manufacturing costs. Gross margin percent
    excluding milestone revenue is equal to gross margin excluding
    milestone revenue divided by wound care product revenue. 43




---



##### Table of Contents



ITEM
    7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  In this managements discussion and analysis, unless
    otherwise specified, all monetary amounts are in thousands of
    United States dollars, all references to $,
    U.S.$, U.S. dollars and
    dollars mean U.S. dollars and all references to
    C$, Canadian dollars and
    CDN$ mean Canadian dollars. To the extent that such
    monetary amounts are derived from our consolidated financial
    statements attached to this managements discussion and
    analysis, they have been translated into U.S. dollars in
    accordance with our accounting policies as described therein.
    Unless otherwise indicated, other Canadian dollar monetary
    amounts have been translated into United States dollars at the
    December 31, 2007 noon buying rate reported by the Federal
    Reserve Bank of New York, being U.S. $1.00 = C$0.9881
  Overview &
    Current Developments
  tm tm
  tm tm tm tm tm tm tm tm tm tm tm
  tm tm
  tm
 44




---



##### Table of Contents



tm tm tm tm
  tm tm tm tm
      tm
  Revenue
    Recognition
  tm tm tm tm tm tm tm tm tm
 45




---



##### Table of Contents



tm tm
  tm tm tm tm tm tm
  tm
  tm tm tm
 46




---



##### Table of Contents



tm
  tm tm tm tm tm tm tm
  tm period-to-period tm
    tm tm tm
 47




---



##### Table of Contents



New
    Product Development
      Pharmaceutical
    Products
    Medical
    Devices
      Results
    of Operations
  Year Ended December 312007


2006


2005(in thousands)Wound Care Product Revenue

$
24,592


$
24,369


$
18,636Manufacturing Cost Rebate


(4,500
)






Net Product Related Revenue

$
20,092


$
24,369


$
18,636Milestone Revenue


10,000







5,000Total Revenue

$
30,092


$
24,369


$
23,636Manufacturing Costs


14,477



16,053



10,015Gross Margin Excluding Milestone Revenue

$
5,615


$
8,316


$
8,621Gross Margin Percent Excluding Milestone Revenue


27.9%



34.1%



46.3%    (1)
    Certain milestone revenue may relate in part to sales activity
    in prior periods.(2)
    Gross margin excluding milestone revenue is equal to wound care
    product revenue minus manufacturing costs. Gross margin percent
    excluding milestone revenue is equal to gross margin excluding
    milestone revenue divided by wound care product revenue.  Year
    Ended December 31, 2007 and December 31,
    2006
  Revenue.
 48




---



##### Table of Contents



Manufacturing Costs.
  Gross Margin.
  tm
  Research and Development Costs.
  General and Administrative Costs.
  Income Taxes.
 49




---



##### Table of Contents



50




---



##### Table of Contents



Year
    Ended December 31, 2006 and December 31,
    2005
  Revenue. tm tm
  Manufacturing Costs. tm tm tm
  Gross Margin. tm
  Research and Development Costs.
  General and Administrative Costs.
  Interest Expense.
  Liquidity
    and Capital Resources
   51




---



##### Table of Contents



52




---



##### Table of Contents



tm
  Contractual
    Commitments and Obligations at December 31, 2007
    Cash Payments Due by PeriodLess than








More than1 year


1-3 years


3-5 years


5 years


Total(in millions)Consolidated Obligations and Commitments as of
    December 31, 2007:Facilities operating leases:Third Parties

$
1.0


$
1.4


$
1.2


$
1.5


$
5.1Contractual Obligations:Third
    Parties(1)






9.1










$
9.1Purchase Obligations:Capital


















Operations


0.9















0.9Total obligations and commitments

$
1.9


$
10.5


$
1.2


$
1.5


$
15.1     (1)
    This commitment relates primarily to our obligation, under our
    supply agreement to pay Smith & Nephew a manufacturing
    cost rebate in the amount of $4.5 million in 2008 and 2009. 53




---



##### Table of Contents



Related
    Party Transactions
      Off-Balance
    Sheet Commitments as of December 31, 2007
       54




---



##### Table of Contents



Critical
    Accounting Policies and Significant Judgments and
    Estimates
    Revenue
    Recognition
      Research
    and Development Costs
    Income
    Taxes
    Intangible
    Assets
   55




---



##### Table of Contents



Translation
    of Foreign Currencies
      Year Ended December 31,

Period End Rate

Period Average Rate

High Rate

Low Rate2005


1.1656



1.2115



1.2703



1.15072006


1.1652



1.1340



1.1726



1.09892007


0.9881



1.0742



1.1852



0.9168Monthly 2007January


1.1792



1.1763



1.1824



1.1647February


1.1700



1.1710



1.1852



1.1586March


1.1530



1.1682



1.1810



1.1530April


1.1068



1.1350



1.1583



1.1068May


1.0701



1.0951



1.1136



1.0701June


1.0634



1.0651



1.0727



1.0579July


1.0656



1.0502



1.0689



1.0372August


1.0560



1.0578



1.0754



1.0497September


0.9959



1.0252



1.0546



0.9959October


0.9496



0.9751



1.0002



0.9496November


1.0007



0.9661



1.0007



0.9168December


0.9881



1.0021



1.0216



0.9784   Stock
    Based Compensation
    paid-in-capital,
   56




---



##### Table of Contents



Recently
    Adopted Accounting Pronouncements
  FIN 48
    Recently
    Pending Accounting Pronouncements
  SFAS 157
    SFAS 159
    EITF
    07-1
  No. 07-1
 57




---



##### Table of Contents



EITF
    07-3
  No. 07-3,
  FASB
    Business Combinations
    i
    Statement No. 141(R), Business Combination; andii
    Statement No. 160, Non-controlling Interests in
    Consolidated Financial Statements  an amendment of
    ARB No. 51.    
    More assets acquired and liabilities assumed to measured at fair
    value as of the acquisition date;
    Liabilities related to contingent consideration to be
    re-measured at fair value in each subsequent reporting period;
    An acquirer in pre-acquisition periods to expense all
    acquisition related costs; and
    Non-controlling interests in subsidiaries initially to be
    measure at fair value and classified as a separate component of
    equity.   58




---



##### Table of Contents



ITEM
    7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISKS     59




---



##### Table of Contents



ITEM
    8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA  Report of
    Independent Registered Chartered Accountants
            Deloitte &
    Touche LLP
      60




---



##### Table of Contents



Comments
    by Independent Registered Chartered Accountants on
    Canada 
    United States of America Reporting Difference
    Deloitte &
    Touche LLP
      61




---



##### Table of Contents



NUCRYST
    Pharmaceuticals Corp.
  Consolidated
    Balance Sheets
 (In US
    thousands, except share data)
  December 31


December 312007


2006ASSETSCurrentCash and cash equivalents

$
17,841


$
18,926Accounts receivable  net (note 4)


14,924



7,041Inventories (note 5)


4,426



7,297Other


427



32737,618



33,591Restricted cash (note 2g)


140



135Capital assets  net (note 6)


12,734



11,350Intangible assets  net (note 7)


807



816$
51,299


$
45,892LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities (note 8)

$
3,650


$
2,261Accounts payable and accrued liabilities to related party
    (note 12)


67



45Deferred lease inducement (note 2m)


111



3,828



2,306Long term deferred lease inducement (note 2m)


726



4,554



2,306Guarantees (note 13)Commitments (note 14)SHAREHOLDERS EQUITYCommon shares no par value, unlimited shares authorized:issued and outstanding  18,367,563 and
    18,309,613 shares at December 31, 2007 and 2006,
    respectively (note 10)


82,776



82,672Additional paid-in capital


1,511



482Accumulated other comprehensive income (loss) (note 2d)


557



(5,490
)Accumulated deficit


(38,099
)


(34,078
)Total shareholders equity


46,745



43,586$
51,299


$
45,892   The accompanying notes are an integral part of these
    consolidated financial statements.
  62




---



##### Table of Contents



NUCRYST
    Pharmaceuticals Corp.
  Consolidated
    Statement of Operations
 (In US
    thousands, except share data)
  Year Ended


Year Ended


Year EndedDecember 31


December 31


December 312007


2006


2005RevenueWound care product revenue (note 3)

$
20,092


$
24,369


$
18,636Milestone revenue (note 3)


10,000







5,00030,092



24,369



23,636CostsManufacturing (note 6)


14,477



16,053



10,015Research and development (note 6)


6,303



11,162



8,520General and administrative


9,067



6,723



3,945Depreciation and amortization (note 6)


355



430



300Write down of capital assets (note 6)


1,173



1,049



(Loss) income from operations


(1,283
)


(11,048
)


856Foreign exchange (loss) gain


(3,283
)


(298
)


193Interest income


685



1,123



12Interest expense (note 9)






(310
)


(3,540
)Loss before income taxes and cumulative effect of a change in
    accounting principle


(3,881
)


(10,533
)


(2,479
)Current income tax (expense) recovery (note 11)


(140
)


41



(162
)Loss before cumulative effect of a change in accounting principle


(4,021
)


(10,492
)


(2,641
)Cumulative effect of a change in accounting principle
    (note 2p)






(7
)


Net loss

$
(4,021
)

$
(10,499
)

$
(2,641
)Loss per common share (note 17)Net loss  basic and diluted

$
(0.22
)

$
(0.58
)

$
(0.27
)Weighted average number of common shares outstanding: basic


18,333,810



17,964,332



9,764,486 diluted


18,333,810



17,964,332



9,764,486   The accompanying notes are an integral part of these
    consolidated financial statements.
  63




---



##### Table of Contents



NUCRYST
    Pharmaceuticals Corp.
  Consolidated
    Cash Flow Statements
 (In US
    thousands, except share data)
  Year Ended


Year Ended


Year EndedDecember 31


December 31


December 312007


2006


2005Operating activitiesNet loss

$
(4,021
)

$
(10,499
)

$
(2,641
)Items not affecting cashDepreciation and amortization


1,638



1,656



1,282Stock-based compensation expense


1,121



496



Amortized lease inducement


(71
)






Write down of capital assets


1,173



1,049



Foreign exchange loss






(356
)


Cumulative effect of a change in accounting principle






7



Changes in non cash working capitalAccounts receivable


(7,009
)


(606
)


(2,000
)Inventories


4,001



(777
)


(3,612
)Other


(13
)


(212
)


22Accounts payable and accrued liabilities


668



(2,376
)


1,191Accounts payable and accrued liabilities to related party
    (note 12)


(177
)


(969
)


1,058Accrued interest on indebtedness to related party (note 9)










2,589Cash used in operating activities


(2,690
)


(12,587
)


(2,111
)Investing activitiesRestricted cash


(5
)


(5
)


(2
)Purchase of short-term investments






(22,191
)


Maturity of short-term investments






22,748



Capital expenditures


(1,920
)


(4,978
)


(3,784
)Intangible assets


(66
)


(153
)


(127
)Cash used in investing activities


(1,991
)


(4,579
)


(3,913
)Financing activitiesIssuance of common shares, net of share issuance costs
    (note 10)


12



286



39,095Deferred lease inducement


822







Net advances from related party (note 9)










1,662Cash provided from financing activities


834



286



40,757Effect of exchange rate changes on cash and cash equivalents


2,762



(95
)


220Net (decrease) increase in cash and cash equivalents


(1,085
)


(16,975
)


34,953Cash and cash equivalents at beginning of year


18,926



35,901



948Cash and cash equivalents at end of year

$
17,841


$
18,926


$
35,901Cash and cash equivalents is comprised of:Cash

$
7,563


$
1,324


$
2,071Cash equivalents

$
10,278


$
17,602


$
33,830Supplemental disclosure of cash flow information:Non-cash capital asset additions included in accounts payable
    and accrued liabilities at end of year

$
458


$
243


$
590Cash paid for interest

$



$
310


$
1,699Cash paid for income taxes

$



$
72


$
121Deferred share issuance costs (accrued and not paid)

$



$



$
925   The accompanying notes are an integral part of these
    consolidated financial statements.
 64




---



##### Table of Contents



NUCRYST
    Pharmaceuticals Corp.
  Consolidated
    Statement of Shareholders Equity
 (In US
    thousands, except share data)
  AccumulatedCommon Shares


Additional


Other





Total


TotalStated


Paid-in


Comprehensive


Accumulated


Comprehensive


ShareholdersNumber


Amount


Capital


Income (Loss)


Deficit


Loss


EquityDecember 31, 2004


9,727,500


$
3,534


$



$
(4,180
)

$
(20,938
)





$
(21,584
)Issuance of common shares


4,500,000



39,095














$




39,095Foreign currency translation adjustments














(1,101
)






(1,101
)


(1,101
)Net loss


















(2,641
)


(2,641
)


(2,641
)December 31, 2005


14,227,500



42,629







(5,281
)


(23,579
)


(3,742
)


13,769Issuance of common shares upon conversion of indebtedness to
    related party (note 9)


3,964,200



39,642



















39,642Issuance of common shares in connection with restricted shares
    and exercises of stock options and share appreciation rights


117,913



401



















401Stock-based compensation










482















482Foreign currency translation adjustments














(209
)






(209
)


(209
)Net loss


















(10,499
)


(10,499
)


(10,499
)December 31, 2006


18,309,613



82,672



482



(5,490
)


(34,078
)


(10,708
)


43,586Issuance of common shares in connection with restricted shares
    and exercises of stock options


57,950



104



















104Stock-based compensation










1,029















1,029Foreign currency translation adjustments














6,047







6,047



6,047Net loss


















(4,021
)


(4,021
)


(4,021
)December 31, 2007


18,367,563


$
82,776


$
1,511


$
557


$
(38,099
)

$
2,026


$
46,745   The accompanying notes are an integral part of these
    consolidated financial statements.
 65




---



##### Table of Contents



NUCRYST
    Pharmaceuticals Corp.
    Notes to Consolidated Financial Statements For
    the years ended December 31, 2007, 2006 and 2005All amounts are expressed in thousands of U.S. dollars,
    except share and per share data
  1
    DESCRIPTION
    OF BUSINESS    tm
  tm tm tm tm tm tm tm tm tm
      2
    SUMMARY
    OF SIGNIFICANT ACCOUNTING PRINCIPLES  a) Basis
    of presentation        b) Use
    of estimates   66




---



##### Table of Contents



c) Translation
    of foreign currencies      d) Accumulated
    other comprehensive income (loss)      e) Revenue
    recognition    f) Product
    warranty    g) Cash
    and cash equivalents      h) Short-term
    investments  held-to-maturity Held-to-maturity
  i) Allowance
    for doubtful accounts    j) Inventories    k) Capital
    assets    Machinery and equipment

5 to 10 yearsComputer hardware and software

2 to 5 yearsLeasehold improvements

Term of lease  5 to 20 years
  67




---



##### Table of Contents



l) Intangible
    assets      m) Deferred
    lease inducement    n) Research
    and development costs    o) Income
    taxes    p) Stock-based
    compensation plans           68




---



##### Table of Contents



assumptions regarding a number of
    highly complex and subjective variables. These variables
    include, but are not limited to, the Corporations expected
    stock price volatility over the term of the awards, and actual
    and projected employee stock option exercise behaviors.
    Option-pricing models were developed for use in estimating the
    value of traded options that have no vesting or hedging
    restrictions and are fully transferable. Although the fair value
    of employee stock options is determined in accordance with
    SFAS 123(R) and Staff Accounting Bulletin 107,
    Share-Based Payment (SAB 107) using
    an option-pricing model, that value may not be indicative of the
    fair value observed in a willing buyer/willing seller market
    transaction.
  q) Earnings
    per share    r) Employee
    future benefits    s) Recently
    adopted accounting pronouncements  FIN 48    t) Recently
    pending accounting pronouncements  SFAS 157    SFAS 159    EITF
    07-1  No. 07-1
  EITF
    07-3  No. 07-3,
  FASB
    Business Combinations       69




---



##### Table of Contents




    More assets acquired and liabilities assumed to measured at fair
    value as of the acquisition date;
    Liabilities related to contingent consideration to be
    re-measured at fair value in each subsequent reporting period;
    An acquirer in pre-acquisition periods to expense all
    acquisition related costs; and
    Non-controlling interests in subsidiaries initially to be
    measure at fair value and classified as a separate component of
    equity.    3
    AGREEMENTS
    WITH SMITH & NEPHEW  tm tm
    4
    ACCOUNTS
    RECEIVABLE    5
    INVENTORIES  December 31,


December 31,2007


2006Raw materials

$
2,793


$
3,888Materials in process


1,394



649Finished product


239



2,760$
4,426


$
7,297   6
    CAPITAL
    ASSETS  Accumulated


NetDecember 31, 2007

Cost


Depreciation


Book ValueMachinery and equipment

$
9,044


$
2,875


$
6,169Leasehold improvements


2,734



1,542



1,192Computer hardware and software


880



632



248Construction in progress


5,125







5,125$
17,783


$
5,049


$
12,734   Accumulated


NetDecember 31, 2006

Cost


Depreciation


Book ValueMachinery and equipment

$
9,814


$
3,529


$
6,285Leasehold improvements


2,265



956



1,309Computer hardware and software


588



348



240Construction in progress


3,516







3,516$
16,183


$
4,833


$
11,350      70




---



##### Table of Contents



implementation of an active
    pharmaceutical ingredient production facility in the amount of
    $1,049 was written off. As a result of the outcome of the
    Corporations second Phase 2 clinical trial for topical NPI
    32101 in the treatment of dermatological conditions, it was
    determined that the facility not be built.
  7
    INTANGIBLE
    ASSETS  December 31,


December 31,2007


2006Patents and trademarks

$
2,642


$
2,180Less accumulated amortization


(1,835
)


(1,364
)$
807


$
816       2008

$
1932009


1652010


1412011


1052012


203Total

$
807   8
    ACCOUNTS
    PAYABLE AND ACCRUED LIABILITIES  December 31,


December 31,2007


2006Compensation liabilities

$
1,737


$
517Royalty liability


340



245Current income tax liability


140



Administrative services


179



483Production liability


311



304Capital projects


458



243Facility related


236



12Research related


80



389Other trade payables and accrued liabilities


169



68$
3,650


$
2,261   9
    INDEBTEDNESS
    TO RELATED PARTY      Year ended


Year ended


Year endedDecember 31,


December 31,


December 31,2007


2006


2005Shareholder advances

$



$



$
1,936Promissory note










653Term loan






310



1,500



310



4,089Less: interest expense included in manufacturing costs










(549
)$



$
310


$
3,540  71




---



##### Table of Contents



10
    SHARE
    CAPITAL    a)
    Common
    shares issued and outstanding    Number


Stated Capital2007


2006


2007


2006Balance at beginning of year


18,309,613



14,227,500


$
82,672


$
42,629Stock options exercised


4,540



105,303



12



286SARs Exercised






7,610







83Conversion of term loan (Note 9)






3,964,200







39,642Restricted shares


53,410



5,000



92



32Balance at end of year


18,367,563



18,309,613


$
82,776


$
82,672         b)
    Stock-based
    compensation plans      ®
    Net loss applicable to common shareholders

$
(2,641
)Total stock-based employee compensation expense determined under
    fair-value based method for awards net of tax effects


(96
)Pro forma net loss applicable to common shareholders

$
(2,737
)Net loss per common share  basic and diluted

$
(0.27
)Pro forma net loss per common share  basic and diluted

$
(0.28
)  72




---



##### Table of Contents



Number of Options


Weighted Average Exercise Price (CDN$)December 31


December 312007


2006


2005


2007


2006


2005Balance at beginning of year


766,352



713,770



625,057


$
5.75


$
3.47


$
3.32Granted


821,757



209,849



92,571



2.87



14.40



4.50Exercised


(4,540
)


(105,303
)






3.08



3.09



Forfeited


(177,931
)


(51,964
)


(3,858
)


4.88



14.73



3.51Balance at end of year


1,405,638



766,352



713,770


$
3.93


$
5.75


$
3.47
         Options Outstanding

Options ExercisableWeighted-Average

Weighted-





Weighted-Number

Remaining

Average



Number

AverageRange of

Outstanding at

Contractual

Exercise

Aggregate

Exercisable at

Exercise

AggregateExercise Prices

December 31,

Life

Price

Intrinsic

December 31,

Price

Intrinsic(CDN$)

2007

(Years)

(CDN$)

Value

2007

(CDN$)

Value$1.38 to $2.07


83,593



9.50


$
1.91


$







$



$
$2.08 to $3.12


728,147



8.50


$
2.69


$




374,328


$
2.84


$
$3.13 to $4.70


408,687



4.92


$
3.80


$




269,257


$
3.68


$
$4.71 to $7.06


55,463



7.71


$
5.25


$




33,234


$
5.22


$
$7.07 to $9.50


10,000



8.21


$
9.05


$




3,333


$
9.05


$
$9.51 to $14.26


60,000



7.99


$
9.88


$




40,000


$
9.88


$
$14.27 to $21.40


59,748



8.40


$
14.78


$




19,916


$
14.78


$
$1.38 to $21.40


1,405,638



7.46


$
3.93


$




740,068


$
3.98


$

   in-the-money
    Number of

Weighted-AverageNon-Vested

Grant Date Fair ValueOptions

(CDN$)Balance at December 31, 2006


247,586


$
5.75Granted


821,757


$
2.17Vested


(285,320
)

$
2.82Forfeited


(118,453
)

$
4.34Balance at December 31, 2007


665,570


$
2.83
      73




---



##### Table of Contents



the Corporation. Groups of
    directors and employees that have similar historical exercise
    patterns are being considered separately for valuation purposes.
    The risk free interest rate is based on the yield of a U.S.
    Government zero-coupon issue with a remaining life approximately
    equal to the expected term of the option.
  Year ended December 31Stock options

2007


2006


2005Expected volatility


66.3%



58.1%



57.7%Dividend yield










Expected life


7 years



7 years



7 yearsRisk free rate


4.63%



3.89%



4.33%     Weighted Average GrantNumber of RSUs


Date Fair ValueDecember 31


December 312007


2006


2007


2006Balance at beginning of year


9,000






$
3.85


$
Granted


49,700



9,000



3.27



3.85Exercised


(4,500
)






3.85



Forfeited


(15,000
)






4.08



Balance at end of year


39,200



9,000


$
3.02


$
3.85         11
    INCOME
    TAXES    Year Ended December 312007


2006


2005Loss before income taxes and cumulative effect of a change in
    accounting principle

$
(3,881
)

$
(10,533
)

$
(2,479
)Statutory income tax rate


32.12%



32.12%



33.62%Expected income tax recovery


(1,247
)


(3,383
)


(833
)Losses and temporary differences  valuation allowance


1,387



3,347



937Large corporations tax






(5
)


58Income tax (recovery) expense

$
140


$
(41
)

$
162       December 31,


December 31,2007


2006Deferred income tax assets:Tax benefit of loss carry-forwards and tax credits

$
21,138


$
18,078Less valuation allowance


(20,896
)


(17,305
)242



773Deferred income tax liabilities:Capital, intangible and other assets


(242
)


(773
)Deferred income tax assets, net

$



$
    74




---



##### Table of Contents



(in thousands)Balance at January 1, 2007

$
Additions based on tax positions related to the current year


Additions for tax positions of prior years


7,429Reductions for tax positions of prior years


(7,429
)Settlements


Balance at December 31, 2007

$
       12
    RELATED
    PARTY TRANSACTIONS    Year Ended December 312007


2006


2005Building rent, including operating costs

$
593


$
1,606


$
1,399Services:Information technology










58Legal


98



170



204Insurance


306



644



289Other


126



219



154$
1,123


$
2,639


$
2,104  75




---



##### Table of Contents



13
    GUARANTEES      14
    COMMITMENTS    2008

2009

2010

2011

2012$
5,549


$
5,287


$
590


$
581


$
586
   15
    FINANCIAL
    INSTRUMENTS    Fair
    value of financial instruments      Foreign
    currency risk    Concentration
    of credit risk    16
    EMPLOYEE
    BENEFIT PLAN     76




---



##### Table of Contents



17
    LOSS PER
    SHARE      Year Ended December 312007


2006


2005Weighted average number of common shares outstanding  basic


18,333,810



17,964,332



9,764,486Effect of dilutive securities










Weighted average number of common shares outstanding 
    diluted


18,333,810



17,964,332



9,764,486     18
    SEGMENTED
    INFORMATION    a) Assets
    by geographic segment
  December 31,


December 31,2007


2006Canada

$
37,251


$
42,440United States


14,048



3,452$
51,299


$
45,892   a) Capital
    assets and intangible assets by geographic segment
 December 31,


December 31,2007


2006Canada

$
12,800


$
11,130United States


741



1,036$
13,541


$
12,166    77




---



##### Table of Contents



ITEM
    9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM
    9A.
    CONTROLS
    AND PROCEDURES  Evaluation
    of disclosure controls and procedures.
  Rule 13a-15(e)
      Managements
    annual report on internal control over financial
    reporting
  Rules 13a-15(f) Internal Control-Integrated Framework
  Attestation
    report of the registered public accounting firm
  Form 10-K Form 10-K
  Changes
    in internal control over financial reporting
    ITEM
    9B.
    OTHER
    MATTERS   78




---



##### Table of Contents



PART III  ITEM
    10.
    DIRECTORS
    AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Name

Age

PositionThomas E. Gardner


60


President, Chief Executive Officer and Chairman of the BoardEliot M. Lurier


49


Vice President, Finance Administration and Chief Financial
    OfficerCarol L. Amelio


46


Vice President, General Counsel and Corporate SecretaryDavid C. McDowell


52


Vice President, Manufacturing OperationsKatherine J. Turner, Ph.D.


56


Vice President, Research & DevelopmentEdward Gaj, Jr. R.Ph.


51


Vice President, Corporate DevelopmentBarry M. Heck


45


DirectorNeil
    Carragher(1)(2)(3)


69


DirectorRoger G.H. Downer,
    Ph.D.(2)(3)


65


DirectorDavid Poorvin,
    Ph.D.(1)(2)(3)


61


DirectorRichard W.
    Zahn(1)(3)


56


Director     (1)
    Member of our audit committee.(2)
    Member of our human resources and compensation committee.(3)
    Member of our corporate governance and nominating committee.  Thomas E. Gardner
  Eliot M. Lurier
  Carol L. Amelio
  David C. McDowell
  Katherine J. Turner, Ph.D.
  Edward Gaj Jr., R. Ph.
 79




---



##### Table of Contents



Barry M. Heck
  Neil Carragher
  Roger G.H. Downer, Ph.D.
  David Poorvin, Ph.D. Executive-in-Residence
  Richard W. Zahn
    Code of
    Ethics
  www.sedar.com www.edgar-online.com www.nucryst.com
  Composition
    of our Board of Directors
   80




---



##### Table of Contents



Business Corporations
    Act
  Audit
    Committee and Financial Expert
  www.nucryst.com
  Nomination
    of Directors
    Section 16(a)
    Beneficial Ownership Reporting Compliance
  Rule 3a12-3 www.sedi.ca
  Scientific
    Advisory Board
   81




---



##### Table of Contents



ITEM
    11.
    EXECUTIVE
    COMPENSATION  Compensation
    Disclosure
  Regulation S-K Form 20-F.
  Summary
    Compensation Table
    Summary
    Compensation Table
  Long-Term CompensationAnnual Compensation

Securities(7)
    Under

Shares
    or(8)
    UnitsFiscal





Other Annual

Options / SARS

Subject to Resale

All
    Other(9)Name and Principal Position

Year

Salary ($)

Bonus(5)($)

Compensation(6)

Granted (#)

Restrictions ($)

Compensation ($)Thomas E.
    Gardner(1)


2007


$
145,641











500,000


$
107,000


$
9,137Chairman, President &Chief Executive OfficerScott H.
    Gillis(2)


2007


$
177,163






$
12,885



75,000






$
432,815Former President &


2006


$
250,000


$
25,000


$
20,000










$
6,000Chief Executive Officer


2005


$
249,375


$
98,004


$
20,000










$
6,850Eliot M. Lurier, CPA


2007


$
171,000


$
89,775







40,000


$
20,500


$
8,550Vice President, Finance and


2006


$
145,000


$
14,500















Administration,


2005


$
105,297


$
41,277







19,455







Chief Financial OfficerDavid C.
    McDowell(3)


2007


$
211,049


$
107,635







30,000


$
20,500


$
35,603Vice President,


2006


$
189,589


$
33,178














$
39,470Manufacturing Operations


2005


$
74,967


$
28,509







38,910






$
1,979Katherine J.
    Turner, Ph.D.(4)


2007


$
207,556


$
85,372







20,000


$
11,070


$
6,227Vice President, Research


2006


$
110,833


$
3,325







25,000






$
3,325and DevelopmentCarol L.
    Amelio(3)


2007


$
181,564


$
78,980







35,000


$
20,500


$
7,671Vice President, General


2006


$
129,458


$
10,219







10,000







Counsel and Corporate Secretary     (1)
    Mr. Gardner became our Chairman, President and Chief
    Executive Officer on August 22, 2007 at an annual salary of
    $400,000.(2)
    Mr. Gillis employment ceased on August 22, 2007.(3)
    Mr. McDowells and Ms. Amelios compensation
    is denominated in Canadian dollars and has been translated into
    U.S. dollars for purposes of this table at an average 2007
    exchange rate of U.S. $1.00= C$1.074, C$1.134 in 2006 and
    C$1.1873 in 2005.(4)
    Ms. Turner was appointed Vice President, Research and
    Development of NUCRYST on July 1, 2007 at which time her
    annual base salary was increased from $195,000 to $220,000.(5)
    Amounts in this column reflect amounts earned in each year under
    our Employee Variable Pay Incentive Program. The awards are paid
    to the executive in the following calendar year. A discussion of
    the material terms of our Employee Variable Pay Program can be
    found in the Compensation Discussion and Analysis section of
    this document.(6)
    Mr. Gillis received cash allowances in lieu of perquisites
    in 2007 in the amount of $12,885 and in the amount of $20,000 in
    each of 2006 and 2005.(7)
    Reflects the grants of Options in the year pursuant to our
    Incentive Plan. Particulars of the grants of Options and RSUs
    made in 2007 are provided in the table Option Grants During the
    Year Ended December 31, 2007 below.(8)
    In lieu of receiving a bonus under our variable pay program,
    Mr. Gardner was granted 38,910 restricted share units
    (RSUs) on August 22, 2007 at an issue price of
    $2.75. The RSUs vested immediately, but are restricted from sale
    until Mr. Gardner is no longer an executive officer or
    director of NUCRYST. On February 21, 2007,
    Messrs. Lurier and McDowell and Ms. Amelio were each
    granted 5,000 RSUs vesting each as to
    1/3
    on February 21, 2008, 2009 and 2010. Ms. Turner was
    granted 2,700 RSUs on February 21, 2007 with the same
    vesting schedule. Mr. Gillis was also granted 10,000 RSUs
    on the same date, all of which terminated on the date he ceased
    to be employed with NUCRYST and, therefore, the value was not
    included in the table. Mr. Gardners RSUs are valued
    at the closing NASDAQ price on August 22, 2007 of $2.75.
    All other RSUs are valued at the closing NASDAQ share price of
    $4.10 on February 21, 2007. 82




---



##### Table of Contents



(9)
    Mr. Gardner received reimbursement for living expenses
    amounting to $9,137. As part of his severance agreement,
    Mr. Gillis received $5,000 in lieu of any future
    perquisites, payment for vacation earned in the amount of
    $27,500, payment of severance in the amount of $295,000,
    $108,065 of which was accrued at December 31, 2007 as part
    of a $150,000 payment due to Mr. Gillis in February 2008 as
    payment for his continued assistance in accordance with the
    terms of his severance agreement. $17,011 was also accrued for
    Mr. Gillis health benefits. Mr. Lurier received
    a payment for vacation earned in the amount of $8,550.
    Mr. McDowell received reimbursement for living expenses
    amounting to $27,667 (CDN). All other compensation reflected in
    this column for all named executive officers consisted of
    contributions to NUCRYSTs defined contribution pension
    plan for employees located in Canada or 401(k) plan for
    employees located in the United States.  Option
    Granted During the Year Ended December 31, 2007 to Named
    Executive Officers
    Market Value of% of Total



SecuritiesSecurities,

Options Granted

Exercise

Underlying OptionsUnder Options

to Employees

Price

on the Date ofName and Principal Position

Granted(2)

in Financial Year

($/Security)

Grant ($/Security)

Expiration DateThomas E. Gardner
    Chairman, President & Chief Executive Officer


500,000



62.3%


$
2.57


$
1,285,000


August 22, 2017Scott H.
    Gillis(1)Former President &
    Chief Executive Officer


75,000



9.4%


$
4.08


$
306,000


February 21, 2017Eliot M. Lurier, CPA
    Vice President, Finance and Administration, Chief
    Financial Officer


40,000



5.0%


$
4.08


$
163,200


February 21, 2017David C. McDowell
    Vice President, Manufacturing Operations


30,000



3.8%


$
4.08


$
122,400


February 21, 2017Katherine J. Turner, Ph.D.
    Vice President, Research and Development


20,000



2.5%


$
4.08


$
81,600


February 21, 2017Carol L. Amelio
    Vice President, General Counsel and Corporate Secretary


35,000



4.4%


$
4.08


$
142,800


February 21, 2017     (1)
    Mr. Gilliss employment ceased on August 22,
    2007. According to the terms of his severance agreement,
    Mr. Gillis has one year or until August 22, 2008 to
    exercise any options that had vested as of his termination date.
    As none of the 75,000 options granted to Mr. Gillis in 2007
    had vested as of the termination date of his employment, all of
    those options automatically terminated on August 22, 2007.(2)
    These awards were made in options to purchase common shares of
    NUCRYST pursuant to the Incentive Plan and, in the ordinary
    course, are exercisable for a period ending 10 years of the
    date of grant. With the exception of the options award made to
    Mr. Gardner, these awards were granted on the basis that in
    the ordinary course they will be exercisable as to one third of
    the grant on each of the first, second and third anniversaries
    of the date of grant. Mr. Gardner was granted an option to
    purchase 500,000 shares of our common stock on
    August 22, 2007 upon becoming our Chief Executive Officer.
    The options vest
    1/3
    immediately on the date of grant and
    1/3
    each on August 22, 2008 and 2009. 83




---



##### Table of Contents



Aggregated
    Option Exercises During the Year Ended December 31, 2007
    And Financial Year-End Option Values
    Value of
    Unexercised(1)in-the-Money Options atSecurities,

Aggregate

Options at Fiscal Year-

Fiscal Year-EndAcquired on

Value

End Exercisable/

Exercisable/Name and Principal Position

Exercise

Realized

Unexercisable

UnexercisableThomas E. Gardner
    Chairman, President & Chief Executive Officer

Nil

Nil

166,667 / 333,333


$0 / $0Scott H. Gillis
    Former President & Chief Executive Officer

Nil

Nil

272,270 / 0


$0 / $0Eliot M. Lurier, CPA
    Vice President, Finance and Administration, Chief Financial
    Officer

Nil

Nil

12,970 /46,485


$0 / $0David C. McDowell
    Vice President, Manufacturing Operations

Nil

Nil

25,940 / 42,970


$0 / $0Katherine J. Turner, Ph.D.
    Vice President, Research and Development

Nil

Nil

8,333 / 36,667


$0 / $0Carol L. Amelio
    Vice President, General Counsel and Corporate Secretary

Nil

Nil

3,333 / 41,667


$0 / $0     (1)
    Based on the December 31, 2007 closing price of the Common
    Shares on the NASDAQ of $1.40.  Employment
    Agreements
  Thomas E.
    Gardner
  1 3 1 3
 84




---



##### Table of Contents



Scott H.
    Gillis
    Eliot M.
    Lurier
  Elements of Our
    Compensation Program Performance-Based
    Incentive Compensation,
  David C.
    McDowell
  Elements of Our
    Compensation Program Performance-Based
    Incentive Compensation,
  Katherine,
    J. Turner, Ph.D.
  Elements of Our
    Compensation Program Performance-Based
    Incentive Compensation,
  Carol L.
    Amelio
  Elements of Our Compensation Program 
    Performance-Based Incentive Compensation,
 85




---



##### Table of Contents



Composition
    of the Compensation Committee
      HUMAN
    RESOURCES AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
    COMPENSATION
  Oversight
    of Executive Compensation Program
    
    key compensation policies;
    our executive compensation program for our President and Chief
    Executive Officer and the other executives officers, including
    those named in the Summary Compensation Table; and
    executive management succession and development.    Executive
    Compensation Objectives and Philosophy
    
    to attract, retain and reward highly qualified executives that
    demonstrate the ability to achieve business success; and
    to motivate those individuals to create and enhance long-term
    shareholder value.    Role of
    Committee and Executive Officers in Compensation
    Decisions
    
    the executives performance;
    the nature, scope and level of the executives
    responsibilities;
    level of experience of the executive in his or her respective
    field; and
    the prevailing market rates for individuals performing similar
    functions at comparable companies. 86




---



##### Table of Contents



Compensation
    Consultant
    
    competitive base salaries, short term cash incentive and
    long-term incentives in the form of equity awards for seven
    executive officer positions;
    short-term and long-term incentive plan design; and
    trends and issues in executive compensation.          Elements
    of Our Compensation Program
      Base Salary.
   87




---



##### Table of Contents



Performance-Based Incentive
    Compensation.
      Threshold

  the minimum level of performance necessary to
    receive a payout  there is no payout for performance below
    Threshold  we believe there is a greater than 50%
    probability of attaining at least Threshold performance measuresTarget

  the expected level of performance  we believe there is a good probability of
    attaining target performance measuresStretch

  performance beyond Target  we believe there is a low probability of
    attaining Stretch performance measures       Corporate Performance.
    Named Executive Performance Targets.
 88




---



##### Table of Contents



Long-Term Equity Incentive Compensation.
  
    enhancing the link between the interests of our named executives
    and those of our shareholders by creating an incentive for our
    named executives to maximize shareholder value;
    providing an opportunity for increased equity ownership by named
    executives and fostering a long term business perspective; and
    retaining our named executives despite very competitive labor
    markets by maintaining competitive levels of total compensation.    1 3
 89




---



##### Table of Contents



1 3
  Other Benefits.
  Tax
    Deductibility Considerations
      Compensation
    Committee Interlocks and Insider Participation
     90




---



##### Table of Contents



Human
    Resources and Compensation Committee Report
  The information contained in this report shall not be deemed
    to be soliciting material or filed with
    the SEC or subject to the liabilities of Section 18 of the
    Exchange Act, except to the extent that we specifically
    incorporate it by reference into any document filed under the
    Securities and Exchange Act.
  Form 10-K
    
  Limitation
    of Liability and Indemnification of Directors and
    Officers
    
    is or was our director or officer; or
    is or was a director or officer of another corporation, of which
    we are or were a shareholder or creditor, at our request;  
    against all costs, charges and expenses, including an amount
    paid to settle an action or satisfy a judgment, reasonably
    incurred by the director or officer in respect of any civil,
    criminal or administrative action or proceeding, in which such
    eligible party is involved because of that association with us
    or the other entity.    
    such eligible party did not act honestly and in good faith with
    a view to our best interests (or the best interests of the other
    entity, as the case may be); and
    in the case of a criminal or administrative proceeding that is
    enforced by monetary penalty, such eligible party did not have
    reasonable grounds for believing that such persons conduct
    was lawful.       91




---



##### Table of Contents



Compensation
    of Directors
    Director
    Fees
  out-of-pocket
  
    each non-employee director (other than Mr. Heck) receives
    an annual retainer of $15,000 and $2,000 for each board meeting
    attended (attendance for purposes of the policy includes
    attendance in person, by teleconference or by video);
    the chairman of our audit committee receives a $7,500 retainer
    and $1,500 for each committee meeting attended and each other
    member of such committee receives $1,200 per committee meeting
    attended; and
    the chairmen of each of the human resources and compensation
    committee and corporate governance and nominating committee
    receives a $5,000 retainer and $1,000 per committee meeting
    attended and each other member of such committees receives $800
    per committee meeting attended.    
    effective February 14, 2007, each non-employee director
    will receive a daily fee of $1,500 when carrying out, at the
    request of our board or committees of our board, additional
    directors duties or services on behalf of our board or
    committees; and
    effective June 14, each non-employee director will receive
    payment of $1,000 if the director is required to travel more
    than four hours by air one-way in North America to attend a
    board meeting and payment of $2,000 if required to travel from
    another continent.    Director
    2007 Retainer and Fees
    AnnualAnnual Board

Committee

Board

Committee

Additional

Travel

Total FeesRetainer

Retainer

Meeting Fees

Meeting Fees

Duty Fees

Fees(6)

EarnedName

($)

($)

($)

($)

($)

($)

($)Neil Carragher


15,000



7,500



20,000
(3)


12,4000



N/A



N/A



54,900Roger G.H. Downer


15,000



5,000



20,000
(3)


8,200



N/A



3,000



51,200Richard W. Zahn


15,000



5,000



20,000
(3)


7,200



15,100



N/A



62,300David W. Poorvin


15,000



N/A



20,000
(3)


13,200



N/A



N/A



46,200Barry M. Heck


5,363
(1)


N/A



4,000
(4)


N/A



N/A



2,000



11,363Thomas E. Gardner


5,685
(2)


N/A



6,000
(5)


1,600
(5)


N/A



N/A



13,286     (1)
    The Annual Board Retainer Fee paid to Mr. Heck was prorated
    for the year commencing August 22, 2007 which was the date
    upon which Mr. Heck resigned as Executive Chair of NUCRYST,
    and continued as a director thereby entitling him to payment of
    director fees.(2)
    The Annual Board Retainer Fee paid to Mr. Gardner was
    prorated to cover the period between May 14, 2007, the date
    upon which Mr. Gardner was appointed to our board, and
    August 22, 2007, the date upon which Mr. Gardner was
    appointed as our Chairman of the Board, President and CEO. 92




---



##### Table of Contents



(3)
    Messrs. Carragher, Downer, Poorvin & Zahn
    attended 10 of 10 board meetings and were paid a fee of $2,000
    per meeting.(4)
    Mr. Heck received payment for his attendance as a director
    at two board meetings that took place following his resignation
    as Executive Chair on August 22, 2007.(5)
    Mr. Gardner received payment for his attendance as a
    director at three board meetings and two Corporate Governance
    and Nominating Committee meetings that took place after his
    appointment to our board and the committee on May 14, 2007
    and prior to his appointment as our President and CEO on
    August 22, 2007.(6)
    Following approval by our board of the payment of a travel fees
    to directors effective June 14, 2007, Mr. Downer
    received payment of a travel fee of $2,000 for travel from
    another continent to attend a board meeting and a travel fee of
    $1,000 for travel over 4 hours one-way in North America.
    Mr. Heck received payment of the $1,000 fee for travel over
    4 hours in North America on two occasions following approval of
    the fee by our board.  Director
    Equity-Based Compensation
      Options
    and Restricted Stock Units Granted to Directors in
    2007
  RSUs


OptionsName

Granted(1)


Granted(2)Neil Carragher


3,000



2,000Roger G.H. Downer


3,000



2,000Richard W. Zahn


3,000



2,000David W. Poorvin


3,000



2,000Barry M.
    Heck(3)






Thomas E. Gardner


5,000



8,000     (1)
    Messrs. Carragher, Poorvin & Zahn were each
    granted 3,000 Restricted Stock Units (RSUs) on the
    anniversary date of their appointment to our board being
    December 21, 2007, 50% of which vest on the first
    anniversary of the grant date and the remaining 50% on the
    second anniversary date of the grant date. The trading price of
    our common shares on NASDAQ on the grant date was $1.42.
    Messrs. Gardner was granted 5,000 RSUs upon first being
    appointed to our board on May 14, 2007, all of which vested
    immediately upon the date, 1,000 of which are restricted from
    sale until the first anniversary of the grant date and the
    remaining 4,000 are restricted from sale until he leaves our
    board. Mr. Poorvin was granted 3,000 RSUs on the
    anniversary of his appointment to the Board being May 30,
    3007, 50% of which vest on the first anniversary of the grant
    date and 50% of which vest on the second anniversary of the
    grant date. The trading price of our common shares on the date
    of grant of the RSUs to Mr. Poorvin was $1.96.(2)
    Pursuant to our board compensation plan, Messrs. Carragher,
    Downer and Zahn were each granted 2,000 options to purchase
    our common shares on the anniversary date of their appointment
    to our board, being December 21, 2007. The options vest
    each as to
    1/3 on
    the first, second and third anniversary of the grant date and
    have an exercise price of $1.40. Mr. Poorvin was granted
    2,000 options on May 30, 2007 with the same vesting
    schedule and with an exercise price of $2.13.(3)
    Mr. Heck was granted 5,000 RSUs and 8,000 options in 2007
    but they were granted to him upon being appointed an executive
    of NUCRYST and not in his capacity as a director.   93




---



##### Table of Contents



ITEM
    12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    
    each person known by us to be the beneficial owner of more than
    5% of our common shares;
    our named executive officers;
    our directors; and
    our directors and executive officers as a group.        Number of


Percentage ofShares Beneficially


Shares BeneficiallyName and Address of Beneficial Owner

Owned


Owned(2)The Westaim Corporation
    10102  114 Street
    Fort Saskatchewan, Alberta
    T8L 3W4


13,691,700



73.27
%Royce & Associates LLC
    1414 Avenue of the Americas
    New York, NY 10019


1,422,400



7.61
%Thomas E. Gardner


210,577



1.13
%Scott H.
    Gillis(1)


272,370



1.46
%Eliot M.
    Lurier(1)


34,455



*David C.
    McDowell(1)


37,607



*Katherine J. Turner, Ph.D.


15,900



*Carol L. Amelio


20,000



*Barry M. Heck


5,000



*Neil
    Carragher(1)


20,500



*Roger G.H. Downer,
    Ph.D.(1)


16,500



*Richard W.
    Zahn(1)


15,500



*David Poorvin, Ph.D.


7,667



*All directors and executive officers as a group (10 persons)


656,076



3.51
%    *
    Less than one percent.  (1)
    Includes options to purchase common shares exercisable within
    60 days of February 11, 2008 as follows:
    272,370 shares for Mr. Gillis; 32,788 shares for
    Mr. Lurier; 35,940 shares for Mr. McDowell;
    14,000 shares for Mr. Carragher; 14,000 shares
    for Dr. Downer; 14,000 shares for Mr. Zahn,
    2,667 shares for Mr. Poorvin.(2)
    For each person and group included in this table, percentage
    ownership is calculated by dividing the number of shares
    beneficially owned by such person or group by the sum of
    18,367,563 common shares outstanding at February 11, 2008,
    plus the number of common shares that such person or group had
    the right to acquire within 60 days after February 11,
    2008. 94




---



##### Table of Contents



Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number of securities to be


Weighted-averageissued upon exercise of


exercise price of


Number of securities remainingEquity compensation plans

outstanding options,


outstanding options,


available for future issuanceapproved by security holders

warrants and rights


warrants and rights


under equity compensation plans1998 Equity Incentive Plan










579,299a) Options


1,405,638


CAD $
3.93b) Restricted Stock Units


39,200   1998
    Equity Incentive Plan (as amended)
    Eligible Participants.
  Grant Committee.
  
    The aggregate number of all awards granted to any one permitted
    participant shall not exceed 5,000 per annum; and
    The aggregate number of all awards granted to all permitted
    participants shall not exceed 54,000 per annum.    Options.
  Share Appreciation Rights.
  
    Tandem Rights.A tandem right is a
    SAR granted in connection with an option that is subject to the
    same terms and conditions applicable to the particular option
    grant to which it pertains with the following exceptions: the
    tandem right shall require the holder to elect between the
    exercise of the underlying option to purchase common shares and
    the surrender, in whole or in part, of such option in exchange
    for a payment of cash or, if provided in the award agreement, at
    our option in common shares, in an amount equal to the excess of
    (A) the fair 95




---



##### Table of Contents



market price of the number of common shares covered by that
    portion of the surrendered option in which the optionholder is
    vested over (B) the aggregate exercise price payable for
    such vested shares. For the purposes of tandem rights, fair
    market price shall be equal to the closing price immediately
    preceding the date of the option surrender.  
    Concurrent Rights.A concurrent
    right is a SAR granted in connection with an option that
    applies to all or a portion of common shares subject to the
    underlying option and which is subject to the same terms and
    conditions applicable to the particular option grant to which it
    pertains with the following exceptions: a concurrent right shall
    be exercised automatically at the same time the underlying
    option is exercised with respect to the common shares to which
    the concurrent right pertains and, on exercise, entitles the
    holder to receive a payment of cash or, if provided in the award
    agreement, at our option in common shares, in an amount equal to
    the excess of (A) the aggregate fair market price of the
    common shares purchased under the underlying option over
    (B) the aggregate exercise price paid for such shares. For
    the purposes of concurrent rights, fair market price shall be
    equal to the closing price immediately preceding the date of the
    exercise of the concurrent right.
    Independent Rights.An independent
    right means a SAR granted independently of any option but
    that is subject to the same terms and conditions applicable to
    an option with the following exceptions: an independent right
    shall be denominated in share equivalents. Upon exercise,
    independent rights will be payable in cash or, if provided in
    the award agreement, at our option in common shares, in an
    amount equal to the excess of (A) the aggregate fair market
    price of a number of common shares equal to the number of share
    equivalents in which the holder is vested under such independent
    right, and with respect to which the holder is exercising the
    independent right on such date, over (B) the aggregate
    exercise price for the independent right exercised. For the
    purposes of independent rights, fair market price shall be equal
    to the closing price immediately preceding the date of exercise
    of the independent right.  Restricted Share Units.
  Other Stock-Based Awards.
  Incentive Awards.
  Shares Reserved; Plan Limits.
  Adjustment. dividends-in-kind.
 96




---



##### Table of Contents



Other Terms.
        Amendments.
  Transferability.
        ITEM
    13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE  Certain
    Relationships and Related Transactions
    Employment
    Agreements
    Director
    and Officer Indemnification
   97




---



##### Table of Contents



Relationship
    with Westaim
    Lease Agreements.
  Services Agreement.
    Master Separation Agreement.
  Registration Rights Agreement.
  Westaim Directors and Officers.
  Policies
    and Procedures for Review, Approval or Ratification of
    Transactions with Related Persons
   98




---



##### Table of Contents



Business Corporations
    Act
      Director
    Independence
    ITEM
    14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES    2007


2006(in thousands)Audit Fees

$
200


$
300Audit-Related Fees


26



67Tax Fees


39



37All Other Fees






   Audit-Related
    Fees
    Tax
    Fees
    All Other
    Fees
       99




---



##### Table of Contents



PART IV  ITEM
    15.
    EXHIBITS,
    FINANCIAL STATEMENTS AND SCHEDULES  1. Consolidated
    Financial Statements
  The
    following documents are filed as part of this Annual Report on
    Form 10-K:
  Report of Deloitte & Touche LLP, Independent
    Registered Chartered Accountants
  Financial Statements
  Consolidated Balance Sheets
  Consolidated Statements of Operations
  Consolidated Cash Flows Statements
  Consolidated Statements of Shareholders Equity
    (Deficit)
  Notes to Consolidated Financial Statements
  2. Financial
    Statement Schedules
    3. Exhibits
  Exhibit











FiledNo.

Description

Form

SEC File No.

Exhibit

Date

Herewith2
.1

Asset Purchase Agreement, dated May 8, 2001, between the
    Registrant and Smith & Nephew, Inc.

Form F-1
    Amendment No. 3

333-130073


2.1


19-12-053
.1

Articles of the Registrant

Form F-1
    Amendment No. 2

333-130073


3.1


16-12-053
.2

Articles of Amendment

Form F-1
    Amendment No. 2

333-130073


3.2


16-12-053
.3

By-laws of the Registrant

Form F-1
    Amendment No. 2

333-130073


3.3


16-12-054
.1

Specimen certificate evidencing common shares

Form F-1
    Amendment No. 2

333-130073


4.1


16-12-0510
.1

Form of Master Separation Agreement between the Registrant and
    The Westaim Corporation (Westaim)

Form F-1
    Amendment No. 2

333-130073


10.1


16-12-0510
.2

Form of Services Agreement between the Registrant and Westaim

Form F-1
    Amendment No. 2

333-130073


10.2


16-12-0510
.3

Form of Registration Rights Agreement between the Registrant and
    Westaim

Form F-1
    Amendment No. 3

333-130073


10.3


19-12-0510
.4

Amended and Restated License and Development Agreement, dated as
    of February 20, 2002, among the Registrant, NUCRYST
    Pharmaceuticals Inc., Smith & Nephew, Inc. and T.J.
    Smith & Nephew Limited

Form F-1
    Amendment No. 3

333-130073


10.6


19-12-0510
.5

Letter Agreement, dated March 14, 2002, among the
    Registrant, NUCRYST Pharmaceuticals Inc., Smith &
    Nephew, Inc. and T.J. Smith & Nephew Limited

Form F-1
    Amendment No. 3

333-130073


10.7


19-12-05 100




---



##### Table of Contents



Exhibit











FiledNo.

Description

Form

SEC File No.

Exhibit

Date

Herewith10
.6

Amending Agreement, dated November 3, 2003, among the
    Registrant, NUCRYST Pharmaceuticals Inc., Smith &
    Nephew, Inc. and T.J. Smith & Nephew Limited

Form F-1
    Amendment No. 3

333-130073


10.8


19-12-0510
.7

Supply Agreement, dated May 8, 2001, among the Registrant,
    Smith & Nephew, Inc. and T.J. Smith & Nephew
    Limited

Form F-1
    Amendment No. 3

333-130073


10.9


14-12-0510
.8

Manufacturing Technology Escrow Agreement, dated May 8,
    2001, among the Registrant, Smith & Nephew, Inc.,
    T.J. Smith & Nephew Limited and Montreal
    Trust Company of Canada, as escrow agent

Form F-1
    Amendment No. 1

333-130073


10.10


14-12-0510
.9

Security Trust Agreement, dated as of May 8, 2001,
    between the Registrant and Montreal Trust Company of
    Canada, as trustee

Form F-1
    Amendment No. 1

333-130073


10.11


14-12-0510
.10

Trust Indenture, dated May 8, 2001, among the
    Registrant, NUCRYST Pharmaceuticals Inc. and Montreal
    Trust Company of Canada, as trustee

Form F-1
    Amendment No. 3

333-130073


10.12


19-12-0510
.11

Subordination and Non-Disturbance Agreement, dated as of
    May 8, 2001, among the Registrant, NUCRYST Pharmaceuticals
    Inc., Smith & Nephew, Inc., T.J. Smith &
    Nephew Limited and Montreal Trust Company of Canada

Form F-1
    Amendment No. 1

333-130073


10.13


14-12-0510
.12

Memorandum of Lease Agreement, dated as of July 1, 2005,
    between the Registrant and The Westaim Corporation

Form F-1
    Amendment No. 2

333-130073


10.14


16-12-0510
.13

Commercial Lease, dated as of September 1, 2001, between
    NUCRYST Pharmaceuticals Inc. and Cummings Properties, LLC

Form F-1
    Amendment No. 2

333-130073


10.15


16-12-0510
.14

AIMS I Amending Lease Agreement with The Westaim
    Corporation, which amended that certain Memorandum of Lease
    Agreement effective December 1, 2005

Form 8-K

000-51686


99.1


22-12-0610
.15*

1998 Equity Incentive Plan

Form F-1
    Amendment No. 2

333-130073


10.16


16-12-0510
.16*

Form of Stock Option Agreements under the 1998 Equity Incentive
    Plan

Form F-1
    Amendment No. 2

333-130073


10.17


16-12-0510
.17*

Form of Amended and Restated 1998 Equity Incentive Plan

Form F-1
    Amendment No. 2

333-130073


10.18


16-12-0510
.18*

Form of Stock Option Agreement under the Amended and Restated
    1998 Equity Incentive Plan

Form F-1
    Amendment No. 3

333-130073


10.19


19-12-0510
.19*

Employment Agreement, dated December 6, 1999, between
    NUCRYST Pharmaceuticals Inc. and Mr. Scott H. Gillis

Form F-1
    Amendment No. 2

333-130073


10.20


16-12-05 101




---



##### Table of Contents



Exhibit











FiledNo.

Description

Form

SEC File No.

Exhibit

Date

Herewith10
.20*

Stock Option Agreement, dated December 6, 1999, among the
    Registrant, Westaim and Mr. Scott H. Gillis

Form F-1
    Amendment No. 2

333-130073


10.21


16-12-0510
.21*

Letter Agreement, dated March 16, 2005, between the
    Registrant and Mr. Eliot M. Lurier

Form F-1
    Amendment No. 2

333-130073


10.22


16-12-0510
.22*

Letter Agreement, dated June 15, 2005, between the
    Registrant and Mr. David C. McDowell

Form F-1
    Amendment No. 2

333-130073


10.23


16-12-0510
.23*

Letter Agreement, dated March 14, 2002, between the
    Registrant and Dr. Paul J. Schechter

Form F-1
    Amendment No. 2

333-130073


10.24


16-12-0510
.24*

Summary of Non-Employee Director Compensation

Form F-1
    Amendment No. 3

333-130073


10.25


19-12-0510
.25

Form of Indemnification Agreement

Form F-1
    Amendment No. 2

333-130073


10.26


16-12-0510
.26*

Change of Control Agreement, dated December 6, 1999,
    between NUCRYST Pharmaceuticals Inc. and Mr. Scott H. Gillis

Form F-1
    Amendment No. 2

333-130073


10.27


16-12-0510
.27*

Summary of Changes to 2008 Compensation of Named Executive
    Officers











X10
.28

Fourth Amending Lease Agreement, AIMS I Second Amending
    Lease Agreement and Letter Agreement entered into with The
    Westaim Corporation

Form 8-K

000-51686


99.1
    99.2
    99.3


14-05-0710
.29*

Summary of Employment arrangement between Registrant and
    Mr. Barry M. Heck, effective May 23, 2007

Form 10-Q/A

000-51686


10.2


7-11-0710
.30*

Letter Agreement dated June 26, 2007 between Registrant and
    Dr. Paul J. Schechter, effective June 30, 2007

Form 10-Q/A

000-51686


10.3


7-11-0710
.31*

Letter Agreement between Registrant and Dr. Katherine
    Turner dated May 19, 2006

Form 10-Q/A

000-51686


10.4


7-11-0710
.32*

Summary of Amendments made effective July 1, 2007 to Letter
    Agreement between Registrant and Dr. Katherine Turner dated
    May 19, 2006

Form 10-Q/A

000-51686


10.5


7-11-0710
.33*

Summary of Non-Employee Director Compensation, as amended
    effective May 2, 2006

Form 10-Q/A

000-51686


10.6


7-11-0710
.34*

Deferred Share Unit Plan adopted by Registrant effective
    March 16, 2006

Form 10-Q/A

000-51686


10.7


7-11-0710
.35*

Summary of Non-Employee Director Compensation, as amended
    effective June 14, 2007

Form 10-Q/A

000-51686


10.8


7-11-07 102




---



##### Table of Contents



Exhibit











FiledNo.

Description

Form

SEC File No.

Exhibit

Date

Herewith10
.36*

Summary of 2007 Named Executive Performance Targets under
    Registrants variable pay program

Form 10-Q/A

000-51686


10.9


7-11-0710
.37*

Form of Director Restricted Stock Unit Award Agreement

Form 8-K

000-51686


99.1


20-12-0610
.38*

Form of Restricted Stock Unit Award Agreement 
    Executive Officer

Form 10-Q/A

000-51686


10.12


7-11-0710
.39*

Employment Agreement between the Registrant and Mr. Thomas
    E. Gardner dated Aug 21, 2007

Form 8-K

000-51686


10.29


23-08-0710
.40*

Summary of Termination of employment arrangement with
    Mr. Barry M. Heck effective August 22, 2007

Form 10-Q

000-51686


10.6


7-11-0710
.41*

Separation Agreement and General Release between the Registrant
    and Mr. Scott H. Gillis, effective September 25, 2007

Form 10-Q

000-51686


10.7


7-11-0710
.42

Amended and Restated Supply Agreement, dated September 30,
    2007, among the Registrant, Smith & Nephew, Inc. and
    T.J. Smith & Nephew Limited, effective
    January 1, 2007

Form 8-K/A

000-51686


99.1


6-11-0710
.43

Second Amended and Restated License and Development Agreement,
    dated September 30, 2007, among the Registrant, NUCRYST
    Pharmaceuticals Inc., Smith & Nephew, Inc., and T.J.
    Smith & Nephew Limited

Form 8-K/A

000-51686


99.2


6-11-0710
.44

Surrender of Lease with Sherritt International Corporation dated
    June 30, 2007 for surrender of the first floor of the AIMS
    I Building











X10
.45

Surrender of Lease with Sherritt International Corporation dated
    September 30, 2007 for surrender of the third floor of the
    AIMS I Building











X10
.46*

Letter Agreement made effective September 1, 2007 amending
    the Letter Agreement between the Registrant and Mr. David
    C. McDowell dated June 15, 2005











X10
.47*

Letter Agreement made effective January 1, 2008 amending
    the Letter Agreement between the Registrant and Mr. Eliot
    Lurier dated March 16, 2005











X10
.48*

Letter Agreement made effective January 1, 2008 amending
    the Letter Agreement between the Registrant and
    Dr. Katherine Turner dated May 19, 2006











X 103




---



##### Table of Contents



Exhibit











FiledNo.

Description

Form

SEC File No.

Exhibit

Date

Herewith10
.49*

Form of Employee Incentive Program











X10
.50*

Letter Agreement between Ms. Carol L. Amelio and the
    Registrant dated February 1, 2006











X10
.51*

Summary of 2008 Variable Pay Targets











X21
.1

Subsidiaries of the Registrant

Form F-1

333-130073


21.1


2-12-0523
.1

Consent of Deloitte & Touche LLP











X24
.1

Power of Attorney (included on signature page hereto)31
.1

Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002











X31
.2

Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002











X32
.1

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002











X32
.2

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002











X     
    Confidential treatment has been granted for portions of this
    exhibit.*
    Indicates management compensatory plan, contract or arrangement. 104




---



##### Table of Contents



SIGNATURES      By:
    /s/  Thomas
    E. Gardner   President, Chief Executive Officer and
 Chairman of the Board
  POWER OF
    ATTORNEY
  Form 10-K,
  Name

Title/s/  Thomas
    E. GardnerThomas
    E. Gardner

President, Chief Executive Officer and Chairman of the Board
    (Principal Executive Officer)/s/  Eliot
    M. LurierEliot
    M. Lurier

Vice President  Finance and Administration, 
    Chief Financial Officer (Principal Financial and Accounting
    Officer)/s/  Barry
    M. HeckBarry
    M. Heck

Director/s/  Neil
    CarragherNeil
    Carragher

Director/s/  Roger
    G. H. DownerRoger
    G. H. Downer

Director/s/  David
    PoorvinDavid
    Poorvin

Director/s/  Richard
    ZahnRichard
    Zahn

Director  105