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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 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-51686
 NUCRYST Pharmaceuticals Corp.
  Alberta, Canada
    
    Not Applicable(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)50 Audubon Road, Suite B
    
    01880Wakefield, Massachusetts(Address of principal executive offices)
    
    (Zip Code)
 (781) 224-1444
    o þ
  o þ
  þ o
 þ
  o o þ
  o þ
   Class
    
    Outstanding at March 7, 2007Common Shares
    
    18,312,856 shares




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##### 



TABLE OF CONTENTS
 Part IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    17Item 1B. Unresolved Staff Comments
    
    
    35Item 2. Properties
    
    
    35Item 3. Legal Proceedings
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Part IIItem 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    36Item 6. Selected Financial Data
    
    
    41Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 7A. Quantitative and Qualitative Disclosures About Market Risks
    
    
    55Item 8. Financial Statements and Supplementary Data
    
    
    56Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    79Item 9A. Controls and Procedures
    
    
    79Item 9B. Other Matters
    
    
    79Part IIIItem 10. Directors and Executive Officers and Corporate Governance
    
    
    80Item 11. Executive Compensation
    
    
    84Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    95Item 13. Certain Relationships and Related Party Transactions and Director Independence
    
    
    96Item 14. Principal Accounting Fees and Services
    
    
    98Part IVItem 15. Exhibits, Financial Statements and Schedules
    
    
    99Signatures
    
    
    102Index to ExhibitsSummary of Annual CompensationConsent of Deloitte & Touche LLPCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350
  
  FORWARD-LOOKING STATEMENTS
  2




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
    
    the initiation, timing, progress and results of our preclinical and clinical trials, research and development programs;
    
    our reliance on our relationship with Smith & Nephew;
    
    our reliance on sales of Acticoat products with our SILCRYST coatings;
    
    the implementation of our business model, strategic plans for our business, product candidates and technology;
    
    our ability to maintain and establish corporate collaborations;
    
    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 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




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INDUSTRY AND MARKET DATA
  
 PART I
 
 ITEM 1. BUSINESS
 Overview
 
       
  in vitro
 in vitro in vivo
 4




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
 Our Nanocrystalline Technology
    
 a
   5




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Market Overview
 Wound Care Market
  
      
    
  6




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
 Pharmaceutical Market
   Acticoat  Products With Our SILCRYST  Coatings
     
    Staphylococcus aureus   
  
 Acticoat  3/Acticoat  Burn Dressings
      
 7




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##### Table of Contents



Acticoat  7 Dressings
      
 Acticoat  Absorbent Dressings
    
 Acticoat  Moisture Control Dressings
      
 New Acticoat  Products
     
 Our Other Products
 Topical Formulation with NPI 32101
 in vitro
 Our Pre-Clinical Programs
 a
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Our Clinical Development Program
    Smith & Nephew Agreements
       
 License and Development Agreement
    
 9




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##### Table of Contents



    
     
   
      
  
 Supply Agreement
    
 10




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   
   
 Manufacturing and Technology Escrow Agreement
   
 Security Trust Agreement and Trust Indenture
  
 11




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Indemnities
  
 Marketing
     
 Manufacturing
  
  Intellectual Property
     12




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Competition
  
 
 Third-Party Reimbursement and Pricing Controls
 
  13




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
 Government Regulation
  United States
  Medical Device Regulation.
    
  New Drug Approval Process.
  14




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Manufacturing cGMP Requirements.
  European Union Regulation
 Marketing Authorizations for Drugs.
   European GMP.
 15




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Medical Devices. 
  
 Environmental and Occupational Safety and Health Regulations
   Employees
  16




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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.
 
     
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
  Smith & Nephew is our only customer for all of our existing products.
       
  
 
 
 
 We may be unable to sell our existing products to other parties, even if our agreements with Smith
& Nephew expire or terminate.
 
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  
 
      
 We are required to manufacture Acticoat  products according to Smith & Nephews
forecasts and, if we suffer a material difficulty supplying Acticoat  products, Smith &
Nephew would have the right to manufacture or cause a third party to manufacture
Acticoat  products using our technology and facilities.
    
    
   
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 
     
 We rely on Smith & Nephew for regulatory filings for Acticoat  products and our results
would be adversely affected if they do not fully comply with regulatory requirements.
 
 Our agreements with Smith & Nephew may limit our ability to enter into agreements to transfer
certain of our assets.
 
 We have agreed to indemnify Smith & Nephew for claims under our agreements, which could result in
significant costs to us.
 
 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.
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
   
    
    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;
    
    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.
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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.
   
 
 
   
    
    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.
  22




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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 Acticoat
products cost effectively or we may develop production capacity too slowly and be unable to meet
demand for Acticoat  products with our SILCRYST  coatings and, in either
event, we may be unable to develop or commercialize future products successfully.
    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.
   23




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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.
   
 If we are not successful in establishing collaborations with prominent health care companies, we
may not be able to grow our business.
  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.
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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.
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Risks Related to Regulatory Matters
 Smith & Nephew may be unable to maintain existing regulatory approvals or obtain new regulatory
approvals for the Acticoat  products 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.
  
  
    
    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;
    
    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
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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.
  
 
    
    delays in commercialization;
    
    refusal by the FDA or other regulatory agencies to review pending applications or supplements to approved applications;
    
    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.
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If government and third-party payors fail to provide coverage and adequate reimbursement rates for
Acticoat  products or our future products, our revenues and potential for profitability
will be reduced.
   
    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.
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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.
     29




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Trade Secrets and Proprietary Know-how.
 Trademarks.  
  The ability to market Acticoat  products and any other products we develop is subject to
the intellectual property rights of third parties.
 
  30




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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.
   31




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
    
    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 Acticoat 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.
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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.
  33




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As a foreign private issuer, we are subject to different U.S. securities laws and rules than a
domestic U.S. issuer, which may limit the information publicly available to our shareholders.
 www.sedi.ca.
 You may be unable to enforce actions against us or certain of our directors and officers under U.S.
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.
    34




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ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Price
  NASDAQ
    
    TSXHigh
    
    Low
    
    High
    
    Low2006
    
    (US$)
    
    (US$)
    
    (CDN$)
    
    (CDN$)First 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
  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
    
    
    
    
    
    
    
    
    
    
    1,306,735a) Options
    
    
    766,352
    
    
    CDN$5.75b) Restricted Stock Units
    
    
    9,000
 1998 Equity Incentive Plan (as amended)
  36




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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 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
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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.
 Other Terms.
    Amendments.
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Transferability.
     Recent Sales of Unregistered Securities
  Repurchases of Equity Securities
  Share Price Performance Graph
 Date

    Healthcare Index

    NASDAQ

    NCST2005

    100.00

    100.00

    100.002006

    100.09

    109.52

    47.16
 
 39




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Information About our Annual Meeting
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ITEM 6. SELECTED FINANCIAL DATA
   Year EndedDecember 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Results of Operations Data:Revenue:Wound care product revenue
    
    $
    24,369
    
    
    $
    18,636
    
    
    $
    14,682
    
    
    $
    8,404
    
    
    $
    5,312Milestone revenue(1)
    
    
    
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    3,000
    
    
    
    Total revenue
    
    
    24,369
    
    
    
    23,636
    
    
    
    24,682
    
    
    
    11,404
    
    
    
    5,312Costs:Manufacturing
    
    
    16,053
    
    
    
    10,015
    
    
    
    7,141
    
    
    
    4,430
    
    
    
    3,206Research and development
    
    
    11,162
    
    
    
    8,520
    
    
    
    8,971
    
    
    
    5,704
    
    
    
    3,467General and administrative
    
    
    6,723
    
    
    
    3,945
    
    
    
    3,901
    
    
    
    2,797
    
    
    
    2,985Depreciation and amortization
    
    
    430
    
    
    
    300
    
    
    
    221
    
    
    
    158
    
    
    
    139Write down of
capital assets
    
    
    1,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (11,048
    )
    
    
    856
    
    
    
    4,448
    
    
    
    (1,685
    )
    
    
    (4,485
    )Other income (expenses):Foreign exchange (losses) gains
    
    
    (298
    )
    
    
    193
    
    
    
    82
    
    
    
    (230
    )
    
    
    (6
    )Interest income
    
    
    1,123
    
    
    
    12
    
    
    
    66
    
    
    
    47
    
    
    
    41Interest expense(2)
    
    
    (310
    )
    
    
    (3,540
    )
    
    
    (3,229
    )
    
    
    (414
    )
    
    
    (14
    )(Loss) income before income taxes and cumulative
effect of a change in accounting principle
    
    
    (10,533
    )
    
    
    (2,479
    )
    
    
    1,367
    
    
    
    (2,282
    )
    
    
    (4,464
    )Current income tax recovery (expense)(3)
    
    
    41
    
    
    
    (162
    )
    
    
    (19
    )
    
    
    (19
    )
    
    
    (7
    )(Loss) income before cumulative effect of a change in
accounting principle
    
    
    (10,492
    )
    
    
    (2,641
    )
    
    
    1,348
    
    
    
    (2,301
    )
    
    
    (4,471
    )Cumulative effect of a change in accounting principle
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    (10,499
    )
    
    $
    (2,641
    )
    
    $
    1,348
    
    
    $
    (2,301
    )
    
    $
    (4,471
    )Net (loss) income per common share  basic and diluted
    
    $
    (0.58
    )
    
    $
    (0.27
    )
    
    $
    0.14
    
    
    $
    (0.24
    )
    
    $
    (.46
    )Weighted average number of common shares outstanding basic
    
    
    17,964,332
    
    
    
    9,764,486
    
    
    
    9,727,500
    
    
    
    9,727,500
    
    
    
    9,727,500 diluted
    
    
    17,964,332
    
    
    
    9,764,486
    
    
    
    9,905,464
    
    
    
    9,727,500
    
    
    
    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 2002 and 2003,
Westaim did not charge interest on substantially all of our indebtedness to Westaim.
Accordingly, interest expense for the years ended December 31, 2002 and 2003 is substantially
less than the interest expense that would have been incurred had we been charged interest on
all of our indebtedness.(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. 41




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##### Table of Contents



As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Consolidated Balance
Sheet Data:Cash and cash equivalents
    
    $
    18,926
    
    
    $
    35,901
    
    
    $
    948
    
    
    $
    201
    
    
    $
    345Current assets
    
    
    33,591
    
    
    
    48,992
    
    
    
    8,002
    
    
    
    4,655
    
    
    
    2,927Total assets
    
    
    45,892
    
    
    
    59,460
    
    
    
    15,597
    
    
    
    10,042
    
    
    
    6,640Current liabilities(1)
    
    
    2,306
    
    
    
    45,691
    
    
    
    37,181
    
    
    
    31,273
    
    
    
    22,046Working capital (deficiency)
    
    
    31,285
    
    
    
    3,301
    
    
    
    (29,179
    )
    
    
    (26,618
    )
    
    
    (19,119
    )Common shares
    
    
    82,672
    
    
    
    42,629
    
    
    
    3,534
    
    
    
    3,534
    
    
    
    3,534Accumulated other comprehensive
(loss) income
    
    
    (5,490
    )
    
    
    (5,281
    )
    
    
    (4,180
    )
    
    
    (2,479
    )
    
    
    1,045Accumulated deficit
    
    
    (34,078
    )
    
    
    (23,579
    )
    
    
    (20,938
    )
    
    
    (22,286
    )
    
    
    (19,985
    )Total shareholders equity
(deficit)
    
    
    43,586
    
    
    
    13,769
    
    
    
    (21,584
    )
    
    
    (21,231
    )
    
    
    (15,406
    )
 
 (1)
    
    Includes indebtedness to Westaim of $0, $39,642, $33,482, $29,612 and $20,913 as of
December 31, 2006, 2005, 2004, 2003 and 2002, respectively. Year EndedDecember 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Wound care product revenue
    
    $
    24,369
    
    
    $
    18,636
    
    
    $
    14,682
    
    
    $
    8,404
    
    
    $
    5,312Milestone revenue(1)
    
    
    
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    3,000
    
    
    
    Total revenue
    
    $
    24,369
    
    
    $
    23,636
    
    
    $
    24,682
    
    
    $
    11,404
    
    
    $
    5,312Manufacturing costs
    
    $
    16,053
    
    
    $
    10,015
    
    
    $
    7,141
    
    
    $
    4,430
    
    
    $
    3,206Gross margin excluding
milestone
revenue(2)
    
    $
    8,316
    
    
    $
    8,621
    
    
    $
    7,541
    
    
    $
    3,974
    
    
    $
    2,106Gross margin percent excluding
milestone revenue(2)
    
    
    34.1
    %
    
    
    46.3
    %
    
    
    51.4
    %
    
    
    47.3
    %
    
    
    39.6
    %
 
 (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. 42




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  
   
   43




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
  
  44




---



##### Table of Contents



in vitro
 
    45




---



##### Table of Contents



Results of Operations
 Year EndedDecember 31,2006
    
    
    2005
    
    
    2004Wound care product revenue
    
    $
    24,369
    
    
    $
    18,636
    
    
    $
    14,682Milestone revenue(1)
    
    
    
    
    
    
    5,000
    
    
    
    10,000Total revenue
    
    $
    24,369
    
    
    $
    23,636
    
    
    $
    24,682Manufacturing costs
    
    $
    16,053
    
    
    $
    10,015
    
    
    $
    7,141Gross margin excluding milestone revenue(2)
    
    $
    8,316
    
    
    $
    8,621
    
    
    $
    7,541Gross margin percent excluding milestone revenue(2)
    
    
    34.1
    %
    
    
    46.3
    %
    
    
    51.4
    %
 
 (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, 2006 and December 31, 2005
 Revenue.
 Manufacturing Costs  
 Gross Margin.
 Research and Development Costs.
 General and Administrative Costs
 Interest Expense.
 46




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Income Taxes
      Year Ended December 31, 2005 and December 31, 2004
 Revenue.  
 Manufacturing Costs  
 47




---



##### Table of Contents



Gross Margin. 
 Research and Development Costs.
 General and Administrative Costs
 Interest Expense.
 Year Ended December 31, 2004 and December 31, 2003
 Revenue.  
 Manufacturing Costs.  
 Gross Margin 
 Research and Development Costs
 General and Administrative Costs. 
 Interest Expense.
 Liquidity and Capital Resources
  48




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49




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Contractual Commitments and Obligations at December 31, 2006
  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, 2006:Facilities operating leases:Westaim
    
    $
    0.6
    
    
    $
    1.1
    
    
    $
    1.0
    
    
    $
    1.7
    
    
    $
    4.4Third Parties
    
    
    0.5
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    1.2Purchase Obligations:Capital
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Operations
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9Total obligations and commitments
    
    $
    2.5
    
    
    $
    1.8
    
    
    $
    1.0
    
    
    $
    1.7
    
    
    $
    7.0
 Related Party Transactions
   50




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Off-Balance Sheet Commitments as of December 31, 2006
    Critical Accounting Policies and Significant Judgments and Estimates
  Revenue Recognition
   51




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##### Table of Contents



Research and Development Costs
  Income Taxes
  Intangible Assets
  Translation of Foreign Currencies
   52




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Year Ended December 31,
    
    Period End Rate
    
    Period Average Rate
    
    High Rate
    
    Low Rate2004
    
    
    1.2034
    
    
    
    1.3017
    
    
    
    1.3970
    
    
    
    1.17752005
    
    
    1.1656
    
    
    
    1.2115
    
    
    
    1.2703
    
    
    
    1.15072006
    
    
    1.1652
    
    
    
    1.1340
    
    
    
    1.1726
    
    
    
    1.0989Monthly 2006January
    
    
    1.1436
    
    
    
    1.1572
    
    
    
    1.1726
    
    
    
    1.1436February
    
    
    1.1379
    
    
    
    1.1489
    
    
    
    1.1577
    
    
    
    1.1379March
    
    
    1.1670
    
    
    
    1.1573
    
    
    
    1.1722
    
    
    
    1.1320April
    
    
    1.1203
    
    
    
    1.1441
    
    
    
    1.1718
    
    
    
    1.1203May
    
    
    1.1027
    
    
    
    1.1100
    
    
    
    1.1232
    
    
    
    1.0989June
    
    
    1.1150
    
    
    
    1.1137
    
    
    
    1.1241
    
    
    
    1.0991July
    
    
    1.1309
    
    
    
    1.1294
    
    
    
    1.1415
    
    
    
    1.1112August
    
    
    1.1066
    
    
    
    1.1182
    
    
    
    1.1312
    
    
    
    1.1066September
    
    
    1.1151
    
    
    
    1.1161
    
    
    
    1.1272
    
    
    
    1.1052October
    
    
    1.1227
    
    
    
    1.1285
    
    
    
    1.1384
    
    
    
    1.1154November
    
    
    1.1413
    
    
    
    1.1359
    
    
    
    1.1474
    
    
    
    1.1275December
    
    
    1.1652
    
    
    
    1.1532
    
    
    
    1.1652
    
    
    
    1.1415
 
 Stock Based Compensation
      53




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Recently Adopted and Pending Accounting Pronouncements
 FIN 48
  SFAS 155
  SFAS 157
  SAB 108
  EITF 06-3
  54




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##### Table of Contents



EITF 0413
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
   55




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Chartered Accountants
  .
      
  56




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##### Table of Contents



Comments by Independent Registered Chartered Accountants on Canada  United States of America
Reporting Difference
   
  57




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##### Table of Contents



NUCRYST Pharmaceuticals Corp.
Consolidated Balance Sheets
(In US thousands, except share data)
 December 31
    
    
    December 312006
    
    
    2005ASSETSCurrentCash and cash equivalents
    
    $
    18,926
    
    
    $
    35,901Accounts receivable  net (note 3)
    
    
    7,041
    
    
    
    6,401Inventories (note 4)
    
    
    7,297
    
    
    
    6,569Other
    
    
    327
    
    
    
    12133,591
    
    
    
    48,992Restricted cash (note 2g)
    
    
    135
    
    
    
    130Capital assets  net (note 5)
    
    
    11,350
    
    
    
    9,464Intangible assets  net (note 6)
    
    
    816
    
    
    
    874$
    45,892
    
    
    $
    59,460LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities (note 7)
    
    $
    2,261
    
    
    $
    4,991Accounts payable and accrued liabilities to related party (note 11)
    
    
    45
    
    
    
    1,058Indebtedness to related party (note 8)
    
    
    
    
    
    
    39,6422,306
    
    
    
    45,691Guarantees (note 12)Commitments (note 13)Shareholders equityCommon shares no par value, unlimited shares
authorized: issued and outstanding  18,309,613 and
14,227,500 shares at
December 31, 2006 and 2005, respectively (note 9)
    
    
    82,672
    
    
    
    42,629Additional paid-in capital
    
    
    482
    
    
    
    Accumulated other comprehensive loss (note 2d)
    
    
    (5,490
    )
    
    
    (5,281
    )Accumulated deficit
    
    
    (34,078
    )
    
    
    (23,579
    )Total shareholders equity
    
    
    43,586
    
    
    
    13,769$
    45,892
    
    
    $
    59,460
  58




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##### 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 312006
    
    
    2005
    
    
    2004RevenueWound care product revenue
    
    $
    24,369
    
    
    $
    18,636
    
    
    $
    14,682Milestone revenue
    
    
    
    
    
    
    5,000
    
    
    
    10,00024,369
    
    
    
    23,636
    
    
    
    24,682CostsManufacturing (note 5)
    
    
    16,053
    
    
    
    10,015
    
    
    
    7,141Research and development (note 5)
    
    
    11,162
    
    
    
    8,520
    
    
    
    8,971General and administrative
    
    
    6,723
    
    
    
    3,945
    
    
    
    3,901Depreciation and amortization (note 5)
    
    
    430
    
    
    
    300
    
    
    
    221Write down of capital assets (note 5)
    
    
    1,049
    
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (11,048
    )
    
    
    856
    
    
    
    4,448Foreign exchange (losses) gains
    
    
    (298
    )
    
    
    193
    
    
    
    82Interest income
    
    
    1,123
    
    
    
    12
    
    
    
    66Interest expense (note 8)
    
    
    (310
    )
    
    
    (3,540
    )
    
    
    (3,229
    )(Loss) income before income taxes and cumulative effect
of a change in accounting principle
    
    
    (10,533
    )
    
    
    (2,479
    )
    
    
    1,367Current income tax recovery (expense) (note 10)
    
    
    41
    
    
    
    (162
    )
    
    
    (19
    )(Loss) income before cumulative effect of a change in accounting principle
    
    
    (10,492
    )
    
    
    (2,641
    )
    
    
    1,348Cumulative effect of a change in accounting principle (note 2o)
    
    
    (7
    )
    
    
    
    
    
    
    Net (loss) income
    
    $
    (10,499
    )
    
    $
    (2,641
    )
    
    $
    1,348(Loss) income per common share (note 16)Net (loss) income  basic and diluted
    
    $
    (0.58
    )
    
    $
    (0.27
    )
    
    $
    0.14Weighted average number of common shares outstanding: basic
    
    
    17,964,332
    
    
    
    9,764,486
    
    
    
    9,727,500 diluted
    
    
    17,964,332
    
    
    
    9,764,486
    
    
    
    9,905,464
  59




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NUCRYST Pharmaceuticals Corp.
Consolidated Cash Flow Statements
(In US thousands, except share data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 312006
    
    
    2005
    
    
    2004Operating activitiesNet (loss) income
    
    $
    (10,499
    )
    
    $
    (2,641
    )
    
    $
    1,348Items not affecting cashDepreciation and amortization
    
    
    1,656
    
    
    
    1,282
    
    
    
    875Foreign exchange loss
    
    
    (356
    )
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    496
    
    
    
    
    
    
    
    Write down of capital assets
    
    
    1,049
    
    
    
    
    
    
    
    Cumulative effect of a change in accounting principle
    
    
    7
    
    
    
    
    
    
    
    Dividends on preferred shares
    
    
    
    
    
    
    
    
    
    
    389Accounts receivable
    
    
    (606
    )
    
    
    (2,000
    )
    
    
    (1,254
    )Inventories
    
    
    (777
    )
    
    
    (3,612
    )
    
    
    (850
    )Other
    
    
    (212
    )
    
    
    22
    
    
    
    (15
    )Accounts payable and accrued liabilities
    
    
    (2,376
    )
    
    
    1,191
    
    
    
    1,150Accounts payable and accrued liabilities to related party (note 11)
    
    
    (969
    )
    
    
    1,058
    
    
    
    Accrued interest on indebtedness to related party (note 8)
    
    
    
    
    
    
    2,589
    
    
    
    3,122Cash (used in) provided from operating activities
    
    
    (12,587
    )
    
    
    (2,111
    )
    
    
    4,765Investing activitiesRestricted cash
    
    
    (5
    )
    
    
    (2
    )
    
    
    (2
    )Purchase of short-term investments
    
    
    (22,191
    )
    
    
    
    
    
    
    Maturity of short-term investments
    
    
    22,748
    
    
    
    
    
    
    
    Capital expenditures
    
    
    (4,978
    )
    
    
    (3,784
    )
    
    
    (1,817
    )Intangible assets
    
    
    (153
    )
    
    
    (127
    )
    
    
    (115
    )Cash used in investing activities
    
    
    (4,579
    )
    
    
    (3,913
    )
    
    
    (1,934
    )Financing activitiesIssuance of common shares, net of share issuance costs (note 9)
    
    
    286
    
    
    
    39,095
    
    
    
    Net advances from (repayments to) related party (note 8)
    
    
    
    
    
    
    1,662
    
    
    
    (1,949
    )Cash provided from (used in) financing activities
    
    
    286
    
    
    
    40,757
    
    
    
    (1,949
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (95
    )
    
    
    220
    
    
    
    (135
    )Net (decrease) increase in cash and cash equivalents
    
    
    (16,975
    )
    
    
    34,953
    
    
    
    747Cash and cash equivalents at beginning of year
    
    
    35,901
    
    
    
    948
    
    
    
    201Cash and cash equivalents at end of year
    
    $
    18,926
    
    
    $
    35,901
    
    
    $
    948Supplemental disclosure of cash flow information:Non-cash capital asset additions included in accounts
payable and accrued liabilities at end of year
    
    $
    243
    
    
    $
    590
    
    
    $
    674Cash paid for interest
    
    $
    310
    
    
    $
    1,699
    
    
    $
    Cash paid for income taxes
    
    $
    72
    
    
    $
    121
    
    
    $
    19Deferred share issue costs (accrued but not paid)
    
    $
    
    
    
    $
    925
    
    
    $
    
  60




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NUCRYST Pharmaceuticals Corp.
Consolidated Statement of Shareholders Equity
(In US thousands, except share data)
 AccumulatedAdditional
    
    Other
    
    
    
    
    
    TotalCommon Shares
    
    Paid-in
    
    Comprehensive
    
    Accumulated
    
    Comprehensive(thousands of U.S. dollars, except share data)
    
    Number
    
    Stated Amount
    
    Capital
    
    Loss
    
    Deficit
    
    LossDecember 31, 2003
    
    
    9,727,500
    
    
    $
    3,534
    
    
    $
    
    
    
    $
    (2,479
    )
    
    $
    (22,286
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,701
    )
    
    
    
    
    
    $
    (1,701
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,348
    
    
    
    1,348December 31, 2004
    
    
    9,727,500
    
    
    
    3,534
    
    
    
    
    
    
    
    (4,180
    )
    
    
    (20,938
    )
    
    
    (353
    )Issuance of common shares
    
    
    4,500,000
    
    
    
    39,095
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,101
    )
    
    
    
    
    
    
    (1,101
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,641
    )
    
    
    (2,641
    )December 31, 2005
    
    
    14,227,500
    
    
    
    42,629
    
    
    
    
    
    
    
    (5,281
    )
    
    
    (23,579
    )
    
    
    (3,742
    )Issuance of common shares upon conversion
of indebtedness to related party (note 8d)
    
    
    3,964,200
    
    
    
    39,642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common shares in connection
with restricted shares and exercises of stock
options and share appreciation rights
    
    
    117,913
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    
    
    
    
    (209
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,499
    )
    
    
    (10,499
    )December 31, 2006
    
    
    18,309,613
    
    
    $
    82,672
    
    
    $
    482
    
    
    $
    (5,490
    )
    
    $
    (34,078
    )
    
    $
    (10,708
    )
  61




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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 1 DESCRIPTION OF BUSINESS
 NUCRYST Pharmaceuticals Corp. (the Corporation) was incorporated on December 18, 1997 by
articles of incorporation under the Business Corporations Act (Alberta) as a wholly owned
subsidiary of The Westaim Corporation (the Parent). On December 29, 2005, the Corporation
completed an initial public offering for the sale of 4,500,000 common shares. Following the
initial public offering, the Parent continues to own a controlling interest in the
Corporation.The Corporation develops, manufactures and commercializes innovative medical products that
fight infection and inflammation based on its noble metal nanocrystalline technology. The
Corporation produces nanocrystalline silver as a coating for wound care products under the
trademark SILCRYSTTM and as a powder for use as an active pharmaceutical
ingredient, which the Corporation refers to as NPI 32101.Advanced wound care products with the Corporations SILCRYST coatings were developed and
sold by the Corporation under the Acticoat trademark until May 2001 when a series of
agreements were completed with Smith & Nephew plc (Smith & Nephew), a global medical device
company. Under the agreements, the Corporation licensed to Smith & Nephew the exclusive
right to market, distribute and sell products with SILCRYST coatings for use on non-minor
skin wounds and burns in humans world-wide. The Corporation also sold various assets to
Smith & Nephew, including the Acticoat trade name and trademark, various regulatory
approvals and certain manufacturing equipment, which the Corporation then leased back. Under
the agreements, the Corporation manufactures these products and supplies them exclusively to
Smith & Nephew and has agreed to work with Smith & Nephew to develop new Acticoat wound care
products made with the Corporations SILCRYST coatings. Smith & Nephew markets and sells
products with the Corporations SILCRYST coatings under its Acticoat trademark.The Corporations revenue comprises wound care product revenue, which includes manufacturing
cost reimbursement on the sale of product to Smith & Nephew and royalties on the further sale
of that product by Smith & Nephew to third parties, as well as milestone revenue which are
payments earned upon the achievement of specified Smith & Nephew sales thresholds or
regulatory events. All of the Corporations revenues since May, 2001 have been derived from
sales to Smith & Nephew and milestone payments from Smith & Nephew.The Corporation is also developing pharmaceutical products based on its nanocrystalline
technology to address medical conditions that are characterized by both infection and
inflammation. The Corporation has developed NPI 32101 for use as an active pharmaceutical
ingredient. The Corporation ceased its development of a pharmaceutical topical cream
containing NPI 32101 for the treatment of dermatological conditions in November, 2006,
following the results of its second Phase 2 clinical trial. The Corporation is currently
conducting preclinical research for the use of NPI 32101 in the treatment of gastrointestinal
conditions.
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
 a)
    
    Basis of presentationThe Corporations consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).The financial statements of entities which are controlled by the Corporation through
voting equity interests, referred to as subsidiaries, are consolidated. Entities which
are not controlled but over which the Corporation has the ability to exercise significant
influence are accounted for using the equity method. Investments in other entities are
accounted for using the cost method. Variable interest entities (VIEs), as defined by
the Financial Accounting Standards Board (FASB) in FASB Interpretation No. (FIN) 46
(Revised 2003), Consolidation of Variable Interest Entities  an Interpretation of
Accounting Research Bulletin No. 51 (FIN 46R), are entities in which equity investors
do not have the characteristics of a controlling financial interest or there is not
sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support. VIEs are consolidated by the Corporation when it is
determined that it will, as the primary beneficiary, absorb the majority of the VIEs
expected losses and/or expected residual returns. The Corporation currently does not
have any VIEs.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 These consolidated financial statements include the accounts of the Corporation and its
wholly owned subsidiary, NUCRYST Pharmaceuticals Inc., which was incorporated in 1998
under the laws of the state of Delaware. All intercompany balances and transactions are
eliminated upon consolidation.b)
    
    Use of estimatesThe preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the reported amounts of revenue and expenses during the year. Actual
results could differ from those estimates. Significant estimates include the useful
lives of capital assets and intangible assets, inventory valuation, valuation allowance
against deferred tax assets, financial instrument valuation and the fair value of
stock-based compensation.c)
    
    Translation of foreign currenciesThe Corporations functional currency is the Canadian dollar. The functional currency of
the Corporations wholly owned subsidiary, NUCRYST Pharmaceuticals Inc., is the United
States dollar (U.S. dollar). The balance sheet accounts of the subsidiary are
translated into Canadian dollars at the period end exchange rate, while income, expense
and cash flows are translated at the average exchange rate for the period. Translation
gains or losses related to net assets of such operations are shown as a component of
accumulated other comprehensive loss in shareholders equity. Gains and losses resulting
from foreign currency transactions, which are transactions denominated in a currency
other than the entitys functional currency, are included in the consolidated statement
of operations.The Corporation uses the U.S. dollar as its reporting currency to be consistent with
other companies in its industry peer group. The Canadian functional currency
consolidated financial statements are translated to the U.S. dollar reporting currency
using the current rate method of translation.d)
    
    Accumulated other comprehensive lossComprehensive loss is comprised of net loss and other comprehensive loss.Other comprehensive loss consists of foreign currency translation adjustments for the
year, which arise from the conversion of the Canadian dollar functional currency
consolidated financial statements to the U.S. dollar reporting currency consolidated
financial statements. Accumulated other comprehensive loss of $5,490 (2005  $5,281)
consists of foreign currency translation adjustments.e)
    
    Revenue recognitionRevenue from direct sales to third parties is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price to the buyer is fixed or
determinable, and collection is reasonably assured. The Corporations revenues under its
agreements with Smith & Nephew consist primarily of manufacturing cost reimbursements,
royalties and payments upon the achievement of specific milestones. Manufacturing cost
reimbursements and royalties are reported as wound care product revenue in the
consolidated statement of operations as they relate directly to the sale of the
Corporations products to Smith & Nephew. For products manufactured under agreements
with Smith & Nephew, revenue is recorded by the Corporation at the date of shipment.
Royalty revenue is earned based on a percentage of Smith & Nephews sales to third
parties. Revenue relating to the achievement of milestones under agreements with Smith &
Nephew is recognized when the milestone event has occurred and is recorded separately as
milestone revenue. The Corporation also derives fees from research activities under
agreements with Smith & Nephew and this revenue is recognized as services are performed.f)
    
    Product warrantyWound care products currently sold by the Corporation carry a limited short term product
warranty. No provision for product warranty claims was required for the years ended
December 31, 2006 and 2005 as the Corporations claims experience has been negligible.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 g)
    
    Cash and cash equivalentsCash and cash equivalents consist of cash on deposit and highly liquid short-term
investments with original maturities at the date of acquisition of 90 days or less and
are recorded at cost.At December 31, 2006 the Corporation had $135 (2005  $130) on deposit as collateral for
the lease of its Wakefield, Massachusetts facility.h)
    
    Short-term investmentsShort-term investments consist of money-market instruments with original maturities of
greater than 90 days but less than one year and are classified as held-to-maturity
financial assets. Held-to-maturity classification will be restricted to fixed maturity
instruments that the Corporation intends, and is able, to hold to maturity and will be
accounted for at amortized cost. As at December 31, 2006 and 2005, the Corporation did
not hold any short-term investments.i)
    
    Allowance for doubtful accountsThe Corporation evaluates the collectibility of accounts receivable and records an
allowance for doubtful accounts, which reduces the accounts receivable to the amount
management reasonably believes will be collected. A specific allowance is recorded
against customer receivables that are considered to be impaired based on the
Corporations knowledge of the financial condition of its customers. In determining the
amount of the allowance, the Corporation considers factors, including the length of time
the receivables have been outstanding, customer and industry concentrations, the current
business environment and historical experience.j)
    
    InventoriesFinished product, raw materials and materials in process are valued at the lower of
average cost and market. Inventories include direct labour and an application of
relevant overhead.The Corporation manufactures products based on specific orders for Smith & Nephew under a
long-term manufacturing agreement. The carrying value of inventories is recoverable
through future sales as product costs are fully recoverable under the terms of this
agreement, and therefore no provision for inventory valuation is required.k)
    
    Capital assetsCapital assets are stated at cost. Internal labour costs directly relating to capital
projects are included in the cost of the specific capital assets. Depreciation is
calculated using a straight-line method based on estimated useful lives of the particular
assets as follows:
 Machinery and equipment
    
    
    
    5 to 10 yearsComputer hardware and software
    
    
    
    2 to 5 yearsLeasehold improvements
    
    Over term of lease
 The Corporation evaluates the carrying value of capital assets whenever events or
changes in circumstances indicate that the carrying value may not be recoverable, and
recognizes an impairment charge when estimated future non-discounted cash flows of the
underlying assets are less than the carrying value of the assets. Where there is an
impairment, the Corporation measures the charge based on the fair value of the assets
using various valuation techniques.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 l)
    
    Intangible assetsThe Corporations definite life intangible assets consist of the prosecution and
application costs of patents and trademarks and are amortized on a straight-line basis
over their estimated useful lives to a maximum of 10 years. The cost of maintaining
patents and trademarks are expensed as incurred. The Corporation evaluates the carrying
value of definite life intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Any impairment in the carrying
value which is based on the fair value of the intangible assets is charged to expense in
the period that impairment has been determined.Indefinite life intangible assets are recorded at fair value. On a regular basis, the
Corporation reviews the carrying value of these assets for impairment. As at December
31, 2006 and 2005, the Corporation had no indefinite life intangible assets.m)
    
    Research and development costsThe costs of materials, equipment, or facilities that are acquired or constructed for a
particular research and development project and that have no alternative future uses (in
other research and development projects or otherwise) are expensed as research and
development costs at the time the costs are incurred. Research and development
expenditures, which include the cost of materials consumed in research and development
activities, salaries, wages and other costs of personnel engaged in research and
development, costs of services performed by others for research and development on behalf
of the Corporation, depreciation on equipment used for research and development and
indirect costs are expensed as research and development costs when incurred.n)
    
    Income taxesThe Corporation uses the asset and liability method of accounting for income taxes.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial reporting
amounts at each year end, based on enacted tax laws and statutory tax rates applicable to
the years in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that, in the
opinion of management, is more likely than not to be realized. The effect of changes in
tax rates is recognized in the year in which the rate change occurs. Research and
development investment tax credits are accounted for as a reduction of income taxes in
accordance with Accounting Principle Board Opinion No. 4, Accounting for the Investment
Credit.o)
    
    Stock-based compensation plansThe Corporation maintains an equity incentive plan for directors and employees under
which stock options and stock appreciation rights (SARs) may be granted for up to
2,200,000 common shares of the Corporation. The exercise price of each stock option and
SAR is set at an amount not less than the market value of the common shares of the
Corporation at the time of grant. Prior to the initial public offering, the market value
of the common shares was determined by the Parent at the time of issuance of each stock
option and SAR. Stock options and SARs vest evenly over a three-year period and expire
ten years from the date of grant.On January 1, 2006, the Corporation adopted SFAS 123(R), Share-Based Payment (SFAS
123(R)), which requires that all share-based payments to directors and employees,
including grants of stock options, be recognized in the financial statements based on
their fair values.In March 2005, the Securities and Exchange Commission (the SEC) issued Staff Accounting
Bulletin No. 107, Share-Based Payment (SAB 107), relating to SFAS 123(R). The
Corporation has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The
Corporation adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day
of the Corporations fiscal year 2006. The Corporations consolidated financial
statements as of and for the year ended December 31, 2006 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, the Corporations
consolidated financial statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123(R). Stock-based compensation expense
recognized under SFAS 123(R) for the year ended December 31, 2006 was $464, which
consisted of stock-based compensation expense of $482 related to director and employee
stock options and a recovery of $18 related to SARs, with a corresponding increase to
additional paid-in capital (APIC) of
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 o)
    
    Stock-based compensation plans (continued)$482 and a decrease in accounts payable and accrued liabilities of $18. There was no
stock-based compensation expense related to employee stock options recognized during the
years ended December 31, 2005 and 2004.SFAS 123(R) requires companies to estimate the fair value of share-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Corporations consolidated statement of operations. Prior to the
adoption of SFAS 123(R), the Corporation accounted for stock-based awards to employees
and directors using the intrinsic value method in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25),
as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Under the intrinsic value method, no stock-based compensation expense had been recognized
in the Corporations consolidated statement of operations because the exercise price of
the Corporations stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.Stock-based compensation expense recognized during the year is based on the value of the
portion of share-based payment awards that is ultimately expected to vest. Stock-based
compensation expense recognized in the Corporations consolidated statement of operations
for the year ended December 31, 2006 included compensation expense for share-based
payment awards granted prior to but not yet vested as at December 31, 2005 based on the
grant date fair value estimated in accordance with the pro forma provisions of SFAS 123,
and compensation expense for share-based payment awards granted subsequent to December
31, 2005 based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R). As stock-based compensation expense recognized in the consolidated
statement of operations for the year ended December 31, 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. In the
Corporations pro forma information required under SFAS 123 for the periods prior to
fiscal year 2006, the Corporation accounted for forfeitures as they occurred.SFAS 123(R) requires that liability classified awards such as SARs be revalued to
estimated fair value at each reporting date using an option-pricing model. Prior to the
adoption of SFAS 123(R), the Corporation valued SARs at the amount by which the market
value exceeded the exercise price at each measurement date. As a result of implementing
SFAS 123(R) on January 1, 2006, the Corporation increased its SAR liability from $90 to
$97, with the increase recorded as a cumulative effect of a change in accounting
principle in the consolidated statements of operations.The Corporation continues to use the Black-Scholes option-pricing model for valuation of
share-based payment awards which was previously used for the Corporations pro forma
information required under SFAS 123. The Corporations determination of fair value of
share-based payment awards on the date of grant using an option-pricing model is affected
by the Corporations stock price as well as 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 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.p)
    
    Earnings per shareBasic earnings per common share is calculated using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is calculated on the
basis of the average number of shares outstanding during the period plus the additional
common shares that would have been outstanding if potentially dilutive common shares had
been issued using the treasury stock method.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 q)
    
    Employee future benefitsThe Corporation maintains a defined contribution pension plan (Note 15). All employee
future benefits are accounted for on an accrual basis.r)
    
    Recently adopted and pending accounting pronouncementsFIN 48In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an
interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 requires that the Corporation recognize the impact of a tax position in
the financial statements if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the
cumulative effect of the change in accounting principle recorded as an adjustment to the
opening balance of deficit. This FIN is effective for the first quarter of 2007 and is
not expected to have a material impact on the Corporations financial position or results
of operations.SFAS 155In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133) and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 155
simplifies the accounting for certain derivatives embedded in other financial instruments
by allowing them to be accounted for as a whole if the holder elects to account for the
whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other
provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments
acquired, issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The Corporation currently does not have any hybrid financial
instruments.SFAS 157In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The Corporation is currently evaluating the impact SFAS 157 will have
on its consolidated financial statements.SAB 108In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 requires companies to evaluate the
materiality of identified unadjusted errors on each financial statement and related
financial statement disclosure using both the rollover approach and the iron curtain
approach. The rollover approach quantifies misstatements based on the amount of the
error in the current year financial statements whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement existing in
the balance sheet at the end of the current year, irrespective of the misstatements
year(s) of origin. Financial statements would require adjustment when either approach
results in quantifying a misstatement that is material. Correcting prior year financial
statements for immaterial errors would not require previously filed reports to be
amended. SAB 108 is effective for fiscal years ending after November 15, 2006 (the
Corporations fiscal year ending December 31, 2006). The implementation of SAB 108 did
not have a material impact on the Corporations financial position or results of
operations.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 r)
    
    Recently adopted and pending accounting pronouncements (continued)EITF 06-3In June 2006, the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Government Authorities Should Be
Presented in the Income Statement (That Is, Gross Versus Net Presentation) (EITF
06-3), which is effective for interim and annual reporting periods beginning after
December 15, 2006. EITF 06-3 addresses which taxes assessed by a government authority
should be considered and how these taxes should be presented in the income statement
(i.e., gross versus net). This EITF is effective for the first quarter of 2007 and is
not expected to have a material impact on the Corporations financial position or results
of operations.EITF 0413In September 2005, the EITF reached consensus on Issue No. 04-13, Accounting for
Purchases and Sales of Inventory with the same Counterparty (EITF 04-13). EITF 04-13
provides guidance on the purchase and sale of inventory to another entity that operates
in the same line of business. The purchase and sale transactions may be pursuant to a
single contractual arrangement or separate contractual arrangements and the inventory
purchased or sold may be in the form of raw materials, work-in-process, or finished
goods. EITF 04-13 applies to new arrangements entered into, or modifications or renewals
of existing arrangements in reporting periods beginning after March 15, 2006. The
adoption of EITF 04-13 did not have a material impact on the Corporations consolidated
results of operations and financial condition. Future impact from the adoption of EITF
04-13 will depend on the nature of future arrangements entered into, or modifications or
renewals of existing arrangements by the Corporation.
 3 ACCOUNTS RECEIVABLE
 As at December 31, 2006 and 2005, no allowance for doubtful accounts was required.
 4 INVENTORIES
 December 31, 2006
    
    December 31, 2005Raw materials
    
    $
    3,888
    
    
    $
    3,921Materials in process
    
    
    649
    
    
    
    2,121Finished product
    
    
    2,760
    
    
    
    527$
    7,297
    
    
    $
    6,569
 5 CAPITAL ASSETS
 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
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 5 CAPITAL ASSETS (continued)
 Accumulated
    
    NetDecember 31, 2005
    
    Cost
    
    Depreciation
    
    Book ValueMachinery and equipment
    
    $
    9,387
    
    
    $
    2,620
    
    
    $
    6,767Leasehold improvements
    
    
    1,888
    
    
    
    825
    
    
    
    1,063Computer hardware and software
    
    
    393
    
    
    
    185
    
    
    
    208Construction in progress
    
    
    1,426
    
    
    
    
    
    
    
    1,426$
    13,094
    
    
    $
    3,630
    
    
    $
    9,464
 Included in capital assets is construction in progress which is not currently subject to
depreciation. Depreciation related to capital assets for the year ended December 31, 2006
was $1,445 (2005  $1,096; 2004  $713), of which $470 (2005  $447; 2004  $379) was
included in research and development costs and $756 (2005  $535; 2004  $275) relating to
manufacturing assets was included in manufacturing costs in the consolidated statements of
operations. Depreciation expense for the year ended December 31, 2006 was comprised of $219
(2005  $114; 2004  $59) relating to other assets. During the year, construction in
progress included in capital assets relating to the design and 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.
 6 INTANGIBLE ASSETS
 December 31, 2006
    
    December 31, 2005Patents and trademarks
    
    $
    2,180
    
    
    $
    2,028Less accumulated amortization
    
    
    (1,364
    )
    
    
    (1,154
    )$
    816
    
    
    $
    874
 Amortization related to intangible assets for the year ended December 31, 2006 was $211
(2005  $186; 2004  $162).The following is the estimated amortization expense of intangible assets for each of the five
fiscal years commencing with 2007:
 2007
    
    $
    1862008
    
    
    1582009
    
    
    1342010
    
    
    1142011
    
    
    224Total
    
    $
    816
 7 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 December 31, 2006
    
    December 31, 2005Accrued compensation liabilities
    
    $
    517
    
    
    $
    1,030Trade payables related to capital projects
    
    
    243
    
    
    
    590Other trade payables and accrued liabilities
    
    
    1,501
    
    
    
    3,371$
    2,261
    
    
    $
    4,991
 8 INDEBTEDNESS TO RELATED PARTY
 The Corporation was indebted to the Parent as follows:
 December 31, 2006
    
    December 31, 2005Term loan
    
    $
    
    
    
    $
    39,642
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 8 INDEBTEDNESS TO RELATED PARTY (continued)
 Prior to July 1, 2004, the Corporations indebtedness to related party was comprised of
shareholder advances and Class F Series 1 cumulative preferred shares. On July 1, 2004, the
Class F Series 1 cumulative preferred shares were converted to a promissory note. Effective
August 31, 2005, the shareholder advances and promissory note were consolidated into a term
loan with a five-year maturity which bore interest at rates of 10% and 15%. The Corporation
repaid $6,850 of the term loan with net proceeds from the initial public offering. In
accordance with the terms of the initial public offering prospectus, on January 27, 2006, the
remaining balance owing in the amount of $39,642 was converted into 3,964,200 common shares
of the Corporation.The Corporation incurred interest expense on indebtedness to related party as follows:
 Year ended
    
    Year ended
    
    Year endedDecember 31, 2006
    
    December 31, 2005
    
    December 31, 2004Shareholder advances
    
    $
    
    
    
    $
    1,936
    
    
    $
    2,653Cumulative preferred shares
    
    
    
    
    
    
    
    
    
    
    389Promissory note
    
    
    
    
    
    
    653
    
    
    
    469Term loan
    
    
    310
    
    
    
    1,500
    
    
    
    310
    
    
    
    4,089
    
    
    
    3,511Less: interest expense
included in
manufacturing costs
    
    
    
    
    
    
    (549
    )
    
    
    (282
    )$
    310
    
    
    $
    3,540
    
    
    $
    3,229
 9 SHARE CAPITAL
 The Corporations authorized share capital consists of an unlimited number of voting
common shares and preferred shares.a)
    
    Common shares issued and outstandingChanges in the Corporations common shares outstanding during 2006 and 2005 are as
follows:
 Number
    
    Stated Capital2006
    
    2005
    
    2006
    
    2005Balance at beginning of year
    
    
    14,227,500
    
    
    
    9,727,500
    
    
    $
    42,629
    
    
    $
    3,534Stock options exercised
    
    
    105,303
    
    
    
    
    
    
    
    286SARs Exercised
    
    
    7,610
    
    
    
    
    
    
    
    83
    
    
    
    Conversion of term loan (Note 8)
    
    
    3,964,200
    
    
    
    
    
    
    
    39,642
    
    
    
    Restricted shares
    
    
    5,000
    
    
    
    
    
    
    
    32
    
    
    
    Issued upon share offering
    
    
    
    
    
    
    4,500,000
    
    
    
    
    
    
    
    39,095Balance at end of year
    
    
    18,309,613
    
    
    
    14,227,500
    
    
    $
    82,672
    
    
    $
    42,629
 On December 16, 2005, the Corporation effected a reverse stock split at a ratio of
0.6485 for 1. These consolidated financial statements give retroactive effect to this
0.6485 for 1 reverse stock split for all periods presented.On December 29, 2005, the Corporation completed an initial public offering of its
common shares. A total of 4,500,000 new common shares were issued at a price of $10.00.
Net proceeds, after fees and expenses, amount to $39,095.On January 27, 2006, 3,964,200 common shares were issued upon the conversion of
$39,642 of the outstanding term loan owed to the Parent at $10.00 per share in accordance
with the terms of the initial public offering prospectus.During the year ended December 31, 2006, 105,303 options were exercised at a weighted
average price of CDN$3.09. No options were exercised in 2005 or 2004. During the year,
5,000 restricted shares with a fair value of $32 were issued. No restricted shares were
issued in 2005 or 2004.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 9 SHARE CAPITAL (continued)
 a)
    
    Common shares issued and outstanding (continued)The Corporation had no SARs outstanding at December 31, 2006 (December 31, 2005 
12,646 with a weighted average exercise price of CDN$3.08 per SAR). During the year,
10,376 SARs were exercised and settled with 7,610 shares of the Corporation. No SARs were
issued, exercised or forfeited in 2005 or 2004. There was no cumulative liability related
to SARs at December 31, 2006 (December 31, 2005  $90).b)
    
    Stock-based compensation plansThe Corporation maintains an equity incentive plan for employees under which stock options
and SARs may be granted for up to 2,200,000 common shares of the Corporation. A total of
1,306,735 common shares were available for grant under the Corporations stock-based
compensation plans as of December 31, 2006. The exercise price of each stock option and
SAR is set at an amount not less than the market value of the common shares of the
Corporation at the date of grant. Prior to the initial public offering, the market value
of the common shares was determined by the Parent at the time of issuance of each stock
option and SAR. Stock options and SARs vest evenly over a three-year period and expire
ten years from the date of grant. Awards that expire or are forfeited generally become
available for issuance under the plan. Independent directors who were appointed to the
Corporations board of directors prior to May 2, 2006 were granted an initial award of
20,000 options. Effective May 2, independent directors are granted an initial award of
8,000 options upon appointment to the board. Each independent director is entitled to a
subsequent annual award of 2,000 options. Effective May 2, 2006, independent directors
are also granted 5,000 restricted share units upon appointment to the board. These units
vest immediately and are subject to trading restrictions, with 1,000 restricted shares
available for sale on the first anniversary date and the remaining 4,000 restricted shares
upon retirement from the board. Each independent director is entitled to a subsequent
annual grant of 3,000 restricted share units, 50% of which is subject to a one-year
vesting and the remaining 50% to a two-year vesting. During the year ended December 31,
2006, 5,000 restricted share units with a fair value of $32 were granted to a new director
and 9,000 restricted share units were granted to three directors. The value of the 9,000
restricted share units, amounting to $35, is being amortized over the vesting period.
Employees are granted options in the quarter of their hire and subsequently upon the
approval by the board of directors.Effective January 1, 2006, the Corporation began recording compensation expense
associated with stock options and other forms of equity compensation in accordance with
SFAS 123(R) as interpreted by SAB 107. Prior to January 1, 2006, the Corporation
accounted for stock options according to the provisions of APB No. 25 and related
interpretations and, therefore, no compensation expense was recorded for awards granted
with no intrinsic value. The Corporation has adopted the modified prospective transition
method provided under SFAS 123(R) and consequently has not retroactively adjusted results
from prior periods. Under this transition method, compensation cost associated with stock
options now includes 1) amortization related to the remaining unvested portion of all
stock option awards granted prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123; and 2) amortization
related to all stock option awards granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of SFAS 123(R). In
addition, the Corporation records expense over the vesting period in connection with SARs.
The compensation expense for stock-based compensation awards includes an estimate for
forfeitures and is recognized over the vesting period of the options using the
straight-line method. As a result of the adoption of SFAS 123(R), the Corporations loss
before income taxes and net loss for the year ended December 31, 2006 were $471 greater
than they would have been under the Corporations previous accounting method for
share-based compensation. Basic and diluted net loss per common share for the year ended
December 31, 2006 was not impacted by the change in accounting method. The Corporation
evaluated the need to record a cumulative effect adjustment for estimated forfeitures upon
the adoption of SFAS 123(R) and determined that no adjustment was required.Effective January 1, 2006, the Corporation adopted SFAS 123(R), which requires that
liability classified awards such as SARs be measured at fair value at each balance sheet
date until the awards are settled. Previously, net changes in the value of SARs, measured
as the amount by which the market value of the common shares of the Corporation exceeds
the exercise price at the measurement date, were recognized as compensation expense over
the SARs vesting period with a corresponding increase to accounts payable and accrued
liabilities. The impact of the adoption of this change in accounting principle was to
increase the SAR liability as at December 31, 2005 from $90 to $97. As a result, the
Corporation recorded a cumulative effect of a change in accounting principle of $7 in the
consolidated statements of operations in the first quarter of 2006.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 9 SHARE CAPITAL (continued)
 Total stock-based compensation expense for the year ended December 31, 2006 was $464,
of which $460 was included in general and administrative expense and $4 was included in
research and development expense.In prior years, as permitted by SFAS 123, the Corporation elected to measure compensation
costs for options as the excess, if any, of the market value of the shares at the date of
the grant over the exercise price. As the exercise price of options granted by the
Corporation was not less than the market value of the shares at the date of grant, no
compensation expense was recognized.If compensation costs for the Corporations stock option plans in 2005 and 2004 had been
determined based on the fair value methodology over the vesting period consistent with
SFAS 123, the Corporations net (loss) income and (loss) income per share for the years
ended December 31, 2005 and 2004 would have been (increased) reduced to the pro forma
amounts indicated below:
 Year ended
    
    Year endedDecember 31, 2005
    
    December 31, 2004Net (loss) income applicable to common shareholders
    
    $
    (2,641
    )
    
    $
    1,348Total stock-based employee compensation expense determined under
fair-value based method for awards net of tax effects
    
    
    (96
    )
    
    
    (55
    )Pro forma net (loss) income applicable to common shareholders
    
    $
    (2,737
    )
    
    $
    1,293Net (loss) income per common share  basic and diluted
    
    $
    (0.27
    )
    
    $
    0.14Pro forma net (loss) income per common share  basic and diluted
    
    $
    (0.28
    )
    
    $
    0.13
 A summary of the status of the Corporations stock option plans as at December 31, 2006,
2005 and 2004 and changes during the years ended on those dates is presented below:
 Number of Options
    
    Weighted Average Exercise Price (CDN$)December 31
    
    December 312006
    
    2005
    
    2004
    
    2006
    
    2005
    
    2004Balance at beginning of year
    
    
    713,770
    
    
    
    625,057
    
    
    
    486,440
    
    
    $
    3.47
    
    
    $
    3.32
    
    
    $
    3.39Granted
    
    
    209,849
    
    
    
    92,571
    
    
    
    165,205
    
    
    
    14.40
    
    
    
    4.50
    
    
    
    3.08Exercised
    
    
    (105,303
    )
    
    
    
    
    
    
    
    
    
    
    3.09
    
    
    
    
    
    
    
    Forfeited
    
    
    (51,964
    )
    
    
    (3,858
    )
    
    
    (26,588
    )
    
    
    14.73
    
    
    
    3.51
    
    
    
    3.08Balance at end of year
    
    
    766,352
    
    
    
    713,770
    
    
    
    625,057
    
    
    $
    5.75
    
    
    $
    3.47
    
    
    $
    3.32
 The weighted average remaining contractual life of options outstanding at December
31, 2006 was 6.37 years (2005  6.50 years; 2004  7.09 years).
 72




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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 9 SHARE CAPITAL (continued)
 The following table summarizes information regarding stock options outstanding as at
December 31, 2006:
 Options Outstanding
    
    Options ExercisableWeighted-Average
    
    Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-Number
    
    Remaining
    
    Average
    
    
    
    
    
    Number
    
    AverageRange of Exercise
    
    Outstanding at
    
    Contractual
    
    Exercise
    
    Aggregate
    
    Exercisable at
    
    Exercise
    
    AggregatePrices
    
    December 31,
    
    Life
    
    Price
    
    Intrinsic
    
    December 31,
    
    Price
    
    Intrinsic(CDN$)
    
    2006
    
    (Years)
    
    (CDN$)
    
    Value
    
    2006
    
    (CDN$)
    
    Value$3.08 to $4.62
    
    
    554,780
    
    
    
    5.34
    
    
    $
    3.40
    
    
    $
    1,008
    
    
    
    479,876
    
    
    $
    3.39
    
    
    $
    878$4.63 to $6.95
    
    
    60,963
    
    
    
    8.56
    
    
    $
    5.44
    
    
    $
    17
    
    
    
    18,890
    
    
    $
    5.18
    
    
    $
    6$6.96 to $9.50
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    $9.51 to $14.26
    
    
    80,000
    
    
    
    9.11
    
    
    $
    11.87
    
    
    $
    
    
    
    
    20,000
    
    
    $
    11.65
    
    
    $
    $14.27 to $21.40
    
    
    70,609
    
    
    
    9.43
    
    
    $
    17.50
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    $3.08 to $21.40
    
    
    766,352
    
    
    
    6.37
    
    
    $
    5.75
    
    
    $
    1,025
    
    
    
    518,766
    
    
    $
    3.77
    
    
    $
    884
 The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value based on the Corporations closing stock price of U.S.$4.74 as of December
31, 2006 which would have been received by the stock option holders had all stock option
holders exercised their options as of that date. The total number of in-the-money options
as of December 31, 2006 was 600,399, based on the closing market value of the
Corporations common shares at that date.Options granted prior to January 1, 2006 were denominated in Canadian dollars while
options granted on or after January 1, 2006 are denominated in U.S. dollars. For the year
ended December 31, 2006, options granted in U.S. dollars totaled 209,849 with a weighted
average exercise price of U.S.$12.35. The exercise price has been converted to Canadian
dollars for reporting purposes at the year-end exchange rate.The Corporations non-vested stock options consist of options granted under the
Corporations stock option plans. The fair value of each non-vested option is calculated
using the stock price at the date of grant. A summary of the status of non-vested stock
options as at December 31, 2006 and changes during the year is presented below.
 Weighted-AverageNumber of
    
    Grant Date Fair ValueNon-Vested Options
    
    (CDN$)Balance at December 31, 2005
    
    
    215,409
    
    
    $
    1.58Granted
    
    
    209,849
    
    
    $
    8.50Vested
    
    
    (125,708
    )
    
    $
    2.04Forfeited
    
    
    (51,964
    )
    
    $
    8.53Balance at December 31, 2006
    
    
    247,586
    
    
    $
    5.75
 The fair value of each stock-based award is estimated on the date of grant using the
Black-Scholes option-pricing model and the assumptions are noted in the table below. The
Corporations common shares have a public trading history of only one year. As a result,
certain assumptions are currently based on assumptions used by the Parent to value its
stock-based compensation expense. The amounts computed according to the Black-Scholes
pricing model may not be indicative of the actual values realized upon the exercise of the
options by the holders. The weighted average fair value of options granted for the year
ended December 31, 2006 was CDN$8.50 (2005  CDN$2.58; 2004  CDN$0.82). As at December
31, 2006, total compensation cost related to non-vested stock options not yet recognized
was $1,008, which is expected to be recognized over the next 36 months on a
weighted-average basis.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 9 SHARE CAPITAL (continued)
 Due to the limited trading history of the Corporation, the expected volatility of stock
options is currently based upon the historical volatility of the Parents stock. The
dividend yield reflects the Corporations intention not to pay cash dividends in the
foreseeable future. The life of options is currently based on observed historical
exercise patterns of the Parent. 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 Government of Canada zero-coupon issue
with a remaining life approximately equal to the expected term of the options.
 Year ended December 31Stock options
    
    2006
    
    2005Expected volatility
    
    
    58.1
    %
    
    
    57.7
    %Dividend yield
    
    
    
    
    
    
    Expected life
    
    7 years
    
    7 yearsRisk free rate
    
    
    3.89
    %
    
    
    4.33
    %
 In December, 2006 certain directors were granted 9,000 units of restricted common
stock, which vest evenly over two years. Unvested restricted share units are subject to
forfeiture upon termination from the board.A summary of the Corporations non-vested restricted share units as at December 31, 2006
and changes during the year is presented below:
 Number of
    
    Weighted-AverageRestricted Share
    
    Grant DateUnits
    
    Fair ValueBalance at beginning of year
    
    
    
    
    
    $
    Granted
    
    
    9,000
    
    
    
    3.85Balance at end of year
    
    
    9,000
    
    
    $
    3.85
 As the units were issued at the end of the year, no non-cash stock-based compensation
expense was recorded in connection with non-vested restricted share units during the year
ended December 31, 2006. At December 31, 2006, total unrecognized non-cash stock-based
compensation expense related to non-vested restricted share units was $35 which is expected
to be recognized over the remaining vesting period of two years. The Corporation measures
fair value of the restricted share units based upon the market price of its common stock as
of the date of grant.
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 10 INCOME TAXES
  Year Ended December 312006
    
    2005
    
    2004(Loss) income before income taxes and
cumulative effect of a change in
accounting principle
    
    $
    (10,533
    )
    
    $
    (2,479
    )
    
    $
    1,367Statutory income tax rate
    
    
    32.12
    %
    
    
    33.62
    %
    
    
    33.87
    %Expected income tax (recovery) expense
    
    
    (3,383
    )
    
    
    (833
    )
    
    
    463Utilization of prior period losses
    
    
    
    
    
    
    
    
    
    
    (595
    )Losses and
temporary differences
valuation allowance
    
    
    3,347
    
    
    
    937
    
    
    
    Non-deductible expenses
    
    
    
    
    
    
    
    
    
    
    132Large corporations tax
    
    
    (5
    )
    
    
    58
    
    
    
    19Income tax expense
    
    $
    (41
    )
    
    $
    162
    
    
    $
    19
   December 31, 2006
    
    December 31, 2005Deferred income tax assets:Tax benefit of loss carry-forwards and tax credits
    
    $
    18,078
    
    
    $
    13,178Less valuation allowance
    
    
    (17,305
    )
    
    
    (12,638
    )773
    
    
    
    540Deferred income tax liabilities:Capital, intangible and other assets
    
    
    (773
    )
    
    
    (540
    )Deferred income tax assets, net
    
    $
    
    
    
    $
    
    75




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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 11 RELATED PARTY TRANSACTIONS
  Year Ended December 312006
    
    2005
    
    2004Building rent, including operating costs
    
    $
    1,606
    
    
    $
    1,399
    
    
    $
    793Services:Information technology
    
    
    
    
    
    
    58
    
    
    
    277Treasury and accounting
    
    
    
    
    
    
    
    
    
    
    14Legal
    
    
    170
    
    
    
    204
    
    
    
    203Insurance
    
    
    644
    
    
    
    289
    
    
    
    255Other
    
    
    219
    
    
    
    154
    
    
    
    108$
    2,639
    
    
    $
    2,104
    
    
    $
    1,650
   12 GUARANTEES
   13 COMMITMENTS
  2007
    
    2008
    
    2009
    
    2010
    
    2011$
    1,010
    
    
    $
    1,002
    
    
    $
    815
    
    
    $
    527
    
    
    $
    499
 76




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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 14
    
    FINANCIAL INSTRUMENTSFinancial instruments include accounts receivable and other like amounts which will result in
future cash receipts and accounts payable and accrued liabilities and other like amounts
which will result in future outlays. Indebtedness to related party is not included in
financial instruments due to the unique terms and conditions attached to this item.Fair value of financial instrumentsThe carrying values of the Corporations interests in financial instruments
approximate their fair value. The estimated fair value approximates the amount for
which the financial instruments could currently be exchanged in an arms length
transaction between willing parties who are under no compulsion to act.Certain financial instruments, including indebtedness to related party, lack an available
trading market and, therefore, fair value amounts should not be interpreted as being
necessarily realizable in an immediate settlement of the instrument.Foreign currency riskThe Corporation is exposed to currency risks as a result of its export to foreign
jurisdictions of goods produced in Canada. These risks are partially covered by
purchases of goods and services in the foreign currency.Concentration of credit riskThe Corporations financial instruments that are exposed to concentrations of credit
risk consist primarily of accounts receivables. This risk is limited due to the
contractual relationship with Smith & Nephew.15
    
    EMPLOYEE BENEFIT PLANThe Corporation has a 401(k) retirement plan (the Plan) for the benefit of permanent
United States employees. These employees may elect to contribute to the Plan through payroll
deductions of up to $15 of their annual compensation, subject to statutory limitations. The
Corporation may declare discretionary matching contributions of up to 50% of employees
contributions up to a maximum of 3% of employee earnings. The Corporations matching
contributions for the year ended December 31, 2006 were $58 (2005  $46; 2004  $41).The Corporation also participates in a defined contribution pension plan for its Canadian
employees which is administrated by the Parent. The Corporation matches employee
contributions of up to 4% of their annual compensation. The Corporations contributions to
this plan for the year ended December 31, 2006 amounted to $274 (2005  $149; 2004  $94).16
    
    (LOSS) EARNINGS PER SHAREIn calculating (loss) earnings per share under the treasury stock method, the numerator
remains unchanged from the basic (loss) earnings per share calculation as the assumed
exercise of the Corporations stock options does not result in an adjustment to income. The
reconciliation of the denominator in calculating diluted (loss) earnings per share is as
follows:
 Year Ended December 312006
    
    2005
    
    2004Weighted average number of common
shares outstanding  basic
    
    
    17,964,332
    
    
    
    9,764,486
    
    
    
    9,727,500Effect of dilutive securitiesOptions
    
    
    
    
    
    
    
    
    
    
    172,052SARS
    
    
    
    
    
    
    
    
    
    
    5,912Weighted average number of common
shares outstanding  diluted
    
    
    17,964,322
    
    
    
    9,764,486
    
    
    
    9,905,464
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NUCRYST Pharmaceuticals Corp.
Notes to Consolidated Financial Statements
For the years ended December 31, 2006, 2005 and 2004  All amounts are expressed in thousands of U.S. dollars, except share and per share data
 16
    
    (LOSS) EARNINGS PER SHARE (continued)Options to purchase 766,352 common shares were outstanding at December
31, 2006. Of these, 90,473 were excluded from the computation of
diluted (loss) earnings per share because the weighted average
exercise price of these options was greater than the weighted average
value of the common shares of the Corporation during 2006. There were
9,000 restricted share units outstanding at December 31, 2006 and they
were all included in the computation of diluted (loss) earnings per
share.Options to purchase 713,770 common shares and 12,646 SARs were
outstanding at December 31, 2005. All the options and SARs were
included in the computation of diluted (loss) earnings per share
because the estimated value of the common shares of the Corporation
during the year ended December 31, 2005 was greater than the exercise
price of the options and SARs.Options to purchase 625,057 common shares and 19,779 SARs were
outstanding at December 31, 2004. Of these options and SARs, 20,655
of the options and none of the SARs were excluded from the computation
of diluted (loss) earnings per share because the exercise price of the
options and SARs was greater than the estimated value of the common
shares of the Corporation during 2004.The impact of all dilutive securities on (loss) earnings per share is
anti-dilutive for the years ended December 31, 2006 and 2005,
including the dilutive impact of the remaining term loan (Note 8) and
all outstanding options and SARs.17
    
    SEGMENTED INFORMATIONThe Corporation operates in one reportable segment consisting of the
manufacturing, research, development and commercialization of medical
products based on its proprietary noble metal nanocrystalline
technology. The Corporation currently manufactures wound care
products and all the Corporations revenues are earned through
long-term agreements with Smith & Nephew. The Corporation exports the
manufactured wound care products directly to Smith & Nephew for resale
in international markets.
 a)
    
    Assets by geographic segment
 December 31, 2006
    
    December 31, 2005Canada
    
    $
    42,440
    
    
    $
    56,005United States
    
    
    3,452
    
    
    
    3,455$
    45,892
    
    
    $
    59,460
 a)
    
    Capital assets and intangible assets by geographic segment
 December 31, 2006
    
    December 31, 2005Canada
    
    $
    11,130
    
    
    $
    8,874United States
    
    
    1,036
    
    
    
    1,464$
    12,166
    
    
    $
    10,338
 All of the Corporations revenues in 2006, 2005 and 2004 were earned through long-term
agreements with Smith & Nephew for the sale and marketing of the Corporations wound
care products manufactured exclusively for Smith & Nephew. The agreements expire in
2026.
 78




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Managements Report on Internal Control Over Financial Reporting
  Evaluation of disclosure controls and procedures .
    Changes in internal control over financial reporting period
  
 ITEM 9B. OTHER MATTERS
  79




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Name
    
    Age
    
    PositionScott H. Gillis
    
    
    54
    
    
    President, Chief Executive Officer and a DirectorPaul J. Schechter, M.D., Ph.D
    
    
    67
    
    
    Vice President, Drug Development & Regulatory
Affairs and Chief Medical OfficerEliot M. Lurier
    
    
    48
    
    
    Vice President, Finance and Administration and
Chief Financial OfficerCarol L. Amelio
    
    
    45
    
    
    General Counsel and Corporate SecretaryDavid C. McDowell
    
    
    50
    
    
    Vice President, Manufacturing OperationsKatherine J. Turner, Ph.D
    
    
    54
    
    
    Vice President, ResearchBarry M. Heck
    
    
    44
    
    
    Chairman of the BoardNeil Carragher(1)(2)(3)
    
    
    68
    
    
    DirectorRoger G.H. Downer, Ph.D.(2)(3)
    
    
    64
    
    
    DirectorDavid Poorvin, Ph.D. (1)(2)(3)
    
    
    60
    
    
    DirectorRichard W. Zahn(1)(3)
    
    
    55
    
    
    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. Scott H. Gillis
 Paul J. Schechter, M.D., Ph.D.
 Eliot M. Lurier
 Carol L. Amelio
 David C. McDowell
 80




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##### Table of Contents



Katherine J. Turner, Ph.D.
 Barry M. Heck
 Neil Carragher
 Roger G.H. Downer, Ph.D
 David Poorvin, Ph.D
 Richard W. Zahn
   Code of Ethics
 www.sedar.com www.edgar-online.com www.nucryst.com.
 Composition of our Board of Directors
 Business Corporations
Act
 81




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Audit Committee and Financial Expert
 www.nucryst.com
 Nomination of Directors
  Compliance with Section 16(a) of the Exchange Act
 www.sedi.ca
 Scientific Advisory Board
  
    
    our research and development programs;
    
    the design and implementation of our clinical trials;
    
    market opportunities from a clinical perspective;
    
    new technologies relevant to our research and development; and
    
    scientific and technical issues relevant to our business.
 82




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##### Table of Contents



Name
    
    
    
    Professional AffiliationAllen J. Bard, Ph.D.
    
    
    
    Hackerman-Welch Regents Chair in Chemistry Department of Chemistry and
Biochemistry, The University of Texas at Austin
    
    Member, National Academy of Sciences
    
    Formerly Editor-in-Chief, Journal of the American Chemical Society
    
    Formerly President, International Union of Pure and Applied ChemistryRobert H. Demling, M.D.
    
    
    
    Professor of Surgery, Harvard Medical School, Boston
    
    Director, Longwood Area Trauma Center, Harvard Medical School, Boston
    
    Director, Intensive Care Unit, Brigham and Womens Hospital, Boston
    
    Director, Burn Center, Brigham and Womens Hospital, Boston
    
    Surgeon, Brigham and Womens Hospital, Boston
    
    Formerly President, American Burn AssociationByron D. McLees, M.D., Ph.D.
    
    
    
    Vice President, Research, Surgical Review Corporation
    
    Formerly Chief Medical Officer, ClinTrials Research, Inc.
    
    Formerly President, MPI Development
    
    Formerly Vice President Worldwide Clinical Development and Medical Affairs,
Procter and Gamble Pharmaceuticals
    
    Formerly Chief Medical Officer, The Upjohn Company
    
    Formerly Professor of Medicine and Director of Pulmonary/Critical Care
Medicine, Bowman Gray School of MedicineRobert S. Stern, M.D.
    
    
    
    Professor of Dermatology, Harvard Medical School
    
    Chairman, Department of Dermatology, Beth Israel Deaconess Medical Center,
Boston
    
    Formerly Chairman, Dermatologic Drugs Advisory Committee, U.S. Food and Drug
AdministrationMichael Weintraub, M.D.
    
    
    
    Weintraub Pharmaceutical Consulting
    
    Formerly Head, Clinical Pharmacology, University of Rochester Medical School,
New York
    
    Formerly Director, Office of Drug Evaluation 5 (OTC Drugs, Dermatologic/Dental
Drugs, Analgesics, Anti-inflammatory and Ophthalmologic Drugs), U.S. Food and
Drug Administration
  83




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ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
 Overview
  Oversight of Executive Compensation Program
  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.
 84




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##### Table of Contents



Compensation Consultant
     Elements of Our Compensation Program
   Base Salary.
   85




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##### 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.
 
    
    Completion of first trial run of the new equipment associated with our
production capacity expansion (and project on budget): Completion by November at Threshold;
October at Target; and September at Stretch;
 86




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##### Table of Contents




    
    Year- over- year reduction in product non-conforming reports; and
    
    Last patient completed in Phase 2b Trial (and results support move to phase 3,
and announce results by year end): Complete in September at Threshold; October at Target,
and August at Stretch.
    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.
   87




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##### Table of Contents



Stock Options
    
    Restricted Share UnitsNamed Executive
    
    (Vesting Over 3 Years)
    
    (Vesting Over 3 Years)Scott Gillis
    
    
    75,000
    
    
    
    10,000Eliot Lurier
    
    
    40,000
    
    
    
    5,000Paul Schechter
    
    
    20,000
    
    
    
    5,000David McDowell
    
    
    30,000
    
    
    
    5,000Katherine Turner
    
    
    20,000
    
    
    
    2,700
  Other Benefits.
 Tax Deductibility Considerations
   Severance and Change of Control Arrangements
  Scott H. Gillis
  88




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Paul J. Schechter
  Compensation Committee Interlocks and Insider Participation
  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.
   
 89




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Summary Compensation Table
  Summary Compensation Table
 Non-EquityOption
    
    Incentive
    
    All OtherName and
    
    
    
    
    
    Salary
    
    Awards1
    
    Plan
    
    Compensation3
    
    TotalPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    Compensation2
    
    ($)
    
    ($)Scott H. Gillis
    
    
    2006
    
    
    $
    250,000
    
    
    
    134
    
    
    $
    25,000
    
    
    $
    26,600
    
    
    $
    301,734President &
Chief Executive OfficerPaul J. Schechter, M.D., Ph.D
    
    
    2006
    
    
    $
    235,654
    
    
    
    30
    
    
    $
    8,248
    
    
    $
    6,600
    
    
    $
    250,532Vice President, Drug
Development & Regulatory
Affairs and Chief Medical
OfficerEliot M. Lurier, CPA
    
    
    2006
    
    
    $
    145,000
    
    
    
    16,760
    
    
    $
    14,500
    
    
    
    
    
    
    $
    176,260Vice President, Finance and
Administration and Chief
Financial OfficerDavid C. McDowell4
    
    
    2006
    
    
    $
    189,589
    
    
    
    40,972
    
    
    $
    33,178
    
    
    $
    39,470
    
    
    $
    303,209Vice President,
Manufacturing OperationsKatherine J. Turner, Ph.D5
    
    
    2006
    
    
    $
    110,833
    
    
    $
    44,450
    
    
    $
    3,325
    
    
    $
    3,325
    
    
    $
    161,933Vice President, Research
 
 (1)
    
    Amounts shown in this column do not reflect compensation actually received by the named
executive. Instead, the amounts shown are the compensation costs recognized by NUCRYST for
financial statement purposes for the fiscal year ended December 31, 2006, as determined, in
accordance with FAS 123(R). These compensation costs reflect option awards granted pursuant
to our 1998 Equity Incentive Plan, as amended, in and prior to 2006. Assumptions used in the
calculation of this amount are included in the notes to our audited financial statements for
the fiscal year ended December 31, 2006 included in this Annual Report on Form 10-K.(2)
    
    Amounts in this column consist of payments earned in 2006 under our Employee Variable Pay
Incentive Program. A discussion of the material terms of our Employee Variable Pay Incentive
Program can be found in the Compensation Discussion and Analysis section of this document.(3)
    
    In 2006, Mr. Gillis received cash allowances in lieu of perquisites in the amount of $20,000
and Mr. McDowell received reimbursement for temporary living costs totaling $32,108. 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.(4)
    
    Mr. McDowells compensation is denominated in Canadian dollars and has been translated into
U.S. dollars for purposes of this table at an average exchange rate of U.S.$1.00 = C$1.134.(5)
    
    Ms. Turner was appointed Vice President, Research of NUCRYST on June 13, 2006. 90




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Grants of Plan-Based Awards
  Grants of Plan-Based Awards
 All OtherOption Awards:Estimated Future Payouts Under
    
    Number of
    
    Exercise or Base
    
    Grant Date FairNon-Equity Incentive Plan Awards1
    
    Securities
    
    Price of Option
    
    Value of OptionThreshold
    
    Target
    
    Maximum
    
    Underlying
    
    Awards3
    
    Awards2Name
    
    Grant Date
    
    $
    
    $
    
    $
    
    Options #
    
    $/Share
    
    $Scott H. Gillis
    
    
    
    
    
    
    50,000
    
    
    
    87,500
    
    
    
    125,000Paul J. Schechter, M.D., Ph. D
    
    
    
    
    47,130
    
    
    
    82,479
    
    
    
    117,827Eliot M. Lurier
    
    
    
    
    
    
    29,000
    
    
    
    50,750
    
    
    
    72,500David C. McDowell
    
    
    
    
    
    
    39,917
    
    
    
    66,356
    
    
    
    94,794Katherine J. Turner, Ph.D
    
    June 13, 2006
    
    
    22,177
    
    
    
    33,250
    
    
    
    55,417
    
    
    
    25,000
    
    
    
    14.71
    
    
    
    228,594
 
 (1)
    
    The amounts shown are estimated payouts for fiscal 2006 under our Employee Variable Pay
Incentive Program. These amounts are based on the individuals 2006 base salary. A
discussion of the material terms of our Employee Variable Pay Incentive Program can be
found in the Compensation Discussion and Analysis section of this document. Actual amounts
received by these named executives for 2006 are reported in the summary compensation table
under the column entitled, Non-Equity Incentive Plan Compensation.(2)
    
    The value of option awards made under the 1998 Equity Incentive Plan is based on the
fair value as of the grant date of such award determined pursuant to FAS 123(R). The
exercise price for all options granted to a named executive is 100% of the fair market
value of the shares on the grant date which pursuant to our 1998 Equity Incentive Plan, as
amended, is determined to be the trading price of our shares on the NASDAQ on the date
immediately preceding the grant date. The option exercise price has not been deducted from
the amounts indicated above. Regardless of the value placed on the stock option on the
grant date, the actual value of the option will depend on the market value of NUCRYST
common shares at such date in the future when the option is exercised.(3)
    
    The exercise price for option awards is the closing price of our common shares on the
NASDAQ on the day preceding the date of the grant. Option awards granted in 2006 have
exercise prices higher than the closing price of the common shares on the NASDAQ on the
date of the grant. Employment Agreements
 Scott H. Gillis
 Performance-Based Incentive Compensation,
 Paul J. Schechter, M.D., Ph.D.
 Performance-Based Incentive Compensation,
 91




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##### Table of Contents



Eliot M. Lurier
 Performance-Based Incentive Compensation,
 David C. McDowell
 Performance-Based Incentive Compensation,
 Katherine, J. Turner, Ph.D.
 Performance-Based Incentive Compensation,
 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.
   92




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##### Table of Contents



Outstanding Equity Awards at December 31, 2006
  Number of Securities UnderlyingUnexercised Options(#)
    
    Option Exercise
    
    Option ExpiryName
    
    Exercisable
    
    Unexercisable
    
    Price1($)
    
    DateScott H. Gillis
    
    
    194,550
    
    
    
    
    
    
    
    3.18
    
    
    Dec. 6, 200951,880
    
    
    
    
    
    
    
    2.91
    
    
    Feb. 6, 201225,940
    
    
    
    
    
    
    
    2.64
    
    
    Feb. 28, 2013Paul J. Schechter, M.D., Ph.D
    
    
    38,910
    
    
    
    
    
    
    
    2.64
    
    
    May 1, 201212,970
    
    
    
    
    
    
    
    2.64
    
    
    July 1, 201310,808
    
    
    
    5,405
    (2)
    
    
    2.64
    
    
    Sept. 10, 2010Eliot M. Lurier
    
    
    6,485
    
    
    
    12,970
    (3)
    
    
    3.57
    
    
    April 5, 2015David McDowell
    
    
    12,970
    
    
    
    25,940
    (4)
    
    
    4.37
    
    
    July 11, 2015Katherine J. Turner, Ph. D
    
    
    
    
    
    
    25,000
    (5)
    
    
    14.71
    
    
    June 13, 2016
 
 (1)
    
    Exercise prices for all option grants except Katherine Turners are denominated in Canadian
dollars and have been converted into U.S. dollars for purposes of this table at the noon
buying rate as reported by the Federal Reserve Bank of New York on December 31, 2006 of
U.S.$1.00 = C$1.1652.(2)
    
    The option was granted on September 10, 2004. Assuming continued employment with NUCRYST,
the options vest and become exercisable on September 10, 2007.(3)
    
    The option was granted on April 5, 2005. Assuming continued employment with NUCRYST, the
options vest and become exercisable on April 5, 2007 and 2008.(4)
    
    The option was granted on July 11, 2006. Assuming continued employment with NUCRYST, the
options vest and become exercisable on July 11 each of 2007 and 2008.(5)
    
    The option was granted on June 13, 2006. Assuming continued employment with NUCRYST, the
options vest and become exercisable as to 1/3 each on June 13, 2007, 2008 and 2009. 93




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Director Compensation Table
  Fees Earned andPaid in Cash 1
    
    Stock Awards 2
    
    Option Awards 3,4
    
    TotalName
    
    Gross
    
    $ Net
    
    $
    
    $
    
    $Neil Carragher
    
    
    43,400
    
    
    
    32,777
    
    
    
    
    
    
    
    88,458
    
    
    
    131,858Roger G.H. Downer
    
    
    38,633
    
    
    
    32,225
    
    
    
    
    
    
    
    88,458
    
    
    
    127,091David Poorvin
    
    
    23,900
    
    
    
    21,125
    
    
    
    32,000
    
    
    
    28,350
    
    
    
    84,250Richard Zahn
    
    
    42,033
    
    
    
    36,588
    
    
    
    
    
    
    
    88,458
    
    
    
    130,491
 
 1.
    
    Director fees paid in accordance with the boards established policy details of which are
presented below.2.
    
    The amounts to be shown in this column are the compensation costs recognized by NUCRYST in
fiscal 2006 for restricted share unit awards as determined in accordance with FAS 123(R).
5,000 restricted share units were granted on May 30, 2006 to Dr. Poorvin all of which vested
immediately. The grant date fair value of the 5,000 RSUs granted to Dr. Poorvin, as determined
in accordance with FAS 123(R), was $32,000. RSUs were also granted to Messrs. Carragher,
Downer and Zahn of 3,000 each on December 21, 2006. No expense was reported by NUCRYST in
respect of these grants in 2006 due to the end of the year timing of the grants. The grant
date fair value of each of the grants of 3,000 RSUs made to Messrs. Carragher and Downer on
December 21, 2006 was $11,550.3.
    
    Amounts shown in this column do not reflect compensation actually received by the directors.
Instead, the amounts shown are the compensation costs recognized by NUCRYST in fiscal 2006 for
option awards as determined in accordance with FAS 123(R). These compensation costs reflect
option awards granted in and prior to 2006. Messrs. Carragher, Downer and Zahn joined our
board in December 2005 and were granted option awards in December 2005. Messrs. Carragher,
Downer and Zahn and Dr. Poorvin were all granted options in 2006. The assumptions used to
calculate the compensation costs recognized in respect of these option awards are set forth in
the notes to our consolidated financial statements included in this Annual Report on Form
10-K.4.
    
    On December 21, 2006, Messrs. Carragher, Downer and Zahn were each granted stock options to
purchase 2,000 common shares at an exercise price of $3.90 per share and the grant date fair
value of each of these grants as determined in accordance with FAS 123(R) was $7,700. On May
30, 2006, Dr. Poorvin was granted stock options to purchase 8,000 common shares at an exercise
price of $14.66 and the grant date fair value of this grant as determined in accordance with
FAS 123(R) was 73,323. Directors Compensation
  
    
    Each non-employee director, other than Mr. Heck (Mr. Heck having waived any
entitlement to directors fees or compensation) received $2,500 per board meeting attended
in person, and $1,000 for meetings attended by video or telephone conference.
    
    The chairman of our audit committee received $2,500 for each committee meeting
attended in person, and $1,500 for meetings attended by video or telephone conference. Each
other member of our audit committee received $1,000 per committee meeting attended in
person, and $750 for meetings attended by video or telephone conference.
    
    The chairmen of our other committees received $1,500 for committee meetings
attended in person and $1,000 for meetings for attended by video or telephone conference.
Each other member of committees, other than the audit committee, received $750 per
committee meeting attended in person, and $500 for meetings attended by video or telephone
conference.
    
    Each of the non-employee directors (other than Mr. Heck), upon their election
to our board, was granted, subject to execution of award agreements, an aggregate of 20,000
Options to purchase our common shares, and would receive an annual grant of 10,000 Options.
The above Options 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 the grant and are exercisable for a period ending 10 years
from the date of the grant.
  94




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
    
    each non-employee director (other 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);
    
    each non-employee director will, upon their election to the board, receive,
under the amended equity incentive plan, an initial restricted share grant of 5,000 common
shares and a stock option grant to purchase 8,000 of our common shares. The restricted
shares vest immediately, with 1,000 shares available for sale in one year and 4,000 shares
to be held for the duration of board service. The stock options will vest in equal annual
installments on the first three anniversaries of the date of grant. Messrs. Carragher,
Downer and Zahn each received an initial grant of options under the prior directors
compensation policy in connection with the initial public offering. These options covered
20,000 common shares each, had an exercise price of $10.00 per common share and vest in
equal annual installments on the first three anniversaries of the date of grant;
    
    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.
   
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
    
    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.
  95




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##### Table of Contents



Number of
    
    Percentage ofShares Beneficially
    
    Shares BeneficiallyName and Address of Beneficial Owner
    
    Owned
    
    Owned(2)The Westaim Corporation
    
    
    13,691,700
    
    
    
    74.7
    %10102114
Street
Fort Saskatchewan, Alberta 
T8L 3W4Royce & Associates LLC
    
    
    1,422,400
    
    
    
    7.77
    %1414 Avenue
of the AmericasNew York, NY
10019AMVESCAP PLC(3)
    
    
    987,858
    
    
    
    5.40
    %PowerShares
Capital Management LLC 30Finsbury
SquareLondon, England XO EC2A
1AGScott H. Gillis(1)
    
    
    272,370
    
    
    
    1.47
    %Paul J. Schechter, M.D., PhD(1)
    
    
    62,688
    
    
    
    *Eliot M. Lurier(1)
    
    
    6,485
    
    
    
    *David C. McDowell(1)
    
    
    12,970
    
    
    
    *Katherine J.
Turner, Ph.D.
    
    
    
    
    
    
    Barry M. Heck
    
    
    
    
    
    
    Neil Carragher(1)
    
    
    11,667
    
    
    
    *Roger G.H.
Downer, Ph.D.(1)
    
    
    7,667
    
    
    
    *Richard W. Zahn(1)
    
    
    6,667
    
    
    
    *David Poorvin, Ph.D.
    
    
    5,000
    
    
    
    *All directors and executive officers as a
group (10 persons)
    
    
    385,514
    
    
    
    2.08
    %
 
 *
    
    Less than one percent.(1)
    
    Includes options to purchase common shares exercisable within 60 days of December 31, 2006 as
follows: 272,370 shares for Mr. Gillis; 62,688 shares for Dr. Schechter; 6,485 shares for Mr.
Lurier; 12,970 shares for Mr. McDowell; 6,667 shares for Mr. Carragher; 6,667 shares for Dr.
Downer; and 6,667 shares of Mr. Zahn.(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
18,309,613 common shares outstanding at December 31, 2006, plus the number of common shares
that such person or group had the right to acquire within 60 days after December 31, 2006.(3)
    
    Pursuant to the Form 13G filed with the SEC, PowerShares Capital Management LLC has the sole
voting and dispositive power in respect of all 987,858 shares. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Relationships and Related Transactions
  Employment Agreements
  Director and Officer Indemnification
  96




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##### Table of Contents



Relationship with Westaim
  Lease Agreements
 Services Agreement.
 Debt Agreement.
 Master Separation Agreement.
 Registration Rights Agreement.
 Westaim Directors and Officers.
 97




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##### Table of Contents



Policies and Procedures for Review, Approval or Ratification of Transactions with Related Persons
 Business Corporations Act
   Director Independence
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  2006
    
    2005(in millions)Audit Fees
    
    $
    0.3
    
    
    $
    0.4Audit-Related
Fees
    
    
    0.1
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
 Audit-Related Fees
  Tax Fees
  All Other Fees
    98




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##### 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 No.
    
    Description
    
    Incorporated by reference herein2.1
    
    Asset Purchase Agreement, dated May 8, 2001, between
the Registrant and Smith & Nephew, Inc.
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)3.1
    
    Articles of the Registrant
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)3.2
    
    Articles of Amendment
    
    R Amendment No. 2 to
Registration Statement on Form
F-1, as amended (File No.
333-130073)3.3
    
    By-laws of the Registrant
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)4.1
    
    Specimen certificate evidencing common shares
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.1
    
    Form of Master Separation Agreement between the
Registrant and The Westaim Corporation (Westaim)
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.2
    
    Form of Services Agreement between the Registrant
and Westaim
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.3
    
    Form of Registration Rights Agreement between the
Registrant and Westaim
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.4
    
    Amended and Restated Loan Agreement, dated August
31, 2005, between the Registrant and Westaim
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)
 99




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##### Table of Contents



Exhibit No.
    
    Description
    
    Incorporated by reference herein10.5
    
    Amended and Restated General Security Agreement,
dated as of August 31, 2005, between the Registrant
and Westaim
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.6
    
    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
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.7
    
    Letter Agreement, dated March 14, 2002, among the
Registrant, NUCRYST Pharmaceuticals Inc., Smith &
Nephew, Inc. and T.J. Smith & Nephew Limited
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.8
    
    Amending Agreement, dated November 3, 2003, among
the Registrant, NUCRYST Pharmaceuticals Inc., Smith
& Nephew, Inc. and T.J. Smith & Nephew Limited
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.9
    
    Supply Agreement, dated May 8, 2001, among the
Registrant, Smith & Nephew, Inc. and T.J. Smith &
Nephew Limited
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.10
    
    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
    
    Amendment No. 1 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.11
    
    Security Trust Agreement, dated as of May 8, 2001,
between the Registrant and Montreal Trust Company of
Canada, as trustee
    
    Amendment No. 1 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.12
    
    Trust Indenture, dated May 8, 2001, among the
Registrant, NUCRYST Pharmaceuticals Inc. and
Montreal Trust Company of Canada, as trustee
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.13
    
    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
    
    Amendment No. 1 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.14
    
    Memorandum of Lease Agreement, dated as of July 1,
2005, between the Registrant and The Westaim
Corporation
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.15
    
    Commercial Lease, dated as of September 1, 2001,
between NUCRYST Pharmaceuticals Inc. and Cummings
Properties, LLC
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.16*
    
    1998 Equity Incentive Plan
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.17*
    
    Forms of Stock Option Agreements under the 1998
Equity Incentive Plan
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.18*
    
    Form of Amended and Restated 1998 Equity Incentive
Plan
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.19*
    
    Form of Stock Option Agreement under the Amended and
Restated 1998 Equity Incentive Plan
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)
 100




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##### Table of Contents



Exhibit No.
    
    Description
    
    Incorporated by reference herein10.20*
    
    Employment Agreement, dated December 6, 1999,
between NUCRYST Pharmaceuticals Inc. and Scott H.
Gillis
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.21*
    
    Stock Option Agreement, dated December 6, 1999,
among the Registrant, Westaim and Scott H. Gillis
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.22*
    
    Letter Agreement, dated March 16, 2005, between the
Registrant and Eliot M. Lurier
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.23*
    
    Letter Agreement, dated June 15, 2005, between the
Registrant and David C. McDowell
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.24*
    
    Letter Agreement, dated March 14, 2002, between the
Registrant and Paul J. Schechter, M.D., Ph.D.
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.25*
    
    Summary of Non-Employee Director Compensation
    
    Amendment No. 3 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.26
    
    Form of Indemnification Agreement
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.27*
    
    Change of Control Agreement, dated December 6, 1999,
between NUCRYST Pharmaceuticals Inc. and Scott H.
Gillis
    
    Amendment No. 2 to Registration
Statement on Form F-1, as
amended (File No. 333-130073)10.28*
    
    Summary of Annual Compensation (filed herewith)21.1
    
    Subsidiaries of the Registrant
    
    Registration Statement on Form
F-1, as amended (File No.
333-130073)23.1
    
    Consent of Deloitte & Touche LLP (filed herewith)24.1
    
    Power of Attorney (included on signature page hereto)31.1
    
    Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)31.2
    
    Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
    
    Confidential treatment has been granted for portions of this exhibit.*
    
    Indicates management compensatory plan, contract or arrangement. 101




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##### Table of Contents



SIGNATURES
  NUCRYST PHARMACEUTICALS CORP.By:
    /s/  Scott H. GillisScott H. GillisPresident and Chief Executive Officer POWER OF ATTORNEY
  Name
    
    Title/s/ Scott H. Gillis
    
    President and Chief Executive
Officer (PrincipalScott H. Gillis
    
    Executive
Officer)/s/ Eliot M. Lurier
    
    Vice President  Finance and
Administration, ChiefEliot M. Lurier
    
    Financial
Officer (Principal Financial
and Accounting Officer)/s/ Barry M. Heck
    
    DirectorBarry M. Heck/s/ Neil Carragher
    
    DirectorNeil Carragher/s/ Roger G. H. Downer
    
    DirectorRoger G.H. Downer/s/ David Poorvin
    
    DirectorDavid Poorvin/s/ Richard Zahn
    
    DirectorRichard Zahn
 102