##### 









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q



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|  |  |                                                                                                
|- |  | -----------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

For
the quarterly period ended: June 30, 2004

Commission file number 1-1143

Inco Limited

(Name of Registrant as specified in its
charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Canada                          |  | 98-0000676                          
|(Jurisdiction of Incorporation) |  | (I.R.S. Employer Identification No.)

145 King Street West, Suite 1500,
Toronto, Ontario M5H 4B7*

(Address of principal executive offices,
including zip code)


(416) 361-7511

(Telephone number)


The Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the Act) during the
preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.

The Registrant is an accelerated filer (as
defined in Rule 12b-2 under the Act).

Unless otherwise stated, dollar amounts in this
Report are expressed in United States currency.

Common Shares outstanding at June 30, 2004:
187,538,813 shares, no par value.

* Notices and communications from the
Securities and Exchange Commission may be sent to S.F. Feiner,
Executive Vice-President, General Counsel and Secretary, 145
King Street West, Suite 1500, Toronto, Ontario M5H 4B7. His
telephone number is (416) 361-7680.



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##### 



PART I  FINANCIAL
INFORMATION

Item 1.Financial
Statements

INCO LIMITED AND SUBSIDIARIES

Consolidated Statement of Earnings

(Unaudited)

|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |      | 
|-------------------------------------------------------------------------- | ------- | ------------------ | ----- | ---------------- | - | ---- | --- | ---------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                                                                           |         |                    |       |                 
|                                                                           |         | Three Months Ended |       | Six Months Ended
|                                                                           |         | June 30,           |       | June 30,        
|                                                                           |         |                    |       |                 
|(in millions of United States dollars except per share amounts)            |         | 2004               |       | 2003             |   | 2004 |     | 2003      
|                                                                           |         |                    |       |                  |   |      |     |           
|                                                                           |         |                    |       | (Restated)       |   |      |     | (Restated)
|Revenues                                                                   |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Net sales                                                                  |         | $                  | 992   |                  |   | $    | 599 |            |  | $ | 2,086 |      |  | $ | 1,192 |     
|Other income, net (Note 3)                                                 |         |                    | 10    |                  |   |      | 13  |            |  |   | 15    |      |  |   | 41    |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|                                                                           |         |                    | 1,002 |                  |   |      | 612 |            |  |   | 2,101 |      |  |   | 1,233 |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Costs and expenses (income)                                                |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Cost of sales and other expenses, excluding
    depreciation and depletion |         |                    | 580   |                  |   |      | 412 |            |  |   | 1,137 |      |  |   | 831   |     
|Depreciation and depletion                                                 |         |                    | 62    |                  |   |      | 59  |            |  |   | 119   |      |  |   | 113   |     
|Selling, general and administrative                                        |         |                    | 41    |                  |   |      | 36  |            |  |   | 75    |      |  |   | 60    |     
|Research and development                                                   |         |                    | 7     |                  |   |      | 9   |            |  |   | 16    |      |  |   | 14    |     
|Exploration                                                                |         |                    | 6     |                  |   |      | 6   |            |  |   | 12    |      |  |   | 12    |     
|Currency translation adjustments                                           |         |                    | (18   | )                |   |      | 72  |            |  |   | (33   | )    |  |   | 150   |     
|Interest expense                                                           |         |                    | 6     |                  |   |      | 12  |            |  |   | 14    |      |  |   | 26    |     
|Asset impairment charge (Note 4)                                           |         |                    | 201   |                  |   |      |    |            |  |   | 201   |      |  |   |      |     
|Goro project suspension                                                    |         |                    | 3     |                  |   |      | 6   |            |  |   | (3    | )    |  |   | 6     |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|                                                                           |         |                    | 888   |                  |   |      | 612 |            |  |   | 1,538 |      |  |   | 1,212 |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Earnings before income and mining taxes and
    minority interest          |         |                    | 114   |                  |   |      |    |            |  |   | 563   |      |  |   | 21    |     
|Income and mining taxes (Note 5)                                           |         |                    | 106   |                  |   |      | (76 | )          |  |   | 266   |      |  |   | (99   | )   
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Earnings before minority interest                                          |         |                    | 8     |                  |   |      | 76  |            |  |   | 297   |      |  |   | 120   |     
|Minority interest                                                          |         |                    | 22    |                  |   |      | 12  |            |  |   | 56    |      |  |   | 23    |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Net earnings (loss)                                                        |         |                    | (14   | )                |   |      | 64  |            |  |   | 241   |      |  |   | 97    |     
|Accretion of convertible debt, net of tax
    (Note 10)                    |         |                    | (2    | )                |   |      | (1  | )          |  |   | (4    | )    |  |   | (3    | )   
|Dividends on preferred shares                                              |         |                    |      |                  |   |      |    |            |  |   |      |      |  |   | (6    | )   
|Premium on redemption of preferred shares                                  |         |                    |      |                  |   |      |    |            |  |   |      |      |  |   | (15   | )   
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Net earnings (loss) applicable to common shares                            |         | $                  | (16   | )                |   | $    | 63  |            |  | $ | 237   |      |  | $ | 73    |     
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|Net earnings (loss) per common share (Note 9)                              |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|                                                                           | Basic   |                    | $     | (0.09            | ) |      | $   | 0.34       |  |   | $     | 1.27 |  |   | $     | 0.40 | 
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     
|                                                                           | Diluted |                    | $     | (0.09            | ) |      | $   | 0.34       |  |   | $     | 1.19 |  |   | $     | 0.39 | 
|                                                                           |         |                    |       |                  |   |      |     |            |  |   |       |      |  |   |       |     

See Notes to Consolidated Financial Statements.

2



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##### 



INCO LIMITED AND SUBSIDIARIES

Consolidated Statement of Retained Earnings
(Deficit)

(Unaudited)

|                                                           |  |                  |      |            |  |   |      |  
|---------------------------------------------------------- |  | ---------------- | ---- | ---------- |  | - | ---- | -
|                                                           |  |                 
|                                                           |  | Six Months Ended
|                                                           |  | June 30,        
|                                                           |  |                 
|(in millions of United States dollars)                     |  | 2004             |      | 2003      
|                                                           |  |                  |      |           
|                                                           |  |                  |      | (Restated)
|Deficit at beginning of period, as previously
    reported |  | $                | (226 | )          |  | $ | (335 | )
|Change in accounting policy (Note 2)                       |  |                  | 20   |            |  |   | 4    |  
|                                                           |  |                  |      |            |  |   |      |  
|Deficit at beginning of year, as restated                  |  |                  | (206 | )          |  |   | (331 | )
|Net earnings                                               |  |                  | 241  |            |  |   | 97   |  
|Accretion of convertible debt, net of tax
    (Note 10)    |  |                  | (4   | )          |  |   | (3   | )
|Dividends on preferred shares                              |  |                  |     |            |  |   | (6   | )
|Premium on redemption of preferred shares                  |  |                  |     |            |  |   | (15  | )
|                                                           |  |                  |      |            |  |   |      |  
|Retained earnings (deficit) at end of period               |  | $                | 31   |            |  | $ | (258 | )
|                                                           |  |                  |      |            |  |   |      |  

See Notes to Consolidated Financial Statements.

3



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##### 



INCO LIMITED AND SUBSIDIARIES

Consolidated Balance Sheet

(Unaudited)

|                                            |                                                                                           |          |       |              |  |   |       |       |  
|------------------------------------------- | ----------------------------------------------------------------------------------------- | -------- | ----- | ------------ |  | - | ----- | ----- | -
|                                            |                                                                                           | June 30, |       | December 31,
|(in millions of United States dollars)      |                                                                                           | 2004     |       | 2003        
|                                            |                                                                                           |          |       |             
|                                            |                                                                                           |          |       | (Restated)  
|ASSETS                                     
|Current assets                              |                                                                                           |          |       |              |  |   |       |      
|Cash and cash equivalents (Note 14)         |                                                                                           | $        | 774   |              |  | $ | 418   |      
|Accounts receivable                         |                                                                                           |          | 490   |              |  |   | 435   |      
|Inventories (Note 14)                       |                                                                                           |          | 839   |              |  |   | 746   |      
|Other                                       |                                                                                           |          | 157   |              |  |   | 112   |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total current assets                        |                                                                                           |          | 2,260 |              |  |   | 1,711 |      
|Property, plant and equipment (Note 14)     |                                                                                           |          | 6,960 |              |  |   | 7,033 |      
|Deferred charges and other assets           |                                                                                           |          | 336   |              |  |   | 319   |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total assets                                |                                                                                           | $        | 9,556 |              |  | $ | 9,063 |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|                                           
|LIABILITIES AND SHAREHOLDERS
    EQUITY   
|Current liabilities                         |                                                                                           |          |       |              |  |   |       |      
|Long-term debt due within one year          |                                                                                           | $        | 101   |              |  | $ | 103   |      
|Accounts payable                            |                                                                                           |          | 257   |              |  |   | 253   |      
|Accrued payrolls and benefits               |                                                                                           |          | 163   |              |  |   | 165   |      
|Other accrued liabilities                   |                                                                                           |          | 358   |              |  |   | 332   |      
|Income and mining taxes payable             |                                                                                           |          | 260   |              |  |   | 27    |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total current liabilities                   |                                                                                           |          | 1,139 |              |  |   | 880   |      
|Deferred credits and other
    liabilities  |                                                                                           |          |       |              |  |   |       |      
|Long-term debt (Note 6)                     |                                                                                           |          | 1,368 |              |  |   | 1,409 |      
|Deferred income and mining taxes            |                                                                                           |          | 1,697 |              |  |   | 1,706 |      
|Post-retirement benefits                    |                                                                                           |          | 600   |              |  |   | 603   |      
|Asset retirement obligation (Note 8)        |                                                                                           |          | 144   |              |  |   | 141   |      
|Minority interest                           |                                                                                           |          | 460   |              |  |   | 442   |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total liabilities                           |                                                                                           |          | 5,408 |              |  |   | 5,181 |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Commitments and contingencies
    (Note 12) |                                                                                           |          |       |              |  |   |       |      
|Shareholders equity                        |                                                                                           |          |       |              |  |   |       |      
|Convertible debt (Note 10)                  |                                                                                           |          | 612   |              |  |   | 606   |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Common shareholders equity                 |                                                                                           |          |       |              |  |   |       |      
|                                            | Common shares issued and outstanding 187,538,813
    (2003  186,915,865 shares) (Note 9) |          |       | 2,874        |  |   |       | 2,858 |  
|                                            | Warrants (Note 11)                                                                        |          |       | 62           |  |   |       | 62    |  
|                                            | Contributed surplus (Note 15)                                                             |          |       | 569          |  |   |       | 562   |  
|                                            | Retained earnings (deficit)                                                               |          |       | 31           |  |   |       | (206  | )
|                                            |                                                                                           |          |       |              |  |   |       |      
|                                            |                                                                                           |          | 3,536 |              |  |   | 3,276 |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total shareholders equity                  |                                                                                           |          | 4,148 |              |  |   | 3,882 |      
|                                            |                                                                                           |          |       |              |  |   |       |      
|Total liabilities and shareholders equity  |                                                                                           | $        | 9,556 |              |  | $ | 9,063 |      
|                                            |                                                                                           |          |       |              |  |   |       |      

See Notes to Consolidated Financial Statements.

4



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INCO LIMITED AND SUBSIDIARIES

Consolidated Statement of Cash Flows

(Unaudited)

|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |      |      |  
|-------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------------------------- | --- | ---------------- | --- | ---- | ----- | ---------- | --- | - | --- | ---- | --- | - | ----- | ---- | ---- | -
|                                                         |                                                                           |                                          |     |                 
|                                                         |                                                                           | Three Months Ended                       |     | Six Months Ended
|                                                         |                                                                           | June 30,                                 |     | June 30,        
|                                                         |                                                                           |                                          |     |                 
|(in millions of United States dollars)                   |                                                                           | 2004                                     |     | 2003             |     | 2004 |       | 2003      
|                                                         |                                                                           |                                          |     |                  |     |      |       |           
|                                                         |                                                                           |                                          |     | (Restated)       |     |      |       | (Restated)
|                                                         |                                                                           |                                         
|Operating activities                                     |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Earnings before minority interest                                         |                                          | $   | 8                |     |      | $     | 76         |     |   | $   | 297  |     |   | $     | 120  |     
|                                                         | Charges not affecting cash Depreciation and
    depletion                 |                                          |     | 62               |     |      |       | 59         |     |   |     | 119  |     |   |       | 113  |     
|                                                         |                                                                           | Deferred income and mining taxes         |     |                  | 26  |      |       |            | (72 | ) |     |      | 42  |   |       |      | (52  | )
|                                                         |                                                                           | Asset impairment charge                  |     |                  | 201 |      |       |            |    |   |     |      | 201 |   |       |      |     |  
|                                                         |                                                                           | Other                                    |     |                  | 5   |      |       |            | 40  |   |     |      | 8   |   |       |      | 72   |  
|                                                         | Decrease (increase) in non-cash working capital
    related to operations |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |      |     
|                                                         |                                                                           | Accounts receivable                      |     |                  | 5   |      |       |            | 43  |   |     |      | (54 | ) |       |      | (27  | )
|                                                         |                                                                           | Inventories                              |     |                  | 4   |      |       |            | (30 | ) |     |      | (93 | ) |       |      | (50  | )
|                                                         |                                                                           | Accounts payable and accrued liabilities |     |                  | (24 | )    |       |            | (12 | ) |     |      | 18  |   |       |      | (53  | )
|                                                         |                                                                           | Income and mining taxes payable          |     |                  | 66  |      |       |            | (41 | ) |     |      | 234 |   |       |      | (162 | )
|                                                         |                                                                           | Other                                    |     |                  | (9  | )    |       |            | 6   |   |     |      | (43 | ) |       |      | (3   | )
|                                                         | Other                                                                     |                                          |     | (5               | )   |      |       | 12         |     |   |     | (10  | )   |   |       | 25   |     
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Net cash provided by (used for) operating
    activities                  |                                          |     | 339              |     |      |       | 81         |     |   |     | 719  |     |   |       | (17  | )   
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|Investing activities                                     |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Capital expenditures                                                      |                                          |     | (156             | )   |      |       | (128       | )   |   |     | (295 | )   |   |       | (291 | )   
|                                                         | Other                                                                     |                                          |     | 8                |     |      |       | 15         |     |   |     | (20  | )   |   |       | 14   |     
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Net cash used for investing activities                                    |                                          |     | (148             | )   |      |       | (113       | )   |   |     | (315 | )   |   |       | (277 | )   
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|Financing activities                                     |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Repayments of long-term debt                                              |                                          |     | (2               | )   |      |       | (176       | )   |   |     | (48  | )   |   |       | (224 | )   
|                                                         | Long-term borrowings                                                      |                                          |     |                 |     |      |       | 6          |     |   |     |     |     |   |       | 8    |     
|                                                         | Convertible debt issued                                                   |                                          |     |                 |     |      |       |           |     |   |     |     |     |   |       | 470  |     
|                                                         | Common shares issued                                                      |                                          |     | 2                |     |      |       |           |     |   |     | 14   |     |   |       | 4    |     
|                                                         | Preferred shares redeemed                                                 |                                          |     |                 |     |      |       | (487       | )   |   |     |     |     |   |       | (487 | )   
|                                                         | Preferred dividends paid                                                  |                                          |     |                 |     |      |       |           |     |   |     |     |     |   |       | (6   | )   
|                                                         | Dividends paid to minority interest                                       |                                          |     | (14              | )   |      |       | (1         | )   |   |     | (15  | )   |   |       | (2   | )   
|                                                         | Other                                                                     |                                          |     | 1                |     |      |       | (3         | )   |   |     | 1    |     |   |       | (3   | )   
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|                                                         | Net cash used for financing activities                                    |                                          |     | (13              | )   |      |       | (661       | )   |   |     | (48  | )   |   |       | (240 | )   
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|Net increase (decrease) in cash and cash
    equivalents |                                                                           |                                          | 178 |                  |     |      | (693  | )          |     |   | 356 |      |     |   | (534  | )   
|Cash and cash equivalents at beginning of period         |                                                                           |                                          | 596 |                  |     |      | 1,246 |            |     |   | 418 |      |     |   | 1,087 |     
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     
|Cash and cash equivalents at end of
    period           |                                                                           | $                                        | 774 |                  |     | $    | 553   |            |     | $ | 774 |      |     | $ | 553   |     
|                                                         |                                                                           |                                          |     |                  |     |      |       |            |     |   |     |      |     |   |       |     

See Notes to Consolidated Financial Statements.

5



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##### 



INCO LIMITED AND SUBSIDIARIES

Notes to Consolidated Financial
Statements

(Unaudited)

(Tabular amounts in millions of United States
dollars except number of shares and per share amounts)



|        |                      
|------- | ---------------------
|Note 1. | Basis of Presentation

The unaudited consolidated financial statements
presented herein have been prepared in accordance with generally
accepted accounting principles (GAAP) in Canada (see
Note 16 for significant differences between Canadian GAAP
and United States GAAP) for interim financial information and in
accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of
management, all adjustments considered necessary for a fair
presentation of results for the periods reported have been
included. These adjustments consist only of normal recurring
adjustments. Results of operations for the three-month and
six-month periods ended June 30, 2004 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2004 or any other interim period. These
interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2003 (2003 Annual Report on
Form 10-K).



|        |                               
|------- | ------------------------------
|Note 2. | Changes in Accounting Policies



|    |                                       
|--- | --------------------------------------
|(a) | Depreciation and depletion
    expense

Effective January 1, 2004, on a retroactive
basis, we changed the method in which we calculate depreciation
and depletion expense. Under the previous method, we depleted
mine development costs on a composite basis. Total historical
capitalized costs and estimated future development costs
relating to our developed and undeveloped estimated proven and
probable ore reserves were depleted using the unit-of-production
method based on total developed and undeveloped estimated proven
and probable ore reserves in our twenty-year mine plan. Under
the revised method, depletion of the deferred mine development
costs is calculated on a unit-of-production basis over the
estimated proven and probable ore reserves which relate to the
particular category of development, either life of mine plan or
area-specific. No future development costs are taken into
account in calculating the depletion charge. In addition, the
depreciation method covering certain other assets of our
61 per cent owned subsidiary, PT International Nickel
Indonesia Tbk (PT Inco), has been changed to a
straight line basis to conform its depreciation method used to
the depreciation methods generally used for similar assets in
other company locations.

Adoption of this change in accounting policy also
removes a significant difference between Canadian GAAP and
United States GAAP. The impact of this change on the first six
months of 2003 depreciation and depletion expense was a
reduction of $18 million.

Reference is made to Note 23(b) of our
consolidated financial statements set forth in our 2003 Annual
Report on Form 10-K for a more complete description of this
method of calculating depreciation and depletion expense.



|    |                                             
|--- | --------------------------------------------
|(b) | Generally accepted accounting
    principles

Effective January 1, 2004, we adopted
Canadian Institute of Chartered Accountants (CICA)
section 1100, Generally Accepted Accounting
Principles. CICA 1100 describes what constitutes
Canadian GAAP and its sources. Adoption of this standard did not
have a significant impact on our results of operations or
financial condition for the first six months of 2004.



|    |                      
|--- | ---------------------
|(c) | Hedging Relationships

Effective January 1, 2004, we adopted a new
accounting guideline issued by the CICA in respect of hedging
relationships which provides guidance concerning documentation
and effectiveness testing for

6



---



##### 



derivative contracts. Adoption of this guideline
did not have a significant impact on our results of operations
or financial condition for the first six months of 2004.




|    |                         
|--- | ------------------------
|(d) | Stock-based compensation

Effective January 1, 2003, we changed our
accounting for stock options from the intrinsic value method to
one that recognizes as an expense the cost of stock-based
compensation based on the estimated fair value of new stock
options granted to employees in 2003 and in future years. The
fair value of each stock option granted is estimated on the date
of the grant using an option-pricing model. As a result of this
change in accounting policy, which was applied prospectively, an
expense of $7 million was recorded in the first six months
of 2004 (2003: $2 million) to reflect the fair value of
stock options, including taking into account their applicable
vesting periods, granted to employees in 2003 and 2004.



|    |                                    
|--- | -----------------------------------
|(e) | Impairment of long-lived
    assets

Effective January 1, 2003, we adopted a new
accounting standard of the CICA in respect of the impairment or
disposal of long-lived assets. The new standard requires that a
fair value determination be made for long-lived assets to be
disposed of by sale, whether previously held and used or newly
acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The initial
adoption of the new standard had no impact on our results of
operations or financial condition.



|    |                             
|--- | ----------------------------
|(f) | Asset retirement obligations

Effective January 1, 2003, we adopted a new
accounting standard of the CICA relating to asset retirement
obligations. This standard significantly changed the method of
accounting for asset retirement obligation costs. Under this new
standard, asset retirement obligations are recognized when
incurred and recorded as liabilities at fair value. The
liability is accreted over time through periodic charges to
earnings. In addition, the asset retirement cost is capitalized
as part of the assets carrying value and depreciated over
the assets useful life. This change in accounting policy
was applied retroactively and, accordingly, the consolidated
financial statements of prior periods were restated.



|        |                  
|------- | -----------------
|Note 3. | Other income, net

Other income, net is comprised of the following:

|                                                                   |  |              |    |            |  |      |    |      |  |   |    |   |  |   |     |  
|------------------------------------------------------------------ |  | ------------ | -- | ---------- |  | ---- | -- | ---- |  | - | -- | - |  | - | --- | -
|                                                                   |  |              |    |           
|                                                                   |  | Three Months |    | Six Months
|                                                                   |  | Ended        |    | Ended     
|                                                                   |  | June 30,     |    | June 30,  
|                                                                   |  |              |    |           
|                                                                   |  | 2004         |    | 2003       |  | 2004 |    | 2003
|                                                                   |  |              |    |            |  |      |    |     
|Interest and dividend income                                       |  | $            | 2  |            |  | $    | 3  |      |  | $ | 5  |   |  | $ | 7   |  
|Earnings from affiliates accounted for using the
    equity method |  |              | 1  |            |  |      |   |      |  |   | 4  |   |  |   |    |  
|Losses from derivative positions in metals                         |  |              |   |            |  |      |   |      |  |   | (4 | ) |  |   |    |  
|Gains from sales of securities and other assets                    |  |              | 3  |            |  |      | 16 |      |  |   | 3  |   |  |   | 35  |  
|Gain from closure of ineffective derivative
    contracts          |  |              |   |            |  |      |   |      |  |   |   |   |  |   | 11  |  
|Other                                                              |  |              | 4  |            |  |      | (6 | )    |  |   | 7  |   |  |   | (12 | )
|                                                                   |  |              |    |            |  |      |    |      |  |   |    |   |  |   |     |  
|Other income, net                                                  |  | $            | 10 |            |  | $    | 13 |      |  | $ | 15 |   |  | $ | 41  |  
|                                                                   |  |              |    |            |  |      |    |      |  |   |    |   |  |   |     |  



|        |                        
|------- | -----------------------
|Note 4. | Asset impairment charge

On May 25, 2004 we announced the preliminary
findings reached to that date as part of the second phase, or
Phase 2, of the comprehensive review of our approximately
85 per cent owned Goro nickel-cobalt project in New
Caledonia. We also announced that the principal changes in the
planned Goro project configuration resulting from such findings
as part of Phase 2 of our review, moving from indirect to
direct heating of ore feed and other changes intended to reduce
the capital cost estimate and enhance the operating efficiency
of the

7



---



##### 



planned process plant and the process itself,
would result in certain assets being written off in the second
quarter of 2004.


Following our review of the affected assets, we
recorded a non-cash charge of $201 million in the second
quarter of 2004. The affected assets are primarily comprised of
engineering and related work associated with the original
project configuration and equipment purchased for the indirect
heating of ore feed which no longer have future benefit to the
Goro project or otherwise.



|        |                        
|------- | -----------------------
|Note 5. | Income and mining taxes

The reconciliation between taxes at the combined
federal-provincial statutory income tax rate in Canada and the
effective income and mining tax rates was as follows:

|                                                                                |  |                    |     |                  |  |      |      |            |  |   |     |   |  |   |      |  
|------------------------------------------------------------------------------- |  | ------------------ | --- | ---------------- |  | ---- | ---- | ---------- |  | - | --- | - |  | - | ---- | -
|                                                                                |  |                    |     |                 
|                                                                                |  | Three Months Ended |     | Six Months Ended
|                                                                                |  | June 30,           |     | June 30,        
|                                                                                |  |                    |     |                 
|                                                                                |  | 2004               |     | 2003             |  | 2004 |      | 2003      
|                                                                                |  |                    |     |                  |  |      |      |           
|                                                                                |  |                    |     | (Restated)       |  |      |      | (Restated)
|Provision at combined Canadian federal-provincial
    statutory income tax rate |  | $                  | 45  |                  |  | $    |     |            |  | $ | 224 |   |  | $ | 8    |  
|Resource and depletion allowances                                               |  |                    | (14 | )                |  |      | 1    |            |  |   | (38 | ) |  |   | (2   | )
|                                                                                |  |                    |     |                  |  |      |      |            |  |   |     |   |  |   |      |  
|Adjusted income taxes                                                           |  |                    | 31  |                  |  |      | 1    |            |  |   | 186 |   |  |   | 6    |  
|Mining taxes                                                                    |  |                    | 15  |                  |  |      |     |            |  |   | 39  |   |  |   | 2    |  
|                                                                                |  |                    |     |                  |  |      |      |            |  |   |     |   |  |   |      |  
|                                                                                |  |                    | 46  |                  |  |      | 1    |            |  |   | 225 |   |  |   | 8    |  
|Currency translation adjustments                                                |  |                    | (1  | )                |  |      | 30   |            |  |   | (7  | ) |  |   | 57   |  
|Currency translation adjustments on long-term debt                              |  |                    | (6  | )                |  |      | 25   |            |  |   | (11 | ) |  |   | 25   |  
|Non-deductible losses                                                           |  |                    | 70  |                  |  |      | (8   | )          |  |   | 66  |   |  |   | (21  | )
|Prior year adjustments                                                          |  |                    | (2  | )                |  |      | (121 | )          |  |   | 7   |   |  |   | (159 | )
|Foreign tax rate differences                                                    |  |                    | (4  | )                |  |      | (3   | )          |  |   | (22 | ) |  |   | (7   | )
|Other                                                                           |  |                    | 3   |                  |  |      |     |            |  |   | 8   |   |  |   | (2   | )
|                                                                                |  |                    |     |                  |  |      |      |            |  |   |     |   |  |   |      |  
|Effective income and mining taxes                                               |  | $                  | 106 |                  |  | $    | (76  | )          |  | $ | 266 |   |  | $ | (99  | )
|                                                                                |  |                    |     |                  |  |      |      |            |  |   |     |   |  |   |      |  



|        |               
|------- | --------------
|Note 6. | Long-Term Debt

On May 28, 2004, we concluded a new
$750 million syndicated revolving credit facility that
matures on May 28, 2009. This syndicated facility replaces
the several bilateral bank credit agreements under which we had
an aggregate of $680 million of available credit as of
year-end 2003, where $273 million of such $680 million
would have otherwise expired on June 1, 2004 and the
balance in either June 2005, June 2006 or June 2007.

Subject to the approval of the lenders
representing not less than 66 2/3 per cent under this
new syndicated facility, the initial May 28, 2009 maturity
date may be extended for the commitments of those lenders who
have approved such extension for an additional one-year period
on each May 28 anniversary date, beginning May 28,
2005. The borrowings under the facility may be made in either
Canadian dollars in the form of (a) prime rate loans or
(b) in bankers acceptances or in United States
dollars in the form of (x) United States base rate loans or
(y) London Interbank Offered Rate (LIBOR) loans. Borrowings
under these facilities bear interest, when drawn, at a rate
which varies based on the type of borrowing and our credit
ratings at the time of borrowing. As of June 30, 2004,
there were no amounts drawn under the new facility.

The new credit facility provides that, so long as
advances are outstanding or any letters of credit or guarantees
issued pursuant to the terms of the facility are outstanding, we
will be required to maintain a ratio of Consolidated
Indebtedness, as defined in the credit facility, to Tangible Net
Worth, as defined in the facility, not to exceed 50:50. At
June 30, 2004 the ratio of Consolidated Indebtedness to
Tangible Net Worth was 24:76. The new facility does not require
any acceleration or prepayment of outstanding balances if our

8



---



##### 



credit ratings on outstanding debt securities
were downgraded or if there were a significant decline in our
earnings, cash flow or in the price of our publicly traded
common shares or other equity securities. A downgrade in our
rating would, however, increase the interest rate payable on
borrowings under the facility and, conversely, any upgrade in
our rating would reduce the interest rate payable on borrowings.
As of June 30, 2004, our outstanding debt securities were
rated as investment grade by Moodys Investors Service and
Standard & Poors Ratings Services, with the
specific ratings being Baa3 by Moodys Investors Service
and BBB- by Standard & Poors.




|        |                                    
|------- | -----------------------------------
|Note 7. | Post-retirement benefit obligations

Employer contributions in respect of our defined
benefit plans during the second quarter and first six months of
2004 were $38 million (2003: $21 million) and
$75 million (2003: $38 million), respectively. For the
year ending December 31, 2004, we currently expect that
such employer contributions will amount to approximately
$160 million.

Post-retirement benefits expense included the
following components:

|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |            |  |      |    |      |  |   |     |   |  |   |     |   |  |   |    |  |  |   |    | 
|----------------------------------------------------------------------------------- |  | --------------------------- | --- | ------------------------- |  | ---------------- | --- | -------------- |  | ---- | -- | ---------- |  | ---- | -- | ---- |  | - | --- | - |  | - | --- | - |  | - | -- |  |  | - | -- | 
|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |           
|                                                                                    |  |                             |     |                           |  | Post-            |     |                |  |      |    | Post-     
|                                                                                    |  |                             |     |                           |  | retirement       |     |                |  |      |    | retirement
|                                                                                    |  |                             |     | benefits other            |  |                  |     | benefits other
|                                                                                    |  | Pension benefits            |     | than pensions             |  | Pension benefits |     | than pensions 
|                                                                                    |  |                             |     |                           |  |                  |     |               
|                                                                                    |  |                             |     |                          
|                                                                                    |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                                                                    |  |                             |     |                          
|                                                                                    |  | 2004                        |     | 2003                      |  | 2004             |     | 2003           |  | 2004 |    | 2003       |  | 2004 |    | 2003
|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |            |  |      |    |     
|Service cost                                                                        |  | $                           | 9   |                           |  | $                | 9   |                |  | $    | 3  |            |  | $    | 2  |      |  | $ | 19  |   |  | $ | 16  |   |  | $ | 5  |  |  | $ | 4  | 
|Interest cost                                                                       |  |                             | 39  |                           |  |                  | 37  |                |  |      | 12 |            |  |      | 12 |      |  |   | 78  |   |  |   | 73  |   |  |   | 25 |  |  |   | 23 | 
|Expected return on plan assets                                                      |  |                             | (40 | )                         |  |                  | (40 | )              |  |      |   |            |  |      |   |      |  |   | (82 | ) |  |   | (78 | ) |  |   |   |  |  |   |   | 
|Amortization of actuarial and investment losses                                     |  |                             | 16  |                           |  |                  | 17  |                |  |      | 4  |            |  |      | 3  |      |  |   | 31  |   |  |   | 32  |   |  |   | 7  |  |  |   | 6  | 
|Amortization of unrecognized prior service costs                                    |  |                             | 3   |                           |  |                  | 4   |                |  |      |   |            |  |      |   |      |  |   | 7   |   |  |   | 8   |   |  |   |   |  |  |   |   | 
|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |            |  |      |    |      |  |   |     |   |  |   |     |   |  |   |    |  |  |   |    | 
|Defined benefit pension and post-retirement
    benefits other than pension expense |  |                             | 27  |                           |  |                  | 27  |                |  |      | 19 |            |  |      | 17 |      |  |   | 53  |   |  |   | 51  |   |  |   | 37 |  |  |   | 33 | 
|Defined contribution pension expense                                                |  |                             | 1   |                           |  |                  | 1   |                |  |      |   |            |  |      |   |      |  |   | 2   |   |  |   | 2   |   |  |   |   |  |  |   |   | 
|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |            |  |      |    |      |  |   |     |   |  |   |     |   |  |   |    |  |  |   |    | 
|Post-retirement benefits expense                                                    |  | $                           | 28  |                           |  | $                | 28  |                |  | $    | 19 |            |  | $    | 17 |      |  | $ | 55  |   |  | $ | 53  |   |  | $ | 37 |  |  | $ | 33 | 
|                                                                                    |  |                             |     |                           |  |                  |     |                |  |      |    |            |  |      |    |      |  |   |     |   |  |   |     |   |  |   |    |  |  |   |    | 



|        |                             
|------- | ----------------------------
|Note 8. | Asset retirement obligations

The following table shows the movement in the
liability for asset retirement obligations:

|                    |  |        |     |  
|------------------- |  | ------ | --- | -
|                    |  | Amount
|                    |  |       
|December 31, 2003   |  | $      | 141 |  
|Accretion expense   |  |        | 4   |  
|Liabilities settled |  |        | (1  | )
|                    |  |        |     |  
|June 30, 2004       |  | $      | 144 |  
|                    |  |        |     |  



|        |                                                
|------- | -----------------------------------------------
|Note 9. | Common Shares and Earnings per Common
    Share

Basic earnings per Common Share is computed by
dividing net earnings applicable to Common Shares by the
weighted-average number of Common Shares issued and outstanding
for the relevant period. Diluted earnings per Common Share is
computed by dividing net earnings applicable to Common Shares,
as adjusted for the effect of dilutive convertible debt using
the if-converted method, by the sum of the
weighted-average number of Common Shares issued and outstanding
and all additional Common Shares that would have been
outstanding if potentially dilutive Common Shares had been
issued.

9



---



##### 



We are authorized to issue an unlimited number of
Common Shares without nominal or par value. Changes in Common
Shares were as follows:

|                                   |  |           |             |        |  |   |       | 
|---------------------------------- |  | --------- | ----------- | ------ |  | - | ----- | 
|                                   |  | Number of |             |       
|                                   |  | shares    |             | Amount
|                                   |  |           |             |       
|December 31, 2003                  |  |           | 186,915,865 |        |  | $ | 2,858 | 
|Options exercised                  |  |           | 581,800     |        |  |   | 14    | 
|Warrants exercised                 |  |           | 1,283       |        |  |   |      | 
|Shares issued under incentive plan |  |           | 39,865      |        |  |   | 2     | 
|                                   |  |           |             |        |  |   |       | 
|June 30, 2004                      |  |           | 187,538,813 |        |  | $ | 2,874 | 
|                                   |  |           |             |        |  |   |       | 

The computation of basic and diluted earnings per
share was as follows:

|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |         |     | 
|------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------ | ----- | ---------------- | - | ---- | ---- | ---------- | ----- | - | ---- | ------- | ----- | - | ---- | ------- | --- | 
|                                                  |                                                                                  |                    |       |                 
|                                                  |                                                                                  | Three Months Ended |       | Six Months Ended
|                                                  |                                                                                  | June 30,           |       | June 30,        
|                                                  |                                                                                  |                    |       |                 
|                                                  |                                                                                  | 2004               |       | 2003             |   | 2004 |      | 2003      
|                                                  |                                                                                  |                    |       |                  |   |      |      |           
|                                                  |                                                                                  |                    |       | (Restated)       |   |      |      | (Restated)
|Basic earnings (loss) per share
    computation   |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Numerator:                                        |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Net earnings (loss)                                                              |                    | $     | (14              | ) |      | $    | 64         |       |   | $    | 241     |       |   | $    | 97      |    
|                                                  | Accretion of convertible debt                                                    |                    |       | (2               | ) |      |      | (1         | )     |   |      | (4      | )     |   |      | (3      | )  
|                                                  | Dividends on preferred shares                                                    |                    |       |                 |   |      |      |           |       |   |      |        |       |   |      | (6      | )  
|                                                  | Premium on redemption of preferred shares                                        |                    |       |                 |   |      |      |           |       |   |      |        |       |   |      | (15     | )  
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Net earnings (loss) applicable to common shares                                  |                    | $     | (16              | ) |      | $    | 63         |       |   | $    | 237     |       |   | $    | 73      |    
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Denominator:                                      |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Weighted-average common shares outstanding (in
    thousands)                    |                    |       | 187,472          |   |      |      | 183,920    |       |   |      | 187,347 |       |   |      | 183,678 |    
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Basic earnings (loss) per common share            |                                                                                  | $                  | (0.09 | )                |   | $    | 0.34 |            |       | $ | 1.27 |         |       | $ | 0.40 |        
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Diluted earnings (loss) per share
    computation |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Numerator:                                        |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Net earnings (loss) applicable to common shares                                  |                    | $     | (16              | ) |      | $    | 63         |       |   | $    | 237     |       |   | $    | 73      |    
|                                                  | Dilutive effect of:                                                              |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |         |    
|                                                  |                                                                                  | Convertible debt   |       |                  |  |      |      |            |      |   |      |         | 2     |   |      |         |    | 
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Net earnings (loss) applicable to common shares,
    assuming dilution           |                    | $     | (16              | ) |      | $    | 63         |       |   | $    | 239     |       |   | $    | 73      |    
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Denominator:                                      |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Weighted-average common shares outstanding (in
    thousands)                    |                    |       | 187,472          |   |      |      | 183,920    |       |   |      | 187,347 |       |   |      | 183,678 |    
|                                                  | Dilutive effect of:                                                              |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |         |    
|                                                  |                                                                                  | Convertible debt   |       |                  |  |      |      |            | 1,896 |   |      |         | 8,731 |   |      |         |    | 
|                                                  |                                                                                  | Stock options      |       |                  |  |      |      |            | 734   |   |      |         | 1,357 |   |      |         | 871 | 
|                                                  |                                                                                  | Warrants           |       |                  |  |      |      |            |      |   |      |         | 3,836 |   |      |         |    | 
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|                                                  | Weighted-average common shares outstanding,
    assuming dilution (in thousands) |                    |       | 187,472          |   |      |      | 186,550    |       |   |      | 201,271 |       |   |      | 184,549 |    
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        
|Diluted earnings (loss) per common share          |                                                                                  | $                  | (0.09 | )                |   | $    | 0.34 |            |       | $ | 1.19 |         |       | $ | 0.39 |        
|                                                  |                                                                                  |                    |       |                  |   |      |      |            |       |   |      |         |       |   |      |        

10



---



##### 



On July 19, 2004, the Emerging Issue Task
Force (EITF) of the United States Financial Accounting Standards
Board (FASB) issued a draft abstract, EITF Issue
No. 04-8, The Effect of Contingently Convertible Debt
on Diluted Earnings per Share. This draft abstract
addresses the issue of when the dilutive effect of contingently
convertible debt instruments should be included in diluted
earnings per share. The EITF reached a tentative consensus that
all shares issuable upon conversion of contingently convertible
debt securities should be included in diluted earnings per share
computations regardless of whether the market price trigger or
other contingent features for conversion have been met. Under
current applicable principles under United States GAAP, the
dilutive effect of contingently convertible debt securities are
included in diluted earnings per share computations if the
conditions under which such debt securities are convertible into
common shares have been met. This new abstract, if adopted,
would be effective for reporting periods ending after
December 15, 2004 and would require restatement of certain
prior period diluted earnings per share amounts. Inco currently
has two issues of contingently convertible debt securities
outstanding (see Note 14 to our consolidated financial
statements set forth in our 2003 Annual Report on Form 10-K
for additional information). In addition, there is an exposure
draft proposing amendments to Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share,
and a corresponding exposure draft in Canada which, if they came
into effect without change, would require the inclusion of the
common shares issuable upon conversion of our LYON Notes into
diluted earnings per share (see Note 14 to our consolidated
financial statements set forth in our 2003 Annual Report on
Form 10-K for a discussion of our LYON Notes).



|         |                 
|-------- | ----------------
|Note 10. | Convertible debt

Changes in convertible debt were as follows:

|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|----------------------------- |  | ----- | --- | ----------- |  | ------------ | --- | ----- |  | - | --- |  |  | - | --- | 
|                              |  |       |     |             |  | Subordinated |     |      
|                              |  | LYON  |     | Convertible |  | Convertible  |     |      
|                              |  | Notes |     | Debentures  |  | Debentures   |     | Total
|                              |  |       |     |             |  |              |     |      
|December 31, 2003             |  | $     | 247 |             |  | $            | 233 |       |  | $ | 126 |  |  | $ | 606 | 
|Accretion of convertible debt |  |       | 4   |             |  |              | 2   |       |  |   |    |  |  |   | 6   | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 
|June 30, 2004                 |  | $     | 251 |             |  | $            | 235 |       |  | $ | 126 |  |  | $ | 612 | 
|                              |  |       |     |             |  |              |     |       |  |   |     |  |  |   |     | 



|         |         
|-------- | --------
|Note 11. | Warrants

Changes in warrants were as follows:

|                   |  |           |            |        |  |   |    | 
|------------------ |  | --------- | ---------- | ------ |  | - | -- | 
|                   |  | Number of |            |       
|                   |  | warrants  |            | Amount
|                   |  |           |            |       
|December 31, 2003  |  |           | 11,023,064 |        |  | $ | 62 | 
|Warrants exercised |  |           | (1,283     | )      |  |   |   | 
|                   |  |           |            |        |  |   |    | 
|June 30, 2004      |  |           | 11,021,781 |        |  | $ | 62 | 
|                   |  |           |            |        |  |   |    | 



|         |                              
|-------- | -----------------------------
|Note 12. | Commitments and contingencies



|    |            
|--- | -----------
|(a) | Commitments

The following table summarizes as of
June 30, 2004 certain of our long-term contractual
obligations and commercial commitments for each of the next five
years and thereafter:

|                        |  |                 |     |      |  |      |     |      |  |      |    |            |  |   |    |  |  |   |    |  |  |   |     | 
|----------------------- |  | --------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | -- | ---------- |  | - | -- |  |  | - | -- |  |  | - | --- | 
|                        |  |                
|                        |  | Payments due in
|                        |  |                
|                        |  | 2004            |     | 2005 |  | 2006 |     | 2007 |  | 2008 |    | Thereafter
|                        |  |                 |     |      |  |      |     |      |  |      |    |           
|Purchase obligations(1) |  | $               | 468 |      |  | $    | 190 |      |  | $    | 10 |            |  | $ | 7  |  |  | $ | 5  |  |  | $ | 19  | 
|Operating leases        |  |                 | 17  |      |  |      | 27  |      |  |      | 20 |            |  |   | 13 |  |  |   | 4  |  |  |   | 4   | 
|Other                   |  |                 |    |      |  |      | 2   |      |  |      | 2  |            |  |   | 3  |  |  |   | 3  |  |  |   | 88  | 
|                        |  |                 |     |      |  |      |     |      |  |      |    |            |  |   |    |  |  |   |    |  |  |   |     | 
|Total                   |  | $               | 485 |      |  | $    | 219 |      |  | $    | 32 |            |  | $ | 23 |  |  | $ | 12 |  |  | $ | 111 | 
|                        |  |                 |     |      |  |      |     |      |  |      |    |            |  |   |    |  |  |   |    |  |  |   |     | 



---



|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These purchase obligations largely relate to the
    Goro and Voiseys Bay development projects with the balance
    comprising routine orders to purchase goods and services at
    current operating locations.

11



---



##### 





| |                  
| | -----------------
| | (b) Contingencies

In the course of our operations, we and our
subsidiaries are subject to routine claims and litigation
incidental to the business conducted by us and them, to various
environmental proceedings, and to other litigation related to
these businesses. With respect to the environmental proceedings
currently pending or threatened against us, they include
(1) a proceeding brought under the Ontario class action
legislation covering claims relating to the alleged decline in
property values in a community where we had operated a nickel
refinery over the 1918-1984 period, (2) claims for personal
injury, (3) enforcement actions, (4) alleged
violations of, including exceeding regulatory limits relating to
discharges under, certain environmental or similar laws and
regulations applicable to our operations in Canada and elsewhere
and (5) certain claims dating back a number of years in
which one of our subsidiaries was designated, under the United
States federal environmental law known as Superfund
or CERCLA, as a potentially responsible party. We
believe that the ultimate resolution of such proceedings, claims
and litigation will not significantly impair our operations or
have a material adverse effect on our financial condition or
results of operations.

On May 25, 2004, we announced the
preliminary findings reached to that date as part of the second
phase, or Phase 2, of the Goro project comprehensive
review. This review had been initiated following our decision to
suspend work on this project in December 2002. These findings
also included an updated preliminary capital cost estimate in
the plus 20 per cent to minus 5 per cent reliability
range. We currently expect to be in a position to announce our
decision on whether we will proceed with the project shortly
after the completion of Phase 2 of the review, which is
currently anticipated to be in the late September-October 2004
period.

We currently believe that, based upon the work
still to be undertaken as part of Phase 2 of the Goro
project review on new approaches to the construction of that
project, including the planned process plant layout, and changes
to certain of the equipment required for the process to be used
to produce nickel and cobalt from the project, that certain
other assets may be identified as impaired as a result of these
changes and we may be required to take additional non-cash
charges beyond the $62 million of pre-tax non-cash charges
taken in the fourth quarter of 2002 and the $201 million of
pre-tax non-cash charges taken in the second quarter of 2004,
and that the level of these additional non-cash charges could
have a material adverse effect on our results of operations for
2004. An estimate of such non-cash charges cannot currently be
made. As of June 30, 2004, taking into account the non-cash
charges referred to above, the carrying value of the Goro assets
was approximately $660 million. This amount excludes a
current estimate of approximately $29 million that would
still have to be spent for equipment, services and other
requirements under existing contracts and commitments.



|         |                    
|-------- | -------------------
|Note 13. | Segment Information

We are a leading producer of nickel and an
important producer of copper, precious metals and cobalt. Our
operations consist of the finished products segment, which
comprises the mining and processing operations in Ontario and
Manitoba, Canada, and refining operations in the United Kingdom
and interests in refining operations in Japan and other Asian
countries, and the intermediates segment, which comprises the
mining and processing operations in Indonesia, where
nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. In addition, we hold mineral
claims and licenses for development projects which include our
Voiseys Bay nickel-copper-cobalt project under development
in the Province of Newfoundland and Labrador and our Goro
nickel-cobalt project in the French overseas territorial
community (collectivité territoriale) of New Caledonia.

12



---



##### 



Data by operating segments as of and for the
period indicated was as follows:

|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |            |  |  |    |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|----------------------------------------------------------------------------------- |  | ----------------- | ----- | ------------- |  | ----------- | ----- | ------------ |  | ----- | --- | ---- |  | ---- | --- | ---- |  | ---- | ---- | ---------- |  |  | -- | - |  |  | ---- | - |  |  | ---- | - |  |  | ----- |  |  |  | ----- | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |     
|                                                                                    |  |                   |       |               |  | Development |       |              |  |      
|                                                                                    |  | Finished Products |       | Intermediates |  | Projects    |       | Eliminations |  | Total
|                                                                                    |  |                   |       |               |  |             |       |              |  |      
|Six Months Ended June 30,                                                           |  | 2004              |       | 2003          |  | 2004        |       | 2003         |  | 2004  |     | 2003 |  | 2004 |     | 2003 |  | 2004 |      | 2003      
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |           
|                                                                                    |  |                   |       | (Restated)    |  |             |       | (Restated)   |  |       |     |      |  |      |     |      |  |      |      | (Restated)
|Net sales to customers                                                              |  |                   | 2,012 |               |  |             | 1,155 |              |  |       | 74  |      |  |      | 37  |      |  |      |     |            |  |  |   |   |  |  |     |   |  |  |     |   |  |  | 2,086 |  |  |  | 1,192 | 
|Intersegment sales                                                                  |  |                   |      |               |  |             |      |              |  |       | 295 |      |  |      | 178 |      |  |      |     |            |  |  |   |   |  |  | (295 | ) |  |  | (178 | ) |  |  |      |  |  |  |      | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |            |  |  |    |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Net sales                                                                           |  |                   | 2,012 |               |  |             | 1,155 |              |  |       | 369 |      |  |      | 215 |      |  |      |     |            |  |  |   |   |  |  | (295 | ) |  |  | (178 | ) |  |  | 2,086 |  |  |  | 1,192 | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |            |  |  |    |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Earnings (loss) before income and mining taxes
    and minority interest by segment |  |                   | 580   |               |  |             | 138   |              |  |       | 210 |      |  |      | 73  |      |  |      | (208 | )          |  |  | (6 | ) |  |  | (5   | ) |  |  | (13  | ) |  |  | 577   |  |  |  | 192   | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |            |  |  |    |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Expenses (income) not specifically allocable to
    segments:                       |  |                   |       |               |  |             |       |              |  |       |     |      |  |      |     |      |  |      |      |            |  |  |    |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Corporate selling, general and administrative
    expenses                          |  |                   | 48    |               |  |             | 36    |             
|Currency translation adjustments                                                    |  |                   | (33   | )             |  |             | 150   |             
|Interest expense                                                                    |  |                   | 14    |               |  |             | 26    |             
|Other income, net                                                                   |  |                   | (15   | )             |  |             | (41   | )           
|                                                                                    |  |                   |       |               |  |             |       |             
|Earnings before income and mining taxes and
    minority interest                   |  |                   | 563   |               |  |             | 21    |             
|                                                                                    |  |                   |       |               |  |             |       |             

|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|----------------------------------------------------------------------------------- |  | ----------------- | ----- | ------------- |  | ----------- | ----- | ------------ |  | ----- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  |  | ----- | - |  |  | ---- | - |  |  | ---- | - |  |  | ----- |  |  |  | ----- | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |     
|                                                                                    |  |                   |       |               |  | Development |       |              |  |      
|                                                                                    |  | Finished Products |       | Intermediates |  | Projects    |       | Eliminations |  | Total
|                                                                                    |  |                   |       |               |  |             |       |              |  |      
|Three Months Ended June 30,                                                         |  | 2004              |       | 2003          |  | 2004        |       | 2003         |  | 2004  |       | 2003 |  | 2004 |       | 2003 |  | 2004 |       | 2003      
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |           
|                                                                                    |  |                   |       | (Restated)    |  |             |       | (Restated)   |  |       |       |      |  |      |       |      |  |      |       | (Restated)
|Net sales to customers                                                              |  |                   | 956   |               |  |             | 577   |              |  |       | 36    |      |  |      | 22    |      |  |      |      |            |  |  |      |   |  |  |     |   |  |  |     |   |  |  | 992   |  |  |  | 599   | 
|Intersegment sales                                                                  |  |                   |      |               |  |             |      |              |  |       | 141   |      |  |      | 106   |      |  |      |      |            |  |  |      |   |  |  | (141 | ) |  |  | (106 | ) |  |  |      |  |  |  |      | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Net sales                                                                           |  |                   | 956   |               |  |             | 577   |              |  |       | 177   |      |  |      | 128   |      |  |      |      |            |  |  |      |   |  |  | (141 | ) |  |  | (106 | ) |  |  | 992   |  |  |  | 599   | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Earnings (loss) before income and mining taxes
    and minority interest by segment |  |                   | 212   |               |  |             | 64    |              |  |       | 92    |      |  |      | 42    |      |  |      | (204  | )          |  |  | (6    | ) |  |  | 20   |   |  |  | (5   | ) |  |  | 120   |  |  |  | 95    | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Expenses (income) not specifically allocable to
    segments:                       |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Corporate selling, general and administrative
    expenses                          |  |                   | 28    |               |  |             | 24    |             
|Currency translation adjustments                                                    |  |                   | (18   | )             |  |             | 72    |             
|Interest expense                                                                    |  |                   | 6     |               |  |             | 12    |             
|Other income, net                                                                   |  |                   | (10   | )             |  |             | (13   | )           
|                                                                                    |  |                   |       |               |  |             |       |             
|Earnings before income and mining taxes and
    minority interest                   |  |                   | 114   |               |  |             |      |             
|                                                                                    |  |                   |       |               |  |             |       |             
|Identifiable assets at June 30, 2004 and
    December 31, 2003                      |  |                   | 2,680 |               |  |             | 2,496 |              |  |       | 1,463 |      |  |      | 1,387 |      |  |      | 4,613 |            |  |  | 4,648 |   |  |  | (51  | ) |  |  | (46  | ) |  |  | 8,705 |  |  |  | 8,485 | 
|                                                                                    |  |                   |       |               |  |             |       |              |  |       |       |      |  |      |       |      |  |      |       |            |  |  |       |   |  |  |      |   |  |  |      |   |  |  |       |  |  |  |       | 
|Other assets                                                                        |  |                   | 851   |               |  |             | 578   |             
|                                                                                    |  |                   |       |               |  |             |       |             
|Total assets at June 30, 2004 and
    December 31, 2003                             |  |                   | 9,556 |               |  |             | 9,063 |             
|                                                                                    |  |                   |       |               |  |             |       |             

13



---



##### 





|         |                         
|-------- | ------------------------
|Note 14. | Supplemental information

The following represents certain supplemental
information in connection with the Consolidated Balance Sheet:

|                                       |  |          |        |              |  |   |            | 
|-------------------------------------- |  | -------- | ------ | ------------ |  | - | ---------- | 
|                                       |  | June 30, |        | December 31,
|                                       |  | 2004     |        | 2003        
|                                       |  |          |        |             
|Cash                                   |  | $        | 44     |              |  | $ | 42         | 
|Cash equivalents                       |  |          | 730    |              |  |   | 376        | 
|                                       |  |          |        |              |  |   |            | 
|Cash and cash equivalents              |  | $        | 774    |              |  | $ | 418        | 
|                                       |  |          |        |              |  |   |            | 
|Finished metals                        |  | $        | 240    |              |  | $ | 193        | 
|In-process metals                      |  |          | 517    |              |  |   | 478        | 
|Supplies                               |  |          | 82     |              |  |   | 75         | 
|                                       |  |          |        |              |  |   |            | 
|Inventories                            |  | $        | 839    |              |  | $ | 746        | 
|                                       |  |          |        |              |  |   |            | 
|                                       |  |          |        |              |  |   | (Restated) | 
|Property, plant and equipment, at cost |  | $        | 11,533 |              |  | $ | 11,502     | 
|Accumulated depreciation and depletion |  |          | 4,573  |              |  |   | 4,469      | 
|                                       |  |          |        |              |  |   |            | 
|Property, plant and equipment, net     |  | $        | 6,960  |              |  | $ | 7,033      | 
|                                       |  |          |        |              |  |   |            | 



|         |                         
|-------- | ------------------------
|Note 15. | Stock compensation plans

For the six months ended June 30, 2004, an
expense of $7 million (2003: $2 million) was charged
to earnings with an equivalent offset credited to contributed
surplus to reflect the fair value of stock options granted to
employees in 2003 and 2004. The fair value of each stock option
granted is estimated on the date of grant using an option
pricing model with the following assumptions:

|                                                                     |  |      |       |      |  |   |       |  
|-------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                     |  | 2004 |       | 2003
|                                                                     |  |      |       |     
|Stock price at grant date                                            |  | $    | 36.40 |      |  | $ | 20.85 |  
|Exercise price                                                       |  | $    | 36.40 |      |  | $ | 20.85 |  
|Weighted-average fair value of options granted
    during the period |  | $    | 10.37 |      |  | $ | 6.29  |  
|Expected life of options (years)                                     |  |      | 3.4   |      |  |   | 3     |  
|Expected dividend yield                                              |  |      |      | %    |  |   |      | %
|Expected stock price volatility                                      |  |      | 35.0  | %    |  |   | 41.1  | %
|Risk-free interest rate                                              |  |      | 2.5   | %    |  |   | 2.1   | %



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Note 16. | Significant differences between Canadian and
    United States GAAP

Our consolidated financial statements are
prepared in accordance with Canadian GAAP. The differences
between Canadian GAAP and United States GAAP, insofar as they
affect our consolidated financial statements, relate to
accounting for post-retirement benefits, research and
development, exploration, convertible debt, derivative
instruments, investments, certain currency translation gains and
losses, income and mining taxes and reporting of comprehensive
income. As noted in (b), (c), (f) and under
Depreciation and depletion expense below, certain
figures have been restated.

14



---



##### 



The following table reconciles results as
reported under Canadian GAAP with those that would have been
reported under United States GAAP:

|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |       |  
|---------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ---- | --- | ---------- | - | - | ---- | ----- | -
|Six Months Ended June 30,                                                                                                    |                                                                                                                         | 2004 |     | 2003      
|                                                                                                                             |                                                                                                                         |      |     |           
|                                                                                                                             |                                                                                                                         |      |     | (Restated)
|Net earnings  Canadian GAAP                                                                                                 |                                                                                                                         | $    | 241 |            |   | $ | 97   |      
|Increased post-retirement benefits expense(a)                                                                                |                                                                                                                         |      | (19 | )          |   |   | (14  | )    
|Increased research and development expense(b)                                                                                |                                                                                                                         |      | (5  | )          |   |   | (3   | )    
|Increased exploration expense(c)                                                                                             |                                                                                                                         |      | (1  | )          |   |   | (1   | )    
|Increased interest expense(d)                                                                                                |                                                                                                                         |      | (12 | )          |   |   | (9   | )    
|Unrealized net gain on derivative instruments(e)                                                                             |                                                                                                                         |      | 6   |            |   |   | 5    |      
|Unrealized currency translation gains (losses) on
    Voiseys Bay project deferred income and mining tax
    liabilities(f) |                                                                                                                         |      | 40  |            |   |   | (156 | )    
|Asset impairment charge(g)                                                                                                   |                                                                                                                         |      | 11  |            |   |   |     |      
|Increased minority interest expense(g)                                                                                       |                                                                                                                         |      | (7  | )          |   |   |     |      
|Increased income and mining tax expense                                                                                      |                                                                                                                         |      |    |            |   |   | (243 | )    
|Taxes on United States GAAP differences                                                                                      |                                                                                                                         |      | 5   |            |   |   | 8    |      
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Net earnings (loss) before cumulative effect of a
    change in accounting principle  United States GAAP                    |                                                                                                                         |      | 259 |            |   |   | (316 | )    
|Cumulative effect of a change in accounting
    principle  asset retirement obligation(h)                                   |                                                                                                                         |      |    |            |   |   | (17  | )    
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Net earnings (loss)  United States GAAP                                                                                     |                                                                                                                         |      | 259 |            |   |   | (333 | )    
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Other comprehensive income (loss)(j):                                                                                        |                                                                                                                         |      |     |            |   |   |      |      
|                                                                                                                             | Reclassification of net gain on derivatives
    designated as cash flow hedges(e)                                       |      |     | (13        | ) |   |      | (18   | )
|                                                                                                                             | Reclassification of net gain on derivatives due
    to ineffectiveness                                                  |      |     | (9         | ) |   |      |      |  
|                                                                                                                             | Change in fair value of derivatives designated as
    cash flow hedges(e)                                               |      |     | 6          |   |   |      | 20    |  
|Reclassification to earnings of gain on long-term
    investments(i)                                                         |                                                                                                                         |      |    |            |   |   | (18  | )    
|Unrealized gain (loss) on long-term investments(i)                                                                           |                                                                                                                         |      | (6  | )          |   |   | 17   |      
|Taxes on other comprehensive income (loss)                                                                                   |                                                                                                                         |      | 2   |            |   |   | 1    |      
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Other comprehensive income (loss)(j)                                                                                         |                                                                                                                         |      | (20 | )          |   |   | 2    |      
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Comprehensive earnings (loss)(j)                                                                                             |                                                                                                                         | $    | 239 |            |   | $ | (331 | )    
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Net earnings (loss) per share  Basic                                                                                        |                                                                                                                         |      |     |            |   |   |      |      
|                                                                                                                             | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle  United
    States GAAP |      | $   | 1.38       |   |   | $    | (1.84 | )
|                                                                                                                             | Cumulative effect of a change in accounting
    principle(h)                                                            |      |     |           |   |   |      | (0.09 | )
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|                                                                                                                             | Net earnings (loss) per share  Basic                                                                                   |      | $   | 1.38       |   |   | $    | (1.93 | )
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|Net earnings (loss) per share  Diluted                                                                                      |                                                                                                                         |      |     |            |   |   |      |      
|                                                                                                                             | Net earnings (loss) per share before cumulative
    effect of a change in accounting principle  United
    States GAAP |      | $   | 1.30       |   |   | $    | (1.84 | )
|                                                                                                                             | Cumulative effect of a change in accounting
    principle(h)                                                            |      |     |           |   |   |      | (0.09 | )
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      
|                                                                                                                             | Net earnings (loss) per share  Diluted                                                                                 |      | $   | 1.30       |   |   | $    | (1.93 | )
|                                                                                                                             |                                                                                                                         |      |     |            |   |   |      |      



|    |                         
|--- | ------------------------
|(a) | Post-retirement benefits

For Canadian GAAP reporting purposes, we amortize
the excess of the net unrecognized actuarial and investment
gains and losses over 10 per cent of the greater of
(i) the post-retirement benefits obligation and
(ii) the fair value of plan assets. Such excess is
amortized over the expected average remaining service life of

15



---



##### 



employees. For United States reporting purposes,
we amortize net unrecognized actuarial and investment gains and
losses on a straight-line basis over the expected average
remaining service life of employees.


United States GAAP requires the recognition of a
minimum additional pension liability in the amount of the excess
of the unfunded accumulated benefits obligation over the
recorded pension benefits liability; an offsetting intangible
pension asset is recorded equal to the unrecognized prior
service costs, with any net difference recorded as a reduction
in accumulated other comprehensive income.



|    |                                     
|--- | ------------------------------------
|(b) | Research and development
    expense

Under Canadian GAAP, development costs are
deferred and amortized if the development project meets certain
generally accepted criteria for deferral and amortization. Fixed
assets, including equipment, may be acquired or constructed in
order to provide facilities for a research and development
project. The use of such assets will extend over a number of
accounting periods and, accordingly, such costs are capitalized
and amortized over their useful lives. Under United States GAAP,
research and development costs are charged to expense in the
period incurred. As noted in Note 23(d) of our consolidated
financial statements set forth in our 2003 Annual Report on
Form 10-K, we have restated our results for 2003 for United
States GAAP purposes as they relate to the accounting for
research and development costs. The impact was a $3 million
increase in research and development expense for the first six
months of 2003 for United States GAAP purposes.



|    |                    
|--- | -------------------
|(c) | Exploration expense

Under Canadian GAAP, capitalized exploration
expenditures are classified under property, plant and equipment
with the related mineral claim. For United States GAAP,
exploration expenditures are not capitalized unless estimated
proven and probable ore reserves to which they relate have been
established by a feasibility study. As noted in Note 23(e)
of our consolidated financial statements set forth in our 2003
Annual Report on Form 10-K, we have restated our results
for 2003 for United States GAAP purposes as they relate to the
accounting for exploration expenditures. The impact was a
$1 million increase in exploration expense for the first
six months of 2003 for United States GAAP purposes.



|    |                 
|--- | ----------------
|(d) | Convertible debt

Under Canadian GAAP, a portion of the convertible
debt is classified as an equity instrument. This convertible
debt accretes over their respective terms to their value at
maturity through periodic after-tax charges to retained
earnings. Under United States GAAP, the convertible debt would
be accounted for as debt and, accordingly, accretion charges and
amortization of debt issuance costs would be recorded as
interest expense. For United States GAAP, the convertible debt
would be classified as current debt beginning 12-months prior to
their special conversion dates and as long-term debt during the
remainder of the term of such debt.



|    |                           
|--- | --------------------------
|(e) | Accounting for derivatives

Under United States GAAP, all derivative
contracts, whether designated in hedging relationships or not,
are required to be recorded on the balance sheet at fair value.
Under Canadian GAAP, we continue to recognize gains and losses
on derivative contracts in income concurrently with the
recognition of the transactions being hedged. The requirements
for documentation and effectiveness testing, however, are
substantially the same under both Canadian and United States
GAAP.



|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(f) | Unrealized currency translation gains
    (losses) on Voiseys Bay project deferred income and mining
    tax liabilities

In the second quarter of 2004, for United States
GAAP reporting purposes we revised our accounting treatment for
unrealized non-cash currency translation gains and losses
arising from the translation into U.S. dollars, at the end
of each period, of certain Canadian dollar-denominated deferred
income and mining tax liabilities established in 1996 upon the
acquisition of the Voiseys Bay deposits. We have concluded
that,

16



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##### 



under United States GAAP, such currency
translation gains and losses should be included in the
determination of earnings. Previously, these unrealized non-cash
currency translation gains and losses had been deferred and
included in property, plant and equipment as part of development
costs for the Voiseys Bay project until operations were to
commence. The impact of this revision, which has been accounted
for retroactively by restating prior period results, was an
increase in the unrealized currency translation gains of
$40 million for the first six months of 2004 (first six
months of 2003  an increase in the unrealized
currency translation losses of $156 million). The deficit
at the beginning of 2004 has been increased by $171 million
to reflect the cumulative impact of the revision to
December 31, 2003.




|    |                        
|--- | -----------------------
|(g) | Asset impairment charge

Net earnings for the first six months of 2004
under Canadian GAAP included an asset impairment charge in the
amount of $201 million before income and mining taxes and
minority interest. Reference is made to Note 4 above. This
charge included the write-off of certain capitalized costs
which, in accordance with (b) above, were previously
expensed for United States GAAP purposes. In addition, it
included an adjustment to reduce minority interest to nil. For
United States GAAP, the asset impairment charge would decrease
by $11 million. The adjustment to reduce minority interest
to nil would also be adjusted with a corresponding increase to
minority interest expense of $7 million.



|    |                             
|--- | ----------------------------
|(h) | Asset retirement obligations

Effective January 1, 2003, we adopted, for
United States reporting purposes, Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligations, and CICA 3110, Asset
Retirement Obligations, which are substantially identical.
Under SFAS No. 143, asset retirement obligations are
recognized when incurred and recorded as liabilities at fair
value. The liability is accreted over time through periodic
charges to earnings. In addition, the asset retirement cost is
capitalized as part of the assets carrying value and
depreciated. Depending on the nature of the asset being retired,
we depreciate such costs using either the straight line or the
unit-of-production method. The cumulative effect of adopting
SFAS No. 143 was a decrease to our net earnings of
$17 million, or nine cents per share, in 2003, which is
shown as a cumulative effect of a change in accounting
principle. For Canadian GAAP, financial results for prior
periods have been restated.



|    |            
|--- | -----------
|(i) | Investments

United States GAAP for equity investments, which
are set forth in SFAS No. 115, require that certain
equity investments not held for trading be recorded at fair
value with unrealized holding gains and losses excluded from the
determination of earnings and reported as a separate component
of other comprehensive income.



|    |                     
|--- | --------------------
|(j) | Comprehensive income

United States accounting standards for reporting
comprehensive income are set forth in SFAS No. 130.
Comprehensive income represents the change in equity during a
reporting period from transactions and other events and
circumstances from non-owner sources. Components of
comprehensive income include items such as net earnings (loss),
changes in the fair value of investments not held for trading,
minimum pension liability adjustments and gains and losses on
derivative instruments.



|    |                  
|--- | -----------------
|(k) | Intangible assets

Previously, we reported that, under United States
GAAP, mineral rights were intangible assets with respect to
balance sheet classification. During the second quarter of 2004,
for United States GAAP the EITF of the FASB released Issue
No. 04-2 which reached the decision that mineral rights
should be reported as tangible assets and disclosed as a
separate component of property, plant and equipment. A FASB
staff position paper dated April 30, 2004 also validated
this change by means of amendments to SFAS Nos. 141 and 142. As

17



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##### 



a result of this change, we have reclassified,
for United States GAAP purposes, intangible assets of
$2,469 million from intangible assets to property, plant
and equipment. We have also, effective January 1, 2004,
ceased amortization of the residual value of intangible assets
referred to in our 2003 Annual Report on Form 10-K.




|    |                                       
|--- | --------------------------------------
|(l) | Depreciation and depletion
    expense

As discussed in Note 2, we retroactively
changed our method of calculating depreciation and depletion
expense for Canadian GAAP reporting purposes effective
January 1, 2004. This method of calculation is the method
described in Note 23(b) of our consolidated financial
statements set forth in our 2003 Annual Report on Form 10-K
for United States reporting purposes and, consequently, there is
no longer a difference between Canadian and United States GAAP.
As a result of this restatement for both Canadian and United
States GAAP, for the first six months of 2003, depreciation and
depletion expense decreased by $18 million, income and
mining taxes increased by $6 million and minority interest
expense increased by $5 million.



|    |                         
|--- | ------------------------
|(m) | Supplemental information

Changes in deficit and accumulated other
comprehensive loss under United States GAAP were as follows:

|                                                                |  |            |        |            |  |   |        |  
|--------------------------------------------------------------- |  | ---------- | ------ | ---------- |  | - | ------ | -
|Six Months Ended June 30,                                       |  | 2004       |        | 2003      
|                                                                |  |            |        |           
|                                                                |  | (Restated) |        | (Restated)
|Deficit at beginning of period, as previously
    reported      |  | $          | (973   | )          |  | $ | (1,030 | )
|Restatement                                                     |  |            | (171   | )          |  |   | 36     |  
|                                                                |  |            |        |            |  |   |        |  
|Deficit at beginning of period, as restated                     |  | $          | (1,144 | )          |  | $ | (994   | )
|Net earnings (loss)                                             |  |            | 259    |            |  |   | (333   | )
|Dividends on preferred shares                                   |  |            |       |            |  |   | (6     | )
|Premium on redemption of preferred shares                       |  |            |       |            |  |   | (15    | )
|                                                                |  |            |        |            |  |   |        |  
|Deficit at end of period                                        |  | $          | (885   | )          |  | $ | (1,348 | )
|                                                                |  |            |        |            |  |   |        |  
|Accumulated other comprehensive loss at beginning
    of period |  | $          | (516   | )          |  | $ | (485   | )
|Other comprehensive income (loss)                               |  |            | (20    | )          |  |   | 2      |  
|                                                                |  |            |        |            |  |   |        |  
|Accumulated other comprehensive loss at end of
    period       |  | $          | (536   | )          |  | $ | (483   | )
|                                                                |  |            |        |            |  |   |        |  



|    |                                     
|--- | ------------------------------------
|(n) | Recent Accounting
    Pronouncements

During the first six months of 2004, other than
the amendments to SFAS Nos. 141 and 142 discussed above under
Intangible Assets, no new accounting pronouncements
were put into effect that would impact our financial condition
or results of operations.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

The following Managements Discussion and
Analysis of Financial Condition and Results of Operations should
be read in conjunction with our interim consolidated financial
statements and notes as of and for the three-month and six-month
periods ended June 30, 2004, which are expressed in
U.S. dollars and prepared in accordance with Canadian GAAP,
which generally conform with those principles established in the
United States, except as explained in Note 16 above to our
interim consolidated financial statements. This discussion
contains certain forward-looking statements based on our current
expectations. The forward-looking statements entail various
risks and uncertainties, as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2003
(2003 Annual Report on Form 10-K), which could
cause actual results to differ materially from those reflected
in these forward-looking statements. Reference is also made to
the Cautionary Notice Regarding Forward-Looking
Statements below.

18



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##### 





| |                       
| | ----------------------
| | Nature of Our Business

We are a leading producer of nickel, a hard,
malleable metal which, given its properties and wide range of
applications, can be found in thousands of products. The largest
end use for nickel is in the production of austenitic or
nickel-bearing stainless steels. This end use currently accounts
for about two-thirds of demand for primary nickel, which we
define to be nickel produced from nickel-containing ores. The
other principal source of nickel is from nickel-containing
stainless steel scrap. We are also an important producer of
copper, precious metals and cobalt and a major producer of
value-added specialty nickel products. Our principal mines and
processing operations are located in the Sudbury area of
Ontario, the Thompson area of Manitoba and, through a subsidiary
in which we have an equity interest of 61 per cent, PT
International Nickel Indonesia Tbk (PT Inco), on the
island of Sulawesi, Indonesia. We have additional wholly-owned
metals refineries at Port Colborne, Ontario and in the United
Kingdom at Clydach, Wales and Acton, England. We also have
interests in nickel refining capacity in Japan, through
contractual arrangements with Inco TNC Limited, in which we have
an equity interest of 67 per cent, in Taiwan, through
Taiwan Nickel Refining Corporation, in which we have an equity
interest of 49.9 per cent, and in South Korea, through
Korea Nickel Company, in which we have an equity interest of
25 per cent. We also have a 65 per cent equity
interest in Jinco Nonferrous Metals Co., Ltd., a company that
produces nickel salts for plating and other applications at a
plant near Shanghai in the Peoples Republic of China
(China). In August 2003, the Company announced that
it would be forming a new joint venture company in China to
produce high quality nickel foam for sale to the manufacturers
of nickel rechargeable batteries in the Asian market. This new
company, in which Inco will have an equity interest of about
75 per cent, with the balance being held by its two
partners in this joint venture, currently expects to begin
production in September 2004. We have been evaluating other
commercial relationships in China, and in early March 2004
started up a shearing and packaging operation for certain nickel
products to service the specific needs of this market.



| |                                       
| | --------------------------------------
| | Key Factors Affecting Our
    Business

The price of nickel has represented, and is
currently expected to continue to represent, the principal
determinant of our profitability and cash flow from operations.
Accordingly, our financial performance has been, and is expected
to continue to be, closely linked to the price of nickel and, to
a lesser extent, the price of copper and other primary metals
produced by us. Historically, the demand for nickel has been
closely correlated to industrial production in the major
industrialized regions, in particular North America and Europe
and more recently Asia, and we expect this positive correlation
to continue.

Our business operations consist of two segments,
our (i) finished products segment, representing our mining
and processing operations in Ontario and Manitoba, our refining
operations in the United Kingdom and interests in the refining
operations in Japan and other Asian countries referred to above,
and (ii) intermediates segment, which represents PT
Incos mining and processing operations in Indonesia, where
nickel-in-matte, an intermediate product, is produced and sold
primarily into the Japanese market. In addition, as part of our
strategy to be the worlds lowest cost and most profitable
nickel producer, we are currently developing or plan to develop
two major new or so-called greenfield projects, our
wholly-owned Voiseys Bay nickel-copper-cobalt project in
the Province of Newfoundland and Labrador and our approximately
85 per cent-owned Goro nickel-cobalt project in the French
overseas territorial community (collectivité territoriale)
of New Caledonia (New Caledonia).

A number of risks and uncertainties are
associated with the current development or planned development
of these projected low-cost sources of nickel and other metals,
including political, regulatory, design, construction, labour,
operating, technical and technological risks, uncertainties
relating to capital and other costs and financial risks and, in
the case of Goro, those risks related to the possible future
transition to independence of New Caledonia. Reference is made
to various risks and uncertainties as disclosed in our 2003
Annual Report on Form 10-K. In late 2002, we initiated a
comprehensive review of the Goro project and that review, being
conducted in two phases, has continued through the first half of
2004. The initial phase of this review was completed in July
2003 and the second phase, or Phase 2, is currently
expected to be completed in the late September 
October 2004 period.

19



---



##### 





| |                                      
| | -------------------------------------
| | Recent Nickel Market
    Developments

For the first two months of the second quarter of
2004, the London Metal Exchange (LME) cash nickel price
declined from year-end 2003 levels, reaching a low of
$10,530 per tonne ($4.78 per pound) on May 18,
2004 before recovering to end the second quarter of 2004 at
$14,990 per tonne ($6.80 per pound). LME stocks
declined during the second quarter of 2004, reaching 7,980
tonnes on June 22, 2004  the lowest level since
1991. LME stocks ended the second quarter at 8,394 tonnes and
totaled 10,422 tonnes at August 5, 2004. We believe that
the recovery in the LME cash nickel price over the late May to
the end of June 2004 period was driven by the declining levels
of LME stocks and subsiding fears that the Chinese economy would
suffer a significant slowdown in growth as the Chinese
government took steps to implement a modest reduction in the
growth rate for the Chinese economy. For 2004, we currently
project that global stainless steel production, and nickel
consumption by both stainless steel and non-stainless
applications, will rise. Non-stainless applications for nickel
have been much stronger in the first half of 2004 than we
originally had expected given the depressed level of such
applications in 2003. For the first half of 2004, nickel and
stainless steel demand improved in Japan and the United States
as the industrial economies in those countries began to show
signs of recovery during that period after a prolonged slump. We
continue to believe that the global supply-demand balance for
nickel in 2004 will reflect a deficit, with the economies of the
United States, Japan and Europe experiencing improved underlying
demand for nickel from 2003 levels and continued growth in
nickel demand in China even if the Chinese economy were to slow
to the rate of growth it experienced in 2003.



| |             
| | ------------
| | Goro Project

The second phase, or Phase 2, of the
comprehensive review of the Goro project is currently expected
to be completed in the late September  October 2004
period. The completion of this review is expected to result in a
new capital cost control estimate, a project implementation plan
and an integrated project execution schedule. Subject to the
satisfactory completion and results of Phase 2 of the
review and meeting certain other conditions, including
(1) having achieved sufficient progress on all required
permits in New Caledonia and a good neighbour agreement and
having reached other appropriate understandings or arrangements
with local labour unions and other key stakeholders in
New Caledonia to enable any restart of the project,
including construction, to proceed on a basis that avoids any
potential labour or other disruptions, (2) finalizing the
terms of the tax-advantaged financing and other support to be
provided to the project by the French Government and
(3) reaching a satisfactory agreement on the disposition of
the interest in the Goro project company held by the French
Government agency, Bureau de Recherches Géologiques et
Minières, as part of a required realignment of the equity
ownership in the project to enable a new partner to be brought
into the project and provide for New Caledonias equity
participation in Goro, we currently expect to be in a position
to announce our decision on whether we will proceed with the
project in the late September  October 2004 period. A
decision to proceed at that time would see initial production
occur around mid-2007.

On May 25, 2004, we announced the
preliminary findings to that date of Phase 2 of our review.
These findings included a preliminary capital cost estimate for
the projects planned mine, process plant and
infrastructure, taking into account the non-cash pre-tax charge
discussed below, of approximately $1.85 billion,
representing an estimate in the plus 20 per cent to minus
5 per cent reliability range. This preliminary estimate
reflected approximately $500 million in capital cost
reductions partially offset by approximately $250 million
made up largely of unfavourable currency adjustments relating to
expenditures expected to be incurred in Australian dollars,
Euros and certain other currencies as well as cost escalation in
certain construction materials. The announcement also indicated
that the work undertaken as a part of Phase 2 of the review
had resulted in an increase in the nameplate capacity of the
planned process plant from approximately 55,000 tonnes of nickel
and 4,500 tonnes of cobalt per annum to approximately 60,000
tonnes of nickel and 5,100 tonnes of cobalt per annum.

As a result of developments arising out of
Phase 2 of our review, including, among other areas, new
approaches to construction, a significant reduction in the
planned process plant footprint and changes in equipment, most
notably a change from indirect to direct heating of ore feed in
the pressure leaching circuit of the planned process plant, a
non-cash pre-tax charge of $201 million was taken against
second quarter 2004 earnings. After taking into account the
minority interest of $9 million and a tax recovery of
$1 million, this

20



---



##### 



charge totalled $191 million. The tax relief
for this charge was insignificant due to the fact that
essentially all of the charge is not deductible for tax
purposes. The majority of this charge covered engineering and
related work expended on the original project configuration
together with equipment purchased for the indirect heating of
ore feed that has no further benefit for the project or
otherwise. This second quarter 2004 charge was in addition to
the $62 million of pre-tax non-cash charges taken in the
fourth quarter of 2002 following the suspension of project
construction. As of June 30, 2004, taking into account the
non-cash charges referred to above, the carrying value of the
Goro assets was approximately $660 million. This amount
excludes a current estimate of approximately $29 million
that would still have to be spent for equipment, services and
other requirements under existing contracts and commitments.


Results of Operations



| |                 
| | ----------------
| | Earnings Summary

The following table summarizes our net sales, net
earnings (loss) and certain other results in accordance with
Canadian GAAP for the periods indicated:

|                                                 |           |                    |     |                  |   |      |     |            |  |   |       |      |  |   |       |      | 
|------------------------------------------------ | --------- | ------------------ | --- | ---------------- | - | ---- | --- | ---------- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                                                 |           |                    |     |                 
|                                                 |           | Three Months Ended |     | Six Months Ended
|                                                 |           | June 30,           |     | June 30,        
|                                                 |           |                    |     |                 
|                                                 |           | 2004               |     | 2003             |   | 2004 |     | 2003      
|                                                 |           |                    |     |                  |   |      |     |           
|                                                 |           |                    |     | (Restated)       |   |      |     | (Restated)
|Net sales                                        |           | $                  | 992 |                  |   | $    | 599 |            |  | $ | 2,086 |      |  | $ | 1,192 |     
|Net earnings (loss)                              |           |                    | (14 | )                |   |      | 64  |            |  |   | 241   |      |  |   | 97    |     
|Net earnings per common share                    |           |                    |     |                  |   |      |     |            |  |   |       |      |  |   |       |     
|                                                 |  basic   |                    |     | (0.09            | ) |      |     | 0.34       |  |   |       | 1.27 |  |   |       | 0.40 | 
|                                                 |  diluted |                    |     | (0.09            | ) |      |     | 0.34       |  |   |       | 1.19 |  |   |       | 0.39 | 
|Cash provided by (used for) operating activities |           |                    | 339 |                  |   |      | 81  |            |  |   | 719   |      |  |   | (17   | )   

The significant decrease in results of operations
and certain changes in costs between the second quarter of 2004
and the corresponding quarter of 2003 were primarily the result
of the following factors:

| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The $201 million non-cash asset impairment
    charge, as discussed below, recorded as a result of changes in
    the scope of the Goro project based upon the preliminary
    findings of the second phase, or Phase 2, of the project
    review
| |  | Decrease in unusual tax benefits compared with
    2003                                                                                                                                                                                           
| |  | Increased costs for nickel production                                                                                                                                                                                                             

These items were partially offset by the
favourable effect of the following factors:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher average realized prices for all metals,
    particularly for nickel and copper                                                          
| |  | The favourable effect of currency translation
    adjustments, particularly the effect of changes in the
    Canadian-U.S. dollar exchange rate

With respect to net earnings for the second
quarter and first half of 2003, those results included a charge
in respect of a three-month strike which began on June 1,
2003 at our Ontario operations.

21



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##### 



The following bar charts describe the dollar
impact (in millions of dollars) of the principal factors, both
favourable and unfavourable (unfavourable factors are shown in
parentheses), affecting our second quarter and first six months
of 2004 net earnings (loss) compared with the corresponding
periods of 2003, with the starting point (first bar on the left)
of each chart being the level of net earnings for the second
quarter and first six months of 2003, as applicable.

Principal factors affecting Second Quarter
2004 net loss in comparison with Second Quarter
2003 net earnings

In millions of dollars

(BAR GRAPH)

Principal factors affecting First Half
2004 net earnings in comparison with First Half
2003 net earnings

In millions of dollars

(BAR GRAPH)



| |                  
| | -----------------
| | Nickel Production

Nickel production increased to 59,586 tonnes
(131 million pounds) and 117,257 tonnes (258 million
pounds) in the second quarter and first half of 2004,
respectively, compared with 45,197 tonnes (100 million
pounds) and 95,425 tonnes (210 million pounds) in the
corresponding periods of 2003. The increases primarily reflect
higher production at our Canadian and U.K. operations compared
with the production for the second quarter of 2003 which was
negatively affected by the three-month strike at our Ontario
operations that began on June 1, 2003. PT Incos
production increased during the first half of 2004 compared with
the same period in 2003 when a planned furnace rebuild at this
operation reduced production.

22



---



##### 





| |                                 
| | --------------------------------
| | Non-Cash Asset Impairment Charge

As previously announced on May 25, 2004, the
key preliminary findings to that date of Phase 2 of our
Goro project review resulted in changes in the planned Goro
project configuration, including moving to direct heating of the
ore feed and other changes intended to reduce the capital cost
estimate and enhance the operating efficiency of the planned
process plant and the process itself. These changes have meant
that certain capitalized costs incurred, principally for
engineering and related work associated with the original
project configuration and equipment purchased for the indirect
heating of ore feed, no longer would have any benefit for the
project or otherwise. As a result of such changes, capitalized
expenditures incurred totalling $201 million before
minority interest and taxes have been written off in the second
quarter of 2004. After taking into account the minority interest
of $9 million and a tax recovery of $1 million, this
charge totalled $191 million. The tax relief for this
charge was insignificant due to the fact that essentially all of
the charge is not deductible for tax purposes.



| |          
| | ---------
| | Net Sales

Net sales increased substantially to
$992 million and $2,086 million, respectively, in the
second quarter and first half of 2004, compared with
$599 million and $1,192 million for the same periods
in 2003. This improvement in net sales was primarily due to
higher selling prices for all metals, particularly for nickel
and copper, as well as higher deliveries of Inco-source nickel
and copper. Deliveries of Inco-source nickel in the second
quarter of 2004 increased by 18 per cent compared with the
second quarter of 2003 due to increased production at our
Canadian and U.K. operations as well as at PT Inco. Production
for the second quarter of 2003 was adversely affected by a
three-month strike at our Ontario operations that began on
June 1, 2003.

Net sales to customers by product were as follows:

|                |  |                |     |                  |  |      |     |      |  |   |       |  |  |   |       | 
|--------------- |  | -------------- | --- | ---------------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                |  |                |     |                 
|                |  | Three Months   |     | Six Months Ended
|                |  | Ended June 30, |     | June 30,        
|                |  |                |     |                 
|                |  | 2004           |     | 2003             |  | 2004 |     | 2003
|                |  |                |     |                  |  |      |     |     
|Primary nickel  |  | $              | 788 |                  |  | $    | 495 |      |  | $ | 1,680 |  |  | $ | 957   | 
|Copper          |  |                | 85  |                  |  |      | 37  |      |  |   | 168   |  |  |   | 99    | 
|Precious metals |  |                | 46  |                  |  |      | 47  |      |  |   | 126   |  |  |   | 94    | 
|Other           |  |                | 73  |                  |  |      | 20  |      |  |   | 112   |  |  |   | 42    | 
|                |  |                |     |                  |  |      |     |      |  |   |       |  |  |   |       | 
|                |  | $              | 992 |                  |  | $    | 599 |      |  | $ | 2,086 |  |  | $ | 1,192 | 
|                |  |                |     |                  |  |      |     |      |  |   |       |  |  |   |       | 

The following bar charts show our average
realized prices for nickel and copper and the LME average cash
prices for nickel and copper for the periods indicated:

Average realized and LME cash selling
prices

In dollars per pound


Second Quarter

(BAR GRAPH AVERAGE REALIZED PRICES SECOND QUARTER)

23



---



##### 



First Half

(BAR GRAPH AVERAGE REALIZED PRICES FIRST HALF)

Deliveries of Inco-source nickel and nickel from
purchased intermediates, copper and PGMs for the periods
indicated are shown below:

Deliveries

Nickel and copper in millions of
pounds


PGMs in thousands of troy ounces


Second Quarter

(BAR GRAPH DELIVERIES SECOND QUARTER)

First Half

( BAR GRAPH DELIVERIES FIRST HALF)

24



---



##### 





| |                                     
| | ------------------------------------
| | Cost of Sales and Other
    Expenses

The following table sets forth production data
for nickel for the periods indicated, nickel unit cash costs of
sales before and after by-product credits for the periods
indicated, and our finished nickel inventories as of the end of
the periods indicated:

|                                                             |             |                    |        |                  |  |      |        |       |  |  |         |       |  |  |        |       | 
|------------------------------------------------------------ | ----------- | ------------------ | ------ | ---------------- |  | ---- | ------ | ----- |  |  | ------- | ----- |  |  | ------ | ----- | 
|                                                             |             |                    |        |                 
|                                                             |             | Three Months Ended |        | Six Months Ended
|                                                             |             | June 30,           |        | June 30,        
|                                                             |             |                    |        |                 
|                                                             |             | 2004               |        | 2003             |  | 2004 |        | 2003 
|                                                             |             |                    |        |                  |  |      |        |      
|Production  Nickel in all forms
    (tonnes)                |             |                    | 59,586 |                  |  |      | 45,197 |       |  |  | 117,257 |       |  |  | 95,425 |      
|Nickel unit cash cost of sales before by-product
    credits |             |                    |        |                  |  |      |        |       |  |  |         |       |  |  |        |      
|                                                             |  per tonne |                    | $      | 5,600            |  |      | $      | 4,189 |  |  | $       | 5,468 |  |  | $      | 4,145 | 
|                                                             |  per pound |                    |        | 2.54             |  |      |        | 1.90  |  |  |         | 2.48  |  |  |        | 1.88  | 
|Nickel unit cash cost of sales after by-product
    credits  |             |                    |        |                  |  |      |        |       |  |  |         |       |  |  |        |      
|                                                             |  per tonne |                    | $      | 5,203            |  |      | $      | 4,189 |  |  | $       | 4,828 |  |  | $      | 4,322 | 
|                                                             |  per pound |                    |        | 2.36             |  |      |        | 1.90  |  |  |         | 2.19  |  |  |        | 1.96  | 
|Finished nickel inventories at end of period
    (tonnes)    |             |                    | 29,080 |                  |  |      | 23,086 |       |  |  | 29,080  |       |  |  | 23,086 |      

Nickel unit cash cost of sales before by-product
credits increased to $5,600 per tonne ($2.54 per
pound) in the second quarter of 2004 from $4,189 per tonne
($1.90 per pound) in the second quarter of 2003. This
increase was principally due to the higher cost for, and volumes
of, purchased intermediates, the higher average Canadian dollar
exchange rate relative to the U.S. dollar exchange rate
compared with 2003, higher spending on maintenance and repairs
and higher employment costs, partially offset by the cost
reductions and related savings as discussed below.

Nickel unit cash cost of sales before by-product
credits increased to $5,468 per tonne ($2.48 per
pound) in the first half of 2004 from $4,145 per tonne
($1.88 per pound) in the first half of 2003. This increase
was principally due to the higher cost for, and volumes of,
purchased intermediates, and the higher average Canadian dollar
exchange rate relative to the U.S. dollar exchange rate
compared with 2003. These factors more than offset the cost
reductions and related savings discussed below.

We use purchased intermediates to increase
processing capacity utilization at our Canadian operations.
While the cost of purchased intermediates is higher than that
for processing our own mine production and such cost increases
as the prevailing prices, LME cash nickel or other benchmark
prices, on which this material is purchased by us increases, the
price realizations are also higher, resulting in margins on
these purchases remaining relatively unchanged.

Nickel unit cash cost of sales after by-product
credits increased to $5,203 per tonne ($2.36 per
pound) in the second quarter of 2004 compared with
$4,189 per tonne ($1.90 per pound) in the second
quarter of 2003. The increase was due to higher unit cash cost
of sales before by-product credits and lower deliveries of PGMs,
partially offset by higher realized selling prices.

Nickel unit cash cost of sales after by-product
credits increased to $4,828 per tonne ($2.19 per
pound) in the first half of 2004 compared with $4,322 per
tonne ($1.96 per pound) in the first half of 2003. The
increase was due to higher unit cash cost of sales before
by-product credits, partially offset by higher by-product
credits as a result of higher realized selling prices and higher
deliveries of PGMs.

A reconciliation of our nickel unit cash cost of
sales before and after by-product credits to cost of sales under
Canadian GAAP is shown in the table entitled
Reconciliation of Nickel Unit Cash Cost of Sales to
Canadian GAAP Cost of Sales below.

In the second quarter of 2004, we realized cost
reductions and related savings of about $14 million, and we
are currently on track to realize our planned $63 million
in cost reductions and related savings for the full year 2004.

25



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##### 



Factors affecting nickel unit cash cost of
sales after by-product credits

In dollars per pound


The following bar charts show the key factors
(per pound) both favourable and unfavourable (unfavourable
factors are shown in parentheses) affecting our second quarter
and first six months of 2004 nickel unit cash cost of sales
after by-product credits, with the starting point (first bar on
the left) of each of the bar charts being the nickel unit cash
cost of sales after by-product credits for the second quarter
and first six months of 2003, as applicable:

Second Quarter

(BAR GRAPH CASH COST OF SALES SECOND QUARTER)

First Six Months

(BAR GRAPH CASH COST OF SALES FIRST SIX MONTHS)



| |                                        
| | ---------------------------------------
| | Selling, General and
    Administrative

Selling, general and administrative expenses
increased by $5 million and $15 million in the second
quarter and first half of 2004, respectively. These increases
for both the second quarter and first half of 2004 were
primarily due to higher costs for share options and other awards
under our corporate incentive compensation programs.



| |                                     
| | ------------------------------------
| | Currency Translation
    Adjustments

Currency translation adjustments represented
primarily the effect of exchange rate movements on the
translation of Canadian dollar-denominated liabilities,
principally post-retirement benefits, accounts payable and
certain deferred income and mining taxes, into
U.S. dollars. Favourable currency translation adjustments

26



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##### 



were $18 million and $33 million in the
second quarter and first half of 2004, respectively, and were
due to the weakening of the Canadian dollar as of June 30,
2004 relative to the U.S. dollar. The Canadian 
U.S. dollar exchange rate depreciated by two per cent
during the second quarter of 2004 and by four per cent during
the first half of 2004. Compared to the corresponding periods of
2003, the average Canadian dollar  U.S. dollar
exchange rate was about 14.6 per cent higher in the second
quarter of 2004 and about 8.6 per cent higher in the first
half of 2004.




| |                        
| | -----------------------
| | Income and Mining Taxes

The effective tax rates for the second quarter
and first half of 2004 were 93 per cent and 47 per
cent, respectively, rates that were higher than the statutory
income tax rate in Canada of 39.9 per cent. These higher
tax rates, particularly the unusually high rate for the second
quarter, were primarily due to the negligible tax relief
recorded with respect to the $201 million non-cash
impairment charge, before minority interest and taxes, referred
to above. This was partially offset by the impact of earnings
generated in lower tax rate jurisdictions and the effect of
currency translation adjustments. The effective tax rate for the
first half of 2003 was significantly affected by a
$134 million tax benefit from changes in Canadian tax
legislation, certain tax rulings and other decisions relating to
prior year transactions and the benefit of non-taxable gains.



| |                      
| | ---------------------
| | Intermediates Segment

Our intermediates segment, as discussed above,
comprises the mining and processing operations of PT Inco in
Indonesia where nickel-in-matte, an intermediate product, is
produced and sold primarily into the Japanese market. Net sales
were $177 million and $369 million in the second
quarter and first half of 2004 compared with $128 million
and $215 million in the same periods of 2003 which was
primarily due to higher realized prices. PT Incos net
realized price for nickel-in-matte in the second quarter and
first half of 2004 averaged $9,722 per tonne
($4.41 per pound) and $10,627 per tonne
($4.82 per pound) compared with $6,400 per tonne
($2.90 per pound) and $6,300 per tonne ($2.86 per
pound) in the same periods in 2003. The selling price of PT
Incos nickel-in-matte is determined by a formula which is
based upon the LME cash price for nickel. All of PT Incos
production is sold in U.S. dollars under long-term
contracts to us and Sumitomo Metal Mining Co., Ltd.

Unit cash cost of production rose by 14% to
$1.78 per pound in the second quarter of 2004 from
$1.56 per pound in the same quarter last year, partly due
to an increase in the high sulphur fuel oil price to an average
$27.43 per barrel from $26.71 per barrel, as well as
greater use of supplies.

Cash provided by PT Incos operating
activities rose to $89 million and $215 million in the
second quarter and first half of 2004 from $59 million and
$121 million in same periods of 2003. The increase was
mainly due to period over period increases in sales, partly
offset by a $31 million increase in payments to suppliers
and corporate tax payments of $17 million.

Cash Flows, Liquidity and Capital
Resources

Net cash provided by operating activities, after
changes in working capital, in the second quarter of 2004 was
$339 million, compared with $81 million in the second
quarter of 2003. The increase in net cash provided by operating
activities was primarily due to higher earnings before the
effect of the non-cash impairment charge noted above. Cash
provided by operations was also higher due to lower tax
instalment payments during the second quarter and first half of
2004 compared to the same periods in 2003.

Net cash used for investing activities increased
to $148 million and $315 million in the second quarter
and first half of 2004, respectively, compared with
$113 million and $277 million in the same periods in
2003. Capital expenditures in the second quarter of 2004 were
higher due to higher capital spending for our Voiseys Bay
project and at PT Inco, partially offset by lower capital
expenditures for our Goro project. During the first quarter of
2004, we used cash of $28 million to acquire an additional
two per cent of the issued and outstanding shares of PT Inco
from a shareholder, increasing our ownership of PT Inco to
approximately 61 per cent.

27



---



##### 



At June 30, 2004, cash and cash equivalents
were $774 million, up from $418 million at
December 31, 2003 and up from $596 million at
March 31, 2004, reflecting the cash provided from operating
activities as discussed above. Total debt was
$1,469 million at June 30, 2004, compared with
$1,512 million at December 31, 2003. Total debt as a
percentage of total debt plus shareholders equity was
26 per cent at June 30, 2004, compared with
28 per cent at December 31, 2003. Under Canadian GAAP,
a substantial portion of our convertible debt is recorded as
equity and not debt.

We have had in effect for a number of years
defined benefit pension plans principally in Canada, the United
States and the United Kingdom. Each of the jurisdictions in
which these plans are located has legislation and regulations
which, among other statutory requirements, cover the minimum
contributions to be made to these plans to meet their potential
liabilities as calculated in accordance with such legislation
and regulations. Based upon the value of the assets in these
plans, as determined pursuant to applicable provincial
legislation and regulations in Canada and other factors to be
taken into account under such legislative or regulatory
requirements, we, in accordance with such applicable legislation
or regulations, increased our contributions, including voluntary
contributions, to such plans to a level of $142 million for
2003 and our pension expense increased to $107 million for
2003. We currently expect that our annual pension contributions
will increase to approximately $160 million in 2004 and be
at about that same level for at least 2005 and our annual
pension expense will increase to approximately $112 million
for at least 2004 and 2005. Since the liabilities associated
with these pension plans are affected by changes in certain
exchange rates, primarily the Canadian dollar, changes in such
exchange rates could also significantly affect the level of
these contributions and pension expense for future years.

On May 28, 2004, we concluded a new
$750 million syndicated revolving credit facility that
matures on May 28, 2009. This syndicated facility replaces
the several bilateral bank credit agreements under which we had
an aggregate of $680 million of available credit as of
year-end 2003, where $273 million of such $680 million
would have otherwise expired on June 1, 2004 and the
balance in either June 2005, June 2006 or June 2007. Subject to
the approval of the lenders representing not less than
66 2/3 per cent under this new syndicated facility, the
initial May 28, 2009 maturity date may be extended for the
commitments of those lenders who have approved such extension
for an additional one-year period on each May 28
anniversary date, beginning May 28, 2005. The borrowings
under the facility may be made either in Canadian dollars in the
form of (a) prime rate loans or (b) in bankers
acceptances or in United States dollars in the form of
(x) United States base rate loans or (y) London
Interbank Offered Rate (LIBOR) loans. Borrowings under
these facilities bear interest, when drawn, at a rate which
varies based on the type of borrowing and our credit ratings at
the time of borrowing. As of June 30, 2004, there were no
amounts drawn under the new facility. The new credit facility
provides that, so long as advances are outstanding or any
letters of credit or guarantees issued pursuant to the terms of
the facility are outstanding, we will be required to maintain a
ratio of Consolidated Indebtedness, as defined in the credit
facility, to Tangible Net Worth, as defined in the facility, not
to exceed 50:50. At June 30, 2004 the ratio of Consolidated
Indebtedness to Tangible Net Worth was 24:76. There can be no
assurance that future material adverse developments would not
result in a breach of this covenant. If we were unable to comply
with this covenant, the lenders would have the right to declare
a default and require all then outstanding loans to be repaid
and pursue the various remedies available to them under the
credit facility, including declining to make any new loans under
the facility. The new facility does not require any acceleration
or prepayment of outstanding balances if our credit ratings on
outstanding debt securities were downgraded or if there were a
significant decline in our earnings, cash flow or in the price
of our publicly traded common shares or other equity securities.
A downgrade in our rating would, however, increase the interest
rate payable on borrowings under the facility and, conversely,
any upgrade in our rating would reduce the interest rate payable
on borrowings. As of June 30, 2004, our outstanding debt
securities were rated as investment grade by Moodys
Investors Service and Standard & Poors Ratings
Services, with the specific ratings being Baa3 by Moodys
Investors Service and BBB- by Standard & Poors.

We currently believe that our level of cash and
cash equivalents as of June 30, 2004, together with
currently projected cash to be provided by our operations,
available cash from our unused lines of credit and access to
international capital markets, will be more than sufficient to
meet our currently anticipated cash requirements at least for
2004 and 2005. These requirements include ongoing cash needs for
our operations as

28



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##### 



well as the cash required to finance currently
planned expenditures on sustaining and other capital projects,
including our Voiseys Bay and Goro projects. Our required
capital expenditures are very significant over the 2004 to 2006
period given the current spending plans for the initial phase of
the Voiseys Bay project and assuming that we reach the
decision in the late September  October 2004 period
to move forward with the Goro project.


Since December 31, 2003, we have entered
into foreign currency contracts to purchase
Aus.$200 million at an average exchange rate of $0.673. Of
this total, Aus.$100 million will mature in 2005 at an
average rate of $0.675 and Aus.$100 million will mature in
2006 at an average rate of $0.672. These contracts were entered
into with respect to anticipated Australian dollar-denominated
expenditures relating to the Goro project. Gains and losses on
these contracts are recorded in other income, net.

Critical Accounting Policies and
Estimates

Reference is made to our 2003 Annual Report on
Form 10-K for a complete discussion of our critical
accounting policies. An update of such policies is provided
below.



| |                                       
| | --------------------------------------
| | Depreciation and Depletion
    Expense

Expenditures for new facilities or equipment and
expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the declining
balance or straight-line method at rates sufficient to
depreciate such costs over the estimated future lives of such
facilities or equipment. These lives do not exceed the estimated
operating mine life based upon estimated proven and probable ore
reserves unless we believe the asset can be utilized in another
facility after the mining operations have ended.

The expected useful lives used in depreciation,
depletion and amortization calculations are determined based on
applicable facts and circumstances, as described below and in
Note 1 to our 2003 consolidated financial statements
included in our 2003 Annual Report on Form 10-K.

Significant judgment is involved in the
determination of useful lives and no assurance can be given that
actual useful lives will not differ significantly from the
useful lives assumed for purpose of depreciation, depletion and
amortization calculations.

Effective January 1, 2004 on a retroactive
basis we changed our accounting policy with respect to
depreciation and depletion.

Amortization of the deferred mine development
costs is calculated on a unit-of-production basis over the
estimated proven and probable ore reserves which relate to the
particular category of development, either life of mine plan or
area-specific. No future development costs are taken into
account in calculating the amortization charge.

Life of mine plan development comprises capital
expenditures that will be utilized in the extraction of all the
estimated proven and probable ore reserves in the current
detailed mine plan. These expenditures are predominantly
incurred up front and in advance of any ore extraction or in
advance of major expansions. The types of development included
in this category encompass such items as ore haulage shafts,
initial decline, ore passes, ventilation and chutes and
underground ore crusher cavities and are intended to be used for
the extraction of all ore within the current mine plan. These
costs are amortized on a unit-of-production basis over the total
estimated proven and probable ore reserves.

Area-specific development costs, which are
amortized over estimated proven and probable ore reserves for
which no further capital is required, consist of capital
expenditures to provide access to various areas within the mine
to allow the extraction of ore to commence. The types of
development costs that are within this category include access
and perimeter drives, ventilation drives and rises, and
progressive declining subsequent to initial contact with the ore
body. These costs are amortized on a unit-of-production basis
over the estimated proven and probable ore reserves that can be
currently accessed without future capital development costs
being incurred.

29



---



##### 



Ongoing mine development costs that provide
access to ore for less than two years production are expensed as
incurred.

The depletion method for PT Incos property,
plant and equipment has been changed for the depletion of
deferred mine development costs and the depreciation of other
assets has been changed from a unit-of-production to a straight
line method over the lesser of the assets useful life up
to 10 years in respect of mine and mobile equipment; the
lesser of the assets useful life and the term of PT
Incos current Contract of Work that expires in 2025 in
respect of roads, bridges and process plant buildings and
equipment; and, in the case of hydroelectric facilities, the
lesser of the assets useful life and 50 years.

Accounting Changes



|    |                                   
|--- | ----------------------------------
|(a) | Depreciation and depletion expense

Effective January 1, 2004 on a retroactive
basis, we changed the method by which we calculate depreciation
and depletion expense. Adoption of this change in accounting
policy removes a significant difference between Canadian GAAP
and United States GAAP. The effect of this change on the first
six-months of 2003 depreciation and depletion expense was a
reduction of $18 million.

Reference is made to Critical Accounting
Policies and Estimates above for a detailed discussion and
to Note 23(b) of our 2003 Annual Report on Form 10-K
for a more complete description of this method of calculating
depreciation and depletion expense.



|    |                                             
|--- | --------------------------------------------
|(b) | Generally accepted accounting
    principles

Effective January 1, 2004, we adopted
Canadian Institute of Chartered Accountants (CICA)
section 1100, Generally Accepted Accounting
Principles. CICA section 1100 describes what
constitutes Canadian GAAP and its sources. Adoption of this
section did not have a significant impact on our results of
operations or financial condition.



|    |                      
|--- | ---------------------
|(c) | Hedging Relationships

Effective January 1, 2004, we adopted a new
accounting guideline issued by the CICA in respect of hedging
relationships which provides guidance concerning documentation
and effectiveness testing for derivative contracts. Adoption of
this guideline did not have a significant impact on our results
of operations or financial condition.

Non-GAAP Financial Measure

We have referred to nickel unit cash cost of
sales before and after by-product credits in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations because we understand that certain
investors use this information to assess our performance and
also determine our ability to generate cash flow. The inclusion
of these two unit cost measurements, nickel unit cash cost of
sales before and after by-product credits, enables investors to
better understand our year-to-year changes in production costs
using metrics that reflect our key ongoing cash production costs
which, in turn, affect our profitability and cash flows. These
measurements capture all of the important components of our
production and related costs. The reason for providing the
nickel unit cash cost of sales on the basis of before as well as
after by-product credits is to allow investors to see the impact
on these metrics of changes in copper, cobalt and precious
metals contributions which have historically largely been driven
by the prices for these metals. In addition, management utilizes
these metrics as an important management tool to monitor cost
performance of each of our key operations relative to planned
and prior period results. These measurements are intended to
provide additional information and should not be considered in
isolation or as a substitute for measures of performance
prepared in accordance with Canadian GAAP.

30



---



##### 



The following table sets forth a reconciliation
of nickel unit cash cost of sales before and after by-product
credits to Canadian GAAP cost of sales for the periods indicated:

Reconciliation of Nickel Unit Cash Cost of
Sales Before and After By-Product Credits to Canadian GAAP Cost
of Sales

|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|-------------------------------------------------------------------------- |  | ----------------------------------- | ---- | -------------- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                                           |  |                                     |      |               
|                                                                           |  | Three Months                        |      | Six Months    
|                                                                           |  | Ended June 30,                      |      | Ended June 30,
|                                                                           |  |                                     |      |               
|                                                                           |  | 2004                                |      | 2003           |  | 2004 |      | 2003
|                                                                           |  |                                     |      |                |  |      |      |     
|                                                                           |  |                                    
|                                                                           |  | ($ in millions except pound and per
|                                                                           |  | pound data)                        
|Cost of sales and other expenses, excluding
    depreciation and depletion |  | $                                   | 580  |                |  | $    | 412  |      |  | $ | 1,137 |   |  | $ | 831  |  
|By-product costs                                                           |  |                                     | (138 | )              |  |      | (96  | )    |  |   | (277  | ) |  |   | (233 | )
|Purchased finished nickel                                                  |  |                                     | (43  | )              |  |      | (58  | )    |  |   | (133  | ) |  |   | (124 | )
|Delivery expense                                                           |  |                                     | (8   | )              |  |      | (6   | )    |  |   | (16   | ) |  |   | (12  | )
|Other businesses cost of sales                                             |  |                                     | (9   | )              |  |      | (6   | )    |  |   | (20   | ) |  |   | (12  | )
|Strike expense, excluding depreciation                                     |  |                                     |     |                |  |      | (29  | )    |  |   |      |   |  |   | (29  | )
|Non-cash items(1)                                                          |  |                                     | (9   | )              |  |      | (6   | )    |  |   | (18   | ) |  |   | (11  | )
|Remediation, demolition and other related expenses                         |  |                                     | (6   | )              |  |      | (9   | )    |  |   | (11   | ) |  |   | (13  | )
|Adjustments associated with affiliate transactions                         |  |                                     | (35  | )              |  |      | 2    |      |  |   | (41   | ) |  |   | 1    |  
|Other                                                                      |  |                                     |     |                |  |      | 7    |      |  |   | 1     |   |  |   | 1    |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|Nickel cash cost of sales before by-product
    credits(2)                 |  |                                     | 332  |                |  |      | 211  |      |  |   | 622   |   |  |   | 399  |  
|By-product net sales                                                       |  |                                     | (161 | )              |  |      | (96  | )    |  |   | (350  | ) |  |   | (218 | )
|By-product costs                                                           |  |                                     | 138  |                |  |      | 96   |      |  |   | 277   |   |  |   | 233  |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|Nickel cash cost of sales after by-product
    credits(2)                  |  | $                                   | 309  |                |  | $    | 211  |      |  | $ | 549   |   |  | $ | 414  |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|Inco-source nickel deliveries (millions of pounds)                         |  |                                     | 131  |                |  |      | 111  |      |  |   | 251   |   |  |   | 212  |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|Nickel cash cost of sales before by-product
    credits per pound          |  | $                                   | 2.54 |                |  | $    | 1.90 |      |  | $ | 2.48  |   |  | $ | 1.88 |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  
|Nickel cash cost of sales after by-product
    credits per pound           |  | $                                   | 2.36 |                |  | $    | 1.90 |      |  | $ | 2.19  |   |  | $ | 1.96 |  
|                                                                           |  |                                     |      |                |  |      |      |      |  |   |       |   |  |   |      |  



---



|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Post-retirement benefits other than pensions.                                                                               
|   
|(2) | Nickel cash cost of sales before and after
    by-product credits includes costs for both Inco-source and
    external feed.



|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk



| |            
| | -----------
| | Other Risks

We review and evaluate our property, plant and
equipment and other assets for impairment when events or changes
in economic and other circumstances indicate that the carrying
value of such assets may not be recoverable. The net recoverable
value of a capital asset is calculated by estimating
undiscounted future net cash flows from the asset together with
the assets residual value. Future net cash flows are
developed using assumptions that reflect our planned course of
action for an asset given our best estimate of the most probable
set of economic conditions. Reference is also made to Key
Factors Affecting Our Business  Goro Project
above.

Evaluation of the future cash flows from major
development projects such as the Voiseys Bay and Goro
projects entails a number of assumptions regarding project
scope, the timing, receipt and terms of regulatory approvals,
estimates of future metals prices, estimates of the ultimate
size of the deposits, ore grades and recoverability, timing of
commercial production, commercial viability of new technological
processes,

31



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##### 



production volumes, operating and capital costs,
and foreign currency exchange rates. Inherent in these
assumptions are significant risks and uncertainties.


The uncertain political situation in Indonesia
could adversely affect PT Incos ability to operate and,
accordingly, our business, results of operations, financial
condition and prospects. The possible transition of New
Caledonia to independence in the future could adversely affect
the Goro nickel-cobalt project. As a result of advisories issued
in May 2004 by the Canadian and Australian governments covering
security and other concerns in the province where PT Incos
operations are located and other developments, we implemented a
number of actions to address these developments and to protect
the safety of PT Incos personnel and facilities. While
these developments and our response to them did not adversely
affect PT Incos operations, we cannot predict whether new
or additional governmental security or other advisories or
similar developments could adversely affect PT Incos
operations.

While global demand for nickel is the most
important determinant of our profitability and cash flows, our
financial results are also very much affected by increases in
the costs we incur to produce nickel and our other metals.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end of the period covered by this
Report, our Chief Executive Officer and Chief Financial Officer
reviewed and evaluated our disclosure controls and procedures
(as such term is defined in Rule 13a-15(e) or
Rule 15d-15(e) under the U.S. Securities Exchange Act
of 1934, as amended) and, based upon such review and evaluation
required by Rule 13a-15(e) or Rule 15d-15(e) under the
U.S. Securities Exchange Act of 1934, as amended, concluded
that such disclosure controls and procedures were effective and
met the requirements thereof. Additionally, no change in our
internal control over financial reporting (as such term is
defined in Rule 13a-15(f) or Rule 15d 
15(f) under the U.S. Securities Exchange Act of 1934, as
amended) occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.



| |                                                           
| | ----------------------------------------------------------
| | Cautionary Notice Regarding Forward-Looking
    Statements

Certain statements contained in this Report are
forward-looking statements (as defined in the
U.S. Securities Exchange Act of 1934, as amended). Examples
of such statements include, but are not limited to, statements
concerning (i) nickel demand and supply in the global
nickel market for 2004 and nickel demand in China and other
geographical and end-use markets for nickel for 2004;
(ii) our costs of production, nickel, copper, cobalt and
precious metals production levels and nickel market conditions;
(iii) capital expenditures; (iv) changes in pension
contributions to our pension plans and pension expense and
(v) the enactment or completion of the necessary
legislation, feasibility studies and reviews, financing plans
and arrangements, and/or other agreements and arrangements
related to, and the timing and costs of construction and
production with respect to, certain development projects,
including the Goro and Voiseys Bay projects. Inherent in
forward-looking statements are risks and uncertainties well
beyond our ability to predict or control. Actual results and
developments are likely to differ, and may differ materially,
from those expressed or implied by the forward-looking
statements contained in this Report and the carrying values of
investments could be materially impacted. Such statements and
carrying values are based on a number of assumptions which may
prove to be incorrect, including, but not limited to,
assumptions about: (a) the supply and demand for, and the
prices of, primary nickel and our other metals products, market
competition and our production and other costs and purchased
intermediates, stainless steel scrap and other substitutes and
competing products, for primary nickel and other metals produced
by the Company, (b) changes in exchange rates and interest
rates and investment performance of pension assets,
(c) political unrest or instability in countries such as
Indonesia, (d) the timing of the completion and the results
of our Goro project review including the projects scope
and schedule and its other key aspects, and (e) the timing
of receipt of all necessary permits and regulatory approvals,
engineering and construction timetables and capital costs, and
the financing plans and arrangements for, and joint venture,
partner or similar investments and other agreements and
arrangements associated with, our development projects. The
forward-looking statements included in this Report represent our
views as of

32



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##### 



the date of this Report. While we anticipate that
subsequent events and developments may cause our views to
change, we specifically disclaim any obligation to update these
forward-looking statements. These forward-looking statements
should not be relied upon as representing our views as of any
date subsequent to the date of this Report.


33



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##### 



PART II  OTHER
INFORMATION



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(a) | Our 2004 Annual and Special Meeting of
    Shareholders (the Meeting) was held on
    April 21, 2004.



|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b), (c) | The following three matters, as described in our
    Proxy Circular and Statement for the Meeting, were submitted to
    a vote of shareholders at the Meeting; (i) the approval of
    a resolution confirming an amendment to the Companys
    by-law to declassify the Companys Board of Directors and
    provide for the annual election of all of the Companys
    Directors (the By-Law Confirmation Resolution),
    (ii) the election of Directors, and (iii) the
    appointment of Auditors. The following describes these matters
    and the voting data on each matter:



| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) By-Law Confirmation Resolution.
    The shareholders approved a resolution confirming an amendment
    to the Companys by-law to declassify the Companys
    Board of Directors and provide for the annual election of all of
    the Companys Directors. In support of the vote, which was
    conducted by a show of hands, the following proxies voting on
    this motion had been received prior to the Meeting:

|            |  |   |       |               |  |   |         |                    |  |   |      |  |  |  |       |  |  |  |      | 
|----------- |  | - | ----- | ------------- |  | - | ------- | ------------------ |  | - | ---- |  |  |  | ----- |  |  |  | ---- | 
|Votes For   |  | % |       | Votes Against |  | % |         | Abstained/Withheld |  | %
|            |  |   |       |               |  |   |         |                    |  |  
|103,810,994 |  |   | 99.59 |               |  |   | 426,942 |                    |  |   | 0.40 |  |  |  | 3,709 |  |  |  | 0.01 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) Election of Directors.The
    individuals listed below were nominated and, in the absence of
    further nominations, elected Directors of the Company to hold
    office for a term expiring immediately prior to the
    Companys next Annual Meeting of Shareholders to be held in
    2005. In support of the vote, which was conducted by a show of
    hands, the following proxies voting on this motion had been
    received prior to the Meeting:

|                  |  |           |             |   |  |                    |       |   |  |  |         |  |  |  |      | 
|----------------- |  | --------- | ----------- | - |  | ------------------ | ----- | - |  |  | ------- |  |  |  | ---- | 
|Name of Nominee   |  | Votes For |             | % |  | Abstained/Withheld |       | %
|                  |  |           |             |   |  |                    |       |  
|Glen A. Barton    |  |           | 105,059,694 |   |  |                    | 99.88 |   |  |  | 120,471 |  |  |  | 0.12 | 
|Angus A. Bruneau  |  |           | 105,051,966 |   |  |                    | 99.87 |   |  |  | 128,199 |  |  |  | 0.13 | 
|Ronald C. Cambre  |  |           | 105,054,216 |   |  |                    | 99.88 |   |  |  | 125,949 |  |  |  | 0.12 | 
|Scott M. Hand     |  |           | 104,731,179 |   |  |                    | 99.57 |   |  |  | 448,986 |  |  |  | 0.43 | 
|Chaviva M. Hosek  |  |           | 105,162,279 |   |  |                    | 99.98 |   |  |  | 17,886  |  |  |  | 0.02 | 
|Peter C. Jones    |  |           | 105,163,508 |   |  |                    | 99.98 |   |  |  | 16,657  |  |  |  | 0.02 | 
|John T. Mayberry  |  |           | 105,171,800 |   |  |                    | 99.99 |   |  |  | 8,365   |  |  |  | 0.01 | 
|David P. OBrien  |  |           | 104,993,286 |   |  |                    | 99.82 |   |  |  | 186,879 |  |  |  | 0.18 | 
|Roger Phillips    |  |           | 104,993,756 |   |  |                    | 99.82 |   |  |  | 186,409 |  |  |  | 0.18 | 
|James M. Stanford |  |           | 104,878,175 |   |  |                    | 99.71 |   |  |  | 301,990 |  |  |  | 0.29 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) Appointment of Auditors.PricewaterhouseCoopers LLP were appointed Auditors of the
    Company to serve until our next Annual Meeting of Shareholders
    to be held in 2005 and the Audit Committee of the Board of
    Directors were authorized to fix the remuneration to be paid to
    the Auditors. In support of the vote, which was conducted by a
    show of hands, the following proxies voting on this motion had
    been received prior to the Meeting:

|            |  |   |       |                    |  |   |         |  |  |  |      | 
|----------- |  | - | ----- | ------------------ |  | - | ------- |  |  |  | ---- | 
|Votes For   |  | % |       | Abstained/Withheld |  | %
|            |  |   |       |                    |  |  
|104,246,324 |  |   | 99.86 |                    |  |   | 152,212 |  |  |  | 0.14 | 

34



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##### 





|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

| |    |    |  |                                                                                                                                                                                     
| | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31 | .1 |  | Certification of the Chief Executive Officer of
    the Registrant pursuant to Rule 13a  14(a) of the
    U.S. Securities Exchange Act of 1934, as amended.                        
| | 31 | .2 |  | Certification of the Chief Financial Officer of
    the Registrant pursuant to Rule 13a  14(a) of the
    U.S. Securities Exchange Act of 1934, as amended.                        
| | 32 | .1 |  | Certification of the Chief Executive Officer of
    the Registrant pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.
| | 32 | .2 |  | Certification of the Chief Financial Officer of
    the Registrant pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.

(b) Reports on Form 8-K

Current Report on Form 8-K dated
April 20, 2004 covering Item 12 of Form 8-K
relating to the Registrants press release on its first
quarter 2004 financial and operating results.

Current Report on Form 8-K dated
May 25, 2004 covering Items 5 and 9 of Form 8-K
relating to the Registrants update on Phase 2 of the
Goro project review.

35



---



##### 



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                 
| | ----------------
| | INCO
    LIMITED

|                     |  |     |  |                                                                                             
|-------------------- |  | --- |  | --------------------------------------------------------------------------------------------
|Date: August 6, 2004 |  | By: |  | /s/ S. F. FEINERS. F. Feiner
    Executive Vice-President,
    General Counsel and Secretary
|                    
|                    
|Date: August 6, 2004 |  | By: |  | /s/ R. A. LEHTOVAARAR. A. Lehtovaara
    Vice-President and Comptroller                     

36



---



##### 



EXHIBIT INDEX

Exhibits

| |    |    |  |                                                                                                                                                                                     
| | -- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31 | .1 |  | Certification of the Chief Executive Officer of
    the Registrant pursuant to Rule 13a  14(a) of the
    U.S. Securities Exchange Act of 1934, as amended.                        
| | 31 | .2 |  | Certification of the Chief Financial Officer of
    the Registrant pursuant to Rule 13a  14(a) of the
    U.S. Securities Exchange Act of 1934, as amended.                        
| | 32 | .1 |  | Certification of the Chief Executive Officer of
    the Registrant pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.
| | 32 | .2 |  | Certification of the Chief Financial Officer of
    the Registrant pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.

37