##### 



EXHIBIT 3 Deloitte & Touche LLP3000 Scotia Centre(DELOITTE LOGO)
    
    700 Second Street S.W.Calgary AB T2P 0S7CanadaTel: (403) 267-1700Fax: (403) 264-2871www.deloitte.ca
 Auditors Report To the Board of Directors and the Shareholders of
The Westaim Corporation We have audited the consolidated balance sheets of The Westaim Corporation as
at December 31, 2003 and 2002 and the consolidated statements of loss, deficit
and cash flow for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2003 and 2002 and the results of its operations and cash flow for each of the
three years in the period ended December 31, 2003 in accordance with Canadian
generally accepted accounting principles. On January 30, 2004, we reported separately to the shareholders of the Company
on financial statements for the same period, prepared in accordance with
Canadian generally accepted accounting principles which excluded Note 23 on
Reconciliation To Accounting Principles Generally Accepted In The United
States. (Signed) Deloitte & Touche LLP Chartered Accountants Calgary, Canada
January 30, 2004




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##### 



(DELOITTE LOGO)Deloitte & Touche LLP3000 Scotia Centre700 Second Street S.W.Calgary AB T2P 0S7CanadaTel: (403) 267-1700Fax: (403) 264-2871www.deloitte.ca
 Comments by Auditors for U. S. Readers on Canada - U.S. Reporting Differences In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph)
outlining changes in accounting principles that have been implemented in the
Companys financial statements. As discussed in Notes 2(n), 2(q) and 15 to the
consolidated financial statements, the Company adopted recommendations with
respect to stock-based compensation, discontinued operations and disclosure of
guarantees to conform to new recommendations of The Canadian Institute of
Chartered Accountants. Our report to the shareholders dated January 30, 2004
is expressed in accordance with Canadian reporting standards, which does not
require a reference to such change in accounting principle in the auditors
report when the change is properly accounted for and adequately disclosed in
the financial statements. (Signed) Deloitte & Touche LLP Chartered Accountants Calgary, Canada
January 30, 2004




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##### 



THE WESTAIM CORPORATION
Consolidated Balance Sheets December 31
    
    December 31(thousands of Canadian dollars)
    
    2003
    
    2002ASSETSCurrentCash and cash equivalents
    
    $
    44,694
    
    
    $
    76,052Short-term investments
    
    
    23,443
    
    
    
    25,250Accounts receivable
    
    
    4,960
    
    
    
    7,359Inventories (note 4)
    
    
    2,610
    
    
    
    2,517Future income taxes (note 7)
    
    
    1,032
    
    
    
    Other
    
    
    659
    
    
    
    827Current assets available for sale (note 3)
    
    
    30,369
    
    
    
    33,162107,767
    
    
    
    145,167Capital assets (note 5)
    
    
    28,783
    
    
    
    23,895Capital assets available for sale (note 3)
    
    
    5,500
    
    
    
    6,913Deferred charges (note 6)
    
    
    2,356
    
    
    
    1,978Future income taxes (note 7)
    
    
    
    
    
    
    5,730Investments (note 8)
    
    
    500
    
    
    
    500$
    144,906
    
    
    $
    184,183LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities
    
    $
    10,015
    
    
    $
    13,786Accounts payable and accrued liabilities available for sale (note 3)
    
    
    3,509
    
    
    
    3,86913,524
    
    
    
    17,655Provision for site restoration (note 9)
    
    
    7,564
    
    
    
    7,749Deferred licensing revenue (note 10)
    
    
    
    
    
    
    56521,088
    
    
    
    25,969Commitments and contingencies (note 18)Shareholders equityCapital stock (note 11)
    
    
    373,230
    
    
    
    373,128Contributed surplus (note 11)
    
    
    403
    
    
    
    403Deficit
    
    
    (249,815
    )
    
    
    (215,317
    )123,818
    
    
    
    158,214$
    144,906
    
    
    $
    184,183
 Approved on behalf of the Board: /s/
Ian W. Delaney

Ian W. Delaney
    
    /s/ Frank W. King

Frank W. KingDirector
    
    Director
 1




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##### 



THE WESTAIM CORPORATION
Consolidated Statements of Loss and Consolidated Statements of Deficit Year Ended
    
    Year Ended
    
    Year EndedDecember 31
    
    December 31
    
    December 31(thousands of Canadian dollars except per share data)
    
    2003
    
    2002
    
    2001Revenue
    
    $
    17,285
    
    
    $
    12,627
    
    
    $
    14,106CostsManufacturing
    
    
    5,948
    
    
    
    4,987
    
    
    
    4,625Selling, general and administrative
    
    
    3,751
    
    
    
    4,861
    
    
    
    7,567Research and development (note 12)
    
    
    25,678
    
    
    
    23,289
    
    
    
    14,823Depreciation and amortization
    
    
    5,001
    
    
    
    4,231
    
    
    
    4,071Divisional loss
    
    
    (23,093
    )
    
    
    (24,741
    )
    
    
    (16,980
    )Corporate costs
    
    
    (8,867
    )
    
    
    (6,686
    )
    
    
    (7,970
    )Interest and foreign exchange
    
    
    653
    
    
    
    2,206
    
    
    
    7,727(Loss) gain on disposal of assets (note 13)
    
    
    (723
    )
    
    
    
    
    
    
    20,122Equity loss (note 8)
    
    
    
    
    
    
    (3,410
    )
    
    
    (18,687
    )Loss from continuing operations before income taxes
    
    
    (32,030
    )
    
    
    (32,631
    )
    
    
    (15,788
    )Income tax (expense) recovery (Note 7)Current
    
    
    (130
    )
    
    
    (94
    )
    
    
    63Future
    
    
    (4,698
    )
    
    
    (6,385
    )
    
    
    (295
    )(4,828
    )
    
    
    (6,479
    )
    
    
    (232
    )Loss from continuing operations
    
    
    (36,858
    )
    
    
    (39,110
    )
    
    
    (16,020
    )Income (loss) from discontinued operations net of income taxes (Note 3)
    
    
    2,360
    
    
    
    (10,652
    )
    
    
    (51,439
    )Net loss
    
    $
    (34,498
    )
    
    $
    (49,762
    )
    
    $
    (67,459
    )Loss per common share (note 20)Continuing operations - basic and diluted
    
    $
    (0.47
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )Net loss - basic and diluted
    
    
    (0.44
    )
    
    
    (0.64
    )
    
    
    (0.87
    )Weighted average number of common shares outstanding (thousands)
    
    
    78,045
    
    
    
    77,924
    
    
    
    77,741Deficit at beginning of year
    
    $
    (215,317
    )
    
    $
    (163,976
    )
    
    $
    (96,517
    )Change in accounting policy (Note 2n)
    
    
    
    
    
    
    (1,579
    )
    
    
    Net loss
    
    
    (34,498
    )
    
    
    (49,762
    )
    
    
    (67,459
    )Deficit at end of year
    
    $
    (249,815
    )
    
    $
    (215,317
    )
    
    $
    (163,976
    )
 2




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##### 



THE WESTAIM CORPORATION
Consolidated Cash Flow Statements Year Ended
    
    Year Ended
    
    Year EndedDecember 31
    
    December 31
    
    December 31(thousands of Canadian dollars)
    
    2003
    
    2002
    
    2001Operating activitiesLoss from continuing operations
    
    $
    (36,858
    )
    
    $
    (39,110
    )
    
    $
    (16,020
    )Items not affecting cashDepreciation and amortization
    
    
    5,001
    
    
    
    4,231
    
    
    
    4,071Provision for site restoration
    
    
    
    
    
    
    1,120
    
    
    
    3,070Future income taxes
    
    
    4,698
    
    
    
    6,385
    
    
    
    295Loss (gain) on disposal of assets
    
    
    723
    
    
    
    422
    
    
    
    (20,122
    )Deferred licensing revenue
    
    
    (565
    )
    
    
    (4,270
    )
    
    
    (4,272
    )Equity loss on investments
    
    
    
    
    
    
    3,410
    
    
    
    18,687Other items
    
    
    
    
    
    
    (479
    )
    
    
    194Accounts receivable
    
    
    225
    
    
    
    957
    
    
    
    (139
    )Inventories
    
    
    (446
    )
    
    
    (1,159
    )
    
    
    (4,284
    )Other
    
    
    136
    
    
    
    (210
    )
    
    
    (772
    )Accounts payable and accrued liabilities
    
    
    2,574
    
    
    
    (2,716
    )
    
    
    (4,044
    )Site restoration expenditures
    
    
    (185
    )
    
    
    (546
    )
    
    
    (585
    )Deferred licensing revenue
    
    
    
    
    
    
    396
    
    
    
    386Cash used in continuing operations
    
    
    (24,697
    )
    
    
    (31,569
    )
    
    
    (23,535
    )Cash provided from discontinued operations
    
    
    3,209
    
    
    
    4,760
    
    
    
    28,801Total cash (used in) provided from operating activities
    
    
    (21,488
    )
    
    
    (26,809
    )
    
    
    5,266Investing activitiesCapital expenditures - continuing operations
    
    
    (10,383
    )
    
    
    (6,052
    )
    
    
    (2,447
    )Capital expenditures - discontinued operations
    
    
    (1,745
    )
    
    
    (1,644
    )
    
    
    (5,372
    )Deferred charges - continuing operations
    
    
    (725
    )
    
    
    (670
    )
    
    
    (526
    )Deferred charges - discontinued operations
    
    
    (234
    )
    
    
    (278
    )
    
    
    (103
    )Purchase of short-term investments
    
    
    53,216
    
    
    
    208,709
    
    
    
    173,636Redemption and sale of short-term investments
    
    
    (51,409
    )
    
    
    (233,959
    )
    
    
    (173,636
    )Proceeds on sale of assets
    
    
    1,308
    
    
    
    
    
    
    
    23,127Investments
    
    
    
    
    
    
    (728
    )
    
    
    (6,384
    )Cash (used in) provided from investing activities
    
    
    (9,972
    )
    
    
    (34,622
    )
    
    
    8,295Financing activitiesIssuance of common shares
    
    
    102
    
    
    
    151
    
    
    
    467Repurchase of common shares
    
    
    
    
    
    
    (318
    )
    
    
    Cash provided from (used in) financing activities
    
    
    102
    
    
    
    (167
    )
    
    
    467Net (decrease) increase in cash and cash equivalents
    
    
    (31,358
    )
    
    
    (61,598
    )
    
    
    14,028Cash and cash equivalents at beginning of year
    
    
    76,052
    
    
    
    137,650
    
    
    
    123,622Cash and cash equivalents at end of year
    
    $
    44,694
    
    
    $
    76,052
    
    
    $
    137,650
 3




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  1
    
    BASIS OF PRESENTATION  The Westaim Corporation (the Company) was incorporated on May 7, 1996
by articles of incorporation under the Business Corporation Act
(Alberta).The consolidated financial statements include the accounts of the
Company, and its principal subsidiaries, iFire Technology Inc. (iFire),
Nucryst Pharmaceuticals Corp. (Nucryst), and Neomet Limited.All amounts are expressed in thousands of Canadian dollars except share
and per share data.  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES  a)
    
    Principles of consolidationThe financial statements of entities which are controlled by the
Company, referred to as subsidiaries, are consolidated. Entities
which are not controlled, but over which the Company has the ability
to exercise significant influence, are accounted for using the equity
method of accounting. Investments in other entities are accounted for
using the cost method.b)
    
    Use of estimatesThe consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles, which require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenue
and expenses during the year. Significant estimates include the
provision for site restoration, provision for discontinued operations,
future income taxes, and useful lives of capital assets. Actual
results could differ from those estimates.c)
    
    Translation of foreign currenciesTransactions in foreign currencies are translated into Canadian
dollars at rates of exchange at the time of such transactions.
Monetary assets and liabilities are translated at current rates of
exchange. Foreign operations are considered financially and
operationally integrated and are translated into Canadian dollars
using the temporal method of translation. Gains or losses resulting
from the translation adjustments are included in income. Foreign
exchange losses included in discontinued operations and interest and
foreign exchange in 2003 amounted to $1,867 (2002 losses  $326; 2001
gains  $865).d)
    
    Revenue recognitionRevenue is generally recognized when the product has been delivered.
Specific revenue recognition policies for each of the Companys
operating segments are as follows:  Ambeon Revenue is generally recognized at the time of shipment.
Under certain consignment contracts, revenue is recognized on the
date that the product is used by the customer.Nucryst Pharmaceuticals Revenue from direct sales to third parties is
recognized upon delivery. For products manufactured under license, revenue is
recorded at the date of shipment at actual cost plus an agreed markup. In
addition, a royalty is earned based on a percentage of sales 4




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  revenue earned by the licensee on sales to third parties. Revenue
relating to the achievement of milestones under licensing
agreements is recognized when the milestone event has occurred.iFire Technology The Company recognizes revenue from
licensing fees over the term that services are being rendered.
Deferred licensing revenue represents amounts received under
agreements for which the process of earning the revenue has not
been completed. Royalties are recognized when earned in accordance
with the terms of the specific agreement.  e)
    
    Cash and cash equivalentsCash and cash equivalents consist of cash on deposit and highly liquid
short-term investments with original maturities at the date of
acquisition of 90 days or less and are recorded at cost.f)
    
    Short-term investmentsShort-term investments consist of money-market instruments with
maturities of less than one year. As at December 31, 2003 the Company
held short-term investments recorded at a cost of $23,443 (2002 
$25,250) which reflects current market values.g)
    
    Inventory valuationFinished products, raw materials, materials in process, spare parts
and operating materials are valued at the lower of average cost and
net realizable value.h)
    
    Research and development costsResearch costs are expensed as incurred and significant project
development costs are capitalized in accordance with Canadian
generally accepted accounting principles once the Company has
determined that commercialization criteria concerning the product or
process have been met. Amortization of these costs over their
estimated useful life commences with the successful commercial
production or use of the product or process. On an ongoing basis,
Management reviews the unamortized balance to ensure that the deferred
development costs continue to satisfy the criteria for deferral and
amortization.As at December 31, 2003 and 2002, no development costs have been
capitalized.i)
    
    Government assistanceGovernment assistance towards research and development expenditures
related to capital assets used for research and development is
credited against the cost of the related capital asset and all other
assistance is credited against the related expenses as incurred.j)
    
    Capital assetsi) Property, Plant and Equipment  Property, plant and equipment are
stated at cost. Depreciation and amortization is calculated using a
straight-line method based on estimated useful lives of the particular
assets which do not exceed 20 years for buildings and 10 years for
equipment. 5




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  ii) Carrying Value  The Company evaluates the carrying value of
property, plant and equipment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable,
and recognizes an impairment charge when it is probable that estimated
future non-discounted cash flows of the underlying assets will be less
than the carrying value of the assets.k)
    
    Site restoration costsSite restoration costs have been estimated as at December 31, 2003,
taking into consideration the anticipated method and extent of the
remediation consistent with regulatory requirements, industry
practices, current technology and the possible uses of the site. The
estimated amount of future restoration costs is reviewed regularly
based on available information. Where the forecasted net restoration
costs exceed existing provisions, an additional expense is recognized
in the period.Potential recoveries of costs resulting from indemnifications provided
by previous owners of the Companys industrial sites have not been
recognized in these consolidated financial statements as the amount of
recovery cannot be reasonably determined. Any future recoveries will
be recorded when received.l)
    
    Derivative financial instrumentsDerivative financial instruments are utilized by the Company in the
management of commodity price and foreign currency exposures. The
Companys policy is not to utilize derivative financial instruments
for trading or speculative purposes.The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. This process
includes linking all derivatives to specific assets and liabilities on
the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedges
inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.The Company enters into hedges of its commodity price exposure on
nickel raw material inventory and anticipated future sales by entering
into nickel forward contracts, when deemed appropriate. Gains and
losses on nickel forward contracts used to hedge nickel raw material
inventory and anticipated future sales in respect of the Ambeon
business segment (Ambeon) are accrued in inventory and included in
assets available for sale on the consolidated balance sheet as at
December 31, 2003. These gains and losses are recognized in the
income statement when the underlying product is sold.The Company also enters into forward agreements in order to reduce the
impact of fluctuating interest rates on its short-term investments and
fluctuating foreign currency exchange rates on anticipated future cash
flows. These forward agreements are not designated as hedges. They
require the exchange of payments without the exchange of the notional
principal amount on which payments are based. These instruments are
recorded at the lower of cost or market. 6




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  m)
    
    Income taxesIncome taxes are accounted for using the liability method of income
tax allocation. Under the liability method, income tax assets and
liabilities are recorded to recognize future income tax inflows and
outflows arising from the settlement or recovery of assets and
liabilities at their carrying values.Income tax assets are also recognized for the benefits from tax losses
and deductions that cannot be identified with particular assets or
liabilities, provided those benefits are more likely than not to
be realized. Future income tax assets and liabilities are determined
based on the tax laws and rates that are anticipated to apply in the
period of realization.n)
    
    Stock-based compensation plansThe Company and certain of its subsidiaries have stock-based
compensation plans, which are described in Note 11. No compensation
expense is recognized for these plans when stock options are issued.
Any consideration paid by option holders for the purchase of stock is
credited to capital stock. If plan entitlements are repurchased from
the holder, the consideration paid is charged to retained earnings.
Any obligation related to increases in the value of deferred share
units (DSUs) is accrued when the change in value occurs, with an
offset to the income statement.Effective January 1, 2002 the Company and its subsidiaries adopted
Section 3870 of the Handbook of the Canadian Institute of Chartered
Accountants (CICA) with respect to the accounting and disclosure of
stock-based compensation, which recommends that awards to employees be
valued using a fair value method of accounting. These new rules also
require that companies account for stock appreciation rights (SARs)
and similar awards to be settled in cash or other assets, by measuring
compensation expense on an ongoing basis, as the amount by which the
quoted market price exceeds the exercise price at each measurement
date.As permitted under Section 3870, the Company has elected to account
for stock options by measuring compensation expense as the excess, if
any, of the quoted market value of the stock at the date of grant over
the exercise price. For stock options in subsidiary companies,
compensation expense is measured as the excess, if any, of the fair
value of the subsidiarys stock at the date of grant over the exercise
price.Under CICA 3870, companies that elect a method other than the fair
value method of accounting are required to disclose pro forma net
income and earnings per share information, using a pricing model such
as the Black-Scholes option pricing model, as if the fair value method
of accounting had been used. These rules do not apply to pre-existing
awards except for those awards that call for settlement in cash or
other assets, in which case, the cumulative liability of these awards
at the date of implementation is charged to deficit with a
corresponding increase to accounts payable and accrued liabilities.
The cumulative liability of the SARs of the Companys subsidiaries at
January 1, 2002, amounting to $1,579, was charged to deficit with a
corresponding increase to accounts payable and accrued liabilities
(Note 11).In September 2003, the CICA revised Section 3870 of the CICA Handbook to
require that effective January 1, 2004, the fair value method of accounting for
stock options be recognized in the financial statements. The Company intends
to apply these provisions retroactively, with restatement of the prior 7




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  year commencing January 1, 2004. The cumulative compensation cost of
options to acquire common shares of the Company and its subsidiaries
issued during 2002, using the Black-Scholes option pricing model, will
be charged to deficit with a corresponding increase to contributed
surplus at January 1, 2003.o)
    
    Earnings per shareBasic earnings per common share is calculated using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is calculated on the basis of the
weighted average number of shares outstanding during the period plus
the additional common shares that would have been outstanding if
potentially dilutive common shares had been issued using the treasury
stock method.p)
    
    Employee future benefitsAll employee future benefits are accounted for on an accrual basis.
In 2003, the Company wound up its defined benefit pension plan (Note
16).q)
    
    Discontinued operationsEffective January 1, 2003, the Company adopted on a prospective basis
new CICA 3475 Disposal of Long-lived assets and Discontinued
Operations. Long-lived assets to be disposed of by sale are
classified as held for sale in the period in which a formal plan of
disposal has been approved, the assets are available for immediate
sale and are actively being marketed, and it is expected that the sale
will occur within one year. Long-lived assets to be abandoned are
classified as held and used until they are disposed of.Long-lived assets classified as held for sale are carried at the lower
of their carrying amount and fair value net of estimated disposition
costs. Losses are recognized immediately where carrying value exceeds
fair value and gains are recognized at time of sale.The results of discontinued operations are reported separately,
included gains or losses relating to the disposal of related
long-lived assets held for sale or disposal. Future costs associated
with an exit or disposal activity are recognized in the period in
which the liability is incurred.Prior to January 1, 2003, the results of discontinued operations were
reported separately with disclosure of the results of operations prior
to the measurement date (date the plan to discontinue operations was
formally approved) and the net gain or loss from discontinued
operations. The net gain or loss from discontinued operations
included both actual or estimated gain or loss on disposal and the
actual or estimated results from operations, if any, between the
measurement date and the disposal date. 8




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  r)
    
    Deferred charges and other intangible assetsEffective January 1, 2002, the Company adopted on a prospective basis
new CICA 3062, Goodwill and Other Intangible Assets, the provisions
of which replace the amortization of goodwill and indefinite life
assets with requirements for an annual impairment test. Any material
decline in fair value from carrying value will be charged to expense
in the period that impairment has been determined. There was no
material impact on the consolidated financial statements resulting
from this change. At present, the Company has no indefinite life
assets. Organization costs are amortized over 5 years and patents are
amortized over 10 years.  3
    
    DISCONTINUED OPERATIONS  AmbeonOn January 29,
2004, the Company sold
substantially all of
the assets and
liabilities related to
Ambeon, including its
wholly-owned
subsidiary Neomet
Limited, for proceeds
of approximately
$35,000 subject to
customary adjustments
including changes in
working capital. The
effective date of the
sale is January 1,
2004. Accordingly,
the results of these
operations have been
accounted for on a
discontinued basis and
the related net assets
classified as
available for sale.
In accordance with
CICA 3475, the Company
has determined that
the net proceeds will
exceed the net book
value of Ambeon as at
December 31, 2003 and
no adjustment to the
carrying value of
Ambeon is required.
Any gain on the sale
of Ambeon will be
reported in the first
quarter of 2004 and
any costs incurred in
subsequent periods
related to
discontinued
operations will be
reported in the period
in which they occur.
Current and prior years operating
results, cash flows and balance sheets
for this business segment are presented
separately as discontinued operations in
these consolidated financial statements.Amounts included in the consolidated balance sheets relating to Ambeon discontinued
operations are as follows: December 31, 2003
    
    December 31, 2002Cash
    
    $
    411
    
    
    $
    1,579Accounts receivable
    
    
    5,438
    
    
    
    6,755Inventories
    
    
    10,812
    
    
    
    11,422Other assets
    
    
    1
    
    
    
    31Deferred charges
    
    
    625
    
    
    
    483Capital assets
    
    
    13,082
    
    
    
    12,892Current assets available for sale
    
    $
    30,369
    
    
    $
    33,162Accounts payable and accrued
liabilities available for sale
    
    $
    3,509
    
    
    $
    3,869
 9




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  3
    
    DISCONTINUED OPERATIONS (Continued)  Coinage Division and Ethylene Coatings BusinessOn May 28, 2002, the Board of Directors of the Company approved
the closing of the Coinage Division and the selling of the Ethylene
Coatings business. Accordingly, the results from operations of these
businesses, including the estimated cost of shutdown for the Coinage
Division and the Ethylene Coatings business, have been accounted for
on a discontinued basis. The Coinage Division was discontinued in
July 2002 and operations in the Ethylene Coatings business were
discontinued in February 2003.All anticipated losses from operations and estimated shutdown
costs of these businesses, amounting to $19,667, were recorded in
2002. As a result, no losses from discontinued operations related to
these businesses were reported in 2003.Amounts included in the consolidated balance sheets relating to
the Coinage Division and Ethylene Coatings business discontinued
operations are as follows: December 31, 2003
    
    December 31, 2002Accounts receivable
    
    $
    4
    
    
    $
    2,178Inventories
    
    
    
    
    
    
    353Other assets
    
    
    
    
    
    
    32Accounts payable and accrued liabilities
    
    
    (1,281
    )
    
    
    (7,626
    )Net working capital
    
    $
    (1,277
    )
    
    $
    (5,063
    )Long term capital assets available for sale
    
    $
    5,500
    
    
    $
    6,913
  Results of discontinued operations: Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,Revenues
    
    2003
    
    2002
    
    2001Ambeon business segment
    
    $
    30,114
    
    
    $
    36,436
    
    
    $
    36,160Coinage and Ethylene Coatings business
segments:Revenues to May 28, 2002
    
    
    
    
    
    
    6,454
    
    
    
    18,616Revenues subsequent to May 28, 2002
    
    
    
    
    
    
    3,829
    
    
    
    
    
    
    
    10,283
    
    
    
    18,616Total revenue from discontinued operations
    
    $
    30,114
    
    
    $
    46,719
    
    
    $
    54,776
 10




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  3
    
    DISCONTINUED OPERATIONS (continued) Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,Divisional income (losses)
    
    2003
    
    2002
    
    2001Ambeon business segment:Divisional income net of income taxes
    
    $
    3,003
    
    
    $
    9,015
    
    
    $
    7,592Costs related to disposition
    
    
    (643
    )
    
    
    
    
    
    
    2,360
    
    
    
    9,015
    
    
    
    7,592Coinage and Ethylene Coatings business segments:Divisional losses to May 28, 2002
    
    
    
    
    
    
    (3,908
    )
    
    
    (24,344
    )Divisional losses subsequent to May 28,
2002
    
    
    
    
    
    
    (6,676
    )
    
    
    Costs related to shutdown and disposition
    
    
    
    
    
    
    (9,083
    )
    
    
    Writedown of carrying value of assets
    
    
    
    
    
    
    
    
    
    
    (34,687
    )
    
    
    
    (19,667
    )
    
    
    (59,031
    )Net income (loss) from discontinued
operations
    
    $
    2,360
    
    
    $
    (10,652
    )
    
    $
    (51,439
    )
  The net income (loss) from discontinued operations is after deduction of
depreciation and amortization of $1,738 for the year ended December 31,
2003 (2002  $2,254; 2001  $5,070). The net loss for the year ended
December 31, 2002 also includes provisions for workforce reduction and
other shutdown and asset disposal costs totaling $9,083. No material
gain or loss is anticipated from the sale of the Ethylene Coatings
facilities and all expected future losses from the Ethylene Coatings
business were included in the net loss from discontinued operations
recorded during 2002.Net income per common share from discontinued operations was $0.03 for
the year ended December 31, 2003 (2002  loss $0.14; 2001  loss $0.66).Current income tax expense included in net income (loss) from
discontinued operations for the year ended December 31, 2003 amounted to
$27 (2002  $7; 2001  $138).  4
    
    INVENTORIES December 31, 2003
    
    December 31, 2002Raw materials
    
    $
    1,222
    
    
    $
    1,294Materials in process
    
    
    709
    
    
    
    570Finished product
    
    
    612
    
    
    
    300Spare parts and operating materials
    
    
    67
    
    
    
    Continuing operations
    
    
    2,610
    
    
    
    2,164Discontinued operations
    
    
    
    
    
    
    353$
    2,610
    
    
    $
    2,517
 11




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  5
    
    CAPITAL ASSETS AccumulatedDepreciation and
    
    NetDecember 31, 2003
    
    Cost
    
    Amortization
    
    Book ValueNucryst Pharmaceuticals
    
    $
    7,642
    
    
    $
    1,991
    
    
    $
    5,651iFire Technology
    
    
    31,421
    
    
    
    12,356
    
    
    
    19,065Other
    
    
    13,979
    
    
    
    9,912
    
    
    
    4,067Continuing operations
    
    $
    53,042
    
    
    $
    24,259
    
    
    $
    28,783
 AccumulatedDepreciation and
    
    NetDecember 31, 2002
    
    Cost
    
    Amortization
    
    Book ValueNucryst Pharmaceuticals
    
    $
    5,816
    
    
    $
    1,294
    
    
    $
    4,522iFire Technology
    
    
    24,349
    
    
    
    10,441
    
    
    
    13,908Other
    
    
    13,973
    
    
    
    8,508
    
    
    
    5,465Continuing operations
    
    $
    44,138
    
    
    $
    20,243
    
    
    $
    23,895
  Included in continuing operations capital assets is construction in
progress of $9,124 (2002  $3,821) that is not currently subject to
depreciation. Depreciation on continuing operations capital assets was
$4,638 (2002  $3,899; 2001  $3,876).  6
    
    DEFERRED CHARGES December 31, 2003
    
    December 31, 2002Patents
    
    $
    3,859
    
    
    $
    3,338Less accumulated amortization
    
    
    (1,503
    )
    
    
    (1,360
    )Continuing operations
    
    $
    2,356
    
    
    $
    1,978
 12




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  7
    
    INCOME TAXES  The following is a reconciliation of income taxes, calculated at
the statutory income tax rate, to the income tax provision included in
the consolidated statements of loss. Year Ended
    
    Year Ended
    
    Year EndedDec. 31, 2003
    
    Dec. 31, 2002
    
    Dec. 31, 2001Loss from continuing operations before income
taxes
    
    $
    (32,030
    )
    
    $
    (32,631
    )
    
    $
    (15,788
    )Statutory income tax rate
    
    
    36.74
    %
    
    
    39.12
    %
    
    
    41.62
    %Expected income tax recovery
    
    
    (11,768
    )
    
    
    (12,765
    )
    
    
    (6,571
    )Tax effect of losses and temporary differences not
recorded
    
    
    16,466
    
    
    
    17,816
    
    
    
    Utilization of prior period losses
    
    
    
    
    
    
    
    
    
    
    (1,450
    )Tax effect of items not subject to tax
    
    
    
    
    
    
    1,334
    
    
    
    7,778Income tax rate change
    
    
    
    
    
    
    
    
    
    
    538Large corporations and capital taxes
    
    
    130
    
    
    
    94
    
    
    
    (63
    )Income tax expense
    
    $
    4,828
    
    
    $
    6,479
    
    
    $
    232Classified as:Current
    
    $
    130
    
    
    $
    94
    
    
    $
    (63
    )Future
    
    
    4,698
    
    
    
    6,385
    
    
    
    295Income tax expense
    
    $
    4,828
    
    
    $
    6,479
    
    
    $
    232
  Income taxes are recognized for future income tax consequences attributed
to estimated differences between the financial statement carrying values
of existing assets and liabilities and their respective income tax bases.The net future income tax asset is comprised of: December 31, 2003
    
    December 31, 2002Future income tax assets:Tax benefit of loss carry-forwards and tax credits
    
    $
    82,012
    
    
    $
    68,218Provisions and reserves
    
    
    3,622
    
    
    
    5,851Capital, intangible and other assets
    
    
    13,890
    
    
    
    13,024Less valuation allowance
    
    
    (95,257
    )
    
    
    (77,831
    )4,267
    
    
    
    9,262Future income tax liabilities:Capital, intangible and other assets
    
    
    (3,053
    )
    
    
    (3,350
    )Other
    
    
    (182
    )
    
    
    (182
    )(3,235
    )
    
    
    (3,532
    )Future income tax assets, net
    
    $
    1,032
    
    
    $
    5,730Classified as:Current asset
    
    $
    1,032
    
    
    $
    Long-term asset
    
    
    
    
    
    
    5,730Future income tax assets, net
    
    $
    1,032
    
    
    $
    5,730
 13




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  7
    
    INCOME TAXES (continued)  The future income tax asset valuation allowance is in respect of tax loss
carry-forwards and tax credits primarily relating to subsidiaries
involved in technology development.For income tax purposes, the Company had non-capital loss carry-forwards
relating to operations in various jurisdictions of approximately $192,764
at December 31, 2003 (2002  $158,102; 2001  $135,415) and accumulated
capital losses of $5,865 (2002  $5,747; 2001  $3,588) which are
available to offset income of specific entities of the consolidated group
in future periods. The non-capital loss carry-forwards will expire at
various times to the end of 2023 with $158,093 expiring by 2010. The
Company also had research and development tax credits of approximately
$29,419 at December 31, 2003 (2002  $25,398; 2001  $22,404) which will
expire at various times to the end of 2013. Cash taxes relating to
continuing operations paid during the year amounted to $155 (2002  $116;
2001  $112).  8
    
    INVESTMENTS December 31, 2003
    
    December 31, 2002Investments  shares  cost basis
    
    $
    500
    
    
    $
    500
  The Company records impairment losses if there has been an impairment in
the value of investments that is other than temporary in nature. No
provisions were recorded in 2003. During 2002, provisions totaling
$2,435 (2001  $1,299) were recorded against the investments and included
in equity loss.In 2001, the investment in Savvion Inc., a U.S. private business
management software and service company, was written down to nominal
value reflecting the then current business environment, weaker
performance outlook and adjustments to technology market valuations. The
Companys voting interest in Savvion was reduced to less than 5% in 2002
(December 31, 2001  24.4%) and is accounted for on a cost basis.  9
    
    PROVISION FOR SITE RESTORATION  Changes in the provision are as follows: Year Ended
    
    Year EndedDecember 31, 2003
    
    December 31, 2002Provision at beginning of year
    
    $
    7,749
    
    
    $
    7,175Additional provisions required
    
    
    
    
    
    
    1,120Site restoration expenditures incurred
    
    
    (2,855
    )
    
    
    (546
    )Site restoration costs recovered
    
    
    2,670
    
    
    
    Provision at end of year
    
    $
    7,564
    
    
    $
    7,749
  The provision relates primarily to site restoration associated with soil
and groundwater reclamation and remediation, as well as the
discontinuance of DS nickel production, based on periodic independent
estimates of these costs as at December 31, 2003.Under a formal agreement, a pro rata share of site restoration costs
incurred by the Company relating to the discontinuance of DS nickel
production is recovered from a third party. 14




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  9
    
    PROVISION FOR SITE RESTORATION (continued)  Potential recoveries of costs resulting from indemnifications
provided by previous owners of the Companys industrial sites have not
been recognized in the consolidated financial statements as the amount
of recovery cannot be reasonably determined. Any future recoveries
will be recorded when received.  10
    
    LICENSING AGREEMENT  In 2000, iFire entered into a non-exclusive licensing agreement with a
third party. The licensing fee was recognized as revenue over three
years, the term that services were being rendered under the agreement.
Deferred licensing revenue represented the unamortized portion of cash
received. In addition, iFire is entitled to royalties from future
commercial sales of products by the third party utilizing the technology.
These receipts vary in amount based on certain factors and are
contingent upon the successful development and commercialization of the
iFire technology in products produced by the third party.  11
    
    CAPITAL STOCK  Share CapitalThe Companys authorized share capital consists of an unlimited number of
common shares, Preferred A shares and Preferred B shares. Changes in the
Companys common shares outstanding during 2003, 2002 and 2001 are as
follows: 2003
    
    2002
    
    2001Stated
    
    
    
    
    
    Stated
    
    
    
    
    
    StatedCommon Shares
    
    Number
    
    Capital
    
    Number
    
    Capital
    
    Number
    
    CapitalBalance at beginning
of year
    
    
    78,032,787
    
    
    $
    373,128
    
    
    
    77,786,915
    
    
    $
    372,598
    
    
    
    77,719,698
    
    
    $
    372,131Employee share purchase plan
    
    
    40,599
    
    
    
    102
    
    
    
    72,843
    
    
    
    151
    
    
    
    67,217
    
    
    
    467Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    (150,500
    )
    
    
    (721
    )
    
    
    
    
    
    
    Compensation expense
    
    
    
    
    
    
    
    
    
    
    323,529
    
    
    
    1,100
    
    
    
    
    
    
    
    Balance at end of year
    
    
    78,073,386
    
    
    $
    373,230
    
    
    
    78,032,787
    
    
    $
    373,128
    
    
    
    77,786,915
    
    
    $
    372,598
  Stock-based compensation plansEmployee and Director stock option plan The Company maintains an
Employee and Director Stock Option Plan under which the Company may grant
options for up to 11,000,000 shares of common stock of the Company at an
exercise price equal to the market price of the Companys stock at the
date of grant. Options awarded are exercisable for a period of 10 years
and vest as to one third of the grant on each of the first, second and
third anniversaries after the date of the grant. The Company maintains a
Directors and Officers Share Purchase Program under the provisions of the
Stock Option Plan. Under the Share Purchase Program, Directors and
designated officers may be granted one option for each common share
purchased, to a cumulative 50,000 options. Options, equal to the net
purchases of common shares by the optionee during the calendar year, vest
at the end of the calendar year in which the purchases were made. Any
options issued under this program which do not vest at year-end are
cancelled. 15




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  11
    
    CAPITAL STOCK (continued)  A summary of the status of the Companys stock option plans as at
December 31, 2003, 2002 and 2001 and changes during the years ending on
those dates is presented below: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseStock Options
    
    Number
    
    Price
    
    Number
    
    Price
    
    Number
    
    PriceOutstanding at
beginning of year
    
    
    5,665,599
    
    
    $
    9.41
    
    
    
    5,245,399
    
    
    $
    9.74
    
    
    
    4,684,999
    
    
    $
    9.61Granted
    
    
    427,800
    
    
    $
    1.87
    
    
    
    420,200
    
    
    $
    5.22
    
    
    
    560,400
    
    
    $
    10.81Cancelled
    
    
    (259,999
    )
    
    $
    12.62
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at end
of year
    
    
    5,833,400
    
    
    $
    8.71
    
    
    
    5,665,599
    
    
    $
    9.41
    
    
    
    5,245,399
    
    
    $
    9.74
  The following table summarizes information about stock options
outstanding as at December 31, 2003: Options Outstanding
    
    Options ExercisableRange of
    
    Number
    
    Weighted
    
    Weighted
    
    Number
    
    WeightedExercise
    
    Outstanding
    
    Average Remaining
    
    Average
    
    Exercisable
    
    AveragePrices
    
    Dec. 31, 2003
    
    Contractual Life
    
    Exercise Price
    
    Dec. 31, 2003
    
    Exercise Price$1  $6
    
    
    1,974,700
    
    
    
    5.2
    
    
    $
    3.98
    
    
    
    1,296,900
    
    
    $
    4.36$6  $15
    
    
    2,388,703
    
    
    
    5.6
    
    
    $
    8.18
    
    
    
    2,205,370
    
    
    $
    7.96>$15
    
    
    1,469,997
    
    
    
    6.3
    
    
    $
    15.93
    
    
    
    1,469,997
    
    
    $
    15.93$1  $16
    
    
    5,833,400
    
    
    
    5.6
    
    
    $
    8.71
    
    
    
    4,972,267
    
    
    $
    9.38
  Deferred share unit plan The Company maintains DSUs for the
non-executive Directors of the Company. DSUs are issued at the market
value of the Companys shares at the date of grant and vest upon death or
retirement of the Director. Directors may elect to receive additional
DSUs in lieu of fees, which are issued at 90% of the market value of the
Companys shares at the date of grant. As at December 31, 2003 a
liability of $782 (2002  $210) has been accrued with respect to issued
DSUs.Employee share purchase plan Under the Employee Share Purchase Plan,
employees are entitled to subscribe for common shares of the Company, to
a maximum value of five percent of their annual compensation. Payment
for these shares is made over a 24 month period at a price per share
equal to the lesser of the market value at the offering date and the
market value at the end of the purchase period. The market value at the
offering date of July 21, 2003 was $2.36 (July 15, 2002  $3.60; July 16,
2001  $10.09). At December 31, 2003 there were outstanding purchase
arrangements with employees having an aggregate value of $389 (2002 
$323; 2001  $606). During the year ended December 31, 2003, a total of
40,599 shares were issued under this Plan at an average price of $2.50
(2002  72,843 shares at $2.08; 2001  67,217 shares at $6.94). 16




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  11
    
    CAPITAL STOCK (continued)  Subsidiary stock-based compensation plans The Company also maintains
equity incentive plans for certain employees of its technology
subsidiaries, Nucryst Pharmaceuticals Corp. and iFire Technology Inc.,
under which stock options have been granted representing 4.76% to 5.01%
of the outstanding shares of the respective subsidiaries. Subsidiary
stock options vest evenly over a 3-year period and expire after 10 years
from the date of grant. The exercise prices of stock options granted are
not less than the fair value of the subsidiarys stock at the time of the
grant. No shares were issued by the Company in 2003 with respect to
these plans. During 2002, the Company issued 323,529 shares and recorded
compensation expense of $1,100 (2001  $Nil).SARs have been granted to employees of certain technology subsidiaries.
SARs vest over time and may be settled with cash, shares of the
subsidiary or shares of the Company, at the Companys option. The
exercise prices of SARs granted are not less than the fair value of the
subsidiarys stock at the time of the grant. The total potential
liability upon exercise of these SARs is capped at $1,950.Effective January 1, 2002, net changes in the value of SARs, measured as
the amount by which quoted market prices or fair value exceeds the
exercise price at the measurement date, is recognized as compensation
expense over the SARs vesting period. The cumulative liability as at
January 1, 2002 amounting to $1,579 was charged to deficit with a
corresponding increase to accounts payable and accrued liabilities. As
at December 31, 2003 and December 31, 2002 the liability was $Nil, as the
estimated market value of the subsidiaries SARs was less than their
exercise price.Pro forma accounting for stock-based compensationEffective January 1, 2002, the CICA recommends that stock-based
compensation be accounted for using a fair value methodology. As
permitted under the rules, the Company and its subsidiaries have elected
to measure compensation expense as the difference, if any, between the
quoted market value or fair value of the stock at the date of grant and
the exercise price at the date of grant. The exercise price of options
granted by the Company and its subsidiaries is not less than the market
value at the date of grant and, consequently, no compensation expense has
been recorded.If compensation costs for options for common shares of the Company and
for common shares of subsidiaries issued on or after January 1, 2002 had
been determined based on the fair value methodology using the
Black-Scholes option pricing model, the Companys net loss and loss per
share would have been increased to the pro forma amounts indicated below: Year Ended
    
    Year EndedDecember 31, 2003
    
    December 31, 2002Net loss applicable to common shareholders as reported
    
    $
    (34,498
    )
    
    $
    (49,762
    )Pro forma net loss applicable to common shareholders
    
    
    (35,440
    )
    
    
    (50,389
    )Net loss per common share as reported (basic and diluted)
    
    
    (0.44
    )
    
    
    (0.64
    )Pro forma net loss per common share (basic and
diluted)
    
    
    (0.45
    )
    
    
    (0.65
    )
 17




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  11
    
    CAPITAL STOCK (continued)  The fair value of each option grant by the Company and its
subsidiaries was estimated using the Black-Scholes option pricing
model assuming no dividends are paid on common shares, a risk-free
interest rate of 5.05% (2002  5.18%), an average life of 7.0 years
and a volatility of 59.8% (2002  59.5%). The amounts computed
according to the Black-Scholes option pricing model may not be
indicative of the actual values realized upon the exercise of these
options by the holders.Normal course issuer bidIn June 2002, the Company filed a normal course issuer bid which
entitled the Company to acquire up to 3,889,000 common shares between
June 19, 2002 and June 18, 2003. The purchases were made on the open
market at the time of any particular purchase.No shares were repurchased in
2003. During 2002, the Company repurchased 150,500 shares through its
normal course issuer bid at an average price of $2.12 for an aggregate
consideration of $318. The amount by which the average carrying value
exceeded the cost of reacquiring the shares, amounting to $403, was
credited to contributed surplus.  12
    
    TECHNOLOGY PARTNERSHIPS CANADA AGREEMENT  On March 26, 2001, iFire entered into a research and development
contribution agreement with the Government of Canada through Technology
Partnerships Canada (TPC). Under this agreement, TPC agreed to
contribute 28.371% of eligible research and development costs and related
capital expenditures incurred by iFire to a maximum of $30,000.Under the terms of the agreement, iFire will pay a royalty to TPC equal
to 1.065% of eventual commercial sales of the technology under
development. In addition, TPC received warrants to purchase common
shares of iFire exercisable for an additional consideration of $6,283.
The warrants expire on April 30, 2007 and, as at December 31, 2003,
represented approximately 0.5% of the current outstanding common shares
of iFire. Under certain circumstances after December 31, 2004, TPC may
put the warrants to iFire in consideration for their fair market value at
that date or for a 0.255 percentage point increase in the royalty rate,
at the option of iFire.Contributions are recorded as a reduction of the cost of the applicable
capital asset or credited to the statement of operations of iFire as
determined by the nature of the expenditure being funded. Contribution
claims totaling $5,997 have been recorded in 2003 (2002  $9,063; 2001 
$14,490). Of this amount, $5,204 (2002  $8,061; 2001  $12,894) has
been credited to research and development expense and $793 (2002 
$1,002; 2001  $1,596) has been credited to capital assets. The final
contribution claims were recorded in the quarter ended September 30, 2003
and final payment received in the fourth quarter of 2003. As at December
31, 2002 the Company had a receivable of $2,080 for contribution claims
relating to expenditures in 2002.  13
    
    NUCRYST PHARMACEUTICALS AGREEMENT WITH SMITH & NEPHEW PLC  On May 8, 2001, Nucryst entered into a series of agreements relating to
its Acticoat burn dressing and wound care products with Smith & Nephew
plc. Under these agreements, Nucryst sold its North American burn
dressing business and entered into an exclusive global licensing
agreement for the sale and marketing of Acticoat burn and wound care
dressings. Nucryst receives royalties based on Smith & Nephews 18




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  13
    
    NUCRYST PHARMACEUTICALS AGREEMENT WITH SMITH & NEPHEW PLC (continued)  future sales of these products as well as milestone payments for the
achievement of certain regulatory and sales targets. Under a
collaborative agreement, the two companies are working together to
develop new wound care products and obtain additional regulatory
approvals. Nucryst continues to manufacture Acticoat products for Smith
& Nephew under a long term manufacturing agreement.The Company recorded a gain on the sale of the North American burn
dressing business of $20,122 in 2001.  14
    
    WRITEDOWN OF CARRYING VALUE OF ASSETS  In late 2001, as a result of projected operating losses arising from
uncertainty regarding the ability to secure future coin blank and other
coinage-related contracts, the Company assessed the recoverability of the
tangible and intangible assets related to the Coinage operating segment.
Profitability in prior years resulted from contracts from certain
customers at significant volumes that were no longer available. The
Company projected the undiscounted future net cash flows from use of
these assets, together with their residual values, to be less than their
carrying amounts.Due to a significant downturn in the global ethylene industry, as well as
changes to the manufacturing process resulting in surplus manufacturing
equipment, in late 2001 the Company assessed the recoverability of the
tangible and intangible assets related to the Ethylene Coatings business
and projected that the undiscounted future net cash flows from the use of
these assets, together with their residual values, to be less than their
carrying amounts.Accordingly, in December 2001, the Company recorded a provision for asset
impairment totaling $34,687, of which $27,651 related to property, plant
and equipment, and $7,036 related to other assets. The provision
relating to other assets includes $2,497 in spare parts associated with
the property, plant and equipment and a $4,000 reduction in future income
tax assets. These businesses were accounted for as discontinued
operations in 2002 (Note 3).Estimates of such undiscounted future net cash flows from use, together
with residual values, are subject to significant uncertainties and
assumptions. Actual results could, therefore, vary significantly from
such estimates.  15
    
    GUARANTEES  In 2003, the CICA issued Accounting Guideline 14 Disclosure of
Guarantees which recommends companies disclose the nature, amount and
terms of obligations under guarantee or indemnification in the event
of an adverse judgment in a lawsuit. In the normal course of
operations, the Company has issued letters of credit in the amounts of
US $1,060 which expire on March 31, 2004. In Canadian dollars, these
guarantees amounted to approximately $1,370 as at December 31, 2003.In the normal course of operations, the Company may provide
indemnification to counterparties that would require the Company to
compensate them for costs incurred as a result of litigation claims or
statutory sanctions that may be suffered by the counterparty as a
consequence of the transaction. The terms of these indemnification
agreements will vary based upon the contract. Management does not
expect the potential amount of these counterparty payments to have a
material effect on the Companys financial position or operating
results. 19




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  15
    
    GUARANTEES (continued)  The Company has agreements to indemnify its Officers and Directors
for certain events or occurrences while the Officer or Director is or
was serving at the Companys request in such capacity. The maximum
potential amount of future payments is unlimited. However, the
Company has Director and Officer insurance coverage that limits its
exposure and enables the Company to recover a portion of any future
amounts paid.In addition, the Company has provided indemnification to third
parties with respect to future site restoration costs to be incurred
on properties previously owned by the Company. These estimated costs
have been included in the provision for site restoration (Note 9).  16
    
    PENSION PLANS  The Company maintains defined contribution pension plans for its salaried
and hourly employees. These plans were funded $784 during the year ended
December 31, 2003 (2002  $1,117; 2001  $1,311).In 2003, the Company wound up the defined benefit pension plan and
purchased annuities for pensioners and remaining plan members. The cost
of these annuities amounting to $2,792 was funded through plan assets
valued at $2,648 and a contribution by the Company of $144.  17
    
    DERIVATIVE FINANCIAL INSTRUMENTS  In respect of its Ambeon Division, the Company hedges its exposure to
contracted nickel sales, raw material purchases and certain produced
inventory which are at price risk, through the use of nickel forward
contracts traded Over the Counter with counterparties under terms
governed by the London Metal Exchange (LME) policies. Settlements are
based on LME prices, unless other prices are negotiated. At December 31,
2003 there were deferred gains of $101 and unrealized losses of $1,083
(2002  deferred losses of $269 and unrealized losses of $75; 2001 
deferred gains of $195 and unrealized losses of $441) on these hedges
which are offset by unrecognized gains in physical inventory and raw
material costs.The unrealized commodity positions at December 31, 2003 totaled 186
tonnes (2002  312; 2001  678) and expire on February 18, 2004.From time to time, the Company reduces its exposure to foreign currency
and interest rate fluctuations by entering into forward transactions.
Gains are recognized upon realization, losses when identified, and both
are included in interest income. At December 31, 2003, 2002 and 2001,
there were no unrecognized gains or losses and no open foreign exchange
contracts. The open positions at December 31, 2002, which expired in
January 2003, were 61 Euro and $2,600 U.S. (2001  1,917 Euro and $5,947
U.S.).At December 31, 2003, there were no open forward rate agreement
contracts. At December 31, 2002, there were accrued losses on open
forward rate agreement contracts of $290. The cumulative notional amount
of these open positions at December 31, 2002 amounted to $100,000. 20




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  18
    
    COMMITMENTS AND CONTINGENCIES  CommitmentsThe Company is committed to capital expenditures of $1,315 (2002 
$3,409; 2001  $1,664) and to future annual payments under operating
leases as follows: 2004
    
    2005
    
    2006
    
    2007
    
    2008$1,011
    
    $
    918
    
    
    $
    544
    
    
    $
    14
    
    
    $
    14
  ContingenciesThe Company and its subsidiaries are party to legal proceedings in the
ordinary course of their businesses. Management does not expect the
outcome of any of these proceedings to have a material effect on the
Companys financial position or operating results.  19
    
    FINANCIAL INSTRUMENTS  Fair value of financial instrumentsThe carrying value of the Companys interest in financial instruments
approximates their fair value. The estimated fair value approximates the
amount for which the financial instruments could currently be exchanged
in an arms length transaction between willing parties who are under no
compulsion to act. Certain financial instruments lack an available
trading market and, therefore, fair value amounts should not be
interpreted as being necessarily realizable in an immediate settlement of
the instrument.Interest rate riskInterest rate risk reflects the sensitivity of the Companys financial
results and condition to movements in interest rates. For 2003, a 1%
decrease in interest rates would have reduced earnings before income
taxes by $783 (2002  $922; 2001  $1,334). Conversely, a 1% increase in
interest rates would have increased earnings before taxes by a similar
amount.Foreign currency riskThe Company is exposed to currency risks as a result of its export to
foreign jurisdictions of goods produced in Canada. These risks are
partially covered by purchases of goods and services in the foreign
currency and by forward exchange contracts.Credit riskThe Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, accounts receivable, and forward contracts. Cash and
short-term investments are placed with major financial institutions or
invested in the commercial paper of large organizations. Concentrations
of credit risk with respect to receivables are limited due to the large
number of customers and their dispersion across geographic areas. 21




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  20
    
    EARNINGS PER SHARE  In calculating earnings per share under the treasury stock method, the
numerator remains unchanged from the basic earnings per share calculation
as the assumed exercise of the Companys stock options does not result in
an adjustment to income. The reconciliation of the denominator in
calculating diluted earnings per share is as follows: Year Ended
    
    Year Ended
    
    Year EndedDec. 31, 2003
    
    Dec. 31, 2002
    
    Dec. 31, 2001Weighted average number of common shares
outstanding  basic earnings per share
    
    
    78,044,689
    
    
    
    77,923,525
    
    
    
    77,740,607Effect of dilutive securities
    
    
    130,654
    
    
    
    17,550
    
    
    
    3,032,981Weighted average number of common shares
outstanding  diluted earnings per share
    
    
    78,175,343
    
    
    
    77,941,075
    
    
    
    80,773,588
  The impact of all dilutive securities on earnings per share is
anti-dilutive as at December 31, 2003, 2002 and 2001.  21
    
    SEGMENTED INFORMATION  The Company is managed using two operating segments, which have been
determined based on the nature of the products produced: Nucryst
Pharmaceuticals and iFire Technology. Discontinued operations are
disclosed separately (Note 3).The Nucryst Pharmaceuticals segment researches, develops and
commercializes wound care products and pharmaceutical products based on
noble metal nanocrystalline technology. The iFire Technology segment has
developed a proprietary flat-panel full color solid state display
technology with applications in both the large screen and small graphic
display markets.The accounting policies of the reportable segments are the same as those
described in Note 2. Included in other non-cash assets of $7,800 at
December 31, 2003 (2002  $13,300) are investments and future income tax
assets that cannot be allocated to a particular segment. Non-cash assets
excludes short-term investments. Depreciation
    
    
    
    
    
    Non-cashYear Ended
    
    
    
    
    
    Divisional
    
    and
    
    Capital
    
    AssetsDecember 31, 2003
    
    Revenue
    
    Loss
    
    Amortization
    
    Expenditures
    
    Dec. 31, 2003Nucryst Pharmaceuticals
    
    $
    16,212
    
    
    $
    (1,948
    )
    
    $
    892
    
    
    $
    1,827
    
    
    $
    12,556iFire Technology
    
    
    911
    
    
    
    (19,861
    )
    
    
    2,693
    
    
    
    8,424
    
    
    
    20,544Other
    
    
    162
    
    
    
    (1,284
    )
    
    
    1,416
    
    
    
    132
    
    
    
    7,800Continuing operations
    
    $
    17,285
    
    
    $
    (23,093
    )
    
    $
    5,001
    
    
    
    10,383
    
    
    $
    40,900
 22




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  21
    
    SEGMENTED INFORMATION (continued) Depreciation
    
    
    
    
    
    Non-cashYear Ended
    
    
    
    
    
    Divisional
    
    and
    
    Capital
    
    AssetsDecember 31, 2002
    
    Revenue
    
    Loss
    
    Amortization
    
    Expenditures
    
    Dec. 31, 2002Nucryst Pharmaceuticals
    
    $
    8,344
    
    
    ($
    6,985
    )
    
    $
    554
    
    
    $
    2,416
    
    
    $
    9,759iFire Technology
    
    
    4,270
    
    
    
    (16,915
    )
    
    
    2,642
    
    
    
    2,909
    
    
    
    17,184Other
    
    
    13
    
    
    
    (841
    )
    
    
    1,035
    
    
    
    727
    
    
    
    13,300Continuing operations
    
    $
    12,627
    
    
    $
    (24,741
    )
    
    
    4,231
    
    
    
    6,052
    
    
    $
    40,243
 DepreciationYear Ended
    
    
    
    
    
    Divisional
    
    and
    
    CapitalDecember 31, 2001
    
    Revenue
    
    Loss
    
    Amortization
    
    ExpendituresNucryst Pharmaceuticals
    
    $
    9,835
    
    
    $
    (6,220
    )
    
    $
    408
    
    
    $
    546iFire Technology
    
    
    4,271
    
    
    
    (10,052
    )
    
    
    2,874
    
    
    
    1,459Other
    
    
    
    
    
    
    (708
    )
    
    
    789
    
    
    
    442Continuing operations
    
    $
    14,106
    
    
    $
    (16,980
    )
    
    $
    4,071
    
    
    $
    2,447
 Export Sales  Year Ended
    
    2003
    
    2002
    
    2001United States
    
    $
    5,678
    
    
    $
    5,095
    
    
    $
    6,560Europe
    
    
    4,415
    
    
    
    2,374
    
    
    
    2,027Asia
    
    
    31
    
    
    
    86
    
    
    
    86Continuing operations
    
    $
    10,124
    
    
    $
    7,555
    
    
    $
    8,673
  22
    
    SUBSEQUENT EVENT  On January 30, 2004, iFire entered into a US$10 million loan
agreement with Dai Nippon Printing Co., Ltd. (DNP) whereby DNP will
partially fund the capital cost to upgrade iFires Toronto facility to
enable pilot manufacturing of flat panel displays. The loan will be
drawn down during 2004, carries a nominal interest rate, and is
repayable on June 30, 2006.  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES  These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (Canadian GAAP)
which conform in all material respects with those used in the United
States (U.S. GAAP), except as set forth below:  a)
    
    Reduction in the Carrying Value of AssetsIn accordance with Canadian GAAP, in 2001 the Company assessed the
recoverability of tangible and intangible assets related to the
Coinage operating segment and the Ethylene Coating business. The 23




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  Company projected that the undiscounted future net cash flows from use
of these assets, together with their residual value, to be less than
their carrying amounts. Accordingly, in December 2001, the Company
recorded a provision for asset impairment totaling $34,687,
representing the difference between the book value of these assets and
the projected undiscounted future net cash flows from the use of these
assets, and their residual values.Under U.S. GAAP, in accordance with Statement of Financial
Accounting Standards 121 Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of 
(SFAS 121), an impairment loss is recognized when future
undiscounted cash flows are less than the carrying amount of the
asset. If this is the case, an impairment loss is measured as
the amount by which the carrying amount of the asset exceeds its
fair value. The Company determined that the impairment provision
calculated under U.S. GAAP is not materially different than that
calculated under Canadian GAAP and no adjustment was required.b)
    
    Derivative Instruments and Hedging ActivitiesUnder U.S. GAAP, pursuant to SFAS 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), companies are
required to record derivatives on the balance sheet as assets or
liabilities measured at fair value. For those derivatives
representing effective cash flow hedges of risks and exposures,
unrealized gains or losses resulting from changes in the fair values
are presented as a component of other comprehensive income (OCI) as
defined in SFAS 130 Reporting Comprehensive Income"(SFAS 130). To
the extent certain derivatives do not represent effective hedges,
unrealized gains or losses are included in the income statement for
U.S. GAAP purposes.Hedges against price risk exposure on contracted nickel sales and raw
materials purchases as described in Note 17 are considered effective
cash-flow hedges under SFAS 133. Management regularly measures the
effectiveness of these hedges, with unrealized gains and losses
reported in OCI for U.S. GAAP purposes. From time to time, the
Company reduces its exposure to foreign currency and interest rate
fluctuations by entering into forward transactions as described in
Note 17. These transactions are not considered hedging activities
under SFAS 133 and unrealized gains and losses are included in the
income statement under U.S. GAAP. The adoption of SFAS 133 on January
1, 2001 resulted in a cumulative pre-tax increase to OCI of $295.
This increase to OCI was attributable to gains on cash-flow hedges.
The net gains on these cash-flow hedges were reclassified into
earnings during the year ended December 31, 2001. As at December 31,
2003 the Company has recorded a charge to OCI with respect to
cash-flow hedges amounting to $907 (December 31, 2002  recovery $171;
December 31, 2001  charge $246).c)
    
    Gain on issuance of shares by subsidiaryIn accordance with Canadian GAAP, the Company is required to account
for gains and losses on the issuance of shares by a subsidiary as a
component of income. Under U.S. GAAP, the effect of such dilution
gains is recorded in equity as an increase in paid-in capital rather
than as income. 24




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  d)
    
    Organization costsIn accordance with Canadian GAAP, organization costs may be deferred
and amortized. Under U.S. GAAP, these costs are expensed as incurred.
During 2001, the remaining organization costs were amortized under
Canadian GAAP.e)
    
    PensionAccounting for pension costs under U.S. GAAP differs from Canadian
GAAP principally with respect to the choice of the discount rate used
to calculate the projected benefit obligation and to the valuation of
assets and related effects on pension expense. There is no
significant effect on the Companys financial statements as a result
of this difference. In addition, under U.S. GAAP, the Company would
have recorded an additional minimum liability for under-funded plans
representing the excess of the accumulated benefit obligation over the
pension plan assets, less the pension liability already recognized and
the net unamortized prior service cost. Under SFAS 130 Reporting
Other Comprehensive Income the increase in liabilities is charged
directly to other comprehensive income. The Company wound up the
defined benefit plan in 2003 and there will be no reconciling
differences in future years.f)
    
    Subsidiary Stock-Based Compensation PlansIn late 2001, the CICA introduced new accounting and disclosure
requirements with respect to stock-based compensation. Effective
January 1, 2002, the Companys subsidiaries SAR plans are subject to
variable plan accounting, consistent with U.S. GAAP, where the net
changes in the value of SARs is recognized as compensation expense
over the SARs vesting period.g)
    
    Income TaxesUnder Canadian GAAP and U.S. GAAP, the impact of changes in income tax
rates to the tax asset or liability account is reflected in the
current years statement of operations. Under Canadian GAAP, the
impact of the change is reflected when the legislation affecting the
tax rate change is substantially enacted whereas the impact under U.S.
GAAP is reflected when legislation is enacted. The Company determined
that the combined corporate income tax rate under Canadian GAAP and
U.S. GAAP is not materially different and no adjustment is required.h)
    
    GuaranteesIn November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
including indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 expands the information disclosures required by guarantors for
obligations under certain types of guarantees. It also requires
initial recognition at fair value of a liability for such guarantees.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The 25




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##### 



The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  disclosure requirements in the Interpretation are
effective for financial statements of interim or annual
periods ending after December 15, 2002.
Management has adopted the Statement and it has had no
material impact on the Companys results from operations
and financial position.  The effect of the above differences on the Companys financial statements
is set out below: Consolidated Balance Sheet
    
    December 31, 2003
    
    December 31, 2002Canadian
    
    U.S.
    
    Canadian
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAPAccounts payable and accrued liabilities (b) (e)
    
    $
    10,015
    
    
    $
    10,997
    
    
    $
    13,786
    
    
    $
    14,526Deficit
    
    
    (249,815
    )
    
    
    (260,324
    )
    
    
    (215,317
    )
    
    
    (225,826
    )Other comprehensive income (loss) (b) (e)
    
    
    
    
    
    
    982
    
    
    
    
    
    
    
    (740
    )Additional paid-in capital (c)
    
    
    
    
    
    
    10,509
    
    
    
    
    
    
    
    10,509
 Shareholders' Equity
    
    December 31, 2003
    
    December 31, 2002Canadian GAAP
    
    $
    123,818
    
    
    $
    158,214AdjustmentsDeferred share unit liability
    
    
    782
    
    
    
    210Pension liability
    
    
    
    
    
    
    (665
    )Cash flow hedges
    
    
    (982
    )
    
    
    (75
    )U.S. GAAP
    
    $
    123,618
    
    
    $
    157,684
 26




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued) Year Ended December 31Consolidated Statement of Loss
    
    2003
    
    2002
    
    2001Loss from continuing operationsCanadian GAAP
    
    $
    (36,858
    )
    
    $
    (39,110
    )
    
    $
    (16,020
    )AdjustmentsFutures contracts (b)
    
    
    
    
    
    
    
    
    
    
    (119
    )Amortization of organization costs (d)
    
    
    
    
    
    
    
    
    
    
    125Subsidiary SAR compensation (f)
    
    
    
    
    
    
    
    
    
    
    2,363Loss from continuing operationsU.S. GAAP
    
    
    (36,858
    )
    
    
    (39,110
    )
    
    
    (13,651
    )Income (loss) from discontinued operationsCanadian GAAP
    
    
    2,360
    
    
    
    (10,652
    )
    
    
    (51,439
    )Net loss applicable to common shareholdersU.S. GAAP
    
    
    (34,498
    )
    
    
    (49,762
    )
    
    
    (65,090
    )Other comprehensive income (loss)Pension (e)
    
    
    665
    
    
    
    (332
    )
    
    
    256Cash flow hedges (b)
    
    
    (907
    )
    
    
    171
    
    
    
    (246
    )Net comprehensive loss  U.S. GAAP
    
    $
    (34,740
    )
    
    $
    (49,923
    )
    
    $
    (65,080
    )
 Year Ended December 31Loss Per Common Share
    
    2003
    
    2002
    
    2001Canadian GAAPContinuing operations
    
    $
    (0.47
    )
    
    $
    (0.50
    )
    
    $
    (0.21
    )Net loss
    
    $
    (0.44
    )
    
    $
    (0.64
    )
    
    $
    (0.87
    )U.S. GAAPContinuing operations
    
    $
    (0.47
    )
    
    $
    (0.50
    )
    
    $
    (0.18
    )Net loss
    
    $
    (0.44
    )
    
    $
    (0.64
    )
    
    $
    (0.84
    )
 Year Ended
    
    Year Ended
    
    Year EndedConsolidated Cash Flow Statement
    
    December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Canadian
    
    U.S.
    
    Canadian
    
    U.S.
    
    Canadian
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAP
    
    GAAP
    
    GAAPLoss from continuing
operations
    
    $
    (36,858
    )
    
    $
    (36,858
    )
    
    $
    (39,110
    )
    
    $
    (39,110
    )
    
    $
    (16,020
    )
    
    $
    (13,651
    )Items not affecting cash:Subsidiary SAR compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,363
    )Changes in non-cash
working
capital
    
    $
    12,161
    
    
    $
    12,161
    
    
    $
    7,541
    
    
    $
    7,541
    
    
    $
    (7,515
    )
    
    $
    (7,521
    )
 27




---



##### 



The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  Stock-based compensationU.S. GAAP, SFAS 123 Accounting for Stock-Based Compensation (SFAS
123) encourages that stock-based compensation be accounted for based on
a fair value methodology. As permitted by the statement, and consistent
with Canadian GAAP, effective January 1, 2002 the Company and its
subsidiaries have elected to continue measuring compensation costs as the
excess, if any, of the quoted market value of the stock at the date of
the grant over the exercise price. As the exercise price of options
granted by the Company and its subsidiaries is not less than the market
value at the date of grant, no compensation expense is recognized.There continues to be a difference between Canadian and U.S. GAAP for
options issued by the Company and its subsidiaries prior to January 1,
2002, with respect to pro forma disclosure requirements. If compensation
costs for the Companys and its subsidiaries stock option plans had been
determined based on the fair value methodology over the vesting period
consistent with SFAS 123, the Companys net loss and earnings per share
would have been reduced to the pro-forma amounts indicated below: Year Ended December 312003
    
    2002
    
    2001Net loss applicable to common shareholders 
U.S. GAAP
    
    $
    (34,498
    )
    
    $
    (49,762
    )
    
    $
    (65,090
    )Total stock-based employee compensation
expense determined under fair-value based
method for awards net of tax effects
    
    
    (4,518
    )
    
    
    (8,499
    )
    
    
    (10,513
    )Pro forma net loss applicable to common
shareholders  U.S. GAAP
    
    
    (39,016
    )
    
    
    (58,261
    )
    
    
    (75,603
    )Loss per common share  U.S. GAAPContinuing operations
    
    
    (0.47
    )
    
    
    (0.50
    )
    
    
    (0.18
    )Net loss
    
    
    (0.44
    )
    
    
    (0.64
    )
    
    
    (0.84
    )Pro formaContinuing operations
    
    
    (0.53
    )
    
    
    (0.61
    )
    
    
    (0.31
    )Net loss
    
    
    (0.50
    )
    
    
    (0.75
    )
    
    
    (0.97
    )
  The fair value of each option grant by the Company and its subsidiaries
was estimated using the Black-Scholes options pricing model assuming no
dividends are to be paid on common shares, a risk free interest rate of
5.05% (2002  5.18%; 2001  5.52%), an average life of 7.0 years and a
volatility for the shares of the companies of 59.8% (2002  59.5%; 2001
57.5%). The amounts computed according to the Black-Scholes pricing
model may not be indicative of the actual values realized upon the
exercise of these options by the holders. The weighted average fair
value of options granted in 2003 was $0.66 (2002  $1.40; 2001 
$3.03). 28




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The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  New Accounting StandardsSFAS 150In May 2003, the FASB issued FASB Statement No.150 Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS 150). SFAS 150 modifies the accounting for certain
financial instruments that, under previous guidance, issuers could
account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in statements of financial position. SFAS 150
is effective for financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle
for financial instruments created before the issuance date of SFAS 150
and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. Adoption of this Statement did not have a
material effect on the Companys results of operations and financial
position.SFAS 149In April 2003, the FASB issued FASB Statement No.149 Amendment of SFAS
No.133 on Derivative Instruments and Hedging Activities (SFAS 149).
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Adoption of this Statement
did not have a material impact on the Companys results of operations and
financial position.FIN 46In January 2003, the FASB issued FASB Interpretation No.46 Consolidation
of Variable Interest Entities, an interpretation of ARB No.51 (FIN
46). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. The consolidation and disclosure
provisions of FIN 46 are effective for variable interest entities created
or entered into after January 31, 2003. In December 2003, the FASB issued
FIN 46® to clarify some of the provisions of FIN 46 and to exempt
certain entities from its requirements. FIN 46® revised the effective
date of the consolidation and disclosure provisions for variable interest
entities held or created on or after January 31, 2003 to its fiscal year
beginning January 1, 2004. Adoption of this Standard is not expected to
have a material effect on the Companys results from operations and
financial position.SFAS 148In December 2002, the FASB issued FASB Statement No.148 Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148). This
Statement amends FASB Statement No.123 Accounting for Stock-Based
Compensation (SFAS 123), to provide alternative methods of transition to
SFAS 123s fair value method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual financial
statements. These amendments to the 29




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The Westaim CorporationNotes to Consolidated Financial Statements  23
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  transition and annual disclosure requirements were effective for fiscal
years ending after December 15, 2002. These rules are generally
consistent with changes in Canadian GAAP as discussed in Note 2n to the
consolidated financial statements.SFAS 143In July 2001, the FASB issued FASB Statement No. 143 Accounting for
Asset Retirement Obligations (SFAS 143). SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. When the liability is recognized, a
corresponding asset retirement cost is capitalized as part of the
carrying value of the long-lived asset. The standard is effective for
fiscal years beginning after June 15, 2002. The Company has evaluated
the provisions of SFAS 143 and determined that the statement does not
have any material impact on its results of operations and financial
position. The Company continues to account for its site restoration
liability under Statement of Position 96-1 Environment Remediation
Liabilities, and the accounting treatment of the provision for site
restoration is discussed in Note 2k to the consolidated financial
statements.  24
    
    COMPARATIVE FIGURES  Certain 2002 and 2001 figures have been reclassified to conform to the
presentation of the current year. 30