##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 20-F
 [Check one]
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission File Number: 0-30600
 The Westaim Corporation
 
 Alberta
 
 
 Suite 1010 Sun Life Plaza, West Tower, 144  4 th Avenue S.W., Calgary, Alberta, Canada T2P 3N4
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  Common Shares, without par value
  None
  94,135,535 Common Shares, without par value
  o þ
  o þ
   þ o
  o o þ
  þ o
  o þ




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Table of Contents
 FORWARD LOOKING STATEMENTS
    
    
    4PART IItem 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    5Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    5Item 3.
    
    Key Information
    
    
    5A.
    
    Selected financial data
    
    
    5B.
    
    Capitalization and indebtedness
    
    
    8C.
    
    Reasons for the offer and use of proceeds
    
    
    8D.
    
    Risk factors
    
    
    8Item 4.
    
    Information on Westaim
    
    
    18A.
    
    History and development of Westaim
    
    
    18B.
    
    Business overview
    
    
    19C.
    
    Organization structure
    
    
    27D.
    
    Property, plants and equipment
    
    
    27Item 4A.
    
    Unresolved Staff Comments
    
    
    27Item 5.
    
    Operating and Financial Review and Prospects
    
    
    28A.
    
    Operating results
    
    
    28B.
    
    Liquidity and capital resources
    
    
    35C.
    
    Research and development, patents and licenses, etc.
    
    
    40D.
    
    Trend information
    
    
    40E.
    
    Off-balance sheet arrangements
    
    
    40F.
    
    Contractual obligations and commitments
    
    
    40Item 6.
    
    Directors, Senior Management and Employees
    
    
    41A.
    
    Directors and senior management
    
    
    41B.
    
    Compensation
    
    
    42C.
    
    Board practices
    
    
    51D.
    
    Employees
    
    
    54E.
    
    Share ownership
    
    
    54Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    54A.
    
    Major shareholders
    
    
    54B.
    
    Related party transactions
    
    
    54C.
    
    Interests of experts and counsel
    
    
    55Item 8.
    
    Financial Information
    
    
    55A.
    
    Consolidated statements and other financial information
    
    
    55B.
    
    Significant changes
    
    
    55Item 9.
    
    The Offer and Listing
    
    
    55A.
    
    Offer and listing details
    
    
    55B.
    
    Plan of distribution
    
    
    56C.
    
    Markets
    
    
    56D.
    
    Selling shareholders
    
    
    57E.
    
    Dilution
    
    
    57F.
    
    Expense of the issue
    
    
    57
 2




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##### 



Item 10.
    
    Additional Information
    
    
    57A.
    
    Share capital
    
    
    57B.
    
    Memorandum and articles of association
    
    
    57C.
    
    Material contracts
    
    
    60D.
    
    Exchange controls
    
    
    60E.
    
    Taxation
    
    
    60F.
    
    Dividend and paying agents
    
    
    64G.
    
    Statement by experts
    
    
    64H.
    
    Documents on display
    
    
    64I.
    
    Subsidiary Information
    
    
    64Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    64Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    65PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    65Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    65Item 15.
    
    Controls and Procedures
    
    
    65Item 16.
    
    [Reserved]
    
    
    66Item 16A.
    
    Audit Committee Financial Expert
    
    
    66Item 16B.
    
    Code of Ethics
    
    
    66Item 16C.
    
    Principal Accountant Fees and Services
    
    
    67Item 16D.
    
    Exemption from the Listing Standards for Audit Committees
    
    
    67Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    67PART IIIItem 17.
    
    Financial Statements
    
    
    67Item 18.
    
    Financial Statements
    
    
    68Item 19.
    
    Exhibits
    
    
    68SIGNATURES
    
    
    
    
    69
 3




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##### 



FORWARD LOOKING STATEMENTS
  4




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##### 



PART I
 In this Annual Report, except where otherwise indicated, all references to the Company and
Westaim refer to The Westaim Corporation and its subsidiaries. References to dollars as CDN
$ or $ are to Canadian dollars and references to US $ are to United States dollars.
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 A. Directors and Senior Management
  B. Advisors
  C. Auditors
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  ITEM 3. KEY INFORMATION
 A. Selected Financial Data
  Operating and Financial
Review and Prospects
   5




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##### 



Selected Canadian GAAP Financial Data
 (In thousands of Canadian dollars, except per share data)
    
    Year Ended December 31,2007(1)
    
    

2006(1)
    
    

2005(1)
    
    

2004(1)
    
    

2003(1)Selected Consolidated Statement of Operations Data:Revenue
    
    
    31,830
    
    
    
    27,591
    
    
    
    28,560
    
    
    
    31,907
    
    
    
    16,212Operating (loss) income from continuing operations
    
    
    (11,440
    )
    
    
    (17,344
    )
    
    
    (6,573
    )
    
    
    4,890
    
    
    
    (3,347
    )(Loss) income from continuing operations
    
    
    (2,830
    )
    
    
    (12,861
    )
    
    
    27,321
    
    
    
    (589
    )
    
    
    (16,445
    )Loss from discontinued operations net of income taxes
    
    
    (55,203
    )
    
    
    (37,696
    )
    
    
    (18,051
    )
    
    
    (24,588
    )
    
    
    (18,995
    )Net (loss) income
    
    
    (58,033
    )
    
    
    (50,557
    )
    
    
    9,270
    
    
    
    (25,177
    )
    
    
    (35,440
    )(Loss) income per common share from
continuing operations  basic and diluted
    
    
    (0.03
    )
    
    
    (0.14
    )
    
    
    0.29
    
    
    
    (0.01
    )
    
    
    (0.21
    )Net (loss) income per common share  basic and diluted
    
    
    (0.62
    )
    
    
    (0.54
    )
    
    
    0.10
    
    
    
    (0.30
    )
    
    
    (0.45
    )Weighted average number of common shares
outstanding  basic
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    92,852,120
    
    
    
    84,093,827
    
    
    
    78,044,689Weighted average number of common shares
outstanding  diluted
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    93,120,936
    
    
    
    94,093,827
    
    
    
    78,044,689Consolidated Balance Sheet Data:Cash and cash equivalents
    
    
    30,993
    
    
    
    45,035
    
    
    
    115,673
    
    
    
    89,139
    
    
    
    44,694Total assets
    
    
    83,387
    
    
    
    148,339
    
    
    
    212,461
    
    
    
    172,263
    
    
    
    144,906Current liabilities
    
    
    8,461
    
    
    
    15,977
    
    
    
    26,614
    
    
    
    12,963
    
    
    
    13,524Net assets
    
    
    56,371
    
    
    
    112,977
    
    
    
    157,640
    
    
    
    147,797
    
    
    
    123,818Capital stock
    
    
    426,262
    
    
    
    426,122
    
    
    
    421,466
    
    
    
    421,233
    
    
    
    373,230Total shareholders equity
    
    
    56,371
    
    
    
    112,977
    
    
    
    157,640
    
    
    
    147,797
    
    
    
    123,818
 (1)
    
    Derived from the audited financial statements for the year then ended.
 6




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##### 



Selected U.S. GAAP Financial Data
 (In thousands of Canadian dollars, except per share data)
    
    Year Ended December 31,2007(1)
    
    

2006(1)
    
    

2005(1)
    
    

2004(1)
    
    

2003(1)Selected Consolidated Statement of Operations Data:Revenue
    
    
    31,830
    
    
    
    27,591
    
    
    
    28,560
    
    
    
    31,907
    
    
    
    16,212Operating (loss) income from continuing operations
    
    
    (11,440
    )
    
    
    (17,344
    )
    
    
    (6,573
    )
    
    
    4,890
    
    
    
    (3,347
    )(Loss) income from continuing operations
    
    
    (2,529
    )
    
    
    (13,313
    )
    
    
    28,226
    
    
    
    621
    
    
    
    (15,503
    )Loss from discontinued operations net of income taxes
    
    
    (54,203
    )
    
    
    (36,696
    )
    
    
    (17,051
    )
    
    
    (27,588
    )
    
    
    (18,995
    )Net (loss) income
    
    
    (56,732
    )
    
    
    (50,009
    )
    
    
    11,175
    
    
    
    (26,967
    )
    
    
    (34,498
    )(Loss) income per common share from
continuing operations  basic and diluted
    
    
    (0.02
    )
    
    
    (0.14
    )
    
    
    0.30
    
    
    
    0.01
    
    
    
    (0.20
    )Net (loss) income per common share  basic and diluted
    
    
    (0.60
    )
    
    
    (0.53
    )
    
    
    0.12
    
    
    
    (0.32
    )
    
    
    (0.44
    )Weighted average number of common shares
outstanding  basic
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    92,852,120
    
    
    
    84,093,827
    
    
    
    78,044,689Weighted average number of common shares
outstanding  diluted
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    93,120,936
    
    
    
    94,093,827
    
    
    
    78,044,689Consolidated Balance Sheet Data:Cash and cash equivalents
    
    
    30,993
    
    
    
    45,035
    
    
    
    115,673
    
    
    
    89,139
    
    
    
    44,694Total assets
    
    
    83,387
    
    
    
    147,339
    
    
    
    210,461
    
    
    
    169,263
    
    
    
    144,906Current liabilities
    
    
    8,461
    
    
    
    15,977
    
    
    
    26,614
    
    
    
    12,963
    
    
    
    14,526Net assets
    
    
    56,398
    
    
    
    112,007
    
    
    
    155,640
    
    
    
    144,797
    
    
    
    123,618Capital stock
    
    
    425,958
    
    
    
    425,831
    
    
    
    421,347
    
    
    
    421,176
    
    
    
    373,230Total shareholders equity
    
    
    56,398
    
    
    
    112,007
    
    
    
    155,640
    
    
    
    144,797
    
    
    
    123,618
 (1)
    
    Derived from the audited financial statements for the year then ended.
 Currency and Exchange Rates
  U.S. Dollars Per One Canadian DollarThree MonthsEnded
    
    
    Year Ended December 31March 31, 2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003End of the period
    
    $
    0.97
    
    
    $
    1.01
    
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.83
    
    
    $
    0.77Average for the period
    
    $
    1.00
    
    
    $
    0.93
    
    
    $
    0.88
    
    
    $
    0.83
    
    
    $
    0.77
    
    
    $
    0.71
 7




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##### 



U.S. Dollars Per One Canadian DollarMarch
    
    
    February
    
    
    January
    
    
    December
    
    
    November
    
    
    October2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007High for the month
    
    $
    1.02
    
    
    $
    1.03
    
    
    $
    1.01
    
    
    $
    1.02
    
    
    $
    1.09
    
    
    $
    1.05Low for the month
    
    $
    0.97
    
    
    $
    0.98
    
    
    $
    0.97
    
    
    $
    0.98
    
    
    $
    1.00
    
    
    $
    1.00
  B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Operating and Financial Review and
Prospects
 Risks and Uncertainties
 Westaim may be unable to develop commercially viable products.
  If Westaim or its subsidiaries fail to raise the capital necessary to fund its operations, they may
be unable to advance the development and commercialization of their technologies.
  Westaims success is dependent upon its ability to form partnerships to develop and sell its
products.
  8




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##### 



Westaims products may become technologically obsolete.
  Westaim is developing products for highly competitive markets.
  Westaim may be unable to protect its intellectual property.
   Westaim may become involved in expensive intellectual property or product liability litigation.
   
    
    these types of products are extremely complex and the Company and its subsidiaries
may fail to discover product faults, despite their best efforts to do so;
    
    these types of products are designed to interact with very complex biological and
man-made systems and may interact with these systems in harmful ways that the Company and
its subsidiaries were unable to anticipate, despite their best efforts to do so; and
    
    because these products may be used by a large number of people, if these products do
cause harm, the Company or its subsidiaries may be exposed to a large number of claims for
damages.
   9




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##### 



Westaim may be unable to retain the required highly skilled people.
  Westaim is subject to certain risks because of the international character of its business.
   Westaims investment in third party asset-backed commercial paper (ABCP) may be overstated.
  Investments
 Westaim may be unable to sell the iFire business and assets for proceeds equal to their book value.
  Westaims success is dependent on the success of Nucryst.
  
    
    Nucryst has a history of net losses and negative cash flow from operations; this will
likely continue in the future and Nucrysts cash resources may not be adequate to
accomplish its objectives.
    
    Nucryst is dependent on its relationship with Smith & Nephew plc.
     
 10




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##### 




  
    
    Smith & Nephew is the only customer for all of Nucrysts existing products.
      
  
 
 
    
    Nucryst may be unable to sell its existing products to other parties, even if the
agreements with Smith & Nephew expire or terminate.
    
 
      
 
    
    Nucryst may be unable to achieve the cost savings required to offset the
manufacturing cost rebate it agreed to pay Smith & Nephew in 2007, 2008 and 2009.
 11




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##### 




    
    Nucryst is required to manufacture Acticoat products according to Smith & Nephews
forecasts and, if Nucryst suffers a material difficulty supplying Acticoat products,
Smith & Nephew would have the right to manufacture or cause a third party to manufacture
Acticoat products using Nucrysts technology and facilities.
     Nucryst currently purchases most of its
raw materials from single suppliers. If Nucryst is unable to obtain raw materials and
other products from its suppliers that it depends on for its operations, its ability to
deliver its products to market may be impeded
    
    
    
 12




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##### 




 
    
    Nucrysts ability to develop and sell future products, particularly gastrointestinal
and future wound care products, is critical to its success, and if Nucryst fails to do so,
its business and financial condition will suffer.
 
  
    
    its ability to develop safe and effective products;
    
    its ability to obtain regulatory approval in the United States, the European
Union and other markets and the scope of such approval;
    
    its ability to add sufficient manufacturing capacity and capability at an
acceptable cost and in compliance with regulatory requirements;
    
    its ability to generate commercial sales of its products;
    
    acceptance of the product by the medical community and by patients and
third-party payors;
    
    inherent development risks, such as the product proving to be unsafe or
unreliable, or not having
the anticipated effectiveness;
    
    preclusion or obsolescence resulting from third parties proprietary rights or
superior or equivalent products;
    
    its ability to enter into favorable and effective marketing and distribution
agreements, or to be able to effectively market and distribute on its own;
    
    its ability to develop repeatable processes to manufacture new products in
sufficient quantities;
    
    its ability to raise on acceptable terms the substantial additional capital
expected to be necessary to successfully develop and commercialize such products;
and
    
    general economic conditions.
  
    
    The market for advanced wound care and pharmaceutical products is intensely
competitive and many of Nucrysts competitors have significantly more resources and
experience than it does, which may limit Nucrysts commercial opportunities and revenues.
   
 13




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##### 




 
 
    
    are more effective;
    
    have fewer or less severe adverse side effects;
    
    have better patient compliance;
    
    receive better reimbursement terms;
    
    are accepted by more physicians;
    
    have better distribution channels;
    
    are easier to administer;
    
    are less expensive; or
    
    are more cost effective.
   
    
    Smith & Nephew, who previously was restricted by a non-competition clause, may now
introduce other silver based products that compete with Acticoat products.
   14




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##### 




    
    If Nucryst is unable to effectively manage its expected future growth, it may develop
too much production capacity resulting in a cost structure too high to permit
cost-effective production of Acticoat products or it may develop production capacity too
slowly and be unable to meet demand for Acticoat products with SILCRYST coatings and, in
either event, Nucryst may be unable to develop or commercialize future products
successfully.
    
    
    Nucryst currently purchases most of its raw materials from single suppliers. If
Nucryst is unable to obtain raw materials and other products from suppliers that it
depends on for its operations, then its ability to deliver its products to market may be
impeded.
  
 15




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##### 




 
    
    Smith & Nephew may be unable to maintain existing regulatory approvals or obtain new
regulatory approvals for the Acticoat products that it currently sells, which would
negatively affect Nucrysts results of operations. Nucrysts future products may not be
approved by the regulatory agencies, and any failure or
delay associated with Nucrysts product development and clinical trials or the agencies
approval would increase its product development costs and time to market.
  
  
    
    delays in obtaining regulatory approvals, including approvals by the competent
institutional review board, or IRB, or ethics committee, or EC, to commence or
continue a study;
    
    delays in identifying and reaching agreement on acceptable terms with
prospective clinical trial sites;
    
    insufficient quantities of the study product;
    
    scheduling conflicts with participating clinicians and clinical institutions;
    
    slower than expected rates of patient recruitment and enrollment or the
inability to reach full enrollment;
    
    improper enrollment practices resulting in protocol management problems and
statistical analysis problems;
    
    inconclusive or negative interim results during clinical trials, including
lack of effectiveness or unforeseen safety issues;
    
    death of, or serious adverse effects experienced by, one or more patients
during a clinical trial even if the reasons are not related to the study product
candidate, including the advanced stage of the patients disease or medical
condition;
    
    uncertain dosing issues;
    
    inability to monitor patients adequately during and after treatment;
    
    inability or unwillingness of contract laboratories to follow good laboratory
practices or of Nucrysts clinical investigators and Nucryst to follow good
clinical practices;
    
    the occurrence of adverse events during the clinical trials;
    
    inability or unwillingness of clinical investigators to follow Nucrysts
clinical protocols or good clinical practices generally;
    
    inability or unwillingness of patients to follow Nucrysts clinical protocols;
and
    
    inability or unwillingness of other third parties to perform data collection
and analysis in a timely or accurate manner.
  
    
    delay or prevent the commercialization of any product that Nucryst develops for
new indications or any product within an already approved indication for which the
submission of additional clinical trial data is required;
    
    in the case of delays, materially and adversely increase the cost of completing
the development of such product and obtaining regulatory approval to market it;
 16




---



##### 




    
    diminish any competitive advantages; and
    
    adversely affect Nucrysts ability to attract new collaborators.
 
    
    Completion of clinical trials does not guarantee successful commercialization of future products.Completion of clinical trials does not guarantee successful commercialization, for a variety
of reasons, including, but not limited to the following factors:
 
    
    clinical trials can have negative or inconclusive results;
    
    regulators may not agree with Nucrysts results or its analysis of the safety or
the efficacy of its products;
    
    there is a risk of unsuccessful commercialization even after a product has been
launched into the market, for example due to unexpected side effects of the product
which were not discovered during clinical trials; and
    
    the market may fail to respond positively to a product for a variety of factors
outside Nucrysts control, including but not limited to inadequate or unsuccessful
marketing efforts by third parties on which Nucryst depends but cannot control,
competition from other products, cost, reimbursement policies of third-party payors
or the buying decisions of consumers for a variety of unforeseen reasons, including
those unrelated to efficacy.
 
    
    Nucrysts ability to commercialize its medical products successfully will depend in
part on the extent to which reimbursement for the cost of such products and related
treatments will be available from government health administration authorities, private
health insurers and other organizations and there can be no assurance that adequate third
party coverage will be available for Nucryst to realize an appropriate return on its
investment in product development.Nucrysts revenues currently depend in part and will continue to depend upon the
reimbursement rates established by third-party payors, including government health
administration authorities, managed-care providers, public health insurers, private health
insurers and other organizations. These third-party payors are increasingly challenging the
price, and examining the cost-effectiveness, of medical products and services. Cost control
initiatives could decrease the established reimbursement rates that Nucryst receives for any
products in the future, which would limit its revenues. Legislation and regulations affecting
the pricing of pharmaceutical products or medical devices, including the Acticoat
products, may change at any time, which could limit or eliminate reimbursement rates for
Acticoat or other products. If physicians, hospitals and other users of
Acticoat products or any products Nucryst develops in the future fail to obtain
sufficient reimbursement from healthcare payors for these products, or if adverse changes
occur in governmental and private third-party payors policies toward reimbursement for these
products, it could negatively affect the demand for these products, which could have a
material adverse effect on Nucrysts results of operations. Significant uncertainty exists as
to the reimbursement status, if any, of newly approved pharmaceutical or medical device
products, and Nucryst has no assurance that adequate or any third-party coverage will be
provided for any new products introduced by it. If Nucrysts new products do not receive
adequate coverage and reimbursement, the market acceptance of these products would be
adversely affected, which would have a material adverse effect on Nucrysts results of
operations.Nucryst may need to conduct post-marketing clinical trials in order to demonstrate the
cost-effectiveness of products. Such studies may require Nucryst to commit a significant
amount of management time and financial and other resources. Future products may not be
reimbursed or covered by any of these third-party payors for Nucrysts targeted indications.In many foreign markets, particularly countries in the European Union and Canada, the pricing
of medical products is subject to governmental control. In these countries, obtaining pricing
approval from governmental authorities can take many months and sometimes years to obtain. To
obtain reimbursement or pricing approval in some countries, Nucryst may be required to
conduct a clinical trial that compares the cost-effectiveness of a product to other available
therapies. If reimbursement of such products is unavailable or limited in scope or amount, or
if pricing is set at unsatisfactory levels, then Nucrysts revenues could be reduced.In the United States, there have been, and Nucryst expects that there will continue to be, a
number of federal and state proposals to implement similar governmental pricing controls.
Nucryst cannot provide assurance that the Medicare Prescription Drug Improvement and
Modernization Act of 2003 will not have a significant effect on pricing or reimbursement for
the pharmaceutical products that Nucryst is developing.
    
    Nucryst performs and manages its clinical trials rather than relying on third-party
clinical research organizations, or CROs, and since Nucryst does not have extensive
experience in this area, there may be delays in completing, or a failure to complete,
clinical trials that comply with regulatory requirements.Nucryst may not have the experience or the capability to take a product through the entire
research and development process. Specifically, Nucryst may not be able to take a product
through pre-clinical development, clinical trials management, clinical data management, study
 17




---



##### 



design, biostatistical analysis, central laboratory and regulatory affairs. Thus, Nucryst may
be unable to obtain regulatory approval for, or successfully commercialize, its product
candidates.Further, Nucryst may not perform its clinical trials in accordance with good clinical and
laboratory practices, as required by the applicable regulatory authorities. If Nucrysts
clinical trials fail to comply with these regulatory practices, it may be unable to use the
data from those trials. Consequently, Nucrysts clinical trials may be extended, delayed or
terminated.Nucryst also may not be able to run its clinical trials as efficiently as a CRO and therefore
it may experience a longer and more costly product development phase. This increase in the
product development phase may subsequently reduce Nucrysts period of patent exclusivity, and
in turn diminish its potential economic returns.
  ITEM 4. INFORMATION ON WESTAIM
 A. History and Development of Westaim
 Business Corporations Act
  
      18




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##### 



Clostridium difficile
 B. Business Overview
    Nucryst Pharmaceuticals Corp. .
 Overview
  19




---



##### 



Nanocrystalline Technology Platform
    Wound Care Products
 2007 Amendments to the
Smith & Nephew Agreements
 Staphylococcus aureus
  20




---



##### 



Acticoat 3 and Acticoat Burn Dressings
 Acticoat 7 Dressing
 Acticoat Absorbent Dressings
 Acticoat Moisture Control Dressings
 Acticoat Site Dressings
 Acticoat Post-Op Dressings
 Other Products
 in-vitro
 Pseudomonas aeruginosa Staphyloccocus aureus
  a Clostridium difficile
 Smith & Nephew Agreements
 2007 Amendment to the Smith & Nephew Agreements
 21




---



##### 



22




---



##### 



2007 Amendments to the Smith & Nephew Agreements
   
    
    Nucryst earned a US $5.0 million milestone payment in the third quarter of 2007
reflecting revisions in milestone sales targets. The achievement criterion for the
remaining milestone payments remains unchanged under the new agreements. In the fourth
quarter of 2007, Nucryst earned a further US $5.0 million milestone as a result of Smith &
Nephew achieving a specified sales threshold. The maximum amount of milestone payments
that Nucryst may receive is US $56.5 million, of which, US $29.0 million has been earned as
at December 31, 2007.
    
    Under the previous agreements, the price paid by Smith & Nephew for Acticoat products
was Nucrysts fully allocated cost of goods sold including equipment depreciation. To
provide Smith & Nephew with greater costing certainty of the Acticoat product line, the
costing mechanism has been amended effective January 1, 2007 to a fixed overhead charge
plus direct costs which will be established annually.
    
    The overhead charge payable by Smith & Nephew in 2007 through 2009 has been fixed at a
minimum amount equal to all indirect costs incurred in 2007 related to the manufacture of
Acticoat products including administration, labour, rent, insurance, utilities, repairs
and quality control. This minimum amount will be payable by Smith & Nephew regardless of
the actual volume of Acticoat products ordered by Smith & Nephew. Nucryst may use any
actual overhead cost savings it achieves over the next two years to offset an annual
manufacturing cost rebate in the amount of US $4.5 million that Nucryst has agreed to make
to Smith & Nephew each year from 2007 through 2009.
    
    A non-compete clause has been deleted from the agreements to allow Smith & Nephew to
broaden their wound care dressings product line to include other forms of silver. In
exchange, Smith & Nephews exclusive license has been limited to existing Acticoat
products and any new wound care or burn products that the parties agree to develop together
using Nucrysts Silcryst technology.
    
    New products developed alone by Nucryst that contain Silcryst technology or any new
form of nanocrystalline silver developed by Nucryst will be initially offered to Smith &
Nephew. If Smith & Nephew declines to purchase any of these products on terms acceptable
to Nucryst, Nucryst will be free to pursue other commercialization options.
    
    Nucryst will contribute services towards the joint development of new products with
Smith & Nephew up to a maximum amount per year equivalent to 1.5% of Smith & Nephews sales
of Acticoat products in the year. This replaces a system whereby Smith & Nephew
reimbursed Nucryst for all of its product development costs.
    
    Royalty rates will be maintained, except for the elimination of a supplemental royalty
that was payable to Nucryst only if certain gross profit margins were achieved on sales of
Acticoat products over a specified threshold.
 Competition
  23




---



##### 



Government Regulation
     Discontinued Operations
 iFire Technology Ltd.
 Overview
     24




---



##### 



Investments
     Investment in Asset-Backed Commercial Paper (ABCP)
    25




---



##### 



Financial Instruments
  Supplies and Raw Materials
   Environmental
     26




---



##### 



C. Organization Structure
  
 D. Property, Plants and Equipment
        ITEM 4A. UNRESOLVED STAFF COMMENTS
  27




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##### 



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 FORWARD LOOKING STATEMENTS
 Forward-Looking Statements  Risk Factors
 The following discussion and analysis of results of operations and liquidity and capital resources
should be read in conjunction with the financial data and the financial statements and the related
notes thereto included elsewhere herein. This item provides information on the activities of the
Company on a consolidated basis. All amounts are expressed in Canadian dollars unless otherwise
noted.
 The Consolidated Financial Statements have been prepared in accordance with Canadian GAAP.
Canadian GAAP differs in certain material respects from U.S. GAAP. For a discussion of the
principal differences between Canadian GAAP and U.S. GAAP as they pertain to the Company see Note
22 to the audited Consolidated Financial Statements. Note 22 to the Consolidated Financial
Statements also provides a reconciliation of the Companys Consolidated Financial Statements to
U.S. GAAP. All amounts are reported in Canadian dollars unless otherwise noted.
 A. Operating Results
 Description of the Business
      Consolidated Results  2007 Compared to 2006
 Overview
  28




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##### 



($millions)
    
    2007
    
    % of Revenue*
    
    2006
    
    % of RevenueManufacturing
    
    $
    14.6
    
    
    
    56
    %
    
    $
    17.3
    
    
    
    63
    %Research and development
    
    
    6.4
    
    
    
    24
    %
    
    
    12.1
    
    
    
    44
    %General and administrative
    
    
    9.3
    
    
    
    36
    %
    
    
    6.8
    
    
    
    25
    %Depreciation and amortization
    
    
    2.1
    
    
    
    8
    %
    
    
    2.6
    
    
    
    9
    %Corporate costs
    
    
    10.9
    
    
    
    42
    %
    
    
    6.1
    
    
    
    22
    %$
    43.3
    
    
    
    
    
    
    $
    44.9
 *
    
    revenue excludes Nucryst milestone revenue of $10.1 million earned in 2007 and manufacturing
cost rebate payments of $4.6 million made in 2007.
   Liquidity and Capital Resources
    Discontinued Operations
  29




---



##### 



Operations
 Performance Measures
  Subsidiaries
  iFire
 Discontinued Operations"
 Nucryst Operations
   Wound Care Products
   30




---



##### 



 Business Overview  Nucryst Pharmaceuticals Corp.  Smith & Nephew Agreements
 Other Products in-vitro in vivo Pseudomonas aeruginosa, Staphyloccocus aureus
 Nucryst Financial Results
   ($millions)
    
    2007
    
    2006Wound care product revenue
    
    $
    26.3
    
    
    $
    27.6Manufacturing cost rebate
    
    
    (4.6
    )
    
    
    Milestone revenue
    
    
    10.1
    
    
    
    Total revenue
    
    $
    31.8
    
    
    $
    27.6Manufacturing costs (1)
    
    $
    15.9
    
    
    $
    18.2Wound care gross margin excluding milestone revenue
    
    $
    5.8
    
    
    $
    9.4Operating loss
    
    $
    (0.6
    )
    
    $
    (11.2
    )
 (1)
 Revenue  
 Manufacturing Costs  
 Gross Margin  
 31




---



##### 



Nucryst Outlook
   Discontinued Operations
 iFire 
 iFire Financial Results  
   iFire Outlook  
  Consolidated Results  2006 Compared to 2005
 Overview
  32




---



##### 



($millions)
    
    2006
    
    % of Revenue
    
    2005
    
    % of Revenue*Manufacturing
    
    $
    17.3
    
    
    
    63
    %
    
    $
    10.8
    
    
    
    48
    %Research and development
    
    
    12.1
    
    
    
    44
    %
    
    
    9.7
    
    
    
    43
    %General and administrative
    
    
    6.8
    
    
    
    25
    %
    
    
    4.1
    
    
    
    18
    %Depreciation and amortization
    
    
    2.6
    
    
    
    9
    %
    
    
    2.3
    
    
    
    10
    %Corporate costs
    
    
    6.1
    
    
    
    22
    %
    
    
    8.2
    
    
    
    36
    %$
    44.9
    
    
    
    
    
    
    $
    35.1
 *
    
    revenue excludes Nucryst milestone revenue of $5.9 million in 2005.
         33




---



##### 



Discontinued Operations
  Nucryst Financial Results
 
 ($millions)
    
    2006
    
    2005Wound care product revenue
    
    $
    27.6
    
    
    $
    22.7Milestone revenue
    
    
    
    
    
    
    5.9Total revenue
    
    $
    27.6
    
    
    $
    28.6Manufacturing costs (1)
    
    $
    18.2
    
    
    $
    11.4Wound care gross margin excluding milestone revenue
    
    $
    9.4
    
    
    $
    11.3Operating (loss) income
    
    $
    (11.2
    )
    
    $
    1.6
 (1)
    
    Manufacturing costs include related depreciation and are net of
inter-company charges
 Revenue  
 Manufacturing Costs  
 Gross Margin  
   34




---



##### 



Discontinued Operations
  ($millions)
    
    2006
    
    
    2005Loss related to discontinued operations  iFire
    
    $
    (37.7
    )
    
    $
    (32.8
    )Income related to discontinued operations  Ambeon
    
    
    
    
    
    
    0.6Dilution gain
    
    
    
    
    
    
    2.2Gain on sale of non-core subsidiaries
    
    
    
    
    
    
    9.3Gain on sale of capital assets held for sale
    
    
    
    
    
    
    1.9Gain on sale of Ambeon
    
    
    
    
    
    
    0.7Loss from discontinued operations net of income taxes
    
    $
    (37.7
    )
    
    $
    (18.1
    )
 iFire Financial Results  
 Sale of Subsidiaries  
 Ambeon
 Ethylene Coatings Business  
 B. Liquidity and Capital Resources
     35




---



##### 



Asset-backed commercial paper
     36




---



##### 



Critical Accounting Policies
   Revenue Recognition
 Research and Development Costs
 Site Restoration Costs
  Income Taxes
 Stock Based Compensation
  37




---



##### 



Variable Interest Entities
 Recently Adopted and Pending Accounting Pronouncements
 Recently adopted and pending accounting pronouncements
  a)
    
    In Section 1530 Comprehensive Income, certain gains and losses arising from changes in fair
value are temporarily recorded outside the consolidated statement of operations in accumulated
other comprehensive income as a separate component of shareholders equity.Comprehensive loss is comprised of the Companys net loss and other comprehensive income (loss).
Other comprehensive income (loss) may include any unrealized gains and losses on
available-for-sale securities, foreign currency translation gains and losses on the net
investment in self-sustaining foreign operations and changes in the fair market value of
derivative instruments designated as cash flow hedges, all net of income taxes. On
implementation of Section 1530, amounts previously recorded as cumulative translation adjustment
are now included in accumulated other comprehensive loss. At December 31, 2007, the balance of
accumulated other comprehensive loss of $1.7 million (December 31, 2006  $0.7 million) is
comprised solely of foreign currency translation losses on the Companys net investment in its
self-sustaining foreign operations.b)
    
    In Section 3855 Financial Instruments  Recognition and Measurement and Section 3865
Hedges, all financial instruments including derivatives are to be included on a companys
balance sheet and measured either at their fair value or, in limited circumstances, when fair
value may not be considered most relevant, at cost or amortized cost. These Sections specify
when gains and losses, as a result of changes in fair value, are to be recognized in the
statement of operations. Section 3855 requires that all financial assets and liabilities be
accounted for using one of five available accounting models, being held-to-maturity,
available-for-sale, held-for-trading, loans and receivables and other liabilities. All
financial instruments classified as available-for-sale, held-for-trading, and derivative
financial instruments meeting certain recognition criteria, are carried at fair value.
Changes in the fair value of financial instruments designated as held-for-trading and
recognized derivative financial instruments are charged or credited to the statement of
operations for the current period, while changes in the fair value of financial instruments
designated as available-for-sale are charged or credited to other comprehensive income and
charged or credited to the statement of operations when the instrument is sold. All other
financial assets and liabilities are accounted for at amortized cost depending upon the nature
of the instrument. Financial assets and liabilities designated as held-to-maturity are
initially recognized at their fair values, with any resulting premium or discount from the
fair value being amortized to income or expense using the effective interest method. After
their initial fair value measurement, they are measured at amortized cost using the effective
interest method. Section 3855 requires the Company to make certain elections, upon initial
adoption of the new rules, regarding the accounting model to be used to classify and measure
each financial instrument. Section 3855 also requires that transaction costs incurred by the
Company in connection with the acquisition of various financial assets or
 38




---



##### 



liabilities be recorded as a reduction of the carrying value of the related financial instrument
and amortized using the effective interest method or expensed as incurred. Transaction costs
related to the acquisition of financial instruments held-for-trading are expensed as incurred.
Transaction costs with respect to instruments not classified as held-for-trading are recognized
as an adjustment to the cost of the underlying instruments, when they are recognized, and
amortized using the effective interest method.The following is a summary of the accounting model the Company has elected to apply to each of
its significant categories of financial instruments on implementation at January 1, 2007 and for
the year ended December 31, 2007:
 Cash and cash equivalents
    
    held-for-tradingShort-term investments
    
    held-for-tradingLong-term investments
    
    available for saleLong-term investments  ABCP
    
    held-for-tradingAccounts receivable
    
    loans and receivablesAccounts payable and accrued liabilities
    
    other liabilitiesLong-term debt
    
    other liabilities
 The implementation of these Sections did not have a material impact on the Companys
consolidated financial statements.Derivative instruments are recorded at fair value unless exempted from derivative treatment as
normal purchases and sales. All changes in their fair value are recorded in income unless cash
flow hedge accounting is used, in which case, changes in fair value are recorded in other
comprehensive income (loss). The Company has elected to apply this accounting treatment for
embedded derivatives on transactions entered into after January 1, 2003, and the change in
accounting policy did not have any impact on the consolidated financial statements.For cash and cash equivalents, short-term investments, accounts receivable, and accounts payable
and accrued liabilities, the carrying value approximates fair value due to their short-term
nature.
   Future accounting pronouncements
     39




---



##### 



C. Research and Development, Patents and Licenses, etc.
 TM
  TM TM
   D. Trend Information
  E. Off-Balance Sheet Arrangements
  F. Contractual Obligations and Commitments
 ($000)
    
    
    
    Payments due by PeriodLess than
    
    1 - 3
    
    3 - 5
    
    More thanAs at December 31, 2007
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsCapital lease obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    8,269
    
    
    
    1,741
    
    
    
    2,834
    
    
    
    2,155
    
    
    
    1,539Contractual obligations
    
    
    8,892
    
    
    
    4,446
    
    
    
    4,446
    
    
    
    
    
    
    
    Supplier purchase obligations (1)
    
    
    1,223
    
    
    
    1,223
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities reflected on
the Companys consolidated balance sheet
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,384
    
    
    $
    7,410
    
    
    $
    7,280
    
    
    $
    2,155
    
    
    $
    1,539
 (1)
    
    Included in supplier purchase obligations are commitments for capital
expenditures totaling $41 and agreements to purchase goods or services
that are enforceable and legally binding on the Company and that specify all significant
terms.
 40




---



##### 



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Directors and Officers
 Name and Residency
    
    Age
    
    Principal Occupation at Present4
    
    Period of Service as DirectorNeil Carragher1,3
Ontario, Canada
    
    
    69
    
    
    Chairman of The Corporate Partnership Ltd.(a management consulting group)
    
    May 1996 to dateIan W. Delaney3
Ontario, Canada
    
    
    64
    
    
    Chairman of the Board of the Company (non-employee)
Executive Chairman of Sherritt International Corporation(a diversified resource company involved in the production
of nickel, cobalt, oil and electricity, and the development of
coal as an energy source)
    
    May 1996 to dateRoger G. H. Downer1, 3
Co. Tipperary, Ireland
    
    
    65
    
    
    President Emeritus of the University of Limerick, Ireland
    
    October 2004 to dateG. A. (Drew) Fitch
Alberta, Canada
    
    
    55
    
    
    President and Chief Executive Officer and Chief Financial
Officer of the Company
    
    May 2007 to dateFrank W. King2,3
Alberta, Canada
    
    
    71
    
    
    President of Metropolitan Investment Corporation(a capital investment and management services company)
    
    May 1996 to dateDaniel P. Owen2,3
Ontario, Canada
    
    
    72
    
    
    Chairman and Chief Executive Officer of Molin Holdings
Limited(an investment management company)
    
    May 1996 to dateBruce V. Walter1,2, 3
Ontario, Canada
    
    
    50
    
    
    Chairman and Chief Executive Officer of Four Mile
Investments Inc.(a private investment company)
    
    May 1997 to dateBrian D. Heck
Alberta, Canada
    
    
    51
    
    
    Vice President, General Counsel and Corporate Secretary of
the Company
    
    n/a
 
 (1)
    
    Messrs. Carragher, Downer and Walter are members of the Human Resources and Compensation
Committee.(2)
    
    Messrs. King, Owen and Walter are members of the Audit Committee.(3)
    
    Messrs. Carragher, Delaney, Downer, King, Owen and Walter are members of the Corporate
Governance Committee.(4)
    
    Each individual has been engaged for more than five years in his present principal occupation
except the following:    41




---



##### 



Additional Disclosure for Directors and Executive Officers
    B. Compensation
  42




---



##### 



Annual Compensation for the year ended December 31, 2007
 Number ofCommon SharesOther
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash
    
    
    BeneficiallyName and
    
    
    
    
    
    
    
    
    
    Annual
    
    
    Under
    
    
    Restricted
    
    
    Deferred
    
    
    All other
    
    
    Compen-
    
    
    Owned orPrincipal
    
    
    
    
    
    
    
    
    
    Compen-
    
    
    Options
    
    
    Share
    
    
    Share
    
    
    Compen-
    
    
    sation
    
    
    Controlled atPosition
    
    Salary
    
    
    Bonus
    
    
    sation
    
    
    Granted(1)
    
    
    Units(2)
    
    
    Units
    
    
    sation
    
    
    Total
    
    
    March 31, 2008N. Carragher
    
    
    
    
    
    
    
    
    
    $
    56,500
    (12)
    
    
    
    
    
    
    
    
    
    
    86,631
    
    
    $
    46,586
    (14)
    
    $
    103,086
    
    
    
    153,907DirectorI.W. Delaney
    
    
    
    
    
    
    
    
    
    $
    101,667
    (13)
    
    
    100,000
    
    
    
    
    
    
    
    34,721
    
    
    $
    14,371
    (14)
    
    $
    116,038
    
    
    
    5,341,869Director
(Chairman of
the Board of
Directors)R.G.H. Downer
    
    
    
    
    
    
    
    
    
    $
    58,000
    (12)
    
    
    40,000
    
    
    
    
    
    
    
    79,330
    
    
    
    
    
    
    $
    58,000
    
    
    
    20,000DirectorF.W. King
    
    
    
    
    
    
    
    
    
    $
    67,000
    (12)
    
    
    
    
    
    
    
    
    
    
    101,195
    
    
    $
    32,245
    (14)
    
    $
    99,245
    
    
    
    336,664DirectorD.P. Owen
    
    
    
    
    
    
    
    
    
    $
    39,530
    (12)
    
    
    
    
    
    
    
    
    
    
    91,828
    
    
    
    
    
    
    $
    39,530
    
    
    
    226,900DirectorB.V. Walter
    
    
    
    
    
    
    
    
    
    $
    12,000
    (12)
    
    
    27,200
    
    
    
    
    
    
    
    186,405
    
    
    
    
    
    
    $
    12,000
    
    
    
    907,300DirectorG.A. Fitch(3)
    
    $
    344,914
    
    
    $
    150,000
    (4)
    
    $
    25,000
    (5)
    
    
    330,000
    
    
    
    89,876
    
    
    
    
    
    
    $
    84,144
    (6)
    
    $
    604,058
    
    
    
    255,922President and
Chief Executive
OfficerB.D. Heck
    
    $
    182,083
    
    
    
    
    
    
    $
    9,167
    (5)
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    $
    343,808
    (7)
    
    $
    535,058
    
    
    
    52,464Vice President,
General Counsel
and Corporate
SecretaryB.M. Heck
    
    $
    189,045
    
    
    
    
    
    
    $
    15,920
    (5)
    
    
    100,000
    (8)
    
    
    196,281
    
    
    
    
    
    
    $
    1,658,248
    (9)
    
    $
    1,863,213
    
    
    
    President and
Chief Executive
Officer from
Jan. 1  May 23,
2007A.B. Johnston
    
    $
    247,500
    
    
    
    
    
    
    $
    22,917
    (5)
    
    
    50,000
    (10)
    
    
    83,678
    
    
    
    
    
    
    $
    720,692
    (11)
    
    $
    991,109
    
    
    
    Senior Vice
President from
Jan. 1  Nov. 30,
2007
 43




---



##### 



1.
    
    Grants of Options pursuant to the Option Plan, which includes the D&O Program. Particulars of
the grants of Options under the D&O Program are given in the table Option Grants During the
Year Ended December 31, 2007 below.2.
    
    Amounts shown represent grants of RSUs pursuant to the RSU Plan made in consideration
of annual performance.3.
    
    Mr. Fitch was appointed President and Chief Executive Officer of the Company on May 23,
2007 and prior to that date he was Senior Vice President and Chief Financial Officer of the
Company.4.
    
    For the year ended December 31, 2007, Mr. Fitch received bonus compensation in respect
of the completion of the monetization of non-core assets of the Company and the completion
of a reorganization of the Company.5.
    
    Messrs. Barry M. Heck, Fitch, Johnston and Brian D. Heck received cash allowances in
lieu of perquisites in 2007, which amounts are included in Other Annual Compensation.6.
    
    Mr. Fitch received $32,766 in the form of contributions to the Companys defined
contribution pension plan. He also received other compensation in 2007 in settlement of
RSUs granted to him pursuant to the RSU Plan by issuance of 26,540 Common Shares with a
value of $25,689 and by payment of $25,689 in cash.7.
    
    On October 31, 2007, Mr. Brian D. Heck was terminated from his employment with the
Company, and received a cash payment in consideration of severance owing under his
employment contract with the Company. Mr. Brian D. Heck was re-hired by the Company on a
half-time basis effective November 1, 2007.8.
    
    In 2007, Mr. Barry M. Heck was originally granted 150,000 options pursuant to the
Option Plan. When his employment with the Company was terminated on May 23, 2007, 50,000
of these options were cancelled pursuant to the terms of his employment agreement.9.
    
    In 2007, Mr. Barry M. Heck received $20,609 in the form of contributions to the
Companys defined contribution pension plan and life insurance premiums plus other
compensation in settlement of RSUs granted to him pursuant to the RSU Plan by issuance of
60,367 Common Shares with a value of $59,019 and by payment of $270,620 in cash. Mr. Heck
also received other compensation in 2007 in the form of a severance payment of $1,308,000
owing under his employment contract with the Company.10.
    
    In 2007, Mr. Johnston was originally granted 75,000 options pursuant to the Option
Plan. When his employment with the Company was terminated on November 30, 2007, 25,000 of
these options were cancelled pursuant to the terms of his employment agreement.11.
    
    In 2007, Mr. Johnston received $23,168 in the form of contribution to the Companys
defined contribution pension plan. He also received other compensation in 2007 and January
2008 in settlement of RSUs granted to him pursuant to the RSU Plan by issuance of 75,676
Common Shares with a value of $29,462 and by payment of $29,462 in cash. Other
compensation received by him in January 2008 also included a cash payment of $638,600 in
consideration of severance owing under his employment contract with the Company.12.
    
    Amounts shown represent payments to Board members with respect to their attendance at
Board meetings in 2007. Mr. Walter has elected to receive his cash meeting fees in the
form of elected DSUs. Fees include an annual payment of $10,000 in lieu of health and
insurance benefits.13.
    
    As Chairman of the Board, Mr. Delaney receives an annual fee of $100,000 in lieu of
directors meeting fees. Effective December 2007, Mr. Delaney has elected to receive 100%
of his fees in the form of elected DSUs.14.
    
    Amounts represent life insurance premiums paid by the Company on behalf of the Board
member. 44




---



##### 



Security Based Compensation Arrangements
 Equity Compensation Plan Information to December 31, 2007
 Number of securitiesNumber of securities to
    
    
    Weighted-average
    
    
    remaining available forEquity compensation plans
    
    be issued upon exercise
    
    
    exercise price of
    
    
    future issuance underapproved by security
    
    of outstanding options,
    
    
    outstanding options,
    
    
    equity compensationholders
    
    warrants and rights
    
    
    warrants and rights
    
    
    plans1996
Employee and Director Stock Option
Plan1
    
    
    4,448,598
    
    
    $
    6.15
    
    
    
    2,703,935
    2Restricted Share Unit Plan
    
    
    69,701
    
    
    
    N/A
    
    
    
    2,703,935
    2
 1.
    
    Includes securities issuable under both the 1996 Employee and Director
Stock Option Plan (the Option Plan) and the Directors and Officers Share
Purchase Program (the D&O Program). A more detailed explanation of the terms
of each of the Option Plan and the D&O Program is provided below under 1996
Employee and Director Stock Option Plan and Directors and Officers Share
Purchase Program respectively.2.
    
    The number of securities remaining available for future issuance under
the Option Plan (including the D&O Program) and the Restricted Share Unit Plan
(the RSU Plan) constitutes a single reserve of 2,703,935 Common Shares shared
by the two plans. 1996 Employee and Director Stock Option Plan
 Eligibility and Participation
      Exercise Price
   Expiry
   45




---



##### 



(a)
    
    if the employment of a participant is terminated for just cause before the expiry date of all
of such participants Options, then the Options granted to such participant shall thereupon
cease and terminate and be of no further force or effect whatsoever; and
 (b)
    
    if the employment of a participant is terminated for reasons other than just cause or the
death or disability of the participant or, in the case of an employee of a subsidiary, if the
subsidiary ceases to be a subsidiary of the Company before the expiry date of all of such
participants Options, then the Options shall remain in force and shall be exercisable as
provided by their terms, for a period of 90 days after the date of termination or cessation,
or such other period as may be specified in such circumstances by the terms of the particular
Option or by the Board. At the end of such period, all of the participants unexercised
Options shall terminate and be of no further force or effect whatsoever.
    Amendment
  Financial Assistance
  Directors and Officers Share Purchase Program
 Eligibility and Participation
   Financial Assistance
  Employee Share Purchase Plan
  46




---



##### 



Restricted Share Unit Plan
 Eligibility and Participation
   Restrictions and Grants
 Summary
Compensation Table, All Other Compensation Summary
Compensation Table, All Other Compensation Long Term Incentive Plan
Awards Granted During the Year Ended December 31, 2007
  RSU Values
  Expiry
  (a)
    
    upon the death of a participant while in the employment of the Company or any of its
affiliated entities, all RSUs granted to that participant prior to the date of death (but for
which no release date has yet occurred) shall be deemed to be vested in the participant
immediately on the date of death, with the release date therefore to be 10 days following the
date of death, and the number of such RSUs that would otherwise be issued to such participant
shall be issued in the form of RSU shares (or paid by cash if the grant so provides and the
appropriate election is made) and delivered to the participants estate as if the participant
had continued in the employment of the Company or one of its affiliated entities until the
release date; and
 47




---



##### 



(b)
    
    except as specifically provided for in the RSU Plan or in any agreement between the
participant and the Company or any of its affiliates, or as otherwise agreed to or determined
by the Board or the administrator under the RSU Plan, if the employment of a participant with
the Company or any of its affiliated entities is terminated for any reason prior to the
release date for any RSUs, other than by early retirement or normal retirement from such
employment, then the participant shall be deemed to have forfeited all right, title and
interest with respect to any RSUs not fully vested upon that participants last day of such
employment (the Termination Date). For this purpose, Termination Date means: (i) if the
participant is terminated for just cause, the actual date of termination; and (ii) if the
participant is terminated for reasons other than just cause, the date at the conclusion of any
statutory, contractual or common law period of notice of termination of employment to which
that participant is entitled.
   (a)
    
    the provisions of any change of control agreement or any other agreement between the
participant and the Company or any of its affiliates;(b)
    
    the terms and conditions upon which the grant was made; and(c)
    
    the determination of the Board or the administrator under the RSU Plan;
  th
 th
  Assignment and Transfer
  Amendment
  Financial Assistance
  48




---



##### 



Option Grants During the Year Ended December 31, 2007
 Market Value ofSecurities UnderlyingCommon Shares
    
    
    Exercise or
    
    
    Options onUnder Options
    
    
    Base Price
    
    
    the Date of GrantName
    
    Granted1
    
    
    ($/Common Share)
    
    
    ($/Common Share)
    
    
    Expiration DateI.W. Delaney
    
    
    100,000
    2
    
    $
    1.23
    
    
    $
    1.23
    
    
    Feb. 20, 2017R.G.H. Downer
    
    
    40,000
    2
    
    $
    0.45
    
    
    $
    0.45
    
    
    Oct. 2, 2017B.V. Walter
    
    
    27,200
    3
    
    $
    0.22
    
    
    $
    0.22
    
    
    Dec. 5, 2017G.A. Fitch
    
    
    100,000
    2
    
    $
    1.23
    
    
    $
    1.23
    
    
    Feb. 20, 2017200,000
    2
    
    $
    0.22
    
    
    $
    0.22
    
    
    Dec. 5, 201730,000
    3
    
    $
    0.22
    
    
    $
    0.22
    
    
    Dec. 5, 2017B.D. Heck
    
    
    40,000
    2
    
    $
    1.23
    
    
    $
    1.23
    
    
    Feb. 20, 2017B.M. Heck
    
    
    100,000
    4
    
    $
    1.23
    
    
    $
    1.23
    
    
    Feb. 20, 2017A.B. Johnston
    
    
    50,000
    5
    
    $
    1.23
    
    
    $
    1.23
    
    
    Feb. 20, 2017
 1.
    
    These awards were made pursuant to the Option Plan and, in the
ordinary course, are exercisable for a period ending 10 years from
the date of the grant.2.
    
    These awards were granted on the basis that in the ordinary
course they will be exercisable as to one third of the grant on
each of the first, second and third anniversaries of the date of
the grant.3.
    
    These awards were granted under the D&O Program. Options
equal to the net purchases of Common Shares by the optionee during
the calendar year, to a cumulative maximum of 50,000 Options, vest
at the end of the calendar year in which the purchase is made. Any
such Options which do not vest at year end are cancelled.4.
    
    In 2007, Mr. Barry M. Heck was originally granted 150,000
options pursuant to the Option Plan. When his employment with the
Company was terminated on May 23, 2007, 50,000 of these options
were cancelled pursuant to the terms of his employment agreement.5.
    
    In 2007, Mr. Johnston was originally granted 75,000 options
pursuant to the Option Plan. When his employment with the Company
was terminated on November 30, 2007, 25,000 of these options were
cancelled pursuant to the terms of his employment agreement. Employment Contracts
  49




---



##### 



Human Resources and Compensation Committee Report on Executive Compensation
 Composition of the Human Resources and Compensation Committee
  Executive Compensation Policy
   Statement of Executive Compensation  Summary Compensation Table
    Executive Compensation Procedures
  Chief Executive Officer Compensation
    50




---



##### 



Remuneration of Directors
      2001 Deferred Share Unit Plan
  Health and Insurance Benefits Allowance
  C. Board Practices
 Corporate Governance
   51




---



##### 



Board of Directors
 (a)
    
    The Board has determined that six of the seven directors are independent, within the
meaning of NI 58-101. The independent directors are:Neil Carragher;
Ian W. Delaney;
Roger G.H. Downer;
Frank W. King;
Daniel P. Owen; and
Bruce V. Walter.(b)
    
    Mr. Fitch is the President and Chief Executive Officer of the Company and is therefore not
considered to be an independent director.(c)
    
    The Board has determined that a majority of the directors are independent, within the
meaning of NI 58-101.(d)
    
    The following directors currently serve on the board of other issuers that are reporting
issuers (or equivalent) which are set out below:
 Director
    
    DirectorshipsNeil Carragher
    
    Agrium Inc.
NUCRYST Pharmaceuticals Corp.Ian W. Delaney
    
    EnCana Corporation
OPTI Canada Inc.
Royal Utilities Income Fund
Sherritt International CorporationRoger G.H. Downer
    
    NUCRYST Pharmaceuticals Corp.Frank W. King
    
    CanWest Global Communications Corp.
RioCan Real Estate Investment TrustDaniel P. Owen
    
    Dynex Power Inc.
Sherritt International Corporation
 (e)
    
    Each independent director of the Company is a member of the Corporate Governance
Committee of the Board and Mr. Fitch, the only non-independent director of the Company, is
not a member of that committee. The Corporate Governance Committee meets independently of
Management on a regular basis, and the Board during its meetings also has regular in-camera
discussions, with all members of Management, including Mr. Fitch, excused from that portion
of the meeting. During the financial year ended December 31, 2007, there were two meetings
of the Corporate Governance Committee.In addition, the independent members of the Board are authorized to retain independent
financial, legal and other experts or advisors as required whenever, in their opinion,
matters come before the Board or any committee which require an independent analysis by the
independent members of the Board or any committee.(f)
    
    Mr. Ian W. Delaney, the chairman of the Board, is independent of the Company. The role
of the chairman of the Board includes ensuring that the Board discharges its duties
independently of management, serving as chairman of the Corporate Governance Committee, and
setting the agendas for the meetings of the Board and its committees in consultation with
the Chief Executive Officer of the Company. See also the corporate governance practices of
the Company described in subparagraph (a) under Position Descriptions of this statement,
below, for further details of the role and responsibilities of the chairman of the Board.
 Mandate of the Board of Directors
 (a)
    
    As at the date hereof, the Board has not formally adopted a written mandate. The Board
sees its principal role as stewardship of the Company and its fundamental objective as the
creation of Shareholder value, including the protection and enhancement of the value of the
Companys assets and operating with honesty and integrity in the conduct of business. The
Boards stewardship responsibility means that it oversees the conduct of the business and
of Management, which is responsible for developing long-term strategy and conducting the
Companys day-to-day business.
 52




---



##### 



The Board meets frequently and is comprised of individuals with considerable experience as
directors of public companies and in respect of corporate governance. The agenda for each
Board meeting is carefully planned and set by the chairman of the Board working in
conjunction with the Chief Executive Officer. Each of the committees of the Board have
specific responsibilities delineated in the terms of reference or charter established for
each respective committee, such terms of reference or charter having been approved by the
Board in each case.
 Position Descriptions
 (a)
    
    As at the date hereof, the Board has not developed a written position description for
the chairman of the Board. Generally, the principal role assigned to the chairman of the
Board by the Board includes providing leadership to the Board and acting as a direct
liaison between the Board and Management. Further, the chairman of the Board is
responsible for ensuring that the Board properly discharges its responsibilities, that the
members of the Board have full opportunity to participate in meetings of the Board, and
that all Board matters are properly and adequately addressed. The chairman of the Board is
accountable to the Board.The terms of reference or the charter of each of the Audit Committee, the Corporate
Governance Committee, the Human Resources and Compensation Committee and the Environmental,
Health and Safety Committee describe certain of the responsibilities of the chairman of each
of these committees. The primary role of the chairman of each such committee is managing the
affairs of the committee, including ensuring the committee is organized properly, functions
effectively and meets its obligations and responsibilities.The chairman of the Audit Committee also maintains on-going communications with the Companys
external auditors in order to lead the committee in performing its oversight and other
audit-related functions.(b)
    
    The Board does not have a specific written position description for the Chief Executive
Officer of the Company. However, the role, responsibilities, and duties of the Chief
Executive Officer are generally set out in his contract of employment with the Company, and
are constantly reviewed and refined by the Board. Additionally, the specific annual
objectives of the Chief Executive Officer are set, and his performance is reviewed, by the
Board and by the Human Resources and Compensation Committee of the Board as circumstances
dictate.
 Audit Committee
   Frank King
 Daniel Owen
 Bruce Walter
 53




---



##### 



D. Employees
  Business UnitCategory
    
    Westaim
    
    
    iFire
    
    
    Nucryst
    
    
    TotalManufacturing
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    79Research and Development
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    24Administration
    
    
    8
    
    
    
    
    
    
    
    29
    
    
    
    37Discontinued Operations
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Total
    
    
    8
    
    
    
    25
    
    
    
    132
    
    
    
    165
 Total number of employees at December 31,2005
    
    
    
    
    2006
    
    
    2007338
    
    
    
    
    351
    
    
    165
  E. Share Ownership
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  Name
    
    Class
    
    
    Shares Owned
    
    
    % of ClassInvestco Ltd.
    
    Common
    
    
    7,675,600
    
    
    
    8.15- AIM Advisors, Inc.- AIM Capital Management Inc.
   B. Related Party Transactions
  54




---



##### 



C. Interests of Experts and Counsel
  ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Export Sales
  Legal Proceedings
  Dividend Policy
  B. Significant Changes
  ITEM 9. THE OFFER AND LISTING
 A. Offer and Listing Details
  55




---



##### 



TSX
    
    NASDAQHigh
    
    Low
    
    High
    
    Low2008March
    
    
    0.30
    
    
    
    0.23
    
    
    
    0.29
    
    
    
    0.23February
    
    
    0.30
    
    
    
    0.25
    
    
    
    0.30
    
    
    
    0.25January
    
    
    0.30
    
    
    
    0.23
    
    
    
    0.30
    
    
    
    0.232007December
    
    
    0.30
    
    
    
    0.21
    
    
    
    0.28
    
    
    
    0.20November
    
    
    0.42
    
    
    
    0.17
    
    
    
    0.43
    
    
    
    0.23October
    
    
    0.50
    
    
    
    0.36
    
    
    
    0.49
    
    
    
    0.352008First Quarter
    
    
    0.30
    
    
    
    0.23
    
    
    
    0.30
    
    
    
    0.232007Fourth Quarter
    
    
    0.30
    
    
    
    0.17
    
    
    
    0.49
    
    
    
    0.20Third Quarter
    
    
    0.50
    
    
    
    0.42
    
    
    
    0.94
    
    
    
    0.42Second Quarter
    
    
    0.69
    
    
    
    0.56
    
    
    
    1.03
    
    
    
    0.52First Quarter
    
    
    1.15
    
    
    
    0.86
    
    
    
    1.68
    
    
    
    0.732006Fourth Quarter
    
    
    2.07
    
    
    
    1.60
    
    
    
    2.44
    
    
    
    1.41Third Quarter
    
    
    5.49
    
    
    
    2.50
    
    
    
    4.84
    
    
    
    2.20Second Quarter
    
    
    7.65
    
    
    
    4.30
    
    
    
    6.55
    
    
    
    3.86First Quarter
    
    
    7.64
    
    
    
    4.31
    
    
    
    6.55
    
    
    
    3.722007
    
    
    1.15
    
    
    
    0.17
    
    
    
    1.68
    
    
    
    0.202006
    
    
    7.65
    
    
    
    1.60
    
    
    
    6.55
    
    
    
    1.412005
    
    
    4.89
    
    
    
    2.85
    
    
    
    4.14
    
    
    
    2.162004
    
    
    4.98
    
    
    
    2.80
    
    
    
    3.97
    
    
    
    2.102003
    
    
    3.85
    
    
    
    1.50
    
    
    
    2.95
    
    
    
    0.99
 B. Plan of Distribution
  C. Markets
   56




---



##### 



D. Selling Shareholders
  E. Dilution
  F. Expense of the Issue
  ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
 Dividends
  Liquidation Rights
    B. Memorandum and Articles of Association
  Information on
Westaim  History and Development of Westaim
 Dependent Adults Act Mental Health Act The Mentally Incapacitated Persons Act
  57




---



##### 




    
    is an arrangement by way of security for money lent to or obligations undertaken by the
director for the benefit of the Company or an affiliate;
    
    relates primarily to his or her remuneration as a director, officer, employee or agent of the Company or an affiliate;
    
    is for indemnity or insurance; or
    
    is with an affiliate.
  
    
    borrow money upon the credit of the Company;
    
    issue, reissue, sell or pledge debt obligations of the Company;
    
    subject to certain disclosure requirements of the ABCA, give a guarantee on behalf of
the Company to secure performance of an obligation of any person;
    
    mortgage, hypothecate, pledge or otherwise create a security interest in all or any
property of the Company owned or subsequently acquired to secure any obligation of the
Company; and
    
    the directors by resolution may delegate to a director, a committee of directors or an
officer any of these powers.
  Rights and Preferences of Capital Stock of the Company
  Changes to the Rights of Shareholders
  Meetings of Shareholders
   58




---



##### 



Limitations on Right to Own Securities
 Investment Canada
Act
      1.
    
    An investment to establish a new Canadian business; and2.
    
    An investment to acquire control of a Canadian business that is not reviewable pursuant
to the ICA.
  1.
    
    An investment is reviewable if there is an acquisition of a Canadian business and the
asset value of the Canadian business being acquired equals or exceeds the following
thresholds:
 (a)
    
    For non-World Trade Organization (WTO) investors, the threshold is $5 million
for a direct acquisition and $50 million for an indirect acquisition; the $5 million
threshold will apply however for an indirect acquisition if the asset value of the
Canadian business being acquired exceeds 50% of the asset value of the global
transaction;(b)
    
    Except as specified in paragraph (c) below, a threshold is calculated annually
for reviewable direct acquisitions by or from WTO investors. Pursuant to Canadas
international commitments, indirect acquisitions by or from WTO investors are not
reviewable;(c)
    
    The limits set out in paragraph (a) apply to all investors for acquisitions of a
Canadian business that:
 (i)
    
    engages in the production of uranium and owns an interest in a producing uranium
property in Canada;(ii)
    
    provides any financial service;
 59




---



##### 



(iii)
    
    provides any transportation services; or(iv)
    
    is a cultural business.
 2.
    
    Notwithstanding the above, any investment which is usually only notifiable, including
the establishment of a new Canadian business, and which falls within a specific business
activity, including the publication and distribution of books, magazines, newspapers, film
or video recordings, audio or video music recordings, or music in print or machine-readable
form may be reviewed if an Order-in-Council directing a review is made and a notice is sent
to the investor within 21 days following the receipt of a certified complete notification.
     Change of Control
  Disclosure of Ownership
  C. Material Contracts
  D. Exchange Controls
 Income Tax Act of Canada The Canada  U.S. Income Tax Convention
 E. Taxation
 Canadian Tax Considerations
 Income
Tax Act
 60




---



##### 



This summary is of a general nature only and is not intended to be, and should not be construed to
be, legal or tax advice to any investor and no representation with respect to the tax consequences
to any particular investor is made. This summary does not address any aspect of any provincial,
state or local tax laws or the laws of any jurisdiction other than Canada. Accordingly, investors
are encouraged to consult with their own tax advisors for advice with respect to the income tax
consequences to them having regard to their own particular circumstances.
 Dividends
 Canada-United States Income Tax Convention
 Capital Gains
  U.S. Tax Considerations
 Material United States Federal Income Tax Consequences
 Canadian Tax Considerations
 Internal Revenue Code of 1986
 This discussion is of a general nature only and is not exhaustive of all U.S. federal income tax
implications, and it is not intended to be, nor should it be construed to be, legal or tax advice
to any particular holder or prospective holder of Westaims common shares and no opinion or
representation with respect to the United States federal income tax consequences to any such holder
or prospective holders is made. Accordingly, holders and prospective holders of Westaims common
shares are encouraged to consult their own tax advisors about the federal, state, local, and
foreign tax consequences of purchasing, owning and disposing of Westaims common shares.
 61




---



##### 



U.S. Holders
  Distributions on Common Shares
 Tax
Credit
   Foreign Tax Credit
   62




---



##### 



Disposition of Common Shares
  Currency Exchange Gains or Losses
  Other Considerations
   Foreign Personal Holding Company
  Foreign Investment Corporation
  Passive Foreign Investment Company
   63




---



##### 



Controlled Foreign Corporation
  F. Dividend and Paying Agents
  G. Statement by Experts
  H. Documents on Display
  I. Subsidiary Information
  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign exchange risk
 Risk Factors
  64




---



##### 



Interest rate risk
  Credit risk
 Investments
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  PART II
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  ITEM 15. CONTROLS AND PROCEDURES
 A. Evaluation of Disclosure Controls and Procedures
  65




---



##### 



B. Managements Annual Report on Internal Control over Financial Reporting
     C. Attestation Report of the Registered Public Accounting Firms
  D. Changes in Internal Controls over Financial Reporting
  ITEM 16. [RESERVED]
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  ITEM 16B. CODE OF ETHICS
  66




---



##### 



www.westaim.com
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  $(000)Accountant Fees and Services
    
    2007
    
    2006Audit Fees
    
    $
    495.1
    
    
    $
    542.5Audit Related Fees
    
    
    94.1
    
    
    
    163.3Tax Fees
    
    
    71.3
    
    
    
    43.5All Other Fees
    
    
    
    
    
    
    4.8$
    660.5
    
    
    $
    754.1
 Audit Fees.
 Audit-related Fees.
 Tax Fees.
  ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   PART III
 ITEM 17. FINANCIAL STATEMENTS
  67




---



##### 



The Westaim Corporation
 
 F-1




---



##### 



Report of Independent Registered Chartered Accountants
 
      
  F-2




---



##### 



Comments by Independent Registered Chartered Accountants on Canada  United States of America
Reporting Difference
   
  F-3




---



##### 



THE WESTAIM CORPORATION
 December 31
    
    
    December 31(thousands of Canadian dollars)
    
    2007
    
    
    2006ASSETSCurrentCash and cash equivalents
    
    $
    30,993
    
    
    $
    45,035Short-term investments
    
    
    
    
    
    
    17,451Accounts receivable
    
    
    14,931
    
    
    
    8,189Inventories (note 6)
    
    
    4,373
    
    
    
    8,506Other
    
    
    674
    
    
    
    589Current assets held for sale (note 3)
    
    
    590
    
    
    
    48651,561
    
    
    
    80,256Investments (note 7)
    
    
    5,968
    
    
    
    Capital assets (note 8)
    
    
    12,581
    
    
    
    19,201Capital assets held for sale (note 3)
    
    
    10,086
    
    
    
    44,757Intangible assets (note 9)
    
    
    799
    
    
    
    951Intangible assets held for sale (note 3)
    
    
    2,392
    
    
    
    3,174$
    83,387
    
    
    $
    148,339LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities (note 20)
    
    $
    7,018
    
    
    $
    6,165Accounts payable and accrued liabilities held for sale (note 3)
    
    
    1,443
    
    
    
    1,812Current portion of long-term debt (note 4, 11)
    
    
    
    
    
    
    8,0008,461
    
    
    
    15,977Deferred gain (note 4)
    
    
    218
    
    
    
    Provision for site restoration (note 12)
    
    
    6,580
    
    
    
    6,58015,259
    
    
    
    22,557Non-controlling interest (note 5)
    
    
    11,757
    
    
    
    12,805Guarantees (note 14)Commitments and contingencies (note 15)Shareholders equityCapital stock (note 13)
    
    
    426,262
    
    
    
    426,122Contributed surplus (note 13)
    
    
    7,769
    
    
    
    5,379Accumulated other comprehensive loss (note 2r)
    
    
    (1,779
    )
    
    
    (676
    )Deficit
    
    
    (375,881
    )
    
    
    (317,848
    )56,371
    
    
    
    112,977$
    83,387
    
    
    $
    148,339
  Approved on behalf of the Board:SIGNED
    
    SIGNEDIan W. Delaney
    
    Frank W. KingDirector
    
    Director
 F-4




---



##### 



THE WESTAIM CORPORATION
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 31(thousands of Canadian dollars except per share data)
    
    2007
    
    
    2006
    
    
    2005Revenue
    
    $
    31,830
    
    
    $
    27,591
    
    
    $
    28,560CostsManufacturing
    
    
    14,617
    
    
    
    17,324
    
    
    
    10,799Research and development
    
    
    6,356
    
    
    
    12,112
    
    
    
    9,742General and administrative
    
    
    9,348
    
    
    
    6,762
    
    
    
    4,109Depreciation and amortization
    
    
    2,093
    
    
    
    2,614
    
    
    
    2,266Corporate costs (note 20)
    
    
    10,856
    
    
    
    6,123
    
    
    
    8,217Operating loss
    
    
    (11,440
    )
    
    
    (17,344
    )
    
    
    (6,573
    )Foreign exchange (loss) gain
    
    
    (3,804
    )
    
    
    (720
    )
    
    
    771Interest
    
    
    1,822
    
    
    
    3,242
    
    
    
    2,078Change in fair value of third party asset-backed commercial paper (note 7)
    
    
    (4,048
    )
    
    
    
    
    
    
    Loss on sale of third party asset-backed commercial paper (note 7)
    
    
    (1,067
    )
    
    
    
    
    
    
    Write-down of capital assets and intangible assets (note 8)
    
    
    (1,203
    )
    
    
    (1,210
    )
    
    
    Gain on sale of investment (note 4)
    
    
    2,648
    
    
    
    
    
    
    
    1,120Gain on sale of capital assets (note 8)
    
    
    8,722
    
    
    
    
    
    
    
    Dilution gain (note 4)
    
    
    4,525
    
    
    
    
    
    
    
    (Loss) gain on issuance of shares of subsidiary (note 5)
    
    
    (134
    )
    
    
    (99
    )
    
    
    30,055Non-controlling interest (note 5)
    
    
    1,293
    
    
    
    3,222
    
    
    
    (Loss) income from continuing operations before income taxes
    
    
    (2,686
    )
    
    
    (12,909
    )
    
    
    27,451Income tax (expense) recovery (note 10)
    
    
    (144
    )
    
    
    48
    
    
    
    (130
    )(Loss) income from continuing operations
    
    
    (2,830
    )
    
    
    (12,861
    )
    
    
    27,321Loss from discontinued operations net of income taxes (note 3)
    
    
    (55,203
    )
    
    
    (37,696
    )
    
    
    (18,051
    )Net (loss) income
    
    $
    (58,033
    )
    
    $
    (50,557
    )
    
    $
    9,270(Loss) income per common share (note 17)Continuing operations  basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.14
    )
    
    $
    0.29Net (loss) income  basic and diluted
    
    
    (0.62
    )
    
    
    (0.54
    )
    
    
    0.10Weighted average number of common shares outstandingBasic
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    92,852,120Diluted
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    93,120,936Consolidated Statements of Comprehensive LossNet (loss) income
    
    $
    (58,033
    )
    
    $
    (50,557
    )
    
    $
    9,270Unrealized loss on translation of net foreign operations (note 2c)
    
    
    (1,103
    )
    
    
    (173
    )
    
    
    (503
    )Comprehensive (loss) income
    
    $
    (59,136
    )
    
    $
    (50,730
    )
    
    $
    8,767Consolidated Statements of DeficitDeficit at beginning of year
    
    $
    (317,848
    )
    
    $
    (267,291
    )
    
    $
    (276,561
    )Net (loss) income
    
    
    (58,033
    )
    
    
    (50,557
    )
    
    
    9,270Deficit at end of year
    
    $
    (375,881
    )
    
    $
    (317,848
    )
    
    $
    (267,291
    )
  F-5




---



##### 



THE WESTAIM CORPORATION  Consolidated Cash Flow Statements
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 31(thousands of Canadian dollars)
    
    2007
    
    
    2006
    
    
    2005Operating activities(Loss) income from continuing operations
    
    $
    (2,830
    )
    
    $
    (12,861
    )
    
    $
    27,321Items not affecting cashDepreciation and amortization
    
    
    2,093
    
    
    
    2,614
    
    
    
    2,266Change in fair value of third party asset-backed commercial
paper
    
    
    4,048
    
    
    
    
    
    
    
    Loss on sale of third party asset-backed commercial paper
    
    
    1,067
    
    
    
    
    
    
    
    Dilution gain
    
    
    (4,525
    )
    
    
    
    
    
    
    Foreign exchange on short-term investments
    
    
    
    
    
    
    (52
    )
    
    
    Stock-based compensation expense
    
    
    2,469
    
    
    
    1,412
    
    
    
    847Write-down of capital assets and intangible assets
    
    
    1,203
    
    
    
    1,210
    
    
    
    Gain on sale of capital assets
    
    
    (8,722
    )
    
    
    
    
    
    
    Gain on sale of investment
    
    
    (2,648
    )
    
    
    
    
    
    
    (1,120
    )Loss (gain) on issuance of shares of subsidiary
    
    
    134
    
    
    
    99
    
    
    
    (30,055
    )Non-controlling interest
    
    
    (1,293
    )
    
    
    (3,222
    )
    
    
    Accounts receivable
    
    
    (7,190
    )
    
    
    (320
    )
    
    
    (2,582
    )Inventories
    
    
    4,128
    
    
    
    (838
    )
    
    
    (4,350
    )Other
    
    
    (98
    )
    
    
    (30
    )
    
    
    (32
    )Accounts payable and accrued liabilities
    
    
    1,131
    
    
    
    (6,563
    )
    
    
    5,234Site restoration expenditures net of recoveries
    
    
    
    
    
    
    
    
    
    
    52Cash used in continuing operations
    
    
    (11,033
    )
    
    
    (18,551
    )
    
    
    (2,419
    )Cash used in discontinued operations
    
    
    (19,739
    )
    
    
    (25,703
    )
    
    
    (30,263
    )Cash used in operating activities
    
    
    (30,772
    )
    
    
    (44,254
    )
    
    
    (32,682
    )Investing activitiesCapital expenditures
    
    
    (2,376
    )
    
    
    (6,541
    )
    
    
    (6,577
    )Capital expenditures  discontinued operations
    
    
    
    
    
    
    (1,339
    )
    
    
    (25,318
    )Intangible assets
    
    
    (72
    )
    
    
    (245
    )
    
    
    (177
    )Intangible assets  discontinued operations
    
    
    (480
    )
    
    
    (404
    )
    
    
    (800
    )Maturity of short-term investments
    
    
    46,904
    
    
    
    30,594
    
    
    
    98,335Purchase of short-term investments
    
    
    (29,453
    )
    
    
    (44,039
    )
    
    
    (90,289
    )Purchase of short-term investments reclassified to investments (note 7)
    
    
    (14,400
    )
    
    
    
    
    
    
    Reclassification of cash equivalents to investments (note 7)
    
    
    (2,650
    )
    
    
    
    
    
    
    Proceeds on sale of capital assets (note 8)
    
    
    14,437
    
    
    
    
    
    
    
    Proceeds on sale of investments (note 4)
    
    
    1,582
    
    
    
    
    
    
    
    1,620Proceeds on sale of discontinued operations (note 3)
    
    
    24
    
    
    
    312
    
    
    
    22,614Proceeds on sale of third party asset-backed commercial paper (note 7)
    
    
    5,968
    
    
    
    
    
    
    
    Cash provided from (used in) investing activities
    
    
    19,484
    
    
    
    (21,662
    )
    
    
    (592
    )Financing activitiesIssuance of common shares of subsidiary, net of share
issuance costs (note 5)
    
    
    14
    
    
    
    325
    
    
    
    45,502Issuance of common shares (note 13)
    
    
    27
    
    
    
    4,484
    
    
    
    171Issuance of convertible debentures of subsidiary (note 11)
    
    
    
    
    
    
    2,000
    
    
    
    6,000Net cash outflow on deconsolidation of former subsidiary
    
    
    (2,306
    )
    
    
    
    
    
    
    Proceeds from long-term debt  discontinued operations (note 3)
    
    
    
    
    
    
    
    
    
    
    7,154Repayment of long-term debt  discontinued operations (note 3)
    
    
    
    
    
    
    (10,434
    )
    
    
    Cash (used in) provided from financing activities
    
    
    (2,265
    )
    
    
    (3,625
    )
    
    
    58,827Effect of exchange rate changes on cash and cash equivalents
    
    
    (489
    )
    
    
    26
    
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (14,042
    )
    
    
    (69,515
    )
    
    
    25,553Cash and cash equivalents at beginning of year
    
    
    45,035
    
    
    
    114,550
    
    
    
    88,997Cash and cash equivalents at end of year
    
    $
    30,993
    
    
    $
    45,035
    
    
    $
    114,550Supplemental disclosure of cash flow information:Non-cash capital asset additions included in accountspayable and accrued liabilities
    
    $
    452
    
    
    $
    508
    
    
    $
    1,304
  F-6




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##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 1
    
    BASIS OF PRESENTATIONThe Westaim Corporation (the Company) was incorporated on May 7, 1996 by articles of
incorporation under the Business Corporations Act (Alberta).These consolidated financial statements include the accounts of the Company and its
subsidiaries, iFire Technology Ltd. (iFire) and Nucryst Pharmaceuticals Corp. (Nucryst).These consolidated financial statements are prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP). In addition, note 22 describes and
reconciles the significant measurement differences between Canadian GAAP and United States
generally accepted accounting principles (U.S. GAAP) affecting these consolidated financial
statements.All amounts are expressed in thousands of Canadian dollars except share and per share data
unless otherwise noted.
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
 a)
    
    Principles of consolidationThe financial statements of entities which are controlled by the Company through voting
equity interests, 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. Investments in other entities are accounted
for using the cost method. Variable interest entities (VIEs) are entities in which
equity investors do not have the characteristics of a controlling financial interest or
there is not sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. VIEs are consolidated by the Company when it
is determined that it will, as the primary beneficiary, absorb the majority of the VIEs
expected losses and/or expected residual returns. The Company currently does not have
any VIEs. Intercompany balances and transactions are eliminated upon consolidation.b)
    
    Use of estimatesCanadian GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the reported amounts of revenue and
expenses during the year. Significant estimates include the provision for site
restoration, inventory valuation, fair value of stock-based compensation, fair value of
financial instruments, valuation allowance against future income taxes, useful lives of
capital assets and intangible assets, uncertain tax positions and the fair value of
assets held for sale. Actual results could differ materially 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. The resulting gains and losses are included in
the consolidated statement of operations.Foreign operations are considered financially and operationally self-sustaining and are
translated into Canadian dollars using the current rate method of translation. Under this
method, assets and liabilities are translated at the year-end exchange rates. Unrealized
gains and losses arising from translating net investments in foreign operations into
Canadian dollars are included in shareholders equity as a component of accumulated other
comprehensive income.d)
    
    Revenue recognitionSpecific revenue recognition policies for each of the Companys operating segments are as
follows:Nucryst Revenue from direct sales to third parties is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and
collection is reasonably assured. The Companys revenues earned under license agreements consist
primarily of product revenue, royalties and payments upon the achievement of specific milestones.
For products manufactured under license, revenue is recorded at the date of shipment. Royalty
revenue is earned based on a percentage of
 F-7




---



##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
  iFire
 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 fair value as they are classified as held-for-trading financial assets
(note 2r). Cash and cash equivalents at December 31, 2007 is comprised of cash of
$12,537 and cash equivalents of $18,456 (2006  $9,180 and $35,855).f)
    
    Short-term investmentsShort-term investments consist of money-market instruments with maturities of less than
one year and are classified as held-for-trading financial assets (note 2r). As at
December 31, 2007, the Company did not hold any short-term investments (2006  $17,451).g)
    
    Long-term investmentsLong-term investments are reported at fair value and are classified as held-for-trading
or available for sale financial assets (note 2r).h)
    
    Inventory valuationFinished product, raw materials, materials in process, and spare parts and operating
materials are valued at the lower of average cost and net realizable value.i)
    
    Research and development costsResearch costs are expensed as incurred and significant project development costs are
capitalized in accordance with Canadian GAAP 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, 2007 and 2006, no development costs have been capitalized.j)
    
    Capital assetsLand, buildings, machinery and equipment, and computer hardware and software are stated
at cost. Depreciation is calculated using a straight-line method based on the estimated
useful lives of the particular assets which are 20 years for buildings, and 3 to 10 years
for machinery and equipment, and computer hardware and software. Leasehold improvements
are depreciated using the straight-line method over the lesser of the term of the lease
or the estimated useful life of the assets.The Company evaluates the carrying value of capital assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable, and recognizes an
impairment charge when it is probable that estimated future non-discounted cash flows of
the underlying assets will be less than the carrying value of the assets. Measurement of
an impairment loss related to capital assets that management intends to hold and use is
based on the fair value of the assets, whereas assets to be disposed of are reported at
the lower of the carrying amount or fair value less estimated costs to sell.
 F-8




---



##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
 k)
    
    Site restoration costs and asset retirement obligationsThe total estimated costs of site restoration relating to tangible, long-lived assets
have been accrued. Site restoration costs have been estimated, 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)
    
    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.Valuation allowances are established when necessary to reduce future tax assets to the
amount that, in the opinion of management, is more likely than not to be realized.
Future income tax assets and liabilities are determined based on the substantively
enacted tax laws and rates that are anticipated to apply in the period of realization.m)
    
    Stock-based compensation plansThe Company and certain of its subsidiaries have stock-based compensation plans, which
are described in note 13. Compensation expense for awards that call for settlement in
cash or other assets is measured on an ongoing basis as the amount by which the quoted
market price exceeds the exercise price at each measurement date. Any obligations
related to increases in the value of Deferred Share Units (DSUs), Restricted Share
Units (RSUs) and Stock Appreciation Rights (SARs) are accrued when a change in value
occurs with an offset to the consolidated statement of operations.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 deficit.n)
    
    Earnings per shareBasic earnings per common share is calculated using the weighted average number of common
            shares outstanding during the period. Diluted earnings per share is calculated on the
basis of the average number of shares outstanding during the period plus the additional
common shares that would have been outstanding if potentially dilutive common shares had
been issued using the treasury stock method.o)
    
    Employee future benefitsAll employee future benefits are accounted for on an accrual basis. The Company
maintains defined contribution pension plans for its employees. These plans were funded
in an amount of $706 during the year ended December 31, 2007 (2006  $876; 2005 $745).p)
    
    Discontinued operationsLong-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 the time
of sale.
 F-9




---



##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
  q)
    
    Intangible assetsThe Companys definite life intangible assets consist of the prosecution and application
costs of patents and trademarks and are amortized on a straight-line basis over their
estimated useful lives to a maximum of 10 years. The cost of maintaining patents and
trademarks are expensed as incurred. The Company evaluates the carrying value of
definite life intangible assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Any impairment in the carrying value, which
is based on the fair value of the intangible assets, is charged to expense in the period
that impairment has been determined.Indefinite life intangible assets are recorded at fair value. On a regular basis, the
Company reviews the carrying value of these assets for impairment. As at December 31,
2007 and 2006, the Company had no indefinite life intangible assets.r)
    
    Recently adopted and pending accounting pronouncements
 i)
    
    In 2005, the Canadian Institute of Chartered Accountants (CICA) issued
three new standards: Comprehensive Income; Financial Instruments  Recognition and
Measurement; and Hedges. These Sections became effective for the Company on January
1, 2007 and require the following:
 a)
    
    In Section 1530 Comprehensive Income, certain gains and losses
arising from changes in fair value are temporarily recorded outside the
consolidated statement of operations in accumulated other comprehensive income as
a separate component of shareholders equity.Comprehensive loss is comprised of the Companys net loss and other comprehensive
income (loss). Other comprehensive income (loss) may include any unrealized gains
and losses on available-for-sale securities, foreign currency translation gains and
losses on the net investment in self-sustaining foreign operations and changes in
the fair market value of derivative instruments designated as cash flow hedges, all
net of income taxes. On implementation of Section 1530, amounts previously
recorded as cumulative translation adjustment are now included in accumulated other
comprehensive loss. At December 31, 2007, the balance of accumulated other
comprehensive loss of $1,779 (December 31, 2006  $676) is comprised solely of
foreign currency translation losses on the Companys net investment in its
self-sustaining foreign operations.b)
    
    In Section 3855 Financial Instruments  Recognition
and Measurement and Section 3865 Hedges, all financial instruments
including derivatives are to be included on a companys balance sheet
and measured either at their fair value or, in limited circumstances,
when fair value may not be considered most relevant, at cost or amortized cost.
These Sections specify when gains and losses, as a result of changes in
fair value, are to be recognized in the statement of operations.
Section 3855 requires that all financial assets and liabilities be accounted
for using one of five available accounting models, being held-to-maturity,
available-for-sale, held-for-trading, loans and receivables and other liabilities.
All financial instruments classified as available-for-sale, held-for-trading, and derivative financial
instruments meeting certain recognition criteria, are carried at fair value. Changes in the fair value of
financial instruments designated as held-for-trading and recognized
derivative financial instruments are
charged or credited to the statement of operations for the current period, while changes in the fair value
of financial instruments designated as available-for-sale are charged or credited to other comprehensive
income and charged or credited to the statement of operations when the instrument is sold. All other financial
assets and liabilities are accounted for at amortized cost depending upon the nature of the instrument.
Financial assets and liabilities designated as held-to-maturity are initially recognized at their fair
values, with any resulting premium or discount from the fair value being amortized to income or expense
using the effective interest method. After their initial fair value measurement, they are measured at
amortized cost using the effective interest method. Section 3855 requires the Company to make certain
elections, upon initial adoption of the new rules, regarding the accounting model to be used to classify
and measure each financial instrument. Section 3855 also requires that transaction costs incurred by the
Company in connection with the acquisition of various financial assets or liabilities be recorded as a
reduction of the carrying
 F-10




---



##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
   Cash and cash equivalents
    
    held-for-tradingShort-term investments
    
    held-for-tradingLong-term investments
    
    available for saleLong-term investments  asset-backed commercial paper
    
    held-for-tradingAccounts receivable
    
    loans and receivablesAccounts payable and accrued liabilities
    
    other liabilitiesLong-term debt
    
    other liabilities
    ii)
    
    In January 2005, the CICA issued a new Section to the CICA Handbook,
Section 3251 Equity which became effective for the Company on January 1, 2007.
This Section establishes standards for the presentation of equity during a reporting
period. The implementation of this Section did not have a material impact on the
Companys consolidated financial statements.iii)
    
    Effective January 1, 2007, the Company adopted CICA Handbook Section
1506 Accounting Changes which establishes criteria for changing accounting
policies, together with the accounting treatment and disclosure of changes in
accounting policies and estimates, and correction of errors. Under the new
standard, accounting changes should be applied retroactively unless otherwise
permitted or where impracticable to determine. As well, voluntary changes in
accounting policies are made only when required by a primary source of Canadian
GAAP or the change results in more relevant and reliable information. The
Company has determined that the application of this Section did not have any
impact on the consolidated financial statements.
 Future accounting pronouncementsEffective January 1, 2008, the Company will be required to adopt two new CICA standards,
Section 3862 Financial Instruments  Disclosures and Section 3863 Financial
Instruments  Presentation which will replace Section 3861 Financial Instruments 
Disclosure and Presentation. The new Disclosure standard increases the emphasis on the
risks associated with both recognized and unrecognized financial instruments and how these
risks are managed. The new Presentation standard carries forward the former presentation
requirements. The Company does not expect that the implementation of these new standards
will have a material impact on its consolidated financial statements.Effective January 1, 2008, the Company will be required to adopt CICA Section 3031
Inventories. This Section relates to the accounting for inventories and revises and
enhances the requirements for assigning costs to inventories. The Company does not expect
that the implementation of this Section will have a material impact on its consolidated
financial statements.
 F-11




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##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 2
    
    SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
    3
    
    DISCONTINUED OPERATIONS
 a)
    
    On November 13, 2007, the Company announced that it was seeking a buyer for the
business and assets of iFire. Accordingly, the results from the operations of this
business have been accounted for on a discontinued basis and the related assets and
liabilities are classified as held for sale. In accordance with CICA Handbook Section
3475 (Section 3475), no depreciation or amortization has been recorded from the date
of this announcement on iFires long-lived assets consisting of capital assets and
intangible assets. Also, in accordance with Section 3475, the Company has estimated the
fair value of these assets at December 31, 2007 less costs to sell, assuming that iFire
will be sold as a going concern. This valuation resulted in a write-down of iFires
capital assets of $22,100 in the fourth quarter of 2007.b)
    
    In December 2005, the Company completed the sale of land and building previously
included in long-term capital assets held for sale. Net proceeds from the sale amounted
to $7,423 and the gain on sale of $1,923 was included in income from discontinued
operations in 2005.c)
    
    In January 2005, the Company completed a series of transactions whereby two
non-core wholly owned subsidiary companies participated in a Plan of Arrangement with
two widely held publicly traded companies. This resulted in the reorganization of the
participating companies into a single company and the dilution of the Companys
investments to approximately 6.0%. The Companys pro rata interest in the book value of
the recapitalized companies amounted to $2,189. Subsequently, the company created under
the Plan of Arrangement was listed on the Toronto Stock Exchange. The subsidiaries were
previously carried at nominal value and this transaction resulted in the Company
recording a dilution gain of $2,189 in 2005. In February 2005, the Company sold its
investment in the publicly traded company discussed above for net proceeds of $11,519
and recorded a gain on sale of $9,330. No income tax provision was recorded in relation
to the dilution gain or the gain on sale of investment as these gains were more than
offset by the reduction of unrecognized tax loss carry-forwards. As a result of the
divestiture, the Companys non-capital losses, capital losses and research and
development tax credits were reduced by approximately $49,500, $7,700 and $600
respectively.d)
    
    In January 2004, the Company sold substantially all of the assets and liabilities
related to the Ambeon business segment, including its wholly owned subsidiary Neomet
Limited, for proceeds of $33,359 (net of transaction costs of $911), of which, $2,800
was held in escrow in respect of general representations and warranties relating to the
sale transaction. The entire escrow amount was received during 2005 and was included as
proceeds on sale of discontinued operations in the consolidated cash flow statement.e)
    
    In 2005, the Company sold the remaining assets and operations related to Ambeon
for net proceeds of $872. The gain on sale of this business amounting to $739 and the
results from operations of this business were reported in discontinued operations in
2005.
 F-12




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##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 3
    
    DISCONTINUED OPERATIONS (continued)
 Results of discontinued operations:
 Year endedRevenue
    
    Dec. 31, 2007
    
    Dec. 31, 2006
    
    Dec. 31, 2005Ambeon
    
    $
    
    
    
    $
    
    
    
    $
    162
 Year endedIncome (expense)
    
    Dec. 31, 2007
    
    Dec. 31, 2006
    
    Dec. 31, 2005Dilution gain
    
    $
    
    
    
    $
    
    
    
    $
    2,189Gain on sale of non-core subsidiaries
    
    
    
    
    
    
    
    
    
    
    9,330Gain on sale of capital assets held for sale
    
    
    
    
    
    
    
    
    
    
    1,923Gain on sale of Ambeon
    
    
    
    
    
    
    
    
    
    
    739Income related to discontinued
operations  Ambeon
    
    
    
    
    
    
    
    
    
    
    597Loss related to discontinued operations  iFire
    
    
    (33,103
    )
    
    
    (37,696
    )
    
    
    (32,829
    )Write-down of discontinued operations to fair value  iFire
    
    
    (22,100
    )
    
    
    
    
    
    
    Loss from discontinued operations
net of income taxes
    
    $
    (55,203
    )
    
    $
    (37,696
    )
    
    $
    (18,051
    )
    December 31,
    
    
    December 31,2007
    
    
    2006Current assets held for sale
    
    $
    590
    
    
    $
    486Accounts payable and accrued liabilities held for sale
    
    
    (1,443
    )
    
    
    (1,812
    )Capital assets held for sale
    
    
    10,086
    
    
    
    44,757Intangible assets held for sale
    
    
    2,392
    
    
    
    3,174
   F-13




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##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 3
    
    DISCONTINUED OPERATIONS (continued)In addition, TPC received warrants to purchase common shares of
iFire exercisable for an additional consideration of $6,283. The
warrants expire on December 31, 2011 and, as at December 31, 2007,
represented approximately 0.5% of the current outstanding common shares of iFire.4
    
    DILUTION GAIN AND GAIN ON SALE OF INVESTMENTSIn the first quarter of 2007, a subsidiary issued 11,954,000
common shares for proceeds of $5,977 to private investors which
reduced the Companys voting interest in the subsidiary to 22.1%. As
a result of this dilution in ownership, the net assets of the
subsidiary were no longer consolidated and in the first quarter of
2007, the Company recorded a dilution gain of $4,525 resulting from a
reduction in cash of $2,306, a reduction in long-term debt of $8,000
and an increase in net working capital of $115. The Company also
recorded a deferred gain of $1,284 in the first quarter of 2007
representing a deficiency in the investment. This investment is
classified as an available-for-sale security. In the third quarter of
2007, the convertible debentures of the subsidiary were converted to
common shares which further reduced the Companys economic interest in
the subsidiary to 14.6%.As a result of the dilution event in the first quarter of 2007,
the Companys consolidated non-capital losses, unclaimed scientific
research and development expenditures, and research and development
tax credits, were reduced by approximately $16,000, $76,000 and
$18,000 respectively.In the fourth quarter of 2007, the Company sold 87% of its
investment in this former subsidiary for proceeds of $1,582. As a
result, the Company realized a gain on the sale of this investment of
$2,648 including the pro-rata recognition of the deferred gain in an
amount of $1,066. The Company continues to carry a deferred gain of
$218 as at December 31, 2007.5
    
    GAIN ON ISSUANCE OF SHARES OF SUBSIDIARY AND NON-CONTROLLING INTERESTOn December 29, 2005, the Companys formerly wholly owned subsidiary, Nucryst, completed an
initial public offering in which 4,500,000 common shares were issued at a price of US $10.00
per share. Net proceeds after commissions and expenses amounted to US $39,095 (CDN $45,502).
US $6,850 of the proceeds were used to reduce the term loan owing by Nucryst to the Company
and the remaining balance of the term loan of US $39,642 was converted to common shares of
Nucryst on January 27, 2006. As a result of these transactions, the Companys ownership in
Nucryst was reduced from 100% to 68.4% as at December 31, 2005 and increased to 75.3% after
the conversion of the remaining term loan on January 27, 2006. The conversion of the term
loan to common shares, completed in January 2006, was in accordance with the terms of the
Nucryst initial public offering and was accounted for as being effective on December 31, 2005
in accordance with Canadian GAAP. The reduction in the Companys equity interest in Nucryst
was accounted for as a disposition of shares and resulted in a dilution gain for accounting
purposes of $30,055 in 2005 and a non-controlling interest of $15,447 as at December 31,
2005.Non-controlling interest on the consolidated statement of operations for the year ended
December 31, 2007 amounted to $1,293 (2006  $3,222; 2005  $nil). The Company recorded a
loss on the issuance of Nucryst shares, in relation to Nucrysts stock-based compensation
plans, of $134 for the year ended December 31, 2007 (2006  $99; 2005  $nil). The Companys
ownership in Nucryst was 74.5% as at December 31, 2007 (2006  74.8%; 2005  68.4%).6
    
    INVENTORIES
 December 31, 2007
    
    December 31, 2006Raw materials
    
    $
    2,759
    
    
    $
    4,531Materials in process
    
    
    1,378
    
    
    
    756Finished product
    
    
    236
    
    
    
    3,217Spare parts and operating materials
    
    
    
    
    
    
    2$
    4,373
    
    
    $
    8,506
 F-14




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##### 



The Westaim Corporation  Notes to Consolidated Financial Statements  Years Ended December 31, 2007, 2006 and 2005  (thousands of Canadian dollars except per share data)
 7
    
    INVESTMENT IN CANADIAN THIRD PARTY ASSET-BACKED COMMERCIAL PAPERIn the third quarter of 2007, global financial markets experienced
an unprecedented credit and liquidity crisis. Dominion Bond Rating
Service (DBRS) placed Canadian third party asset-backed commercial
paper (ABCP) Under Review with Developing Implications following
an announcement on August 16, 2007 that a consortium representing
banks, asset providers and major investors had agreed in principle to
a long-term proposal and interim agreement regarding ABCP (the
Montreal Proposal). Under this proposal, the affected ABCP would be
converted into term floating rate notes maturing no earlier than the
scheduled termination dates of the underlying assets. The Montreal
Proposal called for investors to continue to roll their ABCP during
the standstill period. The Company is not a signatory to this
agreement.On September 6, 2007, a Pan Canadian Committee (the Committee)
was formed to oversee the proposed restructuring process of the ABCP.
On December 23, 2007, the Committee approved an agreement in principle
to restructure the ABCP issued by 20 trusts covered by the Montreal
Proposal, which includes the investments held by the Company. The
Committee expects a AAA rating for most of the restructured notes
which, together with the full transparency of the underlying assets
supporting these notes, will facilitate trading. All of the ABCP will
be exchanged for longer dated notes that will match the maturity of
the underlying reference assets in the proposed structure. The
restructuring will also pool certain series of ABCP which are
supported in whole or in part by underlying synthetic assets. Under
this arrangement, there will be three distinct restructuring solutions
for (1) Traditional-ABCP which is supported solely by traditional
securitized assets, (2) Synthetic-ABCP which is supported by synthetic
assets, or a combination of synthetic and traditional securitized
assets, and (3) Ineligible-ABCP supported primarily by U.S. sub-prime
mortgage assets. The approval of the restructuring is subject to a
vote by all investors, and the Committee expects that the
restructuring will close by March 31, 2008. The information provided
below on the nature of the assets supporting these investments is
based on data provided by the Committee and by DBRS. The Company has
not been able to access information to verify these allocations or the
information relating to the assets securing its investments.At December 31, 2007, the Company held $8,525 of ABCP of which 7%
were Traditional, 91% were Synthetic, and 2% were Ineligible. ABCP
held by the Company was rated by DBRS as R-1 (high) at the date of
investment and met the criteria of the Companys investment policy.
An R-1 (high) rating by DBRS is the highest rating for commercial
paper.At September 30, 2007, the Company held ABCP with a book value of
$14,069 which reflected a face value of $17,050 and a reduction in
fair value of $2,981 recorded in the third quarter of 2007. In
November 2007, in order to diversify its risk in the uncertain global
credit market, the Company sold 50% of its holdings in ABCP with a
face value of $8,525 and a book value of $7,035 for immediate proceeds
of $5,968. The Company retains a right to receive additional proceeds
in the event that the buyer re-sells the related ABCP within six
months. In such event, the Company will receive 50% of any proceeds
received by the buyer in excess of $7,200. This sale resulted in a
loss on the sale of the ABCP of $1,067.The Company has classified its ABCP as long-term investments as
there is no assurance that these assets will be restructured to mature
within a 365-day period. The ABCP in which the Company has invested
has not traded in an active market since mid-August 2007 and there are
currently no market quotations available. The Company has estimated
the fair value of its investments in ABCP considering the best
available public information regarding market conditions and other
factors that a market participant would consider for such investments.
In accordance with CICA Handbook Section 3855, when the market for a
financial instrument is not active, the fair value should be estimated
using an appropriate valuation technique. The Company has used a
probability-weighted discounted cash flow approach to value its ABCP
investments at December 31, 2007 which considered expected interest
rates, fixed/floating interest rate swaps, credit spreads, estimated
restructuring fees, estimated renegotiated maturity dates and
estimated principal reductions. The assumptions used in this model
include: average risk free interest rate of 4.8%; weighted average
discount rate of 6.4%; maturity of long-term notes of 10 years; and
credit losses of 5% to 80%, depending on the nature of the underlying
assets. Due to the lack of public information relating to the details
of the assets supporting these investments and lack of details
surrounding the restructuring proposed by the Committee, the Company
was required to use management estimates when calculating this fair
value. As a result of this valuation, the Company has recorded an
additional valuation adjustment of $1,067 in the fourth quarter of
2007 and the estimated fair value was $5,968 at December 31, 2007.
Based on managements assumptions, the fair value of the Companys
holdings of ABCP could range from $5,600 to $6,400. Realized losses
and valuation adjustments relating to ABCP totaled $5,115 in 2007.
Continuing uncertainties regarding the value of the assets which
underlie the ABCP, the amount and timing of cash flows and the outcome
of the restructuring process could give rise to a further change in
the fair value of the Companys investment in the ABCP which would
impact the Companys results from operations. The Company has
sufficient other cash resources and credit facilities (note 11) to
satisfy its financial obligations as they come due over the next
twelve months.
 F-15




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 8
    
    CAPITAL ASSETS
 Accumulated
    
    NetDecember 31, 2007
    
    Cost
    
    Depreciation
    
    Book ValueBuildings and leasehold
improvements
    
    $
    2,909
    
    
    $
    1,508
    
    
    $
    1,401Machinery and equipment
    
    
    9,422
    
    
    
    3,481
    
    
    
    5,941Construction in progress
    
    
    5,064
    
    
    
    
    
    
    
    5,064Computer hardware and
software
    
    
    1,344
    
    
    
    1,169
    
    
    
    175$
    18,739
    
    
    $
    6,158
    
    
    $
    12,581
 Accumulated
    
    NetDecember 31, 2006
    
    Cost
    
    Depreciation
    
    Book ValueLand
    
    $
    220
    
    
    $
    
    
    
    $
    220Buildings and leasehold
improvements
    
    
    16,407
    
    
    
    9,646
    
    
    
    6,761Machinery and equipment
    
    
    11,993
    
    
    
    4,305
    
    
    
    7,688Construction in progress
    
    
    4,301
    
    
    
    
    
    
    
    4,301Computer hardware and
software
    
    
    1,479
    
    
    
    1,248
    
    
    
    231$
    34,400
    
    
    $
    15,199
    
    
    $
    19,201
      9
    
    INTANGIBLE ASSETS
 December 31, 2007
    
    December 31, 2006Patents and trademarks
    
    $
    2,611
    
    
    $
    2,540Less accumulated amortization
    
    
    1,812
    
    
    
    1,589$
    799
    
    
    $
    951
   10
    
    INCOME TAXESThe following is a reconciliation of income taxes, calculated at
the statutory income tax rate, to the income tax provision included in
the consolidated statement of operations.
 F-16




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 10
    
    INCOME TAXES (continued)
 Year endedDec. 31, 2007
    
    Dec. 31, 2006
    
    Dec. 31, 2005(Loss) income from continuing
operations before income taxes
    
    $
    (2,686
    )
    
    $
    (12,909
    )
    
    $
    27,451Statutory income tax rate
    
    
    32.12
    %
    
    
    32.12
    %
    
    
    33.62
    %Expected income tax (recovery) expense
    
    
    (863
    )
    
    
    (4,146
    )
    
    
    9,229Losses and temporary differences valuation allowance
    
    
    2,456
    
    
    
    4,098
    
    
    
    953Tax effect of items not subject to tax dilution gain (note 4)
    
    
    (1,453
    )
    
    
    
    
    
    
     gain on issuance of shares of
subsidiary (note 5)
    
    
    
    
    
    
    
    
    
    
    (10,107
    )Large corporations and capital taxes
    
    
    4
    
    
    
    
    
    
    
    55Income tax expense (recovery)
    
    $
    144
    
    
    $
    (48
    )
    
    $
    130
   December 31, 2007
    
    December 31, 2006Future income tax assets:Tax benefit of loss carry-forwards
and tax credits
    
    $
    104,430
    
    
    $
    144,561Provisions and reserves
    
    
    3,912
    
    
    
    2,796Capital, intangible and other assets
    
    
    1,198
    
    
    
    2,337Less valuation allowance
    
    
    (109,216
    )
    
    
    (134,182
    )324
    
    
    
    15,512Future income tax liabilities:Capital, intangible and other assets
    
    
    (324
    )
    
    
    (15,330
    )Other
    
    
    
    
    
    
    (182
    )(324
    )
    
    
    (15,512
    )Future income tax assets, net
    
    $
    
    
    
    $
    
    F-17




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 10
    
    INCOME TAXES (continued)proposed adjustments, if processed, will not result in any cash tax liability for the
Company. Although the CRA has not commenced any transfer pricing review for taxation years
beyond 2002, the proposed adjustments, based on the CRAs primary position, are expected to
be extended to later taxation years. Nucryst is currently evaluating the CRAs proposal and
awaiting reports from the CRA which should provide greater details of the basis of their
proposed adjustments. Following receipt of these reports, Nucryst will be better able to
make an informed assessment of the CRAs position. Any reassessments to be issued by the
CRA, on an aggregate basis, could result in a material effect on the Companys consolidated
financial statements, although at this time, the potential impact cannot be reasonably
estimated by Nucryst.11
    
    LONG-TERM DEBTAs at December 31, 2006, a wholly owned subsidiary of the Company
had $8,000 of convertible debentures outstanding which had been issued
to private investors (note 4). These debentures, which were converted
to common shares in July 2007, bore interest at 5% per annum, had no
recourse to the Company and were convertible into a maximum of
16,000,000 non-voting common shares of the subsidiary. These
convertible debentures were financial instruments which had both debt
and equity components. The value assignable to the conversion option
at the date of issue was determined to be immaterial. As a result of
the dilution of the Companys interest in this subsidiary to 22.1% in
the first quarter of 2007, these debentures were no longer included in
the Companys consolidated financial statements (note 4). Interest
expense on these debentures reported by the Company for 2007 amounted
to $94 (2006  $361).In the first quarter of 2008, the Company completed a credit
agreement with a major Canadian financial institution. Under the
terms of the revolving credit line, the Company may borrow up to
$6,300 for 364 days. Borrowings will be secured by ABCP of equivalent
value held by the Company. Interest rates on the credit line increase
during the term from banker acceptance rate to banker acceptance rate
plus 2%.12
    
    PROVISION FOR SITE RESTORATIONThe provision for site restoration amounted to $6,580 at December 31, 2007 and 2006, with no
changes reported in 2007 or 2006.The provision relates primarily to site restoration associated with soil and groundwater
reclamation and remediation, based on periodic independent estimates of these costs.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 determined. Any future recoveries will be
recorded when received.13
    
    CAPITAL STOCKa)     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 2007, 2006, and 2005 are as follows:
 2007
    
    2006
    
    2005Common Shares
    
    Number
    
    Stated Capital
    
    Number
    
    Stated Capital
    
    Number
    
    Stated CapitalBalance at
beginning of year
    
    
    93,978,758
    
    
    $
    426,122
    
    
    
    92,900,649
    
    
    $
    421,466
    
    
    
    92,828,054
    
    
    $
    421,233Employee share
purchase plan
    
    
    54,531
    
    
    
    39
    
    
    
    50,909
    
    
    
    244
    
    
    
    72,595
    
    
    
    233RSUs exercised
    
    
    102,246
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    
    
    
    
    1,027,200
    
    
    
    4,412
    
    
    
    
    
    
    
    Balance at end of
year
    
    
    94,135,535
    
    
    $
    426,262
    
    
    
    93,978,758
    
    
    $
    426,122
    
    
    
    92,900,649
    
    
    $
    421,466
 F-18




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 13
    
    CAPITAL STOCK (continued)During 2007, 54,531 (2006  50,909; 2005  72,595) common shares were issued with respect
to the Companys employee share purchase plan at a weighted average price of $0.49 (2006 
$3.55; 2005  $2.36). The value of these rights to acquire common shares of $13 (2006 
$64; 2005  $62) was reclassified from contributed surplus to share capital.In 2007, 102,246 shares were issued as settlement for 102,246 fully vested RSUs.No options were exercised in 2007 or 2005. In 2006, 1,027,200 options were exercised at a
weighted average price of $4.19 and $108 was reclassified from contributed surplus to share
capital. As a result of the exercise of Nucryst stock options, contributed surplus was
reduced by $nil in 2007 (2006  $31; 2005  $nil).b)
    
    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 10,955,445 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 the end of
the year are cancelled.A summary of the status of the Companys stock option plan as at December 31, 2007, 2006 and
2005, and changes during the years ending on those dates is presented below:
 2007
    
    2006
    
    2005Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    Weighted AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseStock Options
    
    Number
    
    Price
    
    Number
    
    Price
    
    Number
    
    PriceOutstanding at
beginning of year
    
    
    4,431,900
    
    
    $
    7.08
    
    
    
    5,049,600
    
    
    $
    6.68
    
    
    
    4,659,600
    
    
    $
    6.94Granted
    
    
    762,200
    
    
    $
    0.85
    
    
    
    409,500
    
    
    $
    4.73
    
    
    
    390,000
    
    
    $
    3.66Exercised
    
    
    
    
    
    $
    
    
    
    
    (1,027,200
    )
    
    $
    4.19
    
    
    
    
    
    
    $
    Cancelled
    
    
    (428,667
    )
    
    $
    5.84
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Expired
    
    
    (316,835
    )
    
    $
    6.85
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at end
of year
    
    
    4,448,598
    
    
    $
    6.15
    
    
    
    4,431,900
    
    
    $
    7.08
    
    
    
    5,049,600
    
    
    $
    6.68
 F-19




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 13
    
    CAPITAL STOCK (continued)The following table summarizes information about stock options outstanding as at December 31,
2007:
 Options Outstanding
    
    Options ExercisableWeightedNumber
    
    Average Remaining
    
    Weighted Average
    
    Number
    
    WeightedRange of Exercise
    
    Outstanding
    
    Contractual Life
    
    Exercise
    
    Exercisable
    
    AveragePrices
    
    Dec.31, 2007
    
    (in years)
    
    Price
    
    Dec.31, 2007
    
    Exercise Price$0.22$0.93
    
    
    297,200
    
    
    
    9.9
    
    
    $
    0.25
    
    
    
    57,200
    
    
    $
    0.22$0.94$1.40
    
    
    390,000
    
    
    
    6.2
    
    
    $
    1.23
    
    
    
    
    
    
    $
    $1.41$2.10
    
    
    499,533
    
    
    
    4.0
    
    
    $
    1.77
    
    
    
    432,311
    
    
    $
    1.78$2.11$3.20
    
    
    130,800
    
    
    
    6.1
    
    
    $
    2.84
    
    
    
    130,800
    
    
    $
    2.84$3.21$4.80
    
    
    701,000
    
    
    
    4.5
    
    
    $
    3.72
    
    
    
    571,000
    
    
    $
    3.74$4.81$7.20
    
    
    1,351,668
    
    
    
    2.2
    
    
    $
    6.52
    
    
    
    1,168,335
    
    
    $
    6.58$7.21$10.81
    
    
    170,000
    
    
    
    1.1
    
    
    $
    7.53
    
    
    
    170,000
    
    
    $
    7.53$10.82$16.20
    
    
    908,397
    
    
    
    2.1
    
    
    $
    14.13
    
    
    
    908,397
    
    
    $
    14.13Total
    
    
    4,448,598
    
    
    
    3.7
    
    
    $
    6.15
    
    
    
    3,438,043
    
    
    $
    7.30
   Deferred share unit plan
 Restricted share unit plan
  Stock appreciation rights
 F-20




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 13
    
    CAPITAL STOCK (continued)For the year ended December 31, 2007, corporate costs include a recovery of compensation
expense totaling $591 (2006  $1,144; 2005  expense $1,554) relating to DSUs, RSUs and
SARs.Employee share purchase plan  Under the Employee Share Purchase Plan, employees were
entitled to subscribe for common shares of the Company, to a maximum value of five percent of
their annual compensation. Payment for these shares was 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.This plan was discontinued after the issuance of shares in September 2007 with respect to the
2005 and 2006 plans. At December 31, 2007, there were no outstanding purchase arrangements
with employees and the aggregate value was $nil (2006  $409; 2005  $474). During the year
ended December 31, 2007, a total of 54,531 shares were issued under this plan at an average
price of $0.49 (2006  50,909 shares at $3.55; 2005  72,595 shares at $2.36).Subsidiary stock-based compensation plans  The Companys subsidiaries, Nucryst and iFire,
maintain equity incentive plans for certain directors and employees, under which stock
options have been granted representing 7.7% and 3.9% of the outstanding shares of the
respective subsidiaries. These plans are accounted for using the fair value method with the
related compensation expense is recorded in the consolidated statement
of operations. Subsidiary stock options generally vest evenly over a three-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. In
2007, 4,540 Nucryst options were exercised at a weighted average price of $3.08 (2006 
105,303 options at a weighted average price of $3.09). No shares were issued by these
subsidiaries in 2005 with respect to these plans.SARs have been granted to employees of the Companys subsidiaries,
Nucryst and iFire. SARs vest over time and may be settled with cash,
shares of the subsidiary and, in the case of iFire SARs, 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 $586.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. There was no accrued liability as at December 31,
2007 and 2006 as the estimated market value of the subsidiaries SARs
was less than their exercise price.For the year ended December 31, 2007, research and development and
general and administrative expenses included compensation expense
relating to subsidiary SARs of $nil (2006  recovery $19; 2005 
expense $35). There were no Nucryst SARs outstanding at December 31,
2007 or 2006. During the year ended December 31, 2006, 10,376 Nucryst
SARs were exercised and settled through the issuance of 7,610 common
shares of Nucryst (2005  nil).Nucryst Directors and certain Executives have been granted RSUs.
These units are issued at the market value of a Nucryst share at the
date of grant, vest over two to three years and are payable in common
shares of Nucryst. Net changes in the value of these RSUs are
recognized as compensation expense over the vesting period with an
offset to contributed surplus. General and administrative expenses
included compensation expense relating to Nucryst RSUs for the year
ended December 31, 2007 of $79 (2006  $nil; 2005  $nil).14
    
    GUARANTEESThe 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 maintains Director and Officer liability 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 indemnifications 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 12).
 F-21




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 15
    
    COMMITMENTS AND CONTINGENCIESCommitmentsThe Company is committed to capital expenditures of $41 (2006 
$937; 2005  $2,508) and to future annual payments under operating
leases for facility and office space and equipment as follows:
 2008
    
    2009
    
    2010
    
    2011
    
    2012$1,741
    
    $
    1,540
    
    
    $
    1,294
    
    
    $
    1,306
    
    
    $
    849
  Contingencies
  16
    
    FINANCIAL INSTRUMENTSFair 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 2007, a 1% decrease in interest rates on investments,
excluding ABCP (note 7), would have reduced earnings before income taxes by approximately
$160. Conversely, a 1% increase in interest rates would have increased earnings before
income taxes by a similar amount.Foreign currency riskThe Company is exposed to currency risks as a result of holding U.S. dollar denominated
monetary assets and as a result of export to foreign jurisdictions of goods produced in
Canada. These risks are partially covered by purchases of goods and services in the foreign
currency.Credit riskThe Companys financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments, investments, and accounts
receivable. Cash, cash equivalents and short-term investments are
placed with major financial institutions or invested in the commercial
paper of large organizations. The Company currently faces credit risk
relating to the exposure from holding ABCP (note 7). The Company has
a concentration of credit risk through its reliance on one customer
for Nucrysts wound care products. This risk is limited due to the
long-term contractual relationship with this customer.17
    
    EARNINGS PER COMMON SHAREIn 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:
 F-22




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 17
    
    EARNINGS PER COMMON SHARE (continued)
 Year endedDec. 31, 2007
    
    Dec. 31, 2006
    
    Dec. 31, 2005Weighted average number of
common shares
outstanding    basic
earnings per share
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    92,852,120Effect of dilutive securities Options
    
    
    
    
    
    
    
    
    
    
    267,078 Employee share
purchase plan
    
    
    
    
    
    
    
    
    
    
    1,738Weighted average number of
common shares
outstanding 
diluted earnings per
share
    
    
    94,069,547
    
    
    
    93,523,041
    
    
    
    93,120,936
   18
    
    SEGMENTED INFORMATIONThe Company had two operating segments, Nucryst and iFire, which have been determined based
on the nature of the products produced. In November 2007, the
Company announced its intention to sell iFire and, as a result, the iFire segment has been
reported as a discontinued operation (note 3).The Nucryst segment researches, develops and commercializes wound care products and
pharmaceutical products based on noble metal nanocrystalline technology.The accounting policies of the reportable segments are the same as those described in note 2.
Included in other non-cash assets of $6,403 at December 31, 2007 (2006  $6,169; 2005 
$6,914) are assets that cannot be allocated to a particular segment. Non-cash assets
excludes short-term investments and assets held for sale.
 Year ended
    
    
    
    
    
    Operating
    
    Depreciation and
    
    Capital
    
    Non-cash AssetsDecember 31, 2007
    
    Revenue
    
    Loss
    
    Amortization
    
    Expenditures
    
    Dec.31, 2007Nucryst
    
    $
    31,830
    
    
    $
    (635
    )
    
    $
    1,760
    
    
    $
    2,083
    
    
    $
    32,923Other
    
    
    
    
    
    
    (10,805
    )
    
    
    333
    
    
    
    293
    
    
    
    6,403$
    31,830
    
    
    $
    (11,440
    )
    
    $
    2,093
    
    
    $
    2,376
    
    
    $
    39,326
 Year ended
    
    
    
    
    
    Operating
    
    Depreciation
    
    
    
    
    
    Non-cash AssetsDecember 31, 2006
    
    Revenue
    
    Loss
    
    and Amortization
    
    Capital Expenditures
    
    Dec.31, 2006Nucryst
    
    $
    27,591
    
    
    $
    (11,216
    )
    
    $
    1,876
    
    
    $
    5,609
    
    
    $
    31,267Other
    
    
    
    
    
    
    (6,128
    )
    
    
    738
    
    
    
    932
    
    
    
    6,169$
    27,591
    
    
    $
    (17,344
    )
    
    $
    2,614
    
    
    $
    6,541
    
    
    $
    37,436
 OperatingYear ended
    
    
    
    
    
    Income
    
    Depreciation
    
    
    
    
    
    Non-cash AssetsDecember 31, 2005
    
    Revenue
    
    (Loss)
    
    and Amortization
    
    Capital Expenditures
    
    Dec.31, 2005Nucryst
    
    $
    28,560
    
    
    $
    1,590
    
    
    $
    1,549
    
    
    $
    4,584
    
    
    $
    27,315Other
    
    
    
    
    
    
    (8,163
    )
    
    
    717
    
    
    
    1,993
    
    
    
    6,914$
    28,560
    
    
    $
    (6,573
    )
    
    $
    2,266
    
    
    $
    6,577
    
    
    $
    34,229
 F-23




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 18
    
    SEGMENTED INFORMATION (continued)All of Nucrysts revenues are earned through a long-term exclusive licensing agreement with
an international wound care company, Smith & Nephew plc (Smith & Nephew), which expires in
2026. Nucryst exports manufactured products to this company for their resale in
international markets.19
    
    AGREEMENTS WITH SMITH & NEPHEWOn September 30, 2007, Nucryst and Smith & Nephew signed amended
agreements for the sale to Smith & Nephew of Acticoat wound care
dressings manufactured by Nucryst. The new agreements amended the
criteria for the achievement of sales milestones that resulted in a
U.S. $5,000 sales milestone being earned by Nucryst in the third
quarter of 2007. The cost to manufacture Acticoat products was
previously fully reimbursed to Nucryst. The cost recovery structure
has been amended so that the parties will annually come to an
agreement on the direct costs and fixed overhead costs for
manufacturing these products. A U.S. $4,500 manufacturing cost
rebate, relating to 2007, became due and payable to Smith & Nephew on
September 30, 2007 under the terms of the amended agreements. Nucryst
has also committed to similar payments of U.S. $4,500 in each of the
years 2008 and 2009. The manufacturing cost rebate is recorded as a
reduction to wound care product revenue. After 2009, additional
amounts may become due under the terms of the agreements.Milestone revenue for 2007 was $10,143 (2006  $nil; 2005 
$5,882). Wound care product revenue for 2007 was reduced by $4,565
(2006  $nil; 2005  $nil) relating to the 2007 manufacturing cost
rebate.20
    
    OPERATIONAL RESTRUCTURINGIn 2007, the Company announced an operational restructuring in
which staffing levels at iFire and at the Companys corporate offices
were reduced.The total operational restructuring costs, including severances
and transition costs, are estimated to amount to $8,994 of which
$8,798 has been expensed in 2007. Of these amounts, $3,904 is
included in discontinued operations while $4,894 is included in
corporate costs in the consolidated statement of operations. In
addition, approximately $196 in costs have not yet been expensed as
they relate to future estimated severance amounts and to completion
bonus arrangements which will be charged to operations
evenly over the employees expected remaining employment period. These amounts
do not include additional severance costs that may be incurred as a result of
the decision to sell iFire discussed in note 3. Included in accounts payable
and accrued liabilities at December 31, 2007 are accrued severances and
transition costs of $2,430 relating to the operational restructuring. Accounts
payable and accrued liabilities held for sale include accrued severance costs
of $284.21
    
    SUBSEQUENT EVENTSIn January 2008, a wholly owned subsidiary of the
Company issued to a non-related Canadian company
common shares for proceeds of $1,000 representing 40%
of the issued share capital of the subsidiary and
$3,500 of convertible debentures. The debentures
mature on January 31, 2009 and bear interest at 1.0%
per annum commencing February 1, 2008. Interest is
waived for the portion of the year in which the
debentures are converted. The debentures have no
recourse to the Company and are convertible into
common non-voting shares of the subsidiary
representing 58.3% of the issued share capital on a
fully diluted basis. As a result of these
transactions, the Companys interest in this
subsidiary was reduced to 60% in January 2008 and the
Company will report a dilution gain of $1,000 in the
first quarter of 2008. If the debentures are
converted, the Companys economic interest in the
subsidiary will be reduced to approximately 25% and
the Companys consolidated non-capital losses,
unclaimed scientific research and development
expenditures and research and development tax credits
will be reduced by approximately $85,000, $17,000 and
$19,000 respectively.
 F-24




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 22
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATESThese consolidated financial statements have been prepared in accordance with Canadian GAAP
which conform in all material respects with those used in U.S. GAAP, except as set forth
below:
 December 31, 2007
    
    December 31, 2006Consolidated Balance Sheets
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPIntangible assets held for sale (a)
    
    $
    2,392
    
    
    $
    2,392
    
    
    $
    3,174
    
    
    $
    2,174Non-controlling interest (b)
    
    
    11,757
    
    
    
    11,730
    
    
    
    12,805
    
    
    
    12,775Capital stock (b)
    
    
    426,262
    
    
    
    425,958
    
    
    
    426,122
    
    
    
    425,831Contributed Surplus (b)
    
    
    7,769
    
    
    
    4,568
    
    
    
    5,379
    
    
    
    2,468Deficit (a)(b)(c)
    
    
    (375,881
    )
    
    
    (382,858
    )
    
    
    (317,848
    )
    
    
    (326,125
    )Additional paid-in-capital (c)
    
    
    
    
    
    
    10,509
    
    
    
    
    
    
    
    10,509
 Shareholders Equity
    
    December 31, 2007
    
    December 31, 2006Canadian GAAP
    
    $
    56,371
    
    
    $
    112,977AdjustmentsStock-based compensation (b)
    
    
    27
    
    
    
    30Research and development (a)
    
    
    
    
    
    
    (1,000
    )U.S. GAAP
    
    $
    56,398
    
    
    $
    112,007
 Year endedConsolidated Statements of Operations
    
    Dec. 31, 2007
    
    
    Dec. 31, 2006
    
    
    Dec. 31, 2005(Loss) income from continuing operationsCanadian GAAP
    
    $
    (2,830
    )
    
    $
    (12,861
    )
    
    $
    27,321Stock-based compensation (b)
    
    
    303
    
    
    
    (280
    )
    
    
    905Non-controlling interest (b)
    
    
    (2
    )
    
    
    30
    
    
    
    Cumulative effect of a change in
accounting principle (b)
    
    
    
    
    
    
    (202
    )
    
    
    (Loss) income from continuing operationsU.S. GAAP
    
    
    (2,529
    )
    
    
    (13,313
    )
    
    
    28,226Loss from discontinued operationsCanadian GAAP
    
    
    (55,203
    )
    
    
    (37,696
    )
    
    
    (18,051
    )Research and development (a)
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000Loss from discontinued operations  U.S. GAAP
    
    
    (54,203
    )
    
    
    (36,696
    )
    
    
    (17,051
    )Net (loss) income applicable to common
shareholdersU.S. GAAP
    
    
    (56,732
    )
    
    
    (50,009
    )
    
    
    11,175Foreign currency translation adjustments
    
    
    (1,103
    )
    
    
    (173
    )
    
    
    (503
    )Comprehensive (loss) incomeU.S. GAAP
    
    $
    (57,835
    )
    
    $
    (50,182
    )
    
    $
    10,672
 F-25




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 22
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (continued)
 Year ended(Loss) Income Per Common Share
    
    Dec. 31, 2007
    
    
    Dec. 31, 2006
    
    
    Dec. 31, 2005Canadian GAAP(Loss) income from continuing
operations before and after the
cumulative effect of a change in
accounting principle
    
    $
    (0.03
    )
    
    $
    (0.14
    )
    
    $
    0.29Loss from discontinued operations
    
    $
    (0.59
    )
    
    $
    (0.40
    )
    
    $
    (0.19
    )Net (loss) income
    
    $
    (0.62
    )
    
    $
    (0.54
    )
    
    $
    0.10U.S. GAAP(Loss) income from continuing
operations before and after the
cumulative effect of a change in
accounting principle
    
    $
    (0.02
    )
    
    $
    (0.14
    )
    
    $
    0.30Loss from discontinued operations
    
    $
    (0.58
    )
    
    $
    (0.39
    )
    
    $
    (0.18
    )Net (loss) income
    
    $
    (0.60
    )
    
    $
    (0.53
    )
    
    $
    0.12
 a)
    
    Research and DevelopmentUnder U.S. GAAP, the cost of purchased research and development should be charged to income, in the period incurred, when no alternative uses exist for the purchased research and development. As the patents and intellectual property purchased are restricted to use in inorganic electroluminescent displays, the costs have been fully expensed under U.S. GAAP.Under Canadian GAAP, such costs are capitalized and amortized over their estimated useful lives.b)
    
    Stock-based CompensationFor U.S. GAAP, on January 1, 2006, the Company adopted SFAS 123(R), Share-Based Payment (SFAS 123(R)), which requires that all share-based payments to directors and employees, including grants of stock options, be recognized in the financial statements based on their fair values.The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006.SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Companys consolidated statement of operations because the exercise price of the Companys stock options granted to
employees and directors equaled the fair market value of the underlying stock at the date of grant.SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma information required under SFAS 123 for the periods prior to fiscal year 2006, the Company accounted for forfeitures as they occurred. Under Canadian GAAP, the Company accounts for forfeitures at the date they occur.SFAS 123(R) requires that liability classified awards such as SARs be revalued to estimated fair value at each reporting date using an option pricing model. Prior to the adoption of SFAS 123(R), the Company valued SARs at the amount by which the market value exceeded the exercise price at each measurement date. Under Canadian GAAP, the Company records the value of SARs as the amount by which quoted market prices or fair value exceeds the exercise price at measurement date.
 F-26




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 22
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (continued)
 Under SFAS 123(R), the fair value of options with accelerated vesting provisions issued
prior to 2007 is expensed using a graded vesting methodology. Under Canadian GAAP, the
fair value of these options is expensed on a straight-line vesting basis.The Company continues to use the Black-Scholes option-pricing model for valuation of
share-based payment awards which was previously used for the Companys pro forma
information required under SFAS 123.The impact of the implementation of SFAS 123(R) on the reconciliation between Canadian
GAAP and U.S. GAAP in 2007 on the consolidated statement of operations was a decrease in
stock-based compensation expense under U.S. GAAP of $303 (2006  increase $280; 2005 
decrease $905) relating to activity in the current year and $nil (2006  expense $202)
relating to the cumulative effects of the change in accounting principle. The impact on
non-controlling interest for 2007 resulting from the implementation of SFAS 123(R)
amounted to an increase of $2 (2006  decrease $30) in loss from continuing operations
under U.S. GAAP.Stock-based compensation  pro forma disclosureFor U.S. GAAP, effective January 1, 2006, the Company adopted SFAS 123(R) which requires
that liability classified awards such as SARs be measured at fair value at each balance
sheet date until the awards are settled. Previously, net changes in the value of SARs,
measured as the amount by which the market value of the common shares of the Company
exceeds the exercise price at the measurement date, were recognized as compensation
expense over the SARs vesting period with a corresponding increase to accounts payable
and accrued liabilities.If compensation costs for the Companys and its subsidiaries stock option plans had been
determined using SFAS 123(R) prior to January 1, 2006, the Companys net income (loss)
per share for 2005 would have been adjusted to the pro-forma amounts indicated below:
 Year endedDec. 31, 2005Net income applicable to common shareholders
 U.S. GAAP
    
    $
    11,175Total stock-based compensation expense determined
under the fair-value based method for awards net of
tax effects
    
    
    (905
    )Pro forma net income applicable to common shareholders
 U.S. GAAP
    
    $
    10,270Income per common share  U.S. GAAPIncome from continuing operations
    
    
    0.30Net income
    
    
    0.12Pro formaIncome from continuing operations
    
    
    0.29Net income
    
    
    0.11
 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 may be recorded as income except in circumstances where
subsequent capital transactions are contemplated that raise concerns about the likelihood
of realizing the gain. In addition, realization of the gain is not assured where the
subsidiary is a newly formed, non-operating entity; a research and development start-up;
or a development-stage company. It is the Companys policy to record dilution gains as a
component of income for U.S. GAAP purposes. However, for a transaction in 2001 involving
iFire, which at that time was an early stage research and development company, the
dilution gain of $10,509 was required to be recorded in equity as an increase in paid-in
capital rather than as income. Subsequent dilution gains have met the criteria for
income statement recognition under both Canadian GAAP and U.S. GAAP.
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The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 22
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (continued)
 Recently Adopted and Pending Accounting PronouncementsSFAS 157In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. The Company has determined that the adoption of SFAS 157 will not have a material
effect on its consolidated financial statements.SFAS 159In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to
measure eligible financial instruments at fair value as of specified dates. Such election,
which may be applied on an instrument by instrument basis, is typically irrevocable once
elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early
application is allowed under certain circumstances. The Company has determined that the
adoption of SFAS 159 will not have a material effect on its consolidated financial position.SFAS 141(R) and SFAS 160The FASB recently completed the second phase of its business combinations project, to date
the most significant convergence effort with the International Accounting Standards Board
(IASB), and issued the following two accounting standards:
 i)
    
    Statement No. 141(R), Business Combination; andii)
    
    Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51.
 These statements dramatically change the way companies account for business combinations and noncontrolling interests (minority interests in current U.S.
GAAP). Compared with their predecessors, Statements 141(R) and 160 will require:
 
    
    More assets acquired and liabilities assumed to be measured at fair value as of the acquisition date;
    
    Liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period;
    
    An acquirer in preacquisition periods to expense all acquisition related costs; and
    
    Noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity.
 Statements 141(R) and 160 should both be applied prospectively for fiscal years beginning on
or after December 15, 2008. However, Statement 160 requires entities to apply the
presentation and disclosure requirements retrospectively (e.g., by reclassifying
noncontrolling interests to appear in equity) to comparative financial statements if
presented. Both standards prohibit early adoption. The Company is currently assessing the
impact these new standards will have on its consolidated financial statements.FIN 48On January 1, 2007, the Company adopted the provisions of FIN 48 that prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The
interpretation requires that the Company recognize the impact of a tax position in the
financial statements if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods and
disclosure. In accordance with the provisions of FIN 48, any cumulative effect resulting
from the change in accounting principle is to be recorded as an adjustment to the opening
balance of deficit. The adoption of FIN 48 did not result in a material impact on the
Companys financial position or results of operations.EITF 07-3In June 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-3, Accounting
for Non-refundable Advance Payments for Goods or Services Received for Use in Future Research
and Development Activities (EITF 07-3). EITF 07-3 requires that non refundable advance
payments for goods or services that will be used or rendered for future research and
development activities be deferred and capitalized and recognized as an expense as the goods
are delivered or the related services are performed. EITF 07-3 is effective for fiscal years
beginning after December 15, 2007 and will be adopted in the first quarter of 2008. The
Company has determined that the adoption of EITF 07-3 will not have a material impact on its
consolidated financial statements.
 F-28




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The Westaim Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
(thousands of Canadian dollars except per share data)
 22
    
    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (continued)
 EITF 07-1In September 2007, the EITF reached a consensus on EITF Issue No. 07-1 Collaborative
Arrangements (EITF 07-1). EITF 07-1 addresses the accounting for arrangements in which
two companies work together to achieve a commercial objective, without forming a separate
legal entity. The nature and purpose of a companys collaborative arrangements are required
to be disclosed, along with the accounting policies applied and the classification and
amounts for significant financial activities related to the arrangements. EITF 07-1 is
effective for fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact EITF 07-1 will have on its results of operations and financial position.
 F-29




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ITEM 18. FINANCIAL STATEMENTS
  ITEM 19. EXHIBITS
  68




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SIGNATURES
   THE WESTAIM CORPORATIONBy:

/s/ G.A. (Drew) FitchName:
    G.A. (Drew) FitchTitle:
    President and Chief Executive Officer and Chief Financial OfficerDate: May 2, 2008 69




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ANNUAL REPORT ON FORM 20-F
 EXHIBIT INDEX
 Exhibit No.
    
    Description of Document1
    
    Exhibits, Financial Statements and Schedules of Nucryst Pharmaceuticals Corp.
filed with the Nucryst Pharmaceuticals Corp. 2007 Annual Report on Form 10-K
dated February 28, 2008.2
    
    Consent of Deloitte & Touche LLP.3
    
    Section 906 Certification of Chief Executive Officer and Chief Financial Officer.4
    
    Section 302 Certification of Chief Executive Officer.5
    
    Section 302 Certification of Chief Financial Officer.
 70