##### 



Auditors Report

To the Shareholders of
The Westaim Corporation

We have audited the consolidated balance sheets of The Westaim Corporation as
at December 31, 2002 and 2001 and the consolidated statements of loss, deficit
and cash flow for each of the years in the three year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2002 and 2001 and the results of its operations and cash flow for each of the
years in the three year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles (which differ in certain
material respects from accounting principles generally accepted in the United
States (see Note 23)).

On January 30, 2003, we reported separately to the shareholders of the Company
on consolidated financial statements for the same period, prepared in
accordance with Canadian generally accepted accounting principles which
excluded Note 23 on Differences in Canadian and United States Accounting
Principles.

(Signed) Deloitte & Touche LLP

|                                 |  |                      
|-------------------------------- |  | ---------------------
|Calgary, Canada
January 30, 2003 |  | Chartered Accountants





---



##### 



Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Differences

To the Shareholders of
The Westaim Corporation

In the United States of America, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph)
outlining changes in accounting principles that have been implemented in the
financial statements. As discussed in Note 3 to the December 31, 2002
consolidated financial statements, the Company changed its accounting policy
for stock-based compensation in accordance with the new requirements under the
Canadian Institute of Chartered Accountants Handbook Section 3870. The impact
of this change in accounting policy is as set out in Notes 2(n) and 3 to the
consolidated financial statements.

(Signed) Deloitte & Touche LLP

|                                 |  |                      
|-------------------------------- |  | ---------------------
|Calgary, Canada
January 30, 2003 |  | Chartered Accountants

(DELOITTE TOUCHE TOHMATSU LOGO)





---



##### 



THE WESTAIM CORPORATION
Consolidated Balance Sheets

|                                         |                                          |      |             |          |             |      |             |          |   |   |         |         |  
|---------------------------------------- | ---------------------------------------- | ---- | ----------- | -------- | ----------- | ---- | ----------- | -------- | - | - | ------- | ------- | -
|                                         |                                          |      | December 31 |          | December 31 |      | December 31
|(thousands)                              |                                          | 2002 |             | 2001     |             | 2000
|                                         |                                          |      |             |          |             |     
|ASSETS                                   |                                          |      |             |          |             |      |             |          |   |   |         |        
|Current                                  |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         | Cash and cash equivalents                |      | $           | 77,631   |             |      | $           | 138,373  |   |   | $       | 124,519 |  
|                                         | Short-term investments                   |      |             | 25,250   |             |      |             |         |   |   |         |        |  
|                                         | Accounts receivable                      |      |             | 14,114   |             |      |             | 18,152   |   |   |         | 44,894  |  
|                                         | Inventories (Note 5)                     |      |             | 13,939   |             |      |             | 18,510   |   |   |         | 27,614  |  
|                                         | Future income taxes (Note 8)             |      |             |         |             |      |             |         |   |   |         | 9,345   |  
|                                         | Other                                    |      |             | 858      |             |      |             | 929      |   |   |         | 778     |  
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         |                                          |      | 131,792     |          |             |      | 175,964     |          |   |   | 207,150 |        
|Capital assets (Note 6)                  |                                          |      | 45,265      |          |             |      | 44,833      |          |   |   | 77,023  |        
|Deferred charges (Note 7)                |                                          |      | 2,461       |          |             |      | 2,085       |          |   |   | 2,575   |        
|Future income taxes (Note 8)             |                                          |      | 5,730       |          |             |      | 12,115      |          |   |   | 7,249   |        
|Investments (Note 9)                     |                                          |      | 500         |          |             |      | 3,182       |          |   |   | 15,485  |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         |                                          | $    | 185,748     |          |             | $    | 238,179     |          |   | $ | 309,482 |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY     |                                          |      |             |          |             |      |             |          |   |   |         |        
|Current                                  |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         | Accounts payable and accrued liabilities |      | $           | 19,220   |             |      | $           | 17,943   |   |   | $       | 20,854  |  
|Provision for site restoration (Note 10) |                                          |      | 7,749       |          |             |      | 7,175       |          |   |   | 4,689   |        
|Deferred licensing revenue (Note 11)     |                                          |      | 565         |          |             |      | 4,439       |          |   |   | 8,325   |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         |                                          |      | 27,534      |          |             |      | 29,557      |          |   |   | 33,868  |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|Commitments and contingencies (Note 19)  |                                          |      |             |          |             |      |             |          |   |   |         |        
|Shareholders equity                     |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         | Capital stock (Note 12)                  |      |             | 373,128  |             |      |             | 372,598  |   |   |         | 372,131 |  
|                                         | Contributed Surplus (Note 12)            |      |             | 403      |             |      |             |         |   |   |         |        |  
|                                         | Deficit                                  |      |             | (215,317 | )           |      |             | (163,976 | ) |   |         | (96,517 | )
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         |                                          |      | 158,214     |          |             |      | 208,622     |          |   |   | 275,614 |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        
|                                         |                                          | $    | 185,748     |          |             | $    | 238,179     |          |   | $ | 309,482 |        
|                                         |                                          |      |             |          |             |      |             |          |   |   |         |        

|                                 |  |                         
|-------------------------------- |  | ------------------------
|Approved on behalf of the Board: |  |                         
|                                
|/s/Ian W. Delaney                |  | /s/Guy J. Turcotte      
|                                
|Ian W. Delaney
Director          |  | Guy J. Turcotte
Director





---



##### 



THE WESTAIM CORPORATION
Consolidated Statements of Loss and Consolidated Statements of Deficit

|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |        |  
|-------------------------------------------------------------------- | -------------------------------------------------- | ---- | ----------- | ------ | ----------- | ---- | ----------- | ------- | - | - | -------- | ------ | -
|                                                                     |                                                    |      | Year Ended  |        | Year Ended  |      | Year Ended 
|                                                                     |                                                    |      | December 31 |        | December 31 |      | December 31
|(thousands)                                                          |                                                    | 2002 |             | 2001   |             | 2000
|                                                                     |                                                    |      |             |        |             |     
|Revenue                                                              |                                                    | $    | 49,063      |        |             | $    | 50,267      |         |   | $ | 51,324   |       
|Costs                                                                |                                                    |      |             |        |             |      |             |         |   |   |          |       
|                                                                     | Manufacturing                                      |      |             | 24,787 |             |      |             | 25,551  |   |   |          | 25,105 |  
|                                                                     | Selling, general and administrative                |      |             | 8,454  |             |      |             | 11,711  |   |   |          | 15,190 |  
|                                                                     | Research and development (Note 13)                 |      |             | 25,692 |             |      |             | 16,924  |   |   |          | 26,663 |  
|                                                                     | Depreciation and amortization                      |      |             | 5,849  |             |      |             | 5,551   |   |   |          | 5,728  |  
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Divisional loss                                                      |                                                    |      | (15,719     | )      |             |      | (9,470      | )       |   |   | (21,362  | )     
|                                                                     | Corporate costs                                    |      |             | (6,686 | )           |      |             | (7,750  | ) |   |          | (7,654 | )
|                                                                     | Interest income                                    |      |             | 2,206  |             |      |             | 7,727   |   |   |          | 7,694  |  
|                                                                     | Gain on sale of assets (Note 14)                   |      |             |       |             |      |             | 20,122  |   |   |          |       |  
|                                                                     | Equity loss (Note 9)                               |      |             | (3,410 | )           |      |             | (18,687 | ) |   |          | (8,024 | )
|                                                                     | Gain on issuance of shares by subsidiary (Note 16) |      |             |       |             |      |             |        |   |   |          | 10,509 |  
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Loss from continuing operations before income taxes                  |                                                    |      | (23,609     | )      |             |      | (8,058      | )       |   |   | (18,837  | )     
|Income tax (expense) recovery (Note 8)                               |                                                    |      |             |        |             |      |             |         |   |   |          |       
|                                                                     | Current                                            |      |             | (101   | )           |      |             | (75     | ) |   |          | (698   | )
|                                                                     | Future                                             |      |             | (6,385 | )           |      |             | (295    | ) |   |          | 994    |  
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|                                                                     |                                                    |      | (6,486      | )      |             |      | (370        | )       |   |   | 296      |       
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Loss from continuing operations                                      |                                                    |      | (30,095     | )      |             |      | (8,428      | )       |   |   | (18,541  | )     
|Loss from discontinued operations net of income taxes (Note 4)       |                                                    |      | (19,667     | )      |             |      | (59,031     | )       |   |   | (5,346   | )     
|Gain on disposal of discontinued assets net of income taxes (Note 4) |                                                    |      |            |        |             |      |            |         |   |   | 9,239    |       
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Net loss for the year                                                |                                                    | $    | (49,762     | )      |             | $    | (67,459     | )       |   | $ | (14,648  | )     
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Loss per common share (Note 21)                                      |                                                    |      |             |        |             |      |             |         |   |   |          |       
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|                                                                     | Continuing operations  basic and diluted          |      | $           | (0.39  | )           |      | $           | (0.11   | ) |   | $        | (0.24  | )
|                                                                     | Net loss  basic and diluted                       |      |             | (0.64  | )           |      |             | (0.87   | ) |   |          | (0.19  | )
|Weighted average number of shares outstanding (thousands)            |                                                    |      | 77,924      |        |             |      | 77,741      |         |   |   | 76,940   |       
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Deficit at beginning of year                                         |                                                    | $    | (163,976    | )      |             | $    | (96,517     | )       |   | $ | (102,667 | )     
|Change in accounting policy (Note 3)                                 |                                                    |      | (1,579      | )      |             |      |            |         |   |   | 20,798   |       
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|As restated                                                          |                                                    |      | (165,555    | )      |             |      | (96,517     | )       |   |   | (81,869  | )     
|Net loss                                                             |                                                    |      | (49,762     | )      |             |      | (67,459     | )       |   |   | (14,648  | )     
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       
|Deficit at end of year                                               |                                                    | $    | (215,317    | )      |             | $    | (163,976    | )       |   | $ | (96,517  | )     
|                                                                     |                                                    |      |             |        |             |      |             |         |   |   |          |       





---



##### 



THE WESTAIM CORPORATION
Consolidated Cash Flow Statements

|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |         |  
|------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------- | ------- | ----------- | ------ | ----------- | ------- | ----------- | ------- | - | ------- | ------- | ------- | -
|                                                        |                                                                            |                                          |         | Year Ended  |        | Year Ended  |         | Year Ended 
|                                                        |                                                                            |                                          |         | December 31 |        | December 31 |         | December 31
|(thousands)                                             |                                                                            | 2002                                     |         | 2001        |        | 2000       
|                                                        |                                                                            |                                          |         |             |        |            
|Operating activities                                    |                                                                            |                                          |         |             |        |             |         |             |         |   |         |        
|                                                        | Loss from continuing operations                                            |                                          | $       | (30,095     | )      |             | $       | (8,428      | )       |   | $       | (18,541 | )      
|                                                        | Items not affecting cash                                                   |                                          |         |             |        |             |         |             |         |   |         |         |        
|                                                        |                                                                            | Depreciation and amortization            |         |             | 5,849  |             |         |             | 5,551   |   |         |         | 5,784   |  
|                                                        |                                                                            | Provision for site restoration costs     |         |             | 1,120  |             |         |             | 3,070   |   |         |         | 5,516   |  
|                                                        |                                                                            | Future income taxes                      |         |             | 6,385  |             |         |             | 295     |   |         |         | (994    | )
|                                                        |                                                                            | Loss (gain) on sale of assets            |         |             | 422    |             |         |             | (20,122 | ) |         |         |        |  
|                                                        |                                                                            | Gain on issuance of shares by subsidiary |         |             |       |             |         |             |        |   |         |         | (10,509 | )
|                                                        |                                                                            | Deferred licensing revenue               |         |             | (4,270 | )           |         |             | (4,272  | ) |         |         | (3,467  | )
|                                                        |                                                                            | Equity loss on investments               |         |             | 3,410  |             |         |             | 18,687  |   |         |         | 8,024   |  
|                                                        |                                                                            | Other items                              |         |             | (479   | )           |         |             | 194     |   |         |         | (200    | )
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|                                                        | Cash used in continuing operations before non-cash
working capital changes |                                          |         | (17,658     | )      |             |         | (5,025      | )       |   |         | (14,387 | )      
|                                                        | Changes in continuing operations non-cash working capital                  |                                          |         |             |        |             |         |             |         |   |         |         |        
|                                                        |                                                                            | Accounts receivable                      |         |             | 629    |             |         |             | 6,899   |   |         |         | (9,028  | )
|                                                        |                                                                            | Inventories                              |         |             | 3,280  |             |         |             | (5,535  | ) |         |         | 2,313   |  
|                                                        |                                                                            | Other                                    |         |             | (52    | )           |         |             | (949    | ) |         |         | 1,796   |  
|                                                        |                                                                            | Accounts payable and accrued liabilities |         |             | (823   | )           |         |             | (5,782  | ) |         |         | (2,237  | )
|Site restoration expenditures                           |                                                                            |                                          | (546    | )           |        |             | (585    | )           |         |   | (1,645  | )      
|Deferred licensing revenue                              |                                                                            |                                          | 396     |             |        |             | 386     |             |         |   | 11,792  |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Cash used in continuing operations                      |                                                                            |                                          | (14,774 | )           |        |             | (10,591 | )           |         |   | (11,396 | )      
|Cash (used in) provided from discontinued operations    |                                                                            |                                          | (11,179 | )           |        |             | 15,683  |             |         |   | (11,586 | )      
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Total cash (used in) provided from operating activities |                                                                            |                                          | (25,953 | )           |        |             | 5,092   |             |         |   | (22,982 | )      
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Investing activities                                    |                                                                            |                                          |         |             |        |             |         |             |         |   |         |        
|                                                        | Capital expenditures  continuing operations                               |                                          |         | (7,218      | )      |             |         | (5,675      | )       |   |         | (9,569  | )      
|                                                        | Capital expenditures  discontinued operations                             |                                          |         | (478        | )      |             |         | (2,144      | )       |   |         | (4,163  | )      
|                                                        | Proceeds on sale of discontinued assets                                    |                                          |         |            |        |             |         |            |         |   |         | 18,000  |        
|                                                        | Short-term investments                                                     |                                          |         | (25,250     | )      |             |         |            |         |   |         | 90,126  |        
|                                                        | Deferred charges                                                           |                                          |         | (948        | )      |             |         | (629        | )       |   |         | (906    | )      
|                                                        | Proceeds on sale of assets (Note 14)                                       |                                          |         |            |        |             |         | 23,127      |         |   |         |        |        
|                                                        | Investments                                                                |                                          |         | (728        | )      |             |         | (6,384      | )       |   |         | (23,509 | )      
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Cash (used in) provided from investing activities       |                                                                            |                                          | (34,622 | )           |        |             | 8,295   |             |         |   | 69,979  |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Financing activities                                    |                                                                            |                                          |         |             |        |             |         |             |         |   |         |        
|                                                        | Issuance of common shares                                                  |                                          |         | 151         |        |             |         | 467         |         |   |         | 10,449  |        
|                                                        | Repurchase of common shares                                                |                                          |         | (318        | )      |             |         |            |         |   |         |        |        
|                                                        | Proceeds on sale of subsidiary shares                                      |                                          |         |            |        |             |         |            |         |   |         | 10,509  |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Cash (used in) provided from financing activities       |                                                                            |                                          | (167    | )           |        |             | 467     |             |         |   | 20,958  |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Net (decrease) increase in cash and cash equivalents    |                                                                            |                                          | (60,742 | )           |        |             | 13,854  |             |         |   | 67,955  |        
|Cash and cash equivalents at beginning of year          |                                                                            |                                          | 138,373 |             |        |             | 124,519 |             |         |   | 56,564  |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        
|Cash and cash equivalents at end of year                |                                                                            | $                                        | 77,631  |             |        | $           | 138,373 |             |         | $ | 124,519 |        
|                                                        |                                                                            |                                          |         |             |        |             |         |             |         |   |         |         |        





---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|1 |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                      
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | The Westaim Corporation (the Company) was incorporated on May 7, 1996
by articles of incorporation under the Business Corporation Act
(Alberta).                                                                                                         
| 
|  |  | The consolidated financial statements include the accounts of the
Company, and its principal subsidiaries, iFire Technology Inc. (iFire),
Nucryst Pharmaceuticals Corp. (Nucryst), Surface Engineered Products
Corporation (SEP), and Neomet Limited.
| 
|  |  | All amounts are expressed in thousands except per share data.                                                                                                                                                                                              
| 
|2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES                                                                                                                                                                                                               



| | a) |  | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The financial statements of entities, which are controlled by the
Company, referred to as subsidiaries, are consolidated. Entities
which are not controlled, but over which the Company has the ability
to exercise significant influence are accounted for using the equity
method of accounting. Investments in other entities are accounted for
using the cost method.                                                                                                                                                                                                                            
|
| | b) |  | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    |  | The consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenue and expenses during the year.
Significant estimates include the provision for site restoration, provision for
discontinued operations, future income taxes and useful lives of capital
assets. Actual results could differ from those estimates.                                                                  
|
| | c) |  | Translation of foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |    |  | Transactions in foreign currencies are translated into Canadian
dollars at rates of exchange at the time of such transactions.
Monetary assets and liabilities are translated at current rates of
exchange. Foreign operations are considered financially and
operationally integrated and are translated into Canadian dollars
using the temporal method of translation. Gains or losses resulting
from the translation adjustments are included in income. Foreign
exchange losses included in divisional loss and interest income in
2002 amounted to $326 (2001 gains  $865; 2000 gains  $361).
|
| | d) |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Revenue is generally recognized when the product has been delivered.
Specific revenue recognition policies for each of the Companys
operating segments are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | Continuing operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ambeon Revenue is generally recognized at the time of shipment.
Under certain consignment contracts, revenue is recognized on the
date that the product used by the customer.

1



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
|- |  | --------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nucryst Pharmaceuticals Revenue from direct sales to third
parties is recognized upon delivery. For products manufactured under
license, revenue is recorded at the date of shipment at actual cost
plus an agreed markup, plus a royalty based on a percentage of sales
revenue earned by the licensee on sales to third parties. Revenue
relating to the achievement of milestones under licensing agreements
is recognized when the milestone event has occurred.



| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | iFire Technology The Company recognizes revenue from
licensing fees over the term that services are being rendered.
Deferred licensing revenue represents amounts received under
agreements for which the process of earning the revenue has not been
completed. Royalties are recognized when earned in accordance with
the terms of the specific agreement.



| |  |  | Discontinued operations
| |  |  | -----------------------



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Coinage Products Revenue is generally recognized on delivery
to and acceptance by third party customers. Under certain contracts,
revenue is recognized at time of shipment.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SEP For certain products and services, revenue is recognized
on the percentage of completion basis, as specific critical events
occur. In some instances, product is sold on the basis of achieving
defined performance standards. In these cases revenue is not
recognized until these performance standards have been achieved. In
addition, a provision for potential warranty expense is provided for
at the time of sale, based on warranty terms and prior claims
experience.



| | e) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Cash and cash equivalents consist of cash on deposit and highly liquid
short-term investments with original maturities at the date of
acquisition of 90 days or less and are recorded at cost.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | f) |  | Short-term investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Short-term investments consist of money-market instruments with
maturities of less than one year. As at December 31, 2002 the Company
held short term investments recorded at a cost of $25,250 which
reflects current market values. As at December 31, 2001 and December
31, 2000, the Company held no short-term investments.                                                                                                                                                                                                                                                                                        
|
| | g) |  | Inventory valuation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    |  | Finished products, raw materials, materials in process, spare parts
and operating materials are valued at the lower of average cost and
net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | h) |  | Research and development costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | Research costs are expensed as incurred and significant project
development costs are capitalized in accordance with Canadian
generally accepted accounting principles once the Company has
determined that commercialization criteria concerning the product or
process have been met. Amortization of these costs over their
estimated useful life commences with the successful commercial
production or use of the product or process. On an ongoing basis,
Management reviews the unamortized balance to ensure that the deferred
development costs continue to satisfy the criteria for deferral and
amortization.

2



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
|- |  | --------------------------------------------------------



| |  |  | As at December 31, 2002, December 31, 2001 and December 31, 2000, no
research and development costs have been capitalized.
| |  |  | --------------------------------------------------------------------------------------------------------------------------



| | i) |  | Government assistance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Government assistance towards research and development expenditures
related to capital assets used for research and development is
credited against the cost of the related capital asset and all other
assistance is credited against the related expenses as incurred.                                                                                                                                                                                                                                                                                                                                            
|
| | j) |  | Capital assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | i) Property, Plant and Equipment  Property, plant and equipment are
stated at cost. Depreciation and amortization is calculated using a
straight-line method based on estimated useful lives of the particular
assets which do not exceed 20 years for buildings and 10 years for
equipment.                                                                                                                                                                                                                                                                                                                       
|
| |    |  | ii) Carrying Value  The Company evaluates the carrying value of
property, plant and equipment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable, and recognizes
an impairment charge when it is probable that estimated future
non-discounted cash flows of the underlying assets will be less than the
carrying value of the assets.                                                                                                                                                                                                                            
|
| | k) |  | Site restoration costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | 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.                                                                                                                                       
|
| | l) |  | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |    |  | Derivative financial instruments are utilized by the Company in the
management of commodity price, interest rate, and foreign currency exposures.
The Companys policy is not to utilize derivative financial instruments for
trading or speculative purposes.                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company also
formally assesses, both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
|
| |    |  | The Company enters into hedges of its commodity price exposure on nickel
raw material inventory and anticipated future sales by entering into nickel
forward contracts, when deemed appropriate. Gains and losses on nickel forward
contracts used to hedge nickel raw material inventory and anticipated future
sales are accrued under inventory on the balance sheet and recognized in the
income statement when the underlying product is sold.                                                                                                                                                                 

3



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
|- |  | --------------------------------------------------------



| |    |  | The Company also enters into forward agreements in order to reduce the
impact of fluctuating interest rates on its short-term investments and
fluctuating foreign currency exchange rates on anticipated future cash flows.
These forward agreements are not designated as hedges. They require the
exchange of payments without the exchange of the notional principal amount on
which payments are based. These instruments are recorded at the lower of cost
or market.                                                                                                                                                                       
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | m) |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |    |  | Income taxes are accounted for using the liability method of income
tax allocation. Under the liability method, income tax assets and
liabilities are recorded to recognize future income tax inflows and
outflows arising from the settlement or recovery of assets and
liabilities at their carrying values.                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | Income tax assets are also recognized for the benefits from tax losses
and deductions that cannot be identified with particular assets or
liabilities, provided those benefits are more likely than not to be
realized. Future income tax assets and liabilities are determined
based on the tax laws and rates that are anticipated to apply in the
period of realization.                                                                                                                                                                                                                                                                      
|
| | n) |  | Stock-based compensation plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | The Company and certain of its subsidiaries have stock-based
compensation plans, which are described in Note 12. No compensation
expense is recognized for these plans when stock options are issued.
Any consideration paid by option holders for the purchase of stock is
credited to capital stock. If plan entitlements are repurchased from
the holder, the consideration paid is charged to retained earnings.
Any obligation related to increases in the value of Deferred Share
Units is accrued when the change in value occurs, with an offset to
the Statement of Loss.                                                               
|
| |    |  | Effective January 1, 2002 the Company and its subsidiaries adopted Section
3870 of the Handbook of the Canadian Institute of Chartered Accountants (CICA)
with respect to the accounting and disclosure of stock-based compensation,
which recommends that awards to employees be valued using a fair value method
of accounting. These new rules also require that companies account for stock
appreciation rights (SARs) and similar awards to be settled in cash or other
assets, by measuring compensation expense on an ongoing basis, as the amount by
which the quoted market price exceeds the exercise price at each measurement
date.
|
| |    |  | As permitted under Section 3870, the Company has elected to account
for stock options by measuring compensation expense as the excess, if
any, of the quoted market value of the stock at the date of grant over
the exercise price. For stock options in subsidiary companies,
compensation expense is measured as the excess, if any, of the fair
value of the subsidiarys stock at the date of grant over the exercise
price.                                                                                                                                                                                                                
|
| |    |  | Under CICA 3870, companies that elect a method other than the fair
value method of accounting are required to disclose pro forma net
income and earnings per share information, using a pricing model such
as the Black-Scholes model, as if the fair value method of accounting
had been used. These new rules do not apply to pre-existing awards
except for those awards that call for settlement in cash or other
assets , in which case, the cumulative liability of these awards at
the date of implementation is charged to deficit with a corresponding
increase to accounts payable and accrued liabilities.                            

4



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
|- |  | --------------------------------------------------------



| | o) |  | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Basic earnings per common share is calculated using the weighted
average number of common shares outstanding during the period.
Commencing January 1, 2001, the Company changed its calculation of
diluted earnings per share in accordance with Section 3500 of the
Handbook of the CICA. Diluted earnings per share is calculated on the
basis of the weighted average number of shares outstanding during the
period plus the additional common shares that would have been
outstanding if potentially dilutive common shares had been issued
using the treasury stock method.                                                                                                                                 
|
| | p) |  | Employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |    |  | All employee future benefits are accounted for on an accrual basis.
The transitional obligation of $1,338 resulting from the adoption of
CICA 3461 in 2000 is being amortized to pension expense on a
straight-line basis over eight years which is the average remaining
service period of active employees expected to receive benefits under
the pension plan.                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | Post retirement benefit costs for the Companys defined benefit
pension plan are actuarially determined using the projected benefit
method prorated on service. The estimated market value of the pension
plan assets is actuarially determined based on a five-year moving
average. Experience gains and losses, and amounts arising as a result
of changes in assumptions and plan amendment are amortized on a
straight-line basis over the expected average remaining life of the
employee group.                                                                                                                                                                                                               
|
| | q) |  | Discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    |  | Business segments, where a formal plan of disposal has been approved,
are accounted for as discontinued operations. The results of
discontinued operations are reported separately, disclosing the
results of operations prior to the measurement date (date the plan to
discontinue operations was formally approved) and the net gain or loss
from discontinued operations. The net gain or loss from
discontinued operations includes both actual or estimated gain or loss
on disposal and the actual or estimated results from operations, if
any, between the measurement date and the disposal date. Net gains
are only recognized when realized.                                                            
|
| | r) |  | Deferred charges and other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | Effective January 1, 2002, the Company adopted on a prospective
basis new CICA 3062, Goodwill and Other Intangible Assets , the
provisions of which replace the amortization of goodwill and indefinite
life assets with requirements for an annual impairment test. Any
material decline in fair value from carrying value will be charged to
expense in the period that impairment has been determined. There is no
material impact on the consolidated financial statements resulting from
this change either in the current period or the prior periods presented.
At present, the Company has no indefinite life assets. Organization
costs are amortized over 5 years and patents are amortized over 10 years.

5



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|3 |  | CHANGE IN ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| 
|  |  | Effective January 1, 2002, the CICA introduced new accounting and
disclosure requirements with respect to stock-based compensation, which
requires that awards to employees be valued using a fair-value method of
accounting. These new rules also require enterprises to account for SARs
and similar awards to be settled in cash or other assets by measuring, on
an ongoing basis, the amount by which the quoted market price exceeds the
exercise price at measurement date (Note 2n).                                                          
| 
|  |  | These new rules do not apply to pre-existing awards except for those
awards that call for settlement in cash or other assets, in which case,
the cumulative liability of these awards at the date of implementation is
charged to deficit with a corresponding increase to accounts payable and
accrued liabilities. The cumulative liability of the SARs of the
Companys subsidiaries at January 1, 2002, amounting to $1,579, was
charged to deficit with a corresponding increase to accounts payable and
accrued liabilities (Note 12).           
| 
|4 |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| 
|  |  | On May 28, 2002 the Board of Directors of the Company approved the closing
of the Coinage division and the selling of the Ethylene Coatings business.
Accordingly, the results from operations of these businesses, including the
estimated cost of shutdown of the Coinage division and disposition or shutdown
of the Ethylene Coatings business, have been accounted for on a discontinued
basis. The Coinage division was shut down in July 2002. It is expected that
the Ethylene Coatings business will be shutdown in the first quarter of 2003.
| 
|  |  | As a result, the Company recorded a loss from discontinued operations of
$16,518 in the second quarter of 2002 and an additional loss of $3,149 in the
fourth quarter of 2002 for a total loss of $19,667, of which $7,526 remains in
accounts payable and accrued liabilities as at December 31, 2002.                                                                                                                                                                                                                                                
| 
|  |  | Effective December 29, 2000, the Company sold substantially all its
assets and liabilities related to the Chemicals business segment,
including its wholly-owned subsidiary Thio-Pet Chemicals Ltd., for cash
proceeds of $18,000. Accordingly, the results of these operations and
the estimated costs of disposition were accounted for on a discontinued
basis. The gain on disposal of the Chemicals business segment of $9,239
recorded in 2000 was net of income taxes of $3,752.                                                                
| 
|  |  | Amounts included in the consolidated balance sheets relating to
discontinued operations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                         |  |                   |         |                   |  |                   |        |   |  |   |        |  
|---------------------------------------- |  | ----------------- | ------- | ----------------- |  | ----------------- | ------ | - |  | - | ------ | -
|                                         |  | December 31, 2002 |         | December 31, 2001 |  | December 31, 2000
|                                         |  |                   |         |                   |  |                  
|Accounts receivable                      |  | $                 | 2,178   |                   |  | $                 | 5,587  |   |  | $ | 25,430 |  
|Inventories                              |  |                   | 353     |                   |  |                   | 1,645  |   |  |   | 12,721 |  
|Other assets                             |  |                   | 32      |                   |  |                   | 154    |   |  |   | 953    |  
|Accounts payable and accrued liabilities |  |                   | (10,383 | )                 |  |                   | (8,283 | ) |  |   | (5,044 | )
|                                         |  |                   |         |                   |  |                   |        |   |  |   |        |  
|Net working capital                      |  | $                 | (7,820  | )                 |  | $                 | (897   | ) |  | $ | 34,060 |  
|                                         |  |                   |         |                   |  |                   |        |   |  |   |        |  
|Capital assets                           |  | $                 | 8,478   |                   |  | $                 | 9,468  |   |  | $ | 38,335 |  
|                                         |  |                   |         |                   |  |                   |        |   |  |   |        |  

6



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|4 |  | DISCONTINUED OPERATIONS (Continued)                              
|- |  | -----------------------------------------------------------------
| 
|  |  | The results of discontinued operations are summarized as follows:

|                                                                                    |  |                   |         |                   |  |                   |         |   |  |   |        |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- |  | ----------------- | ------- | - |  | - | ------ | -
|                                                                                    |  | Year Ended        |         | Year Ended        |  | Year Ended       
|                                                                                    |  | December 31, 2002 |         | December 31, 2001 |  | December 31, 2000
|                                                                                    |  |                   |         |                   |  |                  
|Revenues to May 28, 2002                                                            |  | $                 | 6,454   |                   |  | $                 | 18,616  |   |  | $ | 94,917 |  
|Revenues subsequent to May 28, 2002 and
estimated future revenues                   |  |                   | 3,829   |                   |  |                   |        |   |  |   |       |  
|                                                                                    |  |                   |         |                   |  |                   |         |   |  |   |        |  
|Total revenue from discontinued operations                                          |  | $                 | 10,283  |                   |  | $                 | 18,616  |   |  | $ | 94,917 |  
|                                                                                    |  |                   |         |                   |  |                   |         |   |  |   |        |  
|Divisional losses to May 28, 2002                                                   |  | $                 | (3,908  | )                 |  | $                 | (24,344 | ) |  | $ | (5,346 | )
|Divisional losses subsequent to May 28, 2002
and estimated future divisional losses |  |                   | (6,676  | )                 |  |                   |        |   |  |   |       |  
|Costs relating to shutdown and disposition                                          |  |                   | (9,083  | )                 |  |                   |        |   |  |   |       |  
|Write down of carrying value of assets (Note 15)                                    |  |                   |        |                   |  |                   | (34,687 | ) |  |   |       |  
|                                                                                    |  |                   |         |                   |  |                   |         |   |  |   |        |  
|Net loss from discontinued operations                                               |  | $                 | (19,667 | )                 |  | $                 | (59,031 | ) |  | $ | (5,346 | )
|                                                                                    |  |                   |         |                   |  |                   |         |   |  |   |        |  



|  |  | The net loss from discontinued operations is after deduction of depreciation of
$636 for the year ended December 31, 2002 (2001  $3,427; 2000  $3,996). The
net loss for the year ended December 31, 2002 also includes provisions for
workforce reduction and other shutdown and asset disposal costs totaling
$9,083. All expected future losses from the Ethylene Coatings business were
included in the net loss from discontinued operations recorded during 2002.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Net loss per common share from discontinued operations was $(0.25) per share
for the year ended December 31, 2002 (2001  $(0.76); 2000  net earnings
$0.05).                                                                                                                                                                                                                                                                                                           
| 
|  |  | The net loss from discontinued operations was after income taxes of $Nil in
2002 and 2001, and $2,724 in 2000. The gain on disposal of discontinued assets
of $9,239 recorded in 2000 was net of income taxes of $3,752. No future income
tax benefit has been recognized with respect to non-capital and capital losses
carried forward associated with discontinued operations.                                                                                        
| 
|5 |  | INVENTORIES                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                    |  |                   |        |                   |  |                   |        |  |  |   |        | 
|----------------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ------ |  |  | - | ------ | 
|                                    |  | December 31, 2002 |        | December 31, 2001 |  | December 31, 2000
|                                    |  |                   |        |                   |  |                  
|Raw materials                       |  | $                 | 4,407  |                   |  | $                 | 3,009  |  |  | $ | 2,788  | 
|Materials in process                |  |                   | 1,946  |                   |  |                   | 3,626  |  |  |   | 4,637  | 
|Finished product                    |  |                   | 6,555  |                   |  |                   | 9,551  |  |  |   | 6,724  | 
|Spare parts and operating materials |  |                   | 678    |                   |  |                   | 679    |  |  |   | 744    | 
|                                    |  |                   |        |                   |  |                   |        |  |  |   |        | 
|Continuing operations               |  |                   | 13,586 |                   |  |                   | 16,865 |  |  |   | 14,893 | 
|Discontinued operations             |  |                   | 353    |                   |  |                   | 1,645  |  |  |   | 12,721 | 
|                                    |  |                   |        |                   |  |                   |        |  |  |   |        | 
|                                    |  | $                 | 13,939 |                   |  | $                 | 18,510 |  |  | $ | 27,614 | 
|                                    |  |                   |        |                   |  |                   |        |  |  |   |        | 

7



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|6 |  | CAPITAL ASSETS
|- |  | --------------

|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|----------------------- |  | ---- | ------- | ------------ |  | ---------------- | ------ | --- |  | - | ------ | 
|                        |  |      |         |              |  | Accumulated      |        |     |  |  
|                        |  |      |         |              |  | Depreciation and |        | Net
|December 31, 2002       |  | Cost |         | Amortization |  | Book Value      
|                        |  |      |         |              |  |                 
|Nucryst Pharmaceuticals |  | $    | 5,816   |              |  | $                | 1,294  |     |  | $ | 4,522  | 
|iFire Technology        |  |      | 24,349  |              |  |                  | 10,441 |     |  |   | 13,908 | 
|Ambeon                  |  |      | 22,216  |              |  |                  | 9,324  |     |  |   | 12,892 | 
|Other                   |  |      | 13,973  |              |  |                  | 8,508  |     |  |   | 5,465  | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|Continuing operations   |  |      | 66,354  |              |  |                  | 29,567 |     |  |   | 36,787 | 
|Discontinued operations |  |      | 42,795  |              |  |                  | 34,317 |     |  |   | 8,478  | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|                        |  | $    | 109,149 |              |  | $                | 63,884 |     |  | $ | 45,265 | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 

|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|----------------------- |  | ---- | ------- | ------------ |  | ---------------- | ------ | --- |  | - | ------ | 
|                        |  |      |         |              |  | Accumulated      |        |     |  |  
|                        |  |      |         |              |  | Depreciation and |        | Net
|December 31, 2001       |  | Cost |         | Amortization |  | Book Value      
|                        |  |      |         |              |  |                 
|Nucryst Pharmaceuticals |  | $    | 3,304   |              |  | $                | 948    |     |  | $ | 2,356  | 
|iFire Technology        |  |      | 22,853  |              |  |                  | 8,917  |     |  |   | 13,936 | 
|Ambeon                  |  |      | 20,906  |              |  |                  | 7,690  |     |  |   | 13,216 | 
|Other                   |  |      | 13,370  |              |  |                  | 7,513  |     |  |   | 5,857  | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|Continuing operations   |  |      | 60,433  |              |  |                  | 25,068 |     |  |   | 35,365 | 
|Discontinued operations |  |      | 61,132  |              |  |                  | 51,664 |     |  |   | 9,468  | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|                        |  | $    | 121,565 |              |  | $                | 76,732 |     |  | $ | 44,833 | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 

|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|----------------------- |  | ---- | ------- | ------------ |  | ---------------- | ------ | --- |  | - | ------ | 
|                        |  |      |         |              |  | Accumulated      |        |     |  |  
|                        |  |      |         |              |  | Depreciation and |        | Net
|December 31, 2000       |  | Cost |         | Amortization |  | Book Value      
|                        |  |      |         |              |  |                 
|Nucryst Pharmaceuticals |  | $    | 7,183   |              |  | $                | 2,221  |     |  | $ | 4,962  | 
|iFire Technology        |  |      | 21,446  |              |  |                  | 6,197  |     |  |   | 15,249 | 
|Ambeon                  |  |      | 16,591  |              |  |                  | 5,149  |     |  |   | 11,442 | 
|Other                   |  |      | 15,752  |              |  |                  | 8,717  |     |  |   | 7,035  | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|Continuing operations   |  |      | 60,972  |              |  |                  | 22,284 |     |  |   | 38,688 | 
|Discontinued operations |  |      | 59,998  |              |  |                  | 21,663 |     |  |   | 38,335 | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 
|                        |  | $    | 120,970 |              |  | $                | 43,947 |     |  | $ | 77,023 | 
|                        |  |      |         |              |  |                  |        |     |  |   |        | 



| |  | Included in continuing operations capital assets is construction in progress of
$4,572 (2001  $2,076; 2000 $5,982) that is not currently subject to
depreciation. Depreciation on continuing operations capital assets was $5,473
(2001  $5,356; 2000  $5,549).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|7 |  | DEFERRED CHARGES
|- |  | ----------------

|                              |  |                   |        |                   |  |                   |        |   |  |   |        |  
|----------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ------ | - |  | - | ------ | -
|                              |  | December 31, 2002 |        | December 31, 2001 |  | December 31, 2000
|                              |  |                   |        |                   |  |                  
|Patents                       |  | $                 | 3,950  |                   |  | $                 | 3,193  |   |  | $ | 2,245  |  
|Organization costs            |  |                   |       |                   |  |                   | 1,448  |   |  |   | 1,448  |  
|Other assets                  |  |                   |       |                   |  |                   |       |   |  |   | 21     |  
|                              |  |                   |        |                   |  |                   |        |   |  |   |        |  
|                              |  |                   | 3,950  |                   |  |                   | 4,641  |   |  |   | 3,714  |  
|Less accumulated amortization |  |                   | (1,489 | )                 |  |                   | (2,556 | ) |  |   | (1,959 | )
|                              |  |                   |        |                   |  |                   |        |   |  |   |        |  
|Continuing operations         |  |                   | 2,461  |                   |  |                   | 2,085  |   |  |   | 1,755  |  
|Discontinued operations       |  |                   |       |                   |  |                   |       |   |  |   | 820    |  
|                              |  |                   |        |                   |  |                   |        |   |  |   |        |  
|                              |  | $                 | 2,461  |                   |  | $                 | 2,085  |   |  | $ | 2,575  |  
|                              |  |                   |        |                   |  |                   |        |   |  |   |        |  

9



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|8 |  | INCOME TAXES                                                                                                                                                                                               
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | The following is a reconciliation of income taxes, calculated at the
Canadian combined federal and provincial income tax rate, to the income tax
provision included in the consolidated statements of loss.

|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |      |  
|------------------------------------------------------- | ---------------------------------------------------------- | - | ------------- | ----- | ------------- | - | ------------- | --- | - | - | ------- | ---- | -
|                                                        |                                                            |   | Year Ended    |       | Year Ended    |   | Year Ended   
|                                                        |                                                            |   | Dec. 31, 2002 |       | Dec. 31, 2001 |   | Dec. 31, 2000
|                                                        |                                                            |   |               |       |               |   |              
|Loss from continuing operations before income taxes     |                                                            | $ | (23,609       | )     |               | $ | (8,058        | )   |   | $ | (18,837 | )   
|Items not subject to tax                                |                                                            |   | 3,410         |       |               |   | 18,687        |     |   |   | 5,539   |     
|Unrecognized tax losses                                 |                                                            |   | 36,540        |       |               |   |              |     |   |   | 12,501  |     
|Recognition of previously unrecognized tax losses       |                                                            |   |              |       |               |   | (11,268       | )   |   |   |        |     
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     
|                                                        |                                                            |   | 16,341        |       |               |   | (639          | )   |   |   | (797    | )   
|Combined basic Canadian federal and provincial tax rate |                                                            |   | 39.12         | %     |               |   | 41.62         | %   |   |   | 44.62   | %   
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     
|Expected income tax expense (recovery)                  |                                                            |   | 6,393         |       |               |   | (266          | )   |   |   | (356    | )   
|Increase (decrease) related to:                         |                                                            |   |               |       |               |   |               |     |   |   |         |     
|                                                        | Large corporations and capital taxes                       |   |               | 103   |               |   |               | 203 |   |   |         | 362  |  
|                                                        | Difference between statutory rate and subsidiary tax rates |   |               | (43   | )             |   |               | (80 | ) |   |         | (137 | )
|                                                        | Income tax rate change                                     |   |               |      |               |   |               | 538 |   |   |         | (287 | )
|                                                        | Other                                                      |   |               | 33    |               |   |               | (25 | ) |   |         | 122  |  
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     
|                                                        |                                                            | $ | 6,486         |       |               | $ | 370           |     |   | $ | (296    | )   
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     
|Classified as:                                          |                                                            |   |               |       |               |   |               |     |   |   |         |     
|                                                        | Current                                                    |   | $             | 101   |               |   | $             | 75  |   |   | $       | 698  |  
|                                                        | Future                                                     |   |               | 6,385 |               |   |               | 295 |   |   |         | (994 | )
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     
|Income tax expense (recovery)                           |                                                            | $ | 6,486         |       |               | $ | 370           |     |   | $ | (296    | )   
|                                                        |                                                            |   |               |       |               |   |               |     |   |   |         |     



| |  | Income taxes are recognized for future income tax consequences attributed to
estimated differences between the financial statement carrying values of
existing assets and liabilities and their respective income tax bases.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The net future income tax asset is comprised of:                                                                                                                                                                            

|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|------------------------------ | -------------------------------------------------- | - | ------------- | ------- | ------------- | - | ------------- | ------- | - | - | ------ | ------- | -
|                               |                                                    |   | Dec. 31, 2002 |         | Dec. 31, 2001 |   | Dec. 31, 2000
|                               |                                                    |   |               |         |               |   |              
|Future income tax assets:      |                                                    |   |               |         |               |   |               |         |   |   |        |        
|                               | Tax benefit of loss carry-forwards and tax credits |   | $             | 68,218  |               |   | $             | 57,245  |   |   | $      | 46,330  |  
|                               | Provisions and reserves                            |   |               | 5,851   |               |   |               | 5,928   |   |   |        | 5,714   |  
|                               | Capital, intangible and other assets               |   |               | 13,024  |               |   |               | 6,995   |   |   |        | 565     |  
|                               | Less: valuation allowance                          |   |               | (77,831 | )             |   |               | (54,172 | ) |   |        | (28,533 | )
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|                               |                                                    |   | 9,262         |         |               |   | 15,996        |         |   |   | 24,076 |        
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|Future income tax liabilities: |                                                    |   |               |         |               |   |               |         |   |   |        |        
|                               | Capital, intangible and other assets               |   |               | (3,350  | )             |   |               | (3,442  | ) |   |        | (7,199  | )
|                               | Other                                              |   |               | (182    | )             |   |               | (439    | ) |   |        | (283    | )
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|                               |                                                    |   | (3,532        | )       |               |   | (3,881        | )       |   |   | (7,482 | )      
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|Future income tax assets, net  |                                                    | $ | 5,730         |         |               | $ | 12,115        |         |   | $ | 16,594 |        
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|Classified as:                 |                                                    |   |               |         |               |   |               |         |   |   |        |        
|                               | Current asset                                      |   | $             |        |               |   | $             |        |   |   | $      | 9,345   |  
|                               | Long-term asset                                    |   |               | 5,730   |               |   |               | 12,115  |   |   |        | 7,249   |  
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  
|Future income tax assets, net  |                                                    | $ | 5,730         |         |               | $ | 12,115        |         |   | $ | 16,594 |        
|                               |                                                    |   |               |         |               |   |               |         |   |   |        |         |  

10



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|8 |  | INCOME TAXES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | The future income tax asset valuation allowance is in respect of tax
loss carry-forwards and tax credits primarily relating to subsidiaries
involved in technology development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| 
|  |  | For income tax purposes the Company had non-capital loss carry-forwards
relating to operations in various jurisdictions of approximately
$158,102 at December 31, 2002 (2001  $135,415; 2000  $104,242) and
accumulated capital losses of $5,747 (2001  $3,588; 2000  $2,641) which
are available to offset income of specific entities of the consolidated
group in future periods. The non-capital loss carry-forwards will expire
at various times to the end of 2022. The Company also had research and
development tax credits of approximately $25,398 at December 31, 2002
(2001  $22,404; 2000  $17,681) which will expire at various times to
the end of 2012. Cash taxes relating to continuing operations paid
during the year amounted to $383 (2001  $563; 2000  $520).
| 
|9 |  | INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                      |  |                   |     |                   |  |                   |       |  |  |   |        | 
|------------------------------------- |  | ----------------- | --- | ----------------- |  | ----------------- | ----- |  |  | - | ------ | 
|                                      |  | December 31, 2002 |     | December 31, 2001 |  | December 31, 2000
|                                      |  |                   |     |                   |  |                  
|Investments  shares  cost basis     |  | $                 | 500 |                   |  | $                 | 2,362 |  |  | $ |       | 
|Investments  shares  equity basis   |  |                   |    |                   |  |                   | 820   |  |  |   | 384    | 
|Savvion, Inc.  shares  equity basis |  |                   |    |                   |  |                   |      |  |  |   | 15,101 | 
|                                      |  |                   |     |                   |  |                   |       |  |  |   |        | 
|Total                                 |  | $                 | 500 |                   |  | $                 | 3,182 |  |  | $ | 15,485 | 
|                                      |  |                   |     |                   |  |                   |       |  |  |   |        | 



|   |  | The Company records impairment losses if there has been an impairment in
the value of investments that is other than temporary in nature. During
the year, provisions totaling $2,435 (2001  $1,299; 2000  $Nil) were
recorded against the investments.                                                                                                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In 2001, the investment in Savvion Inc., a U.S. private business
management software and service company, was written down to nominal
value reflecting the then current business environment, weaker
performance outlook and adjustments to technology market valuations. The
Companys voting interest in Savvion was reduced to less than 5% in 2002
(December 31, 2001  24.4%; December 31, 2000  27.6%) and is accounted
for on a cost basis.
|  
|10 |  | PROVISION FOR SITE RESTORATION                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Changes in the provision are as follows:                                                                                                                                                                                                                                                                                                                                                                                                           

|                                       |  |                   |       |                   |  |                   |       |   |  |   |        |  
|-------------------------------------- |  | ----------------- | ----- | ----------------- |  | ----------------- | ----- | - |  | - | ------ | -
|                                       |  | Year Ended        |       | Year Ended        |  | Year Ended       
|                                       |  | December 31, 2002 |       | December 31, 2001 |  | December 31, 2000
|                                       |  |                   |       |                   |  |                  
|Provision at beginning of year         |  | $                 | 7,175 |                   |  | $                 | 4,689 |   |  | $ | 818    |  
|Additional provisions required         |  |                   | 1,120 |                   |  |                   | 3,071 |   |  |   | 5,516  |  
|Site restoration expenditures incurred |  |                   | (546  | )                 |  |                   | (585  | ) |  |   | (1,645 | )
|                                       |  |                   |       |                   |  |                   |       |   |  |   |        |  
|Provision at end of year               |  | $                 | 7,749 |                   |  | $                 | 7,175 |   |  | $ | 4,689  |  
|                                       |  |                   |       |                   |  |                   |       |   |  |   |        |  



| |  | The provision relates primarily to site restoration associated with the
discontinuance of DS nickel production as well as soil and groundwater
reclamation and remediation, based on periodic independent estimates of these
costs.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|11 |  | LICENSING AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In 2000, iFire entered into a non-exclusive licensing agreement with a
third party. The licensing fee is being recognized as revenue over three
years, the term that services are being rendered under the agreement.
Deferred licensing revenue represents the unamortized portion of cash
received. In addition, iFire is entitled to royalties from future
commercial sales of products by the third party utilizing the technology.
These receipts vary in amount based on certain factors and are
contingent upon the successful development and commercialization of the
iFire technology in products produced by the third party.
|  
|12 |  | CAPITAL STOCK
Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The 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 2002, 2001 and 2000 are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                       

|                             |  |        |            |         |  |        |         |         |  |        |            |         |  |   |         |  |  |        |            |  |  |   |         | 
|---------------------------- |  | ------ | ---------- | ------- |  | ------ | ------- | ------- |  | ------ | ---------- | ------- |  | - | ------- |  |  | ------ | ---------- |  |  | - | ------- | 
|                             |  | 2002   |            | 2001    |  | 2000  
|                             |  |        |            |         |  |       
|                             |  |        |            |         |  | Stated |         |         |  |        |            | Stated  |  |   |         |  |  | Stated
|Common Shares                |  | Number |            | Capital |  | Number |         | Capital |  | Number |            | Capital
|                             |  |        |            |         |  |        |         |         |  |        |            |        
|Balance at beginning of year |  |        | 77,786,915 |         |  | $      | 372,598 |         |  |        | 77,719,698 |         |  | $ | 372,131 |  |  |        | 75,562,340 |  |  | $ | 361,682 | 
|Employee Share Purchase Plan |  |        | 72,843     |         |  |        | 151     |         |  |        | 67,217     |         |  |   | 467     |  |  |        | 2,157,358  |  |  |   | 10,449  | 
|Repurchase of shares         |  |        | (150,500   | )       |  |        | (721    | )       |  |        |           |         |  |   |        |  |  |        |           |  |  |   |        | 
|Compensation expense         |  |        | 323,529    |         |  |        | 1,100   |         |  |        |           |         |  |   |        |  |  |        |           |  |  |   |        | 
|                             |  |        |            |         |  |        |         |         |  |        |            |         |  |   |         |  |  |        |            |  |  |   |         | 
|Balance at end of year       |  |        | 78,032,787 |         |  | $      | 373,128 |         |  |        | 77,786,915 |         |  | $ | 372,598 |  |  |        | 77,719,698 |  |  | $ | 372,131 | 
|                             |  |        |            |         |  |        |         |         |  |        |            |         |  |   |         |  |  |        |            |  |  |   |         | 



| |  | Stock-based compensation plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Employee and Director stock option plan The Company maintains an Employee and
Director Stock Option Plan under which the Company may grant options for up to
11,000,000 shares of common stock of the Company at an exercise price equal to
the market price of the Companys stock at the date of grant. Options awarded
are exercisable for a period of 10 years and vest as to one third of the grant
on each of the first, second and third anniversaries after the date of the
grant. The Company maintains a Directors and Officers Share Purchase Program
under the provisions of the Stock Option Plan. Under the Share Purchase
Program, Directors and designated officers may be granted one option for each
common share purchased, to a cumulative 50,000 options. Options, equal to the
net purchases of common shares by the optionee during the calendar year, vest
at the end of the calendar year in which the purchases were made. Any options
issued under this program which do not vest at year-end are cancelled.

12



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|12 |  | CAPITAL STOCK (Continued)                                                                                                                                                                           
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | A summary of the status of the Companys stock option plans as at December
31, 2002, December 31, 2001 and December 31, 2000, and changes during the years
ending on those dates is presented below:

|                                 |  |        |           |       |  |          |      |       |  |        |           |          |  |   |       |  |  |          |            |   |  |   |       | 
|-------------------------------- |  | ------ | --------- | ----- |  | -------- | ---- | ----- |  | ------ | --------- | -------- |  | - | ----- |  |  | -------- | ---------- | - |  | - | ----- | 
|                                 |  | 2002   |           | 2001  |  | 2000    
|                                 |  |        |           |       |  |         
|                                 |  |        |           |       |  | Weighted |      |       |  |        |           | Weighted |  |   |       |  |  | Weighted
|                                 |  |        |           |       |  | -Average |      |       |  |        |           | -Average |  |   |       |  |  | -Average
|                                 |  |        |           |       |  | Exercise |      |       |  |        |           | Exercise |  |   |       |  |  | Exercise
|                                 |  | Shares |           | Price |  | Shares   |      | Price |  | Shares |           | Price   
|                                 |  |        |           |       |  |          |      |       |  |        |           |         
|Outstanding at beginning of year |  |        | 5,245,399 |       |  | $        | 9.74 |       |  |        | 4,684,999 |          |  | $ | 9.61  |  |  |          | 4,726,366  |   |  | $ | 5.43  | 
|Granted                          |  |        | 420,200   |       |  | $        | 5.22 |       |  |        | 560,400   |          |  | $ | 10.81 |  |  |          | 2,214,596  |   |  | $ | 14.06 | 
|Exercised                        |  |        |          |       |  | $        |     |       |  |        |          |          |  | $ |      |  |  |          | (2,125,962 | ) |  | $ | 4.79  | 
|Cancelled/Purchased              |  |        |          |       |  | $        |     |       |  |        |          |          |  | $ |      |  |  |          | (130,001   | ) |  | $ | 12.02 | 
|                                 |  |        |           |       |  |          |      |       |  |        |           |          |  |   |       |  |  |          |            |   |  |   |       | 
|Outstanding at end of year       |  |        | 5,665,599 |       |  | $        | 9.41 |       |  |        | 5,245,399 |          |  | $ | 9.74  |  |  |          | 4,684,999  |   |  | $ | 9.61  | 
|                                 |  |        |           |       |  |          |      |       |  |        |           |          |  |   |       |  |  |          |            |   |  |   |       | 



| |  | The following table summarizes information about stock options outstanding as
at December 31, 2002:
| |  | ---------------------------------------------------------------------------------------------------

|                |  |                     |           |                     |  |                |  |              |       |                |  |  |           |  |  |   |       |  |  | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------------- |  | ------------ | ----- | -------------- |  |  | --------- |  |  | - | ----- |  |  | 
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           |                     |  | Weighted       |  |              |       |                |  |  |           |  |  |   |       | 
|                |  | Number              |           | -Average            |  | Weighted       |  | Number       |       | Weighted      
|Range of        |  | Outstanding         |           | Remaining           |  | -Average       |  | Exercisable  |       | -Average      
|Exercise Prices |  | Dec.31, 2002        |           | Contractual Life    |  | Exercise Price |  | Dec.31, 2002 |       | Exercise Price
|                |  |                     |           |                     |  |                |  |              |       |               
|$1  $6         |  |                     | 1,546,900 |                     |  | 5.1 years      |  | $            | 4.56  |                |  |  | 1,171,900 |  |  | $ | 4.23  | 
|$6  $15        |  |                     | 2,485,370 |                     |  | 6.6 years      |  | $            | 8.13  |                |  |  | 1,987,315 |  |  | $ | 7.70  | 
|> $15           |  |                     | 1,633,329 |                     |  | 7.3 years      |  | $            | 15.93 |                |  |  | 1,088,886 |  |  | $ | 15.93 | 
|                |  |                     |           |                     |  |                |  |              |       |                |  |  |           |  |  |   |       |  |  | 
|$1  $16        |  |                     | 5,665,599 |                     |  | 6.4 years      |  | $            | 9.41  |                |  |  | 4,248,101 |  |  | $ | 8.85  | 
|                |  |                     |           |                     |  |                |  |              |       |                |  |  |           |  |  |   |       |  |  | 



| |  | Deferred share unit plan During 2001, the Company implemented a Deferred
Share Unit Plan (DSUs) for the outside Directors of the Company. DSUs are
issued at the market value of the Companys shares at the date of grant and
vest upon death or retirement of the Director. Directors may elect to receive
additional DSUs in lieu of fees, which are issued at 90% of the market value of
the Companys shares at the date of grant. As at December 31, 2002 a liability
of $210 (2001  $93) has been accrued with respect to issued DSUs.                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Employee share purchase plan Under the Employee Share Purchase Plan,
employees are entitled to subscribe for common shares of the Company, to a
maximum value of five percent of their annual compensation. Payment for these
shares is made over a 24 month period at a price per share equal to the lesser
of the market value at the offering date and the market value at the end of the
purchase period. The market value at the offering date of July 15, 2002 was
$3.60 (July 16, 2001  $10.09; July 17, 2000  $19.42). At December 31, 2002
there were outstanding purchase arrangements with employees having an aggregate
value of $323 (2001  $606; 2000  $1,021). During the year ended December 31,
2002, 72,843 shares were issued under this Plan at an average price of $2.08
(2001  67,217 shares at $6.94; 2000  30,343 shares at $8.47).

13



---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|12 |  | CAPITAL STOCK (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Subsidiary stock-based compensation plans The Company also maintains
equity incentive plans for certain employees of its technology subsidiaries,
Surface Engineered Products Corporation, Nucryst Pharmaceuticals Corp. and
iFire Technology Inc., under which stock options have been granted representing
4.57% to 4.90% of the outstanding shares of the respective subsidiaries.
Subsidiary stock options vest evenly over a 3-year period and expire after 10
years from the date of grant. The exercise prices of stock options granted are
not less than the fair value of the subsidiarys stock at the time of the
grant. During the year, the Company issued 323,529 shares and recorded
compensation expense of $1,100.
|  
|   |  | SARs have been granted to employees of certain technology subsidiaries.
SARs vest over time and may be settled with cash, shares of the subsidiary or
shares of the Company, at the Companys option. The exercise prices of SARs
granted are not less than the fair value of the subsidiarys stock at the time
of the grant. In 2001, the total liability upon exercise of these SARs was
capped at $1,950 and holders of SARs received options to purchase shares of the
subsidiary with terms comparable to the original SARs.                                                                                                                                                                                                  
|  
|   |  | Effective January 1, 2002 net changes in the value of SARs, measured as
the amount by which quoted market prices or fair value exceeds the exercise
price at the measurement date, is recognized as compensation expense over the
SARs  vesting period. The cumulative liability as at January 1, 2002 amounting
to $1,579 was charged to deficit with a corresponding increase to accounts
payable and accrued liabilities. As at December 31, 2002 the liability has
been reduced to $Nil as the market value of the subsidiaries SARs is less than
their exercise price.                                                                                                                                                       
|  
|   |  | Pro forma accounting for stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Effective January 1, 2002 the CICA recommends that stock-based
compensation be accounted for using a fair value methodology. As permitted
under the new rules, the Company and its subsidiaries have elected to measure
compensation expense as the difference, if any, between the quoted market value
or fair value of the stock at the date of grant and the exercise price at the
date of grant. The exercise price of options granted by the Company and its
subsidiaries is not less than the market value at the date of grant and,
consequently, no compensation expense has been recorded.                                                                                                                                 
|  
|   |  | If compensation costs for options for common shares of the Company and for
common shares of subsidiaries issued on or after January 1, 2002 had been
determined based on the fair value methodology, using the Black-Scholes option
pricing model, the Companys net loss and loss per share would have been
increased to the pro forma amounts indicated below:                                                                                                                                                                                                                                                                                                                                                                    

|                                                       |  |                   |         |  
|------------------------------------------------------ |  | ----------------- | ------- | -
|                                                       |  | Year Ended       
|                                                       |  | December 31, 2002
|                                                       |  |                  
|Net loss applicable to common shareholders as reported |  | $                 | (49,762 | )
|Pro forma net loss applicable to common shareholders   |  |                   | (50,389 | )
|Loss per common share as reported (basic and diluted)  |  |                   | (0.64   | )
|Pro forma loss per common share (basic and diluted)    |  |                   | (0.65   | )
|                                                       |  |                   |         |  



| |  | The fair value of each option grant by the Company and its subsidiaries was
estimated using the Black-Scholes option pricing model assuming no dividends
are paid on common shares, a risk-free interest rate of 5.18%, an average life
of 7.0 years, and a volatility of 59.5%. The amounts computed according to the
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|12 |  | CAPITAL STOCK (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Black-Scholes pricing model may not be indicative of the actual values
realized upon the exercise of these options by the holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Normal course issuer bid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In June 2002, the Company filed a normal course issuer bid which entitles
the Company to acquire up to 3,889,000 common shares between June 19,
2002 and June 18, 2003. The purchases are made on the open market at the
time of any particular purchase.                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | During the year, the Company repurchased 150,500 shares through its normal
course issuer bid at an average price of $2.12 for an aggregate consideration
of $318. The amount by which the average carrying value exceeded the cost of
reacquiring the shares, amounting to $403, has been credited to contributed
surplus.                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Shareholder rights plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company has a Shareholder Rights Plan under which one Right has been
issued for each outstanding common share of the Company. The Rights
expire on March 9, 2005. Each Right may be exercised eight trading days
after a triggering event, which is determined when a person (an
Acquiring Person) has acquired or has commenced a takeover bid to
acquire 20% or more of the common shares, other than by an acquisition
pursuant to a takeover bid permitted by the Shareholder Rights Plan.                                                                                                                                                                          
|  
|   |  | Upon occurrence of a triggering event, as described above, each Right
entitles the holder, other than an Acquiring Person, to purchase for $75
that number of common shares of the Company having an aggregate market
price of $150.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|13 |  | TECHNOLOGY PARTNERSHIPS CANADA AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | On March 26, 2001, iFire entered into a research and development
contribution agreement with the Government of Canada through Technology
Partnerships Canada (TPC). Under this agreement, TPC has agreed to
contribute 28.371% of eligible research and development costs and related
capital expenditures incurred by iFire until April 30, 2003, to a maximum
of $30,000.                                                                                                                                                                                                                                                                                                 
|  
|   |  | Under the terms of the agreement, iFire will pay a royalty to TPC equal
to 1.065% of eventual commercial sales of the technology under
development. In addition, TPC received warrants to purchase common
shares of iFire exercisable for an additional consideration of $6,283.
The warrants expire on April 30, 2007 and, as at December 31, 2002,
represented approximately 0.5% of the current outstanding common shares
of iFire. Under certain circumstances after December 31, 2004, TPC may
put the warrants to iFire in consideration for their fair market value at
that date, or for a 0.255 percentage point increase in the royalty rate,
at the option of iFire.
|  
|   |  | Contributions are recorded as a reduction of the cost of the applicable
capital asset or credited to the statement of operations of iFire as
determined by the nature of the expenditure being funded. In 2002,
contribution claims totaling $9,063 (2001  $14,490) have been recorded.
Of this amount, $8,061 (2001  $12,894) has been credited to research and
development expense and $1,002 (2001  $1,596) has been credited to
capital assets. As at December 31, 2002, the Company has recorded a
receivable of $2,080 (2001  $4,444) for contribution claims relating to
expenditures in 2002.                                                                     

15



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|14 |  | NUCRYST PHARMACEUTICALS AGREEMENT WITH SMITH & NEPHEW PLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On May 8, 2001, Nucryst entered into a series of agreements relating to
its Acticoat burn dressing and wound care products with Smith & Nephew
plc. Under these agreements, Nucryst sold its North American burn
dressing business and entered into an exclusive global licensing
agreement for the sale and marketing of Acticoat burn and wound care
dressings. Nucryst will receive royalties based on Smith & Nephews
future sales of these products as well as milestone payments for the
achievement of certain regulatory and sales targets. Under a
collaborative agreement, the two companies will work together to develop
new wound care products and obtain additional regulatory approvals.
Nucryst will continue to manufacture Acticoat products for Smith &
Nephew under a long term manufacturing agreement.
|  
|   |  | The Company recorded a gain on the sale of the North American burn
dressing business of $20,122 in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|15 |  | WRITE DOWN OF CARRYING VALUE OF ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In late 2001, as a result of projected operating losses arising from
uncertainty regarding the ability to secure future coin blank and other
coinage-related contracts, the Company assessed the recoverability of the
tangible and intangible assets related to the Coinage operating segment.
Profitability in prior years resulted from contracts from certain
customers at significant volumes that are no longer available. The
Company projected the undiscounted future net cash flows from use of
these assets, together with their residual values, to be less than their
carrying amounts.                                                                                                                                                                                                                             
|  
|   |  | Due to a significant downturn in the global ethylene industry, as well as
changes to the manufacturing process resulting in surplus manufacturing
equipment, in late 2001 the Company assessed the recoverability of the
tangible and intangible assets related to the Ethylene Coatings business
and projected that the undiscounted future net cash flows from the use of
these assets, together with their residual values, to be less than their
carrying amounts.                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Accordingly, in December 2001, the Company recorded a provision for asset
impairment totaling $34,687, of which $27,651 related to property, plant
and equipment, and $7,036 related to other assets. The provision
relating to other assets includes $2,497 in spare parts associated with
the property, plant and equipment and a $4,000 reduction in future income
tax assets. These businesses were accounted for as discontinued
operations in 2002 (Note 4).                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Estimates of such undiscounted future net cash flows from use, together
with residual values, are subject to significant uncertainties and
assumptions. Actual results could, therefore, vary significantly from
such estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|16 |  | GAIN ON ISSUANCE OF SHARES BY SUBSIDIARY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | During 2000, iFire issued shares to a third party reducing the Companys
ownership from 100% to 97.5%. The reduction in the Companys equity
interest in iFire was accounted for as an effective disposition of shares
and resulted in a gain for accounting purposes of $10,509.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

16



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|17 |  | PENSION PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company maintains defined contribution pension plans for its salaried
and hourly employees. These plans were funded $1,117 during the year
ended December 31, 2002 (2001  $1,311; 2000  $1,356).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Company also maintains a defined benefit plan. The number of
participants and retirees in this plan is not material. At December 31,
2002, the plan assets had a market value of $2,041 (2001  $2,277; 2000 
$2,350) which is offset by the actuarial present value of the benefit
obligation of $2,706 (2001  $2,686; 2000  $3,177), creating a plan
deficit of $665 (2001  $409; 2000  $827) and an accrued benefit
liability of $Nil (2001  $76; 2000  $238). The Company funds the plan
in amounts that are neither less than the minimum statutory funding
requirements nor more than the maximum amount that can be deducted for
income tax purposes.                                                                             
|  
|18 |  | DERIVATIVE FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | From time to time, the Company hedges its exposure to contracted nickel
sales, raw material purchases and certain produced inventory which are at
price risk, through the use of nickel forward contracts traded Over the
Counter with counterparties under terms governed by the London Metal
Exchange (LME) policies. Settlements are based on LME prices, unless
other prices are negotiated. At December 31, 2002, there were deferred
losses of $269 and unrealized losses of $75 (2001  deferred gains of
$195 and unrealized losses of $441; 2000  deferred gains of $207 and
unrealized gains of $88) on these hedges which are offset by unrecognized
gains (2001  gains; 2000  losses) in physical inventory and raw
material costs.
|  
|   |  | The unrealized commodity positions at December 31, 2002 totaled 312
tonnes (2001  678; 2000  684 tonnes) and expire on varying dates to
March 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | From time to time, the Company reduces its exposure to foreign currency
and interest rate fluctuations by entering into forward transactions.
Gains are recognized upon realization, losses when identified, and both
are included in interest income. At December 31, 2002 and December 31,
2001, there were no unrecognized gains or losses on open foreign exchange
contracts (2000  $166 gain). The open positions at December 31, 2002,
which expire in January 2003 were 61 Euro and $2,600 US (2001  1,917
Euro and $5,947 US; 2000  7,138 Euro and $4,000 US).                                                                                                                                                                           
|  
|   |  | At December 31, 2002 there were accrued losses on open forward rate
agreement contracts of $290. The cumulative notional amount of these
open positions at December 31, 2002 amounted to $100,000. These
contracts expire on varying dates to September 2003. At December 31,
2001, there were no unrecognized gains on the open forward rate agreement
contracts (2000  $47 loss). There were no open positions at December
31, 2001 (2000  positions offset).                                                                                                                                                                                                                                                                                   
|  
|19 |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company is committed to capital expenditures of $3,409 (2001  $1,664;
2000  $1,066) and to future annual payments under operating leases and
building leases for the years ending December 31, 2003 to 2007 as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

17



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|19 |  | COMMITMENTS AND CONTINGENCIES (Continued)
|-- |  | -----------------------------------------

|                 |  |      |     |      |  |      |       |      |  |      |     |  |  |   |     |  |  |   |    | 
|---------------- |  | ---- | --- | ---- |  | ---- | ----- | ---- |  | ---- | --- |  |  | - | --- |  |  | - | -- | 
|                 |  | 2003 |     | 2004 |  | 2005 |       | 2006 |  | 2007
|                 |  |      |     |      |  |      |       |      |  |     
|Operating Leases |  | $    | 229 |      |  | $    | 153   |      |  | $    | 81  |  |  | $ | 44  |  |  | $ |   | 
|Building Leases  |  |      | 988 |      |  |      | 1,009 |      |  |      | 968 |  |  |   | 594 |  |  |   | 14 | 
|                 |  |      |     |      |  |      |       |      |  |      |     |  |  |   |     |  |  |   |    | 



|   |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company and its subsidiaries are party to legal proceedings in the
ordinary course of their businesses. Management does not expect the outcome of
any of these proceedings to have a material effect on the Companys financial
position or operating results.                                                                                                                                                                                                                                                         
|  
|20 |  | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The 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 risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Interest rate risk reflects the sensitivity of the Companys financial
results and condition to movements in interest rates. For 2002 a 1%
decrease in interest rates would have reduced earnings before income
taxes by $922. Conversely, a 1% increase in interest rates would have
increased earnings before taxes by a similar amount.                                                                                                                                                                                 
|  
|   |  | Foreign currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The Company is exposed to currency risks as a result of its export to
foreign jurisdictions of goods produced in Canada. These risks are
partially covered by purchases of goods and services in the foreign
currency and by forward exchange contracts.                                                                                                                                                                                                                                                                   
|  
|   |  | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and short-term investments,
accounts receivable, and forward contracts. Cash and short-term
investments are placed with major financial institutions or invested in
the commercial paper of large organizations. Concentrations of credit
risk with respect to receivables are limited due to the large number of
customers and their dispersion across geographic areas.                                  

18



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|21 |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In calculating earnings per share under the treasury stock method, the
numerator remains unchanged from the basic earnings per share calculation
as the assumed exercise of the Companys stock options does not result in
an adjustment to income. The reconciliation of the denominator in
calculating diluted earnings per share is as follows:

|                                                                                  |  |                   |            |               |  |               |            |  |  |  |            | 
|--------------------------------------------------------------------------------- |  | ----------------- | ---------- | ------------- |  | ------------- | ---------- |  |  |  | ---------- | 
|                                                                                  |  | Year Ended        |            | Year Ended    |  | Year Ended   
|                                                                                  |  | December 31, 2002 |            | Dec. 31, 2001 |  | Dec. 31, 2000
|                                                                                  |  |                   |            |               |  |              
|Weighted average number of common shares
outstanding  basic earnings per share   |  |                   | 77,923,525 |               |  |               | 77,740,607 |  |  |  | 76,939,700 | 
|Effect of dilutive securities                                                     |  |                   | 17,550     |               |  |               | 3,032,981  |  |  |  | 4,305,292  | 
|                                                                                  |  |                   |            |               |  |               |            |  |  |  |            | 
|Weighted average number of common shares
outstanding  diluted earnings per share |  |                   | 77,941,075 |               |  |               | 80,773,588 |  |  |  | 81,244,992 | 
|                                                                                  |  |                   |            |               |  |               |            |  |  |  |            | 



|   |  | The impact of all dilutive securities on earnings per share is
anti-dilutive as at December 31, 2002, 2001 and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|22 |  | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company is managed using three operating segments, which have been
determined based on the nature of the products produced: Nucryst
Pharmaceuticals, iFire Technology and Ambeon. In May, 2002, the Company
announced its intention to close the Coinage division and to seek a
strategic buyer for its Ethylene Coatings business. As a result, these
businesses have been accounted for as discontinued operations. The
Chemicals industry segment previously operated by the Company was sold
effective December 29, 2000 and is reported under discontinued operations
(Note 4).
|  
|   |  | The Nucryst Pharmaceuticals segment researches, develops and
commercializes medical devices and pharmaceutical products based on noble
metal nanocrystalline technology. The iFire Technology segment has
developed a proprietary flat-panel full color solid state display
technology with applications in both the large screen and small graphic
display markets. Ambeon is dedicated to marketing and commercializing
coating solutions and products for customers in the aerospace,
electronics, catalyst, and other markets.                                                      
|  
|   |  | The accounting policies of the reportable segments are the same as those
described in Note 2. Included in other non-cash assets of $14,812 at
December 31, 2002 (2001  $14,101; 2000  $34,346) are the investments
disclosed in Note 9 and future income tax assets that cannot be allocated
to a particular segment. Non-cash assets excludes short-term
investments.                                                                                                                                                                                                                

19



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|22 |  | SEGMENTED INFORMATION (Continued)
|-- |  | ---------------------------------

|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|----------------------- |  | ------- | ------ | ------ |  | ------------ | ------- | ------------ |  | ------------- | ----- | ------ |  | -------- | ----- |  |  | - | ------ | 
|                        |  |         |        |        |  | Divisional   |         | Depreciation |  |               |       |        |  | Non-cash
|Year Ended              |  |         |        |        |  | Earnings     |         | and          |  | Capital       |       | Assets
|December 31, 2002       |  | Revenue |        | (Loss) |  | Amortization |         | Expenditures |  | Dec. 31, 2002
|                        |  |         |        |        |  |              |         |              |  |              
|Nucryst Pharmaceuticals |  | $       | 8,344  |        |  | $            | (6,985  | )            |  | $             | 554   |        |  |          | 2,416 |  |  | $ | 9,759  | 
|iFire Technology        |  |         | 4,270  |        |  |              | (16,915 | )            |  |               | 2,642 |        |  |          | 2,909 |  |  |   | 17,184 | 
|Ambeon                  |  |         | 36,449 |        |  |              | 9,026   |              |  |               | 1,618 |        |  |          | 1,166 |  |  |   | 30,071 | 
|Other                   |  |         |       |        |  |              | (845    | )            |  |               | 1,035 |        |  |          | 727   |  |  |   | 14,812 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|Continuing operations   |  |         | 49,063 |        |  |              | (15,719 | )            |  |               | 5,849 |        |  |          | 7,218 |  |  |   | 71,826 | 
|Discontinued operations |  |         | 10,283 |        |  |              | (19,667 | )            |  |               | 636   |        |  |          | 478   |  |  |   | 11,041 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|                        |  | $       | 59,346 |        |  | $            | (35,386 | )            |  | $             | 6,485 |        |  |          | 7,696 |  |  | $ | 82,867 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 

|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|----------------------- |  | ------- | ------ | ------ |  | ------------ | ------- | ------------ |  | ------------- | ----- | ------ |  | -------- | ----- |  |  | - | ------ | 
|                        |  |         |        |        |  | Divisional   |         | Depreciation |  |               |       |        |  | Non-cash
|Year Ended              |  |         |        |        |  | Earnings     |         | and          |  | Capital       |       | Assets
|December 31, 2001       |  | Revenue |        | (Loss) |  | Amortization |         | Expenditures |  | Dec. 31, 2001
|                        |  |         |        |        |  |              |         |              |  |              
|Nucryst Pharmaceuticals |  | $       | 9,835  |        |  | $            | (6,220  | )            |  | $             | 408   |        |  | $        | 546   |  |  | $ | 5,998  | 
|iFire Technology        |  |         | 4,272  |        |  |              | (10,052 | )            |  |               | 2,874 |        |  |          | 1,459 |  |  |   | 19,167 | 
|Ambeon                  |  |         | 36,160 |        |  |              | 7,729   |              |  |               | 1,480 |        |  |          | 3,228 |  |  |   | 43,686 | 
|Other                   |  |         |       |        |  |              | (927    | )            |  |               | 789   |        |  |          | 442   |  |  |   | 14,101 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|Continuing operations   |  |         | 50,267 |        |  |              | (9,470  | )            |  |               | 5,551 |        |  |          | 5,675 |  |  |   | 82,952 | 
|Discontinued operations |  |         | 18,616 |        |  |              | (23,255 | )            |  |               | 4,006 |        |  |          | 2,144 |  |  |   | 16,854 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 
|                        |  | $       | 68,883 |        |  | $            | (32,725 | )            |  | $             | 9,557 |        |  | $        | 7,819 |  |  | $ | 99,806 | 
|                        |  |         |        |        |  |              |         |              |  |               |       |        |  |          |       |  |  |   |        | 

|                        |  |         |         |        |  |              |         |              |  |               |       |        |  |          |        |  |  |   |         | 
|----------------------- |  | ------- | ------- | ------ |  | ------------ | ------- | ------------ |  | ------------- | ----- | ------ |  | -------- | ------ |  |  | - | ------- | 
|                        |  |         |         |        |  | Divisional   |         | Depreciation |  |               |       |        |  | Non-cash
|Year Ended              |  |         |         |        |  | Earnings     |         | and          |  | Capital       |       | Assets
|December 31, 2000       |  | Revenue |         | (Loss) |  | Amortization |         | Expenditures |  | Dec. 31, 2000
|                        |  |         |         |        |  |              |         |              |  |              
|Nucryst Pharmaceuticals |  | $       | 7,695   |        |  | $            | (8,146  | )            |  | $             | 948   |        |  | $        | 305    |  |  | $ | 8,245   | 
|iFire Technology        |  |         | 3,467   |        |  |              | (22,045 | )            |  |               | 2,891 |        |  |          | 3,745  |  |  |   | 17,488  | 
|Ambeon                  |  |         | 40,162  |        |  |              | 9,377   |              |  |               | 1,239 |        |  |          | 3,463  |  |  |   | 47,445  | 
|Other                   |  |         |        |        |  |              | (548    | )            |  |               | 608   |        |  |          | 2,056  |  |  |   | 34,346  | 
|                        |  |         |         |        |  |              |         |              |  |               |       |        |  |          |        |  |  |   |         | 
|Continuing operations   |  |         | 51,324  |        |  |              | (21,362 | )            |  |               | 5,686 |        |  |          | 9,569  |  |  |   | 107,524 | 
|Discontinued operations |  |         | 94,917  |        |  |              | (2,622  | )            |  |               | 4,038 |        |  |          | 4,163  |  |  |   | 77,439  | 
|                        |  |         |         |        |  |              |         |              |  |               |       |        |  |          |        |  |  |   |         | 
|                        |  | $       | 146,241 |        |  | $            | (23,984 | )            |  | $             | 9,724 |        |  | $        | 13,732 |  |  | $ | 184,963 | 
|                        |  |         |         |        |  |              |         |              |  |               |       |        |  |          |        |  |  |   |         | 



| |  | In 2002, Ambeon recorded revenue from a customer of $9,971 (2001  $10,883)
which represents 20.0% (2001  21.7%) of revenue from continuing operations of
the Company.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

20



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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements



|22 |  | SEGMENTED INFORMATION (Continued)
|-- |  | ---------------------------------

|                          |  |      |        |      |  |      |        |  |  |   |        | 
|------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|Export Sales  Year Ended |  | 2002 |        | 2001 |  | 2000
|                          |  |      |        |      |  |     
|United States             |  | $    | 28,767 |      |  | $    | 30,723 |  |  | $ | 32,915 | 
|Europe                    |  |      | 9,117  |      |  |      | 11,587 |  |  |   | 11,942 | 
|Asia                      |  |      | 5,927  |      |  |      | 2,157  |  |  |   | 1,930  | 
|South America             |  |      | 40     |      |  |      | 41     |  |  |   | 57     | 
|                          |  |      |        |      |  |      |        |  |  |   |        | 
|Continuing operations     |  |      | 43,851 |      |  |      | 44,508 |  |  |   | 46,844 | 
|Discontinued operations   |  |      | 1,314  |      |  |      | 18,508 |  |  |   | 35,055 | 
|                          |  |      |        |      |  |      |        |  |  |   |        | 
|                          |  | $    | 45,165 |      |  | $    | 63,016 |  |  | $ | 81,899 | 
|                          |  |      |        |      |  |      |        |  |  |   |        | 



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (Canadian GAAP)
which conform in all material respects with those used in the United
States (U.S. GAAP), except as set forth below:



| | a) |  | Reduction in the Carrying Value of Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In accordance with Canadian GAAP, in 2001 the Company assessed the
recoverability of tangible and intangible assets related to the
Coinage operating segment and the Ethylene Coating business. The
Company projected that the undiscounted future net cash flows from use
of these assets, together with their residual value, to be less than
their carrying amounts. Accordingly, in December 2001, the Company
recorded a provision for asset impairment totaling $34,687,
representing the difference between the book value of these assets and
the projected undiscounted future net cash flows from the use of these
assets, and their residual values.
|
| |    |  | Under U.S. GAAP, in accordance with Financial Accounting Standard No.121
(SFAS 121), an impairment loss is recognized when future undiscounted cash
flows are less than the carrying amount of the asset. If this is the case, an
impairment loss is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The Company determined that the
impairment provision calculated under U.S. GAAP is not materially different
than that calculated under Canadian GAAP and no adjustment was required.                                                                                                              
|
| | b) |  | Derivative Instruments and Hedging Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | In accordance with Canadian GAAP, futures contracts that are not
designated as hedges are recorded at the lower of cost or market. U.S. GAAP,
SFAS 80 Accounting for Futures Contracts, requires futures contracts that are
not designated as hedges to be recorded at fair value with changes in fair
value recorded in current earnings. This guidance is applied to forward
contracts that are not designated as hedges.                                                                                                                                                                                                                                  
|
| |    |  | In June 1998, the Financial Accounting Standards Board issued SFAS 133, as
amended by SFAS 138 Accounting for Derivative Instruments and Hedging
Activities which was effective for the Companys 2001 fiscal year. Under the
new standard, companies are required to record derivatives on the balance sheet
as assets or liabilities measured at fair value. For those derivatives
representing                                                                                                                                                                                                                                                            

21



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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)
|-- |  | -------------------------------------------------------------------------------------------



| |    |  | effective hedges of risks and exposures, unrealized gains or losses
resulting from changes in the fair values are presented as a component of other
comprehensive income (OCI) as defined by SFAS 130. To the extent certain
derivatives do not represent effective hedges, unrealized gains or losses are
included in the income statement for U.S. GAAP purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Hedges against price risk exposure on contracted nickel sales and raw
materials purchases as described in Note 18 are considered effective cash-flow
hedges under SFAS 133. Management regularly measures the effectiveness of these hedges, with unrealized gains and losses reported in OCI for U.S. GAAP
purposes. From time to time, the Company reduces its exposure to foreign
currency and interest rate fluctuations by entering into forward transactions
as described in Note 18. These transactions are not considered hedging
activities under SFAS 133 and unrealized gains and losses are included in the
income statement under U.S. GAAP. The adoption of SFAS 133 on January 1, 2001
resulted in a cumulative pre-tax increase to OCI of $295. This increase to OCI
was attributable to gains on cash-flow hedges. The net gains on these
cash-flow hedges were reclassified into earnings during the year ended December
31, 2001. As at December 31, 2002, the Company has recorded a recovery to OCI
with respect to cash-flow hedges amounting to $171 (December 31, 2001  charge
$246).
|
| | c) |  | Gain on issuance of shares by subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | In accordance with Canadian GAAP, the Company is required to account for
gains and losses on the issuance of shares by a subsidiary as a component of
income. Under U.S. GAAP, the effect of such dilution gains is recorded in
equity as an increase in paid-in capital rather than as income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | d) |  | Organization costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |    |  | In accordance with Canadian GAAP, organization costs may be deferred
and amortized. Under U.S. GAAP, following Statement of Position 98-5
(SOP 98-5) Reporting on the Costs of Start-Up Activities, costs of
start-up activities, including organization costs, are expensed as
incurred. As permitted, the adoption of SOP 98-5 is accounted for as
an adjustment to net loss. During 2001, the remaining
organization costs were amortized under Canadian GAAP and there was no
reconciling difference as at December 31, 2002 or December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | e) |  | Pension                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |    |  | Accounting for pension costs under U.S. GAAP differs from Canadian
GAAP principally with respect to the choice of the discount rate used
to calculate the projected benefit obligation and to the valuation of
assets and related effects on pension expense. There is no
significant effect on the Companys financial statements as a result
of this difference. In addition, under U.S. GAAP, the Company would
have recorded an additional minimum liability for underfunded plans
representing the excess of the accumulated benefit obligation over the
pension plan assets, less the pension liability already recognized and
the net unamortized prior service cost. Under SFAS 130 Reporting
Other Comprehensive Income, the increase in liabilities is charged
directly to other comprehensive income.                                                                                                                                                                                                                                                                                            

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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)
|-- |  | -------------------------------------------------------------------------------------------



| | f) |  | Subsidiary Stock-Based Compensation Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In late 2001, the CICA introduced new accounting and disclosure
requirements with respect to stock-based compensation. Effective
January 1, 2002, the Companys subsidiaries SAR plans are subject to
variable plan accounting, consistent with U.S. GAAP, where the net
changes in the value of SARs is recognized as compensation expense
over the SARs vesting period. Under Canadian GAAP, the offsetting
liability is reported in accounts payable, while under U.S. GAAP, the
liability is included in Additional Paid-in-Capital. As at December
31, 2002, the liability has been reduced to $Nil and therefore no
balance is reported in Additional Paid-in-Capital.
|
| | g) |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | Under Canadian GAAP and U.S. GAAP, the impact of changes in income
tax rates to the tax asset or liability account is reflected in the
current years statement of operations. Under Canadian GAAP, the impact
of the change is reflected when the legislation affecting the tax rate
change is substantially enacted whereas the impact under U.S. GAAP is
reflected when legislation is enacted. The Company determined that the
combined corporate income tax rate under Canadian GAAP and U.S. GAAP is
not materially different and no adjustment is required.                                                                                                             
|
| |    |  | The effect of the above differences on the Companys financial statements
is set out below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                 |  |                   |          |                   |  |                   |          |      |  |          |          |      |  |   |          |   |  |   |         |   |  |   |          |  
|------------------------------------------------ |  | ----------------- | -------- | ----------------- |  | ----------------- | -------- | ---- |  | -------- | -------- | ---- |  | - | -------- | - |  | - | ------- | - |  | - | -------- | -
|Consolidated Balance Sheet                       |  | December 31, 2002 |          | December 31, 2001 |  | December 31, 2000
|                                                 |  |                   |          |                   |  |                  
|                                                 |  | Canadian          |          | U.S.              |  | Canadian          |          | U.S. |  | Canadian |          | U.S.
|                                                 |  | GAAP              |          | GAAP              |  | GAAP              |          | GAAP |  | GAAP     |          | GAAP
|                                                 |  |                   |          |                   |  |                   |          |      |  |          |          |     
|Accounts receivable (b)                          |  | $                 | 14,114   |                   |  | $                 | 14,114   |      |  | $        | 18,152   |      |  | $ | 18,152   |   |  | $ | 44,894  |   |  | $ | 45,013   |  
|Deferred charges (d)                             |  |                   | 2,461    |                   |  |                   | 2,461    |      |  |          | 2,085    |      |  |   | 2,085    |   |  |   | 2,575   |   |  |   | 2,450    |  
|Accounts payable and accrued
liabilities (b) (e) |  |                   | 19,220   |                   |  |                   | 19,960   |      |  |          | 17,943   |      |  |   | 18,522   |   |  |   | 20,854  |   |  |   | 21,443   |  
|Deficit                                          |  |                   | (215,317 | )                 |  |                   | (225,826 | )    |  |          | (163,976 | )    |  |   | (176,074 | ) |  |   | (96,517 | ) |  |   | (110,984 | )
|Other comprehensive income (b) (e)               |  |                   |         |                   |  |                   | (740     | )    |  |          |         |      |  |   | (579     | ) |  |   |        |   |  |   | (589     | )
|Additional paid-in capital (c) (f)               |  |                   |         |                   |  |                   | 10,509   |      |  |          |         |      |  |   | 12,098   |   |  |   |        |   |  |   | 14,461   |  
|                                                 |  |                   |          |                   |  |                   |          |      |  |          |          |      |  |   |          |   |  |   |         |   |  |   |          |  

23



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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)
|-- |  | -------------------------------------------------------------------------------------------

|                                           |                                              |      |                        |         |   |      |         |         |   |   |         |         |  
|------------------------------------------ | -------------------------------------------- | ---- | ---------------------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                           |                                              |      | Year Ended December 31
|                                           |                                              |      |                       
|Consolidated Statement of Loss             |                                              | 2002 |                        | 2001    |   | 2000
|                                           |                                              |      |                        |         |   |     
|Loss from continuing operations            |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           |  Canadian GAAP                              |      | $                      | (30,095 | ) |      | $       | (8,428  | ) |   | $       | (18,541 | )
|Adjustments                                |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           | Futures contracts (b)                        |      |                        |        |   |      |         | (119    | ) |   |         | (126    | )
|                                           | Amortization of organization costs (d)       |      |                        |        |   |      |         | 125     |   |   |         | 300     |  
|                                           | Gain on issuance of shares by subsidiary (c) |      |                        |        |   |      |         |        |   |   |         | (10,509 | )
|                                           | Subsidiary SAR compensation (f)              |      |                        |        |   |      |         | 2,363   |   |   |         | (3,952  | )
|                                           |                                              |      |                        |         |   |      |         |         |   |   |         |         |  
|Loss from continuing operations            |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           |  U.S. GAAP                                  |      |                        | (30,095 | ) |      |         | (6,059  | ) |   |         | (32,828 | )
|Loss from discontinued operations          |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           |  Canadian GAAP                              |      |                        | (19,667 | ) |      |         | (59,031 | ) |   |         | 3,893   |  
|                                           |                                              |      |                        |         |   |      |         |         |   |   |         |         |  
|Net loss applicable to common shareholders |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           |  U.S. GAAP                                  |      |                        | (49,762 | ) |      |         | (65,090 | ) |   |         | (28,935 | )
|Other comprehensive income (loss)          |                                              |      |                        |         |   |      |         |         |   |   |         |        
|                                           | Pension (e)                                  |      |                        | (332    | ) |      |         | 256     |   |   |         | 40      |  
|                                           | Cash flow hedges (b)                         |      |                        | 171     |   |      |         | (246    | ) |   |         |        |  
|                                           |                                              |      |                        |         |   |      |         |         |   |   |         |         |  
|Net comprehensive loss  U.S. GAAP         |                                              | $    | (49,923                | )       |   | $    | (65,080 | )       |   | $ | (28,895 | )      
|                                           |                                              |      |                        |         |   |      |         |         |   |   |         |         |  

|                      |                       |      |                        |       |   |      |   |       |   |  |   |       |  
|--------------------- | --------------------- | ---- | ---------------------- | ----- | - | ---- | - | ----- | - |  | - | ----- | -
|                      |                       |      | Year Ended December 31
|                      |                       |      |                       
|Loss Per Common Share |                       | 2002 |                        | 2001  |   | 2000
|                      |                       |      |                        |       |   |     
|Canadian GAAP         |                       |      |                        |       |   |      |   |       |   |  |   |      
|                      | Continuing operations |      | $                      | (0.39 | ) |      | $ | (0.11 | ) |  | $ | (0.24 | )
|                      | Net loss              |      | $                      | (0.64 | ) |      | $ | (0.87 | ) |  | $ | (0.19 | )
|U.S. GAAP             |                       |      |                        |       |   |      |   |       |   |  |   |      
|                      | Continuing operations |      | $                      | (0.39 | ) |      | $ | (0.08 | ) |  | $ | (0.43 | )
|                      | Net loss              |      | $                      | (0.64 | ) |      | $ | (0.84 | ) |  | $ | (0.38 | )

24



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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)
|-- |  | -------------------------------------------------------------------------------------------

|                                    |                                          |                   |          |                   |      |                   |          |   |      |   |          |   |      |   |        |        |   |   |         |         |   |   |         |       | 
|----------------------------------- | ---------------------------------------- | ----------------- | -------- | ----------------- | ---- | ----------------- | -------- | - | ---- | - | -------- | - | ---- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------- | ----- | 
|Consolidated Cash Flow              |                                          | Year Ended        |          | Year Ended        |      | Year Ended       
|Statement                           |                                          | December 31, 2002 |          | December 31, 2001 |      | December 31, 2000
|                                    |                                          |                   |          |                   |      |                  
|                                    |                                          |                   | Canadian |                   | U.S. |                   | Canadian |   | U.S. |   | Canadian |   | U.S.
|                                    |                                          |                   | GAAP     |                   | GAAP |                   | GAAP     |   | GAAP |   | GAAP     |   | GAAP
|                                    |                                          |                   |          |                   |      |                   |          |   |      |   |          |   |     
|Loss from continuing
operations     |                                          | $                 | (30,095  | )                 |      | $                 | (30,095  | ) |      | $ | (8,428   | ) |      | $ | (6,059 | )      |   | $ | (18,451 | )       |   | $ | (32,828 | )    
|Items not affecting cash:           |                                          |                   |          |                   |      |                   |          |   |      |   |          |   |      |   |        |        |   |   |         |         |   |   |         |      
|                                    | Gain on issuance of shares
by subsidiary |                   |          |                  |      |                   |          |  |      |   |          |  |      |   |        |       |   |   |         | (10,509 | ) |   |         |      | 
|                                    | Subsidiary SAR
compensation              |                   |          |                  |      |                   |          |  |      |   |          |  |      |   |        | (2,363 | ) |   |         |        |   |   |         | 3,952 | 
|Changes in non-cash working
capital |                                          | $                 | 1,466    |                   |      | $                 | 1,466    |   |      | $ | (5,566   | ) |      | $ | (5,572 | )      |   | $ | 2,991   |         |   | $ | 2,817   |      
|                                    |                                          |                   |          |                   |      |                   |          |   |      |   |          |   |      |   |        |        |   |   |         |         |   |   |         |      



| |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | U.S. GAAP, SFAS 123, Stock-Based Compensation requires that stock-based
compensation be accounted for based on a fair value methodology. As permitted
by the statement, and consistent with Canadian GAAP, effective January 1, 2002
the Company and its subsidiaries have elected to continue measuring
compensation costs as the excess, if any, of the quoted market value of the
stock at the date of the grant over the exercise price. As the exercise price
of options granted by the Company and its subsidiaries is not less than the
market value at the date of grant, no compensation expense is recognized.
|
| |  | There continues to be a reconciling item between Canadian and U.S. GAAP for
options issued by the Company and its subsidiaries prior to January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | If compensation costs for the Companys and its subsidiaries stock option
plans had been determined based on the fair value methodology over the vesting
period consistent with SFAS 123, the Companys net loss and earnings per share
would have been reduced to the pro-forma amounts indicated below:                                                                                                                                                                                                                                                                                                                

|                                           |                       |   |                        |         |      |   |         |         |   |   |         |         |  
|------------------------------------------ | --------------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                           |                       |   | Year Ended December 31
|                                           |                       |   |                       
|                                           |                       |   | 2002                   |         | 2001 |   | 2000   
|                                           |                       |   |                        |         |      |   |        
|Net loss applicable to common shareholders |                       |   |                        |         |      |   |         |         |   |   |         |        
|                                           |  U.S. GAAP           |   | $                      | (49,762 | )    |   | $       | (65,090 | ) |   | $       | (28,935 | )
|Pro-forma                                  |                       | $ | (58,196                | )       |      | $ | (75,603 | )       |   | $ | (35,602 | )      
|Loss per common share  U.S. GAAP          |                       |   |                        |         |      |   |         |         |   |   |         |        
|                                           | Continuing operations |   | $                      | (0.39   | )    |   | $       | (0.08   | ) |   | $       | (0.43   | )
|                                           | Net loss              |   | $                      | (0.64   | )    |   | $       | (0.84   | ) |   | $       | (0.38   | )
|Pro-forma                                  |                       |   |                        |         |      |   |         |         |   |   |         |        
|                                           | Continuing operations |   | $                      | (0.50   | )    |   | $       | (0.21   | ) |   | $       | (0.51   | )
|                                           | Net loss              |   | $                      | (0.75   | )    |   | $       | (0.97   | ) |   | $       | (0.46   | )
|                                           |                       |   |                        |         |      |   |         |         |   |   |         |         |  

25



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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The fair value of each option grant by the Company and its subsidiaries
was estimated using the Black-Scholes options pricing model assuming no
dividends are to be paid on common shares, a risk free interest rate of
5.18% (2001  5.52%; 2000  6.39%), an average life of 7.0 years and a
volatility for the shares of the companies of 59.5% (2001 57.5%; 2000 
41.1%). The amounts computed according to the Black-Scholes pricing
model may not be indicative of the actual values realized upon the
exercise of these options by the holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | New Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In November 2002, the FASB issued interpretation No.45 that broadens the
definition of guarantees and requires substantially expanded disclosure
regarding those guarantees. In addition, the new rules require
recognition of a liability equal to the fair value of a guarantee at its
inception. These rules are applicable on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements apply for reporting periods ending after December 15, 2002.
The Company has not yet determined the additional disclosure
requirements, if any, that will result from the adoption of these new
rules.                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In June 2002, the FASB issued statement No.146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). The standard is
applicable for exit or disposal activities that are initiated after
December 31, 2002 and requires the recognition of costs associated with
exit or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. The adoption of this
standard is not expected to have a material impact on the Companys
results from operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In October 2001, the FASB issued Statement No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144
replaces SFAS 121 Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of and establishes accounting and
reporting standards for long-lived assets to be disposed of by sale.
This standard applies to all long-lived assets, including discontinued
operations. SFAS 144 requires that those assets be measured at the lower
of carrying amount or fair value less cost to sell. SFAS 144 also
broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from
the rest of the entity that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS 144 is effective
for fiscal years beginning after December 15, 2001. Adoption of this
standard has not had a material effect on the Companys results from
operations or financial position.
|  
|   |  | In August 2001, the FASB issued Statement No.143, Accounting for
Asset Retirement Obligations (SFAS 143). SFAS 143 addresses financial
accounting and reporting for obligations and costs associated with the
retirement of tangible long-lived assets and is effective for years
beginning after June 15, 2002. The Company has not yet determined the
impact that this statement will have on its results from operations or
financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In June 2001, the FASB issued Statement No.142, Goodwill and Other
Intangible Assets (SFAS 142), which supercedes APB Opinion No.17,
Intangible Assets. Concurrently, the CICA issued Handbook Section 3062,
Goodwill and Other Intangible Assets, which is consistent with SFAS
142. These statements require that goodwill no longer be amortized to
earnings but instead be reviewed for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

26



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The Westaim Corporation
Notes to Consolidated Financial Statements



|23 |  | RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | impairment. The Statements are effective for fiscal years beginning
after December 15, 2001, and are required to be applied at the beginning
of an entitys fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date.
Adoption of this standard has not had a material effect on the Companys
results from operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In June 2001, the FASB issued Statement No.141, Business Combinations
(SFAS 141), which supercedes APB Opinion No.16, Business Combinations,
and SFAS 38 Accounting for Preacquisition Contingencies of Purchased
Enterprises. Concurrently, the CICA issued Handbook Section 1581,
Business Combinations, which is consistent with SFAS 141. Those
Statements will change the accounting for business combinations and
goodwill. SFAS 141 and CICA Handbook Section 1581 require that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method is
no longer permitted. These Statements also establish criteria for
separate recognition of intangible assets acquired in a purchase business
combination. Adoption of this standard has not had a material effect on
the Companys results from operations or financial position.
|  
|24 |  | COMPARATIVE FIGURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Certain 2001 and 2000 figures have been reclassified to conform to the
presentation of the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

27