##### 



EXHIBIT 2 THE WESTAIM CORPORATION Managements Discussion and Analysis for the year ended December 31, 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS The following discussion of the results of operations and financial condition
for the years ended December 31, 2003 and December 31, 2002 should be read in
conjunction with the Consolidated Financial Statements and accompanying notes. DESCRIPTION OF THE BUSINESS The Westaim Corporation (the Company) develops, commercializes and launches
high-potential technologies into the fast growing sectors of the economy. The
Companys portfolio of business opportunities includes flat panel displays,
antimicrobial wound care products and pharmaceuticals. The Companys strategy is to develop the independent technical, operating and
marketing and sales capabilities of its technology investments through the
early years of product introduction and commercialization with the objective of
taking these technologies public through initial public offerings. Management
recognizes that, in circumstances where it lacks technical or marketing
expertise or the necessary capital to complete development of a product, it may
be in the Companys best interests to pursue commercialization through joint
venture arrangements, strategic alliances, licensing, or selling its
technology. CONSOLIDATED RESULTS OVERVIEW For the year ended December 31, 2003, the Company reported a net loss of $34.5
million compared to a net loss of $49.8 million in 2002. The loss from
continuing operations was $36.9 million in 2003 compared to $39.1 million in
2002. The Company reported income from discontinued operations of $2.4 million
in 2003 compared to a loss from discontinued operations of $10.7 million in
2002. Revenues from continuing operations for the year ended December 31, 2003
were $17.3 million compared to $12.6 million in 2002. The basic and diluted net loss per common share was $0.44 in 2003 compared to
$0.64 in 2002. The basic and diluted loss per common share from continuing
operations was $0.47 in 2003 and $0.50 in 2002. Weighted average number of
common shares outstanding were 78.0 million and 77.9 million in 2003 and 2002,
respectively. On January 29, 2004, the Company sold its Ambeon business segment (Ambeon) to
Sulzer Metco (Canada) Inc. for approximately $35.0 million. As a result, this
business has been accounted for as a discontinued operation in 2003 and 2002.
In May 2002, the Company announced its intention to close the Coinage division
and to seek a strategic buyer for its Ethylene Coatings business. These
businesses are also accounted for as discontinued operations in 2003 and 2002. Continuing operations reflect the results of the Companys subsidiaries,
NUCRYST Pharmaceuticals Corp. (NUCRYST) and iFire Technology Inc. (iFire).
Revenues increased 36.9% in 2003, reflecting the growth of revenues of
NUCRYSTs wound care business. A comparison of operating costs from continuing operations in 2003 compared to
the prior year is as follows: % of
    
    
    
    
    
    % of($millions)
    
    2003
    
    Revenue
    
    2002
    
    RevenueManufacturing
    
    $
    5.9
    
    
    
    34.4
    %
    
    $
    5.0
    
    
    
    39.5
    %Selling, general and administrative
    
    
    3.8
    
    
    
    21.7
    %
    
    
    4.9
    
    
    
    38.5
    %Research and development
    
    
    25.7
    
    
    
    148.6
    %
    
    
    23.3
    
    
    
    184.4
    %Depreciation and amortization
    
    
    5.0
    
    
    
    28.9
    %
    
    
    4.2
    
    
    
    33.5
    %$
    40.4
    
    
    
    
    
    
    $
    37.4
 22 The Westaim Corporation Annual Report 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS Consolidated Results (continued) The increase in manufacturing costs reflects higher sales of wound care
products at NUCRYST. Manufacturing costs measured as a percent of revenue have
improved by 5.1 percentage points as a result of product mix and economies of
scale. Lower selling and administration costs were primarily the result of
reduced salaries and wages and consulting fees. The increase in research and
development expenses reflects a planned reduction in funding contributions to
iFire from Technology Partnerships Canada (TPC), further discussed below, and
increased research and development expenditures relating to pharmaceutical
development at NUCRYST. All eligible research and development expenditures
qualify for a 20% tax credit that can be utilized when the Company reaches a
taxable position. No development costs were capitalized in 2003 and 2002. Corporate expenses for the year ended December 31, 2003 were $8.9 million, up
from $6.7 million in 2002, reflecting the impact of non-recurring costs
relating to a corporate reorganization in early 2003. Additional corporate
costs were incurred with respect to the Board of Directors initiative to
maximize shareholder value in the second half of 2003 and increases in the
value of deferred share units granted to Directors of the Company. Interest income and foreign exchange of $0.7 million in 2003 was significantly
lower than the $2.2 million reported in 2002. This reduction was primarily due
to the impact of the strengthening Canadian dollar in 2003 and the resulting
exchange losses on translation of foreign currency monetary assets. Loss on
disposal of assets reflected losses on the disposal of assets no longer in use,
primarily at iFire. Future income tax expense, a non-cash item, was $4.7 million compared to $6.4
million in 2002 and results from a reduction in the Companys future income tax
asset. The reduction in the tax amount in 2003 reflects the impact of Ambeon
being accounted for as a discontinued operation. The loss in the fourth quarter of 2003 of $17.7 million, is $8.2 million higher
than the same period in 2002. This reflects an increase in future income tax
expense of $3.9 million related to the divestiture of Ambeon, increased
corporate costs of $1.4 million primarily related to the work of the Special
Committee of the Board of Directors, and increased research and development
expenditures. The increase in research and development costs of $2.2 million
reflects spending on pharmaceutical development at NUCRYST and the completion
of funding contributions from TPC at iFire. OPERATIONS Performance Measures As a developer of new technologies, the Company uses financial and technical
performance measures to track corporate performance. The Company develops
comprehensive long-range plans and annual plans for each business segment with
a view to maximizing long-term shareholder value. The success of each business
unit is measured on its ability to achieve performance milestones within a
specified timeframe. These milestones generally relate to specific research and
development targets. Given the uncertainty surrounding developing new
technologies, these milestones are reviewed and updated on a regular basis
during the year. Financial milestones are also set and measured. Financial
performance may relate to sales activity for commercial products or the
achievement of results within operating expense and capital budget targets. The Companys business plans, and related measurements of performance against
plan, are designed to ensure that the Companys capital and human resources are
focused on maximizing return on investment. Continuing Operations The Companys operations are organized into two high-potential emerging
technology businesses: iFire Technology Inc. (iFire) and NUCRYST
Pharmaceuticals Corp. (NUCRYST). The Companys primary strategy is to invest
in the independent technical, research, operating, and marketing and sales
capabilities of each of its technology investments through the early years of
product development, introduction and commercialization. The Westaim Corporation Annual Report 2003 23




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MANAGEMENTS DISCUSSION AND ANALYSIS Consolidated Results (continued)  
    
    iFire Technology Inc. iFire, based in Toronto, Ontario, has developed a proprietary full-color
solid-state display technology with applications in both the fast-growing large
screen TV market and small graphic display market. This business unit continues
to achieve strategic milestones toward proving the commercial viability of its
technology. In 2002, iFire entered into a technology collaboration agreement
with Sanyo Electric Company Ltd. (Sanyo) to provide research and development
expertise to iFire. In the second quarter 2003, iFire entered into an
agreement with Dai Nippon Printing Co., Ltd. (DNP) to develop the front-end
manufacturing processes for iFires display technology. iFire continues to make
further technical improvements to its displays as measured in color,
brightness, lifetime and electronics. The net loss of iFire after Technology Partnerships Canada (TPC) funding for
the year ended December 31, 2003 was $19.9 million compared to $16.9 million in
2002. Revenues were $0.9 million in 2003 compared to $4.3 million in 2002 as
final deferred revenues were recognized from a licensing agreement with TDK
Corporation (TDK). Total expenses for research, development and trial
manufacturing including depreciation, and before TPC funding, were $26.0
million in 2003 compared to $29.2 million in 2002. Approximately 50% of iFires
expenses arise from salaries and wages of research and development staff. In 2003, iFire achieved significant milestones in its initiatives to transition
from research and development to the commercialization of its proprietary flat
panel display technology. In April, iFire announced a technology breakthrough
that further simplified the flat panel manufacturing process. This development,
Color-By-Blue, will result in capital and production costs that in large-scale
production Management estimates will be lower by approximately 15%. Ahead of plan, in December 2003, iFire successfully scaled its prototype
display from 17 inches to 34 inches. The 34-inch display is fabricated using
processes that are expected to be directly transferable to commercial
production. The first steps in the fabrication, referred to as front-end
processes, are completed by iFires joint development partner, DNP, in Kashiwa,
Japan. The remainder of the fabrication process is completed in iFires Toronto
facility. In the first half of 2004, iFire expects to complete the installation of the
remaining prototype production toolset and focus on optimizing processes to
improve performance and reduce defects on prototype 34-inch displays. Upon
successful completion of these milestones, iFire expects to begin construction
of a pilot production plant at its Toronto facility, at a cost of approximately
$40 million in 2004. This will be partially funded through a US$10 million loan
agreement signed in January 2004 with DNP. It is the expectation of both iFire
and DNP that the financing relationship will be rolled into an expanded
commercial agreement as the technology moves through pilot phase and into
commercial production, or alternatively, the loan will be repaid by iFire.
Remaining capital costs for the pilot production plant will be funded through
further partnership agreements or internal Company resources. In late 2002, iFire entered into a joint development agreement with Sanyo. As
part of this agreement, Sanyo provides funding to iFire for certain research
and development projects. This funding is accounted for as a reduction in
research and development expenses and amounted to $1.4 million in 2003. Total
funding is expected to amount to US$3.8 million over 4 years. In 2001, iFire entered into a research and development contribution agreement
with the Government of Canada through TPC. Under the agreement, TPC agreed to
contribute 28.371% of eligible research and development costs and related
capital expenditures incurred by iFire to a maximum of $30 million. In
exchange, iFire agreed to 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, representing approximately 0.5% of
the current outstanding common shares of iFire. Contributions from TPC were
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. Under this arrangement, in 2003 iFire received $6.2
million, the final balance of the total $30 million funding. 24 The Westaim Corporation Annual Report 2003




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Consolidated Results (continued) The impact of the TPC funding on the operating results of the iFire business
segment is summarized below: Operating Expenses
    
    Capital Expenditures($millions)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Expenses  iFire
    
    $
    26.0
    
    
    $
    29.2
    
    
    $
    27.2
    
    
    $
    9.2
    
    
    $
    3.9
    
    
    $
    3.1TPC funding
    
    
    5.2
    
    
    
    8.0
    
    
    
    12.9
    
    
    
    0.8
    
    
    
    1.0
    
    
    
    1.6Net expenses  iFire
    
    $
    20.8
    
    
    $
    21.2
    
    
    $
    14.3
    
    
    $
    8.4
    
    
    $
    2.9
    
    
    $
    1.5
 In 2000, iFire entered into a strategic partnership with TDK. The transaction
included the purchase of a 2.5% equity investment in iFire, an up-front license
fee of $11.8 million for the non-exclusive right to use iFires proprietary
technology to manufacture flat panel displays under 12 inches in size and
ongoing royalty payments on future sales of displays manufactured by TDK using
iFire technology. The up-front license fees received from TDK were recognized
in revenue over three years, the period that the services were provided. The
remaining $0.6 million in deferred licensing revenue was recognized in 2003.
This agreement may be renewed on an annual basis, with $0.3 million received in
2003, representing the current years fee. Capital spending before TPC funding amounted to $9.2 million in 2003 compared
to $3.9 million in 2002. This increase primarily related to the acquisition of
tooling and construction of facilities required to scale production of iFires
flat screen technology from 17 inches to 34 inches. The 2004 outlook for iFire is to continue research and development expenditures
at levels comparable to 2003 and to make capital expenditure investments in the
range of $40 million as discussed above. iFire intends to pursue a strategy of
developing relationships with major international electronics companies with a
view to jointly exploiting the commercialization of large-format display
products and sharing in the development and capital costs of a large-scale
manufacturing facility.  
    
    NUCRYST Pharmaceuticals Corp. NUCRYST researches, develops and commercializes wound care products and
pharmaceutical products based on its noble metal nanocrystalline technology.
The net loss for the year ended December 31, 2003 was $1.9 million compared to
a loss of $7.0 million in 2002. Revenues for the year ended December 31, 2003
were $16.2 million compared to $8.3 million in the prior year. Revenues in 2003
benefited from a one-time payment of $4.6 million (US$3.0 million) from Smith &
Nephew plc (Smith & Nephew) following the achievement of a regulatory
milestone. The financial results of NUCRYST are as follows: ($millions)
    
    2003
    
    2002
    
    2001Wound care product related revenue
    
    $
    11.6
    
    
    $
    8.3
    
    
    $
    8.2Milestone revenue
    
    
    4.6
    
    
    
    
    
    
    
    1.6Total wound care revenue
    
    $
    16.2
    
    
    $
    8.3
    
    
    $
    9.8Wound care contribution
    
    $
    8.0
    
    
    $
    0.7
    
    
    $
    (3.6
    )Pharmaceutical development costs
(including general and administrative expenses)
    
    
    (9.4
    )
    
    
    (7.3
    )
    
    
    (2.5
    )Other expenses
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.1
    )NUCRYST loss
    
    $
    (1.9
    )
    
    $
    (7.0
    )
    
    $
    (6.2
    )
 The Westaim Corporation Annual Report 2003 25




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MANAGEMENTS DISCUSSION AND ANALYSIS Consolidated Results (continued) Wound Care Products  Acticoat Burn Dressings and Acticoat 7 Antimicrobial
Dressings, targeting the burn and chronic wound markets, were developed and
sold by NUCRYST until May 2001 when a series of agreements was completed with
Smith & Nephew under which Smith & Nephew acquired an exclusive global license
to the NUCRYST antimicrobial coating technology for wounds, together with
NUCRYSTs U.S. and Canada Acticoat burn dressing business. NUCRYST continues
to manufacture Acticoat products for Smith & Nephew and receives royalty
payments based on Smith & Nephews global sales. The two companies are
collaborating to develop the technology for the introduction of new products
for chronic and serious wounds. NUCRYSTs wound care business continued to grow in 2003 as indicated in the
table above. Revenue from licensing and manufacturing in 2003 was $11.6 million
compared to $8.3 million in 2002. Total sales to end users of Acticoat
products increased by more than 50% year-over-year in both 2003 and 2002 with
Smith & Nephew now selling Acticoat products in 27 countries. Prior to May
2001, revenues reflected direct sales by NUCRYST to customers. Commencing in
May 2001, revenue comprises licensing royalties, milestone payments and
manufacturing revenues relating to Acticoat products produced for and sold by
Smith & Nephew. Cash flow generated from the wound care business of NUCRYST will continue to be
used to partially fund the significant cash requirements related to
pharmaceutical development. Pharmaceuticals  In April 2003, NUCRYST received approval of its first
Investigational New Drug (IND) from the U.S. Food & Drug Administration
(FDA). This allowed NUCRYST to initiate Phase I human clinical trials of a
dermatology cream containing its proprietary formulation of silver
nanocrystals. NUCRYST is developing this product (NPI 32101) for the treatment
of atopic dermatitis, or eczema, and other skin conditions. The Company
believes that the market in the United States alone for antiinflammatory
topical products was more than US$800 million in 2002. NUCRYST Management
believes that existing treatments in the market do not meet the needs of
patients suffering from eczema. As planned, the Phase I safety trials have been successfully completed in 2003
and the first Phase II trials, which examine the efficacy of the cream on
patients with eczema, were launched in the fourth quarter of 2003. NUCRYSTs
pharmaceutical expenses increased by 29% from 2002 to 2003, reflecting the
increased costs relating to research on dermatological pharmaceuticals and the
initial clinical trials. Capital spending totalled $1.8 million in 2003 compared to $2.4 million in 2002
and in both years related primarily to the completion of additional
manufacturing capacity of Acticoat products in Fort Saskatchewan, Alberta.
NUCRYSTs administration and pharmaceutical research activities are primarily
based in Wakefield, Massachusetts, and manufacturing operations are located in
Fort Saskatchewan. The outlook for NUCRYST is for continued growth in licensing and manufacturing
revenues as markets for Acticoat wound care products are expanded in the
United States and Europe by Smith & Nephew. Increases in revenue are expected
to be significantly more than offset by increases in research and development
expenditures as NUCRYST expands clinical and preclinical research into the
pharmaceutical attributes of its noble metal nanocrystalline technology. The
first Phase II trials are expected to be completed in 2004 and additional
expanded Phase II trials will follow. Losses at NUCRYST are expected to
increase significantly in 2004 as a result of funding these trials. NUCRYSTs
current research and development effort is focused on obtaining FDA approval of
one or more drugs to be used in the treatment of dermatology indications and
will involve 3 to 5 years of clinical development. NUCRYST is targeting its
first pharmaceutical product launch in 2007. Discontinued Operations  
    
    Ambeon On January 29, 2004, the Company sold Ambeon to Sulzer Metco (Canada) Inc. for
total proceeds of approximately $35.0 million subject to customary adjustments
including changes in working capital. The completion of the sale to a strategic
buyer represented an opportunity to enhance the Companys value and to focus
resources on the Companys two high-potential technologies, iFire and NUCRYST. 26 The Westaim Corporation Annual Report 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS Consolidated Results (continued) Under new Canadian Generally Accepted Accounting Principles (GAAP) introduced
in 2003, all expected future losses and estimated shutdown and asset disposal
costs relating to discontinued operations are no longer accrued, but are
reported in the period in which they occur. As a result, the pre-tax gain from
the sale of Ambeon of approximately $5.0 million will be reported in the first
quarter of 2004. In addition, discontinued operations costs estimated to be
approximately $2.0 million relating to the restructuring of the Company as a
result of the sale of Ambeon will be reported in the quarters in which they
occur in 2004 and subsequently. Under Canadian GAAP, all assets relating to a
discontinued operation that are expected to be sold within twelve months are
reported as current assets available for sale. Ambeon was the final industrial business owned and operated by the Company.
This business segment, while generating cash flow to fund the Companys
emerging technologies, had suffered from a downturn in its core markets in the
past two years. The proceeds from this sale will be used to fund NUCRYSTs
pharmaceutical development and iFires transition from development to
production of its flat screen technology. Ambeon, with operations in Fort Saskatchewan, Alberta, and the United Kingdom,
develops, manufactures and sells coating materials and products for customers
in the aerospace, electronics, catalyst and other markets. The segment earnings
from Ambeon operations for the year ended December 31, 2003 were $3.0 million
on revenue of $30.1 million compared to net earnings of $9.0 million on revenue
of $36.4 million in 2002. Revenue from core product lines increased 5.6% from
$27.2 million in 2002 to $28.8 million in 2003 and earnings from core products
declined from $2.6 million in 2002 to $2.0 million in 2003, reflecting the
general downturn in the aerospace and electronics industries. The results in
2003 were also negatively impacted by the weaker U.S. dollar, the currency in
which most of Ambeons products are sold, and by the increasing cost of nickel,
the primary raw material in many of Ambeons products. The cyclical decline in the core business was offset in 2002 and 2003 by
favorable results from a one-time materials supply contract which was completed
in the first quarter of 2003. Revenues and earnings from this contract were
$1.5 million and $1.1 million, respectively, in 2003 compared to $8.9 million
and $6.4 million in 2002. Capital spending totalled $1.7 million in 2003
compared to $1.2 million in 2002. During 2003, Ambeon sold 357 tonnes of nickel composite and other nickel-based
materials to the aerospace and electronics industries compared to 352 tonnes in
2002. Ambeon also sold 385 tonnes of nickel welding powders compared to 373
tonnes in 2002.  
    
    Coinage Division and Ethylene Coatings business In May 2002, the Company announced its intention to close the Coinage division
and to sell or close its Ethylene Coatings business. As a result, these
businesses are accounted for as discontinued operations. The decision to
discontinue the Coinage business followed several quarters of operating losses.
The outlook for the business was unsustainable as a result of weak demand and
global over-capacity in the coin blank industry following completion of the
multiyear Euro coin project. Operations in the Coinage Division were
discontinued in July, 2002. The Ethylene Coatings business, Surface Engineered Products (SEP) produced
anti-coking coatings for furnaces used in the production of ethylene. SEPs
main target market, the ethylene industry, had been experiencing harsh economic
conditions and the rate of adoption of the anti-coking technology had not met
expectations. Subsequently, SEP operations were shut down in February 2003
after the completion of contracted production. The manufacturing warehouse and
office facility of the Ethylene Coatings business in South Edmonton, Alberta is
reported as a long-term asset available for sale in the Companys consolidated
financial statements. The loss from discontinued operations related to these businesses for the year
ended December 31, 2002 was $19.7 million and included provisions for work
force reductions and other shutdown and asset disposal costs totaling $9.1
million. All expected future losses from the Ethylene Coatings business were
included in the net loss from discontinued operations recorded in 2002. Details of the financial impact of discontinued operations are found in Note 3
to the 2003 Audited Consolidated Financial Statements. The Westaim Corporation Annual Report 2003 27




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MANAGEMENTS DISCUSSION AND ANALYSIS INVESTMENTS Until early 2002, the Company, through its Westaim Partners division, made
early-stage investments in emerging technology businesses. In May 2002, the
Company made the decision to discontinue further early-stage investments and
began to reduce its existing investment portfolio. The Company recorded equity
losses and writedowns related to these investments of $3.4 million in 2002. The
carrying value of the remaining investments at December 31, 2003 has not
changed from December 31, 2002. INVENTORY The Companys inventories were $2.6 million at December 31, 2003 compared to
$2.5 million at December 31, 2002. This inventory is related primarily to
NUCRYSTs operations and represents raw materials, work in progress and
finished goods of its wound care business. Ambeons inventories of $10.8
million at December 31, 2003 and $11.4 million at December 31, 2002 have been
included in current assets available for sale. This inventory was part of the
assets sold to Sulzer Metco (Canada) Inc. on January 29, 2004. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, the Company had cash, cash equivalents and short-term
investments of $68.1 million compared to $101.3 million at December 31, 2002.
This reduction in liquidity of $33.2 million is generally consistent with the
prior year and is primarily the result of cash used in continuing operations
before working capital changes of $27.0 million compared to $28.3 million in
2002, and cash provided from discontinued operations of $3.2 million compared
to cash used in discontinued operations of $4.8 million in 2002. Changes in
non-cash working capital balances related to continuing operations generated
cash of $2.3 million in 2003 compared to a use of cash of $3.3 million in 2002
and capital expenditures for continuing operations totalled $10.4 million in
2003 compared to $6.1 million in 2002. The Companys business plans are developed to ensure research and development
costs do not overextend the Companys financial resources. The Companys 2004
Business Plan indicates that the Company will have sufficient cash and
short-term investments to fund its pharmaceutical developments at NUCRYST and
flat screen commercialization plans at iFire. The sale of Ambeon in January 2004 has provided the Company with immediate
proceeds of approximately $31.0 million, giving the Company nearly $100 million
in cash and short-term investments in the first quarter of 2004 to fund NUCRYST
and iFire. A further $2.8 million from the Ambeon sale is held in escrow and
will be eligible for release as certain conditions are met in 2004 and 2005.
NUCRYSTs wound care business will continue to partially fund pharmaceutical
development and is expected to benefit from a US$5 million milestone payment
from Smith & Nephew in 2004. Westaims total capital expenditures are expected to be in the order of $40 to
$45 million in 2004, depending on the achievement of technical milestones. The
Company will benefit from the financing of US$10 million to be provided by DNP
in 2004 for equipment related to the pilot manufacturing facility. Capital
expenditures could increase to approximately $150 million in 2005 if iFire
builds its own production facilities. DIVIDENDS No dividends were paid in 2003 or 2002. The Companys current policy is to
retain its cash reserves to finance capital projects and business growth. CRITICAL ACCOUNTING POLICIES The Companys accounting policies are disclosed in Note 2 to the 2003 Audited
Consolidated Financial Statements. 28 The Westaim Corporation Annual Report 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS Critical Accounting Policies (continued) The Company has established detailed policies and control procedures that are
intended to ensure that Management judgments and estimates are well controlled,
independently reviewed and consistently applied from period to period. The
following are key policies that may impact the Companys financial conditions
and results from operations and that require significant judgments by
Management. Management believes that its estimates for determining the
valuation of the Companys assets and liabilities are appropriate. Research and Development Costs  Development costs are capitalized once the
Company has determined that commercialization criteria concerning the product
or process have been met. The Company reviews the progress of research and
development initiatives on a regular basis and has determined that, in 2002 and
2003, no development costs should be deferred and amortized. Site Restoration Costs  Future site restoration costs have been estimated by
qualified employees of the Company, taking into consideration the anticipated
method and extent of the remediation consistent with regulatory requirements,
industry practices, current technology and possible uses of the site. Provision
details are based on cost estimates provided by independent consultants.
Significant judgment is required in the determination of these provisions and
the Company takes a conservative approach in not accruing potential recoveries
from third parties where indemnifications are in place. It is the Companys
view that where remediation costs will be incurred many years into the future,
third party recoveries cannot be estimated with certainty. Revisions to cost
estimates and the recovery of actual remediation costs could result in material
changes to the provision in future periods. Also see Environmental Matters. Income Taxes  The provision for income taxes is calculated based on the
expected tax treatment of transactions recorded in the consolidated financial
statements. In determining the provision for income taxes and, in particular,
the future tax asset, the Company interprets tax legislation in a variety of
jurisdictions as well as assumptions about the timing and certainty of the
reversal of the future tax assets. Changes to these interpretations could have
a material effect on income tax provisions in future periods. Stock-Based Compensation  As permitted by Canadian GAAP, the Company currently
does not recognize the expense related to applying the fair value method of
accounting for stock options but instead discloses on a pro forma basis in the
capital stock note to the consolidated financial statements. Canadian GAAP
requires that, effective January 1, 2004, the fair value method of accounting
for stock options be recognized in the financial statements. It provides for
alternate methods of implementation and the Company has elected to apply the
provisions retroactively with restatement of prior years. As a result, the
cumulative compensation cost of options issued during 2002, using the Black
Scholes option pricing model, will be charged to deficit with a corresponding
increase to contributed surplus at January 1, 2003. Quarterly results for 2003
will be restated to reflect the expense related to options issued in 2002 and
2003. The Company has determined that electing this method of applying the new
rules will have the most conservative impact on its financial results. ENTERPRISE RISK MANAGEMENT The Company invests in new technologies with the objective of providing
leadership, strategy and capital to commercialize the technology as quickly as
possible. There is significant risk that the technology may not be
commercialized in a timely or cost-effective manner or that it may not be
accepted by the marketplace. The Company reduces this risk by investing in
multiple technologies and product lines but these risks could have a material
adverse impact on the Companys business, financial condition, and results from
operations. RISKS AND UNCERTAINTIES Westaim may be unable to develop commercially viable products. Some of the Companys products, such as iFires flat panel television displays,
are still in the developmental stage. The Company will likely continue to incur
significant research and development costs before any of these products are
commercially viable, and The Westaim Corporation Annual Report 2003 29




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MANAGEMENTS DISCUSSION AND ANALYSIS Enterprise Risk Management (continued) there is no assurance that any of its products will ever reach this stage or
that the Company will achieve the level of market penetration that it expects.
Some or all of the technological obstacles that will need to be overcome in
order to make these products commercially viable may prove to be
insurmountable. Some of the Companys proposed products, such as pharmaceutical products, will
require regulatory approval before the Company is allowed to sell them. The
Company expects the regulatory approval process to be lengthy and expensive and
the Company will have the burden of proving that its products are safe and
effective. There is no assurance that the Company will ever obtain regulatory
approval to sell any of its proposed products, or that the conditions imposed
by regulators will be satisfactory to the Company. Regulatory requirements
imposed on its products could limit the Companys ability to test, manufacture
and commercialize its products. If Westaim fails to raise the capital necessary to fund its operations, it may
be unable to advance the development and commercialization of its technologies. A commitment of substantial resources by the Company and its collaborators to
conduct research and development, construct pilot or large-scale manufacturing
facilities and conduct clinical studies will be required to successfully
commercialize products under development. It has not been necessary for the
Company to raise new capital since its inception and the Company believes that
its current financial position is strong. Nevertheless, the Company believes
that the flat panel television display, medical products and pharmaceuticals
businesses may grow extremely rapidly and the Company may not be able to raise
additional capital at the time it is needed to complete product development and
build manufacturing facilities. Additional capital may be required to fund
operations, fund clinical studies, continue the research and development of
product candidates, commercialize products and construct pilot and full-scale
manufacturing facilities. If the Company is unable to raise additional funds
when required, it may be necessary to delay, reduce or eliminate some or all of
its development programs. The commercial
potential of the Companys products depends upon certain issues
regarding pricing, production costs and medical reimbursement. The ability to commercialize iFires flat screen technology successfully will
depend in part on its ability to price its products at a point that will
generate consumer demand, while allowing for an adequate profit margin. The
Company believes that its product can be produced at costs lower than other
flat screen technologies but there is no assurance that there will be consumer
demand for the iFire product or that competing products will not be developed
and priced below the prices required by iFire to be profitable. The Companys
ability to commercialize its pharmaceutical products successfully will depend
in part on the extent to which reimbursement for the cost of such products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations, and there can be
no assurance that adequate third party coverage will be available for the
Company to realize an appropriate return on its investment in product
development. Westaim will need to form partnerships to develop and sell its products. The Companys ability to successfully develop, manufacture and market its
current and proposed products will depend, to a large extent, on its ability to
form partnerships or joint ventures with established corporations or other
collaborators. Except as described elsewhere in this document, the Company has
not yet entered into any material partnerships or joint ventures for the
development or marketing of these products, nor will it necessarily be able to
do so in the future. The Company may not be able to find suitable partners or
form a partnership or joint venture on terms that are beneficial. Westaims products may become technologically obsolete. The Company competes, and intends to compete, in markets that are characterized
by rapid adaptation to technological change. These markets include, but are not
limited to, the medical devices, pharmaceuticals and flat screen television
monitor markets. The Companys current and future products may be quickly
rendered obsolete and unmarketable. The Company will need to continually
develop new products and enhance existing products to keep pace with evolving
technologies, customer preferences and industry standards. 30 The Westaim Corporation Annual Report 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS Enterprise Risk Management (continued) Westaim is developing products for highly competitive markets. The Company faces, and will face, competition from a number of other companies
including major domestic and international companies which have substantially
greater financial, technical, marketing, sales, distribution and other
resources. Many of these competitors may also have greater name or brand
recognition. The Companys competitors may produce more technologically
advanced products, at a lower cost, than the Company is capable of producing.
Competition may cause the Company to lose market share and may reduce profit
margins on any products that it is able to sell. Westaim may be unable to protect its intellectual property. In order to succeed, the Company will need to prevent its intellectual property
from being misappropriated by third parties. To protect its intellectual
property, the Company relies primarily on its confidentiality agreements,
physical security at research and manufacturing facilities, as well as the
copyright, trade secret, trademark and patent laws of Canada, the United
States, and other countries in which the Company conducts, or will conduct,
business. The laws of other countries may not protect intellectual property
rights to the same extent as the laws of Canada and the United States and, in
any event, the methods that the Company has chosen may fail to adequately
prevent misappropriation of its intellectual property. The Company cannot
provide assurance that it will succeed in obtaining new patents, that it will
be able to enforce existing patents against third parties, or that existing
patents will not be successfully challenged by third parties. Westaim may become involved in expensive intellectual property or product
liability litigation. The Company may be required to commence litigation to enforce its intellectual
property rights. Others may claim that it has infringed upon their intellectual
property rights and commence litigation against the Company. The Company
believes that it will be subject to an increasing number of infringement claims
as it begins to produce more products in more industries. The Company has tried to protect itself against product liability litigation by
including limitation of liability provisions in some of its sales agreements.
There is no assurance, however, that existing or future limitation of liability
provisions will be sufficient to protect the Company in all circumstances, nor
can the Company provide assurance that any of these provisions will be held to
be enforceable by the Courts. The Company believes that it has obtained
sufficient product liability insurance coverage to protect it against claims.
However, the wording of its insurance policies may exclude some claims.
Furthermore, the Company cannot provide assurance that its insurance limits
will be sufficient, nor can it ensure that it will be able to acquire
satisfactory insurance in the future. Westaim may be unable to retain the required highly skilled people. The Companys technology businesses are dependent upon the talents and
knowledge of certain key individuals in each of the businesses. The marketplace
for people with these skills is highly competitive, and the Company may not be
able to retain a sufficient number of people with the skills that it requires.
The Company provides competitive remuneration and incentives for the retention
of key personnel. Westaim is subject to certain risks because of the international character of
its business. The Company estimates that sales to international customers accounted for over
90% of its net sales in the fiscal year ended December 31, 2003 and the Company
anticipates that international sales will continue to represent a material
portion of net sales in the future. International sales are subject to inherent
risks, including variations in local economies, fluctuating exchange rates,
greater difficulty in the collection of accounts receivable, changes in tariffs
and other trade barriers, adverse foreign tax consequences and burdens of
complying with a variety of foreign laws. The Company may also encounter
exchange rate risk in the event international sales are denominated in a
currency other than Canadian dollars. The Westaim Corporation Annual Report 2003 31




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MANAGEMENTS DISCUSSION AND ANALYSIS Enterprise Risk Management (continued) Volatility of share price. Market prices for securities of companies developing new technologies are
generally volatile. Factors such as announcements of technological innovations,
new commercial products, patents, the development of proprietary rights,
results of clinical trials, regulatory actions, publications, quarterly
financial results, the Companys financial position, public concern over the
safety of biotechnology, future sales of shares by the Company or by our
current shareholders, and other factors could have a significant effect on the
market price and volatility of the Companys common shares. ENVIRONMENTAL MATTERS The Companys operations are subject to extensive federal, provincial and
municipal environmental statutes and regulations, including those relating to
air emissions, wastewater discharges, contaminated soil and groundwater, and
the handling and disposal of hazardous substances and wastes. The Companys operations in Toronto are conducted under an environmental
operating approval from the Ontario Ministry of Environment. The Companys
operations in Wakefield are conducted under various state and federal permits. The Company operates under a best management practices program called Safety
and Environment Management Practices (SEMP) which incorporates both an
environmental management system and an occupational health and safety
management system. This program is regularly reviewed and updated to keep pace
with or stay ahead of regulatory changes and is internally audited every year. The provision for site restoration decreased by $0.1 million in 2003 to $7.6
million. The provision relates primarily to site restoration costs associated
with the discontinuance of DS Nickel production, asbestos abatement, and soil
and groundwater reclamation and remediation costs. All of the provision details
are based on cost estimates provided by independent consultants. The Company
spent $2.8 million in 2003, of which $2.7 million was recovered from a third
party. The Company expects to spend approximately $1.8 million in 2004, of
which $0.5 million will be recovered from a third party. These expenditures
relate to finalizing the decontamination and decommissioning of DS Nickel
production equipment and sites, and asbestos removal on the Fort Saskatchewan
site. Thereafter, unless a plant site is decommissioned, it is expected that
only nominal amounts will be expended. For accounting purposes, the total estimated future costs of site restoration
are accrued. Future recoveries from third parties for site restoration costs
resulting from indemnification agreements are not accrued as the amount of
recovery cannot be reasonably estimated. MARKET FOR SECURITIES The common shares of The Westaim Corporation are listed on The Toronto Stock
Exchange under the symbol WED and on NASDAQ under the symbol WEDX. MANAGEMENTS RESPONSIBILITY The Management of the Company is responsible for the accuracy of the
information disclosed in Managements Discussion and Analysis. Management
ensures that the Company has appropriate information systems, procedures and
controls to ensure that information used internally by Management and disclosed
externally is complete and reliable. The interim and annual Management
Discussion and Analyses are also reviewed and approved by the Audit Committee
of the Companys Board of Directors. 32 The Westaim Corporation Annual Report 2003




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MANAGEMENTS DISCUSSION AND ANALYSIS Managements Responsibility (continued) Westaim has adopted a Code of Conduct and Ethics for Directors, Officers and
Employees, as well as a Finance Code of Conduct for Chief Executive and Senior
Financial Officers. These codes can be found on the Corporations website at
www.westaim.com. During the most recently completed fiscal year, no amendments
were made to these codes, and the Corporation has granted no waivers of any of
the provisions of these codes. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth certain financial information for the Company
for 2001 to 2003: Year Ended
    
    Year Ended
    
    Year Ended($000, except per share data)
    
    Dec. 31, 2003
    
    Dec. 31, 2002
    
    Dec. 31, 2001Revenue from continuing operations
    
    $
    17,285
    
    
    $
    12,627
    
    
    $
    14,106Loss from continuing operations
    
    
    (36,858
    )
    
    
    (39,110
    )
    
    
    (16,020
    )Loss per common share from continuing operations
    
    
    (0.47
    )
    
    
    (0.50
    )
    
    
    (0.21
    )Net loss
    
    
    (34,498
    )
    
    
    (49,762
    )
    
    
    (67,459
    )Net loss per common share
    
    
    (0.44
    )
    
    
    (0.64
    )
    
    
    (0.87
    )Total assets
    
    
    144,906
    
    
    
    184,183
    
    
    
    238,179Total long term debt
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    
    
    
    
    
 As disclosed in Note 3 to the audited consolidated financial statements, and
discussed in this MD&A, the Ambeon business segment has been accounted for as a
discontinued operation in 2003. Prior years information has been restated
accordingly. In 2002, the Company made the decision to close the Coinage Division and to
divest or shutdown the Ethylene Coatings business. Accordingly, the results of
these operations and the cost of shutdown have been accounted for on a
discontinued basis. QUARTERLY INFORMATION Q1
    
    Q2
    
    Q3
    
    Q4($000, except per share data)
    
    2003
    
    2003
    
    2003
    
    2003Revenue from continuing operations
    
    $
    7,638
    
    
    $
    2,683
    
    
    $
    3,370
    
    
    $
    3,594Loss from continuing operations
    
    
    (3,421
    )
    
    
    (8,910
    )
    
    
    (7,774
    )
    
    
    (16,753
    )Loss per common share from continuing operations
    
    
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.10
    )
    
    
    (0.21
    )Net loss
    
    
    (984
    )
    
    
    (8,050
    )
    
    
    (7,791
    )
    
    
    (17,673
    )Net loss per common share
    
    
    (0.01
    )
    
    
    (0.10
    )
    
    
    (0.10
    )
    
    
    (0.23
    )
 Q1
    
    Q2
    
    Q3
    
    Q4($000, except per share data)
    
    2002
    
    2002
    
    2002
    
    2002Revenue from continuing operations
    
    $
    3,180
    
    
    $
    2,883
    
    
    $
    3,000
    
    
    $
    3,564Loss from continuing operations
    
    
    (8,241
    )
    
    
    (13,047
    )
    
    
    (8,856
    )
    
    
    (8,966
    )Loss per common share from continuing operations
    
    
    (0.11
    )
    
    
    (0.17
    )
    
    
    (0.11
    )
    
    
    (0.11
    )Net loss
    
    
    (8,362
    )
    
    
    (25,617
    )
    
    
    (6,338
    )
    
    
    (9,445
    )Net loss per common share
    
    
    (0.11
    )
    
    
    (0.33
    )
    
    
    (0.08
    )
    
    
    (0.12
    )
 The results of operations of the Ambeon business segment, Coinage Division, and
Ethylene Coatings business have been accounted for as discontinued operations.
Prior years information has been restated accordingly. The Westaim Corporation Annual Report 2003 33