##### 



EXHIBIT 99.3 Deloitte & Touche LLP
3000 Scotia Centre
700 Second Street S.W.
Calgary AB T2P 0S7
Canada Tel: (403) 267-1700
Fax: (403) 264-2871
www.deloitte.ca Report of Independent Registered Chartered Accountants To the Shareholders of
The Westaim Corporation We have audited the consolidated balance sheets of The Westaim Corporation as at December 31, 2004
and 2003, and the consolidated statements of loss, deficit, and cash flow for each of the three
years in the period ended December 31, 2004. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 2004 and 2003, and the results of its
operations and cash flow for each of the three years in the period ended December 31, 2004, in
accordance with Canadian generally accepted accounting principles. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. On February 4, 2005, we reported separately to the shareholders of the Company on financial
statements for the same period, prepared in accordance with Canadian generally accepted accounting
principles, which excluded Note 22 on Reconciliation To Accounting Principles Generally Accepted In
The United States. (Signed) Deloitte & Touche LLP  Independent Registered Chartered Accountants February 4, 2005
(except for Note 21(b), which is as of February 11, 2005)
Calgary, Canada




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##### 



Deloitte & Touche LLP
3000 Scotia Centre
700 Second Street S.W.
Calgary AB T2P 0S7
Canada Tel: (403) 267-1700
Fax: (403) 264-2871
www.deloitte.ca Comments by Independent Registered Chartered Accountants for
U. S. Readers on Canada  U.S. Reporting Differences The standards of the Public Company Accounting Oversight Board (United States) require the
addition of an explanatory paragraph (following the opinion paragraph) outlining changes in
accounting principles that have been implemented in the Companys financial statements. As
discussed in Notes 2(k), 2(l) and 2(n) to the consolidated financial statements, the Company
adopted recommendations with respect to asset retirement obligations, hedging relationships and
stock-based compensation to conform to new recommendations of The Canadian Institute of Chartered
Accountants. Our report to the shareholders dated February 4, 2005 (except for Note 21(b), which
is as of February 11, 2005) is expressed in accordance with Canadian reporting standards, which
does not require a reference to such change in accounting principle in the auditors report when
the change is properly accounted for and adequately disclosed in the financial statements. (Signed) Deloitte & Touche LLP  Independent Registered Chartered Accountants February 4, 2005
(except for Note 21(b), which is as of February 11, 2005)
Calgary, Canada




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##### 



THE WESTAIM CORPORATION
Consolidated Balance Sheets December 31
    
    
    December 312004
    
    
    2003(thousands of Canadian dollars)
    
    
    
    
    (Restated - note 2n)ASSETSCurrentCash and cash equivalents
    
    $
    89,139
    
    
    $
    44,694Short-term investments
    
    
    12,000
    
    
    
    23,443Accounts receivable
    
    
    6,712
    
    
    
    4,960Inventories (note 4)
    
    
    3,605
    
    
    
    2,610Future income taxes (note 7)
    
    
    
    
    
    
    1,032Other
    
    
    538
    
    
    
    659Current assets available for sale (note 3)
    
    
    
    
    
    
    30,369111,994
    
    
    
    107,767Other receivable (note 3)
    
    
    1,800
    
    
    
    Capital assets (note 5)
    
    
    46,776
    
    
    
    28,783Capital assets available for sale (note 3)
    
    
    5,500
    
    
    
    5,500Intangible assets (note 6)
    
    
    5,693
    
    
    
    2,356Investments (note 8)
    
    
    500
    
    
    
    500$
    172,263
    
    
    $
    144,906LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities
    
    $
    12,963
    
    
    $
    10,015Accounts payable and accrued liabilities available for sale (note 3)
    
    
    
    
    
    
    3,50912,963
    
    
    
    13,524Long-term debt (note 9)
    
    
    4,795
    
    
    
    Provision for site restoration (note 10)
    
    
    6,708
    
    
    
    7,56424,466
    
    
    
    21,088Commitments and contingencies (note 17)Shareholders equityCapital stock (note 12)
    
    
    421,233
    
    
    
    373,230Contributed surplus (note 12)
    
    
    3,125
    
    
    
    1,972Deficit
    
    
    (276,561
    )
    
    
    (251,384
    )147,797
    
    
    
    123,818$
    172,263
    
    
    $
    144,906
 Approved on behalf of the Board: /s/Ian W. Delaney
Ian W. Delaney
Director
    
    /s/Frank W. King
Frank W. King
Director
 1




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##### 



THE WESTAIM CORPORATION
Consolidated Statements of Loss and Deficit Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 312004
    
    
    2003
    
    
    2002(thousands of Canadian dollars except per share data)
    
    
    
    
    (Restated - note 2n)
    
    
    (Restated - note 2n)Revenue
    
    $
    32,241
    
    
    $
    17,285
    
    
    $
    12,627CostsManufacturing
    
    
    8,679
    
    
    
    5,948
    
    
    
    4,987Selling, general and administrative
    
    
    5,342
    
    
    
    3,817
    
    
    
    4,913Research and development (note 13)
    
    
    35,489
    
    
    
    25,871
    
    
    
    23,438Depreciation and amortization
    
    
    5,722
    
    
    
    5,001
    
    
    
    4,231Divisional loss
    
    
    (22,991
    )
    
    
    (23,352
    )
    
    
    (24,942
    )Corporate costs
    
    
    (7,396
    )
    
    
    (9,550
    )
    
    
    (7,112
    )Interest and foreign exchange
    
    
    1,799
    
    
    
    653
    
    
    
    2,206Loss on disposal of assets
    
    
    (22
    )
    
    
    (723
    )
    
    
    Equity loss (note 8)
    
    
    
    
    
    
    
    
    
    
    (3,410
    )Loss from continuing operations before income taxes
    
    
    (28,610
    )
    
    
    (32,972
    )
    
    
    (33,258
    )Income tax expense (note 7)Current
    
    
    (121
    )
    
    
    (130
    )
    
    
    (94
    )Future
    
    
    
    
    
    
    (4,698
    )
    
    
    (6,385
    )(121
    )
    
    
    (4,828
    )
    
    
    (6,479
    )Loss from continuing operations
    
    
    (28,731
    )
    
    
    (37,800
    )
    
    
    (39,737
    )Income (loss) from discontinued operations net of income taxes (note 3)
    
    
    3,554
    
    
    
    2,360
    
    
    
    (10,652
    )Net loss
    
    $
    (25,177
    )
    
    $
    (35,440
    )
    
    $
    (50,389
    )Loss per common share (note 19)Continuing operations  basic and diluted
    
    $
    (0.34
    )
    
    $
    (0.48
    )
    
    $
    (0.51
    )Net loss  basic and diluted
    
    
    (0.30
    )
    
    
    (0.45
    )
    
    
    (0.65
    )Weighted average number of common shares outstanding (thousands)
    
    
    84,094
    
    
    
    78,045
    
    
    
    77,924Deficit at beginning of year
    
    $
    (251,384
    )
    
    $
    (215,944
    )
    
    $
    (165,555
    )Net loss
    
    
    (25,177
    )
    
    
    (35,440
    )
    
    
    (50,389
    )Deficit at end of year
    
    $
    (276,561
    )
    
    $
    (251,384
    )
    
    $
    (215,944
    )
 2




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##### 



THE WESTAIM CORPORATION
Consolidated Cash Flow Statements Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31
    
    
    December 312004
    
    
    2003
    
    
    2002(thousands of Canadian dollars)
    
    
    
    
    (Restated - note 2n)
    
    
    (Restated - note 2n)Operating activitiesLoss from continuing operations
    
    $
    (28,731
    )
    
    $
    (37,800
    )
    
    $
    (39,737
    )Items not affecting cashDepreciation and amortization
    
    
    5,722
    
    
    
    5,001
    
    
    
    4,231Provision for site restoration
    
    
    327
    
    
    
    
    
    
    
    1,120Stock compensation expense
    
    
    1,210
    
    
    
    942
    
    
    
    627Future income taxes
    
    
    
    
    
    
    4,698
    
    
    
    6,385Loss on disposal of assets
    
    
    22
    
    
    
    723
    
    
    
    422Deferred licensing revenue (note 11)
    
    
    
    
    
    
    (565
    )
    
    
    (4,270
    )Equity loss on investments
    
    
    
    
    
    
    
    
    
    
    3,410Other items
    
    
    
    
    
    
    
    
    
    
    (479
    )Accounts receivable
    
    
    (756
    )
    
    
    225
    
    
    
    957Inventories
    
    
    (1,017
    )
    
    
    (446
    )
    
    
    (1,159
    )Other
    
    
    121
    
    
    
    136
    
    
    
    (210
    )Accounts payable and accrued liabilities
    
    
    2,829
    
    
    
    2,574
    
    
    
    (2,716
    )Site restoration expenditures net of recoveries
    
    
    (1,183
    )
    
    
    (185
    )
    
    
    (546
    )Deferred licensing revenue (note 11)
    
    
    
    
    
    
    
    
    
    
    396Cash used in continuing operations
    
    
    (21,456
    )
    
    
    (24,697
    )
    
    
    (31,569
    )Cash (used in) provided from discontinued operations
    
    
    (1,785
    )
    
    
    3,209
    
    
    
    4,760Total cash used in operating activities
    
    
    (23,241
    )
    
    
    (21,488
    )
    
    
    (26,809
    )Investing activitiesCapital expenditures  continuing operations
    
    
    (23,432
    )
    
    
    (10,383
    )
    
    
    (6,052
    )Capital expenditures  discontinued operations
    
    
    
    
    
    
    (1,745
    )
    
    
    (1,644
    )Intangible assets  continuing operations
    
    
    (3,686
    )
    
    
    (725
    )
    
    
    (670
    )Intangible assets  discontinued operations
    
    
    
    
    
    
    (234
    )
    
    
    (278
    )Redemption and sale of short-term investments
    
    
    149,151
    
    
    
    53,332
    
    
    
    208,709Purchase of short-term investments
    
    
    (137,708
    )
    
    
    (51,525
    )
    
    
    (233,959
    )Proceeds on sale of assets
    
    
    61
    
    
    
    1,308
    
    
    
    Proceeds on sale of discontinued operations (note 3)
    
    
    30,559
    
    
    
    
    
    
    
    Investments
    
    
    
    
    
    
    
    
    
    
    (728
    )Cash provided from (used in) investing activities
    
    
    14,945
    
    
    
    (9,972
    )
    
    
    (34,622
    )Financing activitiesProceeds from long term debt (note 9)
    
    
    4,795
    
    
    
    
    
    
    
    Issuance of common shares (note 12)
    
    
    47,946
    
    
    
    102
    
    
    
    151Repurchase of common shares (note 12)
    
    
    
    
    
    
    
    
    
    
    (318
    )Cash provided from (used in) financing activities
    
    
    52,741
    
    
    
    102
    
    
    
    (167
    )Net increase (decrease) in cash and cash equivalents
    
    
    44,445
    
    
    
    (31,358
    )
    
    
    (61,598
    )Cash and cash equivalents at beginning of year
    
    
    44,694
    
    
    
    76,052
    
    
    
    137,650Cash and cash equivalents at end of year
    
    $
    89,139
    
    
    $
    44,694
    
    
    $
    76,052
 3




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   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 wholly
owned subsidiaries, iFire Technology Inc. (iFire) and Nucryst Pharmaceuticals Corp.
(Nucryst). In 2004, iFire repurchased the 2.5% common share interest held by a minority
shareholder for nominal consideration.All amounts are expressed in thousands of Canadian dollars except share and per share data.  2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES  a)

Principles of consolidationThe financial statements of entities which are controlled by the Company, referred to as
subsidiaries, are consolidated. Entities which are not controlled, but over which the
Company has the ability to exercise significant influence, are accounted for using the
equity method of accounting. Investments in other entities are accounted for using the
cost method. All intercompany balances and transactions have been appropriately
eliminated.b)

Use of estimatesThe consolidated financial statements are prepared in accordance with Canadian generally
accepted accounting principles (GAAP), which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the reported
amounts of revenue and expenses during the year. Significant estimates include the
provision for site restoration, provision for discontinued operations, future income
taxes, and useful lives of capital assets. Actual results could differ from those
estimates.c)

Translation of foreign currenciesTransactions in foreign currencies are translated into Canadian dollars at rates of
exchange at the time of such transactions. Monetary assets and liabilities are
translated at current rates of exchange. Foreign operations are considered financially
and operationally integrated and are translated into Canadian dollars using the temporal
method of translation. Gains or losses resulting from the translation adjustments are
included in income. Foreign exchange losses included in discontinued operations and
interest and foreign exchange in 2004 amounted to $563 (2003  $1,867; 2002  $326).d)

Revenue recognitionRevenue is generally recognized when the product has been delivered. Specific revenue
recognition policies for each of the Companys operating segments are as follows:  Nucryst Pharmaceuticals Revenue from direct sales to third parties is
recognized upon delivery. For products manufactured under license, revenue is
recorded at the date of shipment at actual cost plus an agreed markup. In addition,
a royalty is earned based on a percentage of sales 4




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  revenue earned by the licensee on sales to third parties. Revenue relating to the
achievement of milestones under licensing agreements is recognized when the
milestone event has occurred.iFire Technology The Company recognizes revenue from licensing fees over
the term that services are being rendered. Deferred licensing revenue represents
amounts received under agreements for which the process of earning the revenue has
not been completed. Royalties are recognized when earned in accordance with the
terms of the specific agreement. As at December 31, 2004, iFire was not party to
any licensing fee or royalty agreements.  e)

Cash and cash equivalentsCash and cash equivalents consist of cash on deposit and highly liquid short-term
investments with original maturities at the date of acquisition of 90 days or less and
are recorded at cost.f)

Short-term investmentsShort-term investments consist of money-market instruments with maturities of less than
one year. As at December 31, 2004, the Company held short-term investments recorded at
a cost of $12,000 (2003  $23,443) which reflects current market values.g)

Inventory valuationFinished product, raw materials, materials in process, and spare parts and operating
materials are valued at the lower of average cost and net realizable value.h)

Research and development costsResearch costs are expensed as incurred and significant project development costs are
capitalized in accordance with Canadian generally accepted accounting principles once
the Company has determined that commercialization criteria concerning the product or
process have been met. Amortization of these costs over their estimated useful life
commences with the successful commercial production or use of the product or process. On
an ongoing basis, Management reviews the unamortized balance to ensure that the deferred
development costs continue to satisfy the criteria for deferral and amortization.As at December 31, 2004 and 2003, no development costs have been capitalized.i)

Government assistanceGovernment assistance towards research and development expenditures related to capital
assets used for research and development is credited against the cost of the related
capital asset and all other assistance is credited against the related expenses as
incurred.j)

Capital assetsi) Land, Buildings, Machinery and Equipment  Land, buildings, machinery and equipment are
stated at cost. Depreciation and amortization is calculated using a straight-line method based
on 5




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  estimated useful lives of the particular assets which is 20 years for buildings and 3 to
10 years for machinery and equipment.ii) Carrying Value  The Company evaluates the carrying value of capital assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable, and recognizes an impairment charge when it is probable that estimated
future non-discounted cash flows of the underlying assets will be less than the carrying
value of the assets. Measurement of an impairment loss related to capital assets that
management intends to hold and use is based on the fair value of the assets, whereas
assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.k)

Site restoration costsThe total estimated costs of site restoration relating to these assets have been
accrued. Site restoration costs have been estimated as at December 31, 2004, taking
into consideration the anticipated method and extent of the remediation consistent with
regulatory requirements, industry practices, current technology and the possible uses of
the site. The estimated amount of future restoration costs is reviewed regularly based
on available information. Where the forecasted net restoration costs exceed existing
provisions, an additional expense is recognized in the period.Potential recoveries of costs resulting from indemnifications provided by previous
owners of the Companys industrial sites have not been recognized in these consolidated
financial statements as the amount of recovery cannot be reasonably determined. Any
future recoveries will be recorded when received.Effective January 1, 2004, the Company adopted Section 3110, Asset Retirement
Obligations, of the CICA Handbook which addresses the financial accounting and
reporting obligations associated with the retirement of tangible, long-lived assets and
their associated net retirement costs. Under the new Section, an asset retirement
obligation is recognized at its fair value in the period in which it is incurred. Asset
retirement costs are capitalized as part of the carrying amount of the long-lived asset
and a related amortization expense is recognized in future periods. Implementation of
CICA 3110 did not have an impact on the Companys results from operations or its
financial position as the assets subject to these new rules have been sold or written
down to nominal value.l)

Derivative financial instrumentsDerivative financial instruments may be utilized by the Company in the management of
commodity price and foreign currency exposures. The Companys policy is not to utilize
derivative financial instruments for trading or speculative purposes.The Company formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking various
hedge transactions. This process includes linking all derivatives to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedges inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged items. 6




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  The Company has, in previous years, entered into hedges of its
commodity price exposure on nickel raw material inventory and
anticipated future sales by entering into nickel forward contracts
when deemed appropriate. Gains and losses on nickel forward contracts
used to hedge nickel raw material inventory and anticipated future
sales in respect of the discontinued Ambeon business segment
(Ambeon) were accrued in inventory and included in assets available
for sale on the consolidated balance sheet as at December 31, 2003.The Company may enter 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 would not be
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.Effective January 1, 2004, the Company adopted the new Accounting Guideline 13, Hedging
Relationships, for identifying, designating and documenting hedge relationships,
and assessing their effectiveness. The guideline provides parameters on the
conditions necessary for hedge accounting to be applied, but does not specify the
methods to be used in its application. The guideline, however, does require that
the Company adopt an accounting policy for assessing the effectiveness of its hedge
relationships. Any ineffectiveness related to instruments recorded in the
statement of financial position is to be recognized in income for the period. The
new guideline has not had a significant impact on the Companys financial results.m)

Income taxesIncome taxes are accounted for using the liability method of income tax allocation.
Under the liability method, income tax assets and liabilities are recorded to recognize
future income tax inflows and outflows arising from the settlement or recovery of assets
and liabilities at their carrying values.Income tax assets are also recognized for the benefits from tax losses and deductions
that cannot be identified with particular assets or liabilities, provided those benefits
are more likely than not to be realized. Future income tax assets and liabilities are
determined based on the tax laws and rates that are anticipated to apply in the period
of realization.n)

Stock-based compensation plansThe Company and certain of its subsidiaries have stock-based compensation plans, which
are described in Note 12. Compensation expense for awards that call for settlement in
cash or other assets is measured on an ongoing basis as the amount by which the quoted
market price exceeds the exercise price at each measurement date. Any obligations
related to increases in the value of Deferred Share Units (DSUs), Restricted Share
Units (RSUs), and Stock Appreciation Rights (SARs) are accrued when the change in
value occurs with an offset to the income statement.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. 7




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  Effective January 1, 2004, the Company adopted revisions to
Section 3870 of the CICA Handbook with respect to the accounting and
disclosure of stock-based compensation. The revised Section 3870
requires that the fair value of stock options be recorded in the
financial statements. These new rules apply to options issued on or
after January 1, 2002. The Company has elected to apply the
provisions retroactively with restatement of prior years. As a
result, the 2003 and 2002 consolidated statements of loss have been
restated. Selling, general and administrative expenses, research and
development costs, and corporate costs have been increased by a total
of $942, in 2003 and $627 in 2002 with an offsetting increase to
contributed surplus. This resulted in an increase in the loss per
common share from continuing operations and net loss of $0.01 in 2003
(2002  $0.01).o)

Earnings per shareBasic earnings per common share is calculated using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated
on the basis of the average number of shares outstanding during the period plus the
additional common shares that would have been outstanding if
potentially dilutive common shares had been issued using the treasury stock method.p)

Employee future benefitsAll employee future benefits are accounted for on an accrual basis. In 2003, the
Company wound up its defined benefit pension plan (Note 15).q)

Discontinued operationsEffective January 1, 2003, the Company adopted on a prospective basis new CICA 3475
Disposal of Long-lived Assets and Discontinued Operations. Long-lived assets to be
disposed of by sale are classified as held for sale in the period in which a formal plan
of disposal has been approved, the assets are available for immediate sale and are
actively being marketed, and it is expected that the sale will occur within one year.
Long-lived assets to be abandoned are classified as held and used until they are
disposed of.Long-lived assets classified as held for sale are carried at the lower of their carrying
amount and fair value net of estimated disposition costs. Losses are recognized
immediately where carrying value exceeds fair value and gains are recognized at the time
of sale.The results of discontinued operations are reported separately, including gains or
losses related to the disposal of related long-lived assets held for sale or disposal.
Future costs associated with an exit or disposal activity are recognized in the period
in which the liability is incurred.Prior to January 1, 2003, the results of discontinued operations were reported
separately with disclosure of the results of operations prior to the measurement date
(date the plan to discontinue operations was formally approved) and the net gain or loss
from discontinued operations. The net gain or loss from discontinued operations
included both actual or estimated gain or loss on disposal, and the actual or estimated
results from operations, if any, between the measurement date and the disposal date. 8




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  r)

Intangible assetsPatents are amortized on a straight-line basis over 10 years. The Company periodically
assesses the carrying value of patents. Where there has been an impairment in the
carrying value, patents are written off during the year. Any material decline in fair
value from carrying value is charged to expense in the period that impairment has been
determined. Indefinite life intangible assets are valued at cost. On a regular basis,
the Company reviews the carrying value of these assets for impairment.As at December 31, 2004 and 2003, the Company had no indefinite life intangible assets.s)

Recent accounting pronouncementsi)  The Company will adopt the Canadian Institute of Chartered Accountants (CICA)
guideline on the consolidation of variable interest entities (VIEs) on January 1,
2005. VIEs include entities where the equity invested is considered insufficient to
finance the entitys activities. Under this new guideline, the Company will be required
to consolidate VIEs if the investments in these entities and/or the relationships with
them result in the Company being exposed to a majority of their expected losses, being
able to benefit from a majority of their expected residual returns, or both, based on a
formula determined by the standard-setters. The Company does not believe that the
implementation of this guideline will have an impact on its consolidated statement of
operations or consolidated financial position.ii)  The Accounting Standards Board (AcSB) issued an Exposure Draft in
2004 of proposed amendments to Section 1506, Accounting Changes, which would
converge the Section with U.S. GAAP and with equivalent requirements in
International Financial Reporting Standards (IFRS).Under the proposed amendments, a change in accounting policy would be made
only when it is required by a primary source of GAAP or results in a reliable or
more relevant presentation in the financial statements. Unless the primary source
of GAAP contains specific transitional provisions, a change in accounting policy
would be applied retroactively. The Exposure Draft also addresses changes in
accounting estimates and errors.The AcSB has indicated that it will finalize a harmonized standard
subsequent to finalization of proposed amendments to U.S. GAAP. A final standard
is expected in the first quarter of 2005. The Company does not expect the impact
of this standard to be material.iii)  The AcSB has approved, in 2004, amendments to CICA Handbook Section
3500, Earnings per Share. The amendments maintain convergence of the Section with
U.S. GAAP and with equivalent requirements in IFRSs.Significant amendments include:  

amending the computational guidance for calculating the number of incremental shares
included in diluted shares when applying the treasury stock method;

eliminating the provisions that allow an entity to rebut the presumption that
contracts with the option of settling in either cash or stock will be settled in stock;
and 9




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   2

SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)  

requiring that shares that will be issued upon conversion of a mandatorily convertible
instrument be included in computing basic earnings per share.  The AcSB expects to issue a final standard in the first quarter of 2005.
The Company does not expect the impact of this standard to be material.iv) The AcSB issued an Exposure Draft of a proposed new Section 3830,
Non-Monetary Transactions, which would converge with U.S. GAAP and with equivalent
requirements in IFRSs.The Exposure Draft proposes that all non-monetary transactions be measured
at fair value, unless certain criteria are met. The proposed amendments replace
culmination of the earnings process as the test for applying fair value measurement
with a test of commercial substance. Culmination of the earnings process has been
difficult to apply in practice and has depended on an assessment of whether the
assets exchanged were similar. Commercial substance, however, involves satisfying
one of two objectively determined tests based on assessments of cash flows expected
with and without the exchange of the non-monetary items.A final standard is planned to be issued in the first quarter of 2005,
with an effective date of the beginning of the month following issue. The Company
does not expect the impact of this standard to be material.v) In January 2005, the CICA issued a new Section to the CICA Handbook 
Section 1530  Comprehensive Income. Certain gains and losses arising from changes
in fair value will be temporarily recorded outside the income statement in
comprehensive income. This Section will apply for annual financial statements for
fiscal years beginning on or after October 1, 2006. The Company is in the process
of evaluating the impact of this new Standard.vi) In January 2005, the CICA issued Sections 3855, Financial Instruments 
Recognition and Measurement; and Section 3865  Hedges. Under these Sections, all
financial instruments including derivatives are to be included on a companys
balance sheet and measured, either at their fair value or, in limited
circumstances, when fair value may not be considered most relevant, at cost or
amortized cost. The standards also specify when gains and losses, as a result of
changes in fair value, are to be recognized in the income statement. Also,
existing requirements for hedge accounting are extended. These Sections will apply
for annual financial statements for fiscal years beginning on or
after October 1, 2006. The Company is in the process of evaluating the impact of these
recently issued Standards.vii) In January 2005, the CICA issued a new Section to the CICA Handbook 
Section 3251  Equity. This Section establishes standards for the presentation of
equity during a reporting period. This Section will apply for annual financial
statements for fiscal years beginning on or after October 1, 2005. The Company is
currently evaluating the impact of this new Standard. 10




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   3

DISCONTINUED OPERATIONS  a)

AmbeonOn January 29, 2004, the Company sold substantially all of the assets and liabilities
related to the Ambeon business segment, including its wholly-owned subsidiary Neomet
Limited, for proceeds of $33,359 (net of transaction costs of $911), of which, $2,800 is
held in escrow. Of this amount held in escrow, $1,000 is included in accounts
receivable which was received in the first quarter of 2005 and $1,800 is recorded as a
long-term other receivable. The remaining escrow balance is in respect of general
representations and warranties relating to the sale transaction and will be released as
conditions are met in 2005 and 2006. For purposes of the cash flow statement, the
receipt of these escrow funds in future years will be accounted for as proceeds from the
sale of discontinued operations. The net gain on the sale of Ambeon of $5,436 is net of
future income tax expense of $1,032. The results of Ambeons operations in 2003 were
accounted for on a discontinued basis and the related net assets were classified as
available for sale at December 31, 2003.In accordance with CICA 3475, the Company determined that the net proceeds would exceed
the net book value of the Ambeon business segment as at December 31, 2003 and no
adjustment to the carrying value of Ambeon was required. The gain on the sale of Ambeon
was reported in the first quarter of 2004 and any costs incurred in subsequent periods
related to discontinued operations are reported in the period in which they occur.The prior years operating results, cash flows and balance sheets for this business
segment are presented separately as discontinued operations in these consolidated
financial statements.Amounts included in the consolidated balance sheets relating to Ambeon discontinued
operations are as follows: December 31, 2004
    
    
    December 31, 2003Cash
    
    $
    
    
    
    $
    411Accounts receivable
    
    
    
    
    
    
    5,438Inventories
    
    
    
    
    
    
    10,812Other assets
    
    
    
    
    
    
    1Deferred charges
    
    
    
    
    
    
    625Capital assets available for sale
    
    
    
    
    
    
    13,082Current assets available for sale
    
    $
    
    
    
    $
    30,369Accounts payable and accrued liabilities available for sale
    
    $
    
    
    
    $
    (3,509
    )Accounts payable and accrued liabilities
    
    $
    (452
    )
    
    $
    
  b)

Coinage Division and Ethylene Coatings BusinessOn May 28, 2002, the Board of Directors of the Company approved the closing of the
Coinage Division and the shutdown of the Ethylene Coatings business. Accordingly, the
results from operations of these businesses, and all anticipated losses of these
businesses were recorded in 2002. 11




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   3

DISCONTINUED OPERATIONS (continued)  Amounts included in the consolidated balance sheets relating
to the Coinage Division and Ethylene Coatings business discontinued
operations are as follows: December 31, 2004
    
    
    December 31, 2003Accounts receivable
    
    $
    
    
    
    $
    4Accounts payable and accrued liabilities
    
    
    (767
    )
    
    
    (1,281
    )Net working capital
    
    $
    (767
    )
    
    $
    (1,277
    )Long-term capital assets available for sale
    
    $
    5,500
    
    
    $
    5,500
  The Company is actively marketing the land and buildings which make up the long-term
capital assets available for sale and has determined, through independent appraisals,
that their fair market values exceed their carrying values.  Results of discontinued operations: Year Ended
    
    
    Year Ended
    
    
    Year EndedRevenues
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Ambeon business segment
    
    $
    
    
    
    $
    30,114
    
    
    $
    36,436Coinage and Ethylene Coatings business
segments:Revenues to May 28, 2002
    
    
    
    
    
    
    
    
    
    
    6,454Revenues subsequent to May 28, 2002
    
    
    
    
    
    
    
    
    
    
    3,829Total revenue from discontinued operations
    
    $
    
    
    
    $
    30,114
    
    
    $
    46,719
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDivisional income (loss)
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Ambeon business segment:Gain on sale of Ambeon
    
    $
    5,436
    
    
    $
    
    
    
    $
    Divisional income net of income taxes
    
    
    
    
    
    
    3,003
    
    
    
    9,015Costs related to disposition
    
    
    (1,882
    )
    
    
    (643
    )
    
    
    3,554
    
    
    
    2,360
    
    
    
    9,015Coinage and Ethylene Coatings business segments:Divisional losses to May 28, 2002
    
    
    
    
    
    
    
    
    
    
    (3,908
    )Divisional losses subsequent to May 28,
2002
    
    
    
    
    
    
    
    
    
    
    (6,676
    )Costs related to shutdown and disposition
    
    
    
    
    
    
    
    
    
    
    (9,083
    )
    
    
    
    
    
    
    
    (19,667
    )Net income (loss) from discontinued
operations
    
    $
    3,554
    
    
    $
    2,360
    
    
    $
    (10,652
    )
 12




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   3

DISCONTINUED OPERATIONS (continued)  The net income (loss) from discontinued operations is after
deduction of depreciation and amortization of $Nil for the year ended
December 31, 2004 (2003  $1,738; 2002  $2,254). The net loss for
the year
ended December 31, 2002 also includes provisions for workforce reduction and other shutdown
and asset disposal costs totaling $9,083. No material gain or loss is anticipated from the
sale of the Ethylene Coatings facilities and all expected future losses from the Ethylene
Coatings business were included in the net loss from discontinued operations recorded during
2002. Current income tax expense included in net income (loss) from discontinued operations
for the year ended December 31, 2004 amounted to $Nil (2003  $27; 2002  $7).Net income per common share from discontinued operations was $0.04 for the year ended
December 31, 2004 (2003  income $0.03; 2002  loss $0.14).  4

INVENTORIES December 31, 2004
    
    
    December 31, 2003Raw materials
    
    $
    2,378
    
    
    $
    1,222Materials in process
    
    
    923
    
    
    
    709Finished product
    
    
    154
    
    
    
    612Spare parts and operating materials
    
    
    150
    
    
    
    67$
    3,605
    
    
    $
    2,610
  5

CAPITAL ASSETS Accumulated
    
    
    NetDecember 31, 2004
    
    Cost
    
    
    Depreciation
    
    
    Book ValueLand
    
    $
    505
    
    
    $
    
    
    
    $
    505Buildings
    
    
    13,607
    
    
    
    7,910
    
    
    
    5,697Machinery and equipment
    
    
    36,673
    
    
    
    18,776
    
    
    
    17,897Construction in progress
    
    
    22,093
    
    
    
    
    
    
    
    22,093Other
    
    
    2,086
    
    
    
    1,502
    
    
    
    584$
    74,964
    
    
    $
    28,188
    
    
    $
    46,776
 Accumulated
    
    
    NetDecember 31, 2003
    
    Cost
    
    
    Depreciation
    
    
    Book ValueLand
    
    $
    505
    
    
    $
    
    
    
    $
    505Buildings
    
    
    12,535
    
    
    
    7,253
    
    
    
    5,282Machinery and equipment
    
    
    28,199
    
    
    
    15,109
    
    
    
    13,090Construction in progress
    
    
    9,124
    
    
    
    
    
    
    
    9,124Other
    
    
    1,973
    
    
    
    1,191
    
    
    
    782$
    52,336
    
    
    $
    23,553
    
    
    $
    28,783
  5

CAPITAL ASSETS (continued)  In the third quarter of 2004, the Company commenced two major capital projects. iFire is
constructing a pilot manufacturing plant at its Toronto location for flat panel displays and
Nucryst began an expansion of its wound care production facility in Fort Saskatchewan,
Alberta. As a result, at December 31, 2004, capital assets include construction in progress
in the amount of $22,093 (2003  $9,124) that is not currently subject to depreciation.
Depreciation on capital assets for the year ended December 31, 2004 was $5,260 (2003 
$4,638; 2002  $3,899). 13




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004  6

INTANGIBLE ASSETS December 31, 2004
    
    
    December 31, 2003Patents
    
    $
    7,591
    
    
    $
    3,859Less accumulated amortization
    
    
    (1,898
    )
    
    
    (1,503
    )$
    5,693
    
    
    $
    2,356
  Amortization of intangible assets was $462 for the year ended December 31, 2004 (2003  $363).  7

INCOME TAXES  The following is a reconciliation of income taxes, calculated at
the statutory income tax rate, to the income tax provision included in
the consolidated statements of loss. Year Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Loss from continuing operations before income taxes
    
    $
    (28,610
    )
    
    $
    (32,972
    )
    
    $
    (33,258
    )Statutory income tax rate
    
    
    33.87
    %
    
    
    36.74
    %
    
    
    39.12
    %Expected income tax recovery
    
    
    (9,690
    )
    
    
    (12,114
    )
    
    
    (13,011
    )Losses and temporary differences  valuation allowance
    
    
    9,690
    
    
    
    16,812
    
    
    
    18,062Tax effect of items not subject to tax
    
    
    
    
    
    
    
    
    
    
    1,334Large corporations and capital taxes
    
    
    121
    
    
    
    130
    
    
    
    94Income tax expense
    
    $
    121
    
    
    $
    4,828
    
    
    $
    6,479Classified as:Current
    
    $
    121
    
    
    $
    130
    
    
    $
    94Future
    
    
    
    
    
    
    4,698
    
    
    
    6,385Income tax expense
    
    $
    121
    
    
    $
    4,828
    
    
    $
    6,479
  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. 14




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   7

INCOME TAXES (continued)  The net future income tax asset is comprised of: December 31, 2004
    
    
    December 31, 2003Future income tax assets:Tax benefit of loss carry-forwards and tax credits
    
    $
    107,585
    
    
    $
    82,012Provisions and reserves
    
    
    3,174
    
    
    
    3,622Capital, intangible and other assets
    
    
    5,223
    
    
    
    13,890Less valuation allowance
    
    
    (110,537
    )
    
    
    (95,257
    )5,445
    
    
    
    4,267Future income tax liabilities:Capital, intangible and other assets
    
    
    (5,263
    )
    
    
    (3,053
    )Other
    
    
    (182
    )
    
    
    (182
    )(5,445
    )
    
    
    (3,235
    )Future income tax assets, net
    
    $
    
    
    
    $
    1,032Classified as:Current asset
    
    $
    
    
    
    $
    1,032
  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.The Company has non-capital losses for income tax purposes of approximately $215,303 (2003 
$192,764; 2002  $158,102) that can be used to offset income in future periods. These
losses, net of valuation allowance, have not been recognized in these consolidated financial
statements and expire at various times to the end of 2024, with $97,880 expiring by 2011.
The Company also has capital losses of approximately $27,939 (2003  $5,865; 2002  $5,747)
as well as research and development tax credits of approximately $38,837 (2003  $29,419;
2002  $25,398) which will expire at various times to the end of 2014. Following the
transactions completed subsequent to year end (see Note 21), the Companys non-capital
losses, capital losses and research and development tax credits have been reduced to
$165,810, $6,424 and $38,240 respectively. Cash taxes relating to continuing operations paid
during the year amounted to $141 (2003  $155; 2002  $116).  8

INVESTMENTS December 31, 2004
    
    
    December 31, 2003Investments  shares  cost basis
    
    $
    500
    
    
    $
    500
  The Company records impairment losses if there has been an impairment in the value of
investments that is other than temporary in nature. No provisions were recorded in 2004 or
2003. During 2002, provisions totaling $2,435 were recorded against the investments and
included in equity loss. 15




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   9

LONG-TERM DEBT  On January 30, 2004, iFire entered into a Japanese Yen
1,080,000,000 loan agreement with Dai Nippon Printing Co., Ltd.
(DNP) whereby DNP is partially financing certain new equipment being
used to upgrade iFires Toronto facility. The loan is being drawn
down in 2004 and 2005, carries an interest rate of 1.70%, and is
repayable in full in Japanese Yen on June 30, 2006. The loan is
secured by the equipment financed under the agreement.As at December 31, 2004, the outstanding loan balance amounted to
Yen 408,166,000 (CAD $4,782). The liability reported at December 31,
2004 includes current year interest expense accrued for the current
year of $13 and payable at the end of the loan term.  10

PROVISION FOR SITE RESTORATION  Changes in the provision are as follows: Year EndedDecember 31, 2004
    
    
    December 31, 2003Provision at beginning of year
    
    $
    7,564
    
    
    $
    7,749Additional provisions
    
    
    327
    
    
    
    Expenditures incurred
    
    
    (1,640
    )
    
    
    (2,855
    )Costs recovered
    
    
    457
    
    
    
    2,670Provision at end of year
    
    $
    6,708
    
    
    $
    7,564
  The provision relates primarily to site restoration associated with soil and groundwater
reclamation and remediation, based on periodic independent estimates of these costs as at
December 31, 2004.Under a formal agreement, a pro rata share of site restoration costs incurred by the Company
relating to the discontinuance of DS nickel production is recovered from a third party.Potential recoveries of costs resulting from indemnifications provided by previous owners of
the Companys industrial sites have not been recognized in the consolidated financial
statements as the amount of recovery cannot be reasonably determined. Any future recoveries
will be recorded when received.  11

LICENSING AGREEMENT  In 2000, iFire entered into a non-exclusive licensing agreement with a third party. The
licensing fee was recognized as revenue over three years, the term that services were being
rendered under the agreement. Deferred licensing revenue represented the unamortized
portion of cash received. 16




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   12

CAPITAL STOCK  a)

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 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Stated
    
    
    
    
    
    
    Stated
    
    
    
    
    
    
    StatedCommon Shares
    
    Number
    
    
    Capital
    
    
    Number
    
    
    Capital
    
    
    Number
    
    
    CapitalBalance at beginning
of year
    
    
    78,073,386
    
    
    $
    373,230
    
    
    
    78,032,787
    
    
    $
    373,128
    
    
    
    77,786,915
    
    
    $
    372,598Employee share purchase plan
    
    
    28,785
    
    
    
    135
    
    
    
    40,599
    
    
    
    102
    
    
    
    72,843
    
    
    
    151Share offering
    
    
    14,705,883
    
    
    
    47,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    20,000
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,500
    )
    
    
    (721
    )Compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    323,529
    
    
    
    1,100Balance at end of year
    
    
    92,828,054
    
    
    $
    421,233
    
    
    
    78,073,386
    
    
    $
    373,230
    
    
    
    78,032,787
    
    
    $
    373,128
  During 2004, 28,785 common shares were issued with respect to the Companys employee share
purchase plan at a weighted average price of $3.24. The value of these rights to acquire
common shares of $42 was reclassified from contributed surplus to share capital.In 2004, 20,000 options were exercised at an average price of $2.59, and $15 relating to the
fair value of these options was reclassified from contributed surplus to share capital.On August 4, 2004 the Company completed a $50,000 share offering. A total of 14,705,883 new
common shares were issued at a price of $3.40. Four members of the Companys Board of
Directors purchased 4,852,942 shares under the offering. Net proceeds, after fees and
expenses, amounted to $47,801.  b)

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 10,750,000 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 the end of the year are cancelled.A summary of the status of the Companys stock option plans as at December 31, 2004, 2003
and 2002, and changes during the years ending on those dates is presented below: 17




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   12

CAPITAL STOCK (continued) 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseStock Options
    
    Number
    
    
    Price
    
    
    Number
    
    
    Price
    
    
    Number
    
    
    PriceOutstanding at
beginning of year
    
    
    5,833,400
    
    
    $
    8.71
    
    
    
    5,665,599
    
    
    $
    9.41
    
    
    
    5,245,399
    
    
    $
    9.74Granted
    
    
    497,500
    
    
    $
    3.61
    
    
    
    427,800
    
    
    $
    1.87
    
    
    
    420,200
    
    
    $
    5.22Exercised
    
    
    (20,000
    )
    
    $
    2.59
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Cancelled
    
    
    (1,651,300
    )
    
    $
    12.25
    
    
    
    (259,999
    )
    
    $
    12.62
    
    
    
    
    
    
    $
    Outstanding at end
of year
    
    
    4,659,600
    
    
    $
    6.94
    
    
    
    5,833,400
    
    
    $
    8.71
    
    
    
    5,665,599
    
    
    $
    9.41
  The following table summarizes information about stock options outstanding as at December
31, 2004: Options Outstanding
    
    
    Options ExercisableWeightedRange of
    
    Number
    
    
    Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedExercise
    
    Outstanding
    
    
    Remaining
    
    
    Average
    
    
    Exercisable
    
    
    AveragePrices
    
    Dec. 31, 2004
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Dec.31, 2004
    
    
    Exercise Price$1  $6
    
    
    2,302,200
    
    
    
    5.1
    
    
    $
    3.80
    
    
    
    1,662,200
    
    
    $
    4.03$6  $15
    
    
    1,787,403
    
    
    
    4.5
    
    
    $
    8.11
    
    
    
    1,787,403
    
    
    $
    8.11> $15
    
    
    569,997
    
    
    
    5.3
    
    
    $
    15.93
    
    
    
    569,997
    
    
    $
    15.93$1  $16
    
    
    4,659,600
    
    
    
    4.9
    
    
    $
    6.94
    
    
    
    4,019,600
    
    
    $
    7.53
  Effective January 1, 2004, the Company adopted revisions to Section 3870 of the CICA
Handbook with respect to the accounting and disclosure of stock-based compensation. The
revised Section 3870 requires that the fair value of stock options be recorded in the
financial statements. For the year ended
December 31, 2004, corporate costs, research and development costs, and selling, general and
administrative expenses include additional compensation expense relating to stock options
totaling $1,210 (2002  $942; 2001  $627) with an offsetting increase to contributed
surplus.The fair value of each option grant by the Company and its subsidiaries is estimated using
the Black-Scholes option pricing model assuming no dividends are paid on common shares, a
risk-free interest rate of 4.80% (2003  5.05%; 2002  5.18%), an average life of 7.0 years
and a volatility of 58.47% (2003  59.89%; 2002  59.5%). The amounts computed according to
the Black-Scholes pricing model may not be indicative of the actual values realized upon the
exercise of these options by the holders.Deferred share unit plan The Company maintains DSUs for the non-executive Directors of
the Company. DSUs are issued at the market value of the Companys shares at the date of
grant and vest upon death or retirement of the Director. Directors may elect to receive
additional DSUs in lieu of fees, which are issued at 90% of the market value of the
Companys shares at the date of grant. As at December 31, 2004, a liability of $954 (2003
 $782; 2002  $210) has been accrued with respect to issued DSUs. 18




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   12

CAPITAL STOCK (continued)  Restricted share unit plan In 2004, the Company instituted a Restricted Share Unit Plan
for the Executive Officers of the Company. These units vest over three years and are
payable when fully vested in common shares or in cash at the weighted average trading price
at the date of exercise. The liability with respect to these units is accrued over the
vesting period and amounted to $139 as at December 31, 2004.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 19,
2004 was $3.55 (July 21, 2003  $2.36; July 15, 2002  $3.60). At December 31, 2004 there
were outstanding purchase arrangements with employees having an aggregate value of $363
(2003  $389; 2002  $323). During the year ended December 31, 2004, a total of 28,785
shares were issued under this Plan at an average price of $3.24 (2003  40,599 shares at
$2.50; 2002  72,843 shares at $2.08).Subsidiary stock-based compensation plans  The Company also maintains equity incentive
plans for certain employees of its technology subsidiaries, Nucryst and iFire, under which
stock options have been granted representing 5.0% to 6.2% of the outstanding shares of the
respective subsidiaries. Effective January 1, 2004, these plans are being accounted for
under the fair value method with the related compensation expense being recorded in the
financial statements. Subsidiary stock options vest evenly over a three-year period and
expire after 10 years from the date of grant. The exercise prices of stock options granted
are not less than the fair value of the subsidiarys stock at
the time of the grant. No shares were issued by the Company in 2004 or 2003 with respect to these plans, while 323,529
common shares were issued in 2002.SARs have been granted to employees of certain technology subsidiaries. SARs vest over time
and may be settled with cash, shares of the subsidiary or shares of the Company, at the
Companys option. The exercise prices of SARs granted are not less than the fair value of
the subsidiarys stock at the time of the grant. The total potential liability upon
exercise of these SARs is capped at $1,950.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. As at December 31, 2004, 2003 and 2002, the
liability was $Nil as the estimated market value of the subsidiaries SARs was less than
their exercise price.  c)

Normal course issuer bid  In June 2002, the Company filed a normal course issuer bid which entitled the Company to
acquire up to 3,889,000 common shares between June 19, 2002 and June 18, 2003.No shares were repurchased in
2003. During 2002, the Company repurchased 150,500 shares through its
normal course issuer bid at an average price of $2.12 for an aggregate
consideration of $318. The amount by which the average carrying value
exceeded the cost of reacquiring the shares, amounting to $403, was
credited to contributed surplus. 19




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   13

RESEARCH AND DEVELOPMENT FUNDING AGREEMENTS  In 2001, iFire entered into a research and development contribution agreement with
the Government of Canada through Technology Partnerships Canada (TPC). Under this
agreement, TPC agreed to contribute 28.371% of eligible research and development costs and
related capital expenditures incurred by iFire to a maximum of $30,000.Under the terms of the agreement, iFire will pay a royalty to TPC equal to 1.065% of
eventual commercial sales of the technology under development. In addition, TPC received
warrants to purchase common shares of iFire exercisable for an additional consideration of
$6,283. The warrants expire on December 31, 2007 and, as at December 31, 2004, 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 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. Contribution claims totaling $5,997 were recorded in 2003 (2002 
$9,063). Of this amount, in 2003 $5,204 (2002  $8,061) was credited to research and
development expense and $793 (2002  $1,002) was credited to capital assets. The final
contribution claims were recorded in the quarter ended September 30, 2003 and final payment
received in the fourth quarter of 2003. As at December 31, 2003, the Company had received
the maximum $30,000 eligible funding.On January 1, 2003, the Company entered into a series of agreements with a third party
whereby the third party agreed to reimburse iFire for a portion of the costs related to
research and development projects of mutual interest to iFire and the third party. These
agreements provide for reimbursement totaling USD $3.8 million to be paid quarterly between
January 2003 and October 2006. These reimbursements are recorded as a reduction to research
and development expenditures in the consolidated financial statements and amounted to $1,251
(2003  $1,364). In the event that the Company enters into a Pilot Project Agreement with
the third party, the third party will receive credit for the funding already provided to the
Company.  14

GUARANTEES  In 2003, the CICA issued Accounting Guideline 14 Disclosure of
Guarantees which recommends companies disclose the nature, amount and
terms of obligations under guarantee or indemnification in the event
of an adverse judgment in a lawsuit. In the normal course of
operations, the Company has issued letters of credit in the amounts of
US $1,060 which expire on March 31, 2005. In Canadian dollars, these
guarantees amounted to approximately $1,276 as at December 31, 2004.The Company has agreements to indemnify its Officers and Directors
for certain events or occurrences while the Officer or Director is or
was serving at the Companys request in such capacity. The maximum
potential amount of future payments is unlimited. However, the
Company maintains Director and Officer liability insurance coverage
that limits its exposure and enables the Company to recover a portion
of any future amounts paid. 20




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   14

GUARANTEES (continued)  In addition, the Company has provided indemnifications to third
parties with respect to future site restoration costs to be incurred
on properties previously owned by the Company. These estimated costs
have been included in the provision for site restoration (Note 10).  15

PENSION PLANS  The Company maintains defined contribution pension plans for its employees. These plans
which apply to employees in both continuing and discontinued operations were funded $602
during the year ended December 31, 2004 (2003  $784; 2002 $1,117).In 2003, the Company wound up the defined benefit pension plan and purchased annuities for
pensioners and remaining plan members. The cost of these annuities amounting to $2,792 was
funded through plan assets valued at $2,648 and a contribution by the Company of $144.  16

DERIVATIVE FINANCIAL INSTRUMENTS  With respect to its Ambeon Division, which was sold in January 2004 (Note 3), the Company
hedged its exposure to contracted nickel sales, raw material purchases and certain produced
inventory which were 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 were based on LME prices, unless other prices were negotiated. At
December 31, 2004 there were no deferred gains or unrealized losses on these hedges (2003 
deferred gains of $101 and unrealized losses of $1,083; 2002  deferred losses of $269 and
unrealized losses of $75 which were offset by unrecognized gains in physical inventory and
raw material costs).Unrealized commodity positions at December 31, 2004 were Nil tonnes (2003  186 tonnes; 2002
 312 tonnes).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, 2004,
2003 and 2002, there were no unrecognized gains or losses and no open foreign exchange
contracts.At December 31, 2004 and December 31, 2003, there were no open forward rate agreement
contracts. At December 31, 2002, there were accrued losses on open forward rate agreement
contracts of $290. The cumulative notional amount of these open positions at December 31,
2002 amounted to $100,000.  17

COMMITMENTS AND CONTINGENCIES  CommitmentsThe Company is committed to capital expenditures of $17,987 (2003
 $1,315; 2002  $3,409) and to future annual payments under operating
leases as follows: 2005
    
    2006
    
    2007
    
    2008
    
    2009$898
    
    $771
    
    $560
    
    $555
    
    $555
 21




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   17

COMMITMENTS AND CONTINGENCIES (continued)  ContingenciesThe Company and its subsidiaries are party to legal proceedings in
the ordinary course of their businesses. Management does not expect
the outcome of any of these proceedings to have a material effect on
the Companys financial position or operating results.  18

FINANCIAL INSTRUMENTS  Fair value of financial instrumentsThe carrying value of the Companys interest in financial instruments approximates their
fair value. The estimated fair value approximates the amount for which the financial
instruments could currently be exchanged in an arms length transaction between willing
parties who are under no compulsion to act. Certain financial instruments lack an available
trading market and, therefore, fair value amounts should not be interpreted as being
necessarily realizable in an immediate settlement of the instrument.Interest rate riskInterest rate risk reflects the sensitivity of the Companys financial results and condition
to movements in interest rates. For 2004, a 1% decrease in interest rates would have
reduced earnings before income taxes by $937 (2003  $783; 2002  $922). Conversely, a 1%
increase in interest rates would have increased earnings before taxes by a similar amount.Foreign currency riskThe Company is exposed to currency risks as a result of its export to foreign jurisdictions
of goods produced in Canada. These risks are partially covered by purchases of goods and
services in the foreign currency and by forward exchange contracts.Credit riskThe Companys financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments, accounts
receivable, and forward contracts. Cash and short-term investments are placed with
major financial institutions or invested in the commercial paper of large
organizations. The Company has a concentration of credit risk through its reliance on
one customer for Nucrysts wound care products. This risk is limited due to the
long-term contractual relationship with this customer. 22




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   19

EARNINGS PER SHARE  In calculating earnings per share under the treasury stock method, the numerator remains
unchanged from the basic earnings per share calculation as the assumed exercise of the
Companys stock options does not result in an adjustment to income. The reconciliation of
the denominator in calculating diluted earnings per share is as follows: Year Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Weighted average number of common shares
outstanding  basic earnings per share
    
    
    84,093,827
    
    
    
    78,044,689
    
    
    
    77,923,525Effect of dilutive securities
    
    
    255,254
    
    
    
    130,654
    
    
    
    17,550Weighted average number of common shares
outstanding  diluted earnings per share
    
    
    84,349,081
    
    
    
    78,175,343
    
    
    
    77,941,075
  The impact of all dilutive securities on earnings per share is anti-dilutive as at December
31, 2004, 2003 and 2002.  20

SEGMENTED INFORMATION  The Company is managed using two operating segments, which have been determined based on the
nature of the products produced: Nucryst Pharmaceuticals and iFire Technology.
Discontinued operations are disclosed separately (Note 3).The Nucryst Pharmaceuticals segment researches, develops and commercializes wound care
products and pharmaceutical products based on noble metal nanocrystalline technology. The
iFire Technology segment has developed a proprietary flat-panel full color solid state
display technology with applications in both the large screen and small graphic display
markets.The accounting policies of the reportable segments are the same as those described in Note
2. Included in other non-cash assets of $8,770 at December 31, 2004 (2003  $7,800; 2002 
$13,300) are assets that cannot be allocated to a particular segment. Non-cash assets
excludes short-term investments and assets available for sale. Divisional
    
    
    Depreciation
    
    
    
    
    
    
    Non-cashYear Ended
    
    
    
    
    
    Income
    
    
    and
    
    
    Capital
    
    
    AssetsDecember 31, 2004
    
    Revenue
    
    
    (Loss)
    
    
    Amortization
    
    
    Expenditures
    
    
    Dec.31, 2003Nucryst Pharmaceuticals
    
    $
    31,907
    
    
    $
    6,079
    
    
    $
    1,128
    
    
    $
    3,163
    
    
    $
    17,476iFire Technology
    
    
    
    
    
    
    (27,884
    )
    
    
    3,539
    
    
    
    18,649
    
    
    
    39,378Other
    
    
    334
    
    
    
    (1,186
    )
    
    
    1,055
    
    
    
    1,620
    
    
    
    8,770$
    32,241
    
    
    $
    (22,991
    )
    
    $
    5,722
    
    
    $
    23,432
    
    
    $
    65,624
 23




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   20

SEGMENTED INFORMATION (continued) Depreciation
    
    
    
    
    
    
    Non-cashYear Ended
    
    
    
    
    
    Divisional
    
    
    and
    
    
    Capital
    
    
    AssetsDecember 31, 2003
    
    Revenue
    
    
    Loss
    
    
    Amortization
    
    
    Expenditures
    
    
    Dec. 31, 2003Nucryst Pharmaceuticals
    
    $
    16,212
    
    
    $
    (2,014
    )
    
    $
    892
    
    
    $
    1,827
    
    
    $
    12,556iFire Technology
    
    
    911
    
    
    
    (20,054
    )
    
    
    2,693
    
    
    
    8,424
    
    
    
    20,544Other
    
    
    162
    
    
    
    (1,284
    )
    
    
    1,416
    
    
    
    132
    
    
    
    7,800$
    17,285
    
    
    $
    (23,352
    )
    
    $
    5,001
    
    
    $
    10,383
    
    
    $
    40,900
 Depreciation
    
    
    
    
    
    
    Non-cashYear Ended
    
    
    
    
    
    Divisional
    
    
    and
    
    
    Capital
    
    
    AssetsDecember 31, 2002
    
    Revenue
    
    
    Loss
    
    
    Amortization
    
    
    Expenditures
    
    
    Dec. 31, 2002Nucryst Pharmaceuticals
    
    $
    8,344
    
    
    $
    (7,037
    )
    
    $
    554
    
    
    $
    2,416
    
    
    $
    9,759iFire Technology
    
    
    4,270
    
    
    
    (17,064
    )
    
    
    2,642
    
    
    
    2,909
    
    
    
    17,184Other
    
    
    13
    
    
    
    (841
    )
    
    
    1,035
    
    
    
    727
    
    
    
    13,300$
    12,627
    
    
    $
    (24,942
    )
    
    $
    4,231
    
    
    $
    6,052
    
    
    $
    40,243
  All of Nucrysts revenues are earned through a long-term exclusive licensing agreement with
an international wound care company which expires in 2026. Nucryst exports manufactured
products to this company for their resale in international markets.  21

SUBSEQUENT EVENTS  a)  In January 2005, the Company completed a series of transactions whereby two inactive
wholly owned subsidiary companies participated in a Plan of Arrangement with two widely held
publicly traded companies. This resulted in the recapitalization of the participating
companies into a single company and the dilution of the Companys investment to
approximately 6.0%. The companys pro rata interest in the book value of the recapitalized
companies amounted to approximately $2,200. Subsequently, the company created under the
Plan of Arrangement was listed on the Toronto Stock Exchange.The inactive subsidiaries were previously carried at a nominal value and this transaction
will result in the Company recording a dilution gain of approximately $2,200 in discontinued
operations in the first quarter of 2005.b)  On February 10, 2005, the Company sold this investment for net proceeds of approximately
$11,500 and will record an additional gain on the sale of investments of approximately
$9,300 in the first quarter of 2005. 24




---



##### 



The Westaim CorporationNotes to Consolidated Financial StatementsYear Ended December 31, 2004     22

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)

Derivative Instruments and Hedging ActivitiesUnder U.S. GAAP, pursuant to SFAS 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), companies are required to record derivatives on the balance
sheet as assets or liabilities measured at fair value. For those derivatives
representing effective cash flow hedges of risks and exposures, unrealized gains or
losses resulting from changes in the fair values are presented as a component of other
comprehensive income (OCI) as defined in SFAS 130 Reporting Comprehensive
Income (SFAS 130). To the extent certain derivatives do not represent effective
hedges, unrealized gains or losses are included in the income statement for U.S. GAAP
purposes.Hedges against price risk exposure on contracted nickel sales and raw materials
purchases as described in Note 16 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 16. 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, 2004 the
Company has recorded a recovery to OCI with respect to cash-flow hedges amounting to
$982 (December 31, 2003  charge $907; December 31, 2002  recovery $171).b)

Gain on issuance of shares by subsidiaryIn accordance with Canadian GAAP, the Company is required to account for gains and
losses on the issuance of shares by a subsidiary as a component of income. Under U.S.
GAAP, the effect of such dilution gains may be recorded as income except in
circumstances where subsequent capital transactions are contemplated that raise concerns
about the likelihood of realizing the gain. In addition, realization of the gain is not
assured where the subsidiary is a newly formed, non-operating entity; a research and
development, start-up; or development-stage company. It is the Companys policy to
record dilution gains as a component of income for U.S. GAAP purposes. However, for a
transaction in 2001 involving iFire, which is a research and development company, the
dilution gain was required to be recorded in equity as an increase in paid-in capital
rather than as income.c)

PensionUnder U.S. GAAP, the Company would have recorded an additional minimum liability for
under-funded plans representing the excess of the accumulated benefit obligation over
the pension plan assets, less the pension liability already recognized and the net
unamortized prior service cost. Under 25




---



##### 



The Westaim CorporationNotes to Consolidated Financial StatementsYear Ended December 31, 2004     22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  SFAS 130 Reporting Other Comprehensive Income the increase in liabilities is charged
directly to other comprehensive income.The Company wound up the defined benefit plan in 2003 and there will be no reconciling
differences in future years.d)

Research and DevelopmentUnder U.S. GAAP, the cost of purchased research and development should be charged to
income, in the period incurred, when no alternative uses exist for the purchased
research and development. As the patents and intellectual property purchased are
restricted to use in inorganic electroluminescent displays, the costs have been fully
expensed under U.S. GAAP.Under Canadian GAAP, such costs are capitalized and amortized over their estimated
useful lives.e)

Stock-based CompensationU.S. GAAP SFAS 123, Accounting for Stock-based Compensation (SFAS 123), encourages
that stock-based compensation is accounted for based on a fair value methodology. As
permitted by the statement, 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 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.Under Canadian GAAP, effective January 1, 2004, the Company adopted revisions to Section
3870 of the CICA Handbook which requires that the fair value of stock options be
recorded in the financial statements (see Note 2n). These new rules apply to options
issued on or after January 1, 2002. As a result, the Company has recorded stock-based
compensation expense under Canadian GAAP for the year ended December 31, 2004 of $1,210
(2003  $942; 2002  $627).  The effect of the above differences on the Companys financial statements is set out below: Consolidated Balance Sheets
    
    December 31, 2004
    
    
    December 31, 2003Canadian
    
    
    U.S.
    
    
    Canadian
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    GAAP
    
    
    GAAPIntangible assets (d)
    
    $
    5,693
    
    
    $
    2,693
    
    
    $
    2,356
    
    
    $
    2,356Accounts payable and accrued liabilities (a)
    
    
    12,963
    
    
    
    12,963
    
    
    
    10,015
    
    
    
    10,997Capital stock (e)
    
    
    421,233
    
    
    
    421,176
    
    
    
    373,230
    
    
    
    373,230Contributed Surplus (e)
    
    
    3,125
    
    
    
    403
    
    
    
    1,972
    
    
    
    403Deficit (e)
    
    
    (276,561
    )
    
    
    (287,291
    )
    
    
    (251,384
    )
    
    
    (260,324
    )Other comprehensive loss (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (982
    )Additional paid-in capital (b)
    
    
    
    
    
    
    10,509
    
    
    
    
    
    
    
    10,509
 26




---



##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued) Shareholders' Equity
    
    December 31, 2004
    
    
    December 31, 2003Canadian GAAP
    
    $
    147,797
    
    
    $
    123,818AdjustmentsResearch and development (d)
    
    
    (3,000
    )
    
    
    Cash flow hedges (a)
    
    
    
    
    
    
    (982
    )U.S. GAAP
    
    $
    144,797
    
    
    $
    122,836
 Year Ended December 31Consolidated Statements of Loss
    
    2004
    
    
    2003
    
    
    2002Loss from continuing operationsCanadian GAAP
    
    $
    (28,731
    )
    
    $
    (37,800
    )
    
    $
    (39,737
    )Research and development (d)
    
    
    (3,000
    )
    
    
    
    
    
    
    Stock-based compensation (e)
    
    
    1,210
    
    
    
    942
    
    
    
    627Loss from continuing operations
U.S. GAAP
    
    
    (30,521
    )
    
    
    (36,858
    )
    
    
    (39,110
    )Income (loss) from discontinued operations
Canadian GAAP
    
    
    3,554
    
    
    
    2,360
    
    
    
    (10,652
    )Net loss applicable to common shareholders
U.S. GAAP
    
    
    (26,967
    )
    
    
    (34,498
    )
    
    
    (49,762
    )Other comprehensive income (loss)Pension (c)
    
    
    
    
    
    
    665
    
    
    
    (332
    )Cash flow hedges (a)
    
    
    982
    
    
    
    (907
    )
    
    
    171Net comprehensive loss  U.S. GAAP
    
    $
    (25,985
    )
    
    $
    (34,740
    )
    
    $
    (49,923
    )
 Year Ended December 31Loss Per Common Share
    
    2004
    
    
    2003
    
    
    2002Canadian GAAPContinuing operations
    
    $
    (0.34
    )
    
    $
    (0.48
    )
    
    $
    (0.51
    )Net loss
    
    $
    (0.30
    )
    
    $
    (0.45
    )
    
    $
    (0.65
    )U.S. GAAPContinuing operations
    
    $
    (0.36
    )
    
    $
    (0.47
    )
    
    $
    (0.50
    )Net loss
    
    $
    (0.32
    )
    
    $
    (0.44
    )
    
    $
    (0.64
    )
 Consolidated Cash Flow
    
    Year Ended
    
    
    Year Ended
    
    
    Year EndedStatements
    
    December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Canadian GAAP
    
    
    U.S. GAAP
    
    
    Canadian GAAP
    
    
    U.S.
    
    
    Canadian GAAP
    
    
    U.S.Loss from continuing
operations
    
    $
    (28,731
    )
    
    $
    (30,521
    )
    
    $
    (37,800
    )
    
    $
    (36,858
    )
    
    $
    (39,737
    )
    
    $
    (39,110
    )Items not affecting cash:Stock-based compensation
    
    $
    1,210
    
    
    $
    
    
    
    $
    942
    
    
    $
    
    
    
    $
    627
    
    
    $
    Changes in non-cash
working capital
    
    $
    7,275
    
    
    $
    6,065
    
    
    $
    13,103
    
    
    $
    12,161
    
    
    $
    8,168
    
    
    $
    7,541
 27




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The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  Stock-based compensationU.S. GAAP, SFAS 123 Accounting for Stock-Based Compensation (SFAS 123) encourages that
stock-based compensation is accounted for based on a fair value methodology. As permitted
by the Statement, the Company and its subsidiaries have elected to continue measuring
compensation costs as the excess, if any, of the quoted market value of the stock at the
date of the grant over the exercise price. As the exercise price of options granted by the
Company and its subsidiaries is not less than the market value at the date of grant, no
compensation expense is recognized.There continues to be a difference between Canadian and U.S. GAAP for options issued by the
Company and its subsidiaries prior to January 1, 2002, with respect to pro forma disclosure
requirements. If compensation costs for the Companys and its subsidiaries stock option
plans had been determined based on the fair value methodology over the vesting period
consistent with SFAS 123, the Companys net loss and earnings per share would have been
reduced to the pro-forma amounts indicated below: Year Ended December 312004
    
    
    2003
    
    
    2002Net loss applicable to common shareholders U.S. GAAP
    
    $
    (26,967
    )
    
    $
    (34,498
    )
    
    $
    (49,762
    )Total stock-based employee compensation
expense determined under fair-value based
method for awards net of tax effects
    
    
    (1,040
    )
    
    
    (4,518
    )
    
    
    (8,499
    )Pro forma net loss applicable to common
shareholders  U.S. GAAP
    
    
    (28,007
    )
    
    
    (39,016
    )
    
    
    (58,261
    )Loss per common share  U.S. GAAPContinuing operations
    
    
    (0.36
    )
    
    
    (0.47
    )
    
    
    (0.50
    )Net loss
    
    
    (0.32
    )
    
    
    (0.44
    )
    
    
    (0.64
    )Pro formaContinuing operations
    
    
    (0.38
    )
    
    
    (0.53
    )
    
    
    (0.61
    )Net loss
    
    
    (0.33
    )
    
    
    (0.50
    )
    
    
    (0.75
    )
  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 4.80% (2003  5.05%; 2002  5.18%), an average life of
7.0 years and a volatility for the shares of the companies of 58.5% (2003  59.8%; 2002 
59.5%). The amounts computed according to the Black-Scholes pricing model may not be
indicative of the actual values realized upon the exercise of these options by the holders.
The weighted average fair value of options granted in 2004 was $1.13 (2003  $0.66; 2002 
$1.40). 28




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  New Accounting StandardsFIN 46In January 2003, the FASB issued FASB Interpretation No.46
Consolidation of Variable Interest Entities, an interpretation
of ARB No.51 (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. The consolidation and disclosure provisions of FIN 46
are effective for variable interest entities created or entered
into after January 31, 2003. In December 2003, the FASB issued FIN
46(R) to clarify some of the provisions of FIN 46 and to exempt
certain entities from its requirements. FIN 46(R) revised the
effective date of the consolidation and disclosure provisions for
variable interest entities held or created on or after January 31,
2003 to its fiscal year beginning January 1, 2004. Adoption of
this Standard did not have a material effect on the Companys
results from operations and financial position.SFAS 123(R)On December 16, 2004, the FASB issued FASB Statement No. 123(R) Share-Based Payment.
Statement 123(R) requires that compensation expense relating to share-based payment
transactions be recognized in the financial statements. SFAS 123(R) is effective for the
first interim and annual reporting period that begins after June 15, 2005. The Company will
adopt SFAS 123(R) in fiscal 2005 and is currently assessing its transition options and
evaluating the impact.SFAS 150In May 2003, the FASB issued FASB Statement No.150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150
modifies the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be classified
as liabilities in statements of financial position. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS 150 and still existing at the
beginning of the interim period of adoption. Restatement is not permitted. Adoption of
this Statement did not have a material effect on the Companys results of operations and
financial position.SFAS 143In July 2001, the FASB issued FASB Statement No. 143 Accounting or Asset Retirement
Obligations (SFAS 143). SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. When the liability is recognized, a
corresponding asset retirement cost is capitalized as part of the varying value of the
long-lived asset. The standard is effective for fiscal years beginning after June 15, 2002.
The Company has evaluated the provisions of SFAS 143 and determined that the statement does
not have any material impact on its results of operations and financial position. The
Company continues to account for its site restoration liability under Statement of Position
96-1 Environment Remediation Liabilities, and the accounting treatment of the provision
for site restoration is discussed in Note 2k to the consolidated financial statements. 29




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  SFAS 151In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No.
43, Chapter 4, which amends Chapter 4 of ARB No. 43 that deals with inventory pricing. The
Statement clarifies the accounting for abnormal amounts of idle facility expenses, freight,
handling costs, and spoilage. Under previous guidance, paragraph 5 of ARB No. 43, chapter
4, items such as idle facility expense, excessive spoilage, double freight, and rehandling
costs might be considered to be so abnormal, under certain circumstances, as to require
treatment as current period charges. This Statement eliminates the criterion of so
abnormal and requires that those items be recognized as current period charges. Also, this
Statement requires that allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facilities. This Statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005, although
earlier application is permitted for fiscal years beginning after the dale of issuance of
this Statement. Retroactive application is not permitted. The Company does not expect the
impact of this Statement to be material.SFAS 153In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an
amendment of APB No. 29. This Statement amends Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substances. The Statement
specifies that a non-monetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange. This Statement
is effective for non-monetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Earlier application is permitted for non-monetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is issued. Retroactive
application is not permitted. The Company does not expect the impact of this Statement to
be material.FASB Exposure Draft Fair Value MeasurementsIn June 2004, the FASB issued an exposure draft of a proposed Statement, Fair Value
Measurements to provide guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required by other authoritative accounting
pronouncements. The proposed statement attempts to address concerns about the ability to
develop reliable estimates of fair value and inconsistencies in fair value guidance provided
by current U.S. GAAP, by creating a framework that clarifies the fair value objective and
its application in GAAP. In addition, the proposal expands disclosures required about the
use of fair value to remeasure assets and liabilities. The standard would be effective for
financial statements issued for fiscal years beginning after June 15, 2005. The Company
does not expect the impact of this Standard to be material.EITF 031In March 2004, the Emerging Issues Task Force (EITF) reached consensus on Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
(EITF 03-1). EITF 03-1 is applicable to marketable debt and equity securities within the
scope of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115). In September 2004, the
FASB issued FSP EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, which delays the effective date for the measurement and recognition criteria
contained in EITF 03-1 until final application guidance is issued. The delay does not
suspend the 30




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##### 



The Westaim Corporation
Notes to Consolidated Financial Statements
Year Ended December 31, 2004   22

RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
THE UNITED STATES (continued)  requirement to recognize other-than-temporary impairments as
required by existing authoritative literature. The Company does not
expect the impact of this Standard to be material.EITF 0313The Emerging Issues Task Force issued EITF Abstract 03-13 (EITF 03-13) to provide guidance
on applying SFAS 144, Determining Whether to Report Discontinued Operations. SFAS 144
discusses when an entity should disclose a component as discontinued operations. Under
SFAS 144, a component should be disclosed as discontinued operations when continuing cash
flows are eliminated and when there is no significant continuing involvement with the
component. EITF 03-13 provides additional guidance on factors to consider in evaluating
what constitutes continuing cash flows and continuing significant influence. This Statement
is effective for fiscal periods beginning after December 15, 2004. The Company does not
expect there to be any material impact on the consolidated financial statements upon
adoption of the guidance.23

COMPARATIVE FIGURESCertain 2003 and 2002 figures have been reclassified to conform to the presentation of the current year. 31