The Westaim Corporation (WEDXF) 40-F 2002 FY Annual report (Canada)

Auditors’ Report

To the Shareholders of
The Westaim Corporation

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

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

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

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

(Signed) “Deloitte & Touche LLP”

Calgary, Canada
January 30, 2003 Chartered Accountants

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

To the Shareholders of
The Westaim Corporation

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

(Signed) “Deloitte & Touche LLP”

Calgary, Canada
January 30, 2003 Chartered Accountants

THE WESTAIM CORPORATION
Consolidated Balance Sheets

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

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

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

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

THE WESTAIM CORPORATION
Consolidated Cash Flow Statements

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

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

1

The Westaim Corporation
Notes to Consolidated Financial Statements

2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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

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

Discontinued operations

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

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

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

2

The Westaim Corporation
Notes to Consolidated Financial Statements

2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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

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

3

The Westaim Corporation
Notes to Consolidated Financial Statements

2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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

4

The Westaim Corporation
Notes to Consolidated Financial Statements

2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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

5

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

6

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

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

7

The Westaim Corporation
Notes to Consolidated Financial Statements

6 CAPITAL ASSETS

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

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

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

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

8

The Westaim Corporation
Notes to Consolidated Financial Statements

7 DEFERRED CHARGES

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

9

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

Income taxes are recognized for future income tax consequences attributed to estimated differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases.

The net future income tax asset is comprised of:

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

10

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

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

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

11

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

Stock-based compensation plans

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

12

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

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

Deferred share unit plan– During 2001, the Company implemented a Deferred Share Unit Plan (DSUs) for the outside Directors of the Company. DSUs are issued at the market value of the Company’s shares at the date of grant and vest upon death or retirement of the Director. Directors may elect to receive additional DSUs in lieu of fees, which are issued at 90% of the market value of the Company’s shares at the date of grant. As at December 31, 2002 a liability of $210 (2001 – $93) has been accrued with respect to issued DSUs.

Employee share purchase plan– Under the Employee Share Purchase Plan, employees are entitled to subscribe for common shares of the Company, to a maximum value of five percent of their annual compensation. Payment for these shares is made over a 24 month period at a price per share equal to the lesser of the market value at the offering date and the market value at the end of the purchase period. The market value at the offering date of July 15, 2002 was $3.60 (July 16, 2001 – $10.09; July 17, 2000 – $19.42). At December 31, 2002 there were outstanding purchase arrangements with employees having an aggregate value of $323 (2001 – $606; 2000 – $1,021). During the year ended December 31, 2002, 72,843 shares were issued under this Plan at an average price of $2.08 (2001 – 67,217 shares at $6.94; 2000 – 30,343 shares at $8.47).

13

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

14

The Westaim Corporation
Notes to Consolidated Financial Statements

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

15

The Westaim Corporation
Notes to Consolidated Financial Statements

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

16

The Westaim Corporation
Notes to Consolidated Financial Statements

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

17

The Westaim Corporation
Notes to Consolidated Financial Statements

19 COMMITMENTS AND CONTINGENCIES (Continued)

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

	Contingencies
	The Company and its subsidiaries are party to legal proceedings in the ordinary course of their businesses. Management does not expect the outcome of any of these proceedings to have a material effect on the Company’s financial position or operating results.
20	FINANCIAL INSTRUMENTS
	Fair value of financial instruments
	The carrying value of the Company’s interest in financial instruments approximates their fair value. The estimated fair value approximates the amount for which the financial instruments could currently be exchanged in an arm’s length transaction between willing parties who are under no compulsion to act. Certain financial instruments lack an available trading market and, therefore, fair value amounts should not be interpreted as being necessarily realizable in an immediate settlement of the instrument.
	Interest rate risk
	Interest rate risk reflects the sensitivity of the Company’s financial results and condition to movements in interest rates. For 2002 a 1% decrease in interest rates would have reduced earnings before income taxes by $922. Conversely, a 1% increase in interest rates would have increased earnings before taxes by a similar amount.
	Foreign currency risk
	The Company is exposed to currency risks as a result of its export to foreign jurisdictions of goods produced in Canada. These risks are partially covered by purchases of goods and services in the foreign currency and by forward exchange contracts.
	Credit risk
	The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and short-term investments, accounts receivable, and forward contracts. Cash and short-term investments are placed with major financial institutions or invested in the commercial paper of large organizations. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas.

18

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

19

The Westaim Corporation
Notes to Consolidated Financial Statements

22 SEGMENTED INFORMATION (Continued)

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

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

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

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

20

The Westaim Corporation
Notes to Consolidated Financial Statements

22 SEGMENTED INFORMATION (Continued)

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

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

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

21

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

22

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

23

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

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

24

The Westaim Corporation
Notes to Consolidated Financial Statements

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

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

Stock-based compensation

U.S. GAAP, SFAS 123, “Stock-Based Compensation” requires that stock-based compensation be accounted for based on a fair value methodology. As permitted by the statement, and consistent with Canadian GAAP, effective January 1, 2002 the Company and its subsidiaries have elected to continue measuring compensation costs as the excess, if any, of the quoted market value of the stock at the date of the grant over the exercise price. As the exercise price of options granted by the Company and its subsidiaries is not less than the market value at the date of grant, no compensation expense is recognized.

There continues to be a reconciling item between Canadian and U.S. GAAP for options issued by the Company and its subsidiaries prior to January 1, 2002.

If compensation costs for the Company’s and its subsidiaries’ stock option plans had been determined based on the fair value methodology over the vesting period consistent with SFAS 123, the Company’s net loss and earnings per share would have been reduced to the pro-forma amounts indicated below:

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

25

The Westaim Corporation
Notes to Consolidated Financial Statements

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

26

The Westaim Corporation
Notes to Consolidated Financial Statements

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

27