**UNITED
        STATES**
  **SECURITIES
        AND EXCHANGE COMMISSION**
  **Washington,
        D.C. 20549**
  **FORM
        20-F**
  ** ̈**  **REGISTRATION
        STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
        OF
        1934**
 **OR**
 **x**  **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
  **For
        the fiscal year ended December 31, 2006**
 **OR**
 ** ̈**  **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 **OR**
 ** ̈**  **SHELL
        COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934**
   **Commission
        file number 0-29004**
  **NOVATEL
        INC.**
 **(Exact
        name of Registrant as specified in its charter)**
 **N/A**
 **(Translation
        of Registrant’s name into English)**
 **Canada**
 **(Jurisdiction
        of incorporation or organization)**
  **1120-68th
        Avenue N.E., Calgary, Alberta, Canada T2E 8S5**
 **(Address
        of principal executive offices)**
  SECURITIES
        REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 **Title
                  of Each Class**
              
              **Name
                  of Each Exchange on Which Registered****Common
                  Shares**
              
              **The
                  NASDAQ Stock Market, LLC**
  SECURITIES
        REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: **NONE**
 SECURITIES
        FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO
 SECTION
        15(d) OF THE ACT: **NONE**
  At
        December 31, 2006, Registrant had outstanding 8,528,636 Common Shares, no
        par
        value.
  Indicate
        by check mark if the Registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 Yes   ̈ No  x
  If
        this
        report is an annual or transition report, indicate by check mark if the
        Registrant is not required to file reports pursuant to Section 13 or 15(d)
        of
        the Securities Exchange Act 1934.
 Yes    ̈ No  x
  Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports) and (2) has been subject to such filing requirement
        for
        the past 90 days.
 Yes  x No   ̈
  Indicate
        by check mark whether the Registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 Large
        accelerated filer   ̈   Accelerated
        filer  x   Non-accelerated
        filer   ̈
  Indicate
        by check mark which financial statement item the Registrant has elected to
        follow.
 Item
        17   ̈ Item 18  x
  If
        this
        is an annual report, indicate by check mark whether the Registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act).
 Yes   ̈ No  x
 
 
  **Table
        of Contents**
 
 Explanatory
                Note
              
              iiPART
                I
              
              1Item
                1.  Identity of Directors, Senior Management
                and Advisers
              
              1Item
                2.  Offer Statistics and Expected
                Timetable
              
              1Item
                3.  Key Information
              
              1Item
                4.  Information on the
                Company
              
              14Item
                5.  Operating and Financial Review and
                Prospects
              
              26Item
                6.  Directors, Senior Management and
                Employees
              
              40Item
                7.  Major Shareholders and Related Party
                Transactions
              
              47Item
                8.  Financial Information
              
              47Item
                9.  The Offer and Listing
              
              48Item
                10.  Additional Information
              
              48Item
                11.  Quantitative and Qualitative Disclosures
                about Market Risk
              
              51Item
                12.  Description of Securities other than
                Equity Securities
              
              51PART
                II
              
              51Item
                13.  Defaults, Dividend Arrearages and
                Delinquencies
              
              51Item
                14.  Material Modifications to the Rights of
                Security Holders and Use of Proceeds
              
              51Item
                15.  Controls and Procedures
              
              51Item
                16A.  Audit Committee Financial
                Expert
              
              51Item
                16B.  Code of Ethics
              
              51Item
                16C.  Principal Accountant Fees and
                Services
              
              52Item
                16D.  Exemptions from the Listing Standards
                for Audit Committees
              
              52Item
                16E.  Purchases of Equity Securities by the
                Issuer and Affiliated Purchases
              
              52Item
                17.  Financial Statements
              
              52Item
                18.  Financial Statements
              
              52Item
                19.  Financial Statements and
                Exhibits
              
              52
 
  
  
   
 
 
  **EXPLANATORY
        NOTE**
  *The
        dollar amounts presented in this Annual Report on Form 20-F are in Canadian
        currency unless otherwise noted (CDN$1.00 =*  ***U.S.
        $0.9264 on May 25, 2007*** ), *and
        are presented in accordance with accounting principles generally accepted
        in
        Canada.* Historic
        rates of exchange appear in Part I, “Item 3 — Key Information, Selected
        Financial Data.” The material differences between Canadian and U.S. generally
        accepted accounting principles (“GAAP”) which would bear upon NovAtel Inc.’s,
        (hereinafter referred to as “NovAtel” or “the Company”), financial statements
        and, more particularly, income applicable to shareholders’ equity are disclosed
        in Note 20 of Notes to Consolidated Financial Statements *.*
  *Certain
        statements in this Annual Report, including those about the Company’s future
        plans and intentions, financial guidance, risk factors, long-term growth
        prospects, levels of activity or other future events, are forward-looking
        statements within the meaning of the Private Securities Litigation Reform
        Act of
        1995. These forward-looking statements are not based on historical facts
        but
        rather on management’s current expectations regarding NovAtel’s future growth,
        results of operations, performance, future capital and other expenditures,
        competitive advantages, business prospects and opportunities. Wherever possible,
        words such as “anticipate”, “believe”, “expect”, “may”, “could”, “potential”,
“intend”, “estimate”, “should”, “plan”, “predict”, “forecast” or the negative or
        other variations of these words, or similar words or phrases, have been used
        to
        identify these forward-looking statements. Forward-looking statements involve
        significant known and unknown risks, uncertainties and assumptions. Many
        factors
        could cause actual results, performance or achievements to differ materially
        from the results discussed or implied in the forward-looking statements,
        including operating results of the Company’s joint venture Point, Inc.
        (“Point”), U.S. dollar to Canadian dollar exchange rate fluctuations,
        establishing and maintaining effective distribution channels, certification
        and
        market acceptance of NovAtel’s new products, the impact and timing of large
        orders, dependence on key customers, credit risks of customers and the Company’s
        joint venture Point, pricing pressures in the market and other competitive
        factors, maintaining technological leadership, timing of revenue recognition
        in
        connection with certain contracts, the ability to maintain supply of products
        from subcontract manufacturers, the procurement of components to build products,
        product defects, the impact of industry consolidations, vulnerability to
        general
        economic, market and business conditions, competition, environmental and
        other
        actions by governmental authorities, reliance on key personnel and other
        factors
        described in this Annual Report and other SEC filings, many of which are
        beyond
        the control of NovAtel. These factors should be considered carefully and
        undue
        reliance should not be placed on the forward-looking statements. These
        forward-looking statements are made as of the date of this Annual Report,
        and
        NovAtel assumes no obligation to update or revise them to reflect new events
        or
        circumstances.*
  
 ii
  **PART
        I**
  **Item
        1.** **Identity
        of Directors, Senior Management and Advisers**
  Not
        applicable.
  **Item
        2.** **Offer
        Statistics and Expected Timetable**
  Not
        applicable.
  **Item
        3.** **Key
        Information**
  **A.** **Selected
        Financial Data**
  (a) Summary
        Financial Information
  The
        following table sets forth selected financial data of the Company for the
        periods indicated. The selected financial data as at December 31, 2005 and
        2006
        and for the years ended December 31, 2004, 2005 and 2006 have been derived
        from
        the Company’s audited consolidated financial statements, which appear elsewhere
        in this Annual Report. The selected financial data as at and for the years
        ended
        December 31, 2002 and 2003 and as at December 31, 2004 have been derived
        from
        our audited consolidated financial statements, not included in this Annual
        Report. The table sets forth, in Canadian dollars and U.S. dollars, the selected
        financial data as prepared in accordance with Canadian generally accepted
        accounting principles (“Canadian GAAP”). The financial data should be read in
        conjunction with “Item 5 — Operating and Financial Review and Prospects” and the
        Consolidated Financial Statements of the Company and Notes thereto included
        elsewhere in this Annual Report.
  1
   
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(in
                  thousands, except per share data)****Statement
                  of Operations Data (1)**Revenues:Product
                  sales
              
              $
              72,972
              
              $
              59,306
              
              $
              48,802
              
              $
              32,138
              
              $
              26,967NRE
                  fees
              
              
              4,662
              
              
              3,989
              
              
              5,130
              
              
              6,546
              
              
              6,179Total
                  revenues
              
              
              77,634
              
              
              63,295
              
              
              53,932
              
              
              38,684
              
              
              33,146Cost
                  of sales:Cost
                  of product sales
              
              
              27,228
              
              
              22,323
              
              
              19,586
              
              
              14,805
              
              
              11,885Cost
                  of NRE fees
              
              
              2,879
              
              
              2,313
              
              
              2,917
              
              
              3,565
              
              
              4,055Total
                  cost of sales
              
              
              30,107
              
              
              24,636
              
              
              22,503
              
              
              18,370
              
              
              15,940Gross
                  profit
              
              
              47,527
              
              
              38,659
              
              
              31,429
              
              
              20,314
              
              
              17,206Operating
                  expenses:Research
                  and development
              
              
              13,450
              
              
              10,882
              
              
              9,588
              
              
              7,123
              
              
              5,334Selling
                  and marketing
              
              
              7,692
              
              
              6,387
              
              
              5,751
              
              
              5,269
              
              
              5,361General
                  and administration
              
              
              8,009
              
              
              7,082
              
              
              5,312
              
              
              4,280
              
              
              4,045Foreign
                  exchange (gain) loss
              
              
              198
              
              
              255
              
              
              595
              
              
              527
              
              
              (49
              )Share
                  offering costs
              
              
              —
              
              
              —
              
              
              754
              
              
              —
              
              
              —Total
                  operating expenses
              
              
              29,349
              
              
              24,606
              
              
              22,000
              
              
              17,199
              
              
              14,691Operating
                  income
              
              
              18,178
              
              
              14,053
              
              
              9,429
              
              
              3,115
              
              
              2,515Interest
                  income, net
              
              
              1,680
              
              
              787
              
              
              313
              
              
              174
              
              
              84Other
                  expense
              
              
              (86
              )
              
              (72
              )
              
              (67
              )
              
              (137
              )
              
              (377
              )Benefit
                  of investment tax credits
              
              
              —
              
              
              1,592
              
              
              4,356
              
              
              —
              
              
              —Income
                  from continuing operations before income taxes
              
              
              19,772
              
              
              16,360
              
              
              14,031
              
              
              3,152
              
              
              2,222Income
                  taxesCurrent
                  provision
              
              
              341
              
              
              2,046
              
              
              2,328
              
              
              52
              
              
              77Future
                  income tax expense (benefit)
              
              
              (2,061
              )
              
              (2,402
              )
              
              (1,091
              )
              
              —
              
              
              —Total
                  income tax expense (benefit)
              
              
              (1,720
              )
              
              (356
              )
              
              1,237
              
              
              52
              
              
              77Net
                  income from continuing operations (3)
              
              
              21,492
              
              
              16,716
              
              
              12,794
              
              
              3,100
              
              
              2,145Income
                  (loss) from discontinued operations (3)
              
              
              —
              
              
              —
              
              
              21
              
              
              360
              
              
              (648
              )Net
                  income
              
              $
              21,492
              
              $
              16,716
              
              $
              12,815
              
              $
              3,460
              
              $
              1,497Net
                  income (loss) per share (basic):Continuing
                  operations
              
              $
              2.54
              
              $
              2.01
              
              $
              1.59
              
              $
              0.40
              
              $
              0.28Discontinued
                  operations
              
              
              —
              
              
              —
              
              
              —
              
              
              0.05
              
              
              (0.09
              )Net
                  income per share
              
              $
              2.54
              
              $
              2.01
              
              $
              1.59
              
              $
              0.45
              
              $
              0.19Weighted
                  average shares outstanding (basic)
              
              
              8,450
              
              
              8,298
              
              
              8,063
              
              
              7,723
              
              
              7,681Net
                  income (loss) per share (diluted):Continuing
                  operations
              
              $
              2.44
              
              $
              1.91
              
              $
              1.51
              
              $
              0.39
              
              $
              0.27Discontinued
                  operations
              
              
              —
              
              
              —
              
              
              —
              
              
              0.04
              
              
              (0.08
              )Net
                  income per share
              
              $
              2.44
              
              $
              1.91
              
              $
              1.51
              
              $
              0.43
              
              $
              0.19Weighted
                  average shares outstanding (diluted)
              
              
              8,825
              
              
              8,763
              
              
              8,500
              
              
              7,983
              
              
              7,824
  *Footnotes
        appear on pages 4-8*
  2
   
 **Year
                  Ended**
                **December
                  31, 2006****(in
                  thousands, except**
                **per
                  share data)****(U.S.
                  $ equivalent) (2)**Revenues:Product
                  sales
              
              $
              67,601NRE
                  fees
              
              
              4,319Total
                  revenues
              
              
              71,920Cost
                  of sales:Cost
                  of product sales
              
              
              25,224Cost
                  of NRE fees
              
              
              2,667Total
                  cost of sales
              
              
              27,891Gross
                  profit
              
              
              44,029Operating
                  expenses:Research
                  and development
              
              
              12,460Selling
                  and marketing
              
              
              7,126General
                  and administration
              
              
              7,420Foreign
                  exchange loss
              
              
              183Total
                  operating expenses
              
              
              27,189Operating
                  income
              
              
              16,840Interest
                  income, net
              
              
              1,556Other
                  expense
              
              
              (79
              )Benefit
                  of investment tax credits
              
              
              ―Income
                  from continuing operations before income taxes
              
              
              18,317Income
                  taxesCurrent
                  provision
              
              
              316Future
                  income tax expense (benefit)
              
              
              (1,909
              )Total
                  income tax expense (benefit)
              
              
              (1,593
              )Net
                  income
              
              $
              19,910Net
                  income per share (basic):Continuing
                  operations
              
              $
              2.35Discontinued
                  operations
              
              
              ―Net
                  income per share
              
              $
              2.35Weighted
                  average shares outstanding (basic)
              
              
              8,450Net
                  income per share (diluted):Continuing
                  operations
              
              $
              2.26Discontinued
                  operations
              
              
              ―Net
                  income per share
              
              $
              2.26Weighted
                  average shares outstanding (diluted)
              
              
              8,825
  *Footnotes
        appear on pages 4-8*
  3
   
 **December
                  31,**
              
              **U.S.
                  $**
                **Equivalent**
                **December
                  31,**
                **2006(2)****(Canadian
                  $)****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****($
                  thousands)****Balance
                  Sheet Data(1):**Working
                  capital
              
              $
              61,854
              
              $
              44,270
              
              $
              30,322
              
              $
              17,978
              
              $
              14,372
              
              $
              57,302Total
                  assets
              
              
              96,968
              
              
              71,255
              
              
              52,946
              
              
              35,572
              
              
              30,890
              
              
              89,831Long-term
                  liabilities
              
              
              691
              
              
              —
              
              
              —
              
              
              212
              
              
              98
              
              
              640Total
                  shareholders’ equity
              
              
              81,589
              
              
              58,117
              
              
              40,093
              
              
              25,447
              
              
              20,547
              
              $
              75,584
  (1)  The
        consolidated financial statements have been prepared in accordance with
        generally accepted accounting principles in Canada (Canadian GAAP or Canadian
        principles). The material differences from U.S. generally accepted accounting
        principles (U.S. GAAP or U.S. principles) are described below.
  (2)  Canadian
        dollar amounts for 2006 have been translated into U.S. dollars solely for
        the
        convenience of the reader, at the rate of U.S. $0.9264 per CDN $1.00, which
        was
        the exchange rate as of May 25, 2007. These translations are not necessarily
        representative of the amounts that would have been reported if the Company
        historically had reported its financial statements in U.S. dollars. In addition,
        the rates utilized are not necessarily indicative of the rates in effect
        at any
        other time.
  (3)  As
        of
        December 31, 2006, the Company owned a 70% equity interest in Mezure, Inc.,
        a
        company that had been developing a GPS, wireless communication and Internet
        based product for deformation monitoring of manmade and natural structures.
        On
        April 8, 2003, the shareholders of Mezure voted unanimously to proceed with
        a
        Chapter 7 bankruptcy filing for Mezure, which was concluded on September
        24,
        2003. Consequently, the Company is treating Mezure as a discontinued operation.
  **Canadian
        GAAP to U.S. GAAP Reconciliation ($ thousands)**
  ***i)*** ***Deferred
        Development Costs***
  As
        of
        December 31, 2006, the Company had deferred $1,253 of development costs,
        net of
        accumulated amortization related to the development of a certified aviation
        GPS
        receiver. In 2006, the Company deferred $nil of development costs ($nil in
        2005,
        $218 in 2004, $157 in 2003, and $125 in 2002) in accordance with Canadian
        GAAP.
        Under U.S. GAAP, these costs would be expensed as incurred as research and
        development costs.
  In
        2006,
        the Company amortized $404 of deferred development costs ($538 in 2005, $416
        in
        2004, $196 in 2003, and $57 in 2002) in accordance with Canadian GAAP. Under
        U.S. GAAP, these costs would have been expensed in the periods when the
        originating expenditures were incurred.
  In
        addition, for Canadian GAAP purposes, in connection with the recognition
        of
        prior year’s investment tax credits, the Company reduced the deferred
        development costs by $164 in 2005. Under U.S. GAAP, this amount would have
        been
        accounted for as an expense when the originating expenditures were incurred.
  ***ii)*** ***Stock-Based
        Compensation***
  At
        December 31, 2006, the Company had issued 567 unexercised options to employees and directors to purchase common shares
        under
        its stock-based compensation plans (see Note 11).
  On
        January 1, 2004, the Company established a new Long Term Incentive Plan
        (“LTI Plan”), which authorized the grant of approximately 44 phantom shares to
        employees of the Company. All grants of phantom shares under the LTI Plan
        have a
        three-year cliff vesting and vested on December 31, 2006. Payments under
        the LTI Plan are made in cash.
  Effective
        January 1, 2004, under Canadian GAAP the Company adopted the fair value method
        of accounting for stock options awarded to employees on or after January
        1, 2002
        as required by amended CICA Handbook Section 3870 *Stock-Based
        Compensation and Other Stock-Based Payments* .
        As
        permitted by the transitional provisions of Section 3870, the change was
        adopted
        retroactively without restatement. Under Section 3870, the fair value of
        stock
        options is recognized over the applicable vesting period as stock-based
        compensation expense and a credit to contributed surplus. When options are
        exercised, the proceeds are credited to share capital, and the applicable
        fair
        value is reclassified from contributed surplus to share capital. Retroactive
        application of Section 3870 resulted in the opening balances as at January
        1,
        2004 of deficit, contributed surplus and share capital being increased by
        $456,
        $390 and $66, respectively, as though the fair value method had been applied
        since January 1, 2002.
  In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004),
“Share-Based Payment” (“SFAS 123R”), which requires all share-based payments to
        employees, including grants of employee stock options, to be recognized as
        compensation expense in the consolidated financial statements based on their
        fair values. SFAS 123R also modifies certain measurement and expense recognition
        provisions of SFAS 123 that impact the Company, including the requirement
        to
        estimate employee forfeitures each period when recognizing compensation expense
        and requiring that the initial and subsequent measurement of the cost of
        liability-based awards each period be based on the fair value (instead of
        the
        intrinsic value) of the award, resulting in differences from Canadian GAAP.
        Prior to the adoption of SFAS 123R, the Company accounted for stock-based
        compensation to employees and directors using the intrinsic value method
        in
        accordance with APB Opinion No. 25 as allowed under Statement of Financial
        Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”). Under the intrinsic value method, no stock-based compensation
        expense related to the Company’s stock options had been recognized in the
        Company’s consolidated statement of operations for U.S. GAAP purposes, as the
        exercise price of the Company’s stock options granted to employees and directors
        equaled the fair market value of the underlying stock at the date of
        grant.
  4
 Effective
        January 1, 2006, under U.S. GAAP, the Company adopted SFAS 123R using the
        modified prospective transition method and accordingly, the results of prior
        periods have not been restated. As
        a
        result, the Company’s financial statements for fiscal periods after
        December 31, 2005 include stock-based compensation expenses that are not
        comparable to financial statements of fiscal periods prior to January 1,
        2006.
        SFAS 123R requires stock-based compensation to be estimated using the fair
        value
        on the date of grant using an option pricing model. Under the modified
        prospective method, the Company expenses the value of the portion of the
        stock
        based awards that is expected to vest over the related employees’ requisite
        service periods for U.S. GAAP purposes. The adoption of SFAS 123R under U.S.
        GAAP created differences in the accounting treatment of stock based compensation
        from Canadian GAAP, relating primarily to the application of forfeiture
        rates.
  The
        Company estimates the fair value of stock options using the Black-Scholes
        option
        pricing model, consistent with the provisions of SFAS 123R, and the Company’s
        prior period pro forma disclosures of net income, including share-based
        compensation. The key input assumptions used to estimate the fair value of
        stock
        options include the grant price of the award, the expected term of the options,
        the expected volatility of the Company’s stock, the risk-free rate, annual
        forfeiture rate and the Company’s dividend yield. The expected term of the
        options is estimated based on historical grants with similar vesting periods.
        The expected volatility of the Company’s stock is estimated using the daily
        historical stock prices over a prior period in relation to the expected term
        of
        the award. The Company believes that the Black-Scholes option pricing model
        utilized to develop the underlying assumptions is appropriate in calculating
        the
        fair values of the Company’s stock options.
  The
        phantom shares are accounted for as a liability award under U.S. GAAP and
        are
        remeasured to fair value at the end of each reporting period. The Company
        estimates the fair value of the phantom shares granted under the LTI Plan
        based
        on an option pricing model (Black-Scholes). The fair value estimated using
        the
        Black-Scholes model is consistent with the market value of the Company’s common
        shares at each reporting date.
  SFAS
        123R
        requires forfeitures to be estimated at the time of grant in order to estimate
        the amount of share-based awards that will ultimately vest. As share-based
        compensation expense recognized in the consolidated statement of operations
        for
        the year ended December 31, 2006 is based on awards ultimately expected to
        vest,
        it has been reduced for estimated forfeitures. Prior to the adoption of SFAS
        123R, the Company recognized forfeitures as they occurred. The Company recorded
        a gain of $23 as a cumulative effect of an accounting change, as a result
        of the
        change in accounting for forfeitures under SFAS 123R. In the Company’s pro forma
        information required under SFAS 123 for the period prior to fiscal 2006,
        the
        Company accounted for forfeitures as they occurred.
  As
        of
        December 31, 2006, the annual forfeiture rates applied to the Company’s stock
        option plans and the phantom share awards were 2% and 2.4%,
        respectively.
  Stock-based
        compensation under U.S. GAAP recorded for the years ended December 31 was
        as
        follows:
  **Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Stock-based
                  compensation:**Stock
                  option expense
              
              $
              969
              
              $
              ―
              
              $
              ―
              
              $
              ―
              
              $
              ―Phantom
                  share expense
              
              
              1,051
              
              
              347
              
              
              615
              
              
              ―
              
              
              ―Total
                  stock-based compensation expense reported
              
              $
              2,020
              
              $
              347
              
              $
              615
              
              $
              ―
              
              $
              ―
  
 The
        compensation cost that has been charged against income for the Company’s
        share-based award plans was $2,020 for the year ended December 31, 2006 ($347
        and $615, respectively for the years ended December 31, 2005 and 2004). The
        total income tax benefit recognized in the statements of operations for
        stock-based award compensation was nil for the years ended December 31, 2006,
        2005 and 2004.
  As
        of
        December 31, 2006, there was $2,687 of unrecognized compensation cost related
        to
        the Company’s stock option plans that is expected to be recognized over a
        weighted average period of 3.0 years. As of December 31, 2006, there was
        $ nil of total
        unrecognized compensation cost related to the Company’s phantom share awards
        granted.
  Cash
        received from exercise under all share-based payment arrangements was $1,041
        for
        the year ended December 31, 2006 ($721 and $1,505 respectively for the years
        ended December 31, 2005 and 2004). Tax benefits realized by the Company related
        to these exercises were $nil.
  ***iii)*** ***Derivatives
        and Hedging Activities***
  The
        Company has historically entered into forward foreign exchange contracts
        to
        manage its exposure to foreign currency fluctuations. Under U.S. GAAP, the
        accounting for derivative instruments and hedging activities is contained
        in the
        Statement of Financial Accounting Standard (“SFAS”) No. 133, as amended by SFAS
        137, SFAS 138 and SFAS 149 (“SFAS 133”). SFAS 133 establishes accounting and
        reporting standards requiring that all derivative instruments be recorded
        in the
        balance sheet as either an asset or a liability measured at fair value and
        requires that changes in the fair value be recognized currently in earnings
        unless specific hedge accounting criteria are met. For cash flow hedges,
        changes
        in the fair value of the derivative instrument are recognized in net earnings
        in
        the same period as the hedged item and any changes in the fair value prior
        to
        that period are recognized in other comprehensive income. For fair value
        hedges,
        both the derivative instrument and the underlying commitment are recognized
        on
        the balance sheet at their fair value and any changes in the fair value are
        recognized currently in net earnings. Prior to July 18, 2006, the Company’s
        foreign exchange contracts have been accounted for as cash flow hedges. Foreign
        exchange contracts entered into after July 18, 2006 have been recorded at
        fair
        value and any changes in fair value have been recognized in net
        earnings.
  5
 ***iv)*** ***Investment
        in Joint Venture***
  The
        accounts of the Company’s 49% joint venture interest in Point are
        proportionately consolidated as required under Canadian GAAP. Under U.S.
        GAAP,
        proportionate consolidation is not permitted, and the Company’s investment in
        this joint venture would be accounted for using the equity method. As permitted
        by SEC guidance, the effects of this difference in accounting principles
        have
        not been reflected in the accompanying tables.
  In
        2002,
        the Company recognized a gain of $121 related to the reduction of its equity
        interest in Mezure from approximately 74% to 70%. Under U.S. GAAP, the Company
        would have reflected the effects of this transaction as a direct increase
        in
        shareholders’ equity of $160 after consideration of the impact of previous U.S.
        GAAP adjustments.
  In
        addition, in 2003, the Company recognized a gain of $379 related to the
        liquidation of the remaining assets and liabilities of Mezure. Under U.S.
        GAAP,
        this gain would have been $571, since $192 characterized as goodwill under
        Canadian GAAP would have been expensed on acquisition in 2001.
  ***v)*** ****** ***Intangibles
        Related to Acquisition of CMC Electronics’ OEM GPS Business***
  On
        May
        14, 2003, the Company acquired the CMC Electronics non-aviation GPS product
        line. The fair value of the net assets acquired included $497 in intangibles,
        comprised primarily of technology, product design, customer relationships
        and an
        established market presence. Under U.S. GAAP, when accounting for transfer
        of
        assets between entities under common control, the entity that receives the
        net
        assets or the equity interest would initially recognize the assets and
        liabilities transferred at their carrying amounts at the date of transfer.
        Any
        excess of consideration given over the controlling shareholders’ carrying value
        would be accounted for as a reduction of equity.
  ***vi)*** ***Classification
        of Employee Relocation and Termination Costs***
  In
        2002,
        the Company included $128 of employee relocation and $84 of employee termination
        costs within other expense in the consolidated statement of operations. Under
        U.S. GAAP, these costs would be included within operating expenses.
  ***vii)*** ****** ***Provision
        for Future Warranty Costs***
  The
        changes in the provision for future warranty costs during each of the five
        years
        ended December 31, are as follows:
 
 **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Opening
                  balance, beginning of period
              
              $
              693
              
              $
              538
              
              $
              410
              
              $
              344
              
              $
              285Additions
                  to provision
              
              
              560
              
              
              382
              
              
              312
              
              
              220
              
              
              203Costs
                  incurred
              
              
              (437
              )
              
              (227
              )
              
              (184
              )
              
              (154
              )
              
              (144
              )Ending
                  balance, end of period
              
              $
              816
              
              $
              693
              
              $
              538
              
              $
              410
              
              $
              344
  ***viii)*** ***Investment
        Tax Credits***
  Under
        Canadian GAAP, the Company uses the cost reduction method to account for
        its
        investment tax credits. The investment tax credits relate to certain research
        and development expenses and are recognized when there is reasonable assurance
        that the Company will be able to realize the benefit of these credits. In
        2005,
        the Company recognized $1,756 ($4,356 in 2004, $nil in 2003) of investment
        tax
        credits, of which $1,592 was recorded on the statement of operations as a
        benefit of prior years’ investment tax credits and $164 was recorded as a
        reduction of deferred development costs on the balance sheet.
  Under
        U.S. GAAP, the Company would use the flow through method to account for its
        investment tax credits and would record the recognition of the $1,756 of
        investment tax credits in 2005 as a reduction of the current income tax
        provision. Under U.S. GAAP, for the year ended December 31, 2004, the Company
        would record the recognition of the $4,356 of investment tax credits as a
        $2,258
        reduction of the current income tax provision and as a $2,098 increase in
        future
        income tax benefit.
  The
        net
        effect of these reconciling items would be an increase in net income from
        continuing operations of $164 in 2005 under U.S. GAAP.
  ***ix)*** ***Comprehensive
        Income***
  U.S.
        GAAP
        utilizes the concept of comprehensive income, which includes net income and
        other comprehensive income. Currently, there is no similar concept under
        Canadian GAAP. Other comprehensive income represents the change in equity
        during
        the period from transactions and other events from non-owner sources and
        includes such items as changes in the fair value of cash flow hedges.
  ***x)*** ***Summary
        of the Differences between Canadian and U.S. GAAP***
  The
        effects of the above-noted differences between U.S. and Canadian GAAP produces
        the following differences on the presented statement of operations data:
  6
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Net
                  income from continuing operations — Canadian GAAP**
              
              $
              21,492
              
              $
              16,716
              
              $
              12,794
              
              $
              3,100
              
              $
              2,145Adjustments
                  to U.S. GAAP:Deferred
                  development costs (i)
              
              
              —
              
              
              —
              
              
              (218
              )
              
              (157
              )
              
              (125
              )Amortization
                  of deferred development costs (i)
              
              
              404
              
              
              538
              
              
              416
              
              
              196
              
              
              57Stock-based
                  compensation expense (ii)
              
              
              44
              
              
              587
              
              
              326
              
              
              —
              
              
              —Reduction
                  of deferred development costs related to recognition of investment
                  tax
                  credits
              
              
              —
              
              
              164
              
              
              —
              
              
              —
              
              
              —Amortization
                  of intangibles acquired from CMC Electronics (v)
              
              
              125
              
              
              124
              
              
              124
              
              
              62
              
              
              —**Net
                  income from continuing operations — U.S. GAAP**
              
              
              22,065
              
              
              18,129
              
              
              13,442
              
              
              3,201
              
              
              2,077Net
                  income (loss) from discontinued operations — Canadian GAAP
              
              
              —
              
              
              —
              
              
              21
              
              
              360
              
              
              (648
              )Adjustments
                  to U.S. GAAP:Gain
                  on liquidation of Mezure, Inc. (iv)
              
              
              —
              
              
              —
              
              
              —
              
              
              192
              
              
              —Gain
                  on dilution of equity in Mezure, Inc. (iv)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (121
              )Income
                  (loss) from discontinued operations — U.S. GAAP
              
              
              
              
              
              —
              
              
              21
              
              
              552
              
              
              (769
              )**Net
                  income before cumulative effect of accounting change**
              
              
              22,065
              
              
              18,129
              
              
              13,463
              
              
              3,753
              
              
              1,308Cumulative
                  effect of accounting change (ii)
              
              
              23
              
              
              —
              
              
              —
              
              
              —
              
              
              —**Net
                  income - U.S. GAAP**
              
              
              22,088
              
              
              18,129
              
              
              13,463
              
              
              3,753
              
              
              1,308Net
                  unrealized gain (loss) on foreign exchange contracts (iii)
              
              
              (132
              )
              
              192
              
              
              179
              
              
              —
              
              
              (48
              )Reclassification
                  to income of gains and losses on cash flow hedges
              
              
              (192
              )
              
              (179
              )
              
              —
              
              
              48
              
              
              (1
              )**Comprehensive
                  income (loss)**
              
              $
              21,764
              
              $
              18,142
              
              $
              13,642
              
              $
              3,801
              
              $
              1,259
  Net
        income per share as computed under Canadian and U.S. GAAP is as set forth
        below
        for the following periods:
 
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Net
                  income per share from continuing operations**Canadian
                  GAAP — basic
              
              $
              2.54
              
              $
              2.01
              
              $
              1.59
              
              $
              0.40
              
              $
              0.28U.S.
                  GAAP — basic
              
              $
              2.61
              
              $
              2.18
              
              $
              1.67
              
              $
              0.41
              
              $
              0.27Canadian
                  GAAP — diluted
              
              $
              2.44
              
              $
              1.91
              
              $
              1.51
              
              $
              0.39
              
              $
              0.27U.S.
                  GAAP — diluted
              
              $
              2.50
              
              $
              2.07
              
              $
              1.58
              
              $
              0.40
              
              $
              0.27
  
 **Year
                  Ended December 31,****Net
                  income per share**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Canadian
                  GAAP — basic
              
              $
              2.54
              
              $
              2.01
              
              $
              1.59
              
              $
              0.45
              
              $
              0.19U.S.
                  GAAP — basic
              
              $
              2.61
              
              $
              2.18
              
              $
              1.67
              
              $
              0.49
              
              $
              0.17Canadian
                  GAAP — diluted
              
              $
              2.44
              
              $
              1.91
              
              $
              1.51
              
              $
              0.43
              
              $
              0.19U.S.
                  GAAP — diluted
              
              $
              2.50
              
              $
              2.07
              
              $
              1.58
              
              $
              0.47
              
              $
              0.17
  The
        reconciliation of the selected consolidated financial data between U.S. and
        Canadian GAAP produces the following differences on the presented balance
        sheet
        data:
 
 7
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****Total
                  Assets**Canadian
                  GAAP
              
              $
              96,968
              
              $
              71,255
              
              $
              52,946
              
              $
              35,572
              
              $
              30,890Adjustments
                  to U.S. GAAP:Deferred
                  development costs (i)
              
              
              (1,253
              )
              
              (1,657
              )
              
              (2,359
              )
              
              (2,557
              )
              
              (2,596
              )Fair
                  value of financial instruments (iii)
              
              
              (132
              )
              
              192
              
              
              179
              
              
              —
              
              
              (48
              )Write
                  off of development related costs on Mezure acquisition (iv)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (192
              )Reduction
                  of intangibles acquired from CMC Electronics to carrying
                value (v)
              
              
              (57
              )
              
              (182
              )
              
              (306
              )
              
              (430
              )
              
              —U.S.
                  GAAP
              
              $
              95,526
              
              $
              69,608
              
              $
              50,460
              
              $
              32,585
              
              $
              28,054**Total
                  Shareholders’ Equity**Canadian
                  GAAP
              
              $
              81,589
              
              $
              58,117
              
              $
              40,093
              
              $
              25,447
              
              $
              20,547Adjustments
                  to U.S. GAAP:Deferred
                  development costs (i)
              
              
              (1,253
              )
              
              (1,657
              )
              
              (2,359
              )
              
              (2,557
              )
              
              (2,596
              )Write
                  off of development related costs on Mezure acquisition (iv)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (192
              )Stock
                  based compensation (ii)
              
              
              16
              
              
              —
              
              
              —
              
              
              —
              
              
              —Reduction
                  of intangibles acquired from CMC Electronics to carrying
                value (v)
              
              
              (492
              )
              
              (492
              )
              
              (492
              )
              
              (492
              )
              
              —Amortization
                  of intangibles acquired from CMC Electronics (v)
              
              
              435
              
              
              310
              
              
              186
              
              
              62
              
              
              —U.S.
                  GAAP before other comprehensive income
              
              $
              80,295
              
              $
              56,278
              
              $
              37,428
              
              $
              22,460
              
              $
              17,759Accumulated
                  other comprehensive income (loss)
              
              
              (132
              )
              
              192
              
              
              179
              
              
              —
              
              
              (48
              )U.S.
                  GAAP including accumulated comprehensive income
              
              $
              80,163
              
              $
              56,470
              
              $
              37,607
              
              $
              22,460
              
              $
              17,711
  (b) Canadian
        and U.S. Dollar Exchange Rate
  The
        following table sets forth, for each period presented, the high, low and
        average
        exchange rates during the indicated period and the exchange rates at the
        end of
        the indicated period for one Canadian dollar, expressed in U.S. dollars,
        based
        on the noon buying rate in New York City for cable transfers payable in Canadian
        dollars as certified for customs purposes by the Federal Reserve Bank of
        New
        York:
   **U.S.
                  Dollars Per Canadian Dollar**
                **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Average
              
              $
              0.8821
              
              $
              0.8254
              
              $
              0.7682
              
              $
              0.7139
              
              $
              0.6368High
              
              
              0.9100
              
              
              0.8690
              
              
              0.8493
              
              
              0.7738
              
              
              0.6619Low
              
              
              0.8528
              
              
              0.7872
              
              
              0.7158
              
              
              0.6349
              
              
              0.6200Period
                  end
              
              
              0.8581
              
              
              0.8579
              
              
              0.8310
              
              
              0.7738
              
              
              0.6329
  
 **Month
                  Ended****April**
                **2007**
              
              **March**
                **2007**
              
              **February**
                **2007**
              
              **January**
                **2007**
              
              **December**
                **2006**
              
              **November**
                **2006**High
              
              $
              0.9035
              
              $
              0.8673
              
              $
              0.8631
              
              $
              0.8586
              
              $
              0.8760
              
              $
              0.8869Low
              
              $
              0.8633
              
              $
              0.8467
              
              $
              0.8437
              
              $
              0.8457
              
              $
              0.8582
              
              $
              0.8715
  On
        May
        25, 2007, the exchange rate was U.S. $0.9264 per CDN $1.00.
  (c) Dividends
  The
        Company has not paid any cash dividends since its inception. The Board of
        Directors may pay cash dividends in the foreseeable future, but intends to
        retain the majority of earnings, if any, for use in its business operations.
  8
 **B.** **Capitalization
        and Indebtedness**
  Not
        applicable.
  **C.** **Reasons
        for the Offer and Use of Proceeds**
  Not
        applicable.
  **D.** **Risk
        Factors**
  *In
        addition to the other information set forth in this Annual Report, the following
        risk factors should be considered carefully in evaluating the Company. This
        Annual Report contains certain forward-looking statements and intentions.
        The
        cautionary statements made in this Annual Report should be read as being
        applicable to all related forward-looking statements wherever they appear
        in
        this Annual Report. The Company’s actual results could differ materially from
        those discussed here. Factors that could cause or contribute to such differences
        include those discussed below, as well as those discussed elsewhere in this
        Annual Report.*
  *The
        Company’s operating results are susceptible to fluctuations.*
  NovAtel’s
        results of operations have fluctuated and can be expected to continue to
        fluctuate on a periodic basis as a result of a number of factors which affect
        revenue, gross margin and operating expenses. Annual and quarterly revenues
        have
        fluctuated because of a number of factors, including fluctuations in demand
        for
        existing products, the rate of development of new products, the degree of
        market
        acceptance of new products, increased competition, acquisition of new product
        lines, timing of major contracts, U.S. dollar to Canadian dollar exchange
        rates,
        operating results of subsidiaries and joint ventures, certification and market
        acceptance of new products, impact and timing of large orders, pricing pressures
        in the market, establishing and maintaining effective distribution channels,
        fluctuations in non-recurring engineering (“NRE”) fees, seasonality and other
        factors affecting customer purchase patterns and the timing of industry trade
        shows.
  Gross
        margin as a percentage of revenue varies primarily as a result of product
        sales
        mix, the proportion of total revenue comprised of NRE revenue, changes in
        materials and contract manufacturing costs, liquidation of discontinued
        inventory, and absorption of fixed manufacturing costs.
  A
        shortfall from anticipated revenue, lower gross margins or higher than expected
        expenses could adversely affect results of operations. In addition, if NovAtel
        were to receive a major contract, the Company’s expenditures required to support
        such a contract would likely increase. If revenue from the contract were
        delayed
        for any reason, including cancellation or deferral of the contract, the
        Company’s results of operations could be adversely affected. See “Item 5 —
Operating and Financial Review and Prospects, Operating Results.”
  *If
        the Company’s product innovations and enhancements are not successful, the
        Company’s revenue growth and results of operations may be adversely impacted.*
  Although
        NovAtel expects to make significant investments in research and development
        to
        continue to enhance existing products, develop new products which incorporate
        new and existing technologies and achieve market acceptance for such products,
        there can be no assurance that such new products or product enhancements
        will be
        successfully developed or, if developed, that any such new products or product
        enhancements will be developed in time to capture market opportunities or
        achieve a significant or sustainable level of market acceptance in new and
        existing markets. The development of new, technologically advanced products
        and
        product enhancements is a complex and uncertain process requiring accurate
        anticipation of technological and market trends. Any inability on NovAtel’s part
        to successfully define, develop and introduce new products and product
        enhancements may materially adversely affect its growth potential and results
        of
        operations.
  In
        addition, development and manufacturing schedules for technology products
        are
        difficult to predict, and there can be no assurance that NovAtel will achieve
        timely initial customer shipments of new products. The timely availability
        of
        these products in the market place and their acceptance by customers are
        important to the future success of NovAtel. NovAtel has previously experienced
        delays in shipping certain of its products and any future delays, whether
        due to
        manufacturing delays, product design and development delays, lack of market
        acceptance, delays in any required regulatory approval, or otherwise, could
        adversely affect customer acceptance of its products and have a material
        adverse
        effect on NovAtel’s business, financial condition and results of operations.
        From time to time, NovAtel or its competitors may announce new products,
        capabilities or technologies that have the potential to replace or shorten
        the
        life cycles of its existing products. No assurance can be given that
        announcements of currently planned or other new products will not cause
        customers to defer or stop purchasing NovAtel products until NovAtel or its
        competitors’ new products become available. In addition, certain of NovAtel’s
        products must pass governmental and similar certifications before they can
        be
        sold. Any inability or delay in obtaining such certifications could have
        a
        material adverse effect on NovAtel’s business, financial condition and results
        of operations. See “Item 4 — Information on the Company, Business Overview —
Research and Development.”
  *The
        Company is subject to exchange rate fluctuations which could have a material
        effect on the Company’s revenues and results of operations.*
  Over
        95%
        of NovAtel’s revenues have been, and are likely to continue to be, realized in
        currencies other than the Canadian dollar, principally the U.S. dollar. A
        significant portion of NovAtel’s expenses, however, will be incurred in Canadian
        dollars. Accordingly, fluctuations in the exchange rates between the U.S.
        dollar
        and other foreign currencies and the Canadian dollar could have a material
        adverse effect on NovAtel’s revenues and its results from operations. If the
        Canadian dollar increases in value relative to the U.S. dollar, NovAtel’s
        reported Canadian dollar revenues and net income may be materially and adversely
        affected. NovAtel uses forward foreign currency contracts to hedge a portion
        of
        its exposure to fluctuations in the U.S. dollar and Euro. There can be no
        assurance that NovAtel will be successful in such hedging activities.
  *The
        Company relies on a limited number of customers for a substantial portion
        of its
        revenue and any loss of any key customer could have a material effect on
        the
        Company’s business, financial condition or results of operations.*
  In
        2006,
        the Company derived 52% of its revenues from its top four customers, namely
        Leica Geosystems A.G. (“Leica Geosystems”) , Sokkia Co. Ltd. (“Sokkia”)/Point,
        Beijing BDStar, and YC International. The loss of any key customer could
        have a
        material adverse effect on the Company’s business, financial condition and
        results of operations. In addition, should any of the Company’s customers
        experience financial difficulties resulting in an inability to pay amounts
        owing
        to the Company, the Company may experience a material adverse effect on its
        financial condition and results of operations.
  9
 The
        Company’s strategic co-operation agreement with Leica Geosystems provides that
        in the event of the acquisition of control of NovAtel or a significant portion
        of its assets by certain specified competitors of Leica Geosystems, then
        Leica
        Geosystems may, among other things, terminate the agreement and any related
        development or supply agreements. The strategic co-operation agreement between
        the Company and CMC Electronics contains a similar right in favour of CMC
        Electronics which is triggered in circumstances in which control of NovAtel
        or a
        significant portion of its assets are acquired by certain specified competitors
        of CMC Electronics. The termination of either of such agreements could have
        a
        material adverse effect on NovAtel’s business, financial condition and results
        of operations and could cause the Company’s quarterly operating results to
        fluctuate and cause its stock price to decline.
  On
        March
        16, 2007, Topcon Corp. (“Topcon”) and Sokkia announced that they had entered
        into an agreement to form a “combined” entity. Topcon has GNSS technology and
        products that compete with those supplied by NovAtel to Point. The agreement
        under which NovAtel and Sokkia established Point expires in July 2009. The
        loss
        of Point or Sokkia, or both, as a customer or a substantial decrease in sales
        to
        Point could have a material adverse effect on NovAtel’s business, financial
        condition and results from operations and could cause its stock price to
        decline.
  *The
        Company places binding manufacturing orders based on its forecast, and, if
        the
        Company fails to adequately forecast demand for its products, it may incur
        product shortages or excess product inventory.*
  The
        Company’s third-party manufacturers require the Company to place binding
        manufacturing orders in advance of the Company receiving purchase orders
        from
        its customers. This may result in product shortages or excess product inventory
        because the Company cannot easily increase or decrease these purchase orders.
        Obtaining additional supply in the face of product shortages may be costly
        or
        impossible, particularly in the short term, which could prevent the Company
        from
        fulfilling orders. If the Company fails to adequately forecast demand for
        its
        products, it could cause the Company’s operating results to fluctuate and cause
        its stock price to decline.
  *The
        Company relies on suppliers for the components used in its products and
        interruptions in the supply of such components or a significant increase
        in the
        price of one or more components could adversely affect the Company’s business,
        financial condition and results of operations.*
  Most
        of
        the components used in the Company’s products are standard parts readily
        available from more than one supplier. However, a few components are sourced
        from sole suppliers or are custom parts unique to NovAtel, including application
        specific integrated circuits manufactured to proprietary design, radio frequency
        filters, microprocessors and duplexers/filters. While custom parts make the
        Company’s products hard to imitate, they also represent a manufacturing risk due
        to the lack of alternative suppliers. If these parts became unavailable,
        redesign or modification of the Company’s products could be required. In
        addition, suppliers may cease manufacturing common components, replacing
        them
        with newer parts, which require requalification. These risks could cause
        an
        interruption in the Company’s ability to provide a steady stream of products to
        its customers, which would adversely impact the Company’s revenues and results
        of operations.
  NovAtel
        has experienced significant production delays in the past caused by an
        insufficient supply of certain components. If NovAtel is unable to obtain
        a
        sufficient supply of single source components from its current vendors, NovAtel
        may be required to obtain such components from alternative sources at higher
        prices and may experience a delay or interruption in product shipments, which
        could adversely affect its business, financial condition and results of
        operations and damage customer relationships until an alternative source
        can be
        obtained. NovAtel has taken steps to ensure adequate supply of these components
        and commenced product redesigns, as may be required.
  Also,
        a
        significant increase in the price of one or more components could adversely
        affect NovAtel’s business, financial condition and results of operations.
        Although NovAtel has instituted vendor audit programs, there can be no assurance
        that NovAtel will not face problems with the quality of components in the
        future
        that could result in delays in supplies, interrupt shipments and require
        modification of products already sold by NovAtel, any of which could have
        a
        material adverse effect on NovAtel’s business, financial condition and results
        of operations. NovAtel currently relies on three primary subcontractors to
        manufacture the majority of its circuit card assemblies. There can be no
        assurance that the circuit card assembly subcontractors will be able to
        manufacture NovAtel’s products in a timely and reliable manner. The failure by a
        subcontractor to manufacture products in a timely and reliable manner could
        have
        a material adverse effect on NovAtel’s business, financial condition and results
        of operations.
  *The
        Company’s success is dependent upon key personnel.*
  NovAtel’s
        future success depends, in part, on its ability to attract and retain qualified
        technical staff, such as geomatics engineers, electrical engineers (including
        radio frequency engineers, A.S.I.C. engineers and digital signal processing
        engineers), printed circuit board technologists, and marketing, sales and
        executive management. Competition for such personnel is intense and the number
        of persons with relevant experience, particularly in engineering, is limited.
        The Company’s main centre of operation is experiencing a major labour shortage
        due to recent strong economic growth in Calgary. Any inability on the part
        of
        NovAtel to attract and retain additional key employees or the loss of one
        or
        more of its current key employees could materially adversely affect NovAtel’s
        business, financial condition and results of operations.
  *The
        Company may not be able to maintain existing OEM customers and strategic
        relationships or develop distribution channels for the sale of its products
        which would affect the Company’s revenues and results of operations.*
  NovAtel
        sells its OEM products directly to OEM customers and to strategic relationships.
        The Company expects to continue to utilize these relationships to sell to
        companies that will incorporate NovAtel’s products into their products and
        services. Accordingly, the Company’s success will be dependent in large part on
        its ability to continue existing relationships and develop new OEM and other
        third party relationships.
  NovAtel
        cannot predict nor control the extent to which its distribution network will
        be
        successful in marketing products incorporating the Company’s technology. A
        material loss of any of the Company’s key OEM customers or strategic partners,
        either as a result of competitive products offered by other companies or
        products developed internally by these OEM customers and strategic partners,
        or
        their inability to penetrate their respective market segments, could have
        a
        material adverse effect on the Company’s business, financial condition and
        results of operations. There can be no assurance that NovAtel can continue
        to
        attract OEM customers, dealers and strategic partners and any inability to
        do so
        could materially adversely affect the Company’s business, financial condition
        and results of operations.
  NovAtel
        plans to continue expanding its distribution channels. There can be no assurance
        that such expansion will be successfully completed, that the cost of such
        expansion will not exceed the revenues generated, or that the Company’s sales
        and marketing organization will be able to successfully compete against the
        more
        extensive and well-funded sales and marketing operations of many of NovAtel’s
        current or potential competitors. NovAtel’s inability to manage effectively its
        distribution expansion could have a material adverse effect on the Company’s
        business, financial condition and results of operations. See “Item 4 —
Information on the Company, Business Overview — Sales, Marketing and
        Distribution.”
  10
 *The
        Company’s business may be adversely affected by risks associated with
        international operations.*
  NovAtel
        derives a significant portion of its revenues from international sales. NovAtel
        plans to continue to expand its international sales and marketing efforts.
        There
        are a number of risks inherent in NovAtel’s international business activities,
        including unexpected changes in Canadian, United States or other government
        policies concerning the import and export of goods, services and technology
        and
        other regulatory requirements, tariffs and other trade barriers, costs and
        risks
        of localizing products for foreign countries, higher credit risks, potentially
        adverse tax consequences, limits on repatriation of earnings and the burdens
        of
        complying with a wide variety of foreign laws. Fluctuations in currency exchange
        rates could materially adversely affect sales denominated in currencies other
        than the Canadian dollar and cause a reduction in revenues derived from sales
        in
        a particular currency. The financial stability of foreign markets could also
        affect the Company’s international sales. There can be no assurance that such
        factors will not materially adversely affect the revenues from NovAtel’s future
        international sales and, consequently, its results of operations. In addition,
        revenues that NovAtel earns abroad may be subject to taxation by more than
        one
        jurisdiction, which could materially adversely affect its earnings. Furthermore,
        in certain foreign markets, there may be a reluctance to purchase products
        based
        on GPS technology, given the control of GPS by the U.S. Government. Each
        of
        these factors could have an adverse effect on NovAtel’s business, financial
        condition and results of operations. See “Item 4 — Information on the Company,
        Business Overview — Sales, Marketing and Distribution.”
  *Competition
          and increased industry consolidation could adversely affect the Company’s
          business, financial condition and results of operation.*
  NovAtel
            faces competition primarily from other developers and suppliers of
            high-precision positioning component technology which is sold to OEMs
            and system
            integrators for commercial applications, as well as from OEMs who choose
            to
            develop and produce the component technology in-house.  In addition, the
            GNSS industry has been going through a consolidation phase over the past
            several
            years. A number of GNSS companies have been selecting strategic partners
            to
            merge, acquire or form joint businesses in an effort to remain cost competitive
            and meet customer requirements, including the proposed combination of
            Topcon and
            Sokkia announced on March 16, 2007. The Company expects that this consolidation
            phase will continue for the foreseeable future resulting in fewer, but
            larger
            companies. Industry consolidation, by creating stronger and larger potential
            competitors, and industry competition, could have a material adverse effect
            on the Company’s business, financial condition and results of operations.
  *The
          Company may be adversely affected by trends in the markets for Global Navigation
          Satellite System* (“ *GNSS”)
          technology and products.*
  NovAtel
          currently addresses the following markets for the application of GNSS
          technology: surveying and mapping, aerospace, precision agriculture, precise
          timing, marine, unmanned vehicles, mining and machine control. Although
          NovAtel
          believes that these markets have growth potential for sales of GNSS products,
          there can be no assurance that such markets will continue to develop,
          particularly given that GNSS-based systems are still in an early stage
          of
          adoption in some of these markets, or that even if they develop, such markets
          will develop in a direction beneficial to NovAtel’s products or product
          positioning or in the time frame in which NovAtel expects to launch products
          for
          these markets. Any development of these markets away from GNSS technologies
          or
          the GNSS products offered by NovAtel could have a material adverse effect
          on
          NovAtel’s growth potential and its business, financial condition and results of
          operations.
  NovAtel
          also believes that in certain emerging markets its success will depend
          on its
          ability to form and maintain strategic relationships with established system
          providers and industry leaders. NovAtel’s failure to form and maintain such
          relationships, or the pre-emption of such relationships by the actions
          of other
          GNSS competitors, could adversely affect its ability to penetrate emerging
          GNSS
          markets. In addition, NovAtel’s future growth will depend upon the timely
          development of the markets in which it currently competes, its ability
          to
          continue to identify and exploit new markets for its products and its ability
          to
          open new channels of distribution for existing and future products. NovAtel’s
          inability to effectively and efficiently exploit opportunities in new or
          emerging markets through successful product marketing, new and timely product
          introductions and product enhancements and establishing new distribution
          channels for its products could have a material adverse effect on NovAtel’s
          growth, financial condition and results of operations. Further, to the
          extent
          NovAtel builds inventory in anticipation of potential sales in a new market,
          the
          failure of that market to develop could have a material adverse effect
          on
          NovAtel’s business, financial condition and results of operations.
  *The
        price of NovAtel’s common shares has fluctuated substantially over the last few
        years.*
  Since
        January 1, 2006, the closing daily price of NovAtel’s common shares has ranged
        from a low of U.S. $27.42 to a high of U.S. $47.23. A number of factors will
        continue to influence the market price for the common shares, including:
  •  volume
        and timing of orders for NovAtel’s products;
 •  quarterly
        variations in NovAtel’s or its competitors’ results of operations;
 •  the
        announcement and introduction of new products or product enhancements by
        NovAtel
        or its competitors;
 •  the
        announcement of acquisition of companies or technologies by NovAtel or its
        competitors;
 •  product
        liability claims or other litigation;
 •  changes
        in earnings estimates or recommendations by securities analysts; and
 •  general
        market conditions and other factors that may be unrelated to NovAtel’s operating
        performance or the operating performance of its competitors.
  If
        the
        trading market for NovAtel’s stock does not continue to develop, securities
        analysts may not initiate or maintain research coverage of NovAtel and its
        shares, and this could adversely affect the market for NovAtel’s shares.
  *New
        Chinese legislation that restricts the use of certain hazardous substances
        and
        creates requirements for waste electrical and electronic equipment may affect
        sales into China.*
  The
        Company has updated its internal processes to be compliant with the new Chinese
        legislation, which required that the Company’s few remaining products containing
        any hazardous substances be properly marked and documented for shipment to
        China. There is no assurance that the Company will be able to comply with
        future
        regulations governing the use of hazardous materials, which may affect sales
        into China.
  11
 *The
        failure of Point to repay existing loans to the Company or continue as a
        going
        concern could adversely affect the Company’s results of operations.*
  NovAtel
        sells GNSS receivers and antennas to Point which incorporates these receivers
        into surveying systems that are in turn sold through Sokkia’s distribution
        channels and through independent dealers and distributors. NovAtel’s
        consolidated financial statements include its proportionate 49% joint venture
        interest in the accounts of Point. Point is subject to similar types of risks
        as
        the Company.
  Point
        is
        dependent on the Company and Sokkia for product supply, distribution and
        financing. As of December 31, 2006, the Company and Sokkia had collectively
        loaned Point U.S. $1.6 million, U.S. $637,000 of which was advanced by the
        Company. The loans are secured by the assets of Point.
  Should
        Sokkia and the Company discontinue their support, Point’s ability to continue as
        a going concern would be impaired. The consolidated financial statements
        of the
        Company contained elsewhere in this Annual Report do not reflect any adjustments
        that would be required if Point’s operations were discontinued. See “—
Dependence on Key Customers.”
  *The
        Company’s business is dependent on its intellectual property. If the Company’s
        patents or trademarks are declared invalid, the Company’s ability to compete may
        be adversely affected.*
  NovAtel
        currently holds 31 U.S. patents and various related foreign patents which
        expire
        at various dates no earlier than March 31, 2009. NovAtel also has numerous
        pending U.S. and foreign patent applications. NovAtel currently licences
        certain
        peripheral aspects of its technology from third parties. Although NovAtel
        believes that its patents and trademarks have value, there can be no assurance
        that its patents and trademarks, or any additional patents and trademarks
        that
        may be obtained in the future, will provide meaningful protection from
        competition. The value of NovAtel’s products relies substantially on its
        technical innovation in fields in which there are many current patent filings.
        NovAtel recognizes that as new patents are issued or are brought to its
        attention by the holders of such patents, it may be necessary for NovAtel
        to
        withdraw products from the market, negotiate a license from such patent holders,
        redesign its products or pay damages assessed as a result of litigation.
        Such
        events could have a material adverse effect on NovAtel’s business, financial
        condition and results of operations. In addition, the legal costs and
        engineering time required to safeguard intellectual property or to defend
        against litigation could become a significant expense of operations.
  NovAtel
        has received written notices from certain parties alleging patent infringement
        of their respective patents. Other than one claim by Trimble Navigation Limited
        (“Trimble”) for which a settlement agreement was reached, and one other claim by
        ARAM Systems Ltd. (“ARAM”) alleging co-inventorship of a patent, which is
        outstanding, no formal claim has been brought by any of the parties. The
        Company
        believes it has valid defences to these claims should formal proceedings
        be
        commenced. In protecting its intellectual property rights NovAtel has from
        time
        to time sent out letters to third parties regarding potential infringement.
        While no intellectual property right of the Company has been invalidated
        or
        declared unenforceable, there can be no assurance that such rights will not
        be
        invalidated due to the existence of prior art or otherwise held unenforceable.
        See “Item 4 — Information on the Company, Business Overview — Legal
        Proceedings.”
  *The
        Company’s acquisition strategy involves a number of risks, including
        overpayment, failure to adequately integrate an acquired business and
        distraction of management from core operations.*
  In
        order
        to assist in the achievement of growth, NovAtel continues to seek acquisition
        opportunities to complement its existing businesses. NovAtel cannot be certain
        that it will be able to identify suitable acquisition candidates available
        for
        sale at reasonable prices, to consummate any acquisition, or to integrate
        any
        acquired business into its operations successfully. Acquisitions may involve
        a
        number of special risks, circumstances or legal liabilities, some or all
        of
        which may have a material adverse effect on NovAtel’s business, results of
        operations and financial condition. Acquisitions may also result in potentially
        dilutive issuances of equity securities. When evaluating an acquisition
        opportunity, NovAtel cannot be certain that it has correctly identified and
        managed the risks and costs inherent in the business that it is acquiring.
  From
        time
        to time, NovAtel engages in discussions and activities with respect to possible
        acquisitions. At any given time, discussions and activities can be in process
        on
        a number of initiatives, each at different stages of development. While at
        the
        present time NovAtel has no binding agreement or commitment to enter into
        any
        such transaction, in normal course, from time to time, it pursues potential
        acquisitions. NovAtel can provide no assurance that any potential transaction
        will be successfully completed, and, if completed, that the business acquired
        will be successfully integrated into NovAtel’s operations. The failure of
        NovAtel to manage its acquisition strategy successfully could have a material
        adverse effect on NovAtel’s business, results of operations and financial
        condition.
  *The
        products and services provided by the Company could expose the Company to
        product liability and other claims.*
  There
        is
        a risk that NovAtel’s products and services may not perform up to expectations.
        While NovAtel usually contractually limits its liability for damages arising
        from its provision of services, there can be no assurance that the contractual
        limitations will be enforceable in all circumstances or in all jurisdictions.
        Furthermore, litigation, regardless of contractual limitations, could result
        in
        substantial cost to NovAtel, divert management’s attention and resources from
        NovAtel’s operations and result in negative publicity that may impair its
        ongoing marketing efforts. Although NovAtel has general liability insurance,
        there is no assurance that this insurance will cover the claims or that the
        claims will not exceed the insurance limit under its current policies.
  *The
        adoption of new technologies to replace GNSS could adversely affect the
        Company’s business.*
  The
        Company operates in a highly technical market. Technology is constantly
        advancing and changing to meet new demands. NovAtel is unable to determine
        if
        GNSS will be essential in the future due to unpredictable advances in
        technology. There is a risk that GNSS may be replaced with entirely new
        technologies and products which are not foreseeable at this time.
  The
        creation of a new satellite system such as Galileo, and NovAtel’s ability to
        utilize them is also key to the Company’s future. The combination in some cases
        and substitution in others will be a key area that NovAtel must monitor and
        be
        positioned to address.
  12
 *A
        disruption of the GPS satellite network or governmental regulation of this
        network or GPS products could impair the viability of the Company’s business.*
  The
        Company’s products rely on signals from GPS satellites and to a lesser extent
        GLONASS and Galileo satellites. GPS satellites and their ground support systems
        are complex electronic systems subject to electronic and mechanical failures
        and
        possible sabotage. As of December 2006, there are 29 usable satellites, five
        more than the design requirement. The satellites have a limited design life
        of
        between seven and 11 years and the satellites are also subject to damage
        by the
        hostile space environment in which they operate. Of the current constellation
        of
        satellites, 19 are past their design target and five are past their design
        life
        target by six years or more. The repair of damaged or malfunctioning satellites
        is nearly impossible. If a significant number of satellites were to become
        inoperable, there could be a substantial delay before they are replaced with
        new
        satellites. A reduction in the number of operating satellites would impair
        the
        current usefulness of the GPS system or the growth of current and additional
        market opportunities, which, in either case, would adversely affect the
        Company’s business, financial condition and the results of operations. Spare
        satellites have been launched to address these concerns. There can be no
        assurance that the U.S. Government will remain committed to the operation
        and
        maintenance of GPS satellites over a long period of time, or that the policies
        of the U.S. Government for the use of GPS without charge will remain unchanged.
  Prior
        to
        May 2000, the accuracy of GPS was reduced by the distortion of GPS signals
        as a
        result of selective availability (“SA”), which was controlled by the U.S.
        Department of Defense. SA was the activated, intentional system-wide degradation
        of stand alone GPS accuracy from approximately 25 metres to approximately
        100
        metres. The Department of Defense implemented SA in order to deny hostile
        forces
        accurate position, time and velocity information supplied by GPS. In certain
        military applications, classified devices are utilized to decode the SA
        degradation and return accuracies to their original levels. NovAtel has to
        date
        been able to design products that will reduce the degradation that can be
        caused
        by SA. Although the U.S. Government discontinued the use of SA effective
        May
        2000, there can be no assurance that the U.S. Government will not take further
        actions which would adversely affect the use of GPS. These actions could
        include
        various methods of degrading the system, rendering it inoperable or the
        re-implementation of SA by the U.S. Department of Defense in times of military
        action. There can be no assurances that NovAtel would be able to design products
        to compensate for these further actions. In addition, to protect national
        security interests, various U.S. Government agencies have indicated their
        intention to limit or prohibit the use of techniques which compensate for
        SA and
        such limitations or prohibitions could have a material adverse effect on
        the
        Company’s business, financial condition and results of operations. Certain non
        U.S. government organizations have expressed concern regarding the
        susceptibility of GPS equipment to intentional or inadvertent signal
        interference. Such concern could translate into reduced demand for GPS products
        in certain geographic regions.
  The
        European Community and European Space Agency have completed plans and are
        in the
        process of launching full-scale development of Galileo, a system similar
        in
        capability to GPS. NovAtel is actively involved in Galileo receiver development
        activities under contracts funded by the Canadian Space Agency and the European
        Space Agency. There can be no assurance that NovAtel will be able to design
        products compatible with Galileo or that external funding will continue to
        be
        available for such work.
  *The
        Company derives a substantial portion of its revenue from the aviation industry
        and factors that adversely affect the aviation industry generally could
        adversely affect the Company’s financial condition and results of operations.*
  NovAtel
        derives revenue from the Aerospace and Defence market sector, a substantial
        portion of which has been derived from sales to the ground infrastructure
        and
        airborne aviation industry. The aviation industry has only in recent years
        began
        to recover from activities arising from the events of September 11, 2001
        in the
        United States. In addition, as of December 31, 2006, NovAtel deferred $1.3
        million of costs related to the development of a certified aviation GPS
        receiver. A protracted downturn in the aviation industry could result in
        a
        material adverse effect on the Company’s revenue from this market and on
        NovAtel’s ability to recover the deferred development costs which could
        adversely affect its financial condition and results of operations.
  *The
        Company may be unable to utilize certain tax deductions and investment tax
        credits, which could adversely affect the Company’s results of operations.*
  The
        Company’s operations are substantially located in Canada and accordingly, Canada
        is the Company’s main tax jurisdiction. The Company has not recorded a provision
        for current income taxes in Canada, other than for Canadian federal large
        corporations tax, income tax related to Waypoint Consulting Inc.’s (“Waypoint”)
        operations prior to amalgamation with NovAtel and a provision related to
        the
        benefit of income tax credits, due to previously incurred losses, credits
        and
        costs. As of December 31, 2006, the Company had approximately $120 million
        of
        losses, investment tax credits, depreciation and research and development
        costs
        that are available to reduce future taxable income and taxes payable primarily
        in Canada. The Company has determined that the acquisition of a majority
        of its
        Common Shares by CMC Electronics in 1998, BAE SYSTEMS p.l.c.’s acquisition of
        the majority of the common shares of CMC Electronics in November 1999 and
        ONCAP’s acquisition of the majority of the common shares of CMC Electronics in
        April 2001 each constitute an acquisition of control of the Company for Canadian
        income tax purposes. Accordingly, the availability of certain of the Company’s
        Canadian income tax losses, research and development costs, depreciation
        deductible for tax purposes and investment tax credits may be subject to
        limitation. The ultimate availability and amount of these losses, credits
        and
        costs may be dependent upon future Canada Revenue Agency audits.
  *NovAtel
        may incur significant costs to satisfy regulatory requirements relating to
        internal controls over financial reporting.*
  Section
        404 of the Sarbanes-Oxley Act of 2002 requires NovAtel to perform an evaluation,
        including management’s certification of its internal controls over financial
        reporting. Management’s Report is included in this Form 20-F. During 2007,
        NovAtel will be updating its evaluation of internal controls (and any necessary
        remediation) required in an effort to comply with the management certification
        and auditor attestation requirements which will be required in the Company’s
        Form 20-F for the fiscal year ending December 31, 2007. As a result, the
        Company
        expects to incur additional expenses and diversion of management’s time. While
        NovAtel currently anticipates being able to fully implement the requirements
        relating to internal controls and all other aspects of Section 404 in a timely
        fashion, the Company cannot be certain as to the timing of completion of
        its
        evaluation, testing and remediation actions or the impact of the same on
        its
        operations.
  *The
        Company may be subject to litigation and infringement claims that may harm
        its
        business or reputation, be costly and divert management’s attention.*
  The
        technology used by NovAtel in its business may subject the Company to claims
        that the Company infringes on the patents or proprietary rights of others.
        The
        risk of this occurring will tend to increase as the GPS, GLONASS and Galileo
        industry expands and more patents are issued. Furthermore, many of the Company’s
        competitors and other companies have already applied for patents covering
        technology similar to that used by the Company, and many patents have already
        been issued which cover these technologies. The Company may be involved in
        future lawsuits alleging patent infringement, other intellectual property
        rights
        violations, product liability claims or general commercial claims. In addition,
        litigation may be necessary to:
 13
  •  assert
        claims of infringement;
 •  enforce
        the Company’s patents, if any;
 •  protect
        the Company’s trade secrets or know-how; and
 •  determine
        the enforceability, scope and validity of the proprietary rights of others.
  The
        Company may be unsuccessful in defending or pursuing these lawsuits. Regardless
        of the outcome, litigation can be very costly, can divert management’s efforts
        and could materially affect the Company’s business and operating results. An
        adverse determination may subject the Company to significant liabilities
        or
        restrict or prohibit the Company from selling its products.
  See
“Item
        4 — Information on the Company, Business Overview — Legal Proceedings.”
  *The
        reallocation of radio frequency bands used by GNSS technology or other
        interference with the reception of GNSS signals could harm the utility and
        reliability of the Company’s products.*
  GPS
        technology is dependent on the use of the radio frequency spectrum. The
        assignment of spectrum is controlled by the International Telecommunications
        Union (“ITU”). The Federal Communications Commission (“FCC”) and Industry Canada
        are responsible for the assignment of spectrum for non-government use in
        the
        United States and Canada, respectively, in accordance with ITU regulations.
        Any
        ITU, FCC or Industry Canada reallocation of radio frequency spectrum, including
        frequency band segmentation or sharing of the spectrum, could cause interference
        with the reception of GNSS signals and may materially and adversely affect
        the
        utility and reliability of NovAtel’s products, which would, in turn, have a
        material adverse effect on its business, financial condition and results
        of
        operations. In addition, emissions from mobile satellite service and other
        equipment operating in adjacent frequency bands or in band may materially
        and
        adversely affect the utility and reliability of NovAtel’s products, which could
        result in a material adverse effect on the Company’s business, financial
        condition and results of operations.
  On
        May
        11, 2000, the FCC issued a Notice of Proposed Rulemaking that proposed rules
        for
        the operation of Ultra Wideband (“UWB”) radio devices on an unlicensed basis in
        the frequency bands allocated to GPS. A coalition of companies and trade
        associates, including various airline companies, the Air Transport Association
        of America and the U.S. GPS Industry Council, submitted a proposal for the
        regulation of UWB devices to the FCC in November 2001. On February 14, 2002,
        the
        FCC approved the commercial use of UWB technology at conservative power limits.
        The current standards of operation set limits on what radio frequencies UWB
        devices can be operating in, including avoiding those frequencies used by
        the
        military and companies that sell global positioning services. In February
        2003,
        the FCC upheld its ruling to allow the production of UWB devices with
“conservative” power limits. This may lead the way for a proliferation of
        personal wireless devices that would be manufactured and sold on the open
        market
        without licence requirements. No restrictions on the density of these devices
        will be defined. Therefore, it is possible that the GNSS noise floor could
        be
        contaminated and rise by as much as 10 times the current level when operating
        in
        an area with a high density of operating UWB devices. This degradation of
        the
        GNSS signal-to-noise ratio would adversely affect the performance of the
        receivers. NovAtel is adding additional digital signal processing algorithms
        to
        its next generation GNSS receivers to enable tracking of weak GNSS signals
        or
        continue to operate in high noise floor environments. If the FCC expands
        or
        changes the current UWB standards, UWB devices might cause interference with
        the
        reception of GNSS signals. Such interference could reduce demand for GNSS
        products in the future. Any resulting change in market demand for GNSS products
        could have a material adverse effect on the Company’s business, financial
        condition and results of operations.
  *The
        Company may be unable to properly manage the discontinuation of its older
        products.*
  As
        NovAtel develops newer products, many of its older products will reach their
        end
        of life. As NovAtel discontinues the manufacturing and sale of these older
        products, it must manage the liquidation of inventory, supplier commitments
        and
        customer expectations. If NovAtel is unable to properly manage the
        discontinuation of these older products, it could have a material adverse
        effect
        on its business, financial condition and results of operations.
  **Item
        4.** **Information
        on the Company**
  **A.** **History
        and Development of the Company**
  The
        Company was incorporated under the *Canada
        Business Corporations Act* (“CBCA”)
        on October 17, 1978 as 89006 Canada Ltd. The Company was extra provincially
        registered in Alberta on November 20, 1979 and remains active in this
        jurisdiction as of the date of this Annual Report. In July 1979, the Company’s
        name was changed to Westech Systems Ltd. and in April of 1983 was changed
        to
        NovAtel Communications Ltd. In October 1996, the Company changed its name
        to
        NovAtel Inc. and in November 1996, the Company amended its articles to split
        its
        then outstanding common shares from 4 million to 5.2 million and amended
        its
        articles to authorize the stated capital of the Company to include an unlimited
        number of Common Shares and First Preference Shares.
  From
        the
        time of the Company’s formation until the mid-1990s, NovAtel’s business was
        focused on the development of various communication businesses based on wireless
        technology. In 1989, NovAtel acquired Norstar Instruments Ltd., a developer
        of
        GPS technology.
  Between
        1992 and 1996, NovAtel divested its non-GPS businesses in a series of
        transactions. Since that time, NovAtel’s business has been focused primarily on
        high-precision GPS technology and products.
  In
        1997,
        NovAtel completed an initial public offering of its Common Shares in the
        United
        States and was concurrently listed on NASDAQ with the offering under the
        symbol
“NGPS.”
  On
        April
        17, 1998, pursuant to requests by its customers to integrate GPS technology
        into
        its aviation systems, CMC Electronics acquired 58.3% of the then outstanding
        Common Shares.
  14
 In
        1999,
        Point was established to develop advanced measurement solutions that incorporate
        NovAtel’s GPS technology, primarily for Sokkia’s surveying and mapping markets.
  On
        April
        11, 2001, an investor group led by ONCAP L.P. (“ONCAP”) acquired control of the
        Company through the acquisition of CMC Electronics.
  In
        2001,
        NovAtel acquired a controlling equity interest in Mezure, Inc. (“Mezure”), a
        company that had been developing a GPS, wireless communication and
        Internet-based product for deformation monitoring of man-made and natural
        structures. The business operations of Mezure were discontinued in 2003.
        See
“Item 5 — Operating and Financial Review and Prospects, Operating Results —
Overview.”
  In
        2002,
        NovAtel and Leica Geosystems AG (“Leica Geosystems”) formed a strategic
        partnership, under which NovAtel would develop and supply GPS-based products
        and
        technology to Leica Geosystems. See “Item 4 — Information on the Company,
        Business Overview — Strategic Partnerships — Leica Geosystems.”
  In
        May
        2003, NovAtel acquired CMC Electronics’ non-aviation L1 GPS OEM product line to
        broaden the Company’s product line. See “Item 5 — Operating and Financial Review
        and Prospects, Operating Results — Overview.”
  In
        2004,
        NovAtel and CMC Electronics formed a strategic partnership, under which NovAtel
        develops and supplies GPS-based products and technology to CMC Electronics.
        See
“Item 4 — Information on the Company, Business Overview — Strategic Partnerships
— CMC Electronics.”
  From
        January 2005 to August 2005, CMC Electronics sold all of its common shares
        of
        NovAtel.
  On
        October 1, 2005, the Company acquired all of the shares of Waypoint for
        approximately $3.5 million in cash, subject to post-closing adjustments to
        working capital. Waypoint’s products include specialized real-time and
        post-processing GNSS and GNSS/inertial positioning and trajectory software.
        See
“Item 5 — Operating and Financial Review and Prospects, Operating Results —
Executive Overview.”
  The
        Company’s capital expenditures over the last three years were $6.4 million in
        2006, $2.4 million in 2005, and $2.3 million in 2004 and were primarily for
        equipment for research and development, computer equipment and software and
        patents/trademarks. The Company expects capital expenditures of approximately
        $5.5 million in 2007 to be internally financed, substantially all of which
        will
        be made in Canada.
  There
        has
        been no indication of any public takeover offers by third parties in respect
        of
        the Company’s shares or by the Company in respect of other companies’ shares
        during the last and current fiscal year.
  NovAtel’s
        Common Shares are listed on The NASDAQ Global Select Market under the symbol
        “NGPS.” The Company’s head and registered offices are located at 1120-68th
        Avenue N.E., Calgary, Alberta, T2E 8S5, phone number (403) 295-4500. The
        Company’s website is located at www.novatel.com. The information on the website
        is not incorporated by reference into this Annual Report. The Company’s agent
        for service in the United States is CT Corporation System, 111 - 8 th Avenue,
        13 th Floor,
        New York, New York 10011.
  **B.** **Business
        Overview**
  **General**
  NovAtel
        designs, markets and sells high-precision GNSS and other positioning components
        and sub-systems used in a wide variety of commercial applications principally
        in
        the aviation, geomatics (surveying and mapping), mining, precision agriculture,
        marine and defence industries. NovAtel’s solutions combine hardware, such as
        receivers and antennas, with software to enable its customers to fully integrate
        the Company’s high-precision positioning technology into their respective
        products and systems. The Company is focused on supplying core high-precision
        positioning technology to OEMs and system integrators who build systems for
        various end market applications.
  Management
        of the Company believes the primary customer benefits of NovAtel’s core
        technology solutions include:
  •  high-precision
        positioning with accuracy to the sub centimetre level;
 •  high-reliability
        and robust performance, even in challenging environments;
 •  cost-effective
        components and sub-systems to enable broad market application;
 •  small,
        low-power designs for easy system integration; and
 •  flexibility
        to integrate customer software solutions enabling the Company’s customers to
        reduce system costs and accelerate time to market.
  The
        availability of reliable and cost-effective high-precision positioning
        technology has resulted in an expanding number of commercial applications
        for
        the technology. Examples of applications for this technology include enabling
        commercial aircraft to use direct point-to-point flight lines resulting in
        reduced operating cost, farmers to equip their tractors with machine controlled
        precision guidance systems, which typically results in lower operating costs
        and
        higher crop yields, and surveyors to use GNSS-based instruments to survey
        sites
        more rapidly and accurately.
  One
        of
        the most critical elements of the NovAtel solution is the Company’s product line
        of GNSS receivers. The receiver is the core technology which receives, processes
        and resolves the GNSS signals. The majority of NovAtel’s proprietary technology
        is incorporated into NovAtel’s receivers and most of the research and
        development efforts of the Company are directed towards improving their
        accuracy, reliability and cost effectiveness. These receivers are highly
        flexible and configurable with software for differing accuracy and performance,
        allowing the Company and its customers to leverage a limited number of hardware
        platforms into a wide variety of end-market applications.
  15
 **Industry
        Overview**
  ***Satellite
        Navigation Systems***
  Location
        determination has become a fundamental requirement for many consumer and
        commercial activities. GPS is currently the world’s most widely used and
        accepted technology for precise location determination.
  Development
        of the GPS system began with the launch of the first GPS satellite in 1978.
        The
        GPS system was founded and continues to be funded and controlled by the U.S.
        Department of Defense. The purpose of the GPS system is to provide precise
        location and time determination for military and civilian applications. The
        GPS
        system can currently be accessed free of charge and provides positioning
        data 24
        hours a day worldwide.
  The
        survey industry was the first commercial market to make widespread use of
        the
        GPS system. Adoption began in the late 1980’s and grew significantly in the
        early 1990’s as new technologies emerged to make the applications more
        cost-effective. Since that time, use of the system has spread to a variety
        of
        commercial and consumer applications including navigation, tracking, mapping
        and
        monitoring.
  The
        GPS
        system is based on signals presently provided by a constellation of 29 orbiting
        satellites. The system of satellites currently broadcasts on two frequencies,
        L1, which is available for civilian use, and L2 which is encrypted and primarily
        used for military applications. GPS modernization will see a new frequency,
        L5,
        and a new Signal, L2C, on satellites launched in the future. GPS positioning
        is
        based on a triangulation technique that precisely measures the distance from
        a
        GPS receiver to satellites which continuously transmit precisely timed radio
        signals. GPS receivers calculate the distance by measuring the travel time
        of
        the satellite signal. Signals from four satellites are typically required
        to
        compute the three dimensional position of the GPS receiver. Under normal
        operating conditions, a receiver is able to receive signals from six to eight
        satellites at any point in time.
  GLONASS
        is a similar positioning system established by the former Soviet Union and
        controlled and operated by the Russian government. The GLONASS system was
        introduced in 1982 with the launch of its first satellite and currently consists
        of 12 active satellites. Industry participants generally view GPS as being
        superior to GLONASS primarily as a result of the greater number of active
        satellites.
  A
        third
        system, called Galileo, is currently being developed by the European Space
        Agency and is scheduled to become operational between 2010 and 2012. According
        to the report entitled “Global Navigation Satellite Positioning Systems and
        Devices” prepared by Allied Business Intelligence Inc., a leading industry
        research firm, and published in 2006 (the “Allied Report”), the European Union
        is planning to spend €3.2 billion over the next several years to deploy the
        Galileo system. The development of alternative satellite positioning systems
        is
        a benefit to providers of global positioning technology, such as the Company,
        since products can be designed to use the signals from multiple systems
        resulting in greater accuracy and reliability.
  ***GPS
        Market Overview***
  The
        market for positioning technology has experienced significant growth since
        the
        original launch of the first GPS satellites. According to the Allied Report
        Worldwide, revenue from global GPS systems was estimated to be approximately
        U.S. $38.0 billion in 2006. According to the report entitled “North American GPS
        Equipment Markets (A601-22)” prepared by Frost & Sullivan, a leading
        industry research firm, and published in 2004 (the “Frost & Sullivan
        Report”), total unit sales in the North American market are expected to grow
        from 2.9 million in 2003 to 11.4 million in 2010 for a compounded annual
        growth
        rate of approximately 22%.
  ***GNSS*** ***Market***
  The
        overall GNSS market can be divided into three primary segments, lower precision
        consumer markets, mid level commercial and higher precision commercial markets.
        Management of the Company estimates NovAtel’s current total addressable annual
        market for mid level commercial and high-precision positioning component
        technologies and sub-systems is approximately U.S. $400 million to U.S. $500
        million.
  The
        following chart illustrates the view of management of the Company in respect
        of
        the relative accuracy and reliability needs of the various end-markets. Accuracy
        refers to how precise the positioning information is required to be in an
        application. Reliability refers to how important the continuity of positioning
        is to an application.
  16
 
  Management
        of the Company believes that a limited number of highly specialized GNSS
        companies, including NovAtel, have the capability to develop and produce
        technology that can be used in higher precision applications, largely as
        a
        result of proprietary and patented technology.
  As
        a
        result of the high degree of specialization required, commercial high-precision
        GNSS component technology is typically sold at significantly higher prices,
        as
        illustrated by the following chart, which typically results in higher gross
        margins than lower precision, consumer focused systems.
 
 Source:
        Frost & Sullivan Report (2004).
  ***Growth
        in High-Precision GPS*** ******
  Management
        of the Company believes that growth in the high precision segment of the
        GPS
        market is the result of an expanding number of applications which are being
        driven by technological advancements with respect to accuracy and reliability
        and a general reduction in the cost of peripheral component technology. Many
        new
        applications are also being driven by improving safety of life or reducing
        labour requirements.
  *Technological
        Advancements*
  Since
        the
        introduction of GPS technology, there have been a number of technological
        innovations that have significantly increased the accuracy and reliability
        of
        GPS products. Differential GPS, one of the first techniques developed to
        improve
        performance, can be used to achieve position accuracies down to a few
        millimetres for certain applications. With this technique one receiver,
        typically called a base station, is precisely positioned on a known location
        and
        calculates a variety of measurement errors. This differential correction
        data is
        then broadcast via communication links to other receivers, that can be static
        or
        in motion, which receive the differential corrections and apply them to provide
        precise locations. Using this technique, virtually all significant positioning
        errors can be eliminated and the resulting differential positions can achieve
        superior accuracy. Limitations of early differential GPS technology included
        the
        cost, reliability and form factor of the systems.
  Differential
        GPS was originally developed based on single-frequency receivers which used
        only
        the civilian signal. The first commercial dual frequency GPS system, which
        makes
        use of both the L1 frequency and the L2 frequency, was introduced in the
        mid
        1980s. Using both signals allows for significant reductions in the time required
        to calculate a precise position and an increase in the working range of GPS
        devices.
  Other
        technologies have been developed to address specific issues or applications.
        For
        example, in 1993 NovAtel introduced Narrow Correlator® tracking technology which
        significantly reduced the effects of multipath interference which is caused
        by
        the reflection of multiple GPS signals. This innovation has allowed for a
        significant increase in accuracy. Comparable versions of this technology
        have
        been broadly adopted by the industry.
  17
 Another
        innovation was on-the-fly initialization which enabled differential GPS to
        be
        applied to receivers in motion while maintaining accuracy to within a few
        centimetres. This technology broadened the application of GPS to unmanned
        and
        automated vehicles.
  NovAtel
        has introduced numerous additional technological innovations over the past
        ten
        years. See “Item 4 — Information on the Company, Business Overview —
Technology.” These and other technological innovations have enabled the
        significant expansion of applications for high precision GPS positioning
        solutions.
  *Continued
        Reduction in the Cost of Peripheral Component Technology*
  High-precision
        GNSS component suppliers, including the Company, as well as system integrators
        have benefited from significant reductions in the cost of peripheral components
        such as microprocessors, memory and wireless communications technology. These
        savings have enabled a significant reduction in the overall cost of GNSS
        solutions and have driven an expansion in the number of applications using
        the
        technology. Management of the Company believes that this trend will continue
        to
        promote growth for the high precision segment of the GNSS industry.
  ***Other
        Industry Trends***
  In
        addition to the growth trends set forth above, management of the Company
        believes that growth of the high precision segment will be driven by the
        outsourcing of core GNSS technology by OEMs and system integrators and the
        development of complementary technologies that will enhance the performance
        and
        functionality of existing GNSS technology.
  *Outsourcing
        of Core GNSS Technology by OEMs and System Integrators*
  A
        number
        of NovAtel’s key competitors and OEM customers have historically developed core
        GNSS technology in-house or have acquired stand alone GNSS component vendors.
        Management of the Company believes there is currently a trend among OEMs
        and
        system integrators to outsource core GNSS technology to vendors such as NovAtel.
        By doing so, these companies are attempting to re-focus on their core
        competencies, developing custom systems for end market applications, which
        may
        enable them to make better use of their capital and other resources. Management
        of the Company also believes it is becoming increasingly difficult for these
        companies to provide cost effective and technically advanced precision GNSS
        receivers relative to GNSS focused companies, such as NovAtel, that have
        strong
        patent positions, substantial continuous GNSS development and the ability
        to
        leverage their receiver technology across multiple applications and customers.
  *Development
        of Complementary Technology*
  Management
        of the Company believes that the development of complementary technology
        that
        enhances or augments the accuracy and reliability of the core GNSS technology
        will enable a multitude of new applications for the technology and drive
        further
        growth. For example, the integration of inertial technology with GNSS enables
        the combined system to provide full position, velocity and attitude information
        while the receiver passes through areas of signal blockage. There are a number
        of other complementary technologies that are expected to cause acceleration
        in
        the number of applications using the technology.
  **Barriers
        to Entry**
  Management
        of the Company believes there are significant barriers to entry in the industry,
        including:
  •  proprietary
        and patented technology;
 •  scarcity
        of industry expertise; and
 •  extensive,
        established relationships with market leading customers and partners.
  **Mission
        and Strategy**
  NovAtel’s
        goal is to become the leading provider of high-precision global positioning
        component technologies and sub-systems. In order to achieve this goal, NovAtel
        is focused on the following growth strategies:
  •  continue
        to invest in high-precision global positioning technology;
 •  partner
        with and/or acquire enabling and complementary technologies;
 •  continue
        to build market share with large OEMs and emerging system integrators;
 •  attract
        and retain key employees;
 •  continue
        to generate strong revenue growth while improving profitability and capital
        efficiency; and
 •  expand
        international sales.
  *Continue
        to Invest in High-Precision Global Positioning Technology*
  The
        Company is committed to continual improvement of the accuracy, reliability,
        cost
        and quality of its technology. To achieve these objectives, the Company intends
        to invest in research and development primarily in the following areas: (i)
        core
        GNSS hardware and software; (ii) technology supporting the modernization
        of the
        GPS system; (iii) technology supporting other satellite based positioning
        systems; and (iv) technology that augments the Company’s global positioning
        technology.
  *Partner
        with and/or Acquire Enabling and Complementary Technologies*
  NovAtel
        continually seeks to develop strategic partnerships with industry leaders
        of
        enabling and complementary technologies, such as inertial systems, guidance
        technology and wireless communications. The Company also expects to continue
        to
        pursue selective strategic acquisitions that complement current product
        offerings, expand its market opportunity or broaden its customer base.
  18
 *Continue
        to Build Market Share with Large OEMs and Emerging System Integrators*
  The
        Company plans to continue to build market share and enhance its growth through
        leveraging its OEM business model. Furthermore, the Company expects to continue
        to develop relationships with emerging system integrators through its growing
        international dealer network. An important element of this strategy is to
        continue to work with OEMs and system integrators in a highly collaborative
        fashion and to provide them with an exceptional level of customer support.
  *Attract
        and Retain Key Employees*
  NovAtel
        has assembled a talented and experienced team with proven expertise in the
        GNSS
        industry. As the Company experiences growth, it intends to hire employees
        with
        demonstrated experience and ability, with the objective of increasing the
        number
        of highly productive teams. Potential employees are offered the opportunity
        to
        work for an industry leader on challenging assignments in their area of core
        competency with access to state-of-the-art development resources. The Company
        also maintains a competitive performance based compensation program which
        is
        designed to attract and retain employees.
  *Continue
        to Generate Strong Revenue Growth while Improving Profitability and Capital
        Efficiency*
  The
        Company intends to continue to pursue profitable growth opportunities through
        its focus on return on investment. Key elements of this strategy include:
        (i)
        maintaining selling prices and gross margins by pursuing value added
        high-precision global positioning applications; (ii) improving capital
        efficiency through outsourcing select business activities, manufacturing
        services and certain design functions; and (iii) investing in initiatives
        to
        improve efficiency and reduce costs while continuing to deliver superior
        customer service.
  *Expand
        International Sales*
  The
        Company plans to expand international sales by establishing sales offices
        outside of North America. The Company opened a sales office in the United
        Kingdom to service Europe, the Middle East and Africa in 2005, and opened
        a
        sales office in Australia in 2006 to service Australia and Asia.
  **Products**
  NovAtel
        offers a broad range of high-precision GNSS and other positioning components
        and
        sub-systems. The Company’s products combine specialized hardware with
        proprietary software to enable its customers to fully integrate the Company’s
        technology into their respective products and systems. NovAtel’s products
        include GNSS receivers, antennas, proprietary software and augmented GNSS
        products.
  A
        critical component of NovAtel’s products is its GNSS receivers which process the
        satellite signals received through the antenna to determine precise positions.
        A
        key advantage of NovAtel’s GNSS receivers is that they are highly flexible and
        configurable allowing the same receiver to be used across a broad range of
        applications. For example, NovAtel can install different software on the
        same
        hardware receiver to meet the specific requirements of customers. This benefits
        NovAtel through reduced unit costs, higher production rates, focused research
        and development efforts and a streamlined product line. NovAtel’s customers also
        benefit in that they are able to upgrade their systems on a cost-effective
        basis
        by installing new software as opposed to having to replace the entire receiver.
        NovAtel’s GNSS receivers are also capable of storing and running customer
        applications, enabling NovAtel’s customers to realize cost-efficiencies and
        accelerated time to market.
  NovAtel
        offers a range of antennas that are capable of supporting both single frequency,
        dual-frequency and dual constellation receivers and may be incorporated into
        a
        broad range of applications, including those which operate in dynamic or
        challenging environments.
  NovAtel
        has also developed a range of proprietary high-precision GNSS positioning
        software that, working in conjunction with its hardware, enables its customers
        to achieve accuracies to within a few centimetres, in real-time, while providing
        a high degree of reliability.
  NovAtel
        leverages the components described above in its aviation and geomatics product
        lines as well as in its augmented GNSS products, such as the SPAN TM product
        family. The SPAN product family integrates third-party inertial measurement
        technology with the Company’s GNSS technology (receiver, antenna and software)
        to provide the user with continuous positioning data even when a GNSS signal
        has
        been temporarily lost.
  NovAtel
        acquired Waypoint Consulting in 2005. This acquisition provided NovAtel with
        a
        new post-processing software product line which the Company believes is a
        leader
        in the photogrammetry market. One of the software products post-processes
        GNSS
        and inertial measurements and fits directly into the SPAN product family
        mentioned above.
  In
        March
        2006, NovAtel released its new generation of GNSS receivers (“OEMV TM ”)
        which
        include modernized GPS technology and optional GLONASS capability. The OEMV
        product family complies with the upcoming EU regulations governing the use
        of
        hazardous substances.
  In
        2006,
        the Company continued development of a GPS/Galileo receiver, and is part
        of an
        industrial team focused on the development and supply of the reference receivers
        for the Galileo monitoring and ground control system.
  In
        2006,
        the Company also launched the Europak-15a, a 16 channel dual mode GPS and
        Galileo receiver. Customers for this receiver include agencies and organizations
        involved in the test and evaluation of the Galileo system and
        signals.
  The
        following are the Company’s most popular products with a brief explanation of
        their features and applications.
  19
 
  20
  **Markets**
  Management
        of the Company believes there are three primary drivers of future growth
        in the
        high-precision global positioning industry:
  •  increased
        sales into existing applications in traditional markets;
 •  development
        of new applications in non-traditional markets; and
 •  development
        of new applications in emerging markets.
  *Increased
        Sales into Existing Applications in Traditional Markets*
  Management
        of the Company believes sales of existing applications will continue to increase
        in markets that have been traditional users of GNSS technology. Generally,
        these
        are markets where GNSS has either replaced older technology, such as the
        marine
        industry, or markets where GNSS technology was adopted at an early stage
        largely
        because the benefits of GNSS outweighed price sensitivity, such as the survey
        and mapping market.
  The
        Company expects these markets to continue to expand for a number of reasons
        including:
  •  continued
        reductions in the price of GNSS technology are expected to make existing
        applications more cost-effective for a broader range of users;
 •  development
        of new technology is expected to enhance the functionality and productivity
        of
        existing applications which will increase the number of users; and
 •  outsourcing
        of core GNSS technology by OEMs and system integrators is expected to increase.
  Selected
        examples of growth applications in traditional markets include surveying
        and
        mapping, aviation and air traffic navigation ground infrastructure and
        commercial marine.
  *Development
        of New Applications in Non-Traditional Markets*
  New
        applications continue to emerge within established markets that to date have
        not
        been traditional users of GNSS technology. The growth in new applications
        is
        largely being driven by OEMs and system integrators who are developing new
        products that have become commercially viable as a result of technological
        improvements, cost reductions and the development of complementary technology.
  Selected
        examples of growth applications in non-traditional markets include precision
        agriculture and mining and construction machine control.
  *Development
        of New Applications in Emerging Markets*
  New
        applications are also being developed within markets that have been created
        or
        transformed as a result of the evolution of low-cost, high-precision positioning
        technology. These markets represent a diverse range of significant growth
        opportunities for the Company.
  Selected
        examples of applications in emerging markets include unmanned air vehicles,
        airborne weapons training and precision asset tracking and guidance.
  **Customers**
  NovAtel
        competes in the high-precision global positioning market by selling components
        and sub-systems to leading OEMs and system integrators in multiple industries.
        During the past two years, NovAtel has sold its products to over 500 customers
        worldwide, including some of the leading companies in their respective sectors.
  For
        the
        fiscal year ended December 31, 2006, NovAtel’s 10 largest customers represented
        69% of its revenues.
  Sales
        to
        key customers, Leica Geosystems, Beijing BDStar, and YC International, accounted
        for 23%, 9%, and 5%, respectively, of the Company’s total revenues in 2006. In
        comparison, sales to Leica Geosystems, Beijing BDStar, and YC International
        accounted for 18%, 11%, and 3%, respectively, of the Company’s total revenues in
        2005. See “Item 4 — Information on the Company, Business Overview — Strategic
        Partnerships — Leica Geosystems” and “Item 3 — Key Information, Risk Factors —
Dependence on Key Customers.”
  The
        Company’s total revenue attributable to Point, including NovAtel’s sales to
        Point and its 49% proportionate share of sales made by Point, accounted for
        14%
        of total revenues in 2006 and 2005. On March 16, 2007, Topcon Corp. (“Topcon”)
        and Sokkia announced that they had entered into an agreement to form a
“combined” entity. Topcon has GNSS technology and products that compete with
        those supplied by NovAtel to Point. The agreement under which NovAtel and
        Sokkia
        established Point expires in July 2009. The loss of Point or Sokkia, or both,
        as
        a customer or a substantial decrease in sales to Point could have a material
        adverse effect on NovAtel’s business, financial condition and results from
        operations and could cause its stock price to decline.
  In
        2006,
        the Company derived 38% of its revenues in the United States, 17% in
        Asia/Australia, 37% in Europe, 6% in Canada and 2% in other parts of the
        world.
  The
        Company divides its customers into three primary market categories: Special
        Applications, Geomatics and Aerospace and Defence. The following chart sets
        out
        the consolidated revenues of the Company by the categories indicated for
        the
        fiscal years ended December 31, 2004, 2005 and 2006.
  21
  
  The
        following chart sets out consolidated revenues by geographic area for the
        financial years ended December 31, 2004, 2005 and 2006.
  
  ***Special
        Applications***
  Special
        Applications is the largest and fastest growing category, contributing $55.3
        million or 71% of NovAtel’s revenues for the fiscal year ended December 31,
        2006. This category has experienced a 35% compounded annual growth rate from
        2002 to 2006. This group’s customers are in diverse markets, including precision
        agriculture, marine, mining and machine control, unmanned vehicles and sports
        media.
  Special
        Applications has three main types of customers:
  •  large,
        industry leading companies utilizing NovAtel’s proprietary solutions to develop
        replacement and transformative products for their end-markets, such as Leica
        Geosystems in the survey market or AGCO in precision agriculture;
 •  innovative
        system integrators that have developed new markets through creative integration
        of NovAtel’s products with other technology, such as BEELINE; and
 •  dealers
        and distributors that service hundreds of smaller companies that are developing
        innovative solutions for existing and new markets.
  NovAtel’s
        dealers and distributors are critical in extending the market reach of the
        Company. In many cases, these organizations make the first sales to small
        system
        integrators that grow to become significant customers through the development
        of
        innovative product offerings. This was the case for Beijing BDStar, which
        is now
        one of NovAtel’s largest customers.
  ***Geomatics***
  Geomatics
        (surveying and mapping) was one of the first commercial applications of
        high-precision GNSS technology and is currently a well-established market.
        The
        Geomatics category contributed $13.2 million, or 17%, of NovAtel’s revenues for
        the fiscal year ended December 31, 2006. Revenue in NovAtel’s Geomatics category
        consists primarily of sales attributable to Point, the Company’s joint venture
        with Sokkia, which comprised 84% of the Geomatics revenue in 2006. Point
        provides Sokkia’s global marketing organization with advanced measurement
        solutions for the fields of surveying, mapping, geographic information systems,
        construction and construction machine control. Sokkia’s distribution system
        includes subsidiaries and representatives around the world, each having its
        own
        dealer network. The geomatics category also includes revenues from third
        party
        customers which comprised approximately 16% of the geomatics category in
        2006.
        NovAtel’s sales to Leica Geosystems, although primarily for geomatics
        applications, are not included in this category for reporting purposes due
        to
        historical classification.
  Given
        the
        relative maturity of this market, growth in the sale of traditional GPS products
        is expected to be moderate. However, management of the Company believes that
        GPS
        modernization and the introduction of the Galileo system represent significant
        opportunities for future growth as end-users upgrade their equipment in order
        to
        realize the enhanced performance and efficiencies that may be achieved through
        the utilization of the new signals.
  ***Aerospace
        and Defence***
  Aerospace
        and defence continue to be strong markets for GPS technology and include
        some of
        the most technically demanding applications of NovAtel’s products. The Aerospace
        and Defence category contributed $9.0 million or 12% of NovAtel’s revenues for
        the fiscal year ended December 31, 2006. Customers of the Company in this
        group
        utilize NovAtel’s high-precision positioning technology for critical components
        in such applications as the ground networks of civil air traffic navigation
        systems, and in-flight guidance systems on board aircraft that together enable
        aircraft to determine their precise position, and certain military applications.
  22
 The
        Company’s family of Wide Area Augmentation System (“WAAS”) receivers and other
        elements are key components of revenue in this category. The WAAS receivers
        are
        an important part of the existing ground infrastructure that supports the
        next
        generation of air traffic navigation systems for commercial aviation in North
        America, Europe, Japan, China and India. Raytheon Company, the Federal Aviation
        Administration (“FAA”) and other leading companies and national aviation
        organizations around the world have selected NovAtel as a key receiver and
        signal generator supplier for this application primarily because of NovAtel’s
        leading technology in this area.
  Management
        of the Company believes that opportunities for future growth within the aviation
        and defence markets will be driven by such developments as the introduction
        of
        the Galileo system and the use of commercial grade receivers in defence
        applications such as unmanned vehicles. The Company has successfully developed
        early commercial GPS/Galileo receivers, and has been selected as part of
        an
        industrial team to develop and supply the reference receivers for the Galileo
        monitoring and ground control system.
  The
        Company is currently working with OEMs and system integrators that have
        determined precision GPS technology can be utilized in many military
        applications such as training, logistics and missile tracking which do not
        require the use of encrypted military GPS technology.
  **Sales,
        Marketing and Distribution**
  NovAtel
        sells, markets and distributes its products through both direct and indirect
        channels in order to maximize market coverage on a cost-effective basis.
        The
        primary focus for NovAtel’s sales and marketing efforts is on OEM customers,
        strategic relationships and supporting a network of dealers and resellers.
        The
        Company has developed its sales and marketing capabilities in anticipation
        of
        and in response to customer needs as they arise in its multiple markets.
        The
        in-house sales and marketing efforts are focused on market research, product
        management, customer service, distribution management, communications and
        promotions. Each market receives specific attention to the needs of its sales
        and distribution channels, which are rapidly changing.
  The
        Company believes that providing a high level of customer technical support
        is
        critical to creating and maintaining strong relationships with their OEM
        and
        system integrator customers. The Company is able to achieve this level of
        support by employing a sufficient number of qualified engineers and technicians
        to advise and provide customers with integration and after-sale support.
        Due to
        frequent interaction with customers, these integration engineers and support
        technicians also act as an important source of customer information, which
        can
        drive product enhancements, new product ideas and new business opportunities.
  **Technology**
  NovAtel
        has invested significant funds and resources to become a leading provider
        of
        high-precision positioning technology. Since 1992, NovAtel has provided several
        major technological innovations to meet the increasingly demanding needs
        of the
        high-precision positioning industry. NovAtel currently holds 31 U.S. patents
        and
        various related foreign patents in jurisdictions such as Canada, Europe and
        Japan which expire at various dates no earlier than March 31, 2009 and has
        numerous pending U.S. and foreign patent applications. Some of the more
        significant technology developments by the Company are discussed below.
  *1992
        Narrow Correlator® Tracking Technology*
  NovAtel
        established itself in the GPS industry through the introduction of its patented
        Narrow Correlator® tracking technology in 1992. Narrow Correlator tracking
        allowed NovAtel products to provide positioning accuracy to within one meter
        with a single-frequency receiver while significantly reducing the effects
        of
        multipath interference caused by the reflection of multiple GPS signals.
        Relative to other GPS technology available at the time, this innovation resulted
        in a five-fold improvement in accuracy for GPS devices.
  *1994
        Multipath Elimination Technology (“MET”)*
  NovAtel
        continued its technology advancements with the introduction of MET in 1994.
        MET
        expanded upon the Narrow Correlator tracking technology by refining software
        algorithms to more effectively filter the effects of multipath signal
        interference. This new technology removed 25% to 50% of the residual multipath
        errors.
  *1995
        Multipath Estimating Delay Lock Loop (“MEDLL* ® *”)*
  In
        1995,
        NovAtel introduced MEDLL® technology. MEDLL offered a more rigorous approach to
        the reduction of multipath effects using improved circuitry, software control
        and processing. The MEDLL technology further reduced the effects of multipath
        interference by up to 90%.
  *1995
        Real Time Kinematic (“RTK”) Signal Processing Technology*
  Also
        in
        1995, NovAtel introduced a unique method of applying RTK processing to the
        carrier frequency signals in order to rapidly increase the accuracy of the
        computed position from meters to less than 20 centimeters. This signal
        processing method is particularly useful for single frequency GPS receivers.
        Previous attempts at using RTK resulted in significant delays before reaching
        precision accuracies.
  *2000
        PinwheelTM Aperture Coupled Slot Array Technology*
  In
        2000,
        NovAtel introduced a new antenna utilizing its patented PinwheelTM Aperture
        Coupled Slot Array technology. Using this technology, the Company was able
        to
        produce a much smaller and lighter antenna than other available antennas
        on the
        market without sacrificing either accuracy or reliability.
  *2000
        Pulse Aperture Correlation (“PACTM”) Technology*
  Also
        in
        2000, NovAtel introduced its new PACTM technology.  PAC technology
        implements the latest digital signal processing techniques to provide superior
        tracking capability in the presence of multipath interference. PAC effectively
        doubles the accuracy of the Narrow Correlator tracking technology and reduces
        interference by up to eight times.
  23
 *2002
        Model Position Aiding and Position Velocity Filter*
  In
        2002,
        NovAtel developed a method of increasing the reliability of GPS position
        output
        in very challenging environments through the use of model position aiding
        and
        position velocity filter techniques. While this technology was initially
        developed to meet the needs of a specific application, Management of the
        Company
        believes that it can be applied to a broader range of markets, such as precision
        agriculture.
  *2003
        GPS and Micro-Electro-Mechanical System (“MEMS”) Integration*
  In
        2003,
        the Company developed software that enables the integration of its GPS receivers
        with a MEMS system. This system can maintain an accurate estimate of position
        and velocity without the use of GPS satellite signals for short periods of
        time.
        In the absence of GPS satellite signals, a GPS receiver cannot provide
        information about the user’s position or velocity if the direct line-of-sight
        between the receiver and the satellites is blocked. The integration of GPS
        and
        MEMS allows the combined system to provide full position and velocity
        information while the receiver passes through areas of signal blockage.
  *2004
        GPS Modernization and Integration of Inertial Navigation Systems (“INS”)*
  In
        2004,
        the Company developed equipment designed to generate and receive the new
        GPS L5
        civil signal. In support of the Company’s air traffic navigation ground
        infrastructure business, the new L5 equipment will generate the signal used
        by
        WAAS Ground Uplink Stations and will also control and monitor the quality
        of the
        signal produced by the WAAS geostationary satellites.
  The
        Company continued its technology advancement in the area of integrating GPS
        and
        INS technologies, resulting in two patents.
  *2005
        GLONASS and Galileo*
  The
        Company’s OEMV family of products also includes optional GLONASS capability. In
        addition, in 2005, the Company successfully developed GPS/Galileo receivers,
        and
        has been selected as part of an industrial team to develop and supply the
        reference receivers for the Galileo monitoring and ground control system.
  *2006
        RTK Technology and Galileo*
  In
        2006,
        NovAtel launched a new RTK solution
        which delivers performance improvements, including more reliable ambiguity
        solutions and faster narrow lane convergence on short, medium and long
        baselines, allowing users to work more reliably and efficiently in a wider
        range
        of conditions.
  In
        2006,
        the Company launched the Europak-15a, a 16 channel dual mode GPS and Galileo
        receiver. Customers for this receiver include agencies and organizations
        involved in the test and evaluation of the Galileo system and
        signals.
  **Research
        and Development**
  The
        Company’s technology position is supported by a strong commitment to research
        and development. NovAtel has invested heavily in developing GNSS technology,
        including the design of proprietary software and integrated circuits for
        GNSS
        receivers. The Company’s research and development expense, net of customer
        funded programs, was $13.5 million, $10.9 million and $9.6 million in 2006,
        2005
        and 2004, respectively.
  In
        addition, the Company also receives significant amounts of funding from its
        customers through NRE contracts to conduct research and development on their
        behalf. Typically, NovAtel retains ownership of the intellectual property
        developed under these arrangements and is able to exploit such intellectual
        property for its own purposes. The Company’s total engineering expenditures
        comprised of internal research and development programs and customer funded
        programs, were $18.6 million or 24% of revenue in 2006, $15.4 million or
        24% of
        revenue in 2005, and $13.1 million or 24% of revenue in 2004.
  Often
        a
        new product is initially developed for a customer or strategic partner who
        is
        willing to purchase development stage products. The Company uses feedback
        from
        such initial customers as a source of information in designing and refining
        its
        products, and in defining, with greater precision, customer needs in emerging
        market areas.
  **Competition**
  NovAtel
        faces competition primarily from other developers and suppliers of
        high-precision positioning component technology which is sold to OEMs and
        system
        integrators for commercial applications, as well as from OEMs who choose
        to
        develop and produce the component technology in-house.
  The
        primary competitors supplying component technology to OEMs and system
        integrators vary by each industry or market served, but generally include
        Trimble Navigation Limited (U.S.), Thales Group (France), Topcon Positioning
        Systems (Japan), Javad Navigation Systems (U.S.), NavComm Technologies (U.S.)
        and at the single-frequency level, companies such as CSI Wireless Inc. (Canada),
        u-blox (Switzerland) and Furuno Marine Electronics (Japan). While these
        competitors to NovAtel offer high-precision positioning solutions to OEMs,
        many
        also develop, produce and market products that are sold directly to end-users
        and are, therefore, in competition with the OEMs’ end-products and solutions.
  NovAtel
        works with OEMs in a highly collaborative and cooperative process to provide
        them with the core technology that becomes integrated into their end products
        and solutions. Management of the Company believes that the non-competitive
        nature of its relationships with OEMs is a key differentiator and a competitive
        advantage for the Company relative to other suppliers.
  **Strategic
        Partnerships**
  ***Leica
        Geosystems***
  The
        Company entered into a strategic co-operation agreement with Leica Geosystems
        on
        May 1, 2003, to jointly develop new technology for GPS in the high-precision
        geomatics market. The initial term of the agreement is seven years. Under
        the
        terms of the agreement, NovAtel has agreed to develop custom versions of
        existing GNSS receivers and other components for Leica Geosystems. In September
        2003, pursuant to the strategic co-operation agreement, the Company entered
        into
        a supply agreement with Leica Geosystems which sets forth the arrangements
        under
        which NovAtel would develop and supply Leica Geosystems with custom GNSS
        receivers. Leica Geosystems announced the launch of new products that
        incorporate NovAtel’s GNSS receiver and antenna technology in each of 2004, 2005
        and 2006. In October 2005, Leica Geosystems was acquired by Hexagon AB of
        Sweden. The Company does not expect this transaction to affect its business
        with
        Leica Geosystems. In addition, the Company, Leica Geosystems and CMC Electronics
        entered into a change of control agreement dated April 5, 2004, which provides
        Leica Geosystems with certain rights in the event of the acquisition of control
        of NovAtel by certain competitors of Leica Geosystems. See “— Certain
        Contractual Rights” and “Item 3 — Key Information, Risk Factors — Dependence on
        Key Customers.”
 24
  **Point,
        a NovAtel/Sokkia Joint Venture**
  The
        Company owns 49% of the common shares in Point, a geomatics joint venture
        with
        Sokkia, one of the world’s largest suppliers of surveying and mapping equipment.
        The Company sells GNSS receivers and antennas to Point which incorporates
        these
        products into surveying systems that are in turn sold through the Sokkia
        distribution channels and through independent dealers and distributors. In
        addition, the Company provides facilities, computer support and development
        and
        logistical support for Point’s Calgary operations. On March 16, 2007, Topcon
        Corp. (“Topcon”) and Sokkia announced that they had entered into an agreement to
        form a “combined” entity. Topcon has GNSS technology and products that compete
        with those supplied by NovAtel to Point. The agreement under which NovAtel
        and
        Sokkia established Point expires in July 2009. The loss of Point or Sokkia,
        or
        both, as a customer or a substantial decrease in sales to Point could have
        a
        material adverse effect on NovAtel’s business, financial condition and results
        from operations and could cause its stock price to decline. See “Item 3 — Key
        Information, Risk Factors — Dependence on Key Customers.”
  **Certain
        Contractual Rights**
  Pursuant
        to the terms of a strategic co-operation agreement dated April 5, 2004, Leica
        Geosystems has the unilateral right in the case where a defined competitor
        of
        Leica Geosystems obtains (1) 50% of the voting shares of the Company, (2)
        the
        power to elect a majority of the Board of Directors, or (3) obtain a significant
        portion of the Company’s technology, to cancel the strategic co-operation
        agreement and any related development and supply agreements signed between
        the
        Company and Leica Geosystems, the right to purchase the intellectual property
        developed by the Company on behalf of Leica Geosystems (while providing the
        Company a license to use such intellectual property in its ongoing business)
        and
        in the event of a material disruption in supply to deal directly with the
        Company’s suppliers (subject to appropriate compensation to the Company).
  **Employees**
  A
        key
        priority of the Company is to attract, train and retain talented employees.
        NovAtel views its highly skilled and performance-motivated employees as a
        competitive advantage and a key part of the strategy for future growth. The
        Company staff turnover rate was approximately 7% for its fiscal year ending
        December 31, 2006 (excluding Point employees and involuntary separations).
  As
        at
        December 31, 2004, 2005 and 2006, the Company (excluding Point) had the
        following full-time employees:
 **Full-Time
                  Employees****Department**
              **2004**
              **2005**
              **2006**Research
                  and development
              75
              84
              108Operations
              37
              52
              69Administration
                  and finance
              22
              23
              28Sales
                  and marketing
              16
              21
              25TOTAL
              150
              180
              230
  The
        Company also retained four part-time, three temporary employees and three
        student personnel as at December 31, 2006. Separately, Point employed 44
        permanent employees and one temporary employee as at December 31, 2006. None
        of
        NovAtel’s employees are represented by a labour union, and the Company has not
        experienced any work stoppages.
  **Operations
        and Facilities**
  NovAtel’s
        registered and head office is located in Calgary, Alberta. The Company’s office
        space totals approximately 69,000 square feet, including a 22,000 square
        foot
        expansion substantially completed in September 2006, and is subject to a
        ten-year lease that expires in 2016, with an option for NovAtel to extend
        the
        term for a further five-year period. At this location, the Company assembles,
        tests, packages and ships most of its products including GNSS receivers and
        antennas. The Company expects to be at 100% utilization of the Calgary facility
        by March 2008.
  The
        circuit card assemblies, which are a primary component of NovAtel’s GNSS
        receiver, are manufactured by contract suppliers in accordance with NovAtel
        design, manufacturing and testing requirements. NovAtel has two primary
        subcontract suppliers of circuit card assemblies.
  **Patents,
        Trademarks and Licenses**
  NovAtel
        currently holds 31 U.S. patents and various related foreign patents in
        jurisdictions such as Canada, Europe and Japan which expire at various dates
        no
        earlier than November 28, 2010, and has numerous pending U.S. and foreign
        patent
        applications. The Company also currently has numerous trademarks worldwide,
        including the NovAtel trademark, which is registered or pending in over 25
        countries. See “Item 3 — Key Information, Risk Factors — Patents and Proprietary
        Rights; Patent Litigation.”
  NovAtel
        has copyrights and intellectual property rights to its proprietary software
        and
        custom integrated circuit designs. In 1997, the Company purchased a license
        with
        respect to its SoftSurv® software, which is a full-featured GPS dual frequency
        data post-processing package software for surveying applications. In 1999,
        NovAtel licensed SoftSurv and certain intellectual property related to end
        user
        products to Point. See “Item 4 — Information on the Company, Business Overview —
Strategic Partnerships — Sokkia/Point Joint Venture.”
  25
 The
        Company acquired the exclusive rights to the multipath mitigation technique
        (“MMT”) from the Communication Sciences Corporation for applications in
        commercial non-military markets. The Company invested in the commercialization
        of this technology, resulting in design changes within its GNSS Digital Signal
        Processing and software processing sections.
  **Legal
        Proceedings**
  In
        July
        and September 2005, NovAtel, formally contacted ARAM and requested that ARAM
        abandon its Patent Application related to seismic data acquisition points
        using
        GPS, which both violated a Non-Disclosure Agreement and which incorporated
        portions of NovAtel’s United States Patent Publication No. US 2005/0033519. In
        September 2005, ARAM responded stating that NovAtel was in violation of a
        Non-Disclosure Agreement and required that ARAM be listed as a co-inventor
        on
        the NovAtel patent. In July 2006, ARAM commenced action against the Company
        and
        its Chief Technology Officer for alleged
        infringement of a Confidentiality Agreement and the alleged improper filing
        of a
        United States Utility Patent Application .
        The
        action requested declaration that ARAM was the inventor / co-inventor or
        damages
        of $100,000,000, return of all patent based revenue to ARAM and punitive
        damages
        of $1,000,000, special damages and all costs. In August 2006, the Company
        issued
        Notice to Dismiss the action for breach and issued a counterclaim. An initial
        court proceeding supported NovAtel’s position but was overturned on appeal. The
        Company has sought legal advice on this matter and believes the claim is
        without
        merit. As of the date hereof, the Company has not provided for any court
        award
        or for impairment of these intangible assets in its financial statements.
        The
        Company does not expect this issue to materially affect its financial position,
        results of operation or liquidity of the Company.
  Other
        than the foregoing, there are no outstanding legal proceedings material to
        the
        Company that the Company is aware of to which the Company, its subsidiaries
        or
        any of its properties are subject, nor are there any such proceedings known
        to
        be contemplated.
  **C.** **Organizational
        Structure**
  The
        Company’s wholly owned operational subsidiaries are NovAtel Europe Limited in
        the United Kingdom and NovAtel Australia Pty Ltd in Australia.
  **D.** **Property,
        Plant and Equipment**
  See
“Item
        4 — Information on the Company, Business Overview — Operations and Facilities.”
  **Item
        4A.** **Unresolved
        Staff Comments**
  None.
  **Item
        5.****Operating
        and Financial Review and Prospects**
  **A.** **Operating
        Results**
  *Management’s
        discussion and analysis is a review of the results of operations and the
        liquidity and capital resources of the Company. It should be read in conjunction
        with the selected financial data and the consolidated financial statements
        of
        the Company and the notes thereto included elsewhere in this Annual Report.
        Certain information included herein is forward looking and based upon
        assumptions and anticipated results that are subject to uncertainties. Should
        one or more of these uncertainties materialize or should the underlying
        assumptions prove incorrect, actual results may vary significantly from those
        expected. See “Item 3 — Key Information, Risk Factors.”*
  *The
        Company prepares its financial statements in Canadian dollars and in conformity
        with Canadian generally accepted accounting principles (“Canadian GAAP”). Unless
        otherwise noted, the dollar amounts presented in this Annual Report are in
        Canadian currency. The Company is required to reconcile the material differences
        between Canadian GAAP and U.S. generally accepted accounting principles (“U.S.
        GAAP”). Such reconciliation is set forth in Note 20 of the consolidated
        financial statements of the Company included elsewhere in this Annual Report.*
  **Executive
        Overview**
  NovAtel
        designs, markets and sells high-precision GNSS and other positioning component
        technology and sub-systems for a wide variety of commercial applications
        principally in the aviation, geomatics (surveying and mapping), mining,
        precision agriculture, unmanned vehicles, port automation, marine and defence
        industries. NovAtel’s solutions combine hardware, such as receivers and
        antennas, with software to enable its customers to fully integrate the Company’s
        high-precision GNSS technology into their respective products and systems.
        Unless the context requires otherwise, references herein to “NovAtel” or the
“Company” refer to NovAtel Inc., including its interest in its joint venture,
        Point.
  The
        Company’s goal is to become the leading provider of high precision GNSS
        component technology and subsystems. In order to achieve this objective,
        NovAtel’s management focuses on achieving average long-run organic revenue
        growth of 15% to 20% per year (prior to currency fluctuations). Since the
        Company’s top ten customers generated 69% of revenue in 2006, NovAtel’s ability
        to achieve its revenue projections and revenue growth will be largely dependent
        on maintaining successful relationships with its key customers and strategic
        partners, as well as forming relationships with new key OEM customers.
  A
        substantial portion of the Company’s operating costs are relatively fixed in the
        short-term, and consequently, NovAtel’s short-term profitability is largely
        dependent on achieving projected revenues and forecasted gross margins as
        a
        percentage of revenue.
  In
        order
        for the Company to maintain its technology position within its market, the
        Company’s management believes that continued significant investment in research
        and product development programs is required and expects research and
        development costs, net of customer funding, will be 18% to 20% of revenue
        in the
        near term.
  As
        part
        of the Company’s growth strategy, the Company also focuses on managing working
        capital, particularly inventory and trade accounts receivable.
  The
        Company uses performance based incentive programs for both senior management
        and
        employees. Incentive pay under these programs is dependent on the Company
        achieving certain corporate objectives, such as operating income targets.
  26
 Most
        of
        the Company’s revenues (over 95% in 2006) are earned in currencies other than
        the Canadian dollar, principally the U.S. dollar. A substantial portion of
        the
        Company’s expenses, however, have been and will continue to be incurred in
        Canadian dollars. Accordingly, fluctuations in exchange rates between the
        U.S.
        dollar and the Canadian dollar could materially affect results of operations.
  The
        Company’s results of operations have fluctuated and can be expected to continue
        to fluctuate on a periodic basis as a result of a number of factors which
        affect
        revenue, gross margin and operating expenses. Annual and quarterly revenues
        have
        fluctuated because of a number of factors, including introduction of new
        product
        lines, timing of major contracts, U.S. dollar to Canadian dollar exchange
        rates,
        operating results of subsidiaries and a joint venture entity, certification
        and
        market acceptance of the Company’s new products, impact and timing of large
        orders, pricing pressures in the market, establishing and maintaining effective
        distribution channels, fluctuations in non-recurring engineering (“NRE”) fees,
        seasonality, and other issues affecting customer purchase patterns, and the
        timing of industry trade shows.
  NovAtel’s
        consolidated financial statements include a 49% proportionate share of the
        accounts of Point, a geomatics joint venture with Sokkia, as required under
        Canadian GAAP. The Company sells products to Point which incorporates them
        into
        surveying systems that are in turn largely sold through Sokkia’s distribution
        channels. In addition, the Company provides facilities, computer support
        and
        development and logistical support for Point’s Calgary operations. The Company’s
        consolidated Statements of Operations include the proportionate share of
        each of
        the equivalent line items reflected on Point’s Statement of Operations.
        Similarly, the Company consolidates its proportionate share of each line
        item of
        Point’s balance sheet.
  On
        May
        14, 2003, the Company acquired CMC Electronics’ non-aviation L1 GPS OEM product
        line. The new product line extended the Company’s current high-performance,
        upgradeable L1 and L1/L2 product line into the mid-level L1 market. This
        increased the Company’s total addressable market in core sectors and also
        created entry points into new vertical markets, such as timing and marine.
        The
        purchase price was comprised of $150,000 at closing and $600,000 payable
        over
        time as a royalty on the revenue generated by this product line. The $600,000
        royalty payment was paid out in full by the end of 2006. CMC Electronics’
non-aviation L1 GPS OEM product line contributed approximately $3.1 million
        in
        revenue in 2006 compared to $3.4 million in 2005.
  On
        October 1, 2005, the Company acquired Waypoint Consulting Inc. (“Waypoint”) for
        approximately $3.5 million in cash, subject to post closing adjustments to
        working capital. Of the total purchase price, $2.2 million was paid by December
        31, 2005 and $1.2 million held in escrow will be paid in installments over
        three
        years, subject to certain conditions. In 2006, $400,000 of the escrow amount
        was
        paid. Waypoint’s products include specialized real-time and post-processing GNSS
        and /inertial positioning and trajectory software. The Company plans to leverage
        Waypoint’s products, intellectual property and expertise across a number of
        products and market applications. The Waypoint product line contributed $2.1
        million in revenue in 2006, compared to $0.5 million in 2005.
  **Revenue
        and Expenses**
  Revenues
        include product sales and NRE fees. NRE fees are received by the Company
        from
        its customers under engineering service contracts. Revenues from product
        sales
        consist primarily of sales of OEM receivers, GNSS antennas, WAAS type receivers
        and end user products primarily for the survey and mapping market. The Company
        classifies its revenues into the following three primary categories, Geomatics,
        Aerospace and Defence, and Special Applications.
  The
        Geomatics category is made up of surveying and mapping markets. Geomatics
        revenues are largely comprised of NovAtel’s sales to Point, net of intercompany
        eliminations, and NovAtel’s 49% proportionate share of sales by Point.
  The
        Aerospace and Defence category is made up of aviation and defence markets.
        These
        markets utilize the Company’s precision positioning technology for critical
        components in civil air traffic navigation, flight management systems, and
        certain military applications.
  The
        Special Applications category is made up of precision agriculture, marine,
        unmanned vehicles, mining and machine control, and also includes dealers
        (other
        than those that can be identified with a particular market sector) and
        miscellaneous markets. This category also includes sales to Leica Geosystems.
  The
        Company typically maintains control of the technology developed under NRE
        contracts allowing it to use these technologies to improve its current products
        and develop new products and solutions.
  Total
        revenue has increased year over year since 2002 at a compounded annual growth
        rate of 24% through sales to new customers as well as through sales of
        additional products and services to existing customers.
  Cost
        of
        product sales consists primarily of the cost of the raw materials and
        components, labour, manufacturing overhead and provisions for obsolete inventory
        and provisions for warranty obligations. Cost of NRE fees consists primarily
        of
        personnel and related costs incurred in providing the engineering services.
  Gross
        margin as a percentage of revenue varies primarily as a result of product
        sales
        mix, changes in materials and contract manufacturing costs, liquidation of
        discontinued inventory and absorption of fixed manufacturing costs.
  Research
        and development expenses consist primarily of compensation and benefit costs
        of
        engineering personnel, contracted research and development expenses,
        amortization of purchased technology, amortization of equipment costs, and
        facility and computer support costs. Research and development expenses are
        reduced to the extent they are funded under customer contracts and other
        engineering development contracts.
  Selling
        and marketing expenses consist primarily of compensation and benefit costs
        of
        sales and marketing personnel as well as expenses for advertising, promotion
        and
        trade shows, dealer and agent’s commissions, facilities and other expenses
        related to the sale of products.
  General
        and administration expenses consist primarily of compensation and benefit
        costs
        of administrative personnel, professional fees such as legal, audit and
        insurance costs, corporate overhead, computer support costs and facilities
        expenses.
  **Critical
        Accounting Estimates**
  The
        Company applies a number of critical accounting estimates in preparing the
        consolidated financial statements. A discussion of the Company’s critical
        accounting estimates follows.
  27
 ***Revenue
        Recognition***
  The
        Company recognizes product revenue when persuasive evidence of an arrangement
        exists, delivery has occurred, the fee is fixed or determinable and
        collectibility is reasonably assured. Revenues from non-recurring engineering
        fees are recognized at the time services are rendered. On long-term contracts,
        in which the customer pays established rates for time and materials, revenue
        is
        recognized as services are rendered and costs are incurred. On certain long-term
        contracts, revenue is recognized using the proportional performance method
        relative to customer milestones achieved. Revisions in cost and profit estimates
        during the course of work are reflected in the period in which the need for
        revision becomes known. Losses, if any, are recognized fully when first
        anticipated. Some contracts contain penalty provisions based on performance
        relative to established targets. Such penalties are included in revenue or
        cost
        estimates when amounts can be reasonably determined.
  In
        2006,
        approximately $4.7 million, or 6.0%, of the Company’s revenue was derived from
        NRE fees. Approximately 26% of these revenues were recognized from contracts
        on
        which the customer paid established rates for time and materials and 74%
        were
        recognized from contracts that contained customer milestones.
  The
        Company applies American Institute of Certified Public Accountants Statement
        of
        Position 97-2, *Software
        Revenue Recognition* ,
        to
        product sales where software is considered more than incidental. For software
        arrangements involving multiple elements, the Company allocates revenue to
        each
        element based on the relative fair value or the residual method, as applicable,
        and using vendor specific objective evidence of fair values, which is based
        on
        prices charged when the element is sold separately. Software revenue is
        recognized when persuasive evidence of an arrangement exists, the software
        is
        delivered in accordance with all terms and conditions of the customer contracts,
        the fee is fixed or determinable and collection is reasonably assured. Revenue
        related to post-contract support (“PCS”), including technical support and
        unspecified when-and-if available software upgrades, is recognized ratably
        over
        the PCS term.
  As
        of
        December 31, 2006, the Company had deferred revenue of $205,000 in accordance
        with its software revenue recognition policies.
  For
        contracts involving multiple deliverables, where the deliverables are governed
        by more than one authoritative accounting standard, the
        Company applies the Emerging Issues Committee 142, ‘‘Revenue
        Arrangements with Multiple Deliverables’’ (‘‘EIC-142’’), and evaluates each
        deliverable to determine whether it represents a separate unit of accounting
        based on the following criteria: (a) whether the delivered item has value
        to the
        customer on a standalone basis, (b) whether there is objective and reliable
        evidence of the fair value of the undelivered item(s), and (c) if the contract
        includes a general right of return relative to the delivered item, delivery
        or
        performance of the undelivered item(s) is considered probable and substantially
        in the control of the Company. If objective and reliable evidence of fair
        value exists for all units of accounting in the arrangement, revenue is
        allocated to each unit of accounting or element based on relative fair values.
        In situations where there is objective and reliable evidence of fair value
        for
        all undelivered elements, but not for delivered elements, the residual method
        is
        used to allocate the contract consideration. Under the residual method, the
        amount of revenue allocated to delivered elements equals the total arrangement
        consideration less the aggregate fair value of any undelivered elements.
        Each
        unit of accounting is then accounted for under the applicable revenue
        recognition guidance. So long as elements otherwise governed by separate
        authoritative accounting standards cannot be treated as separate units of
        accounting under the guidance in EIC-142 the elements are combined into a
        single unit of accounting for revenue recognition purposes. In this case,
        revenue allocated to the unit of accounting is deferred until all combined
        elements have been delivered or, once there is only one remaining element
        to be
        delivered, based on the revenue recognition guidance applicable to the last
        delivered element within the unit of accounting.
  At
        the
        time the Company recognizes revenue, the Company reduces the measurement
        of
        revenue by an estimate of the expected product returns and price adjustments.
        The provision for product returns and price adjustments is assessed for adequacy
        at each quarter-end and is based on recent historical experience and known
        customer claims. The provision for product returns and price adjustments
        was
        $298,000 as of December 31, 2006 compared to $281,000 at December 31, 2005,
        with
        the increase attributable to an increase in revenue.
  Effective
        with the fourth quarter of 2002, the Company changed its policy of recognizing
        revenue on shipments of product from the Company to Point from revenue
        recognition at the time of shipment to revenue recognition at the time of
        receiving payment from Point, due to the uncertainty of collecting payment
        on
        the associated receivables. As of December 31, 2006, the Company had deferred
        revenue related to product shipments to Point of $485,000, net of inter-company
        eliminations. The Company would revert to its prior policy of recognizing
        revenue at the time of shipment if the Company is able to determine that
        reasonable assurance of collecting payment from Point exists. This determination
        would be based on Point’s ability to demonstrate sustained improved operating
        performance and/or Point receiving additional financial support from the
        Company
        and Sokkia sufficient to enable Point to meet its financial obligations on
        an
        ongoing basis.
  ***Inventories***
  Raw
        materials and components, work-in-progress, and finished goods inventories
        are
        recorded at the lower of cost and net realizable value. Cost is determined
        on a
        first-in, first-out basis and includes materials, labour and manufacturing
        overhead.
  The
        Company establishes provisions for obsolete or excess inventory. The Company’s
        products have product life cycles that range on average from two to four
        years.
        At both the product introduction and product discontinuation stage, there
        is a
        higher degree of risk of inventory obsolescence. In 2006, the provision for
        obsolete and excess inventory included in the statement of operations was
        $201,000 or 0.3% of revenue, compared to $147,000 or 0.2% of revenue in 2005.
  The
        estimate of the provision for obsolete and excess inventory is partially
        based
        on expected future product sales, which are difficult to forecast for certain
        products. As of December 31, 2006, the Company had approximately $392,000
        (gross
        value before inventory provisions) of first generation WAAS and older generation
        GPS receiver inventory for which no firm customer commitments were on hand.
        Based on the Company’s assessment of future market opportunities, the Company
        expects that the value of this inventory will not be realized through future
        sales, and, accordingly, has established provisions to reduce the net value
        of
        this inventory to $nil. As at December 31, 2006, the provision for obsolete
        and
        excess inventory was $1.3 million or 14% of the gross value of inventory,
        compared to $1.5 million or 22% at December 31, 2005, with the decrease
        primarily caused by disposal of certain obsolete inventory items in 2006.
  28
 ***Allowance
        for Doubtful Accounts***
  The
        Company establishes provisions for doubtful accounts receivable. These
        provisions are established at the time revenue is recognized and are
        re-evaluated at each quarter end for adequacy. In determining the adequacy
        of
        the provision, the Company considers known uncollectible or at-risk receivables
        as well as the aging profile of other receivables. In 2006, the provision
        for
        doubtful accounts included in the statement of operations was a recovery
        of
        $74,000 or 0.1% of revenue, compared to $20,000 or 0.03% of revenue in 2005,
        with the change in provision in 2006 attributable to a decrease in the amount
        of
        uncollectible receivables from customers.
  As
        at
        December 31, 2006, the provision for doubtful accounts was $726,000 or 4.9%
        of
        the gross value of the third party receivables compared to $799,000 or 6.8%
        at
        December 31, 2005. The lower dollar amount of the provision reflects recent
        favourable experience relating to collection of customer receivables in 2006.
  ***Provision
        for Future Warranty Costs***
  Warranty
        costs are accrued, to the extent that they are not recoverable from third
        party
        manufacturers, for the estimated cost to repair products for the balance
        of the
        warranty periods.
  The
        Company’s products are covered by standard warranty plans that normally extend
        12 months to 18 months from the date of product shipment. Certain customers
        negotiate warranty terms that range up to three years.
  The
        Company provides for the costs of expected future warranty claims at the
        time of
        product shipment. The adequacy of the provision is assessed at each quarter
        end
        and is based on historical experience of warranty claims and costs. As of
        December 31, 2006, the Company’s provision for future warranty claims was
        $816,000 compared to $693,000 as of December 31, 2005, with the increase
        attributable primarily to increased revenue from product shipments.
  ***Research
        and Development Costs and Deferred Development Costs***
  Research
        costs are charged to operations as incurred. Development costs, including
        software development costs, are charged to operations as incurred unless
        they
        meet specific criteria related to technical, market and financial feasibility.
        In these circumstances, the costs are deferred and amortized on a systematic
        basis, subject to an estimate of recoverability.
  In
        2006
        and 2005, the Company deferred development costs of $nil related to the
        development of a certified aviation GPS receiver.
  At
        December 31, 2006, the Company had deferred $1.3 million of development costs
        ($1.7 million at December 31, 2005). The continued deferral of these costs
        is
        subject to recoverability based on estimates of future sales of the certified
        aviation GPS receiver. With the GPS receiver having reached the
        commercialization stage, the Company amortizes these deferred costs, using
        a
        method similar to the unit-of-production method of amortization. The Company
        amortized $404,000 of these deferred costs in 2006 compared to $538,000 in
        2005.
        On April 5, 2004, the Company and CMC Electronics entered into a Strategic
        Cooperation Agreement which *inter
        alia* provides
        for certain guaranteed future payments over the following four years. Under
        the
        current business programs between the Company and CMC Electronics, the Company
        would expect these guaranteed future payments to recover approximately 44%
        of
        the $1.3 million of deferred development costs as of December 31, 2006. Should
        future actual sales of this receiver be materially lower than the current
        estimated sales, all or a portion of the deferred development costs would
        be
        charged to results of operations. The Company assesses the recoverability
        of the
        deferred development costs at each quarter end.
  ***Income
        Taxes***
  The
        Company follows the liability method of accounting for income taxes. Under
        this
        method, current income taxes are recognized for the estimated income taxes
        payable for the current year. Future income tax assets and liabilities are
        recognized for temporary differences between the tax and accounting bases
        of
        assets and liabilities as well as for the benefit of losses available to
        be
        carried forward to future years for tax purposes that are more likely than
        not
        to be realized.
  As
        of
        December 31, 2006, the Company had income tax benefits related to previously
        incurred income tax losses, research and development costs, depreciation
        deductible for tax purposes and investment tax credits totaling approximately
        $120 million, which are available to reduce future taxable income and taxes
        payable, primarily for Canadian purposes.
  Prior
        to
        2004, the Company had established a full valuation allowance against the
        future
        tax benefits, since it was uncertain that these tax benefits were more likely
        than not to be realized. In determining the valuation allowances to establish
        against these deferred tax benefits, the Company considers many factors,
        including the specific taxing jurisdiction, the carry forward period, income
        tax
        strategies, limitations due to acquisitions-of-control and forecasted earnings.
        A valuation allowance is recognized if, based on the weight of available
        evidence, the Company concludes that it is more likely than not that some
        portion or all of the future tax benefits will not be realized. Effective
        2004,
        and continuing in 2005 and 2006, the Company determined, on the basis of
        consecutive years of increasing profitability from 2001 to 2006 and the
        Company’s forecasts of operating results for the foreseeable future, that it was
        more likely than not that a portion of the future income tax assets would
        be
        realized. As part of this analysis, the Company used a seven year moving
        average
        of forecasted profitability for its operations subject to Canadian income
        tax.
  Accordingly,
        the Company recognized future income tax assets of $7.7 million on its balance
        sheet as of December 31, 2006, and a corresponding $2.1 million future income
        tax benefit in its statement of operations for the year ended December 31,
        2006.
        In 2005, the Company recognized $5.6 million of future income tax assets
        on its
        balance sheet as of December 31, 2005, and a corresponding $2.4 million future
        income tax benefit in its statement of operations for the year ended December
        31, 2005.
  As
        of
        December 31, 2006, the valuation allowance against the calculated future
        income
        tax assets was approximately $31.0 million, or 80% of the gross value of
        the
        future income tax assets.
  If
        the
        Company’s forecasted profitability in the foreseeable future were 20% above or
        20% below current estimates, the future income tax benefit included in the
        statement of operations for the year ended December 31, 2006, would have
        been
        approximately $3.6 million and $0.5 million, respectively.
  29
 **Results
        of Operations**
  The
        following table sets out, as a percentage of revenue, consolidated operations
        data for the periods indicated.
 
 **Year
                  Ended December 31,****2006**
              **2005**
              **2004****(Percentage
                  of Revenue)**Revenues
              100.0%
              100.0%
              100.0%Gross
                  profit — product sales
              63.7
              62.4
              59.9Gross
                  profit — NRE fees
              38.2
              42.0
              43.1Total
                  gross profit
              61.2
              61.1
              58.3Operating
                  expenses:Research
                  and development
              17.3
              17.2
              17.8Selling
                  and marketing
              9.9
              10.1
              10.7General
                  and administration
              10.3
              11.2
              9.8Foreign
                  exchange loss
              0.3
              0.4
              1.1Share
                  offering costs
              —
              —
              1.4Total
                  operating expenses
              37.8
              38.9
              40.8Operating
                  income
              23.4
              22.2
              17.5Interest
                  income, net
              2.2
              1.2
              0.5Other
                  expense
              (0.1)
              (0.1)
              (0.1)Benefit
                  of investment tax credits
              —
              2.5
              8.1Income
                  from continuing operations before income taxes
              25.5
              25.8
              26.0Income
                  taxesCurrent
                  provision
              0.4
              3.2
              4.3Future
                  income tax expense (benefit)
              (2.7)
              (3.8)
              (2.0)Total
                  income tax expense (benefit)
              (2.3)
              (0.6)
              2.3Net
                  income from continuing operations
              27.7
              26.4
              23.7Income
                  (loss) from discontinued operations
              —
              —
              0.1Net
                  income
              27.7%
              26.4%
              23.8%
  ***2006
        Compared to 2005***
  *Revenues*
  Total
        revenues in 2006 were $77.6 million, representing a 23% increase over 2005
        revenues of $63.3 million, despite the adverse impact of the weaker U.S.
        dollar
        relative to the Canadian dollar. Since the majority of the Company’s revenues
        are denominated in U.S. dollars, a weaker U.S. dollar adversely affects
        NovAtel’s revenues. NovAtel’s U.S. dollar denominated revenue declined to an
        average of $1.14 Canadian in 2006 from an average of $1.22 Canadian in 2005.
        If
        the Company’s U.S. dollar denominated revenues were converted into Canadian
        dollars at equivalent exchange rates, revenue in 2006 would have been
        approximately 31% higher than in 2005.
  The
        following table sets out revenues of the Company by the market categories
        indicated for the fiscal years ended December 31, 2006 and 2005.
 **2006**
              
              **2005**
              
              **Change**$
              
              %
              
              $
              
              %
              
              $
              
              %**($000’s)**Geomatics
              
              $
              13,226
              
              
              17
              %
              $
              11,534
              
              
              18
              %
              $
              1,692
              
              
              15
              %Aerospace
                  and Defence
              
              
              8,978
              
              
              12
              %
              
              9,487
              
              
              15
              %
              
              (509
              )
              
              (5
              %)Special
                  Applications
              
              
              55,301
              
              
              71
              %
              
              41,992
              
              
              67
              %
              
              13,309
              
              
              32
              %Other
              
              
              129
              
              
              —
              
              
              282
              
              
              —
              
              
              (153
              )
              
              (54
              %)TOTAL
              
              $
              77,634
              
              
              100
              %
              $
              63,295
              
              
              100
              %
              $
              14,339
              
              
              23
              %
  30
 *Geomatics*
  In
        2006,
        approximately 84% of Geomatics revenues were comprised of NovAtel’s sales to
        Point, net of intercompany eliminations and the Company’s proportionate share of
        sales by Point. The balance of Geomatics revenue was derived from sales to
        third
        party customers. Geomatics sales were $13.2 million in 2006, an increase
        of 15%
        from $11.5 million in 2005, due primarily to higher sales by Point to Sokkia,
        as
        well as higher product shipments by NovAtel to Point. NovAtel only recognizes
        revenue on product shipments to Point at the time of receiving payment.
  *Aerospace
        and Defence*
  Aerospace
        and Defence revenues were $9.0 million in 2006 compared to $9.5 million for
        2005, a decrease of 5%. The Company’s Aerospace and Defence revenues are highly
        dependent on the timing of large, government-funded programs. The lower revenue
        was anticipated and was attributable to lower WAAS and Geostationary Earth
        Orbit
        Augmented Navigation (GAGAN) program revenue.
  In
        2005,
        the Company received a contract for a portion of the Galileo Reception Chain
        (GRC) reference receiver development as part of the European Galileo program.
        The initial contracts valued at €3.7 million, run from June 2005 to December 31,
        2006. The Company recognized $1.5 million revenue under this program in 2006
        compared to $1.1 million revenue in 2005. Should the contract proceed to
        a full
        award, the program may have a value up to €6.3 million and will be substantially
        completed by the end of 2008.
  The
        Company and CMC Electronics jointly developed the certified GPS receiver,
        intended for use in airborne applications and the local area augmentation
        system
        (“LAAS”) program. The Company earned royalties of $683,000 in 2006, compared to
        $800,000 in 2005 related to this receiver, with the decline partially
        attributable to lifetime volume price points.
  In
        October 2004, the Canadian Space Agency (CSA) awarded a contract to the Company
        for demonstration and prototype receiver development for the European Galileo
        system. The value of CSA’s contribution to NovAtel under the contract is
        $997,000, of which $402,000 was recognized as revenue in 2006 compared to
        $595,000 in 2005. This contract was completed in 2006.
  In
        November 2005, the Company commenced work on the Galileo Safety of Life project
        under a CSA contract with CMC Electronics. The Company expects to receive
        $500,000 funding on this program over approximately 18 months, with equipment
        deliveries scheduled for May 2007.
  *Special
        Applications*
  Special
        Applications revenues were $55.3 million in 2006 compared to $42.0 million
        in
        2005, an increase of 32%. The increase was primarily attributable to higher
        product shipments to Leica Geosystems of $6.9 million.
  The
        Company entered into a strategic co-operation agreement with Leica Geosystems
        in
        May 2003 to jointly develop new technology for GPS in the high-precision
        geomatics market. In September 2003, pursuant to the strategic co-operation
        agreement, NovAtel also entered into a supply agreement with Leica Geosystems
        which sets forth the arrangements under which NovAtel would develop and supply
        a
        custom GPS receiver for Leica Geosystems. In 2005 and 2006, Leica Geosystems
        announced the launch of new survey products that incorporate NovAtel’s GNSS
        receiver and antenna technology. The Company’s revenue with Leica Geosystems
        accounted for 23% of total revenue in 2006, and the Company expects revenue
        from
        product shipments supplied to Leica Geosystems to comprise between 18% and
        22%
        of NovAtel’s total revenue in 2007.
  *Revenues
        by Geographic Market*
  In
        2006,
        the Company derived approximately 56% of its total revenues from the sale
        of
        products to countries outside the United States and Canada compared to 52%
        in
        2005. Revenues from such international sales increased to $43.6 million in
        2006
        from $33.2 million in 2005, primarily as a result of higher shipments to
        Leica
        Geosystems and into China.
  *Gross
        Profit*
  Gross
        profit increased to $47.5 million in 2006 from $38.7 million in 2005, mainly
        as
        a result of increased revenue. Gross profit as a percentage of total revenues
        increased to 61.2% in 2006 from 61.1% in 2005, relatively unchanged.
  *Research
        and Development*
  Research
        and development expenses increased 24% from $10.9 million in 2005 to $13.5
        million in 2006 and increased as a percentage of total revenues from 17.2%
        in
        2005 to 17.3% in 2006. The increase in research and development expenses
        is
        primarily attributable to higher employee compensation and benefit costs
        of $2.9
        million, higher material/services costs of $673,000, higher amortization
        costs
        of $269,000, higher recruiting and relocation costs of $113,000, and higher
        equipment costs of $98,000, partially offset by higher recovery of expenses
        from
        customer funded programs of $1.6 million. The Company believes that significant
        investments in research and development are required to maintain its technology
        and compete in its business. The Company expects to spend approximately 18%
        to
        20% of revenue in research and development activities in 2007.
  *Selling
        and Marketing*
 
 Selling
        and marketing expenses increased 20 %
        from
        $ 6.4 million
        in 2005 to $ 7.7 million
        in 2006 but decreased as a percentage of revenue from 10.1 %
        in 2005
        to 9.9 %
        in
        2006. The increased selling and marketing costs were due primarily to higher
        employee compensation and benefit costs of $793,000, higher costs for facilities
        and IT support services of $197,000, higher travel costs of $118,000 and
        higher
        external commission costs of $136,000, partially offset by lower provision
        for
        doubtful customer accounts receivable of $94,000 .
        The
        Company expects to spend approximately 9.5% to 10.5% of revenue in selling
        and
        marketing activities in 2007.
  *General
        and Administration*
  General
        and administration expenses increased 13% from $ 7.1 million
        in 2005 to $8.0 million in 2006 but decreased as a percentage of revenue
        from 11.2 %
        in 2005
        to 10.3 %
        in
        2006. The increase in general and administration expenses was a result of
        higher
        employee compensation and benefit costs of $367,000, higher facilities costs
        of
        $365,000, higher amortization costs of $250,000, and higher insurance costs
        of
        $105,000, partially offset by lower professional fees for legal and audit
        services of $72,000 and higher internal allocation to other departments for
        facilities and IT support services of $117,000 .
        The
        Company expects to spend approximately 9.5% to 10.5% of revenue in general
        and
        administration activities in 2007.
  31
 *Foreign
        exchange loss*
  Foreign
        exchange loss decreased from $255,000 in 2005 to $198,000 in 2006 due to
        a
        slowdown in the weakening of the U.S. dollar relative to the Canadian dollar.
  *Interest
        Income, net*
  NovAtel
        earned net interest income of $1.7 million in 2006 compared to $787,000 in
        2005
        as a result of higher cash balances available for investment and higher interest
        rates. The Company’s cash deposits which are not required for operations are
        invested in short-term interest bearing instruments.
  *Benefit
        of Investment Tax Credits*
  In
        2005,
        the Company recognized a $1.6 million benefit of investment tax credits related
        to the use of investment tax credits to shelter tax otherwise payable in
        2005.
        There was no comparable recognition in 2006 as the Company utilized other
        tax
        shields to shelter tax otherwise payable.
  
 *Provision
        for Current Income Taxes and Future Income Tax Benefit*
  The
        provision for current income taxes consists primarily of an expense related
        to
        the benefit of investment tax credits recognized elsewhere on the statement
        of
        operations, a provision for income tax payable in the United States, United
        Kingdom and Australia, a provision for income tax payable in Canada related
        to
        Waypoint’s operations prior to being amalgamated with the Company, and Canadian
        federal large corporations tax. The provision for current income taxes was
        $341,000 in 2006 compared to $2.0 million in 2006. The decrease was mainly
        attributable to expense incurred with the recognition of the benefit of
        investment tax credits in 2005.
  In
        2006,
        the Company recognized $2.1 million future income tax benefit (see “Critical
        Accounting Estimates”) compared to $2.4 million in 2005. The Company recognized
        the future income tax benefit in 2006 on the basis of its improving
        profitability from 2001 to 2006 and the Company’s forecasted profitability in
        the foreseeable future.
  ***2005
        Compared to 2004***
  *Revenues*
  Total
        revenues in 2005 were $63.3 million, representing a 17% increase over 2004
        revenues of $53.9 million, despite the adverse impact of the weaker U.S.
        dollar
        relative to the Canadian dollar. Since the majority of the Company’s revenues
        are denominated in U.S. dollars, a weaker U.S. dollar adversely affects
        NovAtel’s revenues. NovAtel’s U.S. dollar denominated revenue declined to an
        average of $1.22 Canadian in 2005 from an average of $1.30 Canadian in 2004.
        If
        the Company’s U.S. dollar denominated revenues were converted into Canadian
        dollars at equivalent exchange rates, revenue in 2005 would have been
        approximately 25% higher than in 2004.
  The
        following table sets out revenues of the Company by the market categories
        indicated for the fiscal years ended December 31, 2005 and 2004.
  **2005**
              
              **2004**
              
              **Change**$
              
              %
              
              $
              
              %
              
              $
              
              %**($000’s)**Geomatics
              
              $
              11,534
              
              
              18
              %
              $
              9,339
              
              
              17
              %
              $
              2,195
              
              
              24
              %Aerospace
                  and Defence
              
              
              9,487
              
              
              15
              %
              
              11,503
              
              
              21
              %
              
              (2,016
              )
              
              (18
              %)Special
                  Applications
              
              
              41,992
              
              
              67
              %
              
              32,697
              
              
              61
              %
              
              9,295
              
              
              28
              %Other
              
              
              282
              
              
              —
              
              
              393
              
              
              1
              %
              
              (111
              )
              
              (28
              %)TOTAL
              
              $
              63,295
              
              
              100
              %
              $
              53,932
              
              
              100
              %
              $
              9,363
              
              
              17
              %
 *Geomatics*
  In
        2005,
        approximately 77% of Geomatics revenues were comprised of NovAtel’s sales to
        Point, net of intercompany eliminations and the Company’s proportionate share of
        sales by Point. The balance of Geomatics revenue was derived from sales to
        third
        party customers. Geomatics sales were $11.5 million in 2005, an increase
        of 24%
        from $9.3 million in 2004, due primarily to higher sales to third party
        customers in Canada and Asia, as well as higher NRE revenue associated with
        new
        product development for Point.
  *Aerospace
        and Defence*
  Aerospace
        and Defence revenues were $9.5 million in 2005 compared to $11.5 million
        for
        2004, a decrease of 18%. The Company’s Aerospace and Defence revenues are highly
        dependent on the timing of large, government-funded programs. The majority
        of
        the revenue in 2005 related to the U.S. WAAS and Indian GAGAN aviation programs
        that contributed $4.1 million in revenue in 2005 compared to $8.2 million
        in
        2004. The lower revenue was anticipated and was attributable to the substantial
        completion of major phases of three WAAS related contracts in 2004. In the
        latter half of 2005, the Company also recognized initial revenue of $1.1
        million
        under a contract funded by the European Space Agency (“ESA”) to develop the
        Ground Reference Receiver for the European Galileo program.
  The
        certified GPS receiver jointly developed by the Company and CMC Electronics
        is
        intended for use in airborne applications and the local area augmentation
        system
        (“LAAS”) program. With the GPS receiver achieving certification, the Company
        earned royalties of $800,000 in 2005, compared to $545,000 in 2004.
  32
 In
        October 2004, the Canadian Space Agency (CSA) awarded a contract to the Company
        for demonstration and prototype receiver development for the European Galileo
        system. The value of CSA’s contribution to NovAtel under the contract is
        $997,000, of which $595,000 was recognized as revenue in 2005.
  *Special
        Applications*
  Special
        Applications revenues were $42.0 million in 2005 compared to $32.7 million
        in
        2004, an increase of 28%. The increase was primarily attributable to higher
        product shipments to Leica Geosystems of $2.6 million, higher shipments of
        product into China of $2.6 million and higher shipments to the Company’s U.S.
        dealer network of $2.8 million. The Company’s revenue with Leica Geosystems
        accounted for 18% of total revenue in 2005.
  *Revenues
        by Geographic Market*
  In
        2005,
        the Company derived approximately 52% of its total revenues from the sale
        of
        products to countries outside the United States and Canada compared to 48%
        in
        2004. Revenues from such international sales increased to $33.2 million in
        2005
        from $25.8 million in 2004, primarily as a result of higher shipments to
        Leica
        Geosystems and into China.
  *Gross
        Profit*
  Gross
        profit increased to $38.7 million in 2005 from $31.4 million in 2004, mainly
        as
        a result of increased revenue. Gross profit as a percentage of total revenues
        increased to 61.1% in 2005 from 58.3% in 2004. The increase in gross margin
        as a
        percentage of revenue was primarily attributable to favourable product mix,
        including the benefit of Waypoint related products which are primarily software,
        a lower proportion of NRE fee revenues relative to product sales, and lower
        provisions for inventory obsolescence.
  *Research
        and Development*
  Research
        and development expenses increased 14% from $9.6 million in 2004 to $10.9
        million in 2005 but decreased as a percentage of total revenues from 17.8%
        in
        2004 to 17.2% in 2005. The increase in research and development expenses
        is
        primarily attributable to higher material costs of $523,000, higher employee
        compensation and benefit costs of $343,000, higher costs for facilities and
        IT
        support services of $378,000 and higher consulting and other outside service
        of
        $298,000, partially offset by higher recovery of expenses from customer funded
        programs of $418,000.
  *Selling
        and Marketing*
  Selling
        and marketing expenses increased 11% from $5.8 million in 2004 to $6.4 million
        in 2005 but decreased as a percentage of revenue from 10.7% in 2004 to 10.1%
        in
        2005. The increased selling and marketing costs were due primarily to higher
        employee compensation and benefit costs of $477,000, higher advertising and
        product promotion costs of $307,000, partially offset by lower provision
        for
        doubtful customer accounts receivable of $160,000.
  *General
        and Administration*
  General
        and administration expenses increased 33% from $5.3 million in 2004 to $7.1
        million in 2005 and increased as a percentage of revenue from 9.8% in 2004
        to
        11.2% in 2005. The increase in general and administration expenses was a
        result
        of higher professional fees for legal and audit services of $667,000, higher
        employee compensation and benefit costs of $460,000, higher insurance costs
        of
        $441,000, higher amortization costs of $170,000, higher board of director
        fees
        of $100,000, and higher consulting costs related to the Company’s Sarbanes-Oxley
        404 compliance project of $260,000, partially offset by higher allocations
        for
        facility and IT support to manufacturing, research and development and sales
        and
        marketing departments of $550,000.
  *Foreign
        exchange loss*
  Foreign
        exchange loss decreased from $595,000 in 2004 to $255,000 in 2005 due to
        a
        slowdown in the weakening of the U.S. dollar relative to the Canadian dollar.
  *Interest
        Income, net*
  NovAtel
        earned net interest income of $787,000 in 2005 compared to $313,000 in 2004
        as a
        result of higher cash balances available for investment and higher interest
        rates.
  *Benefit
        of Investment Tax Credits*
  In
        2005,
        the Company recognized a $1.6 million benefit of investment tax credits related
        to the use of investment tax credits to shelter tax otherwise payable in
        2005.
        In 2004, the Company recognized a $4.4 million benefit of investment tax
        credits
        of which $2.3 million was related to the use of investment tax credits to
        shelter tax otherwise payable in 2004 and $2.1 million was related to the
        recognition of future income tax assets.
  *Provision
        for Current Income Taxes and Future Income Tax Benefit*
  The
        provision for current income taxes consists primarily of an expense related
        to
        the benefit of investment tax credits recognized elsewhere on the statement
        of
        operations, a provision for income tax payable in the U.S., a provision for
        income tax payable in Canada related to Waypoint’s operations prior to being
        amalgamated with the Company, and Canadian federal large corporations tax.
        The
        provision for current income taxes was $2.0 million in 2005, compared to
        $2.3
        million in 2004. The decrease was mainly attributable to a lower expense
        incurred with the recognition of the benefit of investment tax credits.
   In
        2005,
        the Company recognized $2.4 million future income tax benefit (see “Critical
        Accounting Estimates”) compared to $1.1 million in 2004. The Company recognized
        the future income tax benefit in 2005 on the basis of its improving
        profitability from 2001 to 2005 and the Company’s forecasted profitability in
        the foreseeable future.
  33
 **Quarterly
        Results of Operations**
  The
        following tables set out certain financial information for each of the eight
        quarters ended December 31, 2006. In the opinion of management of the Company,
        this information has been prepared on the same basis as the audited financial
        statements appearing elsewhere in this Annual Report, and all necessary
        adjustments have been included in the amounts stated below to fairly present
        the
        unaudited quarterly results when read in conjunction with the Company’s audited
        financial statements and the notes to those statements. The operating results
        for any quarter should not be relied upon as any indication of results for
        any
        future period.
  
 **Quarter
                  Ended****2006**
              
              **2005****Dec.
                  31**
              
              **Sept.
                  30**
              
              **Jun.
                  30**
              
              **Mar.
                  31**
              
              **Dec.
                  31**
              
              **Sept.
                  30**
              
              **Jun.
                  30**
              
              **Mar.
                  31****($000's)**Revenue
              
              $
              19,196
              
              $
              19,023
              
              $
              20,965
              
              $
              18,450
              
              $
              16,157
              
              $
              14,295
              
              $
              17,486
              
              $
              15,357Cost
                  of sales
              
              
              7,253
              
              
              6,905
              
              
              8,593
              
              
              7,356
              
              
              5,905
              
              
              5,614
              
              
              6,817
              
              
              6,300Gross
                  profit
              
              
              11,943
              
              
              12,118
              
              
              12,372
              
              
              11,094
              
              
              10,252
              
              
              8,681
              
              
              10,669
              
              
              9,057Operating
                  expenses:Research
                  and development
              
              
              3,447
              
              
              3,480
              
              
              3,334
              
              
              3,189
              
              
              3,056
              
              
              2,606
              
              
              2,882
              
              
              2,338Selling
                  and marketing
              
              
              2,060
              
              
              1,984
              
              
              1,948
              
              
              1,700
              
              
              1,480
              
              
              1,689
              
              
              1,651
              
              
              1,567General
                  and administration
              
              
              2,392
              
              
              2,031
              
              
              1,900
              
              
              1,686
              
              
              1,928
              
              
              1,520
              
              
              1,817
              
              
              1,817Foreign
                  exchange loss (gain)
              
              
              119
              
              
              (69
              )
              
              250
              
              
              (102
              )
              
              19
              
              
              196
              
              
              32
              
              
              8Share
                  offering costs
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  operating expenses
              
              
              8,018
              
              
              7,426
              
              
              7,432
              
              
              6,473
              
              
              6,483
              
              
              6,011
              
              
              6,382
              
              
              5,730Operating
                  income
              
              
              3,925
              
              
              4,692
              
              
              4,940
              
              
              4,621
              
              
              3,769
              
              
              2,670
              
              
              4,287
              
              
              3,327Interest
                  income, net
              
              
              545
              
              
              468
              
              
              380
              
              
              287
              
              
              246
              
              
              218
              
              
              170
              
              
              153Other
                  income (expense)
              
              
              53
              
              
              (56
              )
              
              (63
              )
              
              (20
              )
              
              (12
              )
              
              (16
              )
              
              (30
              )
              
              (14
              )Benefit
                  of investment tax credits
              
              
              —
              
              
              ——
              
              
              —
              
              
              —
              
              
              556
              
              
              —
              
              
              —
              
              
              1,036Income
                  from continuing operations before income taxes
              
              
              4,523
              
              
              5,104
              
              
              5,257
              
              
              4,888
              
              
              4,559
              
              
              2,872
              
              
              4,427
              
              
              4,502Income
                  taxesCurrent
                  provision
              
              
              65
              
              
              96
              
              
              99
              
              
              81
              
              
              549
              
              
              75
              
              
              109
              
              
              1,313Future
                  income tax expense (benefit)
              
              
              (688
              )
              
              (600
              )
              
              (345
              )
              
              (428
              )
              
              (1,121
              )
              
              (371
              )
              
              (355
              )
              
              (555
              )Total
                  income tax expense (benefit)
              
              
              (623
              )
              
              (504
              )
              
              (246
              )
              
              (347
              )
              
              (572
              )
              
              (296
              )
              
              (246
              )
              
              758Net
                  income from continuing operations
              
              $
              5,146
              
              $
              5,608
              
              $
              5,503
              
              $
              5,235
              
              $
              5,131
              
              $
              3,168
              
              $
              4,673
              
              $
              3,744
  
 34
 **Quarter
                  Ended****2006**
              **2005****(Percentage
                  of Revenues)****Dec.
                  31**
              **Sept.
                  30**
              **Jun.
                  30**
              **Mar.
                  31**
              **Dec.
                  31**
              **Sept.
                  30**
              **Jun.
                  30**
              **Mar.
                  31**Revenues
              100%
              100%
              100%
              100%
              100%
              100%
              100%
              100%Gross
                  profit
              62.2
              63.7
              59.0
              60.1
              63.4
              60.7
              61.0
              59.0%Operating
                  expenses:Research
                  and development
              18.0
              18.3
              15.9
              17.3
              18.9
              18.2
              16.5
              15.2Selling
                  and marketing
              10.7
              10.4
              9.3
              9.2
              9.2
              11.8
              9.4
              10.2General
                  and administration
              12.5
              10.7
              9.1
              9.1
              11.9
              10.6
              10.4
              11.8Foreign
                  exchange loss (gain)
              0.6
              (0.4)
              1.2
              (0.6)
              0.1
              1.4
              0.2
              0.1Share
                  offering costs
              —
              —
              —
              —
              —
              —
              —
              —Total
                  operating expenses
              41.8
              39.0
              35.4
              35.1
              40.1
              42.0
              36.5
              37.3Operating
                  income
              20.4
              24.7
              23.6
              25.0
              23.3
              18.7
              24.5
              21.7Interest
                  income, net
              2.8
              2.5
              1.8
              1.6
              1.6
              1.5
              1.0
              1.0Other
                  income (expense)
              0.4
              (0.4)
              (0.3)
              (0.1)
              (0.1)
              (0.1)
              (0.2)
              (0.1)Benefit
                  of investment tax credits
              —
              —
              —
              —
              3.4
              —
              —
              6.7Income
                  from continuing operations before income taxes
              23.6
              26.8
              25.1
              26.5
              28.2
              20.1
              25.3
              29.3Income
                  taxesCurrent
                  provision
              0.4
              0.5
              0.5
              0.4
              3.4
              0.5
              0.6
              8.5Future
                  income tax expense (benefit)
              (3.6)
              (3.2)
              (1.6)
              (2.3)
              (7.0)
              (2.6)
              (2.0)
              (3.6)Total
                  income tax expense (benefit)
              (3.2)
              (2.7)
              (1.1)
              (1.9)
              (3.6)
              (2.1)
              (1.4)
              4.9Net
                  income from continuing operations
              26.8%
              29.5%
              26.2%
              28.4%
              31.8%
              22.2%
              26.7%
              24.4%
  The
        following table sets out revenues of the Company by the market categories
        indicated for the last eight fiscal quarters.
  
 **Quarter
                  Ended****2006**
              
              **2005****Dec.
                  31**
              
              **Sept.
                  30**
              
              **Jun.
                  30**
              
              **Mar.
                  31**
              
              **Dec.
                  31**
              
              **Sept.
                  30**
              
              **Jun.
                  30**
              
              **Mar.
                  31****($000’s)**Geomatics
              
              $
              3,525
              
              $
              3,315
              
              $
              4,015
              
              $
              2,371
              
              $
              2,339
              
              $
              3,010
              
              $
              3,719
              
              $
              2,466Aerospace
                  and Defence
              
              
              1,551
              
              
              3,066
              
              
              2,089
              
              
              2,272
              
              
              3,115
              
              
              1,368
              
              
              3,116
              
              
              1,888Special
                  Applications
              
              
              14,065
              
              
              12,635
              
              
              14,838
              
              
              13,763
              
              
              10,656
              
              
              9,832
              
              
              10,626
              
              
              10,878Other
              
              
              55
              
              
              7
              
              
              23
              
              
              44
              
              
              47
              
              
              85
              
              
              25
              
              
              125TOTAL
              
              $
              19,196
              
              $
              19,023
              
              $
              20,965
              
              $
              18,450
              
              $
              16,157
              
              $
              14,295
              
              $
              17,486
              
              $
              15,357
  The
        Company’s quarterly results of operations have fluctuated and are expected to
        continue to fluctuate because of a number of factors which affect revenue,
        gross
        margins and operating expenses, including revenue generated from major
        contracts, acquisition of new product lines, U.S. dollar to Canadian dollar
        exchange rates, operating results of joint venture and subsidiary entities,
        acquisitions, new product introductions, fluctuations in NRE fees, seasonality
        and other factors affecting customer purchase patterns, and the timing of
        industry trade shows.
  In
        addition, revenues can be expected to vary significantly as a result of a
        lack
        of a significant order backlog, fluctuations in demand for existing products,
        the rate of development of new markets, the degree of market acceptance of
        new
        products, increased competition and the general strength of domestic and
        international economic conditions. Furthermore, if the Company were unable
        to
        deliver sufficient quantities of products in a timely manner, due to factors
        such as parts supply shortages or customs delays, its revenues could be
        adversely affected.
  In
        2006,
        quarterly operating expenses fluctuated due to the impact of changes in staffing
        levels, recovery of research and development expenses from NRE fees, legal
        fees,
        and provisions related to the Company’s employee incentive programs and senior
        management bonus program.
  **Liquidity
        and Capital Resources**
  In
        2006,
        cash provided by operations was $19.4 million, compared to $17.1 million
        in
        2005. Cash provided by operations in 2006 consisted primarily of $21.5 million
        of net income and $3.5 million of amortization expenses, partially offset
        by the
        effect of $2.0 million in non-cash tax-related items and a $4.7 million increase
        in non-cash working capital. The increase in non-cash working capital was
        caused
        primarily by an increase in accounts receivable and inventories, due largely
        to
        the launch of a new generation of GNSS receivers in 2006, partially offset
        by an
        increase in accounts payable and accrued liabilities.
  35
 Cash
        provided by financing activities in 2006 was $2.6 million, consisting of
        $1.0
        million related to the exercise of employee stock options and the reimbursement
        of loans by Point, Inc. of $1.5 million, after the effect of intercompany
        eliminations. In 2005, $778,000 in cash was provided by financing activities,
        of
        which $721,000 was also related to employee stock option exercises.
  Cash
        used
        in investing activities in 2006 was $20.9 million, consisting of purchases
        of
        $51.8 million of short-term investments, an additional investment in Point,
        Inc
        of $1.5 million, after the effect of intercompany eliminations, and $6.4
        million
        of capital equipment, partially offset by proceeds of short-term investments
        of
        $38.7 million. In 2005, cash used in investing activities was $24.1 million,
        consisting of purchases of $56.4 million of short-term investments, $3.5
        million
        related to the acquisition of Waypoint, $2.4 million of capital equipment
        and
        $221,000 in royalty payments made to CMC Electronics in connection with the
        purchase of its former OEM GPS business, partially offset by proceeds from
        maturities of short-term investments of $38.4 million.
  At
        December 31, 2006, NovAtel had cash and short-term investments of $49.3 million
        of which approximately 95% are in Canadian dollars. The Company has credit
        agreements with HSBC Bank Canada and The Toronto Dominion Bank under which
        it
        can borrow up to $1.7 million for day-to-day operating requirements and $3.9
        million to support the margin requirement related to the purchase of up to
        approximately U.S. $17.0 to $18.0 million of foreign exchange contracts
        (depending on the maturity date of the contracts). The lines of credit are
        payable on demand, are secured by certain of the Company's assets and bear
        interest at the financial institutions’ prime rate (December 31, 2006 — 6.0%) on
        Canadian dollar advances. At December 31, 2006, portions of the lines of
        credit
        were utilized to support approximately U.S. $14.0 million of foreign exchange
        contracts (U.S. $8.5 million at December 31, 2005), leaving $1.7 million
        available for day-to-day operating requirements and the margin capacity
        necessary to enter into an additional U.S. $3.0 to $4.0 million in forward
        exchange contracts (depending on the maturity date of the contracts).
  The
        Company believes that its existing cash, cash equivalents, short-term
        investments, available lines of credit and anticipated cash generated from
        operations will be sufficient to satisfy its currently anticipated cash needs
        for at least the next twelve months.
  **Taxes**
  The
        Company’s operations are substantially located in Canada and accordingly, Canada
        is the Company’s main tax jurisdiction. The Company has not recorded a provision
        for current income taxes payable in Canada, other than for Canadian federal
        large corporations tax, income tax related to Waypoint’s operations prior to
        amalgamation with NovAtel, due to previously incurred losses, credits and
        costs.
        As of December 31, 2006, the Company had approximately $120 million of losses,
        investment tax credits, depreciation and research and development costs that
        are
        available to reduce future taxable income and taxes payable primarily in
        Canada.
        The Company has determined that the acquisition of a majority of its Common
        Shares by CMC Electronics in 1998, BAE SYSTEMS p.l.c.’s acquisition of the
        majority of the common shares of CMC Electronics in November 1999, and ONCAP’s
        acquisition of the majority of the common shares of CMC Electronics in April
        2001 each constitute an acquisition of control of the Company for Canadian
        income tax purposes. Accordingly, the availability of certain of the Company’s
        Canadian income tax losses, research and development costs, depreciation
        deductible for tax purposes and investment tax credit may be subject to
        limitation. The ultimate availability and amount of these losses, credits
        and
        costs may be dependent upon future Canada Revenue Agency audits.
  Prior
        to
        2004, the Company had established a full valuation allowance against the
        future
        tax benefits associated with tax shields, since it was uncertain that these
        tax
        benefits were more likely than not to be realized. In determining the valuation
        allowances to establish against these deferred tax benefits, the Company
        considers many factors, including the specific taxing jurisdiction, the carry
        forward period, income tax strategies, limitations due to
        acquisitions-of-control and forecasted earnings. A valuation allowance is
        recognized if, based on the weight of available evidence, the Company concludes
        that it is more likely than not that some portion or all of the future tax
        benefits will not be realized. In 2004, 2005 and 2006, the Company determined,
        on the basis of consecutive years of increasing profitability from 2001 to
        2006
        and the Company’s forecasts of operating results for the foreseeable future,
        that it was more likely than not that a portion of the future income tax
        assets
        would be realized. As part of this analysis, the Company used a seven year
        moving average to forecast profitability of its operations subject to Canadian
        income tax.
  Accordingly,
        the Company recognized future income tax assets of $7.7 million ($3.4 million
        current and $4.3 million long term) on its balance sheet as of December 31,
        2006, and a corresponding $2.1 million future income tax benefit in its
        statement of operations for the year ended December 31, 2006.
  **Outlook**
  Management
        of the Company expects revenues to increase as a result of the addition of
        new
        customers, the sale of additional products and services to existing customers,
        as well as through the implementation of the Company’s overall growth strategy.
        NovAtel’s management expects to achieve average organic revenue growth of 15% to
        20% per year over the long-term, prior to currency fluctuations.
  The
        Company’s U.S. dollar denominated revenue generated an average of $1.14 Canadian
        dollar per U.S. dollar in 2006. As of  May 25, 2007, the U.S. dollar was
        valued at approximately $1.08 per Canadian dollar. The Company currently
        expects
        that product shipments to Leica Geosystems will represent 18% to 22% of 2007
        revenues. The Company expects gross profit generated on product sales and
        NRE
        fees to increase in conjunction with the expected increase in revenue. Research
        and development expenses are expected to increase to support evolving
        technological needs and new product development. Sales and marketing expenses
        and general and administrative expenses are also anticipated to increase
        to
        support the anticipated growth in the Company’s business.
  **Off
        Balance Sheet Arrangements**
  As
        of
        December 31, 2006, the Company had no off balance sheet arrangements other
        than
        operating leases.
  36
 **Contractual
        Obligations**
  The
        following table sets forth the Company’s contractual obligations and commitments
        to make future payments under contracts, excluding trade and related party
        trade
        payables.
  **Payments
                  Due by Period****Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1-3**
                **Years**
              
              **3-5**
                **Years**
              
              **More
                  than**
                **5
                  years****($000’s)**Capital
                  lease obligations
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  leases
              
              
              14,021
              
              
              1,391
              
              
              2,806
              
              
              2,716
              
              
              7,108Purchase
                  obligations for inventory, capital assets and services
              
              
              10,921
              
              
              10,706
              
              
              215
              
              
              —
              
              
              —Notes
                  payable
              
              
              541
              
              
              541
              
              
              —
              
              
              —
              
              
              —Licence
                fee
                payable
              
              
              1,842
              
              
              965
              
              
              877
              
              
              —
              
              
              —TOTAL
              
              $
              27,325
              
              $
              13,603
              
              $
              3,898
              
              $
              2,716
              
              $
              7,108
  **Related
        Party Transactions**
  In
        2006,
        the Company sold $5.8 million of products to Point, its joint venture with
        Sokkia. In addition, the Company provided $322,000 in facilities, computer
        systems support and research and development support and charged engineering
        services of $512,000 to Point. The above transactions between the Company
        and
        Point are before intercompany eliminations.
  On
        November 24, 2006, the Company and Sokkia invested U.S. $5.3 million (the
        Company’s share being U.S. $2.6 million) in the common shares of Point, Inc. The
        Company’s ownership percentage of Point, Inc. remained unchanged as a result of
        this transaction.
  On
        November 27, 2006, Point, Inc. repaid U.S. $5.3 million (the Company’s share
        being $2.6 million) of loans outstanding with the Company and
        Sokkia.
  As
        at
        December 31, 2006, the Company and Sokkia had collectively loaned Point U.S.
        $1.6 million, the Company’s share being U.S. $637,000. The loans are secured by
        the assets of Point. On February 3, 2006, the Company and Sokkia advanced
        U.S.
        $1.6 million in new loans to Point, Inc. with the Company’s share being U.S.
        $637,000 .
  Point
        is
        dependent on the Company and Sokkia for product supply, distribution and
        financing. Should Sokkia and the Company discontinue their support, Point’s
        ability to continue as a going concern would be impaired. The consolidated
        financial statements of the Company included elsewhere in this Annual Report
        do
        not reflect any adjustments that would be required if Point’s operations were
        discontinued.
  On
        March
        16, 2007, Topcon and Sokkia announced that they had entered into an agreement
        to
        form a “combined” entity. Topcon has GNSS technology and products that compete
        with those supplied by NovAtel to Point. The agreement under which NovAtel
        and
        Sokkia established Point expires in July 2009. The loss of Point or Sokkia,
        or
        both, as a customer or a substantial decrease in sales to Point could have
        a
        material adverse effect on NovAtel’s business, financial condition and results
        from operations and could cause its stock price to decline.
  **New
        Canadian and U.S. GAAP Accounting Pronouncements**
  ***Canadian
        Pronouncements***
  In
        January 2005, the Canadian Institute of Chartered Accountants (“CICA”)
        issued Section 1530, “Comprehensive Income”, Section 3251, “Equity”,
        Section 3855, “Financial Instruments - Recognition and Measurement” and
        Section 3865, “Hedges”. The new standards increase harmonization with U.S.
        GAAP and will require the following:
  ·
            Financial
                assets will be classified as either held-to-maturity, held-for-trading
                or
                available-for-sale. Held-to-maturity classification will be restricted
                to
                fixed maturity instruments that the company intends and is able to
                hold to
                maturity and will be accounted for at amortized cost. Held-for-trading
                instruments will be recorded at fair value with realized and unrealized
                gains and losses reported in net income. The remaining financial
                assets
                will be classified as available-for-sale. These will be recorded
                at fair
                value with unrealized gains and losses reported in a new category
                of the
                consolidated balance sheet under shareholders’ equity called other
                comprehensive income (“OCI”); and  ·
            Derivatives
                will be classified as held-for-trading unless designated as hedging
                instruments. All derivatives, including embedded derivatives that
                must be
                separately accounted for, will be recorded at fair value on the
                consolidated balance sheet. For derivatives that hedge the changes
                in fair
                value of an asset or liability, changes in the derivatives’ fair value
                will be reported in net income and be substantially offset by changes
                in
                the fair value of the hedged asset or liability attributable to the
                risk
                being hedged. For derivatives that hedge variability in cash flows,
                the
                effective portion of the changes in the derivatives’ fair value will be
                initially recognized in OCI and the ineffective portion will be recorded
                in net income. The amounts temporarily recorded in OCI will subsequently
                be reclassified to net income in the periods when net income is affected
                by the variability in the cash flows of the hedged
                item.  The
        above
        guidance will apply for interim and annual financial statements relating
        to
        fiscal years beginning on or after October 1, 2006. Earlier adoption will
        be permitted only as of the beginning of a fiscal year. The impact of
        implementing these new standards did not have a material impact on the Company’s
        consolidated financial statements.
  In
        December 2006, CICA issued Section
        3862 - “ Financial
        Instruments - Disclosures”. ** This standard
        requires entities to provide disclosures in their financial statements that
        enable users to evaluate the
        significance of financial instruments to the entity's financial position
        and
        performance. It also requires that entities disclose the
        nature and extent of risks arising from financial instruments and how the
        entity
        manages those risks.
  In
        December 2006, CICA issued Section 3863 - “ Financial
        Instruments - Presentation”. ** This
        standard establishes standards for presentation of financial instruments
        and
        non-financial derivatives and deals with the classification of financial
        instruments, from the perspective of the issuer, between liabilities and
        equity,
        the classification of related interest, dividends, losses and gains, and
        the
        circumstances in which financial assets and financial liabilities are
        offset. CICA
        sections 3862 and 3863 are effective for annual and interim periods beginning
        on
        or after October 1, 2007.
  37
 Canada’s
        Accounting Standards Board issued CICA Section 1506, “Accounting Changes”. The
        standard prescribes the criteria for changing accounting policies, together
        with
        the accounting treatment and disclosure of changes in accounting policies
        and
        estimates, and correction of errors. The standard requires the retrospective
        application to prior periods’ financial statements of changes in accounting
        principle, unless it is impractical to determine either the period-specific
        effects or the cumulative effect of the change. Application is on a prospective
        basis and is effective for changes in accounting policies and estimates and
        correction of errors made in fiscal years beginning on or after January 1,
        2007.
  In
        July 2006, the Emerging Issues Committee ("EIC") issued Abstract
        No. 162, “Stock-Based Compensation for Employees Eligible to Retire Before
        the Vesting Date”. This EIC discusses how compensation cost attributable to a
        stock-based award for a compensation plan that contains provisions that allow
        an
        employee to continue vesting after the employee has retired from the entity
        should be accounted for in the case of an employee who is eligible to retire
        at
        the grant date or who will become eligible to retire during the vesting period.
        In the case of an employee who is eligible to retire at the grant date, this
        EIC
        concludes that compensation should be recognized on the grant date. In the
        case
        of an employee who will become eligible to retire during the vesting period,
        the
        compensation cost should be recognized over the period from the grant date
        to
        the date the employee becomes eligible to retire. The implementation of this
        EIC
        is effective January 1, 2007 and is not expected to have a material impact
        on
        the Company’s consolidated financial statements.
  The
        Emerging Issues Committee issued EIC Abstract 163 - “Determining the Variability
        to be Considered in Applying AcG 15”. This Abstract, which is harmonized with
        the equivalent United States FASB Staff Position (FSP) FIN 46(R) - 6 -
“Determining the Variability to be Considered in Applying FASB Interpretation
        No. 46 (R)”, provides guidance on how an enterprise should determine the
        variability to be considered in applying “AcG 15 - Consolidation of Variable
        Interest Entities”. The Abstract is to be applied prospectively to all entities
        with which an enterprise first becomes involved and to all entities previously
        required to be analyzed under AcG 15 when a reconsideration event has occurred
        beginning the first day of the first reporting period beginning on or after
        January 1, 2007.
  In
        early
        2006, Canada’s Accounting Standards Board ratified a strategic plan that will
        result in Canadian GAAP, as used by public companies, being converged with
        International Financial Reporting Standards over a transitional period. The
        Accounting Standards Board is expected to develop and publish a detailed
        implementation plan with a transition period expected to be approximately
        five
        years. As this convergence initiative is very much in its infancy as of the
        date
        of the annual consolidated financial statements, it would be premature to
        currently assess the impact of the initiative, if any, on the
        Company.
  **U.S.**  **Pronouncements**
 
 In
        February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement
        of Financial Accounting Standards No. 159, “ The
        Fair
        Value Option for Financial Assets and Financial Liabilities (including an
        amendment of FASB Statement No. 115) ”. The
        statement would create a fair value option under which an entity may irrevocably
        elect fair value as the initial and subsequent measurement attribute for
        certain
        financial assets and financial liabilities on a contract-by-contract basis,
        with
        changes in fair value recognized in earnings as those changes occur. This
        Statement is effective as of the beginning of an entity’s first fiscal year that
        begins after November 15, 2007. Management
        is in the process of reviewing the requirements of this recent
        statement .
  In
        September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
        157”).  SFAS 157 provides accounting guidance on the definition of fair
        value and establishes a framework for measuring fair value in U.S. GAAP and
        expands disclosures about fair value measurements.  SFAS 157 is effective
        for financial statements issued for fiscal years beginning after November
        15,
        2007.  The Company plans to adopt the provisions of SFAS 157 on January 1,
        2008.  The Company is currently assessing the impact of the adoption of
        SFAS 157 on its results of operations and financial condition.
  In
        September 2006, the SEC Staff issued Staff Accounting Bulletin 108, “Quantifying
        Misstatements in the Financial Statements” (“SAB 108”). SAB 108 requires that
        misstatements identified in the current year financial statements that result
        from misstatements of prior year financial statements be quantified and
        evaluated using a dual approach that includes both an income statement and
        balance sheet assessment of any misstatement. The
        guidance is effective for fiscal years ending after November 15, 2006. The
        implementation of SAB 108 did not have a material impact on the Company’s
        consolidated financial statements.
  In
        June
        2006, the EITF reached a consensus on EITF Issue No. 06-3 “How Taxes Collected
        from Customers and Remitted to Governmental Authorities Should Be Presented
        in
        the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF
        06-3”).  EITF 06-3 provides guidance on how taxes directly imposed on
        revenue producing transactions between a seller and customer that are remitted
        to governmental authorities should be presented in the income statement (i.e.
        gross versus net presentation).  EITF 06-3 is effective for interim and
        annual reporting periods beginning after December 15, 2006.  The Company
        will adopt the provisions of EITF 06-3 on January 1, 2007.  The Company is
        currently in the process of assessing the impact of EITF 06-3 on the
        presentation of its results of operations and financial condition.
  In
        June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”)
        entitled “Accounting for Uncertain Tax Positions” - an interpretation of SFAS
        No. 109. The interpretation clarifies the accounting for uncertainty in
        income taxes recognized in an enterprise’s financial statements in accordance
        with SFAS No. 109, Accounting for Income Taxes. The evaluation of a tax
        position in accordance with this interpretation is a two-step process. Under
        the
        recognition step an enterprise determines whether it is more likely than
        not
        that a tax position will be sustained upon examination based on the technical
        merits of the position. Under the measurement step a tax position that meets
        the
        more-likely-than-not recognition threshold is measured to determine the amount
        of benefit to recognize in the financial statements. The tax position is
        measured at the largest amount of benefit that is greater than 50 percent
        likely
        of being realized upon ultimate settlement. FIN 48 is effective for fiscal
        years
        beginning after December 15, 2006. Earlier application of the provisions of
        this interpretation is encouraged if the enterprise has not yet issued financial
        statements, including interim financial statements, in the period this
        interpretation is adopted. The implementation of FIN 48 did not have a
        material impact on the Company’s results of operations and financial
        condition.
  38
 In
        February 2006, the FASB issued Statement of Financial Accounting Standard
        (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments - an
        amendment to FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155
        simplifies the accounting for certain hybrid financial instruments containing
        embedded derivatives. SFAS 155 allows fair value measurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation under SFAS No. 133, “Accounting for Derivative
        Instruments and Hedging Activities” (“SFAS 133”). In addition, it amends SFAS
        No. 140 “Accounting for Transfers and Servicing of Financial Assets and
        Extinguishments of Liabilities” (“SFAS 140”), to eliminate the prohibition on a
        qualifying special-purpose entity from holding a derivative financial instrument
        that pertains to a beneficial interest other than another derivative financial
        instrument. SFAS 155 is effective for all financial instruments acquired,
        issued, or subject to a re-measurement event occurring after the beginning
        of an
        entity’s first fiscal year that begins after September 15, 2006. The
        Company will adopt the provisions of SFAS 155 on January 1, 2007. The
        implementation of SFAS 155 is not expected to have a material impact on the
        Company’s results of operations and financial condition.
  In
        September 2006, the EITF reached a consensus on EITF Issue No. 06-1 “Accounting
        for Consideration Given by a Service Provider to Manufacturers or Resellers
        of
        Equipment Necessary for an End-Customer to Receive Service from the Service
        Provider” (“EITF 06-1”). EITF 06-1 provides accounting guidance on the
        consideration given by a service provider to a manufacturer or reseller of
        specialized equipment for the reduction of the price of such equipment to
        an
        end-customer which is necessary for an end-customer to receive service from
        the
        service provider. EITF 06-1 is effective for fiscal years beginning after
        June
        15, 2007. The Company will adopt the provisions of EITF 06-1 on January 1,
        2008.
        The Company is in the process of reviewing the requirements and potential
        impact
        of EITF 06-1.
  In
        June 2005, the FASB published an exposure draft containing proposals to
        change the accounting for business combinations. The proposed standards would
        replace the existing requirements of the FASB’s Statement No. 141, *Business
        Combinations* .
        The
        proposals would result in fewer exceptions to the principle of measuring
        assets
        acquired and liabilities assumed in a business combination at fair value.
        Additionally, the proposals would result in payments to third parties for
        consulting, legal, audit, and similar services associated with an acquisition
        being recognized generally as expenses when incurred rather than capitalized
        as
        part of the business combination. The FASB also published an exposure draft
        that proposes, among other changes, that non-controlling interests be classified
        as equity within the consolidated financial statements. The FASB’s proposed
        standard would replace Accounting Research Bulletin No. 51, *Consolidated
        Financial Statements* .
  **Financial
        Instruments**
  Most
        of
        the Company’s revenues (over 95% in 2006) are earned in currencies other than
        the Canadian dollar, principally the U.S. dollar. A substantial portion of
        the
        Company’s expenses, however, have been and will continue to be incurred in
        Canadian dollars. Accordingly, fluctuations in exchange rates between the
        U.S.
        dollar and the Canadian dollar could materially affect results of operations.
        In
        the normal course of business, the Company uses foreign currency options
        and
        forward foreign currency contracts to reduce exposure to fluctuations in
        the
        U.S. dollar to Canadian dollar exchange rates. At December 31, 2006, the
        Company
        had forward currency contracts to sell U.S. $13.5 million between January
        30,
        2007 and September 28, 2007 at rates between U.S. $0.8715 and $0.9132 per
        Canadian dollar. In addition, the Company had forward foreign currency contracts
        to sell €555,000 between June 29, 2007 and September 28, 2007 at rates between
€0.6498 and €0.6965 per Canadian dollar. Derivative financial instruments are
        not used for speculative purposes. There can be no assurance that the Company
        will be successful in such hedging activities.
  The
        Company’s operating budget for 2007 is based on an exchange rate of U.S. $0.87
        per Canadian dollar. The Company estimates that each $0.01 change in the
        U.S.
        dollar to Canadian dollar exchange rate would impact the Company’s 2006 budgeted
        net income by approximately $550,000, prior to taking into consideration
        the
        Company’s 2007 hedging program. The following table sets forth the potential
        impact of various hypothetical U.S. dollar to Canadian dollar exchange rates
        on
        the Company’s 2007 budgeted net income, prior to taking into consideration the
        Company’s 2007 hedging program.
 
 **U.S.
                    $ per Canadian $**
                **Impact
                    on 2007 Budgeted Net Income****Favourable/(Unfavourable)**
                  **(CDN$)**$0.82
                $2.7
                    million$0.83
                $2.2
                    million$0.84
                $1.6
                    million$0.85
                $1.1
                    million$0.86
                $0.5
                    million$0.87
                $―million$0.88
                $(0.5)
                    million$0.89
                $(1.1)
                    million$0.90
                $(1.6)
                    million$0.91
                $(2.2)
                    million$0.92
                $(2.7)
                    million$0.93
                $(3.2)
                    million$0.94
                $(3.8)
                    million
  The
        Company is not subject to significant interest rate risk due to the short-term
        maturities of the Company’s outstanding loans and short-term investments.
  **A.** **Inflation**
  While
        the
        Company believes that inflation has not had a material effect on its results
        of
        operations, there can be no assurance that inflation will not have such an
        effect in the future.
  **B.** **Liquidity
        and Capital Resources**
  See
“Item
        5 — Operating and Financial Review and Prospects, Liquidity and Capital
        Resources.”
  39
 **C.** **Research
        and Development, Patents and Licences, etc.**
  See
“Item
        4 — Information on the Company, Business Overview — Research and Development”
and “— Patents, Trademarks and Licenses.”
  **D.** **Trend
        Information**
  See
“Item
        5 — Operating and Financial Review and Prospects, Operating Results” and
“Outlook”.
  **E.** **Off
        Balance Sheet Arrangements**
  See
“Item
        5 — Operating and Financial Review and Prospects, Operating Results — Off
        Balance Sheet Arrangements.”
  **F.** **Tabular
        Disclosure of Contractual Obligations**
  See
“Item
        5 — Operating and Financial Review and Prospects, Operating Results —
Contractual Obligations.”
  **Item
        6.****Directors,
        Senior Management and Employees**
  **A.** **Directors
        and Senior Management**
  The
        following table sets forth certain information, as of May 25, 2007, regarding
        the executive officers, directors and certain key employees of the Company:
  **Name**
              **Age**
              **Position**
              **Director**
                **Since**
              **Executive**
                **Officer****Since****Directors
                  and Senior Management**Jonathan
                  W. Ladd
              51
              President
                  and Chief Executive Officer
              2002
              2002Werner
                  Gartner
              50
              Executive
                  Vice President and Chief Financial Officer
              2001
              1995Patrick
                  C. Fenton
              49
              Vice
                  President and Chief Technology Officer
              2005
              2003Colin
                  A. Maclellan
              48
              Vice
                  President and General Manager
              —
              2007Farlin
                  A. Halsey, Jr.
              41
              Vice
                  President, Corporate Strategy and Alliances
              —
              2003Graham
                  C. Purves
              45
              Vice
                  President, Sales and Marketing
              —
              2003Anthony
                  J. Murfin
              59
              Vice
                  President, Business Development
              —
              —Michael
                  McAloney
              49
              Vice
                  President, Operations and Quality
              —
              —Curtis
                  Anderson
              46
              Vice
                  President, OEM Product Development
              —
              —Robert
                  J. Iverach
              59
              Director
              2005
              —Richard
                  D. Orman
              59
              Vice
                  Chairman of the Board
              1994
              —Joel
                  A. Schleicher
              55
              Director
              1997
              —Charles
                  R. Trimble
              65
              Director
              2002
              —David
                  E. Vaughn
              62
              Chairman
                  of the Board
              2001
              —




The
      following is a brief biography of each of the directors and members of senior
      management of the Company, which includes a description of their present
      occupation and their principal occupations during at least the past five years.




**Senior
      Management**




*Jonathan
      W. Ladd.*  Mr.
      Ladd
      was appointed President and Chief Executive Officer of the Company in February
      2002 and has served as a director of the Company from July 2002. From July
      2001
      to November 2001, Mr. Ladd served as Senior Vice President, Engineering at
      Thales Navigation Inc., a satellite positioning product company, and President
      of Thales’ Russian subsidiary, Ashtech A/O. From January 1998 to July 2001, Mr.
      Ladd served in several other management positions at Magellan Corporation,
      a
      satellite positioning product company, including Senior Vice President, Advanced
      Technology Group and Vice President and General Manager of Ashtech Precision
      Products Business Unit.




*Werner
      Gartner.*  Mr.
      Gartner was appointed Executive Vice President and Chief Financial Officer
      of
      the Company in October 1996 and has served as a director of the Company from
      July 2001. Mr. Gartner also served as a director of the Company from November
      1995 until May 1998. From November 2000 to February 2001, Mr. Gartner, in
      addition to his regular duties, served as Acting Interim President and Chief
      Executive Officer of the Company. From August 1990 to October 1996, Mr. Gartner
      served in a variety of financial positions at the Company including Vice
      President, Finance and Corporate Controller.




*Patrick
      C. Fenton.*  Mr.
      Fenton was appointed Chief Technology Officer in January 2002 and became an
      executive officer of the Company in April 2003. Mr. Fenton previously served
      as
      Vice President, Technology of the Company from October 1998 and as Vice
      President, Research and Development of the Company from March 1997 until October
      1998. Mr. Fenton previously served as Director, Research and Development for
      NovAtel’s GPS business unit from February 1995 until March 1997 and was Chief
      Engineer for the GPS business unit from November 1993 to February 1995. Mr.
      Fenton was appointed to the Board of Directors in March 2005.


*Colin
        A
        Maclellan* . 
        Mr. Maclellan joined the company in May 2007 as Vice President and General
        Manager.  From March 2002 to June 2006, Mr. Maclellan worked for CSI
        Wireless, a wireless and GPS product company, serving as General Manager
        Wireless Business Unit and as Chief Operating Officer.  Prior to this, Mr.
        Maclellan spent 16 years with Nortel, a telecommunications equipment company,
        serving in various capacities, including three years as Vice President,
        Wireless Operations.




*Farlin
      A. Halsey, Jr.*M r.
      Halsey
      was appointed Vice President of Corporate Strategy and Alliances in May 2007.
      Mr. Halsey served as Vice President, Marketing of the Company from July 2002
      to
      May 2007. From
      August 2000 to January 2002, Mr. Halsey served as Vice President of Marketing
      for JP Mobile, a mobile server company. From August 1999 to August 2000, Mr.
      Halsey served as Director of Marketing-Personal Navigation with Navigation
      Technologies Company, a provider of digital mapping databases. From March 1993
      to August 1999, Mr. Halsey served in various sales and marketing positions
      for
      Topcon America Company.




40


*Graham
      C. Purves.* Mr.
      Purves was appointed Vice President of Sales and Marketing in May 2007. Mr.
      Purves served as Vice President, Sales of the Company from January 2002 to
      May
      2007. Mr.
      Purves previously served as Vice President, Sales and Marketing of the Company
      from October 1998 to January 2002. Mr. Purves assumed additional responsibility
      for product development in July 1999. Mr. Purves previously served as Director,
      Custom Products Group for the Company from January 1998 until October 1998,
      and
      as Director, Business Operations for the Company’s GPS business unit from
      September 1994 until October 1998. From August 1988 to September 1990, Mr.
      Purves served in various capacities at the Company including Manager, VLSI
      Design Group.




*Anthony
      J. Murfin.*  Mr.
      Murfin was appointed Vice President, Business Development of the Company in
      April 2002. Mr. Murfin has also served as Director, Aviation Group of the
      Company from April 1998 until April 2002. Mr. Murfin previously served as
      Director, Corporate Accounts of the Company from April 1995 to April 1998 and
      as
      Director of Product and Marketing of the Company from April 1994 to April 1995.
      From January 1980 to April 1994, Mr. Murfin served in various capacities
      including Business Development Manager and Product Manager (Flight Systems)
      in
      the Avionics Division of CMC Electronics. From September 1977 until January
      1980, Mr. Murfin was employed by CAE Electronics, a provider of advanced
      simulation technologies.




*Curtis
      Anderson* .
      Mr.
      Anderson was appointed Vice President, OEM Product Development in January 2005.
      Mr. Anderson previously served as Director, OEM Engineering from February 2000
      until January 2005. Since joining NovAtel in 1994, Mr. Anderson served in a
      variety of product development roles, including Firmware Engineer and Project
      Manager.




*Michael
      McAloney.*  Mr.
      McAloney was appointed Vice President, Business Operations and Corporate Quality
      in March, 2005. Mr. McAloney previously served as Director, Technical Services
      and Business Operations from 2002 to 2005 and Director Technical Services from
      1998 to 2002. From 1995 to 1998, Mr. McAloney was Programs Manager for NovAtel’s
      GPS business unit. Mr. McAloney is currently a Director of Canadian
      Manufacturers and Exporters Alberta. Prior to joining NovAtel, Mr. McAloney
      was
      employed as Systems Engineer Manager at Micronav Ltd., a provider of Microwave
      Landing Systems.




**Non-Management
      Directors**




*Robert
      J. Iverach.*  Mr.
      Iverach has served as a director of the Company since March 2005. From January
      1994 to December 2004, Mr. Iverach was a Partner with Felesky Flynn LLP, a
      tax
      law firm in Calgary, Alberta. From January 2005 to December 2005, Mr. Iverach
      was Counsel with that firm. He retired completely from Felesky Flynn LLP on
      December 31, 2005. Mr. Iverach is presently the Chairman of Win Energy
      Corporation, Chairman of RAMTelecom Inc, a director of Vacci-Test Corporation,
      and a Trustee of Big Eagle Services Trust.




*Richard
      D. Orman.*  Mr.
      Orman
      has served as a director of the Company since January 1994. Mr. Orman currently
      serves as Chief Executive of Nor Energy AS. From March 2003 to September 2005,
      he served as Executive Vice-Chairman of Exceed Energy Inc. From June 1999 to
      April 2003, Mr. Orman served as Chairman and Chief Executive Officer of
      Hemisphere International Inc. From March 1996 to October 1998, Mr. Orman was
      Chairman and Chief Executive Officer of Kappa Energy Company Inc. and served
      as
      a director until January 2000. From May 1986 to December 1992, Mr. Orman served
      as a member of the Alberta legislature and as Minister of Employment from May
      1986 to September 1988, Minister of Labour from September 1988 to April 1989
      and
      Minister of Energy from April 1989 to December 1992. Mr. Orman is lead director
      for Daylight Energy, a company listed on the Toronto Stock Exchange. Mr. Orman
      has also served as a director of a number of other public companies.




*Joel
      A. Schleicher.*  Mr.
      Schleicher has served as a director of the Company since March 1997. Mr.
      Schleicher currently serves as Chairman and Chief Executive Officer for
      Integrated Solutions, Inc. From June 2000 to July 2002, Mr. Schleicher served
      as
      Chairman and Chief Executive Officer of Interpath Communications Inc. (prior
      to
      their acquisition of USinternetworking, Inc.) and continued to serve on its
      board until the company was sold to ATT in 2006. From 1995 until 2000, Mr.
      Schleicher held senior positions with private equity backed firms and served
      as
      a business consultant, advisor and investor with and to private equity firms.
      From 1989 to 1995, Mr. Schleicher served as Chief Operating Officer of and
      a
      board member for Nextel Communications, Inc. Mr. Schleicher also currently
      serves as a Director of TechTronic Industries Co. Ltd.




*Charles
      R. Trimble.*  Mr.
      Trimble has served as a director of the Company since January 2002. Mr. Trimble
      currently serves as Chairman of the United States GPS Industry Council. Mr.
      Trimble also serves as a Director of KVH Industries, Inc. Mr. Trimble was one
      of
      the founders of Trimble Navigation Limited, a provider of GPS and other
      positioning technologies and products, in 1978 and served as President, Chief
      Executive Officer and a director of such company from 1981 to 1998.




*David
      E. Vaughn.*  Mr.
      Vaughn has served as a director of the Company since July 2001 and was elected
      Chairman of the Board of Directors in March 2004. Mr. Vaughn also served as
      President and Chief Executive Officer of the Company from February 2001 to
      February 2002. Mr. Vaughn currently serves as President of Foursome
      Technologies, a consulting firm. From January 1999 to December 2000, Mr. Vaughn
      served as Senior Vice President and Chief Operations Officer with Magellan
      Corporation and as Senior Vice President, Strategic Business Alliances from
      August 1998 to January 1999. From June 1991 to July 1998, Mr. Vaughn served
      with
      Trimble Navigation Limited, a provider of GPS and other positioning technologies
      and products, in a variety of positions including Executive Vice President,
      Tracking and Communications Products Division and, most recently, as Executive
      Vice President, Corporate Business Development.




There
      is
      no family relationship between any of the directors and the executive officers.
      There are no arrangements or understandings between any director or executive
      officer and any other person pursuant to which any director and executive
      officer was selected.




**B.
      Compensation**




**Summary
      of Executive Compensation**




The
      following table provides a summary of the compensation paid during each of
      the
      three most recently completed fiscal years to each of the Chief Executive
      Officer, Chief Financial Officer and the three next most highly compensated
      executive officers of the Company who are currently serving as executive
      officers of NovAtel and based on salary and bonus value earned during 2006
      (the
“Named Executive Officers”).




41





**Long
                  Term Compensation****Annual
                  Compensation**
              
              **Awards**
              
              **Payouts****Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)**
              
              **Other
                  Annual**
                **Compensation**
                **($)**
              
              **Restricted**
                **Stock**
                **Awards**
                **($)**
              
              **Securities**
                **Under**
                **Options/**
                **SARs**
                **Granted**
                **(#)**
              
              **LTIP**
                **Payouts**
                **($)**
              
              **All**
                **Other**
                **Compen-**
                **sation**
                **($)**Jonathan
                  W. Ladd, President and CEO
              
              
              2006
                2005
                2004
              
              $
                $
                $
              315,068
                299,369
                294,595
              
              $
                $
                $
              208,000
                242,500
                329,754
              
              $
                $
                $
              15,750(1
                14,917(1
                14,198(1
              )
                )
                )
              $
              —
                —
                71,500(2
              )
              
              16,600
                14,500
                —
              
              $
              274,259(2
                —
                —
              )
              
              —
                —
                —Werner
                  Gartner, Executive Vice President and CFO
              
              
              2006
                2005
                2004
              
              $
                $
                $
              202,542
                193,114
                185,567
              
              $
                $
                $
              88,500
                132,015
                161,992
              
              $
                $
                $
              10,125(1
                9,656(1
                9,266(1
              )
                )
                )
              $
              —
                —
                36,036(2
              )
              
              8,000
                7,000
                —
              
              $
              138,226(2
                —
                —
              )
              
              —
                —
                —Patrick
                  C. Fenton , Vice President and CTO
              
              
              2006
                2005
                2004
              
              $
                $
                $
              175,731
                168,089
                160,696
              
              $
                $
                $
              76,500
                110,090
                140,290
              
              $
                $
                $
              8,785(1
                8,405(1
                8,025(1
              )
                )
                )
              $
              —
                —
                31,200(2
              )
              
              7,100
                6,200
                —
              
              $
              119,678(2
                —
                —
              )
              
              —
                —
                —Farlin
                  A. Halsey, Vice President, Marketing(3)
              
              
              2006
                2005
                2004
              
              $
                $
                $
              169,569
                162,989
                158,744
              
              $
                $
                $
              67,500
                101,024
                134,068
              
              $
                $
                $
              8,477(1
                8,149(1
                7,930(1
              )
                )
                )
              $
              —
                —
                23,288(2
              )
              
              5,700
                5,000
                —
              
              $
              89,328(2
                —
                —
              )
              
              —
                —
                —Graham
                  C. Purves, Vice President, Sales(4)
              
              
              2006
                2005
                2004
              
              $
                $
                $
              169,569
                160,721
                149,432
              
              $
                $
                $
              67,500
                101,024
                134,068
              
              $
                $
                $
              8,477(1
                7,911(1
                7,371(1
              )
                )
                )
              $
              —
                —
                21,840(2
              )
              
              5,700
                5,000
                —
              
              $
              83,776(2
                —
                —
              )
              
              —
                —
                —All
                  directors and executive officers as a group (ten persons in 2006,
                  ten
                  persons in 2005, and twelve persons in 2004)
              
              
              2006
                2005
                2004
              
              $
                $
                $
              1,245,279
                1,265,600
                1,283,333
              
              $
                $
                $
              508,000
                686,653
                1,034,240
              
              $
                $
                $
              51,614
                49,038
                53,821
              
              $
              —
                —
                205,219
              
              
              49,000
                43,855
                —
              
              $
              705,267
                —
                —
              
              
              —
                —
                —




(1)  Represents
      matching contributions made by the Company on behalf of each Named Executive
      Officer into their respective Registered Retirement Savings Plans.




(2)  Represents
      values for awards of phantom share units issued pursuant to the 2004 Employee
      Long-term Incentive Plan. The value of the units are payable in cash subject
      to
      performance vesting conditions. Vesting occurred on December 31, 2006 as
      cumulative revenue and operating income for the three years ending December
      31,
      2006 exceeded certain pre-determined performance objectives. The dollar value
      payable upon vesting of the phantom shares is reported under LTIP payouts in
      the
      table above.




(3)Mr.
      Halsey was appointed Vice President of Corporate Strategy and Alliances in
      May
      2007.




(4)Mr.
      Purves was appointed Vice President of Sales and Marketing in May
      2007.




**Options
      Granted During the Year Ended December 31, 2006**




The
      following table sets forth the details of all options to purchase Common Shares
      that were granted to the Named Executive Officers during the fiscal year ended
      December 31, 2006.





**Name**
            
            **Securities
                Under**
              **Options/SARs**
              **Granted
                (#)**
            
            **%
                of**
              **Total
                Options/**
              **SARs
                Granted**
              **to
                Employees in**
              **Financial
                Year (%)**
            
            **Exercise
                or**
              **Base
                Price**
              **(U.S.$/Security)**
            
            **Grant
                Date**
              **Fair
                Value**
              **(U.S.$)
                (1)**
            
            **Expiration
                Date**Jonathan
                W.  Ladd, President and CEO
            
            
            16,600
            
            
            11.3%
            
            $
            39.58
            
            $
            243,024
            
            
            April
                27, 2011Werner
                Gartner, Executive Vice President and CFO
            
            
            8,000
            
            
            5.4%
            
            $
            39.58
            
            $
            117,120
            
            
            April
                27, 2011Patrick
                C. Fenton, Vice President and CTO
            
            
            7,100
            
            
            4.8%
            
            $
            39.58
            
            $
            103,944
            
            
            April
                27, 2011Farlin
                Halsey, Vice President, Marketing
            
            
            5,700
            
            
            3.9%
            
            $
            39.58
            
            $
            83,448
            
            
            April
                27, 2011Graham
                Purves, Vice President, Sales
            
            
            5,700
            
            
            3.9%
            
            $
            39.58
            
            $
            83,448
            
            
            April
                27, 2011




(1)  Based
      on
      a Black- Scholes option pricing model. The same model is used to compute the
      compensation expense related to stock options reported in the Company’s
      financial statements.




42


**Options
      Exercised During the Year Ended December 31, 2006**




The
      following table sets forth details of: (i) options exercised, and the value
      thereof, by the Named Executive Officers during the fiscal year end December
      31,
      2006, (ii) the number of unexercised options as at December 31, 2006
      (exercisable and unexercisable) held by the Named Executive Officers and (iii)
      the value of unexercised “in-the-money” options as at the fiscal year ended
      December 31, 2006, (exercisable and unexercisable) held by the Named Executive
      Officers. The closing price of the Company’s Common Shares on the last trading
      day of the fiscal year was U.S. $39.90 per share.





**Name**
            
            **Securities**
              **Acquired
                on**
              **Exercise**
            
            **Aggregate**
              **Value
                Realized**
              **(U.S.
                $)**
            
            **Unexercised
                Options**
              **December
                31, 2006**
              **(Exercisable/Unexercisable)**
            
            **Value
                of Unexercised**
              **In-the-Money
                Options at**
              **December
                31, 2006**
              **(Exercisable/Unexercisable)(U.S.
                $)**Jonathan
                W. Ladd,  President and CEO
            
            
            —
            
            $
            —
            
            
            43,625
                / 39,975
            
            $
            1,575,801
                / 696,591Werner
                Gartner, Executive Vice President and CFO
            
            
            50,000
            
            $
            1,580,410
            
            
            20,500
                / 17,000
            
            $
            741,529
                / 250,271Patrick
                C. Fenton, Vice President and CTO
            
            
            20,100
            
            $
            727,844
            
            
            57,100
                / 14,875
            
            $
            1,886,853
                / 214,277Farlin
                A. Halsey, Vice President, Marketing
            
            
            7,500
            
            $
            245,756
            
            
            12,000
                / 11,700
            
            $
            443,938
                / 162,625Graham
                C. Purves, Vice President, Sales
            
            
            6,250
            
            $
            233,714
            
            
            21,423
                / 12,075
            
            $
            685,070
                / 176,743




NovAtel’s
      Employee Stock Option Plan and Directors Stock Option Plan (collectively, the
      “Plans”) authorize the grant of options to purchase Common Shares to employees
      or directors of NovAtel or employees of a related company and non-employee
      directors of NovAtel, respectively.




The
      Employee Stock Option Plan provides for the granting of stock options
      (“Options”) to employees and to such other persons that have or will provide
      some service to the Company or a related company. The purpose of the Employee
      Stock Option Plan is to attract and retain the best available personnel for
      positions of substantial responsibility. The Employee Stock Option Plan is
      administered by the Compensation Committee of the Board of Directors.




The
      price
      of the Company’s Common Shares subject to each Option (the “Option Price”) is
      set by the Compensation Committee and shall not be less than 100% of the fair
      market value per Common Share on the date of grant. The Compensation Committee
      set an option price of 115% of fair market for option grants made in April
      2006.
      Options granted under the Employee Stock Option Plan are exercisable at the
      times and on the terms established by the Compensation Committee. The
      Compensation Committee may accelerate the exercisability of any option. Options
      may also be accelerated in the event the Company is liquidated or dissolved
      or
      if certain conditions are met with respect to a change of control.




Vested
      options terminate 90 days after an optionee’s termination for any reason other
      than death or disability. Unvested options terminate immediately upon the
      termination of an optionee’s employment or service to the Company. Unless
      provided otherwise by the Compensation Committee, all options granted shall
      expire ten years from the date of grant. The Compensation Committee set an
      option expiration date of five years from the date of grant for options granted
      in April 2006.




The
      Employee Stock Option Plan was amended in 2005 to provide that the minimum
      exercise price of stock options be no less than 100% of the fair market value
      on
      the date of grant, that neither the Board of Directors nor the Compensation
      Committee be authorized to materially amend the Employee Stock Option Plan
      without shareholder approval; and re-pricing of stock options (including the
      cancellation and exchange of options) not be permitted without shareholder
      approval. In addition, the number of Common Shares available for future grant,
      together with the number of Common Shares issuable upon exercise of outstanding
      options under the Employee Stock Option Plan and the Directors Stock Option
      Plan, collectively, may not exceed 13% of the Common Shares outstanding at
      any
      time.




The
      Directors Option Plan provides for the granting of stock options to eligible
      non-employee directors of the Company. The purpose of the Directors Option
      Plan
      is to attract and retain the best available persons for positions on the
      Company’s Board of Directors. The Directors Option Plan is administered by the
      Compensation Committee of the Board of Directors.




Each
      non-employee director automatically will receive upon joining the Board of
      Directors and on the date of each subsequent annual meeting at which he or
      she
      is a non-employee director, an option to purchase such number of Common Shares
      as determined by dividing U.S. $40,000 by the closing selling price for a Common
      Share on The NASDAQ Global Select Market on that date.




The
      exercise price of the shares subject to each directors option will be 100%
      of
      the fair market value of the shares on the date of grant. Each directors option
      will become exercisable one year from the date of grant of the directors option;
      provided however that if prior to such date the participant terminates his
      or
      her service on the Board of Directors on account of death or disability, then
      the directors option will become exercisable in full on the date of such
      termination of service. Each directors option will terminate five years from
      the
      date of grant of the directors option. In addition, each directors option
      provides that, until the non-employee director resigns or does not stand for
      re-election, a non-employee director may only sell up to 50% of the shares
      received upon exercise of a directors option.




The
      Directors Option Plan was amended in 2005 to provide that discretionary grants
      to non-employee directors be replaced with annual non-discretionary grants
      pursuant to the terms of the plan; that neither the Board of Directors nor
      the
      Compensation Committee be authorized to materially amend the Directors Option
      Plan without shareholder approval; and that re-pricing of stock options
      (including the cancellation and exchange of options) not be permitted without
      shareholder approval. In addition, the number of Common Shares available for
      future grant, together with the number of Common Shares issuable upon exercise
      of outstanding options under the Employee Stock Option Plan and the Directors
      Stock Option Plan, collectively, may not exceed 13% of the Common Shares
      outstanding at any time.




The
      vesting schedule for each option granted pursuant to the Plans is specified
      by
      the Board of Directors or the committee, as the case may be, at the time of
      the
      grant. The vesting of outstanding options may be accelerated by the Board of
      Directors or the committee, as the case may be, at such times and in such
      amounts as the Board of Directors or the committee, as the case may be,
      determines in its sole discretion. Options that have been outstanding for at
      least six months immediately vest upon a change of control and are fully
      exercisable for a specified number of days depending on the nature of the event
      resulting in a change of control.




43


Options
      granted under the Plans are non-transferable. Vested options granted under
      each
      of the Plans terminate on the earlier of: (i) the expiry of the option (as
      discussed above); (ii) the expiry of 90 days from the date that an optionee
      ceases to be employed by or a member of the Board of Directors of the Company,
      as the case may be, for reasons other than death or disability; and (iii) the
      expiry of one year from the date of death of an optionee or the date that an
      optionee ceases to be employed by or a member of the Board of Directors of
      the
      Company, as the case may be, by reason of disability.




**Management
      Employment Contracts**




Jonathan
      W. Ladd, Werner Gartner and Patrick C. Fenton have employment-related contracts
      which provide for, among other things, industry standard covenants in the
      Company’s favour, including non-competition covenants for one year following
      termination. The contracts also provide that the Company can terminate an
      officer without cause upon which event the officer is entitled to one times
      his
      annual salary plus accelerated vesting of certain options, depending on the
      agreement. In addition, the contracts contain provisions relating to payments
      and accelerated vesting of stock options upon a termination within a certain
      amount of time of a change of control of the Company, with payments ranging
      from
      one and one-half to two times salary, depending on the contract.




**Summary
      of Directors’ Compensation**




Directors
      do not have service contracts with the Company. NovAtel compensates its
      directors who are not employees of the Company a base amount of $20,000 per
      year. The Chairman of the Board receives an additional $20,000 per year.
      Additional payments of $10,000 annually are paid to both the chairman and all
      members of the Audit Committee. The chairman of the Audit Committee receives
      an
      additional $10,000. In addition, directors are paid $1,000 for attendance at
      meetings of the Board of Directors, the Compensation Committee and the Audit
      Committee, with an additional $200 per hour payable for attendance at all
      supplemental meetings.




The
      directors of the Company received an aggregate of 5,900 stock options of NovAtel
      as compensation for their services in 2006 (6,155 in 2005 and nil in 2004).







**Name**
            
            **Fees
                Earned**
              **or
                Paid**
              **in
                Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)
                (1)**
            
            **Non-Equity**
              **Incentive
                Plan**
              **Compensation**
              **($)**
            
            **Change
                in**
              **Pension
                Value**
              **and**
              **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
            
            **All**
              **Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Robert
                J. Iverach
            
            $
            30,000
            
            
            ―
            
            $
            26,018
            
            
            ―
            
            
            ―
            
            
            ―
            
            $
            56,018Richard
                D. Orman
            
            $
            44,000
            
            
            ―
            
            $
            26,306
            
            
            ―
            
            
            ―
            
            
            ―
            
            $
            70,306Joel
                Schleicher
            
            $
            49,400
            
            
            ―
            
            $
            26,306
            
            
            ―
            
            
            ―
            
            
            ―
            
            $
            75,706Charles
                Trimble
            
            $
            38,000
            
            
            ―
            
            $
            26,306
            
            
            ―
            
            
            ―
            
            
            ―
            
            $
            64,306David
                Vaughn
            
            $
            51,000
            
            
            ―
            
            $
            26,018
            
            
            ―
            
            
            ―
            
            
            ―
            
            $
            77,018




(1)  Based
      on
      a Black- Scholes option pricing model. The same model is used to compute the
      compensation expense related to stock options reported in the Company’s
      financial statements.




**Directors’
      and Officers’ Liability Insurance**




The
      Company maintains a comprehensive directors’ and officers’ liability policy for
      events arising prior to CMC Electronics acquiring majority control of the
      Company on April 17, 1998. This policy was originally purchased for $42,000
      for
      the policy period from December 1, 2000 to December 1, 2005 and extended to
      June
      30, 2007. The policy covers limits of liability for each loss and for each
      policy period of $10 million with a $250,000 deductible for any claims.




Esterline
      Technologies Corporation, which controls directly or indirectly, all of the
      common shares of CMC Electronics Inc., maintains a comprehensive directors’ and
      officers’ liability policy which applies to the Company’s directors and officers
      for events arising subsequent to April 12, 2001 and prior to February 3,
      2005. This policy is in place until March 14, 2013.




The
      Company maintains comprehensive directors’ and officers’ liability policies for
      events arising subsequent to January 27, 2005. These policies, in place until
      June 30, 2007, cover limits of liability for each loss and for each policy
      period of U.S. $10 million primary coverage with a U.S. $250,000 deductible
      for
      any claims and U.S. $10 million excess coverage. The annual premium for these
      policies is U.S. $217,850.




**Indebtedness
      of Directors and Executive Officers**




No
      executive officers or directors of NovAtel, or any of their associates or
      affiliates, are or have been indebted to NovAtel since the commencement of
      the
      last completed financial year of the Company, nor have any of the foregoing
      been
      the subject of a guarantee, support agreement, letter of credit or other similar
      arrangement or understanding provided by NovAtel or any of its subsidiaries
      since the commencement of the last completed financial year.




**C.** **Board
      Practices**




All
      directors hold office until the next annual meeting of the Company’s
      shareholders, which has been in July for the past several years, or until their
      respective successors are duly appointed by the Board of Directors or their
      positions are earlier vacated by resignation or otherwise.




Executive
      officers are appointed by the Board of Directors on an annual basis and serve
      until the next annual meeting of the Board of Directors or until their
      respective successors are duly appointed or their positions are earlier vacated
      by resignation or otherwise.




44


**Committees
      of the Board of Directors**




The
      Company has an Audit Committee and a Compensation Committee.




***Audit
      Committee***




The
      Audit
      Committee assists the Board of Directors of the Company in fulfilling its
      responsibilities for oversight and supervision of financial and accounting
      matters. The Audit Committee responsibilities include the engagement or
      discharge of independent auditors, reviewing with the independent auditors
      the
      plan and results of the auditing engagement, reviewing NovAtel’s internal
      auditing procedures, system of internal accounting controls and financial
      management and making inquiries into matters within the scope of this
      Committee’s functions. The members of the Audit Committee are Richard D. Orman,
      Joel A. Schleicher and Charles R. Trimble. The Board of Directors has determined
      that all members of the Audit Committee are “independent directors” as
      determined in accordance with applicable securities laws and rules of The NASDAQ
      Global Select Market. The Board of Directors and the Audit Committee have
      adopted a written charter of the Audit Committee. The Audit Committee reviews
      and assesses the adequacy of the charter on an annual basis.




***Compensation
      Committee***




The
      function of the Compensation Committee is to ensure that the Company has a
      high
      caliber executive management in place and a total compensation plan that is
      competitive, motivating and rewarding for participants. The Compensation
      Committee reviews and makes recommendations to the Board of Directors of the
      Company concerning the compensation of the key management employees of the
      Company and the administration of the Plans. The members of the Compensation
      Committee are Richard D. Orman, Robert Iverach and David E. Vaughn. The Board
      of
      Directors has determined that each member of the Compensation Committee is
      an
“independent director” as determined in accordance with applicable securities
      laws and The NASDAQ Global Select Market rules.




**D.** **Employees**




See
“Item
      4 — Information on the Company, Business Overview — Employees.”




**E.** **Share
      Ownership**




The
      following table sets forth as of April 26, 2007, the ownership of the Company’s
      Common Shares by each director and Named Executive Officer and all directors
      and
      executive officers as a group:


**Shares
                Beneficially Owned****Name**
            **Shares**
            **Percent**Patrick
                C. Fenton (1)
            60,225
            *Werner
                Gartner (2)
            42,250
            *Farlin
                A. Halsey (3)
            14,250
            *Robert
                J. Iverach (4)
            1,231
            *Jonathan
                W. Ladd (5)
            76,125
            *Richard
                D. Orman (6)
            1,231
            *Graham
                C. Purves (7)
            24,048
            *Joel
                A. Schleicher (8)
            1,231
            *Charles
                R. Trimble (9)
            1,231
            *David
                E. Vaughn (10)
            1,231
            *All
                directors and executive officers as a group (ten persons) (11)
            223,053
            2.6%


*  Less
      than
      1%.




(1)  Represents
      vested stock options to purchase 60,225 Common Shares of the Company as of
      April
      26, 2007.


(2)  Includes
      vested stock options to purchase 24,250 Common Shares of the Company as of
      April
      26, 2007.


(3)  Represents
      vested stock options to purchase 14,250 Common Shares of the Company as of
      April
      26, 2007.


(4)  Represents
      vested stock options to purchase 1,231 Common Shares of the Company as of April
      26, 2007.


(5)  Includes
      vested stock options to purchase 56,125 Common Shares of the Company as of
      April
      26, 2007.


(6)  Represents
      vested stock options to purchase 1,231 Common Shares of the Company as of April
      26, 2007.


(7)  Represents
      vested stock options to purchase 24,048 Common Shares of the Company as of
      April
      26, 2007.


(8)  Represents
      vested stock options to purchase 1,231 Common Shares of the Company as of April
      26, 2007.


(9)  Represents
      vested stock options to purchase 1,231 Common Shares of the Company as of April
      26, 2007.


(10)  Represents
      vested stock options to purchase 1,231 Common Shares of the Company as of April
      26, 2007.


(11)  Includes
      vested stock options to purchase 185,053 Common Shares of the Company as of
      April 26, 2007.





45


The
      following table sets forth certain information regarding outstanding options
      to
      purchase securities held by the Company’s Named Executive Officers and directors
      as of April 26, 2007.




**Stock
                  options**
              
              **Total****Amount**
              
              **Purchase**
                **Price
                  U.S $ (1)**
              
              **Expiration****Date**Jonathan
                  W. Ladd
              
              
              15,000
              
              $
              2.50
              
              
              2/18/201237,500
              
              $
              2.25
              
              
              2/12/101314,500
              
              $
              19.61
              
              
              5/12/201016,600
              
              $
              39.58
              
              
              4/27/201183,600Werner
                  Gartner
              
              
              7,500
              
              $
              2.25
              
              
              1/14/201215,000
              
              $
              2.25
              
              
              2/12/20137,000
              
              $
              19.61
              
              
              5/12/20108,000
              
              $
              39.58
              
              
              4/27/201137,500Patrick
                  C. Fenton
              
              
              15,000
              
              $
              7.50
              
              
              6/30/20072,500
              
              $
              1.69
              
              
              1/11/20115,000
              
              $
              2.25
              
              
              1/14/20129,375
              
              $
              2.25
              
              
              2/12/20136,200
              
              $
              19.61
              
              
              5/12/20107,100
              
              $
              39.58
              
              
              4/27/201145,175Farlin
                  A. Halsey
              
              
              9,250
              
              $
              3.10
              
              
              6/16/20125,000
              
              $
              2.25
              
              
              2/12/20133,750
              
              $
              19.61
              
              
              5/12/20105,700
              
              $
              39.58
              
              
              4/27/201123,700Graham
                  C. Purves
              
              
              6,000
              
              $
              10.75
              
              
              10/01/20073,923
              
              $
              8.00
              
              
              1/18/20085,000
              
              $
              7.50
              
              
              12/17/20087,875
              
              $
              2.25
              
              
              2/12/20135,000
              
              $
              19.61
              
              
              5/12/20105,700
              
              $
              39.58
              
              
              4/27/201133,498David
                  E. Vaughn
              
              
              1,231
              
              $
              32.50
              
              
              7/28/20101,180
              
              $
              33.89
              
              
              7/17/20112,411Joel
                  A. Schleicher
              
              
              1,231
              
              $
              32.50
              
              
              7/28/20101,180
              
              $
              33.89
              
              
              7/17/20112,411Charles
                  R. Trimble
              
              
              1,231
              
              $
              32.50
              
              
              7/28/20101,180
              
              $
              33.89
              
              
              7/17/20112,411Richard
                  D. Orman
              
              
              1,231
              
              $
              32.50
              
              
              7/28/20101,180
              
              $
              33.89
              
              
              7/17/20112,411Robert
                  J. Iverach
              
              
              1,231
              
              $
              32.50
              
              
              7/28/20101,180
              
              $
              33.89
              
              
              7/17/20112,411All
                  directors and executive officers as a group (ten persons)
              
              
              235,528




(1)  All
      options were granted at not less than fair market value at date of
      grant.




46


**Item
      7.****Major
      Shareholders and Related Party Transactions**




**A.** **Major
      Shareholders**




The
      following table sets forth as of May 11, 2007 those persons known to the Company
      to be owners of more than 5% of the Common Shares:




**Shares
                Beneficially Owned****Shares**
            **Percent**Neuberger
                Berman LLC (1)
            1,126,050
            13.1%Wellington
                Management Company, LLP (2)
            1,011,412
            11.8Tygh
                Capital Management, Inc. (3)
            589,466
            6.9





(1)  The
      address of Neuberger Berman LLC is 605 Third Avenue, New York, New York, USA,
      10158


Based on a Schedule 13F-HR filed on May 10, 2007.


(2)  The
      address of Wellington Management Company, LLP is 75 State Street, Boston
      Massachusetts, USA, 02109


Based on a Schedule 13G/A filed on April 10, 2007.


(3)  The
      address of Tygh Capital Management, Inc. is 1211 SW, Fifth Avenue, Suite 2100,
      Portland, Oregon, USA, 97204.


Based
      on a Schedule 13F-HR filed on
      May 7, 2007.




The
      Company’s major shareholders do not have different rights from our other common
      shareholders. CMC Electronics, FMR Corp., Provident Investment Counsel and
      Essex
      Investment Management Co. each owned at one or more times during the last three
      years more than 5% of the outstanding common shares, but, to the Company’s
      knowledge, do not own more than 5% currently. To the best of the Company’s
      knowledge, as of May 11, 2007 ,
      U.S
      shareholders held approximately 4.7 million of the Company’s outstanding Common
      Shares ,
      or 55%
      of total Common Shares outstanding. This figure may not be entirely accurate
      because the Company can obtain only limited information regarding the current
      holding of the Company’s shares in the United States. As of May 11, 2007, there
      were 14 registered shareholders of NovAtel, of which 12 have addresses within
      the United States.




**B.** **Related
      Party Transactions**




See
“Item
      5 — Operating and Financial Review and Prospects, Operating Results — Related
      Party Transactions” and “Item 4 — Information on the Company, Business Overview
— Strategic Partnerships — CMC Electronics” and “— Certain Contractual Rights.”




**C.** **Interests
      of Experts and Counsel**




Not
      applicable.




**Item
      8.****Financial
      Information**




**A.** **Consolidated
      Statements and Other Financial Information**




**Consolidated
      Financial Statements**




See
      Item
      18 “Financial Statements” for a full list of financial statements included as
      part of this Annual Report.




**Legal
      Proceedings**




See
“Item
      4 — Information on the Company, Business Overview — Legal
      Proceedings.”




**Dividend
      Policy**




The
      Company has not declared or paid any dividends on the Common Shares to date.
      The
      payment of dividends in the future will be dependent on the earnings and
      financial condition of the Company and on such other factors as the Board of
      Directors of NovAtel considers appropriate.




**B.** **Significant
      Changes**




Not
      applicable.




47


**Item
      9.****The
      Offer and Listing**




**A.** **Offer
      and Listing Details**




The
      Company’s Common Shares have been listed on The NASDAQ Global Select Market
      (formerly The Nasdaq National Market) since February 7, 1997. The following
      are
      the price ranges as reported by The NASDAQ Global Select Market for the periods
      indicated.





**U.S.
                $****Annual**
            
            **High**
            
            **Low**2006
            
            $
            48.250
            
            $
            26.9102005
            
            $
            48.450
            
            $
            14.3182004
            
            $
            50.350
            
            $
            8.0702003
            
            $
            11.080
            
            $
            1.9002002
            
            $
            5.200
            
            $
            1.760**Quarterly**Q4
                - 2006
            
            $
            46.680
            
            $
            36.020Q3
                - 2006
            
            $
            48.250
            
            $
            33.170Q2
                - 2006
            
            $
            40.100
            
            $
            29.500Q1
                - 2006
            
            $
            37.610
            
            $
            26.910Q4
                - 2005
            
            $
            31.760
            
            $
            21.690Q3
                - 2005
            
            $
            37.150
            
            $
            22.910Q2
                - 2005
            
            $
            29.190
            
            $
            14.318Q1
                - 2005
            
            $
            48.450
            
            $
            16.260**Monthly**April
                2007
            
            $
            38.440
            
            $
            34.690March
                2007
            
            $
            44.500
            
            $
            30.720February
                2007
            
            $
            45.050
            
            $
            41.050January
                2007
            
            $
            44.910
            
            $
            39.650December
                2006
            
            $
            42.390
            
            $
            39.500November
                2006
            
            $
            42.230
            
            $
            36.020




**B.** **Plan
      of Distribution**




Not
      applicable.




**C.** **Markets**




In
      February 1997, the Company’s Common Shares commenced trading in the United
      States on the Nasdaq
      National Market tier
      of
      The NASDAQ Stock Market under the symbol “NGPSF.” The Common Shares are not
      listed on any other non-United States trading market. In March 1999, the
      Company’s symbol was changed to “NGPS.” The Common Shares began trading on The
      NASDAQ Global Select Market in August 2006.




Prior
      to
      February 4, 1997, the Company’s Common Shares were not listed on any trading
      market.




**D.** **Selling
      Shareholders**




Not
      applicable.




**E.** **Dilution**




Not
      applicable.




**F.** **Expenses
      of the Issue**




Not
      applicable.




**Item
      10.****Additional
      Information**




**A.** **Share
      Capital**




Not
      applicable.




**B.** **Articles
      of Incorporation**




The
      Company
      is registered under the *Canada
      Business Corporations Act* (“CBCA”
or the “Act”) as corporation number 076226-1 and has the capacity and, subject
      to the provisions of the Act, the rights, powers and privileges of a natural
      person. Pursuant to Item 6 of the Company’s Restated Articles of Incorporation,
      there are no restrictions on the Company’s objects and purposes.




**Powers
      of Directors**




Subject
      to any unanimous shareholder agreement, the directors shall manage or supervise
      the management of the business and affairs of the Company and may exercise
      all
      such powers and do all such acts and things as may be exercised or done by
      the
      Company and are not by the Act, the articles, the by-laws, any special
      resolution of the Company, a unanimous shareholder agreement or by statute
      expressly directed or required to be done in some other manner. Notwithstanding
      any vacancy among the directors, the remaining directors may exercise all the
      powers of the board so long as a quorum of the board remains in office.




48


The
      Act
      requires every director or officer who is a party to a material contract or
      a
      material transaction, whether made or proposed with the Company, or who is
      a
      director or officer of or has a material interest in any person who is a party
      to a material contract or a material transaction, whether made or proposed
      contract with the Company to disclose in writing to the Company or request
      to
      have entered in the minutes of meetings of directors or meetings of committees
      of directors the nature and extent of his or her interest, and shall, except
      in
      certain limited circumstances, refrain from voting in respect of the material
      contract or material transaction. The articles and by-laws do not require an
      independent quorum to enable the directors to vote compensation to themselves
      or
      any member of their body. The Act also provides that the shareholders of the
      Company may examine the portion of any minutes of meetings of directors or
      such
      other documents that contain such disclosures of interest.




Unless
      the articles or by-laws of or a unanimous shareholder agreement relating to
      the
      Company otherwise provide, the directors of the Company may, without
      authorization of the shareholders, (a) borrow money on the credit of the
      Company, (b) issue, reissue, sell, pledge or hypothecate debt obligations of
      the
      Company, (c) to the extent permitted by the CBCA, give a guarantee on behalf
      of
      the Company to secure performance of an obligation by any person, and (d)
      mortgage, hypothecate, pledge or otherwise create a security interest in all
      or
      any property of the Company, owned or subsequently acquired, to secure any
      obligation of the Company. The Company does not have a unanimous shareholder
      agreement and the Company’s articles and by-laws do not limit the above powers.




Directors
      of the Company are not required to own shares of the Company in order to qualify
      as a director and the directors are not required to retire upon reaching a
      specified age.




**Description
      of Securities**




The
      Company is authorized to issue an unlimited number of Common Shares and an
      unlimited number of First Preference Shares.




Holders
      of Common Shares are entitled to receive notice of and to attend all meetings
      of
      the shareholders of the Company, except meetings at which holders of another
      specified class of shares are exclusively entitled to vote, and are entitled
      to
      one vote for each Common Share held on all votes taken at such meetings. The
      holders of Common Shares are entitled to receive such dividends as the directors
      may in their discretion declare, regardless of whether dividends are declared
      on
      any other class of shares. Upon liquidation, dissolution or wind-up of the
      Company, the holders of Common Shares are entitled to receive any remaining
      property after payment of any amount required to redeem or retract the issued
      and outstanding First Preference Shares.




The
      First
      Preference Shares may be issued in one or more series with each series to
      consist of such number of shares as may, before the issue of the series, be
      fixed by the directors of the Company. The directors are authorized, before
      the
      issue of the series, to determine the designation, rights, privileges,
      restrictions and conditions attaching to the First Preference Shares of each
      series.




The
      First
      Preference Shares of each series rank equally with respect to the payment of
      dividends and the distribution of assets or return of capital in the event
      of
      liquidation, dissolution or winding-up and in priority to the Common Shares
      and
      any other shares of the Company ranking junior to the First Preference Shares.
      In addition, if any amount of cumulative dividend or declared non-cumulative
      dividend or an amount payable on return of capital in respect of shares of
      a
      series of First Preference Shares is not paid in full, the shares of the series
      are entitled to participate ratably with the shares of any other series of
      the
      same class in respect of such amounts.




In
      accordance with the provisions of the CBCA, the amendment of certain rights
      attaching to a class of shares, including Common Shares, requires the approval
      of not less than two-thirds of the votes cast by the holders of such shares
      voting at a special meeting of such holders. Pursuant to the Company’s By-laws,
      a quorum for a meeting of the holders of Common Shares occurs when persons
      not
      being less than two in number and holding or representing by proxy not less
      than
      331⁄3% of the issued and outstanding Common Shares entitled to vote at such
      meetings are present, unless a higher number is designated by the Board. In
      circumstances where the rights of Commons Shares may be amended, to add, change
      or remove any provisions restricting or constraining the issue, transfer or
      ownership of Common Shares, holders of Common Shares have the right under the
      CBCA to dissent from such amendment and require the Company to pay them the
      then
      fair value of the Common Shares.




**Shareholder
      Meetings**




There
      are
      two types of shareholder meetings: regular annual meetings and special meetings.
      Pursuant to the CBCA, the annual shareholder meeting shall be held not later
      than fifteen months after the holding of the last preceding annual meeting
      but
      no later than six months after the end of preceding financial year, unless
      an
      order extending the time for calling the annual meeting is obtained. The
      Directors may at any time call a special meeting of shareholders.




A
      notice
      stating the day, hour and place of meeting and, if special business is to be
      transacted, details of the nature of the business, must be served by sending
      such notice to each person who is entitled to notice of such meeting and who
      on
      the record date for notice appears on the records of the Company or the
      Company’s transfer agent as a shareholder entitled to vote at the meeting and to
      each director of the Company and to the auditor of the Company by prepaid mail
      not less than 21 days and not more than 60 days before the meeting unless such
      requirement is otherwise waived. The Company must fix a record date in advance
      of the meeting for the purpose of determining shareholders entitled to notice
      of
      the meeting. Only shareholders of record on such date will be entitled to notice
      of the meeting.




Votes
      at
      meetings of shareholders may be given either personally or by proxy. Every
      shareholder, including a shareholder that is a body corporate, entitled to
      vote
      at a meeting of shareholders may by means of a proxy appoint a proxyholder
      or
      one or more alternate proxyholders, who need not be shareholders, as his nominee
      to attend and act at the meeting in the manner, to the extent and with the
      authority conferred by the proxy.




**C.** **Material
      Contracts**




Except
      for contracts entered into in the ordinary course of business, the only material
      contract entered into by NovAtel in the three years immediately preceding the
      date of this Annual Report which can reasonably be regarded as presently
      material is the following:




49


(1)  Change
      of
      Control Agreement dated April 5, 2004 among NovAtel, Leica Geosystems and CMC
      Electronics, as more particularly described under “Item 4 — Information on the
      Company, Business Overview — Certain Contractual Rights.”




**D.** **Exchange
      Controls**




*Investment
      Canada Act*




Canada
      has no system of exchange controls. There is no law, government decree or
      regulation in Canada restricting the export or import of capital or affecting
      the remittance of dividends, interest or other payments to a non-resident holder
      of Common Shares, other than withholding tax requirements. See “Item 10 —
Additional Information, Taxation.”




There
      is
      no limitation imposed by Canadian law or by the articles or other charter
      documents of the Company on the right of a non-resident to hold or vote Common
      Shares or Preferred Shares of the Company with voting rights (collectively,
      “Voting Shares”), other than as provided in the Investment Canada Act (the
“Investment Act”), as amended by the World Trade Organization Agreement
      Implementation Act (the “WTOA Act”). The Investment Act generally prohibits
      implementation of a reviewable investment by an individual, government or agency
      thereof, corporation, partnership, trust or joint venture that is not a
“Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after
      review, the minister responsible for the Investment Act is satisfied that the
      investment is likely to be of net benefit to Canada. An investment in Voting
      Shares of the Company by a non-Canadian (other than a “WTO Investor,” as defined
      below) would be reviewable under the Investment Act if it was an investment
      to
      acquire control of the Company and the Company was not, immediately prior to
      the
      implementation of the investment, controlled by a WTO Investor, and the value
      of
      the assets of the Company were $5.0 million or more. An investment in Voting
      Shares of the Company by a WTO Investor would be reviewable under the Investment
      Act if it was an investment to acquire direct control of the Company, and the
      value of the assets of the Company equaled or exceeded $265 million for the
      year
      2006 and $287 million for the year 2007. A non-Canadian, whether a WTO Investor
      or otherwise, would acquire control of the Company for purposes of the
      Investment Act if he or she acquired a majority of the Voting Shares of the
      Company. The acquisition of less than a majority, but at least one-third of
      the
      Voting Shares of the Company, would be presumed to be an acquisition of control
      of the Company, unless it could be established that the Company was not
      controlled in fact by the acquirer through the ownership of Voting Shares.
      In
      general, an individual is a WTO Investor if he or she is a “national” of a
      country (other than Canada) that is a member of the World Trade Organization
      (“WTO Member”) or has a right of permanent residence in a WTO Member other than
      Canada. A corporation or other entity will be a WTO investor if it is a “WTO
      investor-controlled entity” pursuant to detailed rules set out in the Investment
      Act. The United States is a WTO Member.




Certain
      transactions involving Voting Shares of the Company would be exempt from the
      Investment Act, including: (a) an acquisition of Voting Shares of the Company
      if
      the acquisition was made in connection with the person’s business as a trader or
      dealer in securities; (b) an acquisition of control of the Company in connection
      with the realization of a security interest granted for a loan or other
      financial assistance and not for any purpose related to the provisions of the
      Investment Act; and (c) an acquisition of control of the Company by reason
      of an
      amalgamation, merger, consolidation or corporate reorganization, following
      which
      the ultimate direct or indirect control in fact of the Company, through the
      ownership of voting interests, remains unchanged.




**E.** **Taxation**




The
      following is a summary of the principal Canadian federal income tax
      considerations generally applicable to a holder of Common Shares who is neither
      resident nor deemed to be resident in Canada, who does not use or hold and
      is
      not deemed to use or hold their Common Shares in carrying on a business in
      Canada and whose Common Shares do not otherwise constitute “taxable Canadian
      property” for purposes of the Tax Act (a “U.S. Holder”). Common Shares of a
      holder will generally not constitute “taxable Canadian property unless (a) at
      any time within the sixty (60) month period that ends at the time of the
      disposition of Common Shares by such holder, such holder, persons not dealing
      at
      arm’s length with such holder, or any combination thereof, owned (or had an
      interest in or option to acquire) 25% or more of the issued shares of any class
      or series of the capital stock of the Company or a predecessor, or (b) the
      Common Shares are deemed by the Tax Act to be taxable Canadian property. The
      Tax
      Act contains provisions relevant to a non-resident insurer for whom any
      Securities are “designated insurance property” which this summary does not take
      into account. This summary is not exhaustive of all potential Canadian income
      tax consequences to a U.S. Holder of acquiring, holding or disposing of Common
      Shares.




This
      summary takes into account the current provisions of Tax Act, the regulations
      thereunder, all specific proposals to amend the Tax Act publicly announced
      prior
      to the date of this Annual Report by the Minister of Finance, Canada, and the
      current published administrative practices and policies of the Canada Revenue
      Agency. It assumes that all proposals to amend the Tax Act will be enacted
      in
      their present form and otherwise does not take into account or anticipate
      changes in the law, whether by way of judicial decision or legislative action,
      nor does it take into account provincial, territorial or foreign tax legislation
      or considerations.




The
      discussion below is of a general nature only and is not intended to be, nor
      should it be construed to be, legal, business or tax advice to any particular
      holder or prospective holder of Common Shares. The tax considerations relative
      to ownership and disposition of the Common Shares may vary from taxpayer to
      taxpayer depending on the taxpayers’ particular status. Accordingly, holders and
      prospective holders of Common Shares should consult their own tax advisors
      regarding any and all tax consequences of purchasing, owning and disposing
      of
      Common Shares.




A
      U.S.
      Holder will not be subject to tax under the Tax Act on any gain realized in
      respect of the disposition or deemed disposition of Common Shares to a person
      other than the Company, provided the Common Shares are not taxable Canadian
      property to the U.S. holder. A disposition of the Common Shares to the Company
      may give rise to a deemed dividend that would be subject to Canadian withholding
      tax. Generally, dividends paid or credited, or deemed to be paid or credited
      by
      the Company, to U.S. Holders who beneficially own the dividends or deemed
      dividends are subject to Canadian withholding tax at the rate of 15% (reduced
      from 25% by the Convention). The Company assumes responsibility for the
      withholding of tax on dividends to a U.S. Holder at the source.




**F.** **Dividends
      and Paying Agents**




Not
      applicable.




50


**G.** **Statement
      by Experts**




Not
      applicable.




**H.** **Documents
      on Display**




Documents
      concerning the Company referred to in this Annual Report may be inspected at
      its
      headquarters at 1120-68th Avenue N.E., Calgary, Alberta, T2E 8S5, CANADA. The
      Company provides access to its Quarterly Reports filed on Form 6-K and Annual
      Report on Form 20-F on its website free of charge, as soon as reasonably
      practicable after those reports are electronically filed. The Company’s Code of
      Ethics and Business Conduct is posted on its website at www.novatel.ca.




The
      Company’s SEC filings and the exhibits thereto, are available for inspection and
      copying at the public reference facilities maintained by the SEC, 100 F Street
      N.E., Washington, D.C., 20549. Copies of these filings may be obtained from
      these offices after the payment of prescribed fees. Please call the SEC at
      1-800-SEC-0330 for further information on the public reference rooms.




As
      a
      foreign private issuer, the Company is exempt from the proxy rules under the
      Securities Exchange Act of 1934, as amended, prescribing the furnishing and
      content of proxy statements to shareholders. As the Company is a foreign private
      issuer, the Company’s directors and officers are also exempt from the short
      swing profit recovery and disclosure regime of Section 16 of the Exchange Act.




**I.** **Subsidiary
      Information**




Not
      applicable.




**Item
      11.****Quantitative
      and Qualitative Disclosures about Market Risk**




See
“Item
      5 — Operating and Financial Review and Prospects, Operating Results — Financial
      Instruments.” The Company is not subject to significant interest rate risk due
      to the short-term maturities of the Company’s outstanding loans and short-term
      investments.




**Item
      12.****Description
      of Securities other than Equity Securities**




Not
      applicable.




**PART
      II**




**Item
      13.****Defaults,
      Dividend Arrearages and Delinquencies**




Not
      applicable.




**Item
      14.****Material
      Modifications to the Rights of Security Holders and Use of Proceeds**




Not
      applicable.




**Item
      15.****Controls
      and Procedures**




(a)  *Evaluation
      of Disclosure Controls and Procedures.* The
      Company’s Chief Executive Officer and Chief Financial Officer, after evaluating
      the effectiveness of the Company’s “disclosure controls and procedures” (as
      defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e))
      as of the end of the period covered by this Annual Report, have concluded that
      the Company’s disclosure controls and procedures were effective.




(b)  *Management’s
      Report on Internal Control over Financial Reporting* .
      Management’s Report on Internal Control over Financial Reporting appears on page
      F-3.




(c)  *Changes
      in Internal Controls.* There
      were no changes in the Company’s internal controls over financial reporting
      identified in connection with the evaluation above during the period covered
      by
      this Annual Report that has materially affected, or is reasonably likely to
      materially affect, the Company’s internal controls over financial reporting.




**Item
      16A.****Audit
      Committee Financial Expert**




The
      Company’s Board of Directors has determined that Joel A. Schleicher is the
      Company’s audit committee financial expert as defined by the rules of the SEC.
      Mr. Schleicher is “independent” as defined by the Nasdaq rules.




**Item
      16B.****Code
      of Ethics**




The
      Company has adopted a Code of Ethics and Business Conduct that applies to its
      principal executive officer, principal financial officer and all other officers,
      employees and directors of the Company. A copy of the Company’s Code of Ethics
      and Business Conduct can be found on the Company’s website at www. novatel.ca.
      There were no amendments to, or waivers granted under, the Code of Ethics and
      Business Conduct during the year ended December 31, 2006.




51


**Item
      16C.****Principal
      Accountant Fees and Services**




The
      following table sets forth the aggregate fees billed to the Company for the
      years ended December 31, 2006 and December 31, 2005:







**Fees**
            
            **2006**
            
            **2005**Audit
                Fees (1)
            
            $
            563,444
            
            $
            342,628Audit-Related
                Fees (2)
            
            
            ―
            
            
            ―Tax
                Fees (3)
            
            
            135,918
            
            
            91,242All
                Other Fees (4)
            
            
            —
            
            
            —**Total
                Fees**
            
            $
            699,362
            
            $
            433,870




(1) " Audit
      Fees" consist of fees for professional services rendered in connection with
      the audit of the Company’s consolidated annual financial statements, review of
      the Company’s quarterly financial statements and the quarterly and annual
      regulatory filings thereon.




(2)  “Audit-Related
      Fees” consist of fees for professional services rendered in connection with
      financial accounting and reporting consultations.




(3)  “Tax
      Fees” consist of fees billed for professional services rendered for tax
      compliance and tax advice. These services include preparation of the Company’s
      income tax returns, employee-related tax issues and excise tax matters.




(4)  “All
      Other Fees” consist of fees for products and services other than the services
      reported above.




The
      Audit
      Committee requires pre-approval of all audit and permissible non-audit services
      (including the fees and terms thereof) to be performed for the Company by its
      independent registered chartered accountants, subject to the de-minimus
      exception for non-audit services described in Section 10A(i)(1)(B) of the
      Securities Exchange act of 1934.




The
      Audit
      Committee reviews all audit related services, tax services and other services
      provided by the independent registered chartered accountants to the Company,
      at
      each quarterly meeting. In 2006, the Audit Committee approved 100% of the audit
      related services provided by the independent registered chartered accountants
      in
      2006.




**Item
      16D.****Exemptions
      from the Listing Standards for Audit Committees**




Not
      applicable.




**Item
      16E.****Purchases
      of Equity Securities by the Issuer and Affiliated Purchases**




The
      Company did not purchase any of its equity securities in 2006, nor were any
      such
      purchases made by or on behalf of any affiliated purchaser as defined in Rule
      10b-18(a)(3) of the Securities Exchange Act of 1934.




**Item
      17.****Financial
      Statements**




Not
      applicable.




**Item
      18.****Financial
      Statements**




See
      Item
      19 below for Financial Statements filed as a part of this Annual
      Report.




**Item
      19.****Financial
      Statements and Exhibits**




(a) Financial
      Statements




1.
            Management’s
                Report2.
            Management’s
                Report on Internal Control over Financial Reporting3.
            Report
                of Independent Registered Chartered Accountants4.
            Consolidated
                Balance Sheets5.
            Consolidated
                Statements of Operations6.
            Consolidated
                Statements of Shareholders’ Equity7.
            Consolidated
                Statements of Cash Flows8.
            Notes
                to Consolidated Financial Statements9.
            Financial
                Statement Schedule




52


(b)
      Exhibits


**Exhibit**
              **Number**
            **Exhibit**3.1
            Restated
                Articles of Incorporation of Registrant. (1)3.2
            Amended
                Bylaws of Registrant.4.1
            Form
                of
                Common Stock Certificate. (1)10.1
            Directors
                Stock
                Option Plan. (2)10.2
            Employee
                Stock
                Option Plan with form of stock option agreement. (2)10.3
            Form
                of
                Indemnification Agreement to be entered into between Registrant and
                certain directors and officers. (1)10.4
            Employment
                Agreement dated July 1, 1997 between NovAtel Inc. and Werner Gartner.
                (3)10.5
            Lease
                Agreement (Building) dated January 29, 1999 between Christian Schumacher
                and NovAtel Inc. (4)10.6
            Agreement
                made
                effective July 20, 1999 between NovAtel Inc. and Sokkia Co., Ltd.
                (5)10.7
            License
                Agreement made effective August 1, 1999 between NovAtel Inc., Sokkia
                Co.,
                Ltd. and Point, Inc. (5)10.8
            Amendment
                No. 1
                to Point Agreement dated September 17, 2004.10.9
            Operating
                Loan
                Credit Facility Letter from HSBC Bank Canada made effective November
                6,
                2000. (6)10.10
            Amendment
                made
                effective August 1, 2006 to Operating Loan Credit Facility Letter
                from
      HSBC Bank Canada.10.11
            Employment
                Agreement dated April 5, 2004 between NovAtel Inc. and Jonathan W.
                Ladd.
                (8)10.12
            Operating
                Line
                of Credit Facility Letter from The Toronto Dominion Bank dated June
                5,
                2002. (7)10.13
            Employment
                Agreement dated November 20, 1996 between NovAtel Inc. and Patrick
                C.
                Fenton. (8)*10.14
            Change
                of Control Agreement dated April 5, 2004 between NovAtel Inc. and
                Leica
                Geosystems A.G., CMC Electronics Inc., and Oncap L.P. (8)10.15
            2004
                Employee Long-term Incentive Plan. (9)21.1
            List
                of
                Subsidiaries.23.1
            Consent
                of Deloitte & Touche LLP, Independent Registered Chartered
                Accountants.31.1
            Section
                302 Certification of Chief Executive Officer.31.2
            Section
                302 Certification of Chief Financial Officer.32.1
            Section
                906 Certification of Chief Executive Officer.32.2
            Section
                906 Certification of Chief Financial
                Officer.




(1)  Incorporated
      by reference to Registrant’s registration statement on Form F-1 (Registration
      Statement No. 333-6088).


(2)  Incorporated
      by reference to Registrant’s annual report on Form 20-F/A for the year ended
      December 31, 2005.


(3)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 1997.


(4)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 1998.


(5)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 1999.


(6)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 2000.


(7)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 2002.


(8)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 2003.


(9)  Incorporated
      by reference to Registrant’s annual report on Form 20-F for the year ended
      December 31, 2004.


*  Certain
      portions of this agreement have been omitted and filed separately with the
      Securities and Exchange Commission. Confidential treatment has been granted
      with
      respect to the omitted portions.




Copies
      of
      the Company’s SEC filings and the above exhibits are available for inspection
      and copying at the public reference facilities maintained by the SEC, 100 F
      Street N.E., Washington, D.C., 20549 or through the SEC’s website at
      www.sec.gov. You may also request copies of the above exhibits by contacting
      our
      investor relations department by telephone (403-295-4532) or by e-mail
      (ir@novatel.com).





53







**SIGNATURES**




The
      Registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.




NOVATEL
      INC.




By:  /s/
      Jonathan W. Ladd




Jonathan
      W.
      Ladd


*President
      and
      Chief Executive Officer*




Date: May
      31, 2007







54







**NOVATEL
      INC.**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Management’s
                Report
            F-2Management’s
                Report on Internal Control over Financial Reporting
            F-3Reports
                of Independent Registered Chartered Accountants
            F-4Consolidated
                Balance Sheets
            F-5Consolidated
                Statements of Operations
            F-6Consolidated
                Statements of Shareholders’ Equity
            F-7Consolidated
                Statements of Cash Flows
            F-8Notes
                to Consolidated Financial Statements
            F-9





F-1




**MANAGEMENT’S
      REPORT**




Management
      is responsible to the Board of Directors for the preparation of the Company’s
      consolidated financial statements. These financial statements have been prepared
      in accordance with generally accepted accounting principles in Canada and
      include certain amounts based on estimates and judgments. Management has
      determined such amounts on a reasonable basis to ensure that the consolidated
      financial statements are presented fairly, in all material respects. Financial
      information presented elsewhere in this Annual Report is consistent with that
      in
      the consolidated financial statements.




The
      Company maintains a system of internal controls which provides management with
      reasonable assurance that assets are safeguarded and that reliable financial
      records are maintained.




The
      independent registered chartered accountants, Deloitte & Touche LLP, have
      been appointed by the shareholders to express an opinion as to whether these
      consolidated financial statements present fairly the Company’s consolidated
      financial position and operating results in accordance with generally accepted
      accounting principles in Canada. Their report follows.




The
      Board
      of Directors has reviewed and approved these consolidated financial statements.
      To assist the Board in meeting its responsibility, it has appointed an Audit
      Committee, all of whose members are outside directors. The committee meets
      periodically with management and the independent registered chartered
      accountants to review internal controls, audit results and accounting principles
      and practices. The independent registered chartered accountants have full and
      free access to the Audit Committee.




/s/
                Jonathan W. Ladd
              Jonathan
                W. Ladd
              President
                and Chief Executive Officer
            /s/
                Werner Gartner
              Werner
                Gartner
              Executive
                Vice President and Chief Financial
                Officer




February
      12, 2007





F-2







**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as defined in Securities Exchange Act Rule 13a-15(f).
      The
      Company’s system of internal control is evaluated on a cost benefit basis and is
      designed to provide reasonable, not absolute, assurance that reported financial
      information is materially accurate.




Under
      the
      supervision and with the participation of Management, including the Company’s
      Chief Executive Officer and Chief Financial Officer, Management has conducted
      an
      evaluation of the design and effectiveness of the Company’s internal control
      over financial reporting based on the Internal Control - Integrated Framework
      issued by the Committee of Sponsoring Organizations (COSO). Based on this
      evaluation, Management concluded that the Company’s internal control over
      financial reporting was effective as of December 31, 2006.










F-3







**REPORT
      OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**




**To
      the Board of Directors and Shareholders of NovAtel Inc.**






We
      have
      audited the consolidated balance sheets of NovAtel Inc. as at December 31,
      2006
      and 2005, and the consolidated statements of operations, shareholders’ equity
      and cash flows for each of the years in the three-year period ended December
      31,
      2006. 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 and the standards of the Public Company Accounting Oversight Board
      (United States). 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. We believe that our audits provide a reasonable basis for our
      opinion.






In
      our
      opinion, these consolidated financial statements present fairly, in all material
      respects, the financial position of NovAtel Inc. as at December 31, 2006 and
      2005 and the results of its operations and its cash flows for each of the years
      in the three-year period ended December 31, 2006 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.




(signed)
      “Deloitte & Touche LLP”






Deloitte
      & Touche LLP


Independent
      Registered Chartered Accountants


Calgary,
      Alberta, Canada




February
      9, 2007, except as to Note 9(c) which is as of March 21, 2007








**COMMENTS
      BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**




**ON
      CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCES**




The
      standards of the Public Company Accounting Oversight Board (United States)
      require the addition of an explanatory paragraph (following the opinion
      paragraph) when there are changes in accounting principles that have a material
      effect on the comparability of the Company’s financial statements or changes
      that have been implemented in the financial statements such as those described
      in Note 2 and Note 20 to the consolidated financial statements. Our report
      to
      the Board of Directors and Shareholders on the consolidated financial statements
      of NovAtel Inc., dated February 9, 2007, except as to Note 9(c) which is as
      of
      March 21, 2007, is expressed in accordance with Canadian reporting standards
      which do not require a reference to such changes in accounting principles in
      the
      auditors’ report when the change is properly accounted for and adequately
      disclosed in the financial statements.




(signed)
      “Deloitte & Touche LLP”




Deloitte
      & Touche LLP


Independent
      Registered Chartered Accountants


Calgary,
      Alberta, Canada




February
      9, 2007, except as to Note 9(c) which is as of March 21, 2007





F-4





**NOVATEL
      INC.**




**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands, Canadian dollars)**


**December
                31,****ASSETS**
            
            **2006**
            
            **2005**Current
                assets:Cash
                and cash equivalents
            
            $
            3,853
            
            $
            2,721Short-term
                investments (Note 8) (includes compensating balances of $4,158 at
                December
                31, 2006 and December 31, 2005)
            
            
            45,454
            
            
            32,363Accounts
                receivable (Notes 3 and 12)
            
            
            13,697
            
            
            10,694Related
                party receivables (Note 15)
            
            
            920
            
            
            1,331Related
                party notes receivable (Note 15)
            
            
            378
            
            
            1,552Inventories
                (Note 4)
            
            
            8,075
            
            
            5,436Prepaid
                expenses and deposits
            
            
            578
            
            
            599Future
                income tax asset — current portion (Note 14)
            
            
            3,356
            
            
            2,370Total
                current assets
            
            
            76,311
            
            
            57,066Capital
                assets (Note 5)
            
            
            6,079
            
            
            3,095Intangible
                assets (Note 6)
            
            
            6,719
            
            
            4,722Goodwill
                (Note 18)
            
            
            1,494
            
            
            1,494Other
                assets
            
            
            816
            
            
            ―Deferred
                development costs (Note 7)
            
            
            1,253
            
            
            1,657Future
                income tax asset — long term portion (Note 14)
            
            
            4,296
            
            
            3,221Total
                assets
            
            $
            96,968
            
            $
            71,255**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            12,336
            
            $
            9,784Related
                party payables (Note 15)
            
            
            72
            
            
            15Notes
                payable (Note 16)
            
            
            541
            
            
            1,552Deferred
                revenue and customer deposits
            
            
            692
            
            
            752Provision
                for future warranty costs
            
            
            816
            
            
            693Total
                current liabilities
            
            
            14,457
            
            
            12,796Licence
                fee payable
            
            
            691
            
            
            ―Deferred
                gain on sale/leaseback of capital assets (Note 5)
            
            
            231
            
            
            342Total
                liabilities
            
            
            15,379
            
            
            13,138Commitments,
                contingencies and guarantees (Note 9)Shareholders’
                equity (Note 11):Capital
                stock(Common
                shares issued and outstanding: 8,529 at December 31, 2006 and 8,365
                at
                December 31, 2005)
            
            
            40,953
            
            
            39,667Contributed
                surplus
            
            
            1,647
            
            
            953Retained
                earnings
            
            
            38,989
            
            
            17,497Total
                shareholders’ equity
            
            
            81,589
            
            
            58,117Total
                liabilities and shareholders’ equity
            
            $
            96,968
            
            $
            71,255




*The
      accompanying notes are an integral part of these consolidated financial
      statements.*





F-5







**NOVATEL
      INC.**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except per share data, Canadian dollars)**




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenues
                (Notes 12 and 15)Product
                sales
            
            $
            72,972
            
            $
            59,306
            
            $
            48,802NRE
                fees
            
            
            4,662
            
            
            3,989
            
            
            5,130Total
                revenues
            
            
            77,634
            
            
            63,295
            
            
            53,932Cost
                of sales (Note 15)Cost
                of product sales
            
            
            27,228
            
            
            22,323
            
            
            19,586Cost
                of NRE fees
            
            
            2,879
            
            
            2,313
            
            
            2,917Total
                cost of sales
            
            
            30,107
            
            
            24,636
            
            
            22,503Gross
                profit
            
            
            47,527
            
            
            38,659
            
            
            31,429Operating
                expenses:Research
                and development
            
            
            13,450
            
            
            10,882
            
            
            9,588Selling
                and marketing
            
            
            7,692
            
            
            6,387
            
            
            5,751General
                and administration
            
            
            8,009
            
            
            7,082
            
            
            5,312Foreign
                exchange loss
            
            
            198
            
            
            255
            
            
            595Share
                offering costs (Note 13)
            
            
            —
            
            
            —
            
            
            754Total
                operating expenses
            
            
            29,349
            
            
            24,606
            
            
            22,000Operating
                income
            
            
            18,178
            
            
            14,053
            
            
            9,429Interest
                income, net
            
            
            1,680
            
            
            787
            
            
            313Other
                expense
            
            
            (86
            )
            
            (72
            )
            
            (67
            )Benefit
                of investment tax credits
            
            
            —
            
            
            1,592
            
            
            4,356Income
                from continuing operations before income taxes
            
            
            19,772
            
            
            16,360
            
            
            14,031Income
                taxes (Note 14)Current
                provision
            
            
            341
            
            
            2,046
            
            
            2,328Future
                income tax expense (benefit)
            
            
            (2,061
            )
            
            (2,402
            )
            
            (1,091
            )Total
                income tax expense (benefit)
            
            
            (1,720
            )
            
            (356
            )
            
            1,237Net
                income from continuing operations
            
            
            21,492
            
            
            16,716
            
            
            12,794Income
                from discontinued operations (Note 17)
            
            
            —
            
            
            —
            
            
            21Net
                income
            
            $
            21,492
            
            $
            16,716
            
            $
            12,815Net
                income per share (basic) (Note 11)Continuing
                operations
            
            $
            2.54
            
            $
            2.01
            
            $
            1.59Discontinued
                operations
            
            
            —
            
            
            —
            
            
            —Net
                income per share (basic)
            
            $
            2.54
            
            $
            2.01
            
            $
            1.59Weighted
                average shares outstanding (basic)
            
            
            8,450
            
            
            8,298
            
            
            8,063Net
                income per share (diluted) (Note 11)Continuing
                operations
            
            $
            2.44
            
            $
            1.91
            
            $
            1.51Discontinued
                operations
            
            
            —
            
            
            —
            
            
            *—*Net
                income per share (diluted)
            
            $
            2.44
            
            $
            1.91
            
            $
            1.51Weighted
                average shares outstanding (diluted)
            
            
            8,825
            
            
            8,763
            
            
            8,500




*The
      accompanying notes are an integral part of these consolidated financial
      statements.*





F-6







**NOVATEL
      INC.**




**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**(in
      thousands, Canadian dollars)**




**Common
                Shares****(Note
                11)****Number**
            
            **Amount**
            
            **Contributed**
              **Surplus**
            
            **Retained**
              **Earnings**
              **(Deficit)**
            
            **Total**
              **Shareholders’**
              **Equity**January
                1, 2004
            
            
            7,984
            
            $
            37,012
            
            $
            13
            
            $
            (11,578
            )
            $
            25,447Change
                in accounting policy relating to stock-based compensation (Note 2(i))
            
            
            —
            
            
            66
            
            
            390
            
            
            (456
            )
            
            —Common
                shares issued pursuant to exercise of stock options (Note 11)
            
            
            276
            
            
            1,792
            
            
            (287
            )
            
            —
            
            
            1,505Stock
                based compensation
            
            
            —
            
            
            —
            
            
            326
            
            
            —
            
            
            326Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            12,815
            
            
            12,815December
                31, 2004
            
            
            8,260
            
            $
            38,870
            
            $
            442
            
            $
            781
            
            $
            40,093Common
                shares issued pursuant to exercise of stock options (Note 11)
            
            
            105
            
            $
            797
            
            $
            (76
            )
            $
            —
            
            $
            721Stock
                based compensation
            
            
            —
            
            
            —
            
            
            587
            
            
            —
            
            
            587Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            16,716
            
            
            16,716December
                31, 2005
            
            
            8,365
            
            $
            39,667
            
            $
            953
            
            $
            17,497
            
            $
            58,117Common
                shares issued pursuant to exercise of stock options (Note 11)
            
            
            166
            
            $
            1,294
            
            $
            (253
            )
            $
            ―
            
            $
            1,041Repurchase
                of shares
            
            
            (2
            )
            
            (8
            )
            
            (73
            )
            
            ―
            
            
            (81
            )Stock-based
                compensation
            
            
            ―
            
            
            ―
            
            
            1,020
            
            
            ―
            
            
            1,020Net
                income
            
            
            ―
            
            
            ―
            
            
            ―
            
            
            21,492
            
            
            21,492December
                31, 2006
            
            
            8,529
            
            $
            40,953
            
            $
            1,647
            
            $
            38,989
            
            $
            81,589




*The
      accompanying notes are an integral part of these consolidated financial
      statements.*





F-7







**NOVATEL
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**(in
                thousands of Canadian dollars)****Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Operating
                activities:Net
                income
            
            $
            21,492
            
            $
            16,716
            
            $
            12,815Share
                offering costs (Note 13)
            
            
            ―
            
            
            —
            
            
            754Charges
                and credits to operations not involving an outlay of cash:Amortization
            
            
            3,454
            
            
            2,921
            
            
            2,390Loss
                on disposal of capital assets
            
            
            31
            
            
            19
            
            
            19Current
                income tax provision and future income tax benefit
            
            
            (2,003
            )
            
            (440
            )
            
            1,167Benefit
                of investment tax credits
            
            
            ―
            
            
            (1,592
            )
            
            (4,356
            )Gain
                on liquidation of Mezure assets and liabilities (Note 17)
            
            
            ―
            
            
            —
            
            
            (21
            )Stock
                based compensation expense
            
            
            2,064
            
            
            934
            
            
            941Amortization
                of deferred gain on sale/leaseback of capital assets
            
            
            (111
            )
            
            (111
            )
            
            (114
            )Accretion
                on royalty payable to CMC related to GPS OEM product line
                acquisition
            
            
            ―
            
            
            17
            
            
            54Net
                change in non-cash working capital related to operations:Increase
                in accounts receivable and related party receivables
            
            
            (2,592
            )
            
            (694
            )
            
            (3,480
            )Increase
                in inventories
            
            
            (2,639
            )
            
            (223
            )
            
            (409
            )Decrease
                (increase) in prepaid expenses and deposits
            
            
            21
            
            
            (309
            )
            
            89Increase
                (decrease) in accounts payable, accrued liabilities and related party
                payables
            
            
            475
            
            
            (125
            )
            
            2,084(Decrease)
                increase in deferred revenue
            
            
            (60
            )
            
            (176
            )
            
            443Increase
                in
                provision for future warranty costs
            
            
            123
            
            
            155
            
            
            128Increase
                in other assets
            
            
            (816
            )
            
            —
            
            
            —Cash
                provided by operating activities
            
            
            19,439
            
            
            17,092
            
            
            12,504Financing
                activities:Issuance
                of shares (Note 11)
            
            
            1,041
            
            
            721
            
            
            1,505Repurchase
                of shares (Note 11)
            
            
            (81
            )
            
            —
            
            
            —Related
                party notes receivable
            
            
            1,169
            
            
            55
            
            
            (11
            )Notes
                payable
            
            
            (1,013
            )
            
            (55
            )
            
            11Equity
                financing of joint venture (Note 16)
            
            
            1,490
            
            
            ―
            
            
            ―Receipts
                (payments) related to share offering costs (Note 13)
            
            
            ―
            
            
            57
            
            
            (807
            )Payment
                of capital lease obligations
            
            
            ―
            
            
            —
            
            
            (100
            )Effect
                of exchange rate changes on financing activities
            
            
            7
            
            
            —
            
            
            —Cash
                provided by financing activities
            
            
            2,613
            
            
            778
            
            
            598Investing
                activities:Purchase
                of capital and intangible assets
            
            
            (6,374
            )
            
            (2,446
            )
            
            (2,293
            )Proceeds
                from disposal of capital assets
            
            
            35
            
            
            53
            
            
            29Purchase
                of short-term investments
            
            
            (51,772
            )
            
            (56,350
            )
            
            (17,720
            )Proceeds
                from short-term investments
            
            
            38,681
            
            
            38,397
            
            
            13,865Acquisition
                of Waypoint Consulting Inc. (Note 18)
            
            
            ―
            
            
            (3,531
            )
            
            —Investment
                in Point, Inc. (Note 16)
            
            
            (1,490
            )
            
            —
            
            
            —Royalty
                payment relating to CMC Electronics’ OEM GPS business
            
            
            ―
            
            
            (221
            )
            
            (261
            )Deferred
                development costs
            
            
            ―
            
            
            —
            
            
            (218
            )Cash
                used in investing activities
            
            
            (20,920
            )
            
            (24,098
            )
            
            (6,598
            )Increase
                (decrease) in cash and cash equivalents
            
            
            1,132
            
            
            (6,228
            )
            
            6,504Cash
                and cash equivalents beginning of year
            
            
            2,721
            
            
            8,949
            
            
            2,445Cash
                and cash equivalents, end of year
            
            $
            3,853
            
            $
            2,721
            
            $
            8,949Interest
              paid related to bank advances and capital lease obligations
            
            $
            ―
            
            $
            ―
            
            $
            3Income
                taxes paid
            
            $
            283
            
            $
            91
            
            $
            71Cash
                and cash equivalents consist of:Cash
            
            $
            614
            
            $
            2,721
            
            $
            1,221Cash
                equivalents
            
            
            3,239
            
            
            —
            
            
            7,728Total
            
            $
            3,853
            
            $
            2,721
            
            $
            8,949




*The
      accompanying notes are an integral part of these consolidated financial
      statements.*


F-8







**NOTE
      1** **NATURE
      OF BUSINESS**




NovAtel
      Inc. (“NovAtel” or the “Company”) is incorporated under the laws of Canada. The
      Company designs, markets and supports a broad range of products that determine
      precise geographic locations using the Global Positioning System (“GPS”) and
      other positioning technologies.




On
      July
      20, 1999, the Company and Sokkia Co., Ltd. formed a joint venture, Point, Inc.
      to develop and distribute GPS based products for surveying, mapping,
      geographical information systems, construction and construction machine control
      applications, on a world-wide basis (see Note 16).




On
      April
      17, 1998, CMC Electronics Inc. (“CMC Electronics”) acquired 58.3% of the
      Company’s outstanding common shares from the Company’s two former principal
      shareholders (see Note 14). On April 11, 2001, an investor group led by ONCAP
      L.P. (“ONCAP”) acquired control of the Company through the acquisition of CMC
      Electronics (see Note 14). From January 2005 through August 2005, CMC
      Electronics sold approximately 4.5 million common shares through open market
      transactions, reducing its ownership of the Company from approximately 55%
      to
      0%.




On
      October 1, 2005 the Company acquired Waypoint Consulting Inc. (“Waypoint”) for
      approximately $3.5 million in cash, subject to post-closing adjustments to
      working capital. Waypoint’s products include specialized real-time and
      post-processing GPS and GPS/inertial positioning and trajectory software (see
      Note 18).




**NOTE
      2  SIGNIFICANT ACCOUNTING POLICIES**




The
      consolidated financial statements have been prepared by management in accordance
      with generally accepted accounting principles in Canada and are stated in
      Canadian dollars. The material differences between Canadian and United States
      (U.S.) generally accepted accounting principles are described in Note 20. The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements,
      and
      revenues and expenses during the reporting period. Actual results could differ
      from those estimated. Estimates are used when accounting for items and matters
      such as revenue recognition, allowance for uncollectible accounts, inventory
      obsolescence, product warranty, amortization, impairment assessments, taxes
      and
      related valuation allowance, stock-based compensation and contingencies.




a)  ***Principles
      of Consolidation***




The
      consolidated financial statements include the accounts of the Company, its
      continuing subsidiaries and its proportionate 49% joint venture interest in
      Point, Inc.




b)  ***Foreign
      Currency Translation***




Foreign
      subsidiaries and Point, Inc. are considered financially and operationally
      dependent on the Company and are translated into Canadian dollars using current
      rates of exchange for monetary assets and liabilities, historical rates of
      exchange for non-monetary assets and liabilities, and average rates for the
      period for revenues and expenses, except amortization and cost of sales, which
      are translated at the rate of exchange applicable to the related assets. Gains
      and losses resulting from these translation adjustments are included in
      operating income.




Transactions
      and monetary balances denominated in a currency other than the Canadian dollar
      are translated into Canadian dollars using yearly average and year-end exchange
      rates, respectively. Gains and losses arising from this translation process
      are
      included in operating income.




c)  ***Cash
      and Cash Equivalents, Short Term Investments***




Cash
      and
      cash equivalents include highly liquid investments which have original
      maturities of 90 days or less. Short-term investments include highly liquid
      investments which have original maturities of 91 days to 12 months at the time
      of purchase.




d)  ***Inventories***




Raw
      materials and components, work-in-progress, and finished goods inventories
      are
      recorded at the lower of cost or net realizable value. Cost is determined on
      a
      first-in, first-out basis and includes materials, labour and manufacturing
      overhead.




e)  ***Capital
      Assets, Intangible Assets and Amortization***




Capital
      assets are recorded at cost. Maintenance and repair costs of a routine nature
      are charged to operations as incurred, and renewals and betterments that extend
      the economic useful life of an asset are capitalized.




F-9


Capital
      assets and intangible assets are amortized on a straight-line basis using the
      expected useful lives of the assets:




Computer
                and ancillary equipment
            4
                yearsResearch
                and development equipment
            4
                yearsProduction
                equipment
            5
                yearsAutomobiles
            5
                yearsLeasehold
                improvements
            Shorter
                of useful life or the term of leasesFurniture
                and fixtures
            10
                yearsProduct
                tooling
            2
                -
                4 yearsPatents
                and trademarks
            10
                yearsTechnology
            4
                -
                10 yearsSoftware
                licenses
            4
                yearsMarket
                presence of CMC Electronics OEM GPS and Waypoint product lines
            4
                -
                8.5 years




Capital
      assets and intangible assets are assessed for future recoverability or
      impairment by estimating future net undiscounted cash flows and residual values.
      When impairment has occurred, a loss is recognized in the period. When the
      carrying value of a long-lived asset is greater than its net recoverable amount
      as determined on an estimated undiscounted cash flow basis, an impairment loss
      is recognized to the extent that its fair value, measured as the discounted
      cash
      flows over the life of the asset when quoted market prices are not readily
      available, is below the asset’s carrying value.




f)  ***Revenue
      Recognition***




The
      Company recognizes product revenue when persuasive evidence of an arrangement
      exists, delivery has occurred, the fee is fixed or determinable and
      collectibility is reasonably assured. Revenues from non-recurring engineering
      (“NRE”) fees are recognized at the time services are rendered. On long-term
      contracts, in which the customer pays established rates for time and materials,
      revenue is recognized as services are rendered and costs are incurred. On
      certain long-term contracts, revenue is recognized using the proportional
      performance method relative to customer milestones achieved. Revisions in cost
      and profit estimates during the course of work are reflected in the period
      in
      which the need for revision becomes known. Losses, if any, are recognized fully
      when first anticipated. Some contracts contain penalty provisions based on
      performance relative to established targets. Such penalties are included in
      revenue or cost estimates when amounts can be reasonably determined.




The
      Company applies American Institute of Certified Public Accountants Statement
      of
      Position 97-2, “Software Revenue Recognition”, to product sales where software
      is considered more than incidental. For software arrangements involving multiple
      elements, the Company allocates revenue to each element based on the relative
      fair value or the residual method, as applicable, and using vendor specific
      objective evidence of fair values, which is based on prices charged when the
      element is sold separately. Software revenue is recognized when persuasive
      evidence of an arrangement exists, the software is delivered in accordance
      with
      all terms and conditions of the customer contracts, the fee is fixed or
      determinable and collection is reasonably assured. Revenue related to
      post-contract support (“PCS”), including technical support and unspecified
      when-and-if available software upgrades, is recognized ratably over the PCS
      term.




For
      contracts involving multiple deliverables, where the deliverables are governed
      by more than one authoritative accounting standard, the
      Company applies the Emerging Issues Committee 142, ‘‘Revenue
      Arrangements with Multiple Deliverables’’ (‘‘EIC-142’’), and evaluates each
      deliverable to determine whether it represents a separate unit of accounting
      based on the following criteria: (a) whether the delivered item has value to
      the
      customer on a standalone basis, (b) whether there is objective and reliable
      evidence of the fair value of the undelivered item(s), and (c) if the contract
      includes a general right of return relative to the delivered item, delivery
      or
      performance of the undelivered item(s) is considered probable and substantially
      in the control of the Company. If objective and reliable evidence of fair
      value exists for all units of accounting in the arrangement, revenue is
      allocated to each unit of accounting or element based on relative fair values.
      In situations where there is objective and reliable evidence of fair value
      for
      all undelivered elements, but not for delivered elements, the residual method
      is
      used to allocate the contract consideration. Under the residual method, the
      amount of revenue allocated to delivered elements equals the total arrangement
      consideration less the aggregate fair value of any undelivered elements. Each
      unit of accounting is then accounted for under the applicable revenue
      recognition guidance. So long as elements otherwise governed by separate
      authoritative accounting standards cannot be treated as separate units of
      accounting under the guidance in EIC-142 the elements are combined into a
      single unit of accounting for revenue recognition purposes. In this case,
      revenue allocated to the unit of accounting is deferred until all combined
      elements have been delivered or, once there is only one remaining element to
      be
      delivered, based on the revenue recognition guidance applicable to the last
      delivered element within the unit of accounting.




F-10


g)  ***Research
      and Development Costs***




Research
      costs are charged to operations as incurred. Development costs, including
      software development costs, are charged to operations as incurred unless they
      meet specific criteria related to technical, market and financial feasibility.
      In these circumstances, the costs are deferred and amortized on a systematic
      basis, using a method similar to the unit-of-production method of amortization,
      subject to an estimate of recoverability.




h)  ***Provision
      for Future Warranty Costs***




Warranty
      costs are accrued, to the extent that they are not recoverable from third party
      manufacturers, for the estimated cost to repair products for the balance of
      the
      warranty periods.




i)  ***Stock-based
      Compensation Plans***




The
      Company has stock-based compensation plans (see Note 11 and Note 19). Effective
      January 1, 2004, the Company adopted the fair value method of accounting for
      stock options awarded to employees on or after January 1, 2002 as required
      by
      amended CICA Handbook Section 3870 “Stock-Based Compensation and Other
      Stock-Based Payments”. As permitted by the transitional provisions of Section
      3870, the change was adopted retroactively without restatement. Under Section
      3870, the fair value of stock options is recognized over the applicable vesting
      period as stock-based compensation expense and a credit to contributed surplus.
      When options are exercised, the proceeds are credited to share capital, and
      the
      applicable fair value is reclassified from contributed surplus to share capital.
      Retroactive application of Section 3870 resulted in the January 1, 2004 opening
      balances of deficit, contributed surplus and share capital being increased
      by
      $456, $390 and $66, respectively, as though the fair value method had been
      applied since January 1, 2002.




j)  ***Hedging
      Relationships***




Effective
      January 1, 2004, the Company adopted Accounting Guideline 13, “Hedging
      Relationships.” The guideline establishes conditions where hedge accounting may
      be applied. Where hedge accounting does not apply, any changes in the fair
      values of the financial contracts are taken into income in the period of change.
      The Company enters into forward foreign currency contracts to reduce its
      exposure to fluctuations in the exchange rates between the Canadian dollar
      and
      the U.S. dollar and Euro. Certain of the contracts entered into qualify as
      hedges under the accounting guideline and the Company applies hedge accounting
      to those financial instruments. Effective July 18, 2006, the Company has
      discontinued the designation of new foreign currency contracts as hedges against
      forecasted transactions. Any gains or losses relating to these contracts have
      been recorded in the consolidated statement of operations for the twelve months
      ended December 31, 2006.




k)  ***Impairment
      of Long-Lived Assets***




The
      Company reviews both long-lived assets to be held and used and identifiable
      intangible assets with finite lives whenever events or changes in circumstances
      indicate that the carrying amount of such assets may not be fully recoverable.
      Determination of recoverability is based on an estimate of undiscounted future
      cash flows resulting from the use of the asset and its eventual disposition.
      Measurement of an impairment loss for long-lived assets and certain identifiable
      intangible assets that management expects to hold and use is based on the fair
      value of the assets, whereas such assets to be disposed of are reported at
      the
      lower of carrying amount or fair value less costs to sell. As at December 31,
      2006, the Company determined that there were no triggering events requiring
      impairment analysis.




Goodwill
      impairment is assessed at the reporting unit level at least annually, or more
      frequently if events or circumstances indicate there may be impairment.
      Potential impairment is identified when the carrying value of a reporting unit,
      including the allocated goodwill, exceeds its fair value. Goodwill impairment
      is
      measured as the excess of the carrying amount of the reporting unit’s allocated
      goodwill over the implied fair value of the goodwill, based on the fair value
      of
      the assets and liabilities of the reporting unit. The fair values are estimated
      using accepted valuation methodologies such as discounted future net cash flows,
      earnings multiples or prices for similar assets, whichever is most appropriate
      under the circumstances.




l)  ***Asset
      retirement obligations***




In
      April 2006, the Company adopted Emerging Issues Committee Abstract
      No. 159, “Conditional Asset Retirement Obligations” (“EIC”-159”). EIC-159
      clarifies the accounting treatment for a legal obligation to perform an
      asset retirement activity in which the timing and/or method of settlement are
      conditional on a future event that may or may not be within the
      control of the entity. Under this EIC, an entity is required to recognize a
      liability for the fair value of a conditional asset retirement obligation if
      the
      fair value of the liability can be reasonably estimated. The implementation
      of
      EIC-159 did not have a material impact on the Company’s consolidated financial
      statements.




F-11


m)  ***Variable
      Interest Entities***




Effective
      January 1, 2006, the Company adopted Emerging Issues Committee Abstract
      No. 157 “Implicit Variable Interests Under AcG 15” (“EIC-157”).
      EIC-157 addresses whether a company has an implicit variable interest in a
      variable interest entity (“VIE”) or potential VIE when specific conditions
      exist. An implicit variable interest acts the same as an explicit variable
      interest except it involves the absorbing and/or receiving of variability
      indirectly from the entity (rather than directly). The identification of an
      implicit variable interest is a matter of judgment that depends on the relevant
      facts and circumstances. The implementation of EIC-157 did not have a material
      impact on the Company’s consolidated financial statements.




n)  ***Income
      Taxes***




The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, current income taxes are recognized for the estimated income taxes
      payable for the current year. Future income tax assets and liabilities are
      recognized for temporary differences between the tax and accounting bases of
      assets and liabilities as well as for the benefit of losses available to be
      carried forward to future years for tax purposes that are more likely than
      not
      to be realized. In establishing the appropriate income tax valuation allowances,
      the Company assesses the realizability of its net future income tax assets
      and
      based on all available evidence, both positive and negative, determines whether
      it is more likely than not that the remaining net future income tax assets
      or a
      portion thereof will be realized (see Note 14).




o)  ***Investment
      Tax Credits***




Investment
      tax credits relating to scientific research and development and capital
      expenditures are accounted for using the cost reduction method and are
      recognized once there is reasonable assurance that the Company will be able
      to
      realize the benefit from these credits.




p)  ***Non-Monetary
      Transactions***




Effective
      January 1, 2006, the Company adopted the accounting standards of
      Section 3831 of the CICA Handbook, “Non-Monetary Transactions” (“Section
      3831”). Section 3831 replaced Section 3830 of the same title. The new
      accounting standard requires all non-monetary transactions be measured at fair
      value unless certain conditions are satisfied. The new requirements are
      effective for non-monetary transactions initiated in periods beginning on or
      after January 1, 2006. The adoption of Section 3831 did not have a
      material impact on the Company’s consolidated financial statements.




q)  ***Earnings
      per Share***




Basic
      earnings per share is calculated by dividing the net earnings available to
      common shareholders by the weighted average number of common shares outstanding.
      Diluted earnings per share reflects the potential dilution that would occur
      if
      stock options were exercised. The treasury stock method is used in calculating
      diluted earnings per share, which assumes that any proceeds received from the
      exercise of in-the-money stock options, including those not currently
      exercisable, would be used to purchase common shares at the average market
      price
      for the period.




**NOTE
      3** **ACCOUNTS
      RECEIVABLE**




**December
                31, 2006**
            
            **December
                31, 2005**Trade
                receivables, net
            
            $
            12,192
            
            $
            9,840Interest
                receivable
            
            
            901
            
            
            231Goods
                and Services Tax receivable
            
            
            318
            
            
            218Other
            
            
            286
            
            
            405$
            13,697
            
            $
            10,694




The
      receivable balances are net of an allowance for doubtful accounts and sales
      returns of $1,024 at December 31, 2006 and $1,080 at December 31, 2005.




**NOTE
      4** **INVENTORIES**




**December
                31, 2006**
            
            **December
                31, 2005**Raw
                materials and components, net
            
            $
            3,626
            
            $
            2,378Work-in-progress
            
            
            1,052
            
            
            552Finished
                goods, net
            
            
            3,397
            
            
            2,506$
            8,075
            
            $
            5,436




The
      inventory balances are net of a provision for excess and obsolete inventory
      of
      $1,320 at December 31, 2006 and $1,546 at December 31, 2005.




F-12


**NOTE
      5** **CAPITAL
      ASSETS**




**December
                31, 2006**
            
            **December
                31, 2005****Cost**
            
            **Accumulated**
              **Amortization**
            
            **Net**
            
            **Cost**
            
            **Accumulated**
              **Amortization**
            
            **Net**Computer
                and ancillary equipment
            
            $
            3,364
            
            $
            2,065
            
            $
            1,299
            
            $
            2,797
            
            $
            1,689
            
            $
            1,108Production,
                research and development equipment
            
            
            5,153
            
            
            3,596
            
            
            1,557
            
            
            4,105
            
            
            3,021
            
            
            1,084Automobiles
            
            
            26
            
            
            14
            
            
            12
            
            
            26
            
            
            9
            
            
            17Leasehold
                improvements
            
            
            2,239
            
            
            199
            
            
            2,040
            
            
            201
            
            
            121
            
            
            80Furniture
                and fixtures
            
            
            2,363
            
            
            1,670
            
            
            693
            
            
            1,770
            
            
            1,491
            
            
            279Product
                tooling
            
            
            1,630
            
            
            1,152
            
            
            478
            
            
            1,445
            
            
            919
            
            
            526Equipment
                under capital lease
            
            
            3
            
            
            3
            
            
            ―
            
            
            3
            
            
            2
            
            
            1$
            14,778
            
            $
            8,699
            
            $
            6,079
            
            $
            10,347
            
            $
            7,252
            
            $
            3,095




On
      January 29, 1999, the Company concluded a sale/leaseback arrangement by which
      the Calgary facility, including certain adjacent land, with a carrying value
      of
      $5,812 at time of sale, was sold for net proceeds of $6,922, resulting in a
      gain
      of $1,110. The gain on the sale of the facility has been deferred and is being
      amortized on a straight-line basis over the ten year term of the lease.




**NOTE
      6** **INTANGIBLE
      ASSETS**




Intangible
      assets subject to amortization are as set out below:


**December
                31, 2006**
            
            **December
                31, 2005****Cost**
            
            **Accumulated**
              **Amortization**
            
            **Net**
            
            **Cost**
            
            **Accumulated**
              **Amortization**
            
            **Net**Patents
                and trademarks
            
            $
            4,690
            
            $
            3,238
            
            $
            1,452
            
            $
            4,262
            
            $
            2,860
            
            $
            1,402Technology
            
            
            5,845
            
            
            2,517
            
            
            3,328
            
            
            3,670
            
            
            2,254
            
            
            1,416Software
                licences
            
            
            4,195
            
            
            2,775
            
            
            1,420
            
            
            3,691
            
            
            2,458
            
            
            1,233Market
                presence of CMC Electronics’ OEM GPS and
              Waypoint’s product lines
            
            
            906
            
            
            387
            
            
            519
            
            
            906
            
            
            235
            
            
            671Total
                intangibles
            
            $
            15,636
            
            $
            8,917
            
            $
            6,719
            
            $
            12,529
            
            $
            7,807
            
            $
            4,722




For
      the
      years ended December 31, 2006, 2005 and 2004, amortization expense of
      intangibles was $1,320, $941, and $757 respectively. The weighted-average
      amortization period is 7 years.




The
      estimated aggregate amortization expense for intangible assets for the years
      ending on December 31 is as follows:





2007
            
            $
            1,3472008
            
            $
            1,2622009
            
            $
            1,0872010
            
            $
            8812011
            
            $
            696




**NOTE
      7** **DEFERRED
      DEVELOPMENT COSTS**




**December
                31, 2006**
            
            **December
                31, 2005**Deferred
                development costs
            
            $
            2,900
            
            $
            2,900Accumulated
                amortization
            
            
            (1,647
            )
            
            (1,243
            )$
            1,253
            
            $
            1,657




The
      Company has deferred certain costs related to the development of a certified
      aviation GPS receiver. The Company amortizes these deferred costs using a method
      similar to the unit-of-production method of amortization. The following table
      discloses the development costs which have been deferred and the amortization
      of
      deferred development costs:





F-13


**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Deferred
                development costs
            
            $
            —
            
            $
            —
            
            $
            218Amortization
                of deferred development costs
            
            $
            404
            
            $
            538
            
            $
            416




At
      December 31, 2006, the Company had deferred $1,253 of development costs, net
      of
      accumulated amortization. The continued deferral of these costs is subject
      to
      recoverability based on estimates of future sales of the certified aviation
      GPS
      receiver. On April 5, 2004, the Company and CMC Electronics entered into a
      Strategic Cooperation Agreement which *inter
      alia* provides
      for certain guaranteed future payments over the following four years. Under
      the
      current business programs between the Company and CMC Electronics, the Company
      would expect these future guaranteed payments to recover approximately 44%
      of
      the $1,253 of deferred development costs as of December 31, 2006. Should future
      actual or estimated sales of this receiver be materially lower than that
      currently estimated, a portion of the deferred development costs would be
      charged to results of operations.




**NOTE
      8** **BANK
      ADVANCES**




At
      December 31, 2006, lines of credit were available with certain Canadian
      financial institutions. The lines of credit are payable on demand and are
      secured by $4,158 of short-term investments held as compensating balances.
      The
      credit line advances bear interest at the financial institutions’ prime rate
      (December 31, 2006 — 6.0%) on Canadian dollar advances.




In
      aggregate, the Company can borrow up to $1,650 for day-to-day operating
      requirements and $3,850 to support the margin requirements related to the
      purchase of up to between U.S. $ $17,000 and $18,000 of forward foreign exchange
      contracts (depending on the maturity date of the contracts). At December 31,
      2006, portions of the lines of credit were utilized to support approximately
      U.S. $ 14,000 of foreign exchange contracts ($8,500 at December 31, 2005)
      leaving $1,650 available for day-to-day operating requirements and the margin
      capacity available to enter into approximately U.S. $3,000 to $4,000 in forward
      foreign exchange contracts (depending on the maturity date of the contracts).




**NOTE
      9** **COMMITMENTS,
      CONTINGENCIES AND GUARANTEES**




a) At
      December 31, 2006, purchase commitments were outstanding for approximately
      $11.0
      million pertaining primarily to the acquisition of inventory, supplies
      and servicesin the
      normal course of
      business.




b)  The
      Company’s facilities and certain equipment are leased for various periods up to
      2016. Payments under the leasing arrangements are estimated to be as follows:





**Operating
                Leases**2007
            
            $
            1,3912008
            
            
            1,3642009
            
            
            1,4422010
            
            
            1,3252011
            
            
            1,3912012
                and beyond
            
            
            7,108Total
                future minimum lease payments
            
            $
            14,021




The
      Company’s rent expense associated with its facilities was $1,032 in 2006, $883
      in 2005, and $910 in 2004.




c) The
      Company is subject to legal proceedings and other claims which arise in the
      ordinary course of its business. The Company has sought legal advice on these
      matters. In the
      opinion of management, the ultimate liability with respect to the resolution
      of
      these actions is not expected to materially affect the financial position,
      results of operations, or
      liquidity of the Company.




On
      July 6, 2006, the Company received notice that a Statement of Claim had
      been filed in the Province of Alberta alleging a breach of confidential
      information and a non-disclosure agreement by the Company and its Chief
      Technology Officer relating to the development of certain technology and an
      associated U.S. patent application for the seismic industry. The Company has
      sought legal advice on this matter and believes that the claim is without merit.
      The Company has defended the action and on December 29, 2006, the Statement
      of
      Claim was dismissed by the provincial court. On January 2, 2007, the plaintiff
      in this matter filed a Notice of Appeal of the dismissal judgment. The dismissal
      judgment was overturned by the appellate court on March 21, 2007. In the opinion
      of management, the ultimate liability with respect to this matter is not
      expected to materially affect the financial position or results of
      operations.




d)  In
      the
      normal course of operations, the Company provides indemnifications that are
      often standard contractual terms to counterparties in transactions such as
      purchase and sale contracts and service agreements. These indemnification
      agreements may require the Company to compensate the counterparties for costs
      incurred as a result of various events, changes in (or in the interpretation
      of)
      laws and regulations, or as a result of litigation claims or statutory sanctions
      that may be suffered by the counterparty as a consequence of the transaction.
      The terms of these indemnification agreements will vary based upon the contract,
      the nature of which prevents the Company from making a reasonable estimate
      of
      the maximum potential amount it could be required to pay counterparties.
      Historically, the Company has not made any payments under such indemnifications
      and no amounts have been accrued in the accompanying consolidated financial
      statements.




F-14


**NOTE
      10** **FINANCIAL
      INSTRUMENTS**




In
      the
      normal course of business, the Company uses forward foreign currency contracts
      to reduce its exposure to fluctuations in the exchange rates between the
      Canadian dollar and the U.S. dollar and the Euro. Where hedge accounting
      applies, the Company documents the relationship between hedging instruments
      and
      hedged items, as well as its risk management objective for undertaking hedging
      transactions. The process includes linking hedging instruments to assets and
      liabilities on the balance sheet or to forecasted transactions. The Company
      also
      assesses, both at the hedge’s inception and on an ongoing basis, whether the
      foreign currency contracts that are used in hedging transactions are effective
      in offsetting changes in fair values or cash flows of hedged items. The
      contracts are normally for terms of up to twelve months and are used as hedges
      of a portion of the Company’s U.S. dollar and Euro denominated revenues.




Effective
      July 18, 2006, the Company has discontinued the designation of new forward
      foreign currency contracts as hedges against forecasted transactions. Any gains
      or losses relating to these contracts have been recorded in the consolidated
      statement of operations for the year ended December 31, 2006.




At
      December 31, 2006, the Company had forward currency contracts to sell U.S.
      $13,500 between January 30, 2007 and September 28, 2007 at rates between $0.8715
      and $0.9132 U.S. dollar per Canadian dollar. In addition, the Company had
      forward foreign currency contracts to sell €555 between June 29, 2007 and
      September 28, 2007 at rates between €0.6498 and €0.6965 per Canadian dollar.




The
      carrying values of other financial instruments, which include cash and cash
      equivalents, short-term investments, accounts receivable, related party
      receivables and advances, related party notes receivable, accounts payable
      and
      accrued liabilities, related party payables and notes payable approximate their
      fair value because of the near-term maturity of these instruments.




**NOTE
      11** **** **SHAREHOLDERS’
      EQUITY**




The
      Company has authorized an unlimited number of common shares and first preference
      shares, of which 8,529 common shares are outstanding as of December 31, 2006
      (8,365 in 2005 and 8,260 in 2004).




Net
      income per share figures presented in the Company’s financial statements are
      based upon the weighted average number of shares outstanding. Diluted net income
      per share figures are computed as if the dilutive instruments were exercised
      at
      the beginning of the period (or the time of issuance, if later) and the funds
      obtained were used to purchase common shares at the average market price during
      the period.




The
      Company maintains stock option plans for employees and members of the Board
      of
      Directors. Under the plans, participants are granted options to purchase common
      shares at no less than the market value on the date of the grant. The options
      have vesting periods ranging from one to four years and expire between five
      and
      ten years from the date of the grant.




A
      summary
      of the status of the Company’s stock option plans as of December 31, 2006, 2005
      and 2004, and changes during the years ending on those dates is presented below:




**2006**
            
            **2005**
            
            **2004****Number**
              **of
                Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **of
                Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **of
                Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price****Options**Outstanding
                at beginning of year
            
            
            584
            
            
            U.S.
                 $ 7.46
            
            
            574
            
            
            U.S.$4.51
            
            
            855
            
            
            U.S.$4.42Granted
            
            
            153
            
            
            39.47
            
            
            118
            
            
            20.28
            
            
            5
            
            
            11.81Exercised
            
            
            (165
            )
            
            5.58
            
            
            (105
            )
            
            5.73
            
            
            (276
            )
            
            4.41Forfeited
            
            
            (5
            )
            
            28.99
            
            
            (3
            )
            
            8.67
            
            
            (10
            )
            
            2.28Outstanding
                at end of year
            
            
            567
            
            
            U.S.
                $16.47
            
            
            584
            
            
            U.S.$7.46
            
            
            574
            
            
            U.S.$4.51Options
                exercisable at end of year
            
            
            289
            
            
            U.S 
                 $ 5.81
            
            
            330
            
            
            U.S.$4.94
            
            
            313
            
            
            U.S.$6.24




F-15


The
      following table summarizes information about the stock option plans as of
      December 31, 2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number**
              **Outstanding**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**U.S.    
                $32.50 to $44.36
            
            
            157
            
            
            4.3
            
            
            U.S
                $39.19
            
            
            6
            
            
            U.S
                $32.50$13.16
                to $19.61
            
            
            105
            
            
            3.4
            
            
            19.53
            
            
            22
            
            
            19.61$7.50
                to $11.25
            
            
            76
            
            
            0.8
            
            
            8.15
            
            
            75
            
            
            8.13$4.00
                to $4.94
            
            
            2
            
            
            6.3
            
            
            4.67
            
            
            2
            
            
            4.57$2.25
                to $3.44
            
            
            202
            
            
            5.6
            
            
            2.35
            
            
            159
            
            
            2.38$1.38
                to $2.00
            
            
            25
            
            
            3.8
            
            
            1.64
            
            
            25
            
            
            1.64U.S.    
                $1.38 to $44.36
            
            
            567
            
            
            4.1
            
            
            U.S.
                $16.47
            
            
            289
            
            
            U.S
                $5.81







The
      aggregate intrinsic value of options outstanding and options exercisable at
      December 31, 2006 was U.S. $13,279 and U.S. $9,848, respectively. The total
      intrinsic value of options exercised during the year ended December 31, 2006
      was
      U.S. $5,387.




A
      summary
      of the Company’s unvested options as at December 31, 2006, and changes during
      the twelve month period then ended, is presented below.




**Options**
            
            **Number of
                Options**
            
            **Weighted
                Average Fair Value**Outstanding
                at January 1, 2006
            
            
            254
            
            
            U.S.
                $5.71Granted
            
            
            153
            
            
            14.91Vested
            
            
            (124
            )
            
            4.62Forfeited
            
            
            (5
            )
            
            11.50Outstanding
                at December 31, 2006
            
            
            278
            
            
            U.S.
                $11.16




In
      2006,
      the Company granted 153 stock options to purchase common shares of the Company,
      of which 147 were granted to employees and 6 were granted to directors. The
      options have a weighted average exercise price of U.S. $ 39.47, and expire
      five
      years from the date of grant. The employee options vest over four years, while
      the directors’ options vest one year from the date of grant.




The
      following table represents the potential dilutive effect of options which have
      been issued, and could be exercised by the option holder.





**Year
                Ended December 31,****Number
                of Common Shares**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Weighted
                average common shares outstanding (basic)
            
            
            8,450
            
            
            8,298
            
            
            8,063Dilutive
                effect of options
            
            
            375
            
            
            465
            
            
            437Weighted
                average common shares outstanding (diluted)
            
            
            8,825
            
            
            8,763
            
            
            8,500




In
      the
      years ended December 31, 2006, 2005 and 2004, there were 88, 6, and nil options,
      respectively, excluded from the calculation, due to an anti-dilutive effect
      as a
      result of the exercise price being higher than the market price of the stock
      in
      the period.




**NOTE
      12** **MAJOR
      CUSTOMERS, EXPORT SALES AND SUPPLIERS**




Certain
      major customers accounted for significant portions of the sales from continuing
      operations. The table below reflects customers whose purchases represented
      more
      than 10% of the Company’s total revenues in any of the periods indicated.





**Year
                Ended December 31,****Sales
                by Major Customer**
            
            **2006**
            
            **2005**
            
            **2004**Customer
                A
            
            $
            18,174
            
            $
            11,211
            
            $
            8,631Customer
                B
            
            
            9,946
            
            
            6,554
            
            
            5,684Customer
                C
            
            
            6,964
            
            
            6,736
            
            
            4,157$
            35,084
            
            $
            24,501
            
            $
            18,472Percentage
                of total revenue
            
            
            45
            %
            
            39
            %
            
            34
            %




F-16


Accounts
      receivable and related party receivables related to these major customers were
      $5,702 at December 31, 2006 and $3,540 at December 31, 2005.




**Year
                Ended December 31,****Sales
                by Geographic Market**
            
            **2006**
            
            **2005**
            
            **2004**U.S.A.
            
            $
            29,302
            
            
            38%
            
            $
            25,671
            
            
            41%
            
            $
            25,105
            
            
            46%Europe
            
            
            28,461
            
            
            37%
            
            
            17,924
            
            
            28%
            
            
            13,852
            
            
            26%Asia/Australia
            
            
            13,047
            
            
            17%
            
            
            13,530
            
            
            21%
            
            
            10,331
            
            
            19%Canada
            
            
            4,748
            
            
            6%
            
            
            4,462
            
            
            7%
            
            
            3,044
            
            
            6%Other
            
            
            2,076
            
            
            2%
            
            
            1,708
            
            
            3%
            
            
            1,600
            
            
            3%$
            77,634
            
            
            100%
            
            $
            63,295
            
            
            100%
            
            $
            53,932
            
            
            100%




Certain
      of the Company’s products incorporate components that are either procured from
      sole source suppliers or which are in short supply. In the opinion of
      management, the Company has taken measures to mitigate the risk associated
      with
      the availability of these components.




**NOTE
      13** **SHARE
      OFFERING COSTS**




In
      the
      year ended December 31, 2004, the Company incurred $754 of expenses in relation
      to a proposed public offering in Canada and a private placement in the U.S.
      of
      its common shares. On May 26, 2004, the Company withdrew the offering and
      expensed the costs.




**NOTE
      14** **INCOME
      TAXES**




The
      Company follows the liability method of accounting for income taxes. Temporary
      differences that give rise to future income tax assets and liabilities as of
      December 31 are as follows:




**2006**
            
            **2005**Future
                income tax assetsLoss
                carryforwards
            
            $
            1,420
            
            $
            1,730Scientific
                research deductions and credits
            
            
            36,370
            
            
            46,110Reserves
                not currently deductible for tax
            
            
            1,130
            
            
            1,710Capital
                assets
            
            
            560
            
            
            970Capital
                losses
            
            
            130
            
            
            150Deferred
                gain on sale of building
            
            
            70
            
            
            120Deferred
                loss on hedging contracts
            
            
            60
            
            
            ―39,740
            
            
            50,790Future
                income tax liabilitiesIntangible
                assets
            
            
            (670
            )
            
            (400
            )Deferred
                development costs
            
            
            (380
            )
            
            (560
            )Deferred
                gain on hedging contracts
            
            
            ―
            
            
            (50
            )(1,050
            )
            
            (1,010
            )Valuation
                allowance
            
            
            (31,038
            )
            
            (44,189
            )$
            7,652
            
            $
            5,591Future
                income tax asset — current portion
            
            
            3,356
            
            
            2,370Future
                income tax asset — long term portion
            
            
            4,296
            
            
            3,221$
            7,652
            
            $
            5,591




As
      at
      December 31, 2006, the Company’s net future income tax assets were $7,652,
      reflecting temporary differences between the financial reporting and tax
      treatment of certain current assets and liabilities and non-current assets
      and
      liabilities, in addition to the tax benefit of net operating and capital loss
      carryforwards and tax credit carryforwards.




In
      accordance with the CICA Handbook Section 3465, “Accounting for Income Taxes”,
      the Company reviews all available positive and negative evidence to evaluate
      the
      recoverability of the future income tax assets. This includes a review of such
      evidence as the carryforward periods of the significant tax assets, the
      Company’s history of generating taxable income in its material tax jurisdictions
      and the Company’s forecasted profitability in the foreseeable future. Based on
      this review the Company concluded that the valuation allowance as at December
      31, 2006 was appropriate and determined that it was more likely than not that
      the recorded future income tax assets would be realized.




F-17


The
      following table reconciles the differences between the income tax that would
      result solely by applying statutory rates and the income tax provided for in
      the
      statements of operations.


**Year
                Ended December 31,****2006**
            
            
            
            **2005**
            
            
            
            **2004**Income
                from continuing operations before income taxes
            
            $
            19,772
            
            
            
            
            $
            16,360
            
            
            
            
            $
            14,031Statutory
                income tax expense
            
            $
            6,426
            
            
            32.5%
            
            $
            5,500
            
            
            33.6%
            
            $
            4,752
            
            
            33.9%Adjusted
                for the effects of:Change
                in valuation allowance on tax benefit
            
            
            (13,151
            )
            
            
            
            
            (6,172
            )
            
            
            
            
            (5,339
            )Change
                in tax rates on future tax benefit
            
            
            4,675
            
            
            
            
            
            —
            
            
            
            
            
            1,604Non
                deductible expenses and costs
            
            
            447
            
            
            
            
            
            258
            
            
            
            
            
            166Other
            
            
            (96
            )
            
            
            
            
            46
            
            
            
            
            
            (17
            )Large
                corporation tax (recovery)
            
            
            (21
            )
            
            
            
            
            12
            
            
            
            
            
            71Total
                income tax expense (benefit)
            
            $
            (1,720
            )
            
            (8.7%)
            
            $
            (356
            )
            
            (2.2%)
            
            $
            1,237
            
            
            8.8%




a)  ***Canadian
      Income Taxes***




At
      December 31, 2006, the Company has approximately $119 million of research and
      development costs deducted in the accounts, in excess of amounts claimed for
      Canadian federal income tax purposes and approximately $101 million of research
      and development costs deducted in the accounts, in excess of amounts claimed
      for
      provincial income tax purposes. These expenditures have an indefinite life
      for
      tax purposes.




At
      December 31, 2006, the Company also has unutilized investment tax credits of
      approximately $3.5 million available to reduce future Canadian federal income
      taxes. These credits expire as follows:




2013
            
            $
            6002014
            
            
            7002015
            
            
            7002016
            
            
            8002017
            
            
            700$
            3,500




The
      Company has determined that CMC Electronics’ acquisition of a majority of the
      common shares of the Company on April 17, 1998, BAE SYSTEMS p.l.c.’s acquisition
      of the majority of the common shares of CMC Electronics on November 29, 1999
      and
      ONCAP’s acquisition of the common shares of CMC Electronics on April 11, 2001,
      constitute acquisitions-of-control of the Company for Canadian income tax
      purposes. Accordingly, the availability of certain of the Company’s Canadian
      losses, deductions, and investment tax credits may be subject to limitation.




The
      ultimate availability and amount of the losses and other tax benefits described
      above may be dependent upon future Canada Revenue Agency audits. An adverse
      determination could result in a significant decrease in the availability and
      amount of the tax benefits described above.




F-18


**NOTE
      15** **RELATED
      PARTY TRANSACTIONS**




In
      the
      normal course of business, the Company had the following transactions, measured
      at the exchange amount, with its related parties:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Product
                sales to Point, Inc.
            
            $
            2,923
            
            $
            2,247
            
            $
            2,178Services
                provided to Point, Inc.
            
            
            164
            
            
            153
            
            
            137Engineering
                and other services charged by Point, Inc.
            
            
            309
            
            
            611
            
            
            265Engineering
                services charged to Point, Inc.
            
            
            261
            
            
            913
            
            
            309Inventory
                purchases from CMC Electronics, Inc. and Point, Inc.
            
            
            54
            
            
            12
            
            
            1,272Inventory
                sold to CMC Electronics, Inc.
            
            
            —
            
            
            124
            
            
            85Contracted
                development costs charged by CMC Electronics, Inc.
            
            
            —
            
            
            —
            
            
            218Other
                charges from CMC Electronics, Inc.
            
            
            —
            
            
            10
            
            
            318Royalties
                charged to CMC Electronics, Inc.
            
            
            —
            
            
            241
            
            
            545Royalties
                paid to CMC Electronics, Inc.
            
            
            —
            
            
            —
            
            
            261Share
                offering costs charged to CMC Electronics, Inc.
            
            
            —
            
            
            —
            
            
            748Share
                offering costs charged by CMC Electronics, Inc.
            
            
            —
            
            
            —
            
            
            55




From
      January 2005 through August 2005, CMC Electronics sold its interest in NovAtel
      and does not maintain any representation on the Company’s Board of Directors and
      therefore is not considered to be a related party, effective May 11, 2005.




Significant
      related party receivables at December 31, 2006 consist of $920 from Point,
      Inc.
      ($1,331 at December 31, 2005). Related party payables at December 31, 2006
      consist of amounts due to Point, Inc. of $72 ($15 at December 31, 2005).




The
      related party notes receivable of $378 at December 31, 2006 ($1,552 at December
      31, 2005) reflects the Company’s proportionate joint venture interest in the
      aggregate borrowings by Point, Inc. from NovAtel and Sokkia Co., Ltd. (Sokkia)
      of U.S. $1,585 (U.S. $5,330 at December 31, 2005). The loans are secured by
      the
      assets of Point, Inc., bore interest at rates of between 3% and 5.5% during
      2006 (3% in 2005 and 2004) and are due on August 31, 2007.




On
      February 3, 2006, the Company and Sokkia advanced U.S. $1,585 in new loans
      to
      Point, Inc. with the Company’s share being U.S. $637.




On
      November 24, 2006, the Company and Sokkia invested U.S. $5,330 (the Company’s
      share being U.S. $2,612) in the common shares of Point, Inc. The Company’s
      ownership percentage of Point, Inc. remained unchanged as a result of this
      transaction.




On
      November 27, 2006, Point, Inc. repaid U.S. $5,330 (the Company’s share being
      $2,612) of loans outstanding with the Company and Sokkia.




**NOTE
      16** **INVESTMENT
      IN POINT, INC.**




On
      July
      20, 1999, the Company and Sokkia Co., Ltd. formed a joint venture, Point, Inc.,
      to distribute GPS based products for surveying, mapping, geographical
      information systems, construction and construction machine control applications,
      on a worldwide basis. The consolidated financial statements presented herein
      include the Company’s proportionate share of the accounts of Point, Inc.




The
      following is a summary of the Company’s 49% proportionate share of the financial
      position, operating results, and cash flows of Point, Inc.:


**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Financial
                Position**Current
                assets
            
            $
            1,537
            
            $
            1,332
            
            $
            1,603Non-current
                assets
            
            
            174
            
            
            118
            
            
            104Total
                assets
            
            $
            1,711
            
            $
            1,450
            
            $
            1,707Current
                liabilities
            
            $
            1,314
            
            $
            2,729
            
            $
            2,635Total
                liabilities
            
            $
            1,314
            
            $
            2,729
            
            $
            2,635**Results
                of Operations**Revenues
            
            $
            8,055
            
            $
            5,819
            
            $
            5,932Gross
                profit
            
            
            2,359
            
            
            1,726
            
            
            1,760Expenses
            
            
            2,097
            
            
            2,094
            
            
            1,781Income
                (loss)
            
            
            262
            
            
            (368
            )
            
            (21
            )**Cash
                Flows**Cash
                provided by (used in)Operating
                activities
            
            $
            (156
            )
            $
            100
            
            $
            62Investing
                activities
            
            
            (136
            )
            
            (68
            )
            
            (23
            )Financing
                activities
            
            
            535
            
            
            (11
            )
            
            9Effect
                of exchange rate changes on financing activities
            
            
            (56
            )
            
            (51
            )
            
            (118
            )




Included
      in current liabilities is the Company’s share of notes payable by Point, Inc. to
      Sokkia, in the amount of $541 ($1,552 at December 31, 2005). The loans are
      secured by the assets of Point, Inc., bore interest at rates of between 3%
      and
      5.5% during 2006 (3% in 2005 and 2004) and are due on August 31, 2007.




On
      February 3, 2006, the Company and Sokkia advanced U.S. $1,585 in new loans
      to Point, Inc. with the Company’s share being U.S. $637.




On
      November 24, 2006, the Company and Sokkia invested U.S. $5,330 (the Company’s
      share being U.S. $2,612) in the common shares of Point, Inc. The Company’s
      ownership percentage of Point, Inc. remained unchanged as a result of this
      transaction.




On
      November 27, 2006, Point, Inc. repaid U.S. $5,330 (the Company’s share being
      $2,612) of loans outstanding with the Company and Sokkia.




Point,
      Inc. is dependent on the Company and Sokkia for product supply, distribution
      and
      financing. Should Sokkia and the Company discontinue their support, Point,
      Inc.’s ability to continue as a going concern would be impaired.




**NOTE
      17** **DISCONTINUED
      OPERATIONS (MEZURE, INC.)**




As
      of
      December 31, 2006, the Company owned a 70% equity interest in Mezure, Inc.
      (“Mezure”), a company that had been developing a GPS, wireless communication and
      Internet-based product for deformation monitoring of manmade and natural
      structures.




During
      the latter part of 2002, the Company discontinued its financial support of
      Mezure. On April 8, 2003, the shareholders of Mezure voted unanimously to
      proceed with a Chapter 7 bankruptcy, which was filed on June 25, 2003. On
      September 24, 2003 an Order Approving Trustee’s Account, Discharging Trustee and
      Closing Estate was entered into the docket of the United States Bankruptcy
      Court, District Oregon (Portland). Consequently, the Company treated Mezure
      as a
      discontinued operation.




The
      consolidated balance sheets as of December 31, 2006 and December 31, 2005
      include residual accounts payable and accrued liabilities related to
      discontinued operations of $15.




F-19


**NOTE
      18** **ACQUISITION
      OF WAYPOINT CONSULTING INC.**




On
      October 1, 2005 the Company acquired all of the shares of Waypoint Consulting
      Inc. (“Waypoint”) for approximately $3.5 million in cash, subject to
      post-closing adjustments to working capital. Of the total purchase price, $2.2
      million was paid by December 31, 2005 and $1.2 million was held in escrow by
      Waypoint’s attorneys to be paid in installments over three years, subject to
      certain conditions. In 2006, $400 was released from escrow. Waypoint’s products
      include specialized real-time and post-processing GPS and GPS/inertial
      positioning and trajectory software. The results of the Waypoint acquisition
      have been included in the consolidated results of operations since October
      1,
      2005.




The
      fair
      value of net assets and liabilities acquired has been allocated as follows:




Accounts
                receivable
            
            $
            384Inventories
            
            
            22Prepaid
                expenses
            
            
            22Capital
                and intangible assets
            
            
            46Intangibles
                related to technology, brand names and customer relationships
            
            
            1,818Goodwill
            
            
            1,494Accounts
                payable
            
            
            (82
            )Deferred
                revenue
            
            
            (173
            )Net
                investment
            
            $
            3,531




The
      intangibles are comprised primarily of technology, customer relationships and
      brand names to which the Company has assigned values of $1,260, $358 and
      $200 respectively. The Company estimates that these intangibles have an average
      expected useful life of 8.5 years and are amortized using the straight-line
      method. The Company has determined that the $1,494 of goodwill is deductible
      for
      tax purposes.




**NOTE
      19** **STOCK-BASED
      COMPENSATION**




*Stock
      Option Plans*




At
      December 31, 2006, the Company had 567 unexercised options to employees and
      directors to purchase common shares under its stock-based compensation plans
      (see Note 11).




Effective
      January 1, 2004, the Company adopted the fair value method of accounting for
      stock options awarded to employees on or after January 1, 2002, as required
      by
      amended CICA Handbook Section 3870 *Stock-Based
      Compensation and Other Stock-Based Payments* .
      As
      permitted by the transitional provisions of Section 3870, the change was adopted
      retroactively without restatement. Under Section 3870, the fair value of stock
      options is recognized over the applicable vesting period as a charge to
      stock-based compensation expense and a credit to contributed surplus. For the
      year ended December 31, 2006 stock-based compensation expense of $1,020 ($587
      and $326 in the years ended December 31, 2005 and 2004) was recognized. When
      options are exercised, the proceeds are credited to share capital, and the
      applicable fair value is reclassified from contributed surplus to share capital.
      As of December 31, 2006, $616 was reclassified from contributed surplus to
      share
      capital, as a result of stock option exercises.




The
      fair
      value of each option granted was estimated using the Black-Scholes option
      pricing model with the following weighted-average assumptions used for options
      granted in 2006, 2005 and 2004: dividend yield of 0%; expected lives of 3 to
      10
      years; a risk free interest rate of between 3.34% and 4.31% and expected
      volatility of between 66% and 84%.




In
      2006,
      the Company granted 153 stock options to purchase common shares of the Company,
      of which 147 were granted to employees and 6 were granted to directors. The
      options have a weighted average exercise price of U.S. $ 39.47, and expire
      five
      years from the date of grant. The employee options vest over four years, while
      the directors’ options vest one year from the date of grant.




The
      weighted average fair value of options granted in 2006 was U.S. $14.94, (U.S.
      $9.61 in 2005 and U.S. $10.67 in 2004.)




*Phantom
      Share Plan*




Effective
      January 1, 2004, the Company established a new Long Term Incentive Plan (LTI
      Plan), which authorized the grant of approximately 44 phantom shares to
      employees of the Company. All grants of phantom shares under the LTI Plan have
      a
      three-year cliff vesting and vested on December 31, 2006. Payments under the
      LTI
      plan will be made in cash.




As
      of
      December 31, 2006, the Company estimated that the fair value of the granted
      and
      outstanding phantom shares was $2,005, based on a 20-day average price of the
      Company’s common shares.




For
      the
      year ended December 31, 2006, the Company recognized $1,044 in compensation
      expense related to phantom shares ($347 in the year ended December 31, 2005
      and
      $615 in the year ended December 31, 2004).




F-20


**NOTE
      20** **DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES**




The
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in Canada (Canadian GAAP or Canadian
      principles). The significant differences from U.S. generally accepted accounting
      principles (U.S. GAAP or U.S. principles) are as follows:




a)  ***Deferred
      Development Costs*** *(see
      Note 7)*




In
      the
      year ended December 31, 2006, the Company deferred $nil of development costs
      ($nil in 2005 and $218 in 2004) in accordance with Canadian GAAP. Under U.S.
      GAAP, these costs would be expensed as incurred as research and development
      costs.




In
      the
      year ended December 31, 2006, the Company amortized $404 of deferred development
      costs ($538 in 2005 and $416 in 2004) in accordance with Canadian GAAP. Under
      U.S. GAAP, these costs would have been expensed in the periods when the
      originating expenditures were incurred.




In
      addition, for Canadian GAAP purposes, in connection with the recognition of
      prior year’s investment tax credits, the Company reduced the deferred
      development costs by $164 in the year ended December 31, 2005. Under U.S. GAAP,
      this amount would have been accounted for as an expense when the originating
      expenditures were incurred.




b)  ***Stock-Based
      Compensation***




At
      December 31, 2006, the Company had issued 567 unexercised options to employees and directors to purchase common shares under
      its stock-based compensation plans (see Note 11).




On
      January 1, 2004, the Company established a new Long Term Incentive Plan
      (“LTI Plan”), which authorized the grant of approximately 44 phantom shares to
      employees of the Company. All grants of phantom shares under the LTI Plan have
      a
      three-year cliff vesting and vested on December 31, 2006. Payments under
      the LTI Plan will be made in cash.




Effective
      January 1, 2004, under Canadian GAAP the Company adopted the fair value method
      of accounting for stock options awarded to employees on or after January 1,
      2002
      as required by amended CICA Handbook Section 3870 *Stock-Based
      Compensation and Other Stock-Based Payments* .
      As
      permitted by the transitional provisions of Section 3870, the change was adopted
      retroactively without restatement. Under Section 3870, the fair value of stock
      options is recognized over the applicable vesting period as stock-based
      compensation expense and a credit to contributed surplus. When options are
      exercised, the proceeds are credited to share capital, and the applicable fair
      value is reclassified from contributed surplus to share capital. Retroactive
      application of Section 3870 resulted in the opening balances as at January
      1,
      2004 of deficit, contributed surplus and share capital being increased by $456,
      $390 and $66, respectively, as though the fair value method had been applied
      since January 1, 2002.




In
      December 2004, the Financial Accounting Standards Board
      ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
      No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires
      all share-based payments to employees, including grants of employee stock
      options, to be recognized as compensation expense in the consolidated financial
      statements based on their fair values. SFAS 123R also modifies certain
      measurement and expense recognition provisions of SFAS No. 123 "Accounting
      for
      Stock-Based Compensation" (“SFAS 123”) that impact the Company, including the
      requirement to estimate employee forfeitures each period when recognizing
      compensation expense and requiring that the initial and subsequent measurement
      of the cost of liability-based awards each period be based on the fair value
      (instead of the intrinsic value) of the award, resulting in differences from
      Canadian GAAP. Prior to the adoption of  SFAS 123R, the Company accounted
      for stock-based compensation to employees and directors using the intrinsic
      value method in accordance with APB Opinion No. 25 as allowed
      under SFAS No. 123.  Under the intrinsic value method, no
      stock-based compensation expense related to the Company’s stock options had been
      recognized in the Company’s consolidated statement of operations for U.S. GAAP
      purposes, as the exercise price of the Company’s stock options granted to
      employees and directors equaled the fair market value of the underlying stock
      at
      the date of grant.




Effective
      January 1, 2006, under U.S. GAAP, the Company adopted SFAS 123R using the
      modified prospective transition method and accordingly, the results of prior
      periods have not been restated. As
      a
      result, the Company’s financial statements for fiscal periods after
      December 31, 2005 include stock-based compensation expenses that are not
      comparable to financial statements of fiscal periods prior to January 1, 2006.
      SFAS 123R requires stock-based compensation to be estimated using the fair
      value
      on the date of grant using an option pricing model. Under the modified
      prospective method, the Company expenses the value of the portion of the stock
      based awards that is expected to vest over the related employees’ requisite
      service periods for U.S. GAAP purposes. The adoption of SFAS 123R under U.S.
      GAAP created differences in the accounting treatment of stock based compensation
      from Canadian GAAP, relating primarily to the application of forfeiture
      rates.




The
      Company estimates the fair value of stock options using the Black-Scholes option
      pricing model, consistent with the provisions of SFAS 123R, and the Company’s
      prior period pro forma disclosures of net income, including share-based
      compensation. The key input assumptions used to estimate the fair value of
      stock
      options include the grant price of the award, the expected term of the options,
      the expected volatility of the Company’s stock, the risk-free rate, annual
      forfeiture rate and the Company’s dividend yield. The expected term of the
      options is estimated based on historical grants with similar vesting periods.
      The expected volatility of the Company’s stock is estimated using the daily
      historical stock prices over a prior period in relation to the expected term
      of
      the award. The Company believes that the Black-Scholes option pricing model
      utilized to develop the underlying assumptions is appropriate in calculating
      the
      fair values of the Company’s stock options.




F-21


The
      phantom shares are accounted for as a liability award under U.S. GAAP and are
      remeasured to fair value at the end of each reporting period. The Company
      estimates the fair value of the phantom shares granted under the LTI Plan based
      on an option pricing model (Black-Scholes). The fair value estimated using
      the
      Black-Scholes model is consistent with the market value of the Company’s common
      shares at each reporting date.




SFAS
      123R
      requires forfeitures to be estimated at the time of grant in order to estimate
      the amount of share-based awards that will ultimately vest. As share-based
      compensation expense recognized in the consolidated statement of operations
      for
      the year ended December 31, 2006 is based on awards ultimately expected to
      vest,
      it has been reduced for estimated forfeitures. Prior to the adoption of SFAS
      123R, the Company recognized forfeitures as they occurred. The Company recorded
      a gain of $23 as a cumulative effect of an accounting change, as a result of
      the
      change in accounting for forfeitures under SFAS 123R. In the Company’s pro forma
      information required under SFAS 123 for the period prior to fiscal 2006, the
      Company accounted for forfeitures as they occurred.




As
      of
      December 31, 2006, the annual forfeiture rates applied to the Company’s stock
      option plans and the phantom share awards were 2% and 2.4%,
      respectively.




Stock-based
      compensation under U.S. GAAP recorded for the years ended December 31 was as
      follows:







**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Stock-based
                compensation:**Stock
                option expense
            
            $
            969
            
            $
            ―
            
            $
            ―Phantom
                share expense
            
            
            1,051
            
            
            347
            
            
            615Total
                stock-based compensation expense reported
            
            $
            2,020
            
            $
            347
            
            $
            615







The
      compensation cost that has been charged against income for the Company’s
      share-based award plans was $2,020 for the year ended December 31, 2006 ($347
      and $615, respectively for the years ended December 31, 2005 and 2004). The
      total income tax benefit recognized in the statements of operations for
      stock-based award compensation was nil for the years ended December 31, 2006,
      2005 and 2004.




As
      of
      December 31, 2006, there was $2,687 of unrecognized compensation cost related
      to
      the Company’s stock option plans that is expected to be recognized over a
      weighted average period of 3.0 years. As of December 31, 2006, there was
      $ nil of total
      unrecognized compensation cost related to the Company’s phantom share awards
      granted.




Cash
      received from exercise under all share-based payment arrangements was $1,041
      for
      the year ended December 31, 2006 ($721 and $1,505 respectively for the years
      ended December 31, 2005 and 2004). Tax benefits realized by the Company related
      to these exercises were $nil.




On
      May 13, 2005, the Company granted 112 options to employees to purchase
      common shares of the Company. The options had an exercise price of U.S. $19.61,
      vest over four years and expire five years from the date of grant. The fair
      value of the options granted (U.S. $9.15) was estimated using the Black-Scholes
      option pricing model with the following weighted-average assumptions used;
      dividend yield of 0%; expected lives of 3 years; a risk-free interest rate
      of
      3.34%, and expected volatility of 84%.




On
      July
      29, 2005, the Company granted 6 options to purchase common shares of the Company
      to directors. The options have an exercise price of U.S. $32.50, and vested
      on
      July 29, 2006, one year from the date of grant. The fair value of the options
      granted (U.S. $18.03) was estimated using the Black-Scholes option pricing
      model
      with the following weighted average assumptions used: dividend yield of 0%,
      expected lives of 3 years; a risk-free interest rate of 3.34%, and expected
      volatility of 84%.




In
      2006,
      the Company granted 153 options to purchase common shares of the Company, of
      which 147 were granted to employees and 6 were granted to directors. The options
      have a weighted average exercise price of U.S. $39.47 and expire five years
      from
      the date of grant. The employees’ options vest over four years, while the
      directors’ options vest one year from the date of grant. The weighted average
      fair value of the options granted (U.S. $14.91) was estimated using the Black
      Scholes option pricing model with the following weighted average assumptions
      used: dividend yield of 0%, expected lives of 3 years; a risk free interest
      rate
      of between 4.03% and 4.31%; and expected volatility of between 66% and
      72%.




Had
      compensation cost for the Company’s stock-based compensation plans been
      determined based on the fair value of the options at the grant dates, the
      Company’s pro forma net income and net income per share for years ended December
      31, 2005 and 2004 would have been as follows:





F-22


**Year
                ended****2005**
            
            **2004**Net
                income - U.S. GAAP
            
            
            As
                reported
            
            $
            18,129
            
            $
            13,463Less:
                Fair value of stock options
            
            
            Pro
                forma
            
            
            502
            
            
            408Net
                income - U.S. GAAP
            
            
            
            
            $
            17,627
            
            $
            13,055Net
                income -per share (basic)
            
            
            As
                reported
            
            $
            2.18
            
            $
            1.67Pro
              forma
            
            $
            2.12
            
            $
            1.62Net
                income -per share (diluted)
            
            
            As
                reported
            
            $
            2.07
            
            $
            1.58Pro
                forma
            
            $
            2.01
            
            $
            1.54




c)  ***Derivatives
      and Hedging Activities***




The
      Company has historically entered into forward foreign exchange contracts to
      manage its exposure to foreign currency fluctuations. Under U.S. GAAP the
      accounting for derivative instruments and hedging activities is contained in
      the
      Statement of Financial Accounting Standard  No. 133, as amended by SFAS
      137, SFAS 138 and SFAS 149 (“SFAS 133”). SFAS 133 establishes accounting and
      reporting standards requiring that all derivative instruments be recorded in
      the
      balance sheet as either an asset or a liability measured at fair value and
      requires that changes in the fair value be recognized currently in earnings
      unless specific hedge accounting criteria are met. For cash flow hedges, changes
      in the fair value of the derivative instrument are recognized in net earnings
      in
      the same period as the hedged item and any changes in the fair value prior
      to
      that period are recognized in other comprehensive income. For fair value hedges,
      both the derivative instrument and the underlying commitment are recognized
      on
      the balance sheet at their fair value and any changes in the fair value are
      recognized currently in net earnings. Prior to July 18, 2006, the Company’s
      foreign exchange contracts have been accounted for as cash flow hedges. Foreign
      exchange contracts entered into after July 18, 2006, have been recorded at
      fair
      value and any changes in fair value have been recognized in net
      earnings.




Under
      U.S. GAAP, SFAS 133 would result in a decrease in total assets of $132 as of
      December 31, 2006 (an increase of $192 as of December 31, 2005) related to
      the
      fair value of the Company’s foreign exchange contracts.




d)  ***Investment
      in Joint Ventures***




The
      accounts of the Company’s 49.0% joint venture interest in Point, Inc. are
      proportionately consolidated as required under Canadian GAAP. Under U.S. GAAP,
      proportionate consolidation is not permitted, and the Company’s investment in
      these joint ventures would be accounted for using the equity method. As
      permitted by SEC guidance, the effects of this difference in accounting
      principles have not been reflected in the accompanying tables (see Note 16).




e)  ***Intangibles
      Related to Acquisition of CMC Electronics OEM GPS Business***




On
      May
      14, 2003, the Company acquired the CMC Electronics non-aviation GPS product
      line. The fair value of the net assets acquired included $497 in intangibles,
      comprised primarily of technology, product design, customer relationships and
      an
      established market presence. Under U.S. GAAP, when accounting for a transfer
      of
      assets between entities under common control, the entity that receives the
      net
      assets or the equity interest would initially recognize the assets and
      liabilities transferred at their carrying amounts at the date of transfer.
      Any
      excess of consideration given over the controlling shareholders’ carrying value
      would be accounted for as a reduction of equity.




f)  ***Provision
      for Future Warranty Costs***




The
      changes in the provision for future warranty costs during each of the years
      ended December 31, 2006, 2005 and 2004 are as follows:




F-23





**2006**
            
            **2005**
            
            **2004**Opening
                balance, beginning of period
            
            $
            693
            
            $
            538
            
            $
            410Additions
                to provision
            
            
            560
            
            
            382
            
            
            312Costs
                incurred
            
            
            (437
            )
            
            (227
            )
            
            (184
            )Ending
                balance, end of period
            
            $
            816
            
            $
            693
            
            $
            538




g)  ***Investment
      Tax Credits***




Under
      Canadian GAAP, the Company uses the cost reduction method to account for its
      investment tax credits. The investment tax credits relate to certain research
      and development expenses and are recognized when there is reasonable assurance
      that the Company will be able to realize the benefit of these credits. In the
      year ended December 31, 2006, the Company recognized $nil ($1,756 in 2005,
      $4,356 in 2004) of investment tax credits. Of the $1,756 recorded in 2005,
      $1,592 was recorded on the statement of operations as a benefit of investment
      tax credits and $164 was recorded as a reduction of deferred development costs
      on the balance sheet.




Under
      U.S. GAAP, the Company would use the flow through method to account for its
      investment tax credits and would record the recognition of the $1,756 of
      investment tax credits in 2005 as a reduction of the current income tax
      provision. Under U.S. GAAP, for the year ended December 31, 2004, the Company
      would record the recognition of the $4,356 of investment tax credits as a $2,258
      reduction of the current income tax provision and as a $2,098 increase in future
      income tax benefit.




The
      net
      effect of these reconciling items would be an increase in net income from
      continuing operations of $164 in the year ended December 31, 2005 under U.S.
      GAAP.




h)  ***Comprehensive
      Income***




U.S.
      GAAP
      utilizes the concept of comprehensive income, which includes net income and
      other comprehensive income. The concept of comprehensive income will be in
      effect under Canadian GAAP as of January 1, 2007. Other comprehensive income
      represents the change in equity during the period from transactions and other
      events from non-owner sources and includes such items as changes in the fair
      value of cash flow hedges.




i)  ***Summary
      of the Differences between Canadian and U.S. GAAP***




The
      effects of the above-noted differences between Canadian and U.S. GAAP on the
      statements of operations and on the balance sheets are as follows:


**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Net
                income from continuing operations**—**Canadian
                GAAP**
            
            $
            21,492
            
            $
            16,716
            
            $
            12,794Adjustments
                to U.S. GAAPDeferred
                development costs (a)
            
            
            —
            
            
            —
            
            
            (218
            )Amortization
                of deferred development costs (a)
            
            
            404
            
            
            538
            
            
            416Reduction
                of deferred development costs related to recognition of investment
                tax
                credits (a)(g)
            
            
            —
            
            
            164
            
            
            —Stock-based
                compensation expense (b)
            
            
            44
            
            
            587
            
            
            326Amortization
                of intangibles acquired from CMC Electronics (e)
            
            
            125
            
            
            124
            
            
            124**Net
                income from continuing operations — U.S. GAAP**
            
            
            22,065
            
            
            18,129
            
            
            13,442Net
                income from discontinued operations
            
            
            —
            
            
            —
            
            
            21**Net
                income before cumulative effect of accounting change — U.S.
                GAAP**
            
            
            22,065
            
            
            18,129
            
            
            13,463Cumulative
                effect of accounting change (b)
            
            
            23
            
            
            ―
            
            
            ―**Net
                income - U.S. GAAP**
            
            
            22,088
            
            
            18,129
            
            
            13,463Net
                unrealised gain (loss) on foreign exchange contracts (c)
            
            
            (132
            )
            
            192
            
            
            179Reclassification
                to income of gains and losses on cash flow hedges (c)
            
            
            (192
            )
            
            (179
            )
            
            —**Comprehensive
                income**
            
            $
            21,764
            
            $
            18,142
            
            $
            13,642





F-24


**December
                31,****2006**
            
            **2005****Total
                Assets**Canadian
                GAAP
            
            $
            96,968
            
            $
            71,255Adjustments
                to U.S. GAAPDeferred
                development costs (a)
            
            
            (1,253
            )
            
            (1,657
            )Fair
                value of financial instruments (c)
            
            
            (132
            )
            
            192Reduction
                of intangibles acquired from CMC Electronics to carrying value (e)
            
            
            (57
            )
            
            (182
            )U.S.
                GAAP
            
            $
            95,526
            
            $
            69,608**Total
                Shareholders’ Equity**Canadian
                GAAP
            
            $
            81,589
            
            $
            58,117Adjustments
                to U.S. GAAPDeferred
                development costs (a)
            
            
            (1,253
            )
            
            (1,657
            )Stock
                based compensation (b)
            
            
            16
            
            
            ―Reduction
                of intangibles acquired from CMC Electronics to carrying value
                (e)
            
            
            (492
            )
            
            (492
            )Amortization
                of intangibles acquired from CMC Electronics (e)
            
            
            435
            
            
            310U.S.
                GAAP — before other comprehensive income (loss)
            
            
            80,295
            
            
            56,278Accumulated
                other comprehensive income (loss)
            
            
            (132
            )
            
            192U.S.
                GAAP — including accumulated other comprehensive income
                (loss)
            
            $
            80,163
            
            $
            56,470




j)  ***Net
      Income per Share***




Net
      income per share as computed under Canadian and U.S. principles is as set forth
      below for the following periods:




**Year
                Ended December 31,****Canadian
                GAAP**
            
            **U.S.
                GAAP****Net
                Income per Share — Basic**
            
            **Net
                Income per Share — Basic****2006**
            
            **2005**
            
            **2004**
            
            **2006**
            
            **2005**
            
            **2004**Continuing
                operations
            
            $
            2.54
            
            $
            2.01
            
            $
            1.59
            
            $
            2.61
            
            $
            2.18
            
            $
            1.67Discontinued
                operations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income per share
            
            $
            2.54
            
            $
            2.01
            
            $
            1.59
            
            $
            2.61
            
            $
            2.18
            
            $
            1.67








**Net
                Income per Share — Diluted**
            
            **Net
                Income per Share — Diluted****2006**
            
            **2005**
            
            **2004**
            
            **2006**
            
            **2005**
            
            **2004**Continuing
                operations
            
            $
            2.44
            
            $
            1.91
            
            $
            1.51
            
            $
            2.50
            
            $
            2.07
            
            $
            1.58Discontinued
                operations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income per share
            
            $
            2.44
            
            $
            1.91
            
            $
            1.51
            
            $
            2.50
            
            $
            2.07
            
            $
            1.58




F-25


k)  ***Consolidated
      Statement of Cash Flows***




The
      effects of the differences between Canadian and U.S. GAAP on the consolidated
      statement of cash flows are as follows:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Cash
                flow provided by operations — Canadian GAAP
            
            $
            19,439
            
            $
            17,092
            
            $
            12,504Adjustments
                to U.S. GAAPDeferred
                development costs (a)
            
            
            —
            
            
            —
            
            
            (218
            )Royalty
                payment relating to CMC Electronics’ OEM GPS business (e)
            
            
            —
            
            
            (221
            )
            
            (261
            )Cash
                flow provided by operations — U.S. GAAP
            
            $
            19,439
            
            $
            16,871
            
            $
            12,025Cash
                flow provided by financing activities — Canadian GAAP
            
            $
            2,613
            
            $
            778
            
            $
            598Adjustments
                to U.S. GAAP
            
            
            —
            
            
            —
            
            
            —Cash
                flow provided by financing activities — U.S. GAAP
            
            $
            2,613
            
            $
            778
            
            $
            598Cash
                used in investing activities — Canadian GAAP
            
            $
            (20,920
            )
            $
            (24,098
            )
            $
            (6,598
            )Adjustments
                to U.S. GAAPDeferred
                development costs (a)
            
            
            —
            
            
            —
            
            
            218Royalty
                payment relating to CMC Electronics’ OEM GPS business (e)
            
            
            —
            
            
            221
            
            
            261Cash
                used in investing activities — U.S. GAAP
            
            $
            (20,920
            )
            $
            (23,877
            )
            $
            (6,119
            )




l)  ***Accounts
      Payable and Accrued Liabilities***




The
      following balances comprise accounts payable and accrued liabilities:




**Year
                Ended December 31,****2006**
            
            **2005**Accounts
                payable and accrued trade liabilities
            
            $
            6,714
            
            $
            5,229Accrued
                salaries, incentive plans and other employee-related obligations
            
            
            4,950
            
            
            3,686Accrued
                dealer and agent commissions
            
            
            322
            
            
            458Other
            
            
            350
            
            
            411Total
            
            $
            12,336
            
            $
            9,784




m)  ***New
      Canadian and U.S. GAAP Accounting Pronouncements***




**Canadian
      Pronouncements**




In
      January 2005, the Canadian Institute of Chartered Accountants (“CICA”)
      issued Section 1530, “Comprehensive Income”, Section 3251, “Equity”,
      Section 3855, “Financial Instruments - Recognition and Measurement” and
      Section 3865, “Hedges”. The new standards increase harmonization with U.S.
      GAAP and will require the following:




·
            Financial
                assets will be classified as either held-to-maturity, held-for-trading
                or
                available-for-sale. Held-to-maturity classification will be restricted
                to
                fixed maturity instruments that the company intends and is able to
                hold to
                maturity and will be accounted for at amortized cost. Held-for-trading
                instruments will be recorded at fair value with realized and unrealized
                gains and losses reported in net income. The remaining financial
                assets
                will be classified as available-for-sale. These will be recorded
                at fair
                value with unrealized gains and losses reported in a new category
                of the
                consolidated balance sheet under shareholders’ equity called other
                comprehensive income (“OCI”); and




·
            Derivatives
                will be classified as held-for-trading unless designated as hedging
                instruments. All derivatives, including embedded derivatives that
                must be
                separately accounted for, will be recorded at fair value on the
                consolidated balance sheet. For derivatives that hedge the changes
                in fair
                value of an asset or liability, changes in the derivatives’ fair value
                will be reported in net income and be substantially offset by changes
                in
                the fair value of the hedged asset or liability attributable to the
                risk
                being hedged. For derivatives that hedge variability in cash flows,
                the
                effective portion of the changes in the derivatives’ fair value will be
                initially recognized in OCI and the ineffective portion will be recorded
                in net income. The amounts temporarily recorded in OCI will subsequently
                be reclassified to net income in the periods when net income is affected
                by the variability in the cash flows of the hedged
                item.




The
      above
      guidance will apply for interim and annual financial statements relating to
      fiscal years beginning on or after October 1, 2006. Earlier adoption will
      be permitted only as of the beginning of a fiscal year. The impact of
      implementing these new standards did not have a material impact on the Company’s
      consolidated financial statements.




F-26


In
      December 2006, CICA issued Section
      3862 - “ Financial
      Instruments - Disclosures”. ** This standard
      requires entities to provide disclosures in their financial statements that
      enable users to evaluate the significance of financial instruments to the
      entity's financial position and performance. It also requires that entities
      disclose the nature and extent of risks arising from financial instruments
      and
      how the entity manages those risks.




In
      December 2006, CICA issued Section 3863 - “ Financial
      Instruments - Presentation”. ** This
      standard establishes standards for presentation of financial instruments and
      non-financial derivatives and deals with the classification of financial
      instruments, from the perspective of the issuer, between liabilities and equity,
      the classification of related interest, dividends, losses and gains, and the
      circumstances in which financial assets and financial liabilities are
      offset. CICA
      sections 3862 and 3863 are effective for annual and interim periods beginning
      on
      or after October 1, 2007.




Canada’s
      Accounting Standards Board issued CICA Section 1506, “Accounting Changes”. The
      standard prescribes the criteria for changing accounting policies, together
      with
      the accounting treatment and disclosure of changes in accounting policies and
      estimates, and correction of errors. The standard requires the retrospective
      application to prior periods’ financial statements of changes in accounting
      principle, unless it is impractical to determine either the period-specific
      effects or the cumulative effect of the change. Application is on a prospective
      basis and is effective for changes in accounting policies and estimates and
      correction of errors made in fiscal years beginning on or after January 1,
      2007.




In
      July 2006, the Emerging Issues Committee ("EIC") issued Abstract
      No. 162, “Stock-Based Compensation for Employees Eligible to Retire Before
      the Vesting Date”. This EIC discusses how compensation cost attributable to a
      stock-based award for a compensation plan that contains provisions that allow
      an
      employee to continue vesting after the employee has retired from the entity
      should be accounted for in the case of an employee who is eligible to retire
      at
      the grant date or who will become eligible to retire during the vesting period.
      In the case of an employee who is eligible to retire at the grant date, this
      EIC
      concludes that compensation should be recognized on the grant date. In the
      case
      of an employee who will become eligible to retire during the vesting period,
      the
      compensation cost should be recognized over the period from the grant date
      to
      the date the employee becomes eligible to retire. The implementation of this
      EIC
      is effective January 1, 2007 and is not expected to have a material impact
      on
      the Company’s consolidated financial statements.




The
      Emerging Issues Committee issued EIC Abstract 163 - “Determining the Variability
      to be Considered in Applying AcG 15”. This Abstract, which is harmonized with
      the equivalent United States FASB Staff Position (FSP) FIN 46(R) - 6 -
“Determining the Variability to be Considered in Applying FASB Interpretation
      No. 46 (R)”, provides guidance on how an enterprise should determine the
      variability to be considered in applying “AcG 15 - Consolidation of Variable
      Interest Entities”. The Abstract is to be applied prospectively to all entities
      with which an enterprise first becomes involved and to all entities previously
      required to be analyzed under AcG 15 when a reconsideration event has occurred
      beginning the first day of the first reporting period beginning on or after
      January 1, 2007.




In
      early
      2006, Canada’s Accounting Standards Board ratified a strategic plan that will
      result in Canadian GAAP, as used by public companies, being converged with
      International Financial Reporting Standards over a transitional period. The
      Accounting Standards Board is expected to develop and publish a detailed
      implementation plan with a transition period expected to be approximately five
      years. As this convergence initiative is very much in its infancy as of the
      date
      of the annual consolidated financial statements, it would be premature to
      currently assess the impact of the initiative, if any, on the
      Company.




**U.S.**  **Pronouncements**





In
      February 2007, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 159, “ The
      Fair
      Value Option for Financial Assets and Financial Liabilities (including an
      amendment of FASB Statement No. 115) ”. The
      statement would create a fair value option under which an entity may irrevocably
      elect fair value as the initial and subsequent measurement attribute for certain
      financial assets and financial liabilities on a contract-by-contract basis,
      with
      changes in fair value recognized in earnings as those changes occur. This
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. Management
      is in the process of reviewing the requirements of this recent
      statement .




In
      September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
      157”).  SFAS 157 provides accounting guidance on the definition of fair
      value and establishes a framework for measuring fair value in U.S. GAAP and
      expands disclosures about fair value measurements.  SFAS 157 is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007.  The Company plans to adopt the provisions of SFAS 157 on January 1,
      2008.  The Company is currently assessing the impact of the adoption of
      SFAS 157 on its results of operations and financial condition.




In
      September 2006, the SEC Staff issued Staff Accounting Bulletin 108, “Quantifying
      Misstatements in the Financial Statements” (“SAB 108”). SAB 108 requires that
      misstatements identified in the current year financial statements that result
      from misstatements of prior year financial statements be quantified and
      evaluated using a dual approach that includes both an income statement and
      balance sheet assessment of any misstatement. The
      guidance is effective for fiscal years ending after November 15, 2006. The
      implementation of SAB 108 did not have a material impact on the Company’s
      consolidated financial statements.




In
      June
      2006, the EITF reached a consensus on EITF Issue No. 06-3 “How Taxes Collected
      from Customers and Remitted to Governmental Authorities Should Be Presented
      in
      the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF
      06-3”).  EITF 06-3 provides guidance on how taxes directly imposed on
      revenue producing transactions between a seller and customer that are remitted
      to governmental authorities should be presented in the income statement (i.e.
      gross versus net presentation).  EITF 06-3 is effective for interim and
      annual reporting periods beginning after December 15, 2006.  The Company
      will adopt the provisions of EITF 06-3 on January 1, 2007.  The Company is
      currently in the process of assessing the impact of EITF 06-3 on the
      presentation of its results of operations and financial condition.




F-27


In
      June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”)
      entitled “Accounting for Uncertain Tax Positions” - an interpretation of SFAS
      No. 109. The interpretation clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109, Accounting for Income Taxes. The evaluation of a tax
      position in accordance with this interpretation is a two-step process. Under
      the
      recognition step an enterprise determines whether it is more likely than not
      that a tax position will be sustained upon examination based on the technical
      merits of the position. Under the measurement step a tax position that meets
      the
      more-likely-than-not recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      of being realized upon ultimate settlement. FIN 48 is effective for fiscal
      years
      beginning after December 15, 2006. Earlier application of the provisions of
      this interpretation is encouraged if the enterprise has not yet issued financial
      statements, including interim financial statements, in the period this
      interpretation is adopted.  The implementation of FIN 48 did not have a
      material impact on the Company’s results of operations and financial
      condition.




In
      February 2006, the FASB issued Statement of Financial Accounting Standard
      (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments - an
      amendment to FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155
      simplifies the accounting for certain hybrid financial instruments containing
      embedded derivatives. SFAS 155 allows fair value measurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation under SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“SFAS 133”). In addition, it amends SFAS
      No. 140 “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities” (“SFAS 140”), to eliminate the prohibition on a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. SFAS 155 is effective for all financial instruments acquired,
      issued, or subject to a re-measurement event occurring after the beginning
      of an
      entity’s first fiscal year that begins after September 15, 2006. The
      Company will adopt the provisions of SFAS 155 on January 1, 2007. The
      implementation of SFAS 155 is not expected to have a material impact on the
      Company’s results of operations and financial condition.




In
      September 2006, the EITF reached a consensus on EITF Issue No. 06-1 “Accounting
      for Consideration Given by a Service Provider to Manufacturers or Resellers
      of
      Equipment Necessary for an End-Customer to Receive Service from the Service
      Provider” (“EITF 06-1”). EITF 06-1 provides accounting guidance on the
      consideration given by a service provider to a manufacturer or reseller of
      specialized equipment for the reduction of the price of such equipment to an
      end-customer which is necessary for an end-customer to receive service from
      the
      service provider. EITF 06-1 is effective for fiscal years beginning after June
      15, 2007. The Company will adopt the provisions of EITF 06-1 on January 1,
      2008.
      The Company is in the process of reviewing the requirements and potential impact
      of EITF 06-1.




In
      June 2005, the FASB published an exposure draft containing proposals to
      change the accounting for business combinations. The proposed standards would
      replace the existing requirements of the FASB’s Statement No. 141, *Business
      Combinations* .
      The
      proposals would result in fewer exceptions to the principle of measuring assets
      acquired and liabilities assumed in a business combination at fair value.
      Additionally, the proposals would result in payments to third parties for
      consulting, legal, audit, and similar services associated with an acquisition
      being recognized generally as expenses when incurred rather than capitalized
      as
      part of the business combination. The FASB also published an exposure draft
      that proposes, among other changes, that non-controlling interests be classified
      as equity within the consolidated financial statements. The FASB’s proposed
      standard would replace Accounting Research Bulletin No. 51, *Consolidated
      Financial Statements* .







F-28







**REPORT
      OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**




**To
      the Board of Directors and Shareholders of NovAtel Inc.**






We
      have
      audited the consolidated financial statements of NovAtel Inc. as at December
      31,
      2006 and 2005, and for each of the years in the three-year period ended December
      31, 2006, and have issued our reports thereon dated February 9, 2007, except
      as
      to Note 9(c) which is as of March 21, 2007 (which audit report expresses an
      unqualified opinion and includes an explanatory paragraph referring to our
      consideration of internal control over financial reporting and also includes
      a
      separate report titled Comments by Independent Registered Chartered Accountants
      on Canada — United States of America Reporting Differences referring to changes
      in accounting principles that have a material effect on the comparability of
      the
      Company’s financial statements and changes in accounting principles that have
      been implemented in the Company’s financial statements); such financial
      statements and reports are included in the 2006 Annual Report on Form 20-F.
      Our
      audits also included the financial statement schedule of NovAtel Inc. This
      financial statement schedule is the responsibility of the Company’s management.
      Our responsibility is to express an opinion based on our audits. In our opinion,
      the financial statement schedule, when considered in relation to the basic
      financial statements taken as a whole, present fairly, in all material respects,
      the information set forth therein.






(signed)
      “Deloitte & Touche LLP”


Deloitte
      & Touche LLP


Independent
      Registered Chartered Accountants


Calgary,
      Alberta, Canada




February
      9, 2007





F-29







**SCHEDULE
      II**






**Valuation
      and Qualifying Accounts**






**(in
      thousands, Canadian dollars)**







**2004**
            
            **Balance
                at**
              **beginning
                of**
              **period**
            
            **Additions**
            
            **Deductions**
            
            **Balance
                at**
              **end
                of period**Allowance
                for doubtful accounts and provision for sales returns
            
            $
            1,078
            
            $
            215
            
            $
            (86
            )
            $
            1,207Provision
                for future warranty costs
            
            $
            410
            
            $
            312
            
            $
            (184
            )
            $
            538





**2005**
            
            **Balance
                at**
              **beginning
                of**
              **period**
            
            **Additions**
            
            **Deductions**
            
            **Balance
                at**
              **end
                of period**Allowance
                for doubtful accounts and provision for sales returns
            
            $
            1,207
            
            $
            29
            
            $
            (156
            )
            $
            1,080Provision
                for future warranty costs
            
            $
            538
            
            $
            382
            
            $
            (227
            )
            $
            693





**2006**
            
            **Balance
                at**
              **beginning
                of**
              **period**
            
            **Additions**
            
            **Deductions**
            
            **Balance
                at**
              **end
                of period**Allowance
                for doubtful accounts and provision for sales returns
            
            $
            1,080
            
            $
            34
            
            $
            (90
            )
            $
            1,024Provision
                for future warranty costs
            
            $
            693
            
            $
            560
            
            $
            (437
            )
            $
            816










F-30