**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

# **WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**o****                                ****REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**ý****                                ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal yearended December 31, 2003**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**Commission filenumber 0-29004**

 

**NOVATELINC.**

(Exact name of Registrant as specified in ourcharter)

 

**N/A**

(Translation of Registrant’s name intoEnglish)

 

**Canada**

(Jurisdiction of incorporation ororganization)

 

**1120– 68th Avenue N.E., Calgary, Alberta, Canada T2E 8S5**

(Address of principal executive offices)

 

SECURITIES REGISTERED OR TO BEREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: **NONE**

 

SECURITIES REGISTERED OR TO BE REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:

**CommonShares**

(Title of Class)

 

SECURITIES FOR WHICH THERE IS AREPORTING OBLIGATION PURSUANT TO SECTION 15(d) OF THE ACT:  **NONE**

 

At December 31, 2003,Registrant had outstanding 7,984,272 Common Shares, no par value.

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling requirement for the past 90 days.

 
| ý Yes |   | o No |
|------------|--------|------|

 

Indicate by check mark which financial statement item the Registranthas elected to follow.
| o Item 17 |   | ý Item 18 |
|-----------|--------|----------------|

 

 

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*The dollar amounts presented in this Annual Report on Form 20-F are inCanadian currency unless otherwise noted (CDN$1 = US$0.7358 on April 21, 2004),and are presented in accordance with accounting principles generally acceptedin Canada. Historic rates of exchange appear in Part I, “Item 3 - KeyInformation, Selected Financial Data.” The material differences betweenCanadian and U.S. generally accepted accounting principles (“GAAP”) which wouldbear upon the Company’s financial statements and, more particularly, income(loss) applicable to shareholders’ equity, are disclosed in Note 21 of Notes toConsolidated Financial Statements.*

 

*Certain statements in this Annual Report are forward-lookingstatements. These forward-looking statements are not based on historical factsbut rather on management’s expectations regarding NovAtel’s future growth,results of operations, performance, future capital and other expenditures(including the amount, nature and sources of funding thereof), competitiveadvantages, business prospects and opportunities. Statements in this AnnualReport about the Company’s future plans and intentions, results, outlook,levels of activity, performance, goals or achievements or other future events constituteforward-looking statements. Wherever possible, words such as “anticipate”,“believe”, “expect”, “may”, “could”, “will”, “potential”, “intend”, “estimate”,“should”, “plan”, “predict” or the negative or other variations of these words,or similar words or phrases, have been used to identify these forward-lookingstatements. Such forward-looking statements reflect management’s currentbeliefs and assumptions and are based on information currently available tomanagement. Forward-looking statements involve significant known and unknownrisks, uncertainties and assumptions. Many factors could cause actual results,performance or achievements to differ materially from the results discussed orimplied in the forward-looking statements, including operating results ofsubsidiaries and joint ventures, establishing and maintaining effectivedistribution channels, certification and market acceptance of NovAtel’s newproducts, impact and timing of large orders, credit risks of customers andjoint ventures, financing of joint ventures, pricing pressures in the marketand other competitive factors, maintaining technological leadership, timing ofrevenue recognition in connection with certain contracts, the ability tomaintain supply of products from subcontract manufacturers, the procurement ofcomponents to build products, product defects, U.S. dollar to Canadian dollarexchange rate fluctuations, the impact of industry consolidations,vulnerability to general economic, market and business conditions, competition,environmental and other regulatory changes, actions by governmentalauthorities, the availability of capital markets, reliance on key personnel,uninsured and underinsured losses and other factors, many of which are beyondthe control of NovAtel. These factors should be considered carefully and unduereliance should not be placed on the forward-looking statements. Although theforward-looking statements contained in this Annual Report are based upon whatmanagement believes to be reasonable assumptions, NovAtel cannot assureinvestors that actual results will be consistent with these forward-lookingstatements. See “Item 3 – Key Information, Risk Factors” below.  These forward-looking statements are made asof the date of this Annual Report, and NovAtel assumes no obligation to updateor revise them to reflect new events or circumstances.*

 

**PARTI**

 

**Item 1****              Identityof Directors, Senior Management and Advisers**

 

Not applicable

 

**Item 2****              OfferStatistics and Expected Timetable**

 

Not applicable

 

**Item 3****              KeyInformation**

 

**A.****                                    SelectedFinancial Data**

 

The following table sets forth selected financial data of the Companyfor the periods indicated. The selected financial data as at December 31 2002and 2003 and for the years ended December 31, 2001, 2002 and 2003 havebeen derived from our audited consolidated financial statements, which appearelsewhere in this Annual Report. The selected financial data as at and for theyears ended December 31, 1999 and 2000 and as at December 31, 2001 havebeen derived from our audited consolidated financial statements, not includedin this Annual Report. The following unaudited summary financial information,in the opinion of management, has been prepared on the same basis as theaudited consolidated financial statements and contains all

 

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adjustments, consisting only of normal recurring adjustments, necessaryfor a fair presentation of the financial condition and results of operationsfor such periods. The table sets forth, in Canadian dollars and U.S. dollars,the selected financial data as prepared in accordance with Canadian generallyaccepted accounting principles (“Canadian GAAP”). The financial data should beread in conjunction with “Item 5 – Operating and Financial Review and Prospects”and the Consolidated Financial Statements of the Company and Notes theretoincluded elsewhere in this Annual Report.

 

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|                                                          |   | **Year Ended  December 31,**          |   |
|---------------------------------------------------------------|--------|--------------------------------------------|--------|
| **Statement of Operations Data(1):**                          |   | **1999**                                   |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                          |   | **(in  thousands, except per share data)** |   |
| Revenues:                                                     |   |                                       |   |   |   |   |   |   |   |   |   |
| Product sales                                                 |   | $                                          | 23,363 |   | $ | 23,980 |   | $ | 23,241 |   | $ | 26,967 |   | $ | 32,138 |   |
| NRE fees                                                      |   | 863                                        |   | 863 |   | 4,996 |   | 6,179 |   | 6,546 |   |
| Total revenues                                                |   | 24,226                                     |   | 24,843 |   | 28,237 |   | 33,146 |   | 38,684 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Cost of sales:                                                |   |                                       |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                         |   | 12,096                                     |   | 10,360 |   | 10,730 |   | 11,885 |   | 14,805 |   |
| Cost of NRE fees                                              |   | 550                                        |   | 482 |   | 2,542 |   | 4,055 |   | 3,565 |   |
| Total cost of sales                                           |   | 12,646                                     |   | 10,842 |   | 13,272 |   | 15,940 |   | 18,370 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Gross profit                                                  |   | 11,580                                     |   | 14,001 |   | 14,965 |   | 17,206 |   | 20,314 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                           |   |                                       |   |   |   |   |   |   |   |   |   |
| Research and development                                      |   | 6,902                                      |   | 7,811 |   | 6,571 |   | 5,334 |   | 7,123 |   |
| Selling and marketing                                         |   | 3,925                                      |   | 4,087 |   | 3,612 |   | 5,361 |   | 5,269 |   |
| General and administration                                    |   | 2,783                                      |   | 3,661 |   | 3,711 |   | 4,045 |   | 4,280 |   |
| Total operating expenses                                      |   | 13,610                                     |   | 15,559 |   | 13,894 |   | 14,740 |   | 16,672 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                       |   | (2,030                                     | )      | (1,558 | ) | 1,071 |   | 2,466 |   | 3,642 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Interest income, net                                          |   | 374                                        |   | 319 |   | 131 |   | 84 |   | 174 |   |
| Other expense                                                 |   | (204                                       | )      | (769 | ) | (123 | ) | (328 | ) | (664 | ) |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations  before income taxes |   | (1,860                                     | )      | (2,008 | ) | 1,079 |   | 2,222 |   | 3,152 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                                    |   | 123                                        |   | 13 |   | 13 |   | 77 |   | 52 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing operations (3)              |   | (1,983                                     | )      | (2,021 | ) | 1,066 |   | 2,145 |   | 3,100 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Income (loss) from discontinued operations  (3)               |   | 949                                        |   | (774 | ) | (956 | ) | (648 | ) | 360 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                             |   | $                                          | (1,034 | ) | $ | (2,795 | ) | $ | 110 |   | $ | 1,497 |   | $ | 3,460 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share (basic):                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Continuing operations                                         |   | $                                          | (0.26  | ) | $ | (0.26 | ) | $ | 0.14 |   | $ | 0.28 |   | $ | 0.40 |   |
| Discontinued operations                                       |   | 0.13                                       |   | (0.10 | ) | (0.13 | ) | (0.09 | ) | 0.05 |   |
| Net income (loss) per share                                   |   | $                                          | (0.13  | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   | $ | 0.45 |   |
| Weighted average shares outstanding (basic)                   |   | 7,674                                      |   | 7,676 |   | 7,690 |   | 7,681 |   | 7,723 |   |
|                                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share (diluted):                        |   |                                       |   |   |   |   |   |   |   |   |   |
| Continuing operations                                         |   | $                                          | (0.26  | ) | $ | (0.26 | ) | $ | 0.14 |   | $ | 0.27 |   | $ | 0.39 |   |
| Discontinued operations                                       |   | 0.13                                       |   | (0.10 | ) | (0.13 | ) | (0.08 | ) | 0.04 |   |
| Net income (loss) per share                                   |   | $                                          | (0.13  | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   | $ | 0.43 |   |
| Weighted average shares outstanding  (diluted)                |   | 7,704                                      |   | 7,816 |   | 7,704 |   | 7,824 |   | 7,983 |   |
|                                                               |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Footnotes appear onpages 6-12*

 

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| **(US$  equivalent) (2)**                              |   | **Year Ended December 31,****2003**  |   |
|--------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                   |   | **(in thousands, except per share data)** |   |
| Revenues:                                              |   |                                      |   |
| Product sales                                          |   | $23,647                                   |   |
| NRE fees                                               |   | 4,817                                     |   |
| Total revenues                                         |   | 28,464                                    |   |
|                                                   |   |                                      |   |
| Cost of sales:                                         |   |                                      |   |
| Cost of product sales                                  |   | 10,894                                    |   |
| Cost of NRE fees                                       |   | 2,623                                     |   |
| Total cost of sales                                    |   | 13,517                                    |   |
|                                                   |   |                                      |   |
| Gross profit                                           |   | 14,947                                    |   |
|                                                   |   |                                      |   |
| Operating expenses:                                    |   |                                      |   |
| Research and development                               |   | 5,241                                     |   |
| Selling and marketing                                  |   | 3,877                                     |   |
| General and administration                             |   | 3,149                                     |   |
| Total operating expenses                               |   | 12,267                                    |   |
|                                                   |   |                                      |   |
| Operating income                                       |   | 2,680                                     |   |
|                                                   |   |                                      |   |
| Interest income, net                                   |   | 128                                       |   |
| Other expense                                          |   | (489)                                     |   |
| Income from continuing operations before  income taxes |   | 2,319                                     |   |
|                                                   |   |                                      |   |
| Provision for income taxes                             |   | 38                                        |   |
| Net income from continuing operations                  |   | 2,281                                     |   |
|                                                   |   |                                      |   |
| Income (loss) from discontinued operations             |   | 265                                       |   |
| Net income                                             |   | $2,546                                    |   |
|                                                   |   |                                      |   |
| Net income (loss) per share (basic):                   |   |                                      |   |
| Continuing operations                                  |   | $0.29                                     |   |
| Discontinued operations                                |   | 0.04                                      |   |
| Net income per share                                   |   | $0.33                                     |   |
| Weighted average shares outstanding (basic)            |   | 7,723                                     |   |
|                                                   |   |                                      |   |
| Net income (loss) per share (diluted):                 |   |                                      |   |
| Continuing operations                                  |   | $0.29                                     |   |
| Discontinued operations                                |   | 0.03                                      |   |
| Net income per share                                   |   | $0.32                                     |   |
| Weighted average shares outstanding  (diluted)         |   | 7,983                                     |   |

 

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|                            |   | **December 31,** |   | **US$  Equivalent  December 31,** |   |
|---------------------------------|--------|-----------------------|--------|----------------------------------------|--------|
| **Balance Sheet Data(1):**      |   | **1999**              |   | **2000**                               |   | **2001** |   | **2002** |   | **2003** |   | **2003(2)** |   |
| **(Canadian $)**                |   | **(in  thousands)**   |   |
|                            |   |                  |   |                                   |   |   |   |   |   |   |   |   |   |
| Working capital                 |   | $                     | 13,957 |                                   | $      | 11,279 |   | $ | 12,284 |   | $ | 14,372 |   | $ | 17,978 |   | $ | 13,228 |   |
| Total assets                    |   | 29,204                |   | 28,830                                 |   | 27,821 |   | 30,890 |   | 35,572 |   | 26,174 |   |
| Bank advances                   |   | —                |   | —                                 |   | — |   | — |   | — |   | — |   |
| Long-term liabilities           |   | 549                   |   | 307                                    |   | 253 |   | 98 |   | 212 |   | 156 |   |
| Total shareholders’ equity |   | 21,752                |   | 18,969                                 |   | 19,086 |   | 20,547 |   | 25,447 |   | 18,724 |   |
|                                 |        |                       |        |                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Theconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in Canada (Canadian GAAP or Canadianprinciples). The significant differences from U.S. generally acceptedaccounting principles (U.S. GAAP or U.S. principles) are as follows ($thousands):

 

**i) *DeferredDevelopment Costs***

 

In the year ended December 31, 2003, theCompany deferred $157 of development costs ($125 in 2002, $4 in 2001, $757 in2000 and $1,275 in 1999) 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, 2003, theCompany amortized $196 of deferred development costs ($57 in 2002. $36 in 2001,$nil in 2000 and 1999) in accordance with Canadian GAAP. Under U.S. GAAP, thesecosts would have been expensed in the periods when the originating expenditureswere incurred.

 

Further, for U.S. GAAP purposes, the Companywould have recharacterized the goodwill acquired on the Mezure, Inc. shareacquisition of $231 as development related costs, and these costs would havebeen expensed on acquisition in 2001.

 

***ii) Derivatives andHedging Activities***

 

The Company has historically entered into foreign exchange options andforward contracts to manage its exposure to foreign currency fluctuations.Under U.S. GAAP the accounting for derivative instruments and hedging activitiesis contained in the Statement of Financial Accounting Standard (“SFAS”) No.133, as amended by SFAS 137 and SFAS 138 (“SFAS 133”). SFAS 133 establishesaccounting and reporting standards requiring that all derivative instruments berecorded in the balance sheet as either an asset or a liability measured atfair value and requires that changes in the fair value be recognized currentlyin earnings unless specific hedge accounting criteria are met. For cash flowhedges, changes in the fair value of the derivative instrument are recognizedin net earnings in the same period as the hedged item and any changes in thefair value prior to that period are recognized in other comprehensive income.For fair value hedges, both the derivative instrument and the underlyingcommitment are recognized on the balance sheet at their fair value and anychanges in the fair value are recognized currently in net earnings. TheCompany’s foreign exchange contracts have been accounted for as cash flowhedges.

 

**iii) *Investmentin Joint Ventures***

 

The accounts of the Company’s 49.0% joint venture interest in Point,Inc. and former 48.7% joint venture interest in Mezure, Inc. (prior to theCompany acquiring a 74% controlling interest on July 23, 2001) areproportionately consolidated as required under Canadian GAAP. Under U.S. GAAP,proportionate consolidation is not permitted, and the Company’s investment inthese joint ventures would be accounted for using the equity method. Aspermitted by SEC guidance, the effects of this difference in accountingprinciples have not been reflected in the accompanying tables.

 

In 2002, the Company recognized a gain of $121 related to the reductionof 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

 

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a direct increase in shareholders’ equity of $160 after considerationof the impact of previous U.S. GAAP adjustments.

 

In addition, in 2003, the Company recognized a gain of $379 related tothe liquidation of the remaining assets and liabilities of Mezure. Under U.S.GAAP, this gain would have been $571, since $192 characterized as goodwillunder Canadian GAAP would have been expensed on acquisition in 2001 (see Note(i) above).

 

**iv)*****Intangibles Related to Acquisitionof CMC Electronics OEM GPS Business***

 

On May 14, 2003, the Company acquired the CMC Electronicsnon-aviation GPS product line. The fair value of the net assets acquiredincluded $497 in intangibles, comprised primarily of technology, productdesign, customer relationships and an established market presence. UnderU.S. GAAP, when accounting for transfer of assets between entities undercommon control, the entity that receives the net assets or the equity interestwould initially recognize the assets and liabilities transferred at theircarrying amounts at the date of transfer. Any excess of consideration givenover the controlling shareholders’ carrying value would be accounted for as areduction of equity.

 

**v)**  ***Classification of Employee Relocation and Termination Costs***

 

In the year ended December 31, 2002, the Company included $128 ofemployee relocation and $84 of employee termination costs within Other expensein the consolidated statement of operations. Under U.S. GAAP, these costswould be included within operating expenses.

 

**vi)**  ***Provision for Future Warranty Costs***

 

The changes in the provision for future warranty costs during each ofthe years ended December 31 are as follows:

 
|                                 |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Opening balance, beginning of period |   | $        | 110    |     | $      | 246      |   | $        | 268    |     | $      | 285 |   | $ | 344 |   |
| Additions to provision               |   | 200      |   | 78       |   | 148      |   | 203      |   | 220      |   |
| Costs incurred                       |   | (64      | )      | (56      | )      | (131     | )      | (144     | )      | (154     | )      |
|                                 |   |     |   |     |   |     |   |     |   |     |   |
| Ending balance, end of period        |   | $        | 246    |     | $      | 268      |   | $        | 285    |     | $      | 344 |   | $ | 410 |   |

 

**vii) *IncomeTaxes***

 

Effective January 1, 2000, the Company adopted the liabilitymethod of income tax accounting for Canadian GAAP, which is consistent with theaccounting required under U.S. principles. In 1999 and prior years, the Company accounted for income taxes forCanadian GAAP under the deferral method. In 1999 and prior years, under U.S. principles, deferred income taxeswould be recognized, at enacted rates, to reflect the future effects of taxcarryforwards and temporary differences arising between the tax bases of assetsand liabilities and their financial reporting amounts at each balance sheetdate.

 

If U.S. GAAP had been followed in 1999 and prior years, the Companywould also have recorded the tax benefit attributable to the estimated Canadiannet operating loss carryforwards, research and development costs and unutilizedinvestment tax credits and U.S. net operating loss carryforwards, available tooffset future taxable income, subject to certain limitations.  However, the Company would also haveestablished a full valuation allowance against the calculated tax benefits,since it was uncertain whether any of these tax benefits would have beenrealized.  As no significant incometaxes were payable other than large corporations tax, and as a full valuationallowance would have been recorded against the deferred tax assets asdetermined under U.S. GAAP, this difference between Canadian and U.S. GAAP hadno effect on our consolidated financial statements presented herein.

 

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**viii) *Comprehensive Income***

 

U.S. GAAP utilizes the concept of comprehensive income, which includesnet income and other comprehensive income. There is no similar concept underCanadian GAAP. Other comprehensive income represents the change in equityduring the period from transactions and other events from non-owner sources andincludes such items as changes in the fair value of cash flow hedges.

 

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**ix) * ******Summary of the Differences betweenCanadian and U.S. GAAP***

 

The effects of the above-noted differences between U.S. and CanadianGAAP produces the following differences on the presented statement ofoperations data:

 
|                                                                    |   | **Year Ended  December 31,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                    |   | **1999**                          |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| **Net income (loss)  from continuing operations – Canadian GAAP**  |   | $                                 | (1,983 | ) | $ | (2,021 | ) | $ | 1,066 |   | $ | 2,145 |   | $ | 3,100 |   |
| Adjustments to U.S. GAAP                                                |   |                              |   |   |   |   |   |   |   |   |   |
| Deferred development costs                                              |   | (1,275                            | )      | (757 | ) | (4 | ) | (125 | ) | (157 | ) |
| Amortization of deferred development costs                              |   | 3⁄4                            |   | 3⁄4 |   | 36 |   | 57 |   | 196 |   |
| Fair value of financial instruments                                     |   | 329                               |   | (21 | ) | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Amortization of intangibles acquired from  CMC Electronics              |   | 3⁄4                            |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   | 62 |   |
| **Net income from  continuing operations – U.S. GAAP**             |   | $                                 | (2,929 | ) | $ | (2,799 | ) | $ | 1,098 |   | $ | 2,077 |   | $ | 3,201 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| Net  income (loss) from discontinued operations – Canadian GAAP    |   | 949                               |   | (774 | ) | (956 | ) | (648 | ) | 360 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| Adjustments to U.S. GAAP                                                |   |                              |   |   |   |   |   |   |   |   |   |
| Gain on liquidation of Mezure, Inc.                                     |   | 3⁄4                            |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   | 192 |   |
| Gain on dilution of equity in Mezure, Inc.                              |   | 3⁄4                            |   | 3⁄4 |   | 3⁄4 |   | (121 | ) | 3⁄4 |   |
| Write-off of Mezure, Inc. development  related costs                    |   | 3⁄4                            |   | 3⁄4 |   | (231 | ) | 3⁄4 |   | 3⁄4 |   |
| Income (loss) from discontinued operations  – U.S. GAAP            |   | 949                               |   | (774 | ) | (1,187 | ) | (769 | ) | 552 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| **Net income (loss) –  U.S. GAAP**                                 |   | (1,980                            | )      | (3,573 | ) | (89 | ) | 1,308 |   | 3,753 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| Net  unrealized gain (loss) on foreign exchange contracts               |   | 3⁄4                            |   | 3⁄4 |   | 1 |   | (48 | ) | 3⁄4 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| **Reclassification to  income of gains and losses on cash flow hedges** |   | 3⁄4                            |   | 3⁄4 |   | 3⁄4 |   | (1 | ) | 48 |   |
|                                                                    |   |                              |   |   |   |   |   |   |   |   |   |
| **Comprehensive  Income (loss)**                                        |   | (1,980                            | )      | (3,573 | ) | (88 | ) | 1,259 |   | 3,801 |   |

 

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Net income (loss) per share ascomputed under Canadian and U.S. GAAP is as set forth below for the followingperiods:

 
|                                                        |   | **Year Ended December 31,** |   |
|-------------------------------------------------------------|--------|----------------------------------|--------|
| **Net income (loss) per share from  continuing operations** |   | **1999**                         |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                        |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP  – basic                                 |   | $                                | (0.26  | ) | $ | (0.26 | ) | $ | 0.14 |   | $ | 0.28 |   | $ | 0.40 |   |
|                                                        |   |                             |   |   |   |   |   |   |   |   |   |
| U.S. GAAP –  basic                                     |   | $                                | (0.38  | ) | $ | (0.36 | ) | $ | 0.14 |   | $ | 0.27 |   | $ | 0.41 |   |
|                                                        |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP  – diluted                               |   | $                                | (0.26  | ) | $ | (0.26 | ) | $ | 0.14 |   | $ | 0.27 |   | $ | 0.39 |   |
|                                                        |   |                             |   |   |   |   |   |   |   |   |   |
| U.S. GAAP – diluted                                    |   | $                                | (0.38  | ) | $ | (0.36 | ) | $ | 0.14 |   | $ | 0.27 |   | $ | 0.40 |   |

 
|                            |   | **Year Ended December 31,** |   |
|---------------------------------|--------|----------------------------------|--------|
| **Net income (loss) per share** |   | **1999**                         |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                            |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP  – basic     |   | $                                | (0.13  | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   | $ | 0.45 |   |
|                            |   |                             |   |   |   |   |   |   |   |   |   |
| U.S. GAAP –  basic         |   | $                                | (0.26  | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   | $ | 0.49 |   |
|                            |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP  – diluted   |   | $                                | (0.13  | ) | $ | (0.36 | ) | $ | 0.01 |   | $ | 0.19 |   | $ | 0.43 |   |
|                            |   |                             |   |   |   |   |   |   |   |   |   |
| U.S. GAAP –  diluted       |   | $                                | (0.26  | ) | $ | (0.47 | ) | $ | (0.01 | ) | $ | 0.17 |   | $ | 0.47 |   |

 

10

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The reconciliation of theselected consolidated financial data between U.S. and Canadian GAAP producesthe following differences on the presented balance sheet data:

 
|                                                                         |   | **Year Ended December 31,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                         |   | **1999**                         |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| **Total Assets**                                                             |   |                             |   |   |   |   |   |   |   |   |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP                                                                |   | $                                | 29,204 |   | $ | 28,830 |   | $ | 27,821 |   | $ | 30,890 |   | $ | 35,572 |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| Adjustments to  U.S. GAAP                                                    |   |                             |   |   |   |   |   |   |   |   |   |
| Deferred  development costs                                                  |   | (1,803                           | )      | (2,560 | ) | (2,528 | ) | (2,596 | ) | (2,557 | ) |
| Fair value of  financial instruments.                                        |   | 21                               |   | (1 | ) | 3⁄4 |   | (48 | ) | 3⁄4 |   |
| Write off of development related costs on  Mezure acquisition                |   | 3⁄4                           |   | 3⁄4 |   | (231 | ) | (192 | ) | 3⁄4 |   |
| Reduction of  intangibles acquired  from  CMC Electronics to  carrying value |   | 3⁄4                           |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   | (430 | ) |
| U.S. GAAP                                                                    |   | $                                | 27,422 |   | $ | 26,269 |   | $ | 25,062 |   | $ | 28,054 |   | $ | 32,585 |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| **Total  Shareholders’ Equity**                                         |   |                             |   |   |   |   |   |   |   |   |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| Canadian GAAP                                                                |   | $                                | 21,752 |   | $ | 18,969 |   | $ | 19,086 |   | $ | 20,547 |   | $ | 25,447 |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| Adjustments to  U.S. GAAP                                                    |   |                             |   |   |   |   |   |   |   |   |   |
| Deferred  development costs                                                  |   | (1,803                           | )      | (2,560 | ) | (2,528 | ) | (2,596 | ) | (2,557 | ) |
| Fair value of  financial instruments                                         |   | 21                               |   | (1 | ) | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   |
| Write off of development related costs on  Mezure acquisition                |   | 3⁄4                           |   | 3⁄4 |   | (231 | ) | (192 | ) | 3⁄4 |   |
| Reduction of intangibles acquired from CMC  Electronics to carrying value    |   | 3⁄4                           |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   | (492 | ) |
| Amortization of intangibles acquired from  CMC Electronics                   |   | 3⁄4                           |   | 3⁄4 |   | 3⁄4 |   | 3⁄4 |   | 62 |   |
|                                                                         |   |                             |   |   |   |   |   |   |   |   |   |
| U.S. GAAP  before other comprehensive  income                                |   | $                                | 19,970 |   | $ | 16,408 |   | $ | 16,327 |   | $ | 17,759 |   | $ | 22,460 |   |
| Accumulated  other comprehensive  income  (loss)                             |   | 3⁄4                           |   | 3⁄4 |   | 1 |   | (48 | ) | 3⁄4 |   |
| U.S. GAAP  including accumulated comprehensive income                        |   | $                                | 19,970 |   | $ | 16,408 |   | $ | 16,328 |   | $ | 17,711 |   | $ | 22,460 |   |

 

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(2)          Canadian dollar amounts for all years presentedhave been translated into U.S. dollars solely for the convenience of the readerat the rate of US$0.7358 per CDN$1.00, which was the exchange rate as of April21, 2004. These translations are not necessarily representative of the amountsthat would have been reported if the Company historically had reported itsfinancial statements in U.S. dollars. In addition, the rates utilized are notnecessarily indicative of the rates in effect at any other time.

 

11

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(3)          As of December 31, 2003, the Companyowned a 70% equity interest in Mezure, Inc., a company that had beendeveloping a GPS, wireless communication and Internet based product fordeformation monitoring of manmade and natural structures. On April 8,2003, the shareholders of Mezure voted unanimously to proceed with aChapter 7 bankruptcy filing for Mezure, which was concluded onSeptember 24, 2003. Consequently, the Company is treating Mezure as adiscontinued operation and accordingly has restated the consolidated statementof operations for prior periods.

 

(b)  Canadian and U.S. Dollar Exchange Rate

 

The following table sets forth, for each period presented, the high andlow exchange rates, the average of the exchange rates on the last day of each monthduring the indicated period and the exchange rates at the end of the indicatedperiod for one Canadian dollar, expressed in U.S. dollars, based on the noonbuying rate in New York City for cable transfers payable in Canadian dollars ascertified for customs purposes by the Federal Reserve Bank of New York:

 
|       |   | **U.S. Dollars Per Canadian Dollar****Year Ended  December 31,** |   |
|------------|--------|-----------------------------------------------------------------------|--------|
|       |   | **1999**                                                              |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
| Average    |   | $                                                                     | 0.6730 |   | $ | 0.6732 |   | $ | 0.6457 |   | $ | 0.6368 |   | $ | 0.7139 |   |
|       |   |                                                                  |   |   |   |   |   |   |   |   |   |
| High       |   | 0.6925                                                                |   | 0.6969 |   | 0.6697 |   | 0.6619 |   | 0.7738 |   |
|       |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Low        |   | 0.6535                                                                |   | 0.6410 |   | 0.6241 |   | 0.6200 |   | 0.6349 |   |
|       |   |                                                                  |   |   |   |   |   |   |   |   |   |
| Period end |   | 0.6888                                                                |   | 0.6669 |   | 0.6267 |   | 0.6329 |   | 0.7738 |   |
|            |        |                                                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|   |   | **Month  Ended**   |   |
|--------|--------|--------------------|--------|
|   |   | **November  2003** |   | **December  2003** |   | **January  2004** |   | **February  2004** |   | **March  2004** |   | **April  2004** |   |
| High   |   | $                  | 0.7708 |   | $ | 0.7738 |   | $ | 0.7880 |   | $ | 0.7629 |   | $ | 0.7645 |   | $ | 0.7637 |   |
|   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Low    |   | 0.7484             |   | 0.7460 |   | 0.7496 |   | 0.7439 |   | 0.7418 |   | 0.7293 |   |
|        |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On April 21, 2004 the exchange rate was US$0.7358 per CDN$1.00.

 

(c) Dividends

 

The Company has not paid any cash dividendssince its inception.  The Board ofDirectors may pay cash dividends in the foreseeable future, but intends toreturn the majority of earnings, if any, for use in its business operations.

 

**B.****                                    Capitalizationand Indebtedness**

 

Not applicable

 

**C.****                                    Reasonsfor the Offer and Use of Proceeds**

 

Not applicable

 

**D.****                                    RiskFactors**

 

*In addition to the other information set forth in this Annual Report,the following risk factors should be considered carefully in evaluating theCompany. This Annual Report contains certain forward-looking statements andintentions. The cautionary statements made in this Annual Report should be readas being applicable to all related forward-looking statements wherever theyappear in this Annual Report. Our actual results could differ materially fromthose discussed here. Factors that could cause or contribute to suchdifferences include those discussed below, as well as those discussed elsewherein this Annual Report.*

 

*The Company’s operating results are susceptible to fluctuations.*

 

NovAtel’sresults of operations have fluctuated and can be expected to continue tofluctuate on a periodic basis as a result of a number of factors which affectrevenue, gross margin and operating expenses. Annual and quarterly revenueshave fluctuated because of a number of factors, including fluctuations indemand for existing products, the rate of development of new products, thedegree of market acceptance of new products, increased competition, acquisitionof new product lines, timing of major contracts, U.S. dollar to Canadian dollarexchange rates, operating

 

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results of subsidiaries andjoint ventures, certification and market acceptance of new products, impact andtiming of large orders, pricing pressures in the market, establishing andmaintaining effective distribution channels, fluctuations in non-recurringengineering (“NRE”) fees, seasonality of customer purchase patterns and thetiming of industry trade shows.

 

Gross margin as a percentage of revenue varies primarily as a result ofproduct sales mix, changes in materials and contract manufacturing costs,liquidation of discontinued inventory, and absorption of fixed manufacturingcosts. The Company’s OEM products typically have higher gross margins than thesale of survey products by Point, and, consequently, the sale of surveyproducts through Point could adversely affect NovAtel’s gross margins as apercentage of revenue. In May 2003, the Company acquired CMC Electronics’ non aviationL1 GPS OEM product line, which typically have lower gross margins as apercentage of revenue and consequently, the addition of these products toNovAtel’s product line will adversely affect its gross margins as a percentageof revenue.

 

A shortfall from anticipated revenue, lower gross margins or higherthan expected expenses could adversely affect results of operations. Inaddition, if NovAtel were to receive a major contract, theCompany’s expenditures required to support such a contract would likelyincrease. If revenue from the contract were delayed for any reason, includingcancellation or deferral of the contract, the Company’s results of operationscould be adversely affected.  See“Item 5 – Operating and Financial Review and Prospects, Operating Results.”

 

*The failure of Point, Inc. to repay existingloans to the Company or continue as a going concern would adversely affect theCompany’s results of operations.*

 

NovAtel sells GPS receivers and antennas to Point which incorporatesthese receivers into surveying systems that are in turn sold through Sokkia’sdistribution channels and through independent dealers and distributors.NovAtel’s consolidated financial statements include its proportionate 49% jointventure interest in the accounts of Point. Point is subject to similar types ofrisks as the Company.

 

Point is dependent on the Company and Sokkia for product supply,distribution and financing. As of December 31, 2003, the Company andSokkia had collectively loaned Point U.S.$5.3 million, U.S.$2.6 million ofwhich was advanced by the Company. The loans are secured by the assets ofPoint.

 

Should Sokkia and the Company discontinue their support, Point’sability to continue as a going concern would be impaired. If the existing loanswere ultimately not repaid by Point to the Company and Sokkia, or if Point wereliquidated in an orderly wind-down, the Company believes that its maximum lossexposure in the statement of operations to Point as of December 31, 2003,after consideration of the effects of the proportionate consolidation of Point,would be approximately $700,000, comprised primarily of working capital relateditems and the costs that would be incurred to cease operations. Theconsolidated financial statements of the Company contained elsewhere in thisAnnual Report do not reflect any adjustments that would be required if Point’soperations were discontinued.  See“—Dependence on Key Customers.”

 

*The Company cannot be certain that itsproduct innovations and enhancements will be successful.*

 

Although NovAtel expects to make significant investments in researchand development to continue to enhance existing products, develop new productswhich incorporate new and existing technologies and achieve market acceptancefor such products, there can be no assurance that such new products or productenhancements will be successfully developed or, if developed, that any such newproducts or product enhancements will be developed in time to capture marketopportunities or achieve a significant or sustainable level of marketacceptance in new and existing markets. The development of new, technologicallyadvanced products and product enhancements is a complex and uncertain processrequiring accurate anticipation of technological and market trends. Any inabilityon NovAtel’s part to successfully define, develop and introduce new productsand product enhancements may materially adversely affect its growth potentialand results of operations.

 

In addition, development and manufacturing schedules for technology productsare difficult to predict, and there can be no assurance that NovAtel willachieve timely initial customer shipments of new products. The timelyavailability of these products in the market place and their acceptance bycustomers are important to the future success of NovAtel. NovAtel haspreviously experienced delays in shipping certain of its products and anyfuture delays, whether due to manufacturing delays, product design anddevelopment delays, lack of market acceptance,

 

13

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delays in any required regulatory approval, or otherwise, couldadversely affect customer acceptance of its products and have a materialadverse effect on NovAtel’s business, financial condition and results ofoperations. From time to time, NovAtel or its competitors may announce newproducts, capabilities or technologies that have the potential to replace orshorten the life cycles of its existing products. No assurance can be giventhat announcements of currently planned or other new products will not causecustomers to defer or stop purchasing NovAtel products until NovAtel or itscompetitors’ new products become available. In addition, certain of NovAtel’sproducts must pass governmental and similar certifications before they can besold. Any inability or delay in obtaining such certifications could have amaterial adverse effect on NovAtel’s business, financial condition and resultsof operations.  See “Item 4 –Information on the Company, Business Overview – Research and Development.”

 

*The Company relies on a limited number ofcustomers for a substantial portion of its revenue.*

 

In 2003, the Company derived 36% of its revenues from its top fourcustomers, namely BEELINE, Leica Geosystems, FAA and Sokkia/Point. While theCompany believes it maintains good relationships with its key customers, theloss of any key customer could have a material adverse effect on the Company’sbusiness, financial condition and results of operations. In addition, shouldany of the Company’s customers experience financial difficulties resulting inan inability to pay amounts owing to the Company, the Company may experience amaterial adverse effect on its financial condition and results of operations.

 

The Company’s strategic co-operation agreement with Leica Geosystemsprovides that in the event of the acquisition of control of NovAtel or asignificant portion of its assets or, for so long as NovAtel is controlled byCMC, the acquisition of control of CMC, in either case by certain specifiedcompetitors of Leica Geosystems, then Leica Geosystems may, among other things,terminate the agreement and any related development or supply agreements. Thestrategic co-operation agreement between the Company and CMC Electronicscontains a similar right in favour of CMC Electronics which is triggered incircumstances in which control of NovAtel or a significant portion of itsassets are acquired by certain specified competitors of CMC Electronics. Thetermination of either of such agreements could have a material adverse effecton NovAtel’s business, financial condition and results of operations.

 

*The Company relies on suppliers for thecomponents used in its products and interruptions in the supply of suchcomponents or a significant increase in the price of one or more componentscould adversely affect the Company’s business, financial condition and resultsof operation.*

 

NovAtel believes there are a number of qualified vendors for most ofthe parts and components used in its products. However, several components arepurchased from a single source. In many cases, despite the availability ofmultiple sources, NovAtel may select a single source to maintain qualitycontrol. Components for which NovAtel currently does not have multiple sourcesinclude application specific integrated circuits manufactured to proprietarydesign, radio frequency filters, microprocessors and duplexers/filters.

 

NovAtel has experienced significant production delays in the pastcaused by an insufficient supply of certain components. If NovAtel is unable toobtain a sufficient supply of single source components from its currentvendors, NovAtel may be required to obtain such components from alternativesources at higher prices and may experience a delay or interruption in productshipments, which could adversely affect its business, financial condition andresults of operations and damage customer relationships until an alternativesource can be obtained. NovAtel has taken steps to ensure adequate supply ofthese components and commenced product redesigns, as may be required.

 

Also, a significant increase in the price of one or more componentscould adversely affect NovAtel’s business, financial condition and results ofoperations. Although NovAtel has instituted vendor audit programs, there can beno assurance that NovAtel will not face problems with the quality of componentsin the future that could result in delays in supplies, interrupt shipments andrequire modification of products already sold by NovAtel, any of which couldhave a material adverse effect on NovAtel’s business, financial condition andresults of operations. NovAtel currently relies on a primary and two secondarysubcontractors to manufacture the majority of its circuit card assembly. Therecan be no assurance that the circuit card assembly subcontractors will be ableto manufacture NovAtel’s products in a timely and reliable manner. The failureby a subcontractor to manufacture products in a timely and reliable mannercould have a material adverse effect on NovAtel’s business, financial conditionand results of operations.

 

14

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*The Company’s success is dependent upon keypersonnel.*

 

NovAtel’s future success depends, in part, on its ability to attractand retain qualified technical, marketing, sales and management personnel.Competition for such personnel is intense and the number of persons withrelevant experience, particularly in engineering, is limited. Any inability onthe part of NovAtel to attract and retain additional key employees or the lossof one or more of its current key employees could materially adversely affectNovAtel’s business, financial condition and results of operations.

 

*The Company may not be able to maintainexisting OEM customers and strategic relationships or develop distributionchannels for the sale of its products.*

 

NovAtel sells its OEM products directly to OEM customers and tostrategic relationships. The Company expects to continue to utilize theserelationships to sell to companies that will incorporate NovAtel’s productsinto their products and services. Accordingly, the Company’s success will bedependent in large part on its ability to continue existing relationships anddevelop new OEM and other third party relationships.

 

NovAtel cannot predict nor control the extent to which its distributionnetwork will be successful in marketing products incorporating its products. Amaterial loss of any OEM customers or strategic partners, either as a result ofcompetitive products offered by other companies or products developedinternally by these OEM customers and strategic partners, or their inability topenetrate their respective market segments, could have a material adverseeffect 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 materiallyadversely affect the Company’s business, financial condition and results ofoperations.

 

NovAtel plans to continue expanding its distribution channels. Therecan be no assurance that such expansion will be successfully completed, thatthe cost of such expansion will not exceed the revenues generated, or that theCompany’s sales and marketing organization will be able to successfully competeagainst the more extensive and well-funded sales and marketing operations ofmany of NovAtel’s current or potential competitors. NovAtel’s inability tomanage effectively its distribution expansion could have a material adverseeffect on the Company’s business, financial condition and results ofoperations.  See “Item 4 – Information on theCompany, Business Overview - Sales, Marketing and Distribution.”

 

*The Company may be adversely affected bytrends in the markets for GPS technology and products.*

 

NovAtel currently addresses the following markets for the applicationof GPS technology: surveying and mapping, aerospace, precision agriculture,precise timing, marine, unmanned vehicles, mining and machine control. AlthoughNovAtel believes that these markets have growth potential for sales of GPSproducts, there can be no assurance that such markets will continue to develop,particularly given that GPS-based systems are still in an early stage ofadoption in some of these markets, or that even if they develop, such marketswill develop in a direction beneficial to NovAtel’s products or productpositioning or in the time frame in which NovAtel expects to launch productsfor these markets. Any development of these markets away from GPS technologiesor the GPS products offered by NovAtel could have a material adverse effect onNovAtel’s growth potential and its business, financial condition and results ofoperations.

 

NovAtel also believes that in certain emerging markets its success willdepend on its ability to form and maintain strategic relationships withestablished systems providers and industry leaders. NovAtel’s failure to formand maintain such relationships, or the pre-emption of such relationships bythe actions of other GPS competitors, could adversely affect its ability topenetrate emerging GPS markets. In addition, NovAtel’s future growth willdepend upon the timely development of the markets in which it currentlycompetes, its ability to continue to identify and exploit new markets for itsproducts and its ability to open new channels of distribution for existing andfuture products. NovAtel’s inability to effectively and efficiently exploitopportunities in new or emerging markets through successful product marketing,new and timely product introductions and product enhancements and establishingnew distribution channels for its products could have a material adverse effecton NovAtel’s growth, financial condition and results of operations. Further, tothe extent NovAtel builds inventory in anticipation of potential sales in a newmarket, the failure of that market to develop could have a material adverseeffect on NovAtel’s business, financial condition and results of operations.

 

15

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*The Companymay not be able to manage its business effectively.*

 

The Company’s ability to manage its business will be substantiallydependent upon its ability to efficiently and effectively allocate resources toconduct research and development, product implementation, sales and marketingactivities, financial management and customer support services. Accordingly,the Company’s future results of operations will depend on the continuingability of its officers and other key employees to conduct business effectivelyand to improve operations. NovAtel will need to continue to improve itsoperational, financial and management systems. There can be no assurance thatthe Company will be able to manage business shortfalls or growth successfully,and any inability to do so would have a material adverse effect on NovAtel’sbusiness, financial condition and results of operations. Among other things,NovAtel must successfully manage research and development projects, the controlof overhead expenses and inventories and the management and training of itsemployees. Any inability on NovAtel’s part to manage these and other factorssuccessfully could have a material adverse effect on the Company’s business,financial condition and results of operations. See “Item 6 - Directors, Senior Management and Employees.”

 

*The Company’s business is dependent on itsintellectual property.  If the Company’spatents or trademarks are declared invalid, the Company’s ability to competemay be adversely affected.*

 

NovAtel currently holds 25 U.S. patents and 32 related foreign patentswhich expire at various dates no earlier than November 28, 2010. NovAtelalso has numerous pending U.S. and foreign patent applications. NovAtelcurrently licences certain peripheral aspects of its technology from thirdparties. Although NovAtel believes that its patents and trademarks have value,there can be no assurance that its patents and trademarks, or any additionalpatents and trademarks that may be obtained in the future, will provide meaningfulprotection from competition. The value of NovAtel’s products reliessubstantially on its technical innovation in fields in which there are manycurrent patent filings. NovAtel recognizes that as new patents are issued orare brought to its attention by the holders of such patents, it may benecessary for NovAtel to withdraw products from the market, negotiate a licensefrom such patent holders, redesign its products or pay damages assessed as aresult of litigation. Such events could have a material adverse effect onNovAtel’s business, financial condition and results of operations. In addition,the legal costs and engineering time required to safeguard intellectualproperty or to defend against litigation could become a significant expense ofoperations.

 

NovAtel has received written notices from certain parties allegingpatent infringement of their respective patents. Other than one claim byTrimble Navigation Limited (“Trimble”) for which a settlement agreement wasreached, to date, no formal claim has been brought by any of the parties.  The Company believes it has valid defencesto these claims should formal proceedings be commenced. In protecting itsintellectual property rights NovAtel has from time to time sent out letters tothird parties regarding potential infringement. While no intellectual propertyright of the Company has been invalidated or declared unenforceable, there canbe no assurance that such rights will not be invalidated due to the existenceof prior art or otherwise held unenforceable. See “Item 4 – Information on theCompany, Business Overview - Legal Proceedings.”

 

*The Company’s acquisition strategy involves anumber of risks.*

 

In order to assist in the achievement of growth, NovAtel continues toseek acquisition opportunities to complement its existing businesses. NovAtelcannot be certain that it will be able to identify suitable acquisitioncandidates available for sale at reasonable prices, to consummate anyacquisition, or to integrate any acquired business into its operationssuccessfully. Acquisitions may involve a number of special risks, circumstancesor legal liabilities, some or all of which may have a material adverse effecton NovAtel’s business, results of operations and financial condition.Acquisitions may also result in potentially dilutive issuances of equitysecurities. When evaluating an acquisition opportunity, NovAtel cannot becertain that it has correctly identified and managed the risks and costsinherent in the business that it is acquiring.

 

From time to time, NovAtel engages in discussions and activities withrespect to possible acquisitions. At any given time, discussions and activitiescan be in process on a number of initiatives, each at different stages ofdevelopment. While at the present time NovAtel has no binding agreement orcommitment to enter into any such transaction, in normal course, from time totime, it pursues potential acquisitions. NovAtel can provide no assurance thatany potential transaction will be successfully completed, and, if completed,that the business acquired will be successfully integrated into NovAtel’soperations. The failure of NovAtel to manage its acquisition strategy

 

16

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successfully could have a material adverse effect on NovAtel’sbusiness, results of operations and financial condition.

 

*The Company may be unable to effectivelyintegrate CMC Electronics’ non-aviation L1 GPS OEM product line.*

 

On May 14, 2003, NovAtel acquired CMC Electronics’ non-aviation L1 GPSOEM product line. The new product line extends the Company’s currenthigh-performance, upgradeable L1 and L1/L2 product line into the mid-level L1market which increases NovAtel’s total addressable market in core segments andalso creates entry points into new vertical markets, such as timing and marine.

 

If NovAtel does not effectively integrate the product development,marketing, production and the distribution of CMC Electronics’ non-aviation L1GPS OEM product line, the Company’s business, financial condition and resultsof operations could be adversely affected.

 

*The products and services provided by theCompany could expose the Company to product liability and other claims.*

 

There is a risk that NovAtel’s products and services may not perform upto expectations. While NovAtel contractually limits its liability for damagesarising from its provision of services, there can be no assurance that theywill be enforceable in all circumstances or in all jurisdictions. Furthermore,litigation, regardless of contractual limitations, could result in substantialcost to NovAtel, divert management’s attention and resources from NovAtel’soperations and result in negative publicity that may impair its ongoingmarketing efforts. Although NovAtel has general liability insurance, there isno assurance that this insurance will cover the claims or that the claims willnot exceed the insurance limit under its current policies.

 

*The Company’s business may be adverselyaffected by risks associated with international operations.*

 

NovAtel derives a significant portion of its revenues frominternational sales. NovAtel plans to continue to expand its internationalsales and marketing efforts. There are a number of risks inherent in NovAtel’sinternational business activities, including unexpected changes in Canadian,United States or other government policies concerning the import and export ofgoods, services and technology and other regulatory requirements, tariffs andother trade barriers, costs and risks of localising products for foreigncountries, higher credit risks, potentially adverse tax consequences, limits onrepatriation of earnings and the burdens of complying with a wide variety offoreign laws. Fluctuations in currency exchange rates could materiallyadversely affect sales denominated in countries other than the Canadian dollarand cause a reduction in revenues derived from sales in a particular country.The financial stability of foreign markets could also affect the Company’sinternational sales. There can be no assurance that such factors will notmaterially adversely affect the revenues from NovAtel’s future internationalsales and, consequently, its results of operations. In addition, revenues thatNovAtel earns abroad may be subject to taxation by more than one jurisdiction,which could materially adversely affect its earnings. Furthermore, in certainforeign markets, there may be a reluctance to purchase products based on GPStechnology, given the control of GPS by the U.S. Government. Each of thesefactors could have an adverse effect on NovAtel’s business, financial conditionand results of operations.  See “Item 4– Information on the Company, Business Overview - Sales, Marketing andDistribution.”

 

*The adoption of new technologies to replaceGPS could adversely affect the Company’s business.*

 

The Company operates in a highly technical market. Technology isconstantly advancing and changing to meet new demands. NovAtel is unable todetermine if GPS will be essential in the future due to unpredictable advancesin technology. There is a risk that GPS may be replaced with entirely newtechnologies and products which are not foreseeable at this time.

 

*Competition and increased industryconsolidation could adversely affect the Company’s business, financialcondition and results of operation.*

 

The GPS industry has been going through a consolidation phase over thepast several years. A number of GPS companies have been selecting strategicpartners to merge, acquire or form joint businesses in an effort to remain costcompetitive and meet customer requirements. The Company expects that thisconsolidation phase will continue for the foreseeable future resulting infewer, but larger companies. Industry consolidation, by creating stronger

 

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and larger potential competitors, could have a material adverse effecton the Company’s business, financial condition and results of operations. See“Item 4 – Information on the Company, Business Overview – Competition.”

 

*The Company is subject to exchange ratefluctuations.*

 

Over 95% of NovAtel’s revenues have been, and are likely to continue tobe, realized in currencies other than the Canadian dollar, principally the U.S.dollar. A significant portion of NovAtels’ expenses, however, will be incurredin Canadian dollars. Accordingly, fluctuations in the exchange rates betweenthe U.S. dollar and other foreign currencies and the Canadian dollar could havea material adverse effect on NovAtel’s revenues and its results fromoperations. If the Canadian dollar increases in value relative to the U.S.dollar, NovAtel’s reported Canadian dollar revenues and net income may bematerially and adversely affected. NovAtel uses forward foreign currencycontracts to reduce its exposure to fluctuations in the U.S. dollar. There canbe no assurance that NovAtel will be successful in such hedging activities.

 

*A disruption of the GPS satellite network ongovernmental regulation of this network or GPS products could impair theviability of the Company’s business.*

 

The Company’s products rely on signals from GPS satellites and to alesser extent GLONASS satellites. GPS satellites and their ground supportsystems are complex electronic systems subject to electronic and mechanicalfailures and possible sabotage. There are currently 28 usable satellites, fourmore than the design requirement. The satellites have a limited design life ofbetween seven and 11 years and the satellites are also subject to damage by thehostile space environment in which they operate. The repair of damaged ormalfunctioning satellites is nearly impossible. If a significant number ofsatellites were to become inoperable, there could be a substantial delay beforethey are replaced with new satellites. A reduction in the number of operatingsatellites would impair the current usefulness of the GPS system or the growthof current and additional market opportunities, which, in either case, wouldadversely affect the Company’s business, financial condition and the results ofoperations. Spare satellites have been launched to address these concerns.There can be no assurance that the U.S. Government will remain committed to theoperation and maintenance of GPS satellites over a long period of time, or thatthe policies of the U.S. Government for the use of GPS without charge willremain unchanged.

 

Prior to May 2000, the accuracy of GPS was reduced by the distortion ofGPS signals as a result of selective availability (“SA”), which was controlledby the U.S. Department of Defense. SA was the activated, intentionalsystem-wide degradation of stand alone GPS accuracy from approximately 25metres to approximately 100 metres. The Department of Defense implemented SA inorder to deny hostile forces accurate position, time and velocity informationsupplied by GPS. In certain military applications, classified devices areutilized to decode the SA degradation and return accuracies to their originallevels. NovAtel has to date been able to design products that will reduce thedegradation that can be caused by SA. Although the U.S. Government discontinuedthe 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 useof GPS. These actions could include various methods of degrading the system,rendering it inoperable or the re-implementation of SA by the U.S. Departmentof Defense in times of military action. There can be no assurances that NovAtelwould be able to design products to compensate for these further actions. Inaddition, to protect national security interests, various U.S. Governmentagencies have indicated their intention to limit or prohibit the use oftechniques which compensate for SA and such limitations or prohibitions couldhave a material adverse effect on the Company’s business, financial conditionand results of operations. Certain European government organizations haveexpressed concern regarding the susceptibility of GPS equipment to intentionalor

 

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inadvertent signal interference. Such concern could translate intoreduced demand for GPS products in certain geographic regions.

 

The European Community and European Space Agency have completed plansand are in the process of launching full-scale development of Galileo. NovAtelexpects to be involved in Galileo receiver development activities in thefuture, through continuing support from the Canadian Space Agency. There can beno assurance that NovAtel will be able to design products compatible withGalileo or that external funding will be obtained for such work.

 

*The Company derives a substantial portion ofits revenues from the aviation industry and factors that adversely affect theaviation industry generally could adversely affect the Company’s financial conditionand results of operations.*

 

NovAtel derives revenue from the Aerospace and Defence market sector, asubstantial portion of which has been derived from sales to the ground andairborne aviation industry. In the past 30 months, the aviation industry hasexperienced an economic slow down in response to activities arising from theevents of September 11, 2001 in the United States. In addition, as ofDecember 31, 2003, NovAtel deferred $2.6 million of costs related to thedevelopment of a certified aviation GPS receiver. A protracted downturn in theaviation industry could result in a material adverse effect on the Company’srevenue from this market, NovAtel’s ability to recover the deferred developmentcosts, and its financial condition and results of operations.

 

*The Company may be unable to utilize certaintax deductions and investment tax credits, which could adversely affect theCompany’s results of operation.*

 

The Company has not recorded a provision for income taxes in Canada,other than for Canadian federal large corporations tax, due to previouslyincurred losses, credits and costs. As of December 31, 2003, losses,investment tax credits, depreciation and research and development costs areavailable to reduce future taxable income and taxes payable in Canada. TheCompany has determined that the acquisition of a majority of its Common Sharesby CMC Electronics in 1998, BAE SYSTEMS p.l.c.’s acquisition of the majority ofthe common shares of CMC Electronics in November 1999 and ONCAP’s acquisitionof the majority of the common shares of CMC Electronics in April 2001 eachconstitute an acquisition of control of the Company for Canadian income taxpurposes. Accordingly, the availability of certain of the Company’s Canadianincome tax losses, research and development costs, depreciation deductible fortax purposes and investment tax credits may be subject to limitation. Theultimate availability and amount of these losses, credits and costs may bedependent upon future Canada Customs and Revenue Agency audits.

 

*The Company’s subject to pending litigationand administrative proceedings.*

 

NovAtel is currently subject to certain legal and administrativeproceedings. NovAtel believes that it has meritorious defences and claims withrespect to these matters. There can be no assurance, however, that NovAtel willresolve these proceedings without paying damages or assessments. Any resolutionof these legal and administrative proceedings which involves a judgment orfindings against NovAtel could have a material adverse effect on the business,financial condition and results of operations of NovAtel. See “Item 4 -  Information on the Company, BusinessOverview - Legal Proceedings.”

 

*The reallocation of radio frequency bandsused by GPS technology or other interference with the reception of GPS signalscould 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 ITU. The FCC and IndustryCanada are responsible for the assignment of spectrum for non-government use inthe 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 causeinterference with the reception of GPS signals and may materially and adverselyaffect the utility and reliability of NovAtel’s products, which would, in turn,have a material adverse effect on its business, financial condition and resultsof operations. In addition, emissions from mobile satellite service and otherequipment operating in adjacent frequency bands or inband may materially andadversely affect the utility and reliability of NovAtel’s products, which couldresult in a material adverse effect on the Company’s business, financialcondition and results of operations.

 

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On May 11, 2000, the FCC issued a Notice of Proposed Rulemaking thatproposed rules for the operation of Ultra Wideband (“UWB”) radio devices on anunlicensed basis in the frequency bands allocated to GPS. A coalition ofcompanies and trade associates, including various airline companies, the AirTransport Association of America and the U.S. GPS Industry Council, submitted aproposal for the regulation of UWB devices to the FCC in November 2001. OnFebruary 14, 2002, the FCC approved the commercial use of UWB technologyat conservative power limits. The current standards of operation set limits onwhat radio frequencies UWB devices can be operating in, including avoidingthose frequencies used by the military and companies that sell globalpositioning services. In February 2003, the FCC upheld its ruling to allowthe production of UWB devices with “conservative” power limits. This may leadthe way for a proliferation of personal wireless devices that would bemanufactured and sold on the open market without licence requirements. Norestrictions on the density of these devices will be defined. Therefore, it ispossible that the GPS noise floor could be contaminated and rise by as much as10 times the current level when operating in an area with a high density ofoperating UWB devices. This degradation of the GPS signal-to-noise ratio wouldadversely affect the performance of the receivers. NovAtel is adding additionaldigital signal processing algorithms to its next generation GPS receivers toenable tracking of weak GPS signals or continue to operate in high noise floorenvironments. If the FCC expands or changes the current UWB standards, UWBdevices might cause interference with the reception of GPS signals. Suchinterference could reduce demand for GPS products in the future. Any resultingchange in market demand for GPS products could have a material adverse effecton the Company’s business, financial condition and results of operations.

 

*The Company could become subject to theclaims of third party creditors of Mezure, Inc.*

 

The Company owns a 70% equity interest in Mezure, a U.S. residentcompany that had been developing a GPS, wireless communication andInternet-based product for deformation monitoring of manmade and naturalstructures.  During the latter part of2002, the Company discontinued its financial support of Mezure. On April 8,2003, the shareholders of Mezure voted unanimously to proceed with a Chapter 7bankruptcy, which was filed on June 25, 2003. On September 24, 2003an Order Approving Trustee’s Account, Discharging Trustee and Closing Estatewas entered into the docket of the United States Bankruptcy Court, DistrictOregon (Portland).

 

While Mezure operated as a separate company, Mezure’s third partycreditors could potentially attempt to satisfy their claims with Mezure bypursuing these claims against the Company. Although NovAtel believes that theseclaims would not be valid, NovAtel has no assurance that the ultimate liabilitywith respect to the resolution of these actions would not adversely affectNovAtel’s financial position or results of operations.

 

*CMC Electronics, through its ownership of amajority of the Company’s outstanding common stock, can greatly influencecontrol of the Company.*

 

As of April 21, 2004,  CMCElectronics owned approximately 56% of NovAtel’s outstanding Common Shares. Asa result, CMC Electronics is able to exercise significant influence overmanagement of the business, including such matters as budgets, profitability,acquisitions and development of new markets. In addition, the controllinginterest by CMC Electronics may have an effect on public securities marketissues such as analyst coverage and stock price.

 

In April 2001, an investor group led by ONCAP, which is itselfcontrolled by Onex Corporation, acquired control of CMC Electronics. ONCAP and,indirectly, Onex Corporation, is able to exercise significant influence overCMC Electronics, and therefore, the Company.

 

CMC Electronics, acting alone, is able to exercise significantinfluence over all matters requiring shareholder approval, including theelection of directors and approval of significant corporate transactions. Suchconcentration of ownership may also have the effect of delaying or preventing achange in control of the Company. See “Item 7 – Major Shareholders and RelatedParty Transactions.”

 

*The Company may be unable to properly managethe discontinuation of its older products.*

 

As NovAtel develops newer products, many of its older products willreach their end of life. As NovAtel discontinues the manufacturing and sale ofthese older products, it must manage the liquidation of inventory, suppliercommitments and customer expectations. If NovAtel is unable to properly managethe discontinuation of

 

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these older products, it could have a material adverse effect on itsbusiness, financial condition and results of operations.

 

*The Company's fomer use of Arthur AndersonLLP as its independent public accountant may pose risks to the Company and willlimit the ability of investors to seek potential recoveries from ArthurAnderson LLP related to their work.*

 

In connection with the filing of this annual report, the Company wouldnormally be required to obtain written consent from Arthur Anderson LLP,independent auditors, to the incorporation of their audit report on theCompany’s consolidated financial statements for the year ended December 31,2001 and to file that consent with the Securities and Exchange Commission.  However, on June 3, 2002, Arthur AndersonLLP, which was an Ontario limited liability partnership, separate from ArthurAnderson LLP in the United States, ceased to practice public accounting inCanada.  As a consequence,representatives of Arthur Anderson LLP are no longer available to provideconsent in connection with the filing of this annual report.  The Company is filing this annual report inreliance on a Securities and Exchange Commission notice which relives an issuerfrom the obligation to obtain Arthur Anderson LLP’s consent in certaincases.  As a result of Arthur AndersonLLP not having provided their consent, shareholders of the Company will nothave the statutory right of action for damages against Arthur Anderson LLPprescribed by applicable securities legislation with respect to their auditreport.  Furthermore, Arthur AndersonLLP may not possess sufficient assets to satisfy any claims that may arise outof Arthur Anderson LLP’s audit of the Company’s financial statements.

 

**Item 4****              Information on theCompany**

 

**A.****                                    Historyand Development of the Company**

 

The Company was incorporated under the *CanadaBusiness Corporations Act* (“CBCA”) on October 17, 1978 as 89006Canada Ltd. The Company was extra provincially registered in Alberta onNovember 20, 1979 and remains active in this jurisdiction as of the dateof this Annual Report. In July 1979, the Company’s name was changed toWestech Systems Ltd. and in April of 1983 was changed to NovAtelCommunications Ltd. In October 1996, the Company changed its name toNovAtel Inc. and in November 1996, the Company amended its articles tosplit its then outstanding common shares from 4 million to 5.2 million andamended its articles to authorize the stated capital of the Company to includean unlimited number of Common Shares and First Preference Shares.

 

From the time of the Company’s formation until the mid-1990s, NovAtel’sbusiness was focused on the development of various communication businessesbased on wireless technology. In 1989, NovAtel acquired NorstarInstruments Ltd., a developer of GPS technology.

 

Between 1992 and 1996, NovAtel divested its non-GPS businesses in aseries of transactions. Since that time, NovAtel’s business has been focusedsolely on high-precision GPS technology and products.

 

In 1997, NovAtel completed an initial public offering of its CommonShares in the United States and was concurrently listed on NASDAQ with theoffering under the symbol “NGPS”.

 

On April 17, 1998, pursuant to requests by its customers tointegrate GPS technology into its aviation systems, CMC Electronics acquired58.3% of the then outstanding Common Shares.

 

In 1999, Point was established to develop advanced measurementsolutions that incorporate NovAtel’s GPS technology, primarily for Sokkia’ssurveying 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 inMezure, Inc. (“Mezure”), a company that had been developing a GPS,wireless communication and Internet-based product for deformation monitoring ofman-made and natural structures. The business operations of Mezure werediscontinued in 2003.  See “Item 5 – Operating and FinancialReview and Prospects, Operating Results— Overview.”

 

In 2002, NovAtel and Leica Geosystems AG (“Leica Geosystems”)formed a strategic partnership, under which NovAtel would develop and supplyGPS-based products and technology to Leica Geosystems. See “Item 4 –Information on the Company, Business Overview — StrategicPartnerships — Leica Geosystems.”

 

In May 2003, NovAtel acquired CMC Electronics’ non-aviation L1 GPSOEM 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 would develop and supply GPS-based products and technologyto CMC Electronics. See “Item 4 – Information on the Company,Business Overview — Strategic Partnerships — CMC Electronics.”

 

The Company’s principal capital expenditures over the last three yearswere $2.7 million in 2003, $1.2 million in 2002 and $937,000 in 2001 and wereprimarily for equipment for research and development, computer equipment andsoftware and patents/trademarks.  TheCompany expects the capital expenditures of approximately $2.6 million in 2004to be internally financed.

 

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NovAtel’s Common Shares are listed on NASDAQ under the symbol“NGPS.”  The Company’s head andregistered offices are located at 1120 - 68th Avenue N.E., Calgary, Alberta,T2E 8S5, and its website is located at www.novatel.com.  The information on the website is notincorporated by reference into this Annual Report.

 

**B.****                                    BusinessOverview**

 

**General**

 

NovAtel designs, markets and sells high-precision GPS and otherpositioning components and sub-systems used in a wide variety of commercialapplications principally in the aviation, geomatics (surveying and mapping),mining, precision agriculture, marine and defence industries. NovAtel’ssolutions combine hardware, such as receivers and antennas, with software toenable its customers to fully integrate the Company’s high-precision GPStechnology into their respective products and systems. The Company is focusedon supplying core high-precision positioning technology to OEMs and systemintegrators who build systems for various end market applications.

 

Management of the Company believes the primary customer benefits ofNovAtel’s core technology solutions include:

 

•                                          high-precisionpositioning with accuracy to the sub centimetre level;

 

•                                          high-reliabilityand robust performance, even in challenging environments;

 

•                                          cost-effectivecomponents and sub-systems to enable broad market application;

 

•                                          small,low-power designs for easy system integration; and

 

•                                          flexibilityto integrate customer software solutions enabling the Company’s customers toreduce system costs and accelerate time to market.

 

The availability of reliable and cost-effective high-precisionpositioning technology has resulted in an expanding number of commercialapplications for the technology. Examples of applications for this technologyinclude enabling commercial aircraft to use direct point-to-point flight linesresulting in reduced operating cost, farmers to equip their tractors withmachine controlled precision guidance systems, which typically results in loweroperating costs and higher crop yields, and surveyors to use GPS-basedinstruments to survey sites more rapidly and accurately.

 

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**Industry Overview**

 

***SatelliteNavigation Systems***

 

Location determination has become afundamental requirement for many consumer and commercial activities. GPS is theworld’s most widely used and accepted technology for precise locationdetermination.

 

Development of the GPS system began with thelaunch of the first GPS satellite in 1978. The GPS system was founded andcontinues to be funded and controlled by the U.S. Department of Defense. Thepurpose of the GPS system is to provide precise location and time determinationfor military and civilian applications. The GPS system can currently beaccessed free of charge and provides positioning data 24 hours a day worldwide.

 

The survey industry was the first commercialmarket to make widespread use of the GPS system. Adoption began in the late1980’s and grew significantly in the early 1990’s as new technologies emergedto make the applications more cost-effective. Since that time, use of thesystem has spread to a variety of commercial and consumer applications includingnavigation, tracking, mapping and monitoring.

 

The GPS system is based on signals presentlyprovided by a constellation of 28 orbiting satellites. The system of satellitescurrently broadcasts on two frequencies, L1, which is available for civilian use,and L2 which is encrypted and primarily used for military applications. GPSpositioning is based on a triangulation technique that precisely measures thedistance from a GPS receiver to satellites which continuously transmitprecisely timed radio signals. GPS receivers calculate the distance bymeasuring the travel time of the satellite signal. Signals from four satellitesare typically required to compute the three dimensional position of the GPSreceiver. Under normal operating conditions, a receiver is able to receivesignals from six to eight satellites at any point in time.

 

GLONASS is a similar positioning systemestablished by the former Soviet Union and controlled and operated by theRussian government. The GLONASS system was introduced in 1982 with the launchof its first satellite and currently consists of ten active satellites.Industry participants generally view GPS as being superior to GLONASS primarilyas a result of the greater number of active satellites.

 

A third system, called Galileo, is currentlybeing developed by the European Space Agency and is scheduled to becomeoperational in 2008. According to the report entitled “GPS World Markets”prepared by AlliedBusiness Intelligence Inc., a leading industry research firm,and published in the fourth quarter of 2003 (the Allied Report”), the EuropeanUnion is planning to spend U.S.$3.6 billion over the next five years to deploythe Galileo system. The development of alternative satellite positioningsystems is a benefit to providers of global positioning technology, such as theCompany, since products can be designed to use the signals from multiplesystems resulting in greater accuracy and reliability.

 

***GPSMarket Overview***

 

The market for positioning technology hasexperienced significant growth since the original launch of the first GPSsatellites. According to the Allied Report, revenue from global GPS systems wasestimated to be approximately U.S.$13.0 billion in 2003. According to thereport entitled “North American GPS Equipment Markets (A601-22)” prepared byFrost & Sullivan, a leading industry research firm, and published inDecember 2003 (the Frost & Sullivan Report”), revenue from the NorthAmerican GPS market was approximately U.S.$3.5 billion in 2003 and is expectedto grow to U.S.$5.7 billion in 2006, an 18% compounded annual growth rate.

 

According to the Frost & Sullivan Report,total unit sales in the North American market are expected to grow from 2.9million in 2003 to 11.4 million in 2010 for a compounded annual growth rate of approximately22%. The following chart estimates total North American GPS units shipped or tobe shipped for the periods indicated.

 

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**TotalGPS Units Shipped**

**(NorthAmerica: 2003 to 2010)**

 

 

Source: Frost & Sullivan Report.

 

***GPSMarket Segmentation***

 

The overall GPS market can be divided intotwo primary segments, lower precision consumer markets and higher precisioncommercial markets. Management of the Company estimates NovAtel’s current totaladdressable annual market for high-precision positioning component technologiesand sub-systems is approximately U.S.$300 million to U.S.$400 million.

 

The following chart illustrates the view ofmanagement of the Company in respect of the relative accuracy and reliabilityneeds of the various end-markets. Accuracy refers to how precise thepositioning information is required to be in an application. Reliability refersto how important the continuity of positioning is to an application.

 

 

Management of the Company believes that alimited number of highly specialized GPS companies, including NovAtel, have thecapability to develop and produce technology that can be used in higherprecision applications, largely as a result of proprietary and patentedtechnology.

 

As a result of the high degree ofspecialization required, commercial high-precision GPS component technology istypically sold at significantly higher prices, as illustrated by the followingchart, which typically results in higher gross margins than lower precision,consumer focused systems.

 

**AverageGPS System Pricing**

**(2003)**

 

 

Source: Frost & Sullivan Report.

 

***Growthin High-Precision GPS***

 

Management of the Company believes thatgrowth in the high precision segment of the GPS market is the result of an expandingnumber of applications which are being driven by technological advancementswith respect to accuracy and reliability and a general reduction in the cost ofperipheral component technology.

 

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*TechnologicalAdvancements*

 

Since the introduction of GPS technology,there have been a number of technological innovations that have significantlyincreased the accuracy and reliability of GPS products. Differential GPS, oneof the first techniques developed to improve performance, can be used toachieve position accuracies down to a few millimetres. With this technique onereceiver, typically called a base station, is precisely positioned on a knownlocation and calculates a variety of measurement errors. This differentialcorrection data is then broadcast via communication links to other receivers,that can be static or in motion, which receive the differential corrections andapply them to provide precise locations. Using this technique, virtually allsignificant positioning errors can be eliminated and the resulting differentialpositions can achieve superior accuracy. Limitations of early differential GPStechnology included the cost, reliability and form factor of the systems.

 

Differential GPS was originally developedbased on single-frequency receivers which used only the civilian signal. Thefirst commercial dual frequency GPS system, which makes use of both the L1frequency and the L2 frequency, was introduced in the mid 1980s. Using bothsignals allows for significant reductions in the time required to calculate aprecise position and an increase in the working range of GPS devices.

 

Other technologies have been developed toaddress specific issues or applications. For example, in 1993 NovAtelintroduced Narrow Correlator tracking technology which significantly reducedthe effects of multipath interference which is caused by the reflection ofmultiple GPS signals. This innovation has allowed for a significant increase inaccuracy. Comparable versions of this technology have been broadly adopted bythe industry.

 

Another innovation was on-the-flyinitialization which enabled differential GPS to be applied to receivers inmotion while maintaining accuracy to within a few centimetres. This technologybroadened the application of GPS to unmanned and automated vehicles.

 

NovAtel has introduced numerous additional technological innovationsover the past ten years. See “Item 4 – Information on the Company,Business Overview – Technology.” These and other technological innovations haveenabled the significant expansion of applications for high precision GPSpositioning solutions.

 

*Continued Reductionin the Cost of Peripheral Component Technology*

 

High-precision GPS component suppliers,including the Company, as well as system integrators have benefited fromsignificant reductions in the cost of peripheral components such asmicroprocessors, memory and wireless communications technology. These savingshave enabled a significant reduction in the overall cost of GPS solutions andhave driven an expansion in the number of applications using the technology.Management of the Company believes that this trend will continue to promotegrowth for the high precision segment of the GPS industry.

 

***OtherIndustry Trends***

 

In addition to the growth trends set forthabove, management of the Company believes that growth of the high precisionsegment will be driven by the outsourcing of core GPS technology by OEMs andsystem integrators and the development of complementary technologies that willenhance the performance and functionality of existing GPS technology.

 

*Outsourcing of CoreGPS Technology by OEMs and System Integrators*

 

A number of NovAtel’s key competitors and OEMcustomers have historically developed core GPS technology in-house or haveacquired stand alone GPS component vendors. Management of the Company believesthere is currently a trend among OEMs and system integrators to outsource coreGPS technology to vendors such as NovAtel. By doing so, these companies areattempting to re focus on their core competencies, developing custom systemsfor end market applications, which may enable them to make better use of theircapital and other resources. Management of the Company also believes it isbecoming increasingly difficult for these companies to provide cost effectiveand technically advanced precision GPS receivers relative to GPS focusedcompanies, such as NovAtel, that have strong patent positions, substantialcontinuous GPS development and the ability to leverage their receivertechnology across multiple applications.

 

*Development ofComplementary Technology*

 

Management of the Company believes that thedevelopment of complementary technology that enhances or augments the accuracyand reliability of the core GPS technology will enable a multitude of newapplications for the technology and drive further growth. For example, theintegration of inertial technology with GPS enables the combined system toprovide full position and velocity information while the receiver passes throughareas of signal blockage. There are a number of other complementarytechnologies that are expected to cause an acceleration in the number ofapplications using the technology.

 

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**Barriers to Entry**

 

Management of the Company believes there aresignificant barriers to entry in the industry, including:

 

•                                          proprietary and patented technology;

 

•                                          scarcity of industry expertise; and

 

•                                          extensive, established relationships withmarket leading customers and partners.

 

**The NovAtel Solution**

 

NovAtel designs, markets and sellshigh-precision GPS and other positioning components and sub-systems used in awide variety of commercial applications principally in the aviation, geomatics(surveying and mapping), mining, precision agriculture, marine and defenceindustries. The NovAtel solution combines hardware, such as receivers andantennas, with software to enable its customers to fully integrate theCompany’s GPS technology into their respective products and systems.

 

The primary features of the NovAtel solutioninclude:

 

•                                          high-precision positioning with accuracy tothe sub centimetre level;

 

•                                          high-reliability and robust performance, evenin challenging environments;

 

•                                          cost-effective components and sub-systems toenable broad market application;

 

•                                          small, low-power designs for easy systemintegration; and

 

•                                          flexibility to integrate customer softwaresolutions enabling the Company’s customers to reduce system costs andaccelerate time to market.

 

One of the most critical components of theNovAtel solution is the Company’s product line of GPS receivers. The receiveris the core technology which receives, processes and resolves the GPS signals.The majority of NovAtel’s proprietary technology is incorporated into NovAtel’sreceivers and most of the research and development efforts of the Company aredirected towards improving their accuracy, reliability and cost effectiveness.These receivers are highly flexible and configurable with software for specificapplications and that enable the Company and its customers to leverage alimited number of hardware platforms into a wide variety of end-marketapplications.

 

**Mission and Strategy**

 

NovAtel’s goal is to become the leadingprovider of high-precision global positioning component technologies andsub-systems. In order to achieve this goal, NovAtel is focused on the followinggrowth strategies:

 

•                                          continue to invest in high-precision globalpositioning technology;

 

•                                          partner with and/or acquire enabling andcomplementary technologies;

 

•                                          continue to build market share with largeOEMs and emerging system integrators;

 

•                                          attract and retain key employees; and

 

•                                          continue to generate strong revenue growthwhile improving profitability and capital efficiency.

 

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*Continue to Investin High-Precision Global Positioning Technology*

 

The Company is committed to continualimprovement of the accuracy, reliability, cost and quality of its technology.To achieve these objectives, the Company intends to invest in research anddevelopment primarily in the following areas: (i) core GPS hardware andsoftware; (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/orAcquire Enabling and Complementary Technologies*

 

NovAtel continually seeks to developstrategic partnerships with industry leaders of enabling and complementarytechnologies, such as inertial systems, guidance technology and wirelesscommunications. The Company also expects to continue to pursue selectivestrategic acquisitions that are complementary to current product offerings,expand its market opportunity or broaden its customer base.

 

*Continue to BuildMarket Share with Large OEMs and Emerging System Integrators*

 

The Company plans to continue to build marketshare and enhance its growth through leveraging its OEM business model.Furthermore, the Company expects to continue to develop relationships withemerging system integrators through its growing international dealer network.An important element of this strategy is to continue to work with OEMs andsystem integrators in a highly collaborative fashion and to provide them withan exceptional level of customer support.

 

*Attract and RetainKey Employees*

 

NovAtel has assembled a talented andexperienced team with proven expertise in the GPS industry. As the Companyexperiences growth, it intends to hire employees with demonstrated experienceand ability, with the objective of increasing the number of highly productiveteams. Potential employees are offered the opportunity to work for an industryleader on challenging assignments in their area of core competency with accessto state-of-the-art development resources. The Company also maintains acompetitive performance based compensation program which is designed to attractand retain employees.

 

*Continue to GenerateStrong Revenue Growth while Improving Profitability and Capital Efficiency*

 

The Company intends to continue to pursueprofitable growth opportunities through its focus on return on investment. Keyelements of this strategy include: (i) maintaining selling prices and grossmargins by pursuing value added high-precision global positioning applications;(ii) improving capital efficiency through outsourcing select businessactivities, manufacturing services and certain design functions; and (iii)investing in initiatives to improve efficiency and reduce costs whilecontinuing to deliver superior customer service.

 

**Products**

 

NovAtel offers a broad range ofhigh-precision GPS and other positioning components and sub-systems. TheCompany’s products combine specialized hardware with proprietary software toenable its customers to fully integrate the Company’s technology into theirrespective products and systems. NovAtel’s products include GPS receivers,antennas, proprietary software and augmented GPS products.

 

A critical component of NovAtel’s productsare its GPS receivers which process the satellite signals received through theantenna to determine precise positions. A key advantage of NovAtel’s GPSreceivers is that they are highly flexible and configurable allowing the samereceiver to be used across a broad range of applications. For example, NovAtelcan install different software on the same type of receiver to meet thespecific requirements of customers. This benefits NovAtel through reduced unitcosts, higher production rates, focused research and development efforts and astreamlined product line. NovAtel’s customers also benefit in that they areable to upgrade their systems on a cost-effective basis by installing newsoftware as opposed to having to replace the entire receiver. NovAtel’s GPSreceivers are also capable of storing and running customer applications,enabling NovAtel’s customers to realize cost-efficiencies and accelerated timeto market.

 

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NovAtel offers a range of antennas that arecapable of supporting both single frequency and dual-frequency receivers andmay be incorporated into a broad range of applications, including those whichoperate in dynamic or challenging environments.

 

NovAtel has also developed a range ofproprietary high-precision GPS positioning software that enables theircustomers to achieve accuracies to within a few centimetres, in real-time,while providing a high degree of reliability.

 

NovAtel leverages the components describedabove in its aviation and geomatics product lines as well as offers augmentedGPS products, such as the Black Diamond System. This product integratesthird-party inertial measurement technology with the Company’s GPS technology(receiver, antenna and software) to provide the user with continuous positioningdata even when a GPS signal has been temporarily lost.

 

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The following is a list of NovAtel’s productofferings.

 

 

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The following are the Company’s most popularproducts with a brief explanation of their features and applications.

 

 

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**Markets**

 

Management of the Company believes there are three primary drivers offuture growth in the high-precision global positioning industry:

 

•                                          increasedsales into existing applications in traditional markets;

 

•                                          developmentof new applications in non-traditional markets; and

 

•                                          developmentof new applications in emerging markets.

 

*Increased Sales intoExisting Applications in Traditional Markets*

 

Management of the Company believes sales of existing applications willcontinue to increase in markets that have been traditional users of GPStechnology. Generally, these are markets where GPS has either replaced oldertechnology, such as the marine industry, or markets where GPS technology wasadopted at an early stage largely because the benefits of GPS outweighed pricesensitivity, such as the survey and mapping market.

 

The Company expects these markets to continue to expand for a number ofreasons including:

 

•                                          continuedreductions in the price of GPS technology are expected to make existingapplications more cost-effective for a broader range of users;

 

•                                          developmentof new technology is expected to enhance the functionality of existingapplications; and

 

•                                          outsourcingof core GPS technology by OEMs and system integrators is expected to increase.

 

Selected examples of growth applications in traditional markets includesurveying and mapping, aviation and air traffic control ground infrastructureand commercial marine.

 

*Development of NewApplications in Non-Traditional Markets*

 

New applications continue to emerge within established markets that todate have not been traditional users of GPS technology. The growth in newapplications is largely being driven by OEMs and system integrators whoare developing new products that have become commercially viable as a result oftechnological improvements, cost reductions and the development ofcomplementary technology.

 

Selected examples of growth applications in non-traditional marketsinclude precision agriculture and mining and construction machine control.

 

*Development of NewApplications in Emerging Markets*

 

New applications are also being developed within markets that have beencreated or transformed as a result of the evolution of low-cost, high-precisionpositioning technology. These markets represent a diverse range of significantgrowth opportunities for the Company.

 

Selected examples of applications in emerging markets include unmannedair vehicles, airborne weapons training and precision asset tracking andguidance.

 

**Customers**

 

NovAtel competes in the high-precision global positioning market byselling components and sub-systems to leading OEMs and system integratorsin multiple industries. During the past two years NovAtel has sold its productsto over 350 customers worldwide, including some of the leading companies intheir respective sectors.

 

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For the fiscal year ended December 31, 2003, NovAtel’s 10 largestcustomers represented 59% of revenue. With the beginning of commercialshipments under agreements between the Company and Leica Geosystems, NovAtelexpects Leica Geosystems to become one of the Company’s largest customers. See“Item 4 – Information on the Company, Business Overview - StrategicPartnerships — Leica Geosystems” and “Item 3 – Key Information, RiskFactors — Dependence on Key Customers.”

 

Sales to key customers (outside of Point/Sokkia), BEELINE Technologiesand Shenzhen Shenyuan, accounted for 10.9%, and nil%, respectively, of theCompany’s total revenues in 2003.  Incomparison, sales to BEELINE Technologies and Shenzhen Shenyuan accounted for10.4% and 11.4%, respectively, of the Company’s total revenues in 2002.

 

The Company’s proportionate share of sales by Point accounted for 15.8%of total revenues in 2003 compared to 14.0% of total revenues in 2002.

 

In 2003, the Company derived 50% of its revenues in the United States,22% in Asia/Australia, 20% in Europe, 7% in Canada and 1% in other parts of theworld.

 

The Company divides its customers into three primary categories,Special Applications, Geomatics and Aerospace and Defence. The following chartsets out the consolidated revenues of the Company by the categories indicatedfor the fiscal years ended December 31, 2001, 2002 and 2003.

 

**NovAtelRevenues by Category**

**(2001to 2003)**

 

 

***SpecialApplications***

 

Special Applications is the largest and fastest growing category,contributing $22.6 million or 58% of NovAtel’s revenues for the fiscal yearended December 31, 2003. This category has experienced a 38% compoundedannual growth rate from 2001 to 2003. In addition, Special Applicationsservices emerging end markets for global positioning technology. This group’scustomers 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 developreplacement and transformative products for their end-markets, such as LeicaGeosystems in the survey market or AGCO in precision agriculture;

 

•                                          smalland innovative system integrators that have developed new markets throughcreative integration of NovAtel’s products with other technology, such asSportvision in sports media technology; and

 

•                                          dealersand distributors that service hundreds of smaller companies that are developinginnovative solutions for existing and new markets.

 

NovAtel’s dealers and distributors are critical in extending the marketreach of the Company. In many cases, these organizations make the first salesto small system integrators that grow to become significant customers throughthe development of innovative product offerings. This was the case for BEELINETechnologies which is now one of NovAtel’s largest customers.

 

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***Geomatics***

 

Geomatics (surveying and mapping) was one of the first commercialapplications of high-precision GPS technology and is currently awell-established market. The Geomatics category contributed $8.4 million or 22%of NovAtel’s revenues for the fiscal year ended December 31, 2003.NovAtel’s Geomatics category consists primarily of Point, the Company’s jointventure with Sokkia. Point provides Sokkia’s global marketing organization withadvanced measurement solutions for the fields of surveying, mapping, geographicinformation systems, construction and construction machine control. Sokkia’sdistribution system includes more than 25 subsidiaries and additionalrepresentatives around the world, each having its own dealer network. NovAtel’ssales to Leica Geosystems, although primarily for geomatics applications, arenot included in this category for reporting purposes due to historicalclassification.

 

Given the relative maturity of this market, growth in the sale oftraditional GPS products is expected to be moderate. However, management of theCompany believes that GPS Modernization and the introduction of Galileorepresent significant opportunities for future growth as end-users upgradetheir equipment in order to realize the enhanced performance and efficienciesthat may be achieved through the utilization of the new signals.

 

***Aerospaceand Defence***

 

Aerospace and defence continue to be strong markets for GPS technologyand include some of the most technically demanding applications of NovAtel’sproducts. The Aerospace and Defence category contributed $7.6 million or20% of NovAtel’s sales for the fiscal year ended December 31, 2003.Customers of the Company in this group utilize NovAtel’s high-precision positioningtechnology for critical components in civil air traffic control, flightmanagement systems that enable aircraft to determine their precise position andcertain military applications.

 

The Company’s wide area augmentation system (“WAAS”) receivers are akey component of revenue in this category. The WAAS receivers are an importantpart of the existing ground infrastructure that supports the next generation ofair traffic control for commercial aviation in North America, Europe, Japan andChina. Raytheon Company, the Federal Aviation Administration (“FAA”) and otherleading companies and national aviation organizations around the world haveselected NovAtel as a key supplier for this application primarily because ofNovAtel’s leading technology in this area.

 

Management of the Company believes there are significant opportunitiesfor future growth within the aviation and defence markets. For example, theCompany was recently awarded a sole-source contract by the FAA to develop thenext generation of WAAS receivers in the U.S., delivery of which commenced in2004. Other opportunities for growth include the expected modernization of theGPS system, the introduction of Galileo and the FAA’s announced plans to beginwork on the local area augmentation system (“LAAS”) and multiple other defenceapplications, including unmanned vehicles.

 

The Company is currently working with OEMs and system integrators thathave determined precision GPS technology can be utilized in many militaryapplications such as training, logistics and missile tracking which do notrequire the use of encrypted military GPS technology.

 

 

**Sales, Marketing andDistribution**

 

NovAtel sells, markets and distributes its products through both directand indirect channels in order to maximize market coverage on a cost-effectivebasis. The primary focus for NovAtel’s sales and marketing efforts is on OEMcustomers, strategic relationships and supporting a network of dealers andresellers. The Company has developed its sales and marketing capabilities inanticipation of and in response to customer needs as they arise in its multiplemarkets. The in-house sales and marketing efforts are focused on productmanagement, distribution management, communications and promotions. Each marketreceives specific attention to the needs of its sales and distributionchannels, which are rapidly changing.

 

The Company believes that providing a high level of customer technicalsupport is critical to creating and maintaining strong relationships with theirOEM and system integrator customers. The Company is able to achieve

 

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this level of support by employing a sufficient number of qualifiedengineers and technicians to advise and provide customers with integration andafter-sale support. Due to frequent interaction with customers, theseintegration engineers and support technicians also act as an important sourceof customer information, which can drive product enhancements, new productideas and new business opportunities.

 

**Technology**

 

NovAtel has invested significant funds and resources to become aleading provider of high-precision positioning technology. Since 1992, NovAtelhas provided several major technological innovations to meet the increasinglydemanding needs of the high-precision positioning industry. NovAtel currentlyholds 25 U.S. patents and 32 related foreign patents which expire atvarious dates no earlier than November 28, 2010 and has numerous pendingU.S. and foreign patent applications. Some of the more significant technologydevelopments by the Company are discussed below.

 

*1992 NarrowCorrelator Tracking Technology*

 

NovAtel established itself in the GPS industry through the introductionof its patented Narrow Correlator tracking technology in 1992. NarrowCorrelator tracking allowed NovAtel products to provide positioning accuracy towithin one meter with a single-frequency receiver while significantly reducingthe effects of multipath interference caused by the reflection of multiple GPSsignals. Relative to other GPS technology available at the time, thisinnovation resulted in a five-fold improvement in accuracy forGPS devices.

 

*1994 MultipathElimination Technology (“MET”)*

 

NovAtel continued its technology advancements with the introduction ofMET in 1994. MET expanded upon the Narrow Correlator tracking technology byrefining software algorithms to more effectively filter the effects ofmultipath signal interference. This new technology removed 25% to 50% of theresidual multipath errors.

 

*1995 MultipathEstimating Delay Lock Loop (“MEDLL”)*

 

In 1995, NovAtel introduced MEDLL technology. MEDLL offered a morerigorous approach to the reduction of multipath effects using improvedcircuitry, software control and processing. The MEDLL technology further reducedthe effects of multipath interference by up to 90%.

 

*1995 Real TimeKinematic (“RTK”) Signal Processing Technology*

 

Also in 1995, NovAtel introduced a unique method of applying RTKprocessing to the carrier frequency signals in order to rapidly increase theaccuracy of the computed position from meters to less than 20 centimeters. Thissignal processing method is particularly useful for single frequency GPSreceivers. Previous attempts at using RTK resulted in significant delays beforereaching precision accuracies.

 

*2000 PinwheelTMAperture Coupled Slot Array Technology*

 

In 2000, NovAtel introduced a new antenna utilizing its patent pendingPinwheelTM Aperture Coupled Slot Array technology. Using this technology, theCompany was able to produce a much smaller and lighter antenna than otheravailable antennas on the market without sacrificing either accuracy orreliability.

 

*2000 Pulse ApertureCorrelation (“PAC”) TechnologyTM*

 

Also in 2000, NovAtel introduced its new PACTM technology. Availableexclusively on the Company’s OEM4 product line, PACTM technology implements thelatest digital signal processing techniques to provide superior trackingcapability in the presence of multipath interference. PAC effectively doublesthe accuracy of the Narrow Correlator tracking technology and reducesinterference by up to eight times.

 

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*2002 Model PositionAiding and Position Velocity Filter*

 

In 2002, NovAtel developed a method of increasing the reliability ofGPS position output in very challenging environments through the use of modelposition aiding and position velocity filter techniques. While this technologywas initially developed to meet the needs of a specific application, Managementof the Company believes that it can be applied to a broader range of markets,such as precision agriculture.

 

*2003 GPS andMicro-Electro-Mechanical System (“MEMS”) Integration*

 

The Company has developed software that enables the integration of itsGPS receivers with a MEMS system. This system can maintain an accurate estimateof position and velocity without the use of GPS satellite signals for shortperiods of time. In the absence of GPS satellite signals, a GPS receiver cannotprovide information about the user’s position or velocity if the directline-of-sight between the receiver and the satellites is blocked. Theintegration of GPS and MEMS allows the combined system to provide full positionand velocity information while the receiver passes through areas of signalblockage.

 

**Research andDevelopment**

 

The Company’s technology position is supported by a strong commitmentto research and development. NovAtel has invested heavily in developing GPStechnology, including the design of proprietary software and integratedcircuits for GPS receivers. The Company’s research and development expense was$7.1 million, $5.3 million and $6.6 million in 2003, 2002 and 2001,respectively.

 

In addition, the Company also receives significant amounts of fundingfrom its customers through NRE contracts to conduct research and development ontheir behalf. Typically, NovAtel retains ownership of the intellectual propertydeveloped under these arrangements and is able to exploit such intellectualproperty for its own purposes. The Company’s total engineering expenditures,comprised of internal research and development programs and customer fundedengineering programs, were $10.7 million or 28% of revenue in 2003, $9.4million or 28% of revenue in 2002 and $9.1 million or 32% of revenue in 2001.

 

Often a new product is initially developed for a customer or strategicpartner who is willing to purchase development stage products. The Company hasused feedback from such initial customers as a source of information indesigning 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 suppliersof high-precision positioning component technology which is sold to OEMs andsystem integrators for commercial applications, as well as from OEMs whochoose to develop and produce the component technology in-house.

 

The primary competitors supplying component technology to OEMs andsystem integrators vary by each industry or market served, but generallyinclude 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, companiessuch as CSI Wireless Inc. (Canada) and Furuno MarineElectronics (Japan). While these competitors to NovAtel offerhigh-precision positioning solutions to OEMs, many also develop, produce andmarket products that are sold directly to end-users and are therefore incompetition with the OEMs’ end-products and solutions.

 

The Company works with OEMs in a highly collaborative andcooperative process to provide them with the core technology that becomesintegrated into their end products and solutions. Management of the Companybelieves that the non-competitive nature of its relationships with OEMs isa key differentiator and a competitive advantage for the Company relative toother suppliers.

 

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**StrategicPartnerships**

 

***LeicaGeosystems***

 

The Company entered into a strategic co-operation agreement with LeicaGeosystems on May 1, 2003, to jointly develop new technology for GPS in thehigh-precision geomatics segment. The initial term of the agreement is sevenyears. Under the terms of the agreement, NovAtel has agreed to develop a customversion of existing GPS receivers and other components for Leica Geosystems. InSeptember 2003, pursuant to the strategic co operation agreement, theCompany entered into a supply agreement with Leica Geosystems which sets forththe arrangements under which NovAtel would develop and supply Leica Geosystemswith a custom GPS receiver. In February 2004, Leica Geosystems announcedthe launch of a new surveying system that incorporates NovAtel’s GPS receiverand antenna technology. In addition, the Company, Leica Geosystems and CMCElectronics entered into a change of control agreement dated April 5,2004, which provides Leica Geosystems with certain rights in the event of theacquisition of control of NovAtel or CMC Electronics by certain competitors ofLeica Geosystems. See “— Certain Contractual Rights” and “Item 3 – KeyInformation, Risk Factors — Dependence on Key Customers.”

 

***Sokkia/PointJoint Venture***

 

The Company owns 49% of the common shares in Point, a geomatics jointventure with Sokkia, one of the world’s largest suppliers of surveying andmapping equipment. The Company sells GPS receivers and antennas to Point whichincorporates these products into surveying systems that are in turn soldthrough the Sokkia distribution channels and through independent dealers anddistributors. In addition, the Company provides facilities, computer supportand development and logistical support for Point’s Calgary operations. See“Item 3 – Key Information, Risk Factors — Dependence on Key Customers.”

 

***CMCElectronics***

 

The Company and CMC Electronics entered into a strategic co-operationagreement on April 5, 2004, to jointly develop new technology for GPSaviation solutions and under which the Company would develop and supply globalpositioning products and technology to CMC Electronics. CMC Electronics is oneof the world’s largest suppliers of certified GPS products into the commercialaviation market. The initial term of the agreement is ten years. Under theterms of the agreement, for so long as the Company is CMC Electronics’ sole andexclusive supplier of global positioning products and technologies for certainspecified avionics markets and ground based augmentation systems, NovAtel hasagreed not to sell such products and technology for use in such markets. In considerationfor agreeing to such restrictions, the Company is entitled to receive certainminimum royalty payments. “Item 3 – Key Information, Risk Factors —Dependence on Key Customers.”

 

**Certain Contractual Rights**

 

Pursuant to the terms of a change of control agreement datedApril 5, 2004, between the Company, Leica Geosystems, CMC Electronics andONCAP, Leica Geosystems has certain rights which arise upon the acquisition ofcontrol of NovAtel or CMC Electronics by certain competitors of Leica Geosystems.In particular, for so long as NovAtel is controlled by CMC Electronics, in theevent of (a) a proposed sale by CMC Electronics of more than 50% of the issuedand outstanding voting shares of NovAtel to a Leica Geosystems competitor, (b)the sale of a significant portion of the assets of NovAtel or all orsubstantially all of the technology underlying the agreement to a LeicaGeosystems competitor, or (c) the proposed acquisition of control of CMCElectronics by a Leica Geosystems competitor, Leica Geosystems has the right topurchase the shares of NovAtel held by CMC Electronics or the assets of NovAtelfor the fair market value thereof, as applicable. The foregoing rights willterminate when CMC Electronics no longer owns 50% of NovAtel’s voting shares orthe power to elect a majority of the directors of NovAtel. In addition, thechange of control agreement provides that if in the event that a LeicaGeosystems competitor acquires the power to elect a majority of the directorsof NovAtel, Leica Geosystems will have the right to purchase the shares ofNovAtel held by CMC Electronics for the fair market value thereof.

 

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The change of control agreement also provides that in the event CMCElectronics proposes to sell some or all of the shares of NovAtel held by it toa party other than a competitor of Leica Geosystems, Leica Geosystems has theright to make an offer to purchase all of such shares. CMC Electronics isobligated to consider any offer by Leica Geosystems in good faith, but is underno obligation to accept any offer from Leica Geosystems.

 

**Employees**

 

A key priority of the Company is to attract, train and retain talentedemployees. NovAtel views its highly skilled and performance-motivated employeesas a competitive advantage and a key part of the strategy for future growth.The Company staff turnover ratewas approximately 1.5% for its fiscal yearending December 31, 2003 (excluding Point employees and involuntaryseparations).

 

As at December 31, 2001, 2002 and 2003, the Company (excludingPoint) had the following full-time employees:

 
|                       |   | **Full-Time  Employees** |   |
|----------------------------|--------|--------------------------|--------|
| **Department**             |   | **2001**                 |   | **2002** |   | **2003** |   |
| Research and development   |   | 51                       |   | 57 |   | 67 |   |
| Operations                 |   | 18                       |   | 28 |   | 32 |   |
| Administration and finance |   | 28                       |   | 22 |   | 21 |   |
| Sales and marketing        |   | 16                       |   | 13 |   | 18 |   |
|                       |   |                     |   |   |   |   |   |
| TOTAL                      |   | 113                      |   | 120 |   | 138 |   |

 

The Company retained seven temporary and contract personnel as atDecember 31, 2003. Separately, Point employed 37 permanent staff as atDecember 31, 2003. None of NovAtel’s employees are represented by a labourunion, and the Company has not experienced any work stoppages. All of theCompany’s full-time employees are eligible to be granted stock options and allNovAtel employees participate in performance-based bonus programs.

 

**Operations andFacilities**

 

NovAtel’s registered and head office is located in Calgary, Alberta.The Company’s office space totals approximately 46,000 square feet and issubject to a ten-year lease that expires in 2009, with an option for NovAtel toextend the term for a further five-year period. The current lease provides foran expansion of up to 25,000 square feet. At this location, the Companyassembles, tests, packages and ships most of NovAtel’s products including GPSreceivers and antennas.

 

The circuit card assemblies, which are a primary component of NovAtel’sGPS receiver, are manufactured by contract suppliers in accordance with NovAteldesign, manufacturing and testing requirements. NovAtel’s primary contractsupplier of circuit card assemblies is Raven Industries Inc., which islocated in Sioux Falls, South Dakota. Other suppliers include Dynamic SourceManufacturing in Calgary, Alberta and United TriTech Corporation inCornwall, Ontario.

 

**Patents, Trademarksand Licenses**

 

NovAtel currently holds 25 U.S. patents and 32 related foreignpatents which expire at various dates no earlier than November 28, 2010and has numerous pending U.S. and foreign patent applications. The Company alsocurrently has numerous trademarks worldwide, including the NovAtel trademark,which is registered or pending in 31 countries. See “Item 3 – Key Information,Risk Factors — Patents and Proprietary Rights; Patent Litigation.”

 

NovAtel has copyrights and intellectual property rights to itsproprietary software and custom integrated circuit designs. In 1997, theCompany purchased a license with respect to its SoftSurv software, which is afull-featured GPS dual frequency data post-processing package software forsurveying applications. The purchase allows for

 

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more control over the pricing, costs, support and development ofSoftSurv. In 1999, NovAtel licensed SoftSurv and certain intellectual propertyrelated to end user products to Point. See “Item 4 - Information on the Company,Business Overview — Strategic Partnerships — Sokkia/Point JointVenture”.

 

**Legal Proceedings**

 

In July 1995, a claim was made in the Court of Queen’s Bench ofAlberta, Judicial District of Calgary, Alberta, by one of the Company’s formerdealers, Premier GPS Inc. (“Premier”), arising in part out of NovAtel’srefusal to renew a dealer agreement with Premier. Premier is alleging breach ofcontract and seeking damages in the amount of $500,000, special damages in anamount to be ascertained at trial, and an additional $500,000 in punitive orexemplary damages, plus interest and costs. NovAtel filed a Statement ofDefence and Counterclaim on September 14, 1995 seeking judgment forapproximately $74,000 (unpaid invoices), damages for conspiracy, breach of trustand breach of fiduciary duty, and an Order for return of certain beta testequipment or damages, interest and costs. The Company believes it has validdefences to the claim filed by Premier and that the claim is without merit.This lawsuit has largely been inactive.

 

In November 1994, the Company commenced an action against TrimbleNavigation Limited (“Trimble”) seeking relief and damages for an allegedinfringement of the Company’s U.S. Patent No. 5,101,416 (the “NarrowCorrelator patent”). In March 1995, Trimble commenced an action againstthe Company seeking relief and damages for an alleged infringement of Trimble’sU.S. Patent No. 5,390,207 (the “207 patent”). In January 1996,Trimble filed a complaint with the International Trade Commission in the U.S. seekingto ban imports of the Company’s products into the U.S. which allegedlyinfringed upon the 207 patent. All of these claims were resolved onJuly 16, 1996 when the Company and Trimble entered into a settlementagreement by cross licensing certain technologies, including a NarrowCorrelator license to Trimble. The 1996 settlement agreement with Trimbleincludes a provision that Trimble may, at its sole option, terminate thelicenses and rights granted upon a direct change of control. As at December 31,2003, intangible assets of the Company included $354,000 related to thesettlement agreement with Trimble. On June 26, 2001, NovAtel receivednotice from Trimble terminating the licenses and rights under the settlementagreement in connection with the share acquisition of the Company by CMCElectronics in April 1998. The Company has sought legal advice regardingTrimble’s termination rights under the 1996 settlement agreement and iscontinuing to evaluate the impact, if any, of Trimble’s notice of termination.As of the date hereof, the Company has not provided for any impairment of theseintangible assets in its financial statements.

 

Other than the foregoing, there are no outstanding legal proceedingsmaterial to the Company that the Company is aware of to which the Company, itssubsidiaries or any of its properties are subject, nor are there any suchproceedings known to be contemplated.

 

**C.****                                    OrganizationalStructure**

 

On April 17, 1998, CMC Electronics purchased approximately 58% ofthe Company’s total shares outstanding from the Company’s two principalshareholders.  As of April 21,2004, CMC Electronics owned approximately 56% of the Company’s total sharesoutstanding.

 

On April 11, 2001, an investor group led by ONCAP L.P. acquiredcontrol of the Company through the acquisition of CMC Electronics.

 

The Company does not have any significant subsidiaries.

 

**D.****                                    Property,Plant and Equipment**

 

See “Item 4 – Information on the Company, Business Overview –Operations and Facilities.”

 

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**Item 5****              Operating andFinancial Review and Prospects**

 

**A.****                                    OperatingResults**

 

*Management’s discussion and analysis is areview of the results of operations and the liquidity and capital resources ofthe Company and is dated March 2004. It should be read in conjunction withthe selected financial data and the consolidated financial statements of theCompany and the notes thereto included elsewhere in this Annual Report. Certaininformation included herein is forward looking and based upon assumptions andanticipated results that are subject to uncertainties. Should one or more ofthese uncertainties materialize or should the underlying assumptions proveincorrect, actual results may vary significantly from those expected. See “Item3 – Key Information, Risk Factors”.*

 

*The Company prepares its financial statementsin Canadian dollars and in conformity with Canadian generally acceptedaccounting principles (“Canadian GAAP”). The Company is required to reconcile the material differences betweenCanadian GAAP and U.S. generally accepted accounting principles (“U.S. GAAP”).Such reconciliation is set forth in Note 21 of the consolidated financialstatements of the Company included elsewhere in this Annual Report.*

 

**Overview**

 

NovAtel designs, markets and sells high-precision GPS and otherpositioning component technology and sub-systems for a wide variety ofcommercial applications principally in the aviation, geomatics (surveying andmapping), mining, precision agriculture, marine and defence industries.NovAtel’s solutions combine hardware, such as receivers and antennas, withsoftware to enable its customers to fully integrate the Company’shigh-precision GPS 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 jointventure, Point.

 

NovAtel’s consolidated financial statements include a 49% proportionateshare of the Point accounts as required under Canadian GAAP. The Company sellsproducts to Point which incorporates them into surveying systems that are inturn sold through the Sokkia distribution channels and through independentdealers and distributors. In addition, the Company provides facilities, computersupport and development and logistical support for Point’s Calgary operations.The Company’s consolidated Statements of Operations include the proportionateshare of each of the equivalent line items reflected on Point’s Statement ofOperations. Similarly, the Company consolidates its proportionate share of eachline 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 will extend theCompany’s current high-performance, upgradeable L1 and L1/L2 product line intothe mid-level L1 market. This will increase the Company’s total addressablemarket in core sectors and also create entry points into new vertical markets,such as timing and marine. The purchase price was comprised of $150,000 atclosing and $600,000 payable over time as a royalty on the revenue generated bythis product line. NovAtel expects the $600,000 royalty payment will be paidout in full by the end of 2005. CMC Electronics’ non-aviation L1 GPS OEMproduct line contributed approximately $2.3 million in revenue andincurred a loss of approximately $490,000 during 2003. The loss in 2003 wasprimarily a result of one-time engineering development related costs of$366,000 incurred in 2003.

 

The Company owned a 70% equity interest in Mezure, a U.S. company thathad been developing a GPS, wireless communication and Internet-based productfor deformation monitoring of manmade and natural structures. Mezure wasestablished in 2000 and had been working with the Company to develop marketapplications combining GPS, wireless infrastructure and the Internet. OnApril 8, 2003, the shareholders of Mezure voted unanimously to proceedwith a Chapter 7 bankruptcy, which was filed on June 25, 2003. OnSeptember 24, 2003 an Order Approving Trustee’s Account, DischargingTrustee and Closing Estate was entered into the docket of theUnited States Bankruptcy Court, District Oregon (Portland). Consequently,the Company is treating Mezure as a discontinued operation.

 

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The Company’s results of operations have fluctuated and can be expectedto continue to fluctuate on a periodic basis as a result of a number of factorswhich affect revenue, gross margin and operating expenses. Annual and quarterlyrevenues have fluctuated because of a number of factors, including acquisitionof new product lines, timing of major contracts, U.S. dollar to Canadiandollar exchange rates, operating results of subsidiary and joint venture entitiescertification and market acceptance of the Company’s new products, impact andtiming of large orders, pricing pressures in the market, establishing andmaintaining effective distribution channels, fluctuations in non-recurringengineering (“NRE”) fees, seasonality of customer purchase patterns and thetiming of industry trade shows.

 

**Revenue and Expenses**

 

Revenues include product sales and NRE fees. NRE fees are received bythe Company from its customers under engineering service contracts. Revenuesfrom product sales consist primarily of sales of OEM receivers, softwareupgrades, GPS antennas, WAAS type receivers and end user products. The Companyclassifies 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 ofintercompany eliminations, and NovAtel’s 49% proportionate share of salesby Point.

 

The Aerospace and Defence category is made up of aviation and defencemarkets. These markets utilize the Company’s precision positioning technologyfor critical components in civil air traffic control, flight managementsystems, and certain military applications.

 

The Special Applications category is made up of marine, precisionagriculture, unmanned vehicles, construction/grading, dealers (other than thosethat can be identified with a particular market sector) and miscellaneousmarkets.

 

The Company typically maintains control of the technology developedunder NRE contracts allowing it to use these technologies to improve itscurrent products and develop new products and solutions.

 

Total revenue has increased year over year since 2000 at a compoundedannual growth rate of 16% through sales to new customers as well as throughsales of additional products and services to existing customers.

 

Cost of product sales consists primarily of the cost of the rawmaterials and components, labour and other manufacturing expenses and overhead.Cost of NRE fees consists primarily of personnel and related costs incurred inproviding the engineering services.

 

Gross margin as a percentage of revenue varies primarily as a result ofproduct sales mix, changes in materials and contract manufacturing costs,liquidation of discontinued inventory and absorption of fixedmanufacturing costs.

 

Research and development expenses consist primarily of engineeringpersonnel expenses, contracted research and development expenses, amortizationof purchased technology, equipment costs and facility and computer supportcosts.

 

Selling and marketing expenses consist primarily of compensation ofsales and marketing personnel as well as expenses for advertising, promotionand trade shows, dealer and agents commissions, facilities and other expensesrelated to the sale of products.

 

General and administration expenses consist primarily of salaries ofadministrative personnel, corporate overhead and facilities expenses.

 

40

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**Critical AccountingPolicies and Accounting Estimates**

 

The Company applies a number of critical accounting policies andestimates in preparing the consolidated financial statements. A discussion ofthe Company’s critical accounting policies and estimates follows.

 

***RevenueRecognition***

 

Revenues from product sales are generally recognized at the time ofshipment to the customer. Revenues from NRE fees are recognized at the timeservices are rendered. On long-term contracts, in which the customer paysestablished rates for time and materials, revenue is recognized as services arerendered and costs are incurred. On certain long-term contracts, revenue isrecognized using the proportional performance method relative to customermilestones achieved or total costs incurred. Revisions in cost and profitestimates during the course of work are reflected in the period in which theneed for revision becomes known. Losses, if any, are recognized fully whenfirst anticipated. Some contracts contain penalty provisions based onperformance relative to established targets. Such penalties are included inrevenue or cost estimates when amounts can be reasonably determined.

 

In 2003, approximately $6.5 million, or 17%, of the Company’srevenue was derived from NRE services fees. Approximately 70% of these revenueswere recognized from contracts on which the customer paid established rates fortime and materials.

 

At the time the Company recognizes revenue, the Company reduces themeasurement of revenue by an estimate of the expected return of product andprice adjustments. The provision for product returns and price adjustments isassessed for adequacy at each quarter-end and is based on recent historicalexperience and known customer claims. The provisions for product returns andprice adjustments was $268,000 as of December 31, 2003 compared to$289,000 at December 31, 2002, with the decrease attributable to reducedknown claims.

 

The Company generally ships its products FCA (free carrier all)shipping point, and accordingly, recognizes revenue at time of shipment,provided that collection of payment is reasonably assured and no significantobligations on the Company’s part remains.

 

Effective with the fourth quarter of 2002, the Company changed itspolicy of recognizing revenue on shipments of product from the Company to Pointfrom revenue recognition at the time of shipment to revenue recognition at thetime of receiving payment from Point, due to the uncertainty of collectingpayment on the associated receivables. As of December 31, 2003, theCompany had deferred revenue related to product shipments to Point of $570,000,net of inter-company eliminations. The Company would revert to its prior policyof recognizing revenue at the time of shipment if the Company is able todetermine that reasonable assurance of collecting payment from Point exists.This determination would be based on Point’s ability to demonstrate sustainedimproved operating performance and/or Point receiving additional financialsupport from the Company and Sokkia sufficient to enable Point to meet itsfinancial obligations on an ongoing basis.

 

***Inventories***

 

Raw materials and components, work-in-progress, and finished goodsinventories are recorded at the lower of cost and net realizable value. Cost isdetermined on a first-in, first-out basis and includes materials, labour andmanufacturing overhead.

 

The Company establishes provisions for obsolete and excess inventory.The Company’s products have product life cycles that range on average from twoto four years. At both the product introduction and product discontinuationstage, there is a higher degree of risk of inventory obsolescence. In 2003, theprovision for obsolete and excess inventory included in the statement ofoperations was $691,000 or 1.8% of revenue, compared to $779,000 or 2.4% ofrevenue in 2002. The provision for obsolete and excess inventory is evaluatedfor adequacy at each quarter end.

 

The estimate of the provision for obsolete and excess inventory ispartially based on expected future product sales, which are difficult toforecast for certain products. As of December 31, 2003, the Company hadapproximately $280,000 (net value) of WAAS receiver inventory for which no firmcustomer commitments were on

 

41

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hand. Based on the Company’s assessment of future market opportunities,the Company expects that the value of this inventory will be realized throughfuture sales, but if this is not achieved, all or a portion of this inventorymay be written off.

 

***Allowancefor Doubtful Accounts***

 

The Company establishes provisions for doubtful accounts receivable.These provisions are established at the time revenue is recognized and arere-evaluated at each quarter end for adequacy. In determining the adequacy ofthe provision, the Company considers known uncollectible or at-risk receivablesas well as the aging profile of other receivables. In 2003, the provision fordoubtful accounts included in the statement of operations was $371,000 or 0.96%of revenue, compared to $434,000 or 1.3% of revenue, in 2002.

 

As at December 31, 2003, the provision for doubtful accounts was$810,000 or 10.9% of the gross value of the receivables compared to $788,000 or7.4% at December 31, 2002. The higher dollar amount of the provisionreflects higher revenues in general and higher sales by Point to customersoutside of Sokkia’s distribution in 2003.

 

***Provisionfor Future Warranty Costs***

 

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

 

The Company’s products are covered by standard warranty plans thatextend normally 15 months to 18 months from the date of productshipment. Certain customers negotiate warranty terms that range up to threeyears.

 

The Company provides for the costs of expected future warranty claimsat the time of product shipment. The adequacy of the provision is assessed ateach quarter end and is based on historical experience of warranty claims andcosts. As of December 31, 2003, the Company’s provision for futurewarranty claims was $410,000 compared to $344,000 as of December 31, 2002,with the increase attributable primarily to increased revenue from productshipments.

 

***Researchand Developments Costs and Deferred Development Costs***

 

Research costs are charged to operations as incurred. Developmentcosts, including software development costs, are charged to operations asincurred unless they meet specific criteria related to technical, market andfinancial feasibility. In these circumstances, the costs are deferred andamortized on a systematic basis, subject to an estimate of recoverability.

 

In 2003, the Company deferred development costs of $157,000 related tothe development of a certified aviation GPS receiver, compared to $125,000 in2002. With the GPS receiver reaching the commercialization stage, the Companyhas commenced amortizing these deferred costs, using a method similar to theunit-of-production method of amortization. The Company amortized $196,000 ofthese deferred costs in 2003 compared to $57,000 in 2002.

 

At December 31, 2003 the Company had deferred $2.6 million ofdevelopment costs ($2.6 million at December 31, 2002). The continueddeferral of these costs is subject to recoverability based on estimates offuture sales of the certified aviation GPS receiver. Should future actual salesof this receiver be materially lower than the current estimated sales, all or aportion of the deferred development costs would be charged to results ofoperations. The Company assesses the recoverability of the deferred developmentcosts at each quarter end.

 

***IncomeTaxes***

 

The Company follows the liability method of accounting for incometaxes. Under this method, current income taxes are recognized for the estimatedincome taxes payable for the current year. Future income tax assets andliabilities are recognized for temporary differences between the tax andaccounting bases of assets and liabilities

 

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as well as for the benefit of losses available to be carried forward tofuture years for tax purposes that are more likely than not to be realized.

 

As of December 31, 2003, the Company had net unrecognized incometax benefits related to previously incurred income tax losses, research anddevelopment costs, depreciation deductible for tax purposes and investment taxcredits totaling $60.5 million, which are available to reduce futuretaxable income and taxes payable, primarily for Canadian purposes.

 

The Company has established a full valuation allowance against thecalculated tax benefits, since it is uncertain that these tax benefits are morelikely than not to be realized. In determining the valuation allowances toestablish against these deferred tax benefits, the Company considers manyfactors, including the specific taxing jurisdiction, the carry forward period,income tax strategies, limitations due to acquisitions-of-control andforecasted earnings. A valuation allowance is recognized if, based on theweight of available evidence, the Company concludes that it is more likely thannot that some portion or all of the deferred tax benefits will not be realized.

 

**Results of Operations**

 

The following table sets out, as a percentage of revenue, consolidatedoperations data for the periods indicated.

 
|                                                   |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------|--------|
|                                                   |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                   |   | **(Percentage  of Revenue)**      |   |
| Revenues                                               |   | 100.0                             | %      | 100.0 | % | 100.0 | % |
| Gross profit — product sales                 |   | 53.9                              |   | 55.9 |   | 53.8 |   |
| Gross profit — NRE fees                      |   | 45.5                              |   | 34.4 |   | 49.1 |   |
|                                                   |   |                              |   |   |   |   |   |
| Total gross profit                                     |   | 52.5                              |   | 51.9 |   | 53.0 |   |
|                                                   |   |                              |   |   |   |   |   |
| Operating expenses:                                    |   |                              |   |   |   |   |   |
| Research and development                               |   | 18.4                              |   | 16.1 |   | 23.3 |   |
| Selling and marketing                                  |   | 13.6                              |   | 16.2 |   | 12.8 |   |
| General and administration                             |   | 11.1                              |   | 12.2 |   | 13.1 |   |
|                                                   |   |                              |   |   |   |   |   |
| Total operating expenses                               |   | 43.1                              |   | 44.5 |   | 49.2 |   |
|                                                   |   |                              |   |   |   |   |   |
| Operating income                                       |   | 9.4                               |   | 7.4 |   | 3.8 |   |
| Interest income, net                                   |   | 0.4                               |   | 0.3 |   | 0.4 |   |
| Other expense                                          |   | (1.7                              | )      | (1.0 | ) | (0.4 | ) |
|                                                   |   |                              |   |   |   |   |   |
| Income from continuing operations before  income taxes |   | 8.1                               |   | 6.7 |   | 3.8 |   |
| Provision for income taxes                             |   | 0.1                               |   | 0.2 |   | 0.0 |   |
|                                                   |   |                              |   |   |   |   |   |
| Net income from continuing operations                  |   | 8.0                               |   | 6.5 |   | 3.8 |   |
| Income (loss) from discontinued operations             |   | 0.9                               |   | (2.0 | ) | (3.4 | ) |
|                                                   |   |                              |   |   |   |   |   |
| Net income                                             |   | 8.9                               | %      | 4.5 | % | 0.4 | % |

 

***2003Compared to 2002***

 

*Revenues*

 

Total revenues in 2003 were $38.7 million, representing a 17% increaseover 2002 revenues of $33.1 million, despite the adverse impact of the weakerU.S. dollar relative to the Canadian dollar. Since the majority of

 

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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 denominatedrevenue declined to an average of $1.40 Canadian in 2003 from an average of$1.57 Canadian in 2002. If the Company’s U.S. dollar denominated revenues wereconverted into Canadian dollars at equivalent exchange rates, revenue in 2003would have been approximately 30% higher than in 2002.

 

The following table sets out revenues of the Company by the categoriesindicated for the fiscal years ended December 31, 2003 and 2002.

 
|                  |   | **2003**          |   | **2002** |   | **Change** |   |
|-----------------------|--------|-------------------|--------|----------|--------|------------|--------|
|                  |   | **$**             |   | **%**    |   | **$**      |   | **%** |   | **$** |   | **%** |   |
|                  |   | **($000’s)** |   |
| Geomatics             |   | $                 | 8,380  |     | 22     | %          | $      | 5,671 |   | 17 | % | $ | 2,709 |   | 48 | % |
| Aerospace and Defence |   | 7,558             |   | 20       |   | 10,486     |   | 32 |   | (2,928 | ) | (28 | ) |
| Special Applications  |   | 22,563            |   | 58       |   | 16,755     |   | 50 |   | 5,808 |   | 35 |   |
| Other                 |   | 183               |   | 0        |   | 234        |   | 1 |   | (51 | ) | (22 | ) |
|                  |   |              |   |     |   |       |   |   |   |   |   |   |   |
| TOTAL                 |   | $                 | 38,684 |     | 100    | %          | $      | 33,146 |   | 100 | % | $ | 5,538 |   | 17 | % |

 

 

*Geomatics*

 

In 2003, Geomatics revenues were largely comprised of NovAtel’s salesto Point, net of intercompany eliminations and the Company’s proportionateshare of sales by Point. Geomatics sales were $8.4 million in 2003, anincrease of 48% from $5.7 million in 2002, due partly to higher sales fromthe Company to Point and primarily due to higher sales at Point into the Sokkiadistribution system and through independent distribution channels.

 

Point’s operations were restructured in April 2002, with the aimof focusing operating activities on sales, marketing and distribution asopposed to product development. NovAtel has been disappointed in the operatingperformance of Point, particularly the lower than expected revenues which theCompany anticipated would increase after the April 2002 restructuring. TheCompany continues to work with Point’s management and Sokkia to improve theoperating results of Point. Point’s operating performance in the second half of2003 improved in comparison to recent years in certain areas, including higherrevenue and customer orders pertaining to increased shipments to Japan, otherAsian markets and Europe. However, there can be no assurance that Point’soperating performance will continue to improve.

 

*Aerospace andDefence*

 

Aerospace and Defence revenues were $7.6 million in 2003 comparedto $10.5 million for 2002, a decrease of 28%. The decrease was primarilyattributable to the absence of shipments into the Chinese Satellite NavigationAugmentation Systems (“SNAS”) programs and partially attributable to thedecline in the U.S. dollar relative to the Canadian dollar. In 2002, theCompany had revenue of $3.8 million from the SNAS program compared to $nilin 2003. In addition, new NRE contracts relating to the WAAS and EuropeanGalileo and Japanese MTSAT Satellite-based Augmentation System programs offsetlower revenue from the European Geostationary Overlay System (“EGNOS”) programwhich was largely completed in 2002.

 

The certified GPS receiver jointly developed by NovAtel and CMCElectronics is now being integrated into Honeywell airborne systems and is alsointended for Honeywell Inc.’s local area augmentation system (“LAAS”) groundstation program.

 

NovAtel is also participating in the new Geostationary Command &Control Segment program to develop Ground Uplink System receivers for the newthird Geostationary Satellite for WAAS, which was recently contracted

 

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to Lockheed Martin, Raytheon Company and Boeing. NovAtel received aletter subcontract from Raytheon worth up to $1.64 million NRE plusU.S.$885,000 in hardware deliverables.

 

In 2003, NovAtel received a letter subcontract from Raytheon Companyfor the development of an L1/L5 Signal Generator to be used with the newWAAS/GEO Ground Uplink System. This letter contract is worth up to U.S.$970,000NRE plus U.S.$591,000 in hardware deliverables.

 

In June 2002, the Company received a contract from the FAA todevelop the next generation WAAS receiver. The contract covers receiverdevelopment and qualifications work over a 21 month period and alsoincludes an additional option, exercisable at the FAA’s discretion, for thedevelopment of a new broadband WAAS antenna. The basic contract has a value ofU.S.$2.4 million and the option is worth U.S.$835,000. This contract hasbeen modified to add funding up to U.S.$2.7 million and activities arescheduled to be completed by March 2004. In addition, Raytheon Company hasnow provided a letter subcontract worth up to U.S.$3.0 million for productionstart-up and initial 44 deliverable receivers, starting inApril 2004, with options for an additional 117 receivers for deliveryin 2005 and 2006. Raytheon has recently authorized U.S.$450,000 toward thepurchasing of long lead materials for 39 of the optional receivers foraccelerated delivery in 2004.

 

The FAA has awarded the LAAS program to Honeywell. The LAAS program isintended to complement the WAAS program and provide precision approach landingguidance using GPS. NovAtel has provided prototype LAAS equipment which wasdeveloped for Raytheon and Thales and has sold some prototype equipment to theFAA to support LAAS testing. Recently, there have been indications from the FAAthat the implementation of the LAAS program may be spread over a longertimeframe.

 

The Company has completed most of the work with Thales Avionics tosupply one section of the EGNOS Remote Integrity Monitoring System. Thebalance of the remaining work is to support Thales Avionics in the EGNOSOperational Readiness Review (“ORR”) and to complete warranty support throughDecember 2004. The EGNOS receivers have the same hardware configuration asthe Company’s WAAS receivers, with added software qualification andfunctionality. There can be no assurance that NovAtel will receive commitmentsfor future participation in the EGNOS program. Delays in system implementationhave delayed final hold-back payments of approximately $568,000 related tocompletion of EGNOS ORR. These hold-backs are currently anticipated by the endof 2004.

 

*Special Applications*

 

Special Applications revenues were $22.6 million in 2003 compared to$16.8 million in 2002, an increase of 35%. The major factors leading to higherrevenues in 2003 compared to 2002 were varied and included the acquisition ofCMC Electronics’ non aviation L1 GPS OEM product line, which contributedapproximately $2.3 million in revenue, higher sales into the U.S. agriculturalmarket and higher shipments through the Company’s U.S., European and Chinesedealers. The increase in Special Applications revenue was achieved despite theimpact of the weaker U.S. dollar on revenues of the Company. NovAtel’s U.S.dollar denominated revenue declined to an average of $1.40 Canadian in 2003from an average of $1.57 Canadian in 2002.

 

The Company entered into a strategic co-operation agreement with LeicaGeosystems on May 1, 2003, to jointly develop new technology for GPS in thehigh-precision geomatics segment. More specifically, NovAtel is developing acustom version of existing GPS receivers and other components for LeicaGeosystems. In September 2003, pursuant to the strategic co operationagreement, NovAtel also entered into a supply agreement with Leica Geosystemswhich sets forth the arrangements under which NovAtel would develop and supplya custom GPS receiver for Leica Geosystems. In February 2004, LeicaGeosystems announced the launch of a new survey product that incorporatesNovAtel’s GPS receiver and antenna technology. The Company expects revenue fromproduct shipments and engineering services supplied to Leica Geosystems tocomprise between 15-20% of NovAtel’s total revenue in 2004.

 

45

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*Revenues byGeographic Market*

 

In 2003, the Company derived approximately 43% of its total revenuesfrom the sale of products to countries outside the United States andCanada compared to 50% in 2002. Revenues from international sales decreasedmarginally to $16.5 million in 2003 from $16.6 million in 2002.

 

*Gross Profit*

 

Gross profit increased to $20.3 million in 2003 from $17.2 millionin 2002, mainly as a result of increased revenue. Gross profit as a percentageof total revenues increased to 52.5% in 2003 from 51.9% in 2002. The increasein gross margin as a percentage of revenue is primarily attributable tofavourable product mix and lower per unit manufacturing costs of the Company’sGPS receivers.

 

*Research andDevelopment*

 

Research and development expenses increased 34% to $7.1 million in2003 from $5.3 million in 2002 and increased as a percentage of totalrevenues to 18.4% in 2003 from 16.1% in 2002. The increase in research anddevelopment dollars reflects higher employee compensation and benefit costs of$951,000, one time costs being incurred in 2003 related to the acquisition ofCMC Electronics’ non-aviation L1 GPS OEM product line of $441,000, andlower recoveries from customer funded engineering programs of $578,000,partially offset by lower amortization costs relating to intellectual propertyof $399,000.

 

*Selling andMarketing*

 

Selling and marketing expenses decreased 2% to $5.3 million in2003 from $5.4 million in 2002 and decreased as a percentage of totalrevenues to 13.6% in 2003 from 16.2% in 2002. The decrease in selling andmarketing expenses was primarily due to lower external commissions of $734,000,partially offset by increased employee compensation and benefit costs of$422,000, higher product promotion costs of $138,000, increased amortizationcosts of $64,000 and one time costs incurred in 2003 related to the acquisitionof CMC Electronics’ non-aviation L1 GPS OEM product line of $63,000.

 

*General andAdministration*

 

General and administration expenses increased 6% to $4.3 millionin 2003 from $4.0 million in 2002 and decreased as a percentage of totalrevenues to 11.1% in 2003 from 12.2% in 2002. The increased expenses areattributable to higher employee compensation and benefit costs of $86,000,increased board of directors’ fees of $65,000 and higher legal, audit andinsurance fees of $136,000.

 

*Interest Income*

 

NovAtel earned net interest income of $174,000 in 2003 compared to$84,000 in 2002 as a result of higher cash balances available for investment.The Company’s cash deposits which are not required for operations are investedin short-term interest bearing instruments.

 

*Other Expense*

 

Other expense in 2003 was $664,000 compared to $328,000 in 2002. Otherexpense in 2003 consisted primarily of $527,000 in foreign exchange lossesarising from a strengthening of the Canadian dollar versus the U.S. dollarand $83,000 in cash discount costs related to early payment on sales to Sokkiaby Point. Other expense in 2002 included $84,000 related to the April 2002restructuring of Point, $128,000 related to executive relocation, $49,000related to foreign exchange losses and $47,000 related to cash discount costsat Point.

 

46

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*Provision for IncomeTaxes*

 

The provision for income taxes which consists primarily of Canadianfederal large corporations tax and the consolidated proportionate share ofincome taxes related to Point, was $52,000 in 2003, compared to $77,000 in2002. The decrease was mainly attributable to a lower tax base for Canadianfederal large corporations tax.

 

*Income (Loss) fromDiscontinued Operations*

 

In 2003, the Company recognized income from discontinued operations of$360,000 attributable to the liquidation of the residual assets and liabilitiesof its former subsidiary, Mezure. In 2002, the Company had a loss fromdiscontinued operations relating to Mezure of $648,000.

 

***2002Compared to 2001***

 

*Revenues*

 

Total revenues increased 17% to $33.1 million in 2002 from$28.2 million in 2001. The following table sets out revenues of theCompany by the categories indicated for the fiscal years endedDecember 31, 2002 and 2001.

 
|                       |   | **2002** |   | **2001** |   | **Change** |   |
|----------------------------|--------|----------|--------|----------|--------|------------|--------|
|                       |   | **$**    |   | **%**    |   | **$**      |   | **%** |   | **$** |   | **%** |   |
| Geomatics                  |   | $        | 5,671  |     | 17     | %          | $      | 7,040 |   | 25 | % | $ | (1,369 | ) | (19 | )% |
| Aerospace and Defence |   | 10,486   |   | 32       |   | 8,846      |   | 31 |   | 1,640 |   | 19 |   |
| Special Applications       |   | 16,755   |   | 50       |   | 11,945     |   | 42 |   | 4,810 |   | 40 |   |
| Other                      |   | 234      |   | 1        |   | 406        |   | 2 |   | (172 | ) | (42 | ) |
|                       |   |     |   |     |   |       |   |   |   |   |   |   |   |
| TOTAL                      |   | $        | 33,146 |     | 100    | %          | $      | 28,237 |   | 100 | % | $ | 4,909 |   | 17 | % |

 

 

## *Geomatics*

## * *

Geomatics revenues decreased 19% to $5.7 million in 2002 from$7.0 million in 2001. The decrease in revenue was primarily caused bylower sales by Point into Sokkia’s distribution system. The decrease was alsopartially attributable to a restructuring of Sokkia’s U.S. organization in2002, a reduction in new product introductions by Point in 2002 anddifficulties in establishing effective distribution of Point products in certainof Sokkia’s geographic markets, particularly Asia and Europe in 2002.

 

*Aerospace andDefence*

 

Aerospace and Defence sales were $10.5 million in 2002 compared to$8.8 million for 2001, an increase of 19%, with the majority of the growthcoming from higher revenue from the Chinese SNAS program, which contributed$3.8 million revenue in 2002 compared to $2.0 million revenue in2001. In addition, new NRE contracts relating to the WAAS and LAAS programsoffset lower NRE revenue from the EGNOS program which was largely completed in2002. NovAtel’s EGNOS related revenue decreased to $938,000 in 2002 compared to$2.9 million in 2001.

 

*Special Applications*

 

Special Applications revenues were $16.8 million in 2002 comparedto $11.9 million in 2001, an increase of 40% primarily attributable tohigher shipments to the agricultural market, including a ramp up of initialshipments for AGCO, which purchased the former agricultural division fromCaterpillar Agricultural Products, Inc. in 2002, and engineering servicerevenue pertaining to the development of new core positioning products forLeica Geosystems.

 

47

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*Revenues byGeographic Market*

 

In 2002, NovAtel derived approximately 50% of its total revenues fromthe sale of products to countries outside the United States and Canadacompared to 48% in 2001. Revenues from international sales increased to$16.6 million in 2002 from $13.6 million in 2001, primarily due tohigher sales into China, Japan and Australia.

 

*Gross Profit*

 

Gross profit as a percentage of total revenues decreased to 51.9% in2002 from 53.0% in 2001. The decrease in gross margin as a percentage ofrevenue is primarily attributable to lower gross margins as a percentage ofrevenue from engineering contracts, which generally earn lower gross margins asa percent of revenue, and higher provisions for inventory obsolescence relatedto the discontinuance of various older products.

 

*Research andDevelopment*

 

Research and development expenses decreased 19% to $5.3 million in2002 from $6.6 million in 2001 and decreased as a percentage of totalrevenues to 16.1% in 2002 from 23.3% in 2001. The reduction in research anddevelopment expense in 2002 reflected the impact of higher customer fundedengineering programs of $1.6 million, partially offset by highercompensation and benefit costs of $551,000. The increased compensation andbenefit costs are net of cost reductions associated with lower staffing levelsat Point, which was restructured in April 2002.

 

*Selling andMarketing*

 

Selling and marketing expenses increased 48% to $5.4 million in2002 from $3.6 million in 2001 and increased as a percentage of totalrevenues to 16.2% in 2002 from 12.8% in 2001. The increase in selling andmarketing expenses was due to higher Point related costs of $348,000 resultingfrom the April 2002 restructuring, which included a shift in focus fromproduct development to product sales and distribution, higher externalcommissions of $528,000, increased compensation and benefit costs of $288,000,costs associated with a new distribution initiative in the Asian market of$210,000 and higher travel costs of $164,000.

 

*General andAdministration*

 

General and administrationexpenses increased 9% to $4.0 million in 2002 from $3.7 million in 2001and decreased as a percentage of total revenues to 12.2% in 2002 from 13.1% in2001. The increase in expenses was attributable to higher employee compensationand benefit costs of $415,000 related mainly to the Company’s employee profitsharing program and senior management bonus program.

 

*Interest Income*

 

NovAtel earned net interest income of $84,000 in 2002 compared to$131,000 in 2001. The reduced interest income was attributable to lowerinterest rates.

 

*Other Expense*

 

Other expense in 2002 included costs of $84,000 related to theApril 2002 restructuring of Point, $128,000 related to executiverelocation, $49,000 related to foreign exchange losses and $47,000 related tocash discount costs at Point related to sales to Sokkia. In 2001, other expenseincluded $164,000 cash discounts at Point, partially offset by gains ondisposal of fixed assets.

 

*Provision for IncomeTaxes*

 

The provision for income taxes, which consists primarily of Canadianfederal large corporations tax and the consolidated proportionate share ofincome taxes related to Point, was $77,000 in 2002, compared to $13,000 in2001. The increase was mainly attributable to a higher tax base for Canadianfederal large corporations tax.

 

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*Income (Loss) fromDiscontinued Operations*

 

In 2002, the Company recorded a loss from discontinued operations of$648,000, compared to a loss of $956,000 in 2001. These losses relate toMezure, the Company’s former subsidiary, which ceased operations in 2003.

 

**Quarterly Results ofOperations**

 

The following tables set out certain financial information for each ofthe eight quarters ended December 31, 2003. In the opinion of managementof the Company, this information has been prepared on the same basis as the auditedfinancial statements appearing elsewhere in this Annual Report, and allnecessary adjustments have been included in the amounts stated below to fairlypresent the unaudited quarterly results when read in conjunction with theCompany’s audited financial statements and the notes to those statements. Theoperating results for any quarter should not be relied upon as any indicationof results for any future period.

 
|                                                   |   | **Quarter  Ended** |   |
|--------------------------------------------------------|--------|--------------------|--------|
|                                                   |   | **2003**           |   | **2002** |   |
|                                                   |   | **Dec. 31**        |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   | **Dec. 31** |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   |
|                                                   |   | **($000’s)**  |   |
| Revenues                                               |   | $                  | 11,347 |   | $ | 10,924 |   | $ | 9,514 |   | $ | 6,899 |   | $ | 11,245 |   | $ | 6,735 |   | $ | 7,925 |   | $ | 7,241 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                          |   | 5,444              |   | 4,997 |   | 4,550 |   | 3,379 |   | 4,615 |   | 3,748 |   | 4,000 |   | 3,577 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                           |   | 5,903              |   | 5,927 |   | 4,964 |   | 3,520 |   | 6,630 |   | 2,987 |   | 3,925 |   | 3,664 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                               |   | 1,938              |   | 2,095 |   | 1,775 |   | 1,315 |   | 1,471 |   | 1,039 |   | 1,307 |   | 1,517 |   |
| Selling and marketing                                  |   | 1,479              |   | 1,376 |   | 1,286 |   | 1,128 |   | 2,325 |   | 1,107 |   | 1,184 |   | 745 |   |
| General and administration                             |   | 1,242              |   | 1,175 |   | 993 |   | 870 |   | 1,184 |   | 921 |   | 1,013 |   | 927 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total operating expenses                               |   | 4,659              |   | 4,646 |   | 4,054 |   | 3,313 |   | 4,980 |   | 3,067 |   | 3,504 |   | 3,189 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                |   | 1,244              |   | 1,281 |   | 910 |   | 207 |   | 1,650 |   | (80 | ) | 421 |   | 475 |   |
| Interest income, net                                   |   | 28                 |   | 48 |   | 55 |   | 43 |   | 31 |   | 25 |   | 18 |   | 10 |   |
| Other income (expense)                                 |   | (230               | )      | (28 | ) | (220 | ) | (186 | ) | (40 | ) | 64 |   | (126 | ) | (226 | ) |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations before  income taxes |   | 1,042              |   | 1,301 |   | 745 |   | 64 |   | 1,641 |   | 9 |   | 313 |   | 259 |   |
| Provision for income taxes                             |   | 17                 |   | 14 |   | 20 |   | 1 |   | 14 |   | 45 |   | 9 |   | 9 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing  operations          |   | $                  | 1,025  |   | $ | 1,287 |   | $ | 725 |   | $ | 63 |   | $ | 1,627 |   | $ | (36 | ) | $ | 304 |   | $ | 250 |   |

 

49

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|                                                   |   | **Quarter Ended**             |   |
|--------------------------------------------------------|--------|-------------------------------|--------|
|                                                   |   | **2003**                      |   | **2002** |   |
|                                                   |   | **Dec. 31**                   |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   | **Dec. 31** |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   |
|                                                   |   | **(Percentage  of Revenues)** |   |
| Revenues                                               |   | 100.0                         | %      | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Gross profit                                           |   | 52.0                          |   | 54.3 |   | 52.2 |   | 51.0 |   | 59.0 |   | 44.4 |   | 49.5 |   | 50.6 |   |
| Operating expenses:                                    |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                               |   | 17.1                          |   | 19.2 |   | 18.7 |   | 19.1 |   | 13.1 |   | 15.4 |   | 16.5 |   | 20.9 |   |
| Selling and marketing                                  |   | 13.0                          |   | 12.6 |   | 13.5 |   | 16.3 |   | 20.7 |   | 16.5 |   | 14.9 |   | 10.3 |   |
| General and administration                             |   | 10.9                          |   | 10.8 |   | 10.4 |   | 12.6 |   | 10.5 |   | 13.7 |   | 12.8 |   | 12.8 |   |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total operating expenses                               |   | 41.0                          |   | 42.6 |   | 42.6 |   | 48.0 |   | 44.3 |   | 45.6 |   | 44.2 |   | 44.0 |   |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                |   | 11.0                          |   | 11.7 |   | 9.6 |   | 3.0 |   | 14.7 |   | (1.2 | ) | 5.3 |   | 6.6 |   |
| Interest income, net                                   |   | 0.2                           |   | 0.4 |   | 0.5 |   | 0.6 |   | 0.3 |   | 0.4 |   | 0.2 |   | 0.1 |   |
| Other income (expense)                                 |   | (2.0                          | )      | (0.2 | ) | (2.3 | ) | (2.7 | ) | (0.4 | ) | 0.9 |   | (1.6 | ) | (3.1 | ) |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations before  income taxes |   | 9.2                           |   | 11.9 |   | 7.8 |   | 0.9 |   | 14.6 |   | 0.1 |   | 3.9 |   | 3.6 |   |
| Provision for income taxes                             |   | 0.2                           |   | 0.1 |   | 0.2 |   | 0.0 |   | 0.1 |   | 0.6 |   | 0.1 |   | 0.1 |   |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing  operations          |   | 9.0                           | %      | 11.8 | % | 7.6 | % | 0.9 | % | 14.5 | % | (0.5 | )% | 3.8 | % | 3.5 | % |

 

 

The following table sets out revenues of the Company by the categoriesindicated for the last eight fiscal quarters.

 
|                  |   | **Quarter  Ended** |   |
|-----------------------|--------|--------------------|--------|
|                  |   | **2003**           |   | **2002** |   |
|                  |   | **Dec. 31**   |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   | **Dec. 31** |   | **Sep. 28** |   | **Jun. 29** |   | **Mar. 30** |   |
|                  |   | **($000’s)**  |   |
| Geomatics             |   | $                  | 2,733  |   | $ | 2,408 |   | $ | 1,862 |   | $ | 1,377 |   | $ | 1,284 |   | $ | 1,318 |   | $ | 1,769 |   | $ | 1,300 |   |
| Aerospace and Defence |   | 1,754              |   | 2,487 |   | 1,935 |   | 1,382 |   | 5,262 |   | 1,466 |   | 2,215 |   | 1,543 |   |
| Special Applications  |   | 6,776              |   | 5,975 |   | 5,692 |   | 4,120 |   | 4,468 |   | 3,951 |   | 3,940 |   | 4,396 |   |
| Other                 |   | 84                 |   | 54 |   | 25 |   | 20 |   | 231 |   | — |   | 1 |   | 2 |   |
|                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                 |   | $                  | 11,347 |   | $ | 10,924 |   | $ | 9,514 |   | $ | 6,899 |   | $ | 11,245 |   | $ | 6,735 |   | $ | 7,925 |   | $ | 7,241 |   |

 

 

The Company’s quarterly results of operations have fluctuated and areexpected to continue to fluctuate because of a number of factors which affectrevenue, gross margins and operating expenses, including revenue generated frommajor contracts, acquisition of new products lines, U.S. dollar toCanadian dollar exchange rates, operating results of joint venture andsubsidiary entities, new product introductions, fluctuations in NRE fees, seasonalityof customer purchase patterns and the timing of industry trade shows.

 

50

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In addition, revenues can be expected to vary significantly as a resultof a lack of a significant order backlog, fluctuations in demand for existingproducts, the rate of development of new markets, the degree of marketacceptance of new products, increased competition and the general strength ofdomestic and international economic conditions. Furthermore, if the Companywere unable to deliver sufficient quantities of products in a timely manner,due to factors such as parts supply shortages or customs delays, its revenuescould be adversely affected.

 

In 2003, quarterly operating expenses fluctuated due to the impact ofchanges in staffing levels, recovery of research and development expenses fromNRE fees, dealer and agents commissions and provisions related to the Company’semployee incentive programs and senior management bonus program.

 

**Liquidity and Capital Resources**

 

In 2003, cash provided by operations was $8.0 million compared to$3.2 million in 2002. Cash provided by operations in 2003 consistedprimarily of $3.1 million of net income from continuing operations,$1.8 million in amortization expenses and a $3.3 million decrease inworking capital. The decrease in working capital was caused mainly bycollection of accounts receivable.

 

Cash provided by financing activities in 2003 was $1.3 million,related primarily to employee stock option exercises, partially offset bycapital lease payments. In 2002, $435,000 in cash was provided by financingactivities, related primarily to financing activities by Mezure and Point,partially offset by capital lease payments.

 

Cash used in investing activities in 2003 was $2.9 million, pertainingmainly to the purchase of capital equipment for regular operations ($2.7million) and the acquisition of the CMC Electronics’ non-aviation L1 GPS OEMproduct line ($155,000). In 2002, cash used in investing activities was $1.8million, primarily attributable to the purchase of capital equipment and a$588,000 equity investment (net of intercompany eliminations) in Point.

 

At December 31, 2003, NovAtel had cash and short-term investmentsof $13.0 million. The Company has credit agreements with HSBC Bank Canadaand The Toronto Dominion Bank under which it can borrow up to $1.7 millionfor day-to-day operating requirements and $1.8 million to support themargin requirement related to the purchase of up to approximatelyU.S.$6.5 million of foreign exchange contracts (depending on the maturitydate of the contracts). The lines of credit are payable on demand and aresecured by certain assets of NovAtel. At December 31, 2003, portions ofthe lines of credit were utilized to support $65,000 of letters of credit ($79,000at December 31, 2002), leaving $1.6 million available for day-to-dayoperating requirements and the margin capacity necessary to enter intoapproximately U.S.$6.5 million in forward foreign exchange contracts(depending on the maturity date of the contracts).

 

The Company believes that the current cash and cash equivalents andanticipated cash flow from operations will be sufficient to meet the Company’sworking capital, capital expenditures and growth strategy requirements for theforeseeable future.

 

**Taxes**

 

The Company has not recorded a provision for income taxes in Canada,other than for Canadian federal large corporations tax, due to previouslyincurred losses, credits and costs. As of December 31, 2003, losses,investment tax credits, depreciation and research and development costs areavailable to reduce future taxable income and taxes payable in Canada. TheCompany has determined that the acquisition of a majority of its Common Sharesby CMC Electronics in 1998, BAE SYSTEMS p.l.c.’s acquisition ofthe majority of the common shares of CMC Electronics in November 1999and ONCAP’s acquisition of the majority of the common shares ofCMC Electronics in April 2001 each constitute an acquisition ofcontrol of the Company for Canadian income tax purposes. Accordingly, theavailability of certain of the Company’s Canadian income tax losses, researchand development costs, depreciation deductible for tax purposes and investmenttax credit may be subject to limitation. The ultimate availability and amount ofthese losses, credits and costs may be dependent upon future Canada Customs andRevenue Agency audits.

 

51

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**Outlook**

 

Management of the Company expects revenues to increase as a result ofthe addition of new customers, the sale of additional products and services toexisting customers as well as through the implementation of the Company’soverall growth strategy. In 2004, the Company expects that product shipments toLeica Geosystems will contribute a significant proportion of total revenue andgrowth of revenue over 2003. The Company currently expects that productshipments and NRE revenues to Leica Geosystems will represent 15% to 20% of2004 revenues. In addition, the Company’s revenues in 2004 will include twelvemonths of revenue from the non-aviation L1 GPS OEM product line which wasacquired from CMC Electronics in May 2003, compared to only seven andone-half months in 2003. The Company’s U.S. dollar denominated revenuegenerated an average of $1.40 Canadian per U.S. dollar in 2003. As ofMarch 30, 2004, the U.S. dollar was valued at approximately $1.31 perCanadian dollar. The Company expects gross profit generated on product salesand NRE fees to increase in conjunction with the expected increase in revenue.Research and development expenses are expected to increase to support evolvingtechnological needs and new product development. Sales and marketing expensesand general and administrative expenses are also expected to increase tosupport the expected growth in the Company’s business.

 

**Off Balance SheetArrangements**

 

As of December 31, 2003, the Company had no off balance sheetarrangements other than operating leases discussed below.

 

**ContractualObligations**

 

The following table sets forth the Company’s contractual obligationsand commitments to make future payments under contracts, excluding trade andrelated 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                                        |   | $                           | 100    |   | $ | 100 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases                                                 |   | 4,659                       |   | 970 |   | 2,694 |   | 954 |   | 41 |   |
| Purchase obligations for inventory, capital  assets and services |   | 8,066                       |   | 7,773 |   | 293 |   | — |   | — |   |
| Notes payable                                                    |   | 1,721                       |   | 1,721 |   | — |   | — |   | — |   |
|                                                             |   |                        |   |   |   |   |   |   |   |   |   |
| TOTAL                                                            |   | $                           | 14,546 |   | $ | 10,564 |   | $ | 2,987 |   | $ | 954 |   | $ | 41 |   |

 

 

**Related PartyTransactions**

 

On May 14, 2003, the Company acquired CMC Electronics’non-aviation L1 GPS OEM product line. The purchase price was comprised of$150,000 at closing and $600,000 payable over time as a royalty on the revenuegenerated by this product line. The Company expects the $600,000 royaltypayment will be paid out by the end of 2005. The transaction was reviewed andapproved by a committee of independent directors of the board of directors ofthe Company.

 

In 2003, the Company purchased $2.8 million of products, $157,000of contracted engineering services and $408,000 of miscellaneous services,primarily legal and insurance related, from CMC Electronics. Also, relatedto the acquisition of the CMC Electronics’ non-aviation L1 GPS OEMproduct line, the Company purchased engineering services of $366,000 and paidroyalties of $82,000 to CMC Electronics.

 

During 2003, the Company sold $54,000 of products toCMC Electronics, and charged $261,000 in royalties related to thedevelopment of a certified aviation GPS receiver.

 

52

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The Company and CMC Electronics entered into a strategic co-operationagreement on April 5, 2004, to jointly develop new technology for GPSaviation solutions. The initial term of the agreement is ten years. Under theterms of the agreement, NovAtel has agreed to develop and supply globalpositioning products and technology to CMC Electronics. In addition, NovAtel hasagreed to restrictions on its ability to sell its global positioning productsand technology to certain specified markets, in consideration for the paymentof certain minimum royalty payments.

 

In 2003, the Company sold $3.1 million of products to Point, itsjoint venture with Sokkia. In addition, the Company provided $261,000 infacilities, computer systems support and research and development support toPoint. The above financial transactions between the Company and Point are on agross basis, before intercompany eliminations.

 

As at December 31, 2003, the Company and Sokkia had collectivelyloaned Point U.S.$5.3 million, the Company’s share beingU.S.$2.6 million. The loans are secured by the assets of Point. During2003, the Company and Sokkia advanced U.S.$500,000 in loans to Point with theCompany’s share being U.S.$245,000. In addition, in 2002, the Company andSokkia provided U.S.$1.5 million in equity financing to Point andU.S.$830,000 in loans. The Company’s share of the equity financing was U.S.$735,000and its equity interest in Point remained at 49%. The Company’s share of theloan financing was U.S.$407,000.

 

Point is dependent on the Company and Sokkia for product supply,distribution and financing. Should Sokkia and the Company discontinue theirsupport, Point’s ability to continue as a going concern would be impaired. IfPoint were not able to continue operations and was liquidated in an orderlywind down, the Company believes that its maximum loss exposure in the statementof operations to Point as of December 31, 2003, would be approximately$700,000, comprised primarily of working capital related items and costsincurred to cease operations, after consideration of the effects of theproportionate consolidation of Point. The consolidated financial statements ofthe Company included elsewhere in this Annual Report do not reflect anyadjustments that would be required if Point’s operations were discontinued.

 

David E. Vaughn, a director and the Company’s former Chief ExecutiveOfficer and President until February 2002, continued to provide consultantservices to the Company on various business matters. The Company paidMr. Vaughn $38,000 for these services in 2003, and $105,000 in 2002.

 

**New AccountingPronouncements**

 

***CanadianPronouncements***

 

In December 2001, the Canadian Institute of Chartered Accountants(“CICA”) issued Accounting Guideline 13, Hedging Relationships (“AcG-13”).AcG-13 establishes certain conditions for when hedge accounting may be applied.The guideline is effective for fiscal years beginning on or after July 1,2003. The adoption of AcG-13 effective January 1, 2004 is not expected tohave a material impact on the Company’s financial position or results ofoperations.

 

In September 2002, the CICA approved Section 3063, Impairmentof Long-lived Assets (“S.3063”). S.3063 establishes standards for therecognition, measurement and disclosure of the impairment of long-lived assets,and applies to long-lived assets held for use. An impairment loss is recognizedwhen the carrying amount of a long-lived asset is not recoverable and exceedsits fair value. S.3063 is effective for fiscal years beginning on or afterApril 1, 2003. Adoption of S.3063 is not expected to have a materialimpact on the Company’s financial position or results of operations.

 

In December 2002, the CICA approved Section 3110, AssetRetirement Obligations (“S.3110”). S.3110 requires liability recognition forretirement obligations associated with property, plant and equipment. Theseobligations are initially measured at fair value, which is the discountedfuture value of the liabilities. This fair value is capitalized as part of thecost of the related assets and amortized to expense over their useful life. Theadoption of S.3110 is not expected to have a material impact on the Company’sfinancial position or results of operation.

 

53

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In October 2003, the CICA approved amendments to Section 3870Stock-based Compensation and Other Stock Based Payments (“S.3870”) effectivefor fiscal years beginning January 1, 2004. The amended provisions requirethe expensing of all stock-based compensation awards. The adoption of S.3870 in2004 is expected to result in an increase in the Company’s operating expensesof approximately of $322,000 per year, based on the amortization of the fairvalue of options granted in 2002 and 2003.

 

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

 

The Company is a reporting issuer in the United States and accordinglyis required to reconcile the material differences between Canadian GAAP andU.S. GAAP.

 

In August 2001, the Financial Accounting Standards Board (“FASB”)approved for issuance Statement No. 143, “Accounting for AssetRetirement Obligations” (“SFAS 143”). This statement is effective forfiscal years beginning after June 15, 2002. This statement requires thatthe fair value of the liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made. Associated asset retirement costs are capitalized aspart of the carrying amount of the long-lived asset. The adoption ofSFAS 143 in January 2003 did not have a material impact on theCompany’s financial statements.

 

In November 2002, the FASB issued Interpretation No. 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45elaborates on the disclosures the Company must make about the Company’sobligations under certain guarantees that the Company has issued. It alsorequires the Company to recognize, at the inception of a guarantee, a liabilityfor the fair value of the obligations the Company has undertaken in issuing theguarantee. The initial recognition and initial measurement provisions are to beapplied only to guarantees issued or modified after December 31, 2002.Adoption of these provisions did not have a material impact on the Company’sfinancial statements.

 

In December 2002, the FASB issued Statement No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure, anAmendment of FASB Statement No. 123” (“SFAS 148”). SFAS 148amends SFAS 123 “Accounting for Stock-Based Compensation”(“SFAS 123”), to provide alternative methods of transaction for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require prominent disclosures in both annualand interim financial statements about the method for accounting forstock-based employee compensation and the effect of the method used on reportedresults.

 

On April 30, 2003, the FASB issued SFAS No. 149“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS 149”). SFAS 149 amends and clarifies the accounting forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”. The provisionsof this statement are generally effective for contracts entered into ormodified after June 30, 2003. The adoption of SFAS No. 149 didnot have a material impact on the Company’s financial statements.

 

On May 15, 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity” (“SFAS 150”). The provisions of this statement areeffective for all financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. SFAS 150 establishesstandards dealing with the classification of certain financial instruments withcharacteristics of both liabilities and equity. Financial instruments issued inthe form of shares that are mandatorily redeemable, those that require theissuer to buy back shares in exchange for cash or other assets, and instrumentsthat can be settled with shares at a specific or determinable date andvaluation, are required to be classified as liabilities. The adoption ofSFAS 150 did not have a material impact on the Company’s financialstatements.

 

The following standards issued by the FASB do not impact the Company atthis time:

 

•                                          StatementNo. 145 — “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections”,effective for financial statements issued on or after May 15, 2002;

 

54

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•                                          StatementNo. 146 — “Accounting for Costs Associated with Exit or DisposalActivities”, effective for exit or disposal activities initiated afterDecember 31, 2002; and

 

•                                          InterpretationNo. 46 — “Consolidation of Variable Interest Entities”, effective forfinancial statements issued after January 31, 2003.

 

**Financial Instruments**

 

Most of the Company’s revenues (over 97% in 2003) are earned incurrencies other than the Canadian dollar, principally the U.S. dollar. Asubstantial portion of the Company’s expenses, however, have been and willcontinue to be incurred in Canadian dollars. Accordingly, fluctuations inexchange rates between the U.S. dollar and the Canadian dollar couldmaterially affect results of operations. In the normal course of business, theCompany uses foreign currency options and forward foreign currency contracts toreduce exposure to fluctuations in the U.S. dollar to Canadian dollarexchange rates. At December 31, 2003, the Company had $nil forward foreigncurrency contracts on hand as all contracts had matured by that date.Derivative financial instruments are not used for speculative purposes. Therecan be no assurance that the Company will be successful in such hedgingactivities.

 

During 2003, the Company entered into forward currency contracts tosell U.S.$9.0 million from January 1 to December 31, 2003 at anaverage rate of U.S.$0.6478 per Canadian dollar. The net benefit of theCompany’s 2003 hedging program was approximately $1.3 million.

 

In January 2004, the Company entered into additional forwardcurrency contracts to sell U.S.$7.5 million between January 31, 2004and December 31, 2004 at an average rate of U.S.$0.7622 per Canadiandollar.

 

The Company’s operating budget for 2004 is based on an exchange rate ofUS$0.77 per Canadian dollar.  TheCompany estimates that each $0.01 change in the US dollar to Canadian dollarexchange rate would impact the Company’s 2004 budgeted net income byapproximately $225,000 prior to taking into consideration the Company’s 2004hedging program.  The following tablesets forth the potential impact of various hypothetical US dollar to Canadiandollar exchange rates on the Company’s 2004 budgeted net income, prior totaking into consideration the Company’s 2004 hedging program.

 
| **US $ per Canadian $** |   | **Impact on 2004 Budgeted Net  Income** |   |
|-------------------------|--------|-----------------------------------------|--------|
|                    |   | **Favourable  /(Unfavourable)**         |   |
|                    |   | **(CDN$)**                              |   |
|                    |   |                                    |   |
| $0.73                   |   | $900,000                                |   |
| $0.74                   |   | $680,000                                |   |
| $0.75                   |   | $450,000                                |   |
| $0.76                   |   | $225,000                                |   |
| $0.77                   |   | —                                  |   |
| $0.78                   |   | $(225,000)                              |   |
| $0.79                   |   | $(450,000)                              |   |
| $0.80                   |   | $(680,000)                              |   |

 

**Inflation**

 

While the Company believes that inflation has not had a material effecton its results of operations, there can be no assurance that inflation will nothave such an effect in the future.

 

**B.****                                    Liquidityand Capital Resources**

 

See “Item 5 – Operating and Financial Review and Prospects, Liquidityand Capital Resources.”

 

**C.****                                    Researchand Development, Patents and Licences, etc.**

 

See “Item 4 – Information on the Company, Business Overview — Researchand Development” and “—Patents, Trademarks and Licenses.”

 

**D.****                                    TrendInformation**

 

See “Item 5 – Operating and Financial Review and Prospects, OperatingResults.”

 

**E.****                                      OffBalance Sheet Arrangements**

 

See “Item 5 – Operating and Financial Review and Prospects, Operating Results – Off Balance SheetArrangements.”

 

**F.****                                      TabularDisclosure of Contractual Obligations**

 

See “Item 5 – Operating and Financial Review and Prospects, Operating Results – ContractualObligations.”

 

55

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**Item 6****              Directors, SeniorManagement and Employees**

 

**A.****                                    Directorsand Senior Management**

 

The following table sets forth certain information, as ofApril 21, 2004, regarding the executive officers, directors and certainkey employees of the Company:

 
| **Name**                              |   | **Age** |   | **Position**                                         |   | **Director  Since** |   | **Executive  Officer  Since** |
|---------------------------------------|--------|---------|--------|------------------------------------------------------|--------|---------------------|--------|-------------------------------|
| **Directors and  Executive Officers** |   |    |   |                                                 |   |                |   |                          |
| Jonathan W. Ladd                      |   | 48      |   | President and Chief Executive Officer                |   | 2002                |   | 2002                          |
| Werner Gartner                        |   | 47      |   | Executive Vice President and Chief Financial Officer |   | 2001                |   | 1995                          |
| Patrick C. Fenton                     |   | 46      |   | Vice President and Chief Technology Officer          |   | —              |   | 2003                          |
| Farlin A. Halsey, Jr.                 |   | 38      |   | Vice President, Marketing                            |   |                |   | 2003                          |
| Anthony J. Murfin                     |   | 56      |   | Vice President, Business Development                 |   | —              |   | 2003                          |
| Graham C. Purves                      |   | 42      |   | Vice President, Sales                                |   | —              |   | 2003                          |
| Gregory O. Baylin                     |   | 34      |   | Director                                             |   | 2001                |   | —                        |
| Richard D. Orman                      |   | 55      |   | Vice Chairman of the Board                           |   | 1994                |   | —                        |
| Joel A. Schleicher                    |   | 52      |   | Director                                             |   | 1997                |   | —                        |
| Charles R. Trimble                    |   | 62      |   | Director                                             |   | 2002                |   | —                        |
| David E. Vaughn                       |   | 58      |   | Chairman of the Board                                |   | 2001                |   | —                        |
| Gregory A. Yeldon                     |   | 44      |   | Director                                             |   | 1998                |   | —                        |

 

The following is a brief biography of each of the directors andofficers of the Company, which includes a description of their presentoccupation and their principal occupations during at least the past five years.

 

*Jonathan W. Ladd.*  Mr. Ladd was appointed President and ChiefExecutive Officer of the Company in February 2002 and has served as adirector of the Company from July 2002. From July 2001 toNovember 2001, Mr. Ladd served as Senior Vice President, Engineering atThales Navigation Inc., a satellite positioning product company, and Presidentof Thales’ Russian subsidiary, Ashtech A/O. From January 1998 toJuly 2001, Mr. Ladd served in several other management positions atMagellan Corporation, a satellite positioning product company, including SeniorVice President, Advanced Technology Group and Vice President and GeneralManager of Ashtech Precision Products Business Unit.

 

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

 

*Patrick C. Fenton.*  Mr. Fenton was appointed ChiefTechnology Officer in January 2002 and became an executive officer of theCompany in April 2003. Mr. Fenton previously served as VicePresident, Technology of the Company from October 1998 and as VicePresident, Research and Development of the Company from March 1997 untilOctober 1998. Mr. Fenton previously served as Director, Research andDevelopment for NovAtel’s GPS business unit from February 1995 untilMarch 1997 and was Chief Engineer for the GPS business unit fromNovember 1993 to February 1995.

 

*Farlin A. Halsey,Jr.* Mr. Halsey was appointed Vice President, Marketingof the Company in July 2002. From August 2000 to January 2002,Mr. Halsey served as Vice President of Marketing for JP Mobile, a mobileserver company. From August 1999 to August 2000, Mr. Halseyserved as Director of Marketing-Personal Navigation with

 

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Navigation Technologies Company, a provider of digital mappingdatabases. From March 1993 to August 1999, Mr. Halsey served invarious sales and marketing positions for Topcon America Company.

 

*Anthony J. Murfin.*  Mr. Murfin was appointed Vice President,Business Development of the Company in April 2002. Mr. Murfin has alsoserved as Director, Aviation Group of the Company from April 1998 untilApril 2002. Mr. Murfin previously served as Director, Corporate Accountsof the Company from April 1995 to April 1998 and as Director ofProduct and Marketing of the Company from April 1994 to April 1995.From January 1980 to April 1994, Mr. Murfin served in variouscapacities including Business Development Manager in the Avionics Division ofCMC Electronics. From September 1977 until January 1980, Mr. Murfinwas employed by CAE Electronics, a provider of advanced simulationtechnologies.

 

*Graham C. Purves.*  Mr. Purves was appointed Vice President,Sales of the Company in January 2002. Mr. Purves previously served as VicePresident, Sales and Marketing of the Company from October 1998 toJanuary 2002. Mr. Purves assumed additional responsibility for productdevelopment in July 1999. Mr. Purves previously served as Director, CustomProducts Group for the Company from January 1998 until October 1998,and as Director, Business Operations for the Company’s GPS business unit fromSeptember 1994 until October 1998. From August 1988 to September 1990,Mr. Purves served in various capacities at the Company including Manager, VLSIDesign Group.

 

*Gregory O. Baylin.*  Mr. Baylin has served as a director of theCompany since August 2001. Mr. Baylin has been a principal with ONCAPManagement Partners, an organization controlled by Onex Corporation which hascontrolled, directly and indirectly, a majority of the common shares of CMCElectronics, since January 2000. From September 1994 toDecember 1999, Mr. Baylin served in various capacities, including as anAssociate Director, with Scotia Capital Markets. Mr. Baylin also serves as adirector of CMC Electronics.

 

*Richard D. Orman.*  Mr. Orman has served as Vice Chairmanof the board of directors of the Company since March 1997 and as adirector of the Company since January 1994. Mr. Orman currentlyserves as Executive Vice-Chairman of Exceed Energy Inc. From June 1999 toApril 2003, Mr. Orman served as Chairman and Chief Executive Officer ofHemisphere International Inc. and currently serves as Chairman. FromMarch 1996 to October 1998, Mr. Orman served as Chairman and ChiefExecutive Officer of Kappa Energy Company Inc. and as a director untilJanuary 2000. From May 1986 to December 1992, Mr. Orman served as amember of the Alberta legislature and as Minister of Employment from May 1986to September 1988, Minister of Labour from September 1988 toApril 1989 and Minister of Energy from April 1989 toDecember 1992. Mr. Orman has also served as a director of a number ofpublic companies.

 

*Joel A. Schleicher.*  Mr. Schleicher has served as a directorof the Company since March 1997. Since September 2003,Mr. Schleicher has served as Chairman and Chief Executive Officer forIntegrated Solutions, Inc. Mr. Schleicher served as Chairman andChief Executive Officer of Interpath Communications Inc. (prior to theiracquisition of USinternetworking, Inc.) from June 2000 toJune 2002. Mr. Schleicher also serves as a Director of TechTronicIndustries Co. Ltd. Mr. Schleicher served as Chairman and ChiefExecutive Officer of Expanets, Inc. from June 1998 toJanuary 2000. Mr. Schleicher served as a business consultant, advisorand investor with and to private equity firms from July 1997 toJune 1998. From June 1996 to June 1997, Mr. Schleicherserved as President and Chief Executive Officer of ProCommunications, Inc.From July 1995 to June 1996, Mr. Schleicher was a privateinvestor. From 1989 to July 1995, Mr. Schleicher served as ChiefOperating Officer for and a director of Nextel Communications, Inc.

 

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

 

*David E. Vaughn.*  Mr. Vaughn has served as a director ofthe Company since July 2001 and was elected Chairman of the board ofdirectors in March 2004. Mr. Vaughn also served as President andChief Executive Officer of the Company from February 2001 toFebruary 2002. Mr. Vaughn currently serves as President of FoursomeTechnologies, a consulting firm. From January 1999 to December 2000,Mr. Vaughn served as Senior Vice President and Chief Operations Officerwith Magellan Corporation. Also with Magellan Corporation, Mr. Vaughnserved as Senior Vice President, Strategic Business Alliances fromAugust 1998 to January 1999. From June 1991 to July 1998,Mr. Vaughn

 

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served with Trimble Navigation Limited, a provider of GPS and otherpositioning technologies and products, in a variety of positions includingExecutive Vice President, Tracking and Communications Products Division and,most recently, as Executive Vice President, Corporate Business Development.

 

*Gregory A. Yeldon.*  Mr. Yeldon has served as a director of theCompany since May 1998. Mr. Yeldon has served as Chief Financial Officer forCMC Electronics since December 1994. From October 1994 toJuly 1995, Mr. Yeldon served as Corporate Controller for CMC Electronicsand from February 1988 to December 1994 he served as Finance Directorof Micronav International Co.

 

There is no family relationshipbetween any of the directors and the executive officers.  There are no arrangements or understandingsbetween any director or executive officer and any other person pursuant towhich any director and executive officer was selected.

 

**B.****                                    Compensation**

 

**Summary of ExecutiveCompensation**

 

The following table provides a summary of the compensation paid duringeach of the three most recently completed fiscal years to each of the ChiefExecutive Officer and the four next most highly compensated executive officersof the Company who are currently serving as executive officers of NovAtel andwhose total salary and other compensation during the fiscal year endedDecember 31, 2003 exceeded $100,000 (the “Named Executive Officers”).

 
|                             |   |                     |   |            |   |           |   |                                 |   | **Long Term  Compensation**      |   |
|----------------------------------|--------|--------------------------|--------|-----------------|--------|----------------|--------|--------------------------------------|--------|----------------------------------|--------|
|                             |   |                     |   | **Awards**      |   | **Payouts**    |   |
|                             |   |                     |   |            |   |           |   |                                 |   | **Securities**                   |   | **Restricted** |   |   |   |   |   |
|                             |   | **Annual  Compensation** |   | **Under**       |   | **Shares or**  |   |                                 |   |                             |   |
| **Name and  Principal Position** |   | **Year**                 |   | **Salary  ($)** |   | **Bonus  ($)** |   | **Other  Annual  Compensation  ($)** |   | **Options/  SARs  Granted  (#)** |   | **Restricted  Share  Units  ($)** |   | **LTIP  Payouts  ($)** |   | **All Other  Compensation  ($)** |   |
| Jonathan W. Ladd                 |   | 2003                     |   | 282,383         |   | 176,148        |   | 14,674                               | (4)    | 50,000                           |   | — |   | — |   | 6,079 | (2) |
| CEO and President                |   | 2002                     |   | 239,038         | (1)    | 119,418        |   | —                               |   | 30,000                           |   | — |   | — |   | 130,830 | (2) |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| Werner Gartner                   |   | 2003                     |   | 177,902         |   | 79,176         |   | 9,129                                | (4)    | 15,000                           |   | — |   | — |   | — |   |
| Executive Vice                   |   | 2002                     |   | 169,837         |   | 69,300         |   | 8,359                                | (4)    | 15,000                           |   | — |   | — |   | — |   |
| President and CFO                |   | 2001                     |   | 162,458         |   | 33,000         |   | 27,024                               | (3)(4) | 12,000                           |   | — |   | — |   | — |   |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| Patrick C. Fenton                |   | 2003                     |   | 154,027         |   | 68,551         |   | 8,004                                | (4)    | 12,500                           |   | — |   | — |   | — |   |
| Chief Technology                 |   | 2002                     |   | 149,589         |   | 60,000         |   | 7,772                                | (4)    | 10,000                           |   | — |   | — |   | — |   |
| Officer                          |   | 2001                     |   | 136,175         |   | 28,500         |   | 6,816                                | (4)    | 10,000                           |   | — |   | — |   | — |   |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| Farlin A. Halsey                 |   | 2003                     |   | 153,524         |   | 62,100         |   | 7,967                                | (4)    | 9,000                            |   | — |   | — |   | — |   |
| Vice President,  Marketing       |   | 2002                     |   | 72,329          | (5)    | 32,548         |   | —                               |   | 20,000                           |   | — |   | — |   | 63,243 | (2) |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| Graham C. Purves                 |   | 2003                     |   | 143,759         |   | 72,800         |   | 7,344                                | (4)    | 10,500                           |   | — |   | — |   | — |   |
| Vice President, Sales            |   | 2002                     |   | 136,877         |   | 56,000         |   | 6,998                                | (4)    | 7,500                            |   | — |   | — |   | — |   |
|                             |   | 2001                     |   | 126,619         |   | 26,500         |   | 6,225                                | (4)    | 10,000                           |   | — |   | — |   | — |   |
|                             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| All directors and                |   | 2003                     |   | 1,172,999       |   | 517,900        |   | 54,022                               |   |                             |   |   |   |   |   | 6,079 |   |
| executive officers as            |   | 2002                     |   | 550,662         |   | 188,718        |   | 8,359                                |   |                             |   |   |   |   |   | 236,099 |   |
| a group (twelve                  |   | 2001                     |   | 558,458         |   | 33,000         |   | 27,024                               |   |                             |   |   |   |   |   | — |   |
| persons in 2003, ten             |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| persons in 2002 and              |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| eight persons in                 |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |
| 2001)                            |   |                     |   |            |   |           |   |                                 |   |                             |   |   |   |   |   |   |   |

 

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**Notes:**

 

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(1)                                  Mr. Ladd wasappointed Chief Executive Officer and President in February 2002.

 

(2)                                  Represents totalrelocation costs paid by the Company.

 

(3)                                  Includes compensationfor Mr. Gartner for assuming, in addition to his regular duties, theduties of Acting Interim President and Chief Executive Officer fromNovember 2000 to February 2001.

 

(4)                                  Includes matchingcontributions made by the Company on behalf of each Named Executive Officerinto their respective Registered Retirement Savings Plans.

 

(5)                                  Mr. Halsey wasappointed Vice President, Marketing in July 2002.

 

**OptionsGranted During the Year Ended December 31, 2003**

 

The following table sets forth details of all options to purchaseCommon Shares that were granted to the Named Executive Officers during thefiscal year ended December 31, 2003.

 

 
| **Name**                                              |   | **Securities  Under  Options/SARs  Granted  (#)** |   | **% of Total  Options/SARs  Granted to  Employees in  Financial Year  (%)** |   | **Exercise  or  Base Price  (U.S.$/Security)** |   | **Market  Value  of Securities  Underlying  Options/SARs on   the Date of Grant  (U.S.$)** |   | **Expiration  Date**   |   |
|-------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                  |   |                                              |   |                                                                        |   |                                           |   |                                                                                       |   |                   |   |
| Jonathan W. Ladd CEO and President                    |   | 50,000                                            |   | 26.9                                                                        |   | 2.25                                           |   | 112,500                                                                                    |   | February 12, 2013 |   |
| Werner Gartner Executive Vice President  and CFO |   | 15,000                                            |   | 8.1                                                                         |   | 2.25                                           |   | 33,750                                                                                     |   | February 12, 2013 |   |
| Patrick C. Fenton Chief Technology Officer            |   | 12,500                                            |   | 6.7                                                                         |   | 2.25                                           |   | 28,125                                                                                     |   | February 12, 2013 |   |
| Farlin A. Halsey Vice President, Marketing            |   | 9,000                                             |   | 4.8                                                                         |   | 2.25                                           |   | 20,250                                                                                     |   | February 12, 2013 |   |
| Graham C. Purves Vice President, Sales                |   | 10,500                                            |   | 5.6                                                                         |   | 2.25                                           |   | 23,625                                                                                     |   | February 12, 2013 |   |

 

**Options ExercisedDuring the Year Ended December 31, 2003**

 

The following table sets forth details of: (i) options exercised,and the value thereof, by the Named Executive Officers during the fiscal yearend December 31, 2003, (ii) the number of unexercised options as atDecember 31, 2003 (exercisable and unexercisable) held by the NamedExecutive Officers and (iii) the value of unexercised “in-the-money”options as at the fiscal year ended December 31, 2003, (exercisable andunexercisable) held by the Named Executive Officers.

 

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| **Name**                                                   |   | **Securities  Acquired on  Exercise** |   | **Aggregate  Value  Realized  (U.S.$)** |   | **Unexercised  Options  December 31, 2003  (Exercisable/Unexercisable)** |   | **Value of  Unexercised   In-the-Money Options at    December 31, 2003  (Exercisable/Unexercisable) (U.S.$)** |   |
|------------------------------------------------------------|--------|---------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
|                                                       |   |                                  |   |                                    |   |                                                                          |   |                                                                                                                    |   |
| Jonathan W. Ladd  CEO and President                   |   | —                                |   | —                                  |   | 7,500/72,500                                                                  |   | 43,275/430,825                                                                                                          |   |
| Werner Gartner  Executive Vice President and CFO |   | 12,000                                |   | 91,500                                  |   | 95,000/34,000                                                                 |   | 151,005/206,621                                                                                                         |   |
| Patrick C. Fenton  Chief Technology Officer           |   | 17,000                                |   | 123,525                                 |   | 74,750/26,750                                                                 |   | 93,976/162,418                                                                                                          |   |
| Farlin A. Halsey  Vice President, Marketing           |   | 3,500                                 |   | 24,572                                  |   | 1,500/24,000                                                                  |   | 7,755/131,730                                                                                                           |   |
| Graham C. Purves  Vice President, Sales               |   | 12,000                                |   | 77,027                                  |   | 57,048/22,875                                                                 |   | 84,666/139,092                                                                                                          |   |

 

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

 

Each of the Plans may be administered by either NovAtel’s board ofdirectors or by a committee established by the board of directors. A committeeestablished by the board of directors to administer the Employee Stock OptionPlan must include at least one director of the Company.

 

The board of directors or the committee, as the case may be, has alldiscretion and authority necessary or appropriate to administer each of thePlans including the authority to determine which employees or directors, as thecase may be, will be granted options, the number of Common Shares subject toeach option and the terms and conditions of such options. The price at whichoptions may be granted under each of the Plans must be fixed by the board ofdirectors or the committee, as the case may be, at any price that such board ofdirectors or committee, as the case may be, may determine in the exercise ofits sole discretion in good faith. The Employee Stock Option Plan imposescertain restrictions on the option price applicable to incentive stock optionsgranted thereunder. The Directors Stock Option Plan provides that the per shareexercise price for an option may not be less than the fair market value perCommon Share at the date of grant. Under each of the Plans, options issuedthereunder must be exercised no later than 10 years from the date grantedsubject to certain restrictions applicable to options granted to a shareholderwho holds more than 10% of the Common Shares, in the case of the Employee StockOption Plan, and restrictions providing that the maximum number of shares thatmay be granted to any one individual will not exceed 5% of the outstandingCommon Shares, in the case of the Directors Stock Option Plan.

 

The vesting schedule for each option granted pursuant to the Plansis specified by the board of directors or the committee, as the case may be, atthe time of the grant. The vesting of outstanding options may be accelerated bythe board of directors or the committee, as the case may be, at such times andin 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 atleast six months immediately vest upon a change of control and are fullyexercisable for a specified number of days depending on the nature of the eventresulting in a change of control.

 

Options granted under the Plans are non-transferable. Vested optionsgranted under each of the Plans terminate on the earlier of: (i) theexpiry of the option (as discussed above); (ii) the expiry of 90 daysfrom the date that an optionee ceases to be employed by or a member of theboard of directors of the Company, as the case may be, for reasons other thandeath or disability; and (iii) the expiry of one year from the date ofdeath of an optionee or the date that an optionee ceases to be employed by or amember of the board of directors of the Company, as the case may be, by reasonof disability.

 

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**Management EmploymentContracts**

 

Certain of the Company’s executive officers have employment-relatedcontracts which provide for, among other things, industry standard covenants inthe Company’s favour, including non-competition covenants for one yearfollowing termination. The contracts also provide that the Company canterminate an officer without cause upon which event the officer is entitled toone times his annual salary plus accelerated vesting of certain options,depending on the agreement. In addition, the contracts contain provisionsrelating to payments and accelerated vesting of stock options upon atermination within a certain amount of time of a change of control of theCompany, with payments ranging from one and one-half to two times salary,depending on the contract.  Copies ofthese agreements have been filed as an exhibit to this Annual Report on form20-F.

 

**Summary of Directors’Compensation**

 

Directors do not have service contracts with the Company. NovAtelcompensates its directors who are not employees of the Company in the amount of$20,000 per year, with additional payments of $10,000 annually to both thechairman and all members of the Audit and Finance Committee. The chairman ofthe Audit and Finance 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 and Finance Committee, with anadditional $200 per hour payable for attendance at all supplementalmeetings. Notwithstanding the foregoing, the two representatives of CMCElectronics currently on the board of directors of the Company,Messrs. Yeldon and Baylin, have waived any fees to which they areotherwise entitled. In addition, all directors are reimbursed for expensesincurred by them in their capacity as directors.

 

The directors of the Company have not received stock options of NovAtelas compensation for their services since January 2002.

 

**Directors’ andOfficers’ Liability Insurance**

 

The Company maintains a comprehensive directors and officers liabilitypolicy for events arising prior to CMC Electronics acquiring majority controlof the Company on April 17, 1998. This policy was purchased for $32,000for the policy period from December 1, 2000 to December 1, 2004. Thepolicy covers limits of liability for each loss and for each policy period of$10 million with a $250,000 deductible for any claims.

 

CMC Electronics maintains a comprehensive directors and officersliability policy for events arising subsequent to April 17, 1998 and priorto April 12, 2001. This policy was purchased for the period April 1,2001 to April 1, 2007. Directors and officers of the Company are coveredby this policy which cover limits of liability for each loss and for the policyperiod of $35 million with a $250,000 deductible for U.S. securities relatedclaims and $100,000 deductible for other claims. The Company’s share of thepremium for this policy was $31,200. Onex Corporation, which controls, directlyor indirectly, a majority of the common shares of CMC Electronics, maintains a comprehensivedirectors and officers liability policy which applies to the Company’sdirectors and officers for events arising subsequent to April 12, 2001.The Onex Corporation policy, in place until November 29, 2004, coverslimits of liability for each loss and for each policy period of U.S.$75 millionto be shared with other Onex companies, with U.S.$2.5 million deductible forsecurities related claims and for U.S. claims and U.S.$1 million deductible forother claims. The Company’s share of the premium for this policy is $26,365.

 

**Indebtedness ofDirectors and Executive Officers**

 

No executive officers or directors of NovAtel, or any of theirassociates or affiliates, are or have been indebted to NovAtel since thecommencement of the last completed financial year of the Company, nor have anyof the foregoing been the subject of a guarantee, support agreement, letter ofcredit or other similar arrangement or

 

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understanding provided by NovAtel or any of its subsidiaries since thecommencement of the last completed financial year.

 

**C.****                                    BoardPractices**

 

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

 

Executive officers are appointed by the board of directors on an annualbasis and serve until the next annual meeting of the board of directors oruntil their respective successors are duly appointed or their positions areearlier vacated by resignation or otherwise.

 

**Committees of theBoard of Directors**

 

The Company has an Audit and Finance Committee and a CompensationCommittee.

 

***Auditand Finance Committee***

 

The Audit and Finance Committee assists the board of directors of theCompany in fulfilling its responsibilities for oversight and supervision offinancial and accounting matters. The Audit and Finance Committee responsibilitiesinclude the engagement or discharge of independent auditors, review with theindependent auditors the plan and results of the auditing engagement, reviewNovAtel’s internal auditing procedures, system of internal accounting controlsand financial management and to make inquiries into matters within the scope ofthis Committee’s functions. The members of the Audit and Finance Committee areRichard D. Orman, Joel A. Schleicher and Gregory A. Yeldon. The Board ofDirectors has determined that Messrs. Orman and Schleicher are“independent directors” as determined in accordance with applicable securitieslaws. The board of directors of the Company and the Audit and Finance Committeehave adopted a written charter of the Audit and Finance Committee. The Auditand Finance Committee reviews and assesses the adequacy of the charter on anannual basis.

 

***CompensationCommittee***

 

The function of the Compensation Committee is to ensure that theCompany has a high calibre executive management in place and a total compensationplan that is competitive, motivating and rewarding for participants. TheCompensation Committee reviews and makes recommendations to the board ofdirectors of the Company concerning the compensation of the key managementemployees of the Company and the administration of the Plans. The members ofthe Compensation Committee are Richard D. Orman, Gregory A. Yeldon and David E.Vaughn. The Board of Directors has determined that Mr. Orman is an“independent director” as determined in accordance with applicablesecurities laws.

 

**D.****                                    Employees**

 

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

 

**E.****                                      ShareOwnership**

 

The following table sets forth as of April 21, 2004, the ownershipof the Company’s Common Shares by each director and Named Executive Officer,listed in the compensation table above, and all directors and executiveofficers as a group:

 

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|                                                                  |   | **Shares  Beneficially  Owned** |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|
| **Name**                                                              |   | **Shares**                      |   | **Percent** |   |
| Gregory O. Baylin(1)                                                  |   | 4,474,500                       |   | 55.9 | % |
| Patrick C. Fenton(2)                                                  |   | 84,625                          |   | 1.0 | % |
| Werner Gartner(3)                                                     |   | 109,750                         |   | 1.4 | % |
| Farlin A. Halsey (4)                                                  |   | 3,750                           |   |   | * |
| Jonathan W. Ladd (5)(6)                                               |   | 27,500                          |   |   | * |
| Richard D. Orman(7)                                                   |   | 4,500                           |   |   | * |
| Graham C. Purves (8)                                                  |   | 65,798                          |   |   | * |
| Joel A. Schleicher(9)                                                 |   | 3,500                           |   |   | * |
| Charles R. Trimble(10)                                                |   | 3,500                           |   |   | * |
| David E. Vaughn                                                       |   | —                          |   |   | * |
| Gregory A. Yeldon(1)                                                  |   | 4,474,500                       |   | 55.9 | % |
| All directors and executive officers as a  group (twelve persons)(11) |   | 4,787,923                       |   | 57.6 | % |

 

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*                                         Less than 1%.

 

(1)                                  Represents 4,474,500Common Shares held by CMC Electronics with whom Messrs. Yeldon and Baylin areaffiliated.

 

(2)                                  Represents vestedstock options to purchase 84,625 Common Shares of the Company as ofApril 21, 2004.

 

(3)                                  Includes vested stockoptions to purchase 107,250 Common Shares of the Company as of April 21,2004.

 

(4)                                  Includesvested stock options to purchase 3,750 Common Shares of the Company as ofApril 21, 2004.

 

(5)                                  Mr. Ladd wasappointed Chief Executive Officer and President in February 2002.

 

(6)                                  Represents vestedstock options to purchase 27,500 Common Shares of the Company as ofApril 21, 2004.

 

7)                                      Includes vestedstock options to purchase 3,500 Common Shares of the Company as ofApril 21, 2004.

 

(8)                                  Includesvested stock options to purchase 65,798 Common Shares of the Company as ofApril 21, 2004.

 

(9)                                  Represents vestedstock options to purchase 3,500 Common Shares of the Company as ofApril 21, 2004.

 

(10)                            Representsvested stock options to purchase 3,500 Common Shares of the Company as ofApril 21, 2004.

 

(11)                            Includes vested stockoptions to purchase 309,923 Common Shares of the Company as of April 21,2004.

 

**Item 7****              MajorShareholders and Related Party Transactions**

 

**A.****                                    MajorShareholders**

 

The following table sets forth as of April 21, 2004 those personsknown to the Company to be owners of more than 5% of the Common Shares:

 
|                    |   | **Shares  Beneficially  Owned** |       |
|-------------------------|--------|---------------------------------|------------|
| **Name**                |   | **Shares**                      | ** ** | **Percent** | ** ** |
|                    |   |                            |       |   |   |
| CMC Electronics Inc.(1) |   | 4,474,500                       |       | 55.9 | % |

 

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(1)                                  The address of CMCElectronics Inc. is 600 Dr. Frederik Philips Boulevard, Ville Saint-Laurent,Quebec, Canada H4M 2S9.  CMC Electronicsmay be deemed to be a “control person” of the Company within the meaning of therules and regulations of the SEC.

 

63

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**B.****                                    RelatedParty Transactions**

 

See “Item 5 – Operating and Financial Review and Prospects, Operating Results – Related PartyTransactions” and “Item 4 -  Informationon the Company, Business Overview - Strategic Partnerships — CMC Electronics”and “— Certain Contractual Rights.”

 

**C.****                                    Interestsof Experts and Counsel**

 

Not applicable.

 

**Item 8****              FinancialInformation**

 

**A.****                                    ConsolidatedStatements and Other Financial Information**

 

**ConsolidatedFinancial Statements**

 

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

 

**Legal Proceedings**

 

See “Item 4 -  Information onthe Company, Business Overview - Legal Proceedings.”

 

**Dividend Policy**

 

The Company has not declared or paid anydividends on the Common Shares to date. The payment of dividends in the futurewill be dependent on the earnings and financial condition of the Company and onsuch other factors as the board of directors of NovAtel considers appropriate.

 

**B.****                                    SignificantChanges**

 

Not applicable

 

**Item 9****              TheOffer and Listing**

 

**A.****                                    Offerand Listing Details**

 

The Company’s Common Shares have been listed on The Nasdaq Stock Marketsince February 7, 1997.  Thefollowing are the price ranges as reported by The Nasdaq Stock Market for theperiods indicated.

 

64

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|               |   | **US $** |   |
|--------------------|--------|----------|--------|
|               |   | **High** |   | **Low** |   |
| **Annual**         |   |     |   |   |   |
| 2003               |   | $        | 11.080 |   | $ | 1.900 |   |
| 2002               |   | $        | 5.200  |   | $ | 1.760 |   |
| 2001               |   | $        | 2.750  |   | $ | 1.250 |   |
| 2000               |   | $        | 10.500 |   | $ | 1.188 |   |
| 1999               |   | $        | 3.813  |   | $ | 1.000 |   |
|               |   |     |   |   |   |
| **Quarterly**      |   |     |   |   |   |
| Q4 – 2003     |   | $        | 11.080 |   | $ | 4.660 |   |
| Q3 – 2003     |   | $        | 4.980  |   | $ | 3.250 |   |
| Q2 – 2003     |   | $        | 4.190  |   | $ | 2.840 |   |
| Q1 – 2003     |   | $        | 3.500  |   | $ | 1.900 |   |
| Q4 – 2002     |   | $        | 2.820  |   | $ | 1.760 |   |
| Q3 – 2002     |   | $        | 2.840  |   | $ | 1.810 |   |
| Q2 – 2002     |   | $        | 5.200  |   | $ | 2.550 |   |
| Q1 – 2002     |   | $        | 4.000  |   | $ | 2.100 |   |
|               |   |     |   |   |   |
| **Monthly**        |   |     |   |   |   |
| April 2004         |   | $        | 14.49  |   | $ | 9.50 |   |
| March 2004    |   | $        | 13.83  |   | $ | 10.25 |   |
| February 2004 |   | $        | 18.900 |   | $ | 12.000 |   |
| January 2004  |   | $        | 16.300 |   | $ | 8.070 |   |
| December 2003 |   | $        | 11.080 |   | $ | 7.560 |   |
| November 2003 |   | $        | 10.550 |   | $ | 7.310 |   |

 

**B.****                                    Planof Distribution**

 

Not applicable.

 

**C.****                                    Markets**

 

In February 1997, the Company’s Common Shares commenced trading inthe United States on the Nasdaq National Market tier of The Nasdaq Stock Marketunder the symbol “NGPSF.”  The CommonShares are not listed on any other non-United States trading market.  On March 15, 1999, the Company’s symbolwas changed to “NGPS”.

 

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

 

A significant number of the Company’s Common Shares are held in streetname. To the best of the Company’s knowledge, as of March 1, 2004, therewere 13 shareholders of record resident in the United States, including Cede& Co., holding approximately 3,516,168 shares, representing 43.9% of theCommon Shares then outstanding.  Intotal, the Company has 22 shareholders of record.

 

**D.****                                    SellingShareholders**

 

Not applicable

 

65

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**E.****                                      Dilution**

 

Not applicable

 

**F.****                                      Expensesof the Issue**

 

Not applicable

 

**Item 10****       AdditionalInformation**

 

**A.****                                    ShareCapital**

 

Not applicable

 

# **B.**                                    Articlesof Incorporation

# ** **

The Company is registered under the *CanadaBusiness Corporations Act* (“CBCA” or the “Act”) as corporationnumber 076226-1 and has the capacity and, subject to the provisions of the Act,the rights, powers and privileges of a natural person.

 

**Powers of Directors**

 

Subject to any unanimous shareholder agreement, the directors shallmanage or supervise the management of the business and affairs of the Companyand may exercise all such powers and do all such acts and things as may be exercisedor done by the Company and are not by the Act, the articles, the by-laws, anyspecial resolution of the Company, a unanimous shareholder agreement or bystatute expressly directed or required to be done in some other manner.  Notwithstanding any vacancy among thedirectors, the remaining directors may exercise all the powers of the board solong as a quorum of the board remains in office.

 

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

 

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

 

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

 

66

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**Description of Securities**

 

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

 

Holders of Common Shares are entitled to receive notice of and toattend all meetings of the shareholders of the Company, except meetings atwhich holders of another specified class of shares are exclusively entitled tovote, and are entitled to one vote for each Common Share held on all votestaken at such meetings. The holders of Common Shares are entitled to receivesuch dividends as the directors may in their discretion declare, regardless ofwhether dividends are declared on any other class of shares.  Upon liquidation, dissolution or wind-up ofthe Company, the holders of Common Shares are entitled to receive any remainingproperty after payment of any amount required to redeem or retract the issuedand outstanding First Preference Shares.

 

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

 

The First Preference Shares of each series rank equally with respect tothe payment of dividends and the distribution of assets or return of capital inthe event of liquidation, dissolution or winding-up and in priority to theCommon Shares and any other shares of the Company ranking junior to the FirstPreference Shares.  In addition, if any amountof cumulative dividend or declared non-cumulative dividend or an amount payableon return of capital in respect of shares of a series of First PreferenceShares is not paid in full, the shares of the series are entitled toparticipate rateably with the shares of any other series of the same class inrespect of such amounts.

 

In accordance with the provisions of the CBCA, the amendment of certainrights attaching to a class of shares, including Common Shares, requires theapproval of not less than two-thirds of the votes cast by the holders of suchshares voting at a special meeting of such holders.  Pursuant to the Company’s By-laws, a quorum for a meeting of theholders of Common Shares occurs when persons not being less than two in numberand holding or representing by proxy not less than 33 1/3% of the issued andoutstanding Common Shares entitled to vote at such meetings are present, unlessa higher number is designated by the Board. In circumstances where the rights of Commons Shares may be amended, toadd, change or remove any provisions restricting or constraining the issue,transfer or ownership of Common Shares, holders of Common Shares have the rightunder the CBCA to dissent from such amendment and require the Company to paythem 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 shareholdermeeting shall be held not later than fifteen months after the holding of thelast preceding annual meeting but no later than six months after the end of theCompany’s preceding financial year, unless an order extending the time forcalling the annual meeting is obtained. The Directors may at any time call aspecial meeting of shareholders.

 

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

 

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

 

67

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**C.****                                    MaterialContracts**

 

Except for contracts entered into in the ordinary course of business,the only material contract entered into by NovAtel in the two years immediatelypreceding the date of this Annual Report which can reasonably be regarded aspresently material is the following:

 

(1)                                  Change of ControlAgreement dated April 5, 2004 among NovAtel, Leica Geosystems andCMC Electronics, as more particularly described under “Item 4 -Information on the Company, Business Overview — CertainContractual Rights.”

 

**D.****                                    ExchangeControls**

 

*Investment CanadaAct*

 

Canada has no system of exchange controls. There is no law, governmentdecree or regulation in Canada restricting the export or import of capital oraffecting the remittance of dividends, interest or other payments to anon-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 orother charter documents of the Company on the right of a non-resident to holdor vote Common Shares or Preferred Shares of the Company with voting rights(collectively, “Voting Shares”), other than as provided in the InvestmentCanada Act (the “Investment Act”), as amended by the World Trade OrganizationAgreement Implementation Act (the “WTOA Act”). The Investment Act generallyprohibits implementation of a reviewable investment by an individual,government or agency thereof, corporation, partnership, trust or joint venturethat is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”),unless, after review, the minister responsible for the Investment Act issatisfied that the investment is likely to be of net benefit to Canada. Aninvestment in Voting Shares of the Company by a non-Canadian (other than a “WTOInvestor,” as defined below) would be reviewable under the Investment Act if itwas an investment to acquire control of the Company and the Company was not,immediately prior to the implementation of the investment, controlled by a WTOInvestor, 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 bereviewable under the Investment Act if it was an investment to acquire directcontrol of the Company, and the value of the assets of the Company equalled orexceeded $223 million for the year 2003 and $237 million, the expectedthreshold, for the year 2004.  Anon-Canadian, whether a WTO Investor or otherwise, would acquire control of theCompany for purposes of the Investment Act if he or she acquired a majority ofthe Voting Shares of the Company. The acquisition of less than a majority, butat least one-third of the Voting Shares of the Company, would be presumed to bean acquisition of control of the Company, unless it could be established thatthe Company was not controlled in fact by the acquirer through the ownership ofVoting 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 TradeOrganization (“WTO Member”) or has a right of permanent residence in a WTOMember other than Canada. A corporation or other entity will be a WTO investorif it is a “WTO investor-controlled entity” pursuant to detailed rules set outin the Investment Act. The United States is a WTO Member.

 

Certain transactions involving Voting Shares of the Company would beexempt from the Investment Act, including: (a) an acquisition of Voting Sharesof the Company if the acquisition was made in connection with the person’sbusiness as a trader or dealer in securities; (b) an acquisition of control ofthe Company in connection with the realization of a security interest grantedfor a loan or other financial assistance and not for any purpose related to theprovisions of the Investment Act; and (c) an acquisition of control of theCompany by reason of an amalgamation, merger, consolidation or corporatereorganization, following which the ultimate direct or indirect control in factof the Company, through the ownership of voting interests, remains unchanged.

 

**E.****                                      Taxation**

 

The following is a summary of the principal Canadian federal income taxconsiderations generally applicable to a holder of Shares who is neitherresident nor deemed to be resident in Canada, who does not use or hold and isnot deemed to use or hold their Shares in carrying on a business in Canada andwhose Shares do not otherwise constitute “taxable Canadian property” forpurposes of the Tax Act (a “U.S. Holder”). Shares of a holder will generallynot constitute “taxable Canadian property” unless (a) at any time within thesixty (60) months immediately preceding the disposition of Shares by suchholder, such holder, persons not dealing at arm’s length with such holder, orany combination thereof, owned (or had options to acquire) 25% or more of theissued shares of any class or series of the capital stock of the Company or apredecessor, (b) a holder, upon ceasing to be a Canadian resident, electedunder the Tax Act to have the Shares deemed to be taxable Canadian property, or(c) the Shares were acquired in circumstances under which they are deemed to betaxable Canadian property.  The Tax Actcontains provisions relevant to a non-resident insurer for whom any Securitiesare “designated insurance property” which this summary does not take intoaccount.  This summary is not exhaustiveof all potential Canadian income tax consequences to a U.S. Holder ofacquiring, holding or disposing of Common Shares.

 

This summary takes into account the current provisions of Tax Act, theregulations thereunder, all specific proposals to amend the Tax Act publiclyannounced prior to the date of this Annual Report, and the current publishedadministrative practices and policies of the Canada Customs and RevenueAgency.  It assumes that all proposalsto amend the Tax Act will be enacted in their present form and otherwise doesnot take into account or anticipate changes in the law, whether by way ofjudicial decision or legislative action nor does it take into accountprovincial, territorial or foreign tax legislation or considerations.

 

A U.S. Holder will not be subject to tax under the Tax Act on any gainrealized in respect of the disposition or deemed disposition of Common Sharesto a person other than the Company.  Adisposition of the Shares to the Company may give rise to a deemed dividendthat would be subject to Canadian withholding tax.  Generally, dividends paid or credited, or deemed to be paid orcredited by the Company are subject to Canadian withholding tax at the rate of15% (reduced from 25% by the Convention) for U.S. Holders who beneficially ownthe dividends.  The Company assumesresponsibility for the withholding of tax on dividends to a U.S. Holder at thesource.

 

68

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**F.****                                      Dividendsand Paying Agents**

 

Not applicable

 

**G.****                                    Statementby Experts**

 

Not applicable

 

**H.****                                    Documentson Display**

 

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

 

The Company’s SEC filings, and the exhibitsthereto, are available for inspection and copying at the public referencefacilities maintained by the SEC in Room 1024, 450 Fifth Street N.W.,Washington, D.C., 20549.  Copies ofthese filings may be obtained from these offices after the payment ofprescribed fees.  Please call the SEC at1-800-SEC-0330 for further information on the public reference rooms.

 

69

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As a foreign private issuer, the Company isexempt from the 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 shortswing profitrecovery and disclosure regime of section 16 of the Exchange Act.

 

**I.****                                         SubsidiaryInformation**

 

Not applicable

 

**Item 11****       Quantitiveand Qualitative Disclosures about Market Risk**

 

See “Item 5 – Operating and Financial Review and Prospects, Operating Results – FinancialInstruments.”  The Company is notsubject to significant interest rate risk due to the short-term maturities ofthe Company’s outstanding loans.

 

**Item 12****       Descriptionof Securities other than Equity Securities**

 

Not applicable

 

**PARTII**

 

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

 

Not applicable.

 

**Item 14****       MaterialModifications to the Rights of Security Holders and Use of Proceeds**

 

Not applicable.

 

**Item 15****       Controlsand Procedures**

 

*Evaluation ofDisclosure Controls and Procedures. *The Company’s Chief Executive Officer andChief Financial Officer, after evaluating the effectiveness of the Company’s“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934, Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered bythis Annual Report, have concluded that the Company’s disclosure controls andprocedures were effective and designed to ensure that material informationrelating to the Company should be made know to them by others within thoseentities.

 

*Changes in InternalControls. *There were no changes in the Company’sinternal controls over financial reporting identified in connection with theevaluation above during the period covered by this Annual Report that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

**Item 16A.****                                           AuditCommittee Financial Expert**

 

The Company’s board of directors hasdetermined that Joel A. Schleicher is the Company’s audit committee financialexpert as defined by the rules of the SEC. Mr. Schleicher is “independent” as defined by the Nasdaq Stock Marketlisting standards.

 

**Item 16B.****                                           Codeof Ethics**

 

The Company has adopted a Code of Ethics thatapplies to its principal executive officer, principal financial officer and allother officers, employees and directors of the Company.  A copy of the Company’s Code of Ethics canbe found on the Company’s website at www. novatel.ca.

 

70

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**Item 16C.****                                           PrincipalAccountant Fees and Services**

 

The following table sets forth the aggregate fees billed to the Companyfor the years ended December 31, 2002 and December 31, 2003:

 

 
| **Fees**               |   | **2003 (b)** |        | **2002 (a)** |   |
|------------------------|--------|--------------|-------------|--------------|--------|
| Audit Fees (1)         |   | $            | 176,120     |         | $      | 151,250 |   |
| Audit-Related Fees (2) |   | 3,500        |        | —       |   |
| Tax Fees (3)           |   | 48,485       |        | 30,700       |   |
| All Other Fees (4)     |   | —       |        | 26,332       |   |
| **Total Fees**         |   | **$**        | **228,105** |         | **$**  | **208,282** | ** ** |

 

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(a)                                  Consists of feesbilled for professional services rendered by Arthur Andersen LLP fromJanuary 1, 2002 to June 1, 2002 and from June 1, 2002 toDecember 31, 2002 by Deloitte & Touche LLP.

 

(b)                                 Fees billed forprofessional services rendered by Deloitte & Touche LLP from January 1,2003 to December 31, 2003.

 

1.  “Audit Fees” consist of feesbilled for professional services rendered in connection with the audit of theCompany’s consolidated annual financial statements, review of the Company’squarterly financial statements and the quarterly and annual regulatory filingsthereon.

 

2.  “Audit-Related Fees” consistof fees for professional services rendered in connection with financialaccounting and reporting consultations.

 

3.  “Tax Fees” consist of feesbilled 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 offees for products and services other than the services reported above. In 2002,this category included fees related to Mezure, Inc.

 

Effective February 13, 2003, the Audit and Finance Committeerequired pre-approval of all audit and permissible non-audit services(including the fees and terms thereof) to be performed for the Company by itsindependent auditors, subject to the de-minimus exception for non-auditservices described in Section 10A(i)(1)(B) of the Securities Exchange actof 1934.

 

The Audit and Finance Committee reviews all non-audit related servicesprovided by the independent auditors to the Company, at each quarterlymeeting.  In 2003, the Audit and FinanceCommittee approved 100% of the non-audit related services provided in 2003,with the exception of certain services which had been in process prior toJanuary 1, 2003.

 

**Item 16D.****                                           Exemptionsfrom the Listing Standards for Audit Committees**

 

Not applicable

 

71

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

 
| **Period**                            |   | **Total  Number of  Shares (or Units)  Purchased** |   | **Average  Price Paid  per Share (or unit)  ($US)** |    | **Total  Number of  Shares (or Units)  Purchased as Part  of Publicly  Announced Plans  or Programs** |   | **Maximum  Number  (or Approximate  Dollar Value) of  Share (or Units) that  May Yet Be  Purchased Under the  Plans or Programs** |   |
|---------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------------------|---------|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                  |   |                                               |   |                                                |    |                                                                                                  |   |                                                                                                                              |   |
| June 1 – June 30, 2003 |   | 500                                                |   | 3.50                                                |    | 500                                                                                                   |   | 230,232                                                                                                                           |   |
|                                  |   |                                               |   |                                                |    |                                                                                                  |   |                                                                                                                              |   |
| July 1 – July 31, 2003 |   | 1,000                                              |   | 3.39                                                |    | 1,000                                                                                                 |   | 229,232                                                                                                                           |   |
|                                  |   |                                               |   |                                                |    |                                                                                                  |   |                                                                                                                              |   |
| **Total**                             |   | 1,500                                              |   | 3.43                                                | *  | 1,500                                                                                                 |   | 229,232                                                                                                                           |   |

 

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* Wt.average price per share

 

**Item 17****       FinancialStatements**

 

Not applicable.

 

**Item 18****       FinancialStatements**

 

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

 

**Item 19****       FinancialStatements and Exhibits**

 

(a)                                  FinancialStatements

 

1. Report of Independent Chartered Accountants

 

2. Consolidated Balance Sheets

 

3. Consolidated Statements of Operations

 

4. Consolidated Statements of Shareholders’ Equity (Deficit)

 

5. Consolidated Statements of Cash Flows

 

6. Notes to Consolidated Financial Statements

 

7. Financial Statement Schedules

 

(b)                                 Exhibits

 
| **Exhibit  Number** |   | **Exhibit**                                                                                                     |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------|
| 3.1                 |   | Restated Articles of Incorporation of Registrant.(1)                                                            |
| 3.2                 |   | Restated Bylaws of Registrant.                                                                                  |
| 4.1                 |   | Form of Common Stock Certificate.(1)                                                                            |
| 10.1                |   | Directors Stock Option Plan.(1)                                                                                 |
| 10.2                |   | Stock Option Plan with form of stock option agreement.(1)                                                       |
| 10.3                |   | Form of Indemnification Agreement to be entered into between  Registrant and certain directors and officers.(1) |

 

72

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| 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.(2)                                   |
| 10.6   |   | Agreement made effective July 20, 1999 between NovAtel Inc. and  Sokkia Co., Ltd.(4)                                                  |
| 10.7   |   | License Agreement made effective August 1, 1999 between NovAtel  Inc., Sokkia Co., Ltd. and Point, Inc.(4)                            |
| 10.8   |   | Operating Loan Credit Facility Letter from HSBC Bank Canada made  effective November 6, 2000.(5)                                      |
| 10.9   |   | Amendment No. 1 to Definitive Project Agreement made effective  November 15, 2000 between NovAtel Inc. and BAE Systems Canada Inc.(5) |
| 10.10  |   | Amendment made effective January 26, 2001 to Operating Loan  Credit Facility Letter from HSBC Bank Canada.(5)                         |
| 10.11  |   | Employment Agreement dated April 5, 2004 between NovAtel Inc.  and Jonathan W. Ladd.                                                  |
| 10.12  |   | Operating Line of Credit Facility Letter from The Toronto Dominion  Bank dated June 5, 2002. (6)                                      |
| 10.13  |   | Employment Agreement dated November 20, 1996 between NovAtel  Inc. and Patrick C. Fenton.                                             |
| *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. |
| 21.1   |   | List of Subsidiaries.                                                                                                                      |
| 23.1   |   | Consent of Deloitte & Touche LLP.                                                                                                      |
| 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.                                                                                 |

 

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(1)                                  Incorporatedby reference to Registrant’s registration statement on Form F-1 (RegistrationStatement No. 333-6088).

(2)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1998.

(3)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1997.

(4)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1999.

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

(6)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 2002.

 

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

 

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**SIGNATURES**

 

The Registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorized theundersigned 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 26, 2004 |                                        |

 

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**NOVATEL INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Auditors                        |   |
|-------------------------------------------------------|--------|
| Consolidated Balance Sheets                           |   |
| Consolidated Statements of Operations                 |   |
| Consolidated Statements of Shareholders’  Equity |   |
| Consolidated Statements of Cash Flows                 |   |
| Notes to Consolidated Financial Statements            |   |

 

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**REPORT OF INDEPENDENT AUDITORS**

 

To the Shareholders of NovAtel Inc.,

 

We have audited the consolidated balance sheets of NovAtel Inc. asat December 31, 2003 and 2002, and the consolidated statements ofoperations, shareholders’ equity and cash flows for the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with generally accepted auditingstandards in Canada and the United States of America. Those standardsrequire that we plan and perform an audit to obtain reasonable assurancewhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat 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 atDecember 31, 2003 and 2002 and the results of its operations and its cashflows for the years then ended in accordance with Canadian generally acceptedaccounting principles.

 

The financial statements of NovAtel Inc. for the year endedDecember 31, 2001 were audited by other auditors who have ceasedoperations. Those auditors expressed an opinion without reservation on thosefinancial statements in their report dated February 1, 2002. As describedin Note 17, those financial statements have been revised to give effect tothe discontinued operations. We audited the amounts reclassified asdiscontinued operations in the 2001 financial statements. Our proceduresincluded (1) comparing the reclassified amounts related to thediscontinued operations to the Company’s underlying analysis obtained frommanagement, and (2) testing the mathematical accuracy of the amounts tothe consolidated financial statements. In our opinion, such adjustments havebeen properly applied. However, we were not engaged to audit, review, or applyany procedures to the 2001 financial statements of the Company other than withrespect to such adjustments and, accordingly, we do not express an opinion orany other form of assurance on the 2001 financial statements taken as a whole.

 
| Calgary, Canada           |                  |                          |
|---------------------------|-----------------------|-------------------------------|
| Deloitte & Touche LLP |                  | /s/ Deloitte & Touche LLP |
| January 30, 2004     | Chartered Accountants |

 

 

**COMMENTSBY AUDITORS FOR US READERS ON CANADA-US REPORTING DIFFERENCES**

 

In the United States of America, reporting standards for auditorsrequire the addition of an explanatory paragraph outlining changes inaccounting principles that have been implemented in the financial statements.As discussed in Note 2 to the consolidated financial statements, in2002 the Company changed its method of accounting for stock options to conformto the new Canadian Institute of Chartered Accountants Handbook recommendationsSection 3870.

 
| Calgary, Canada           |                  |                          |
|---------------------------|-----------------------|-------------------------------|
| Deloitte & Touche LLP |                  | /s/ Deloitte & Touche LLP |
| January 30, 2004     | Chartered Accountants |

 

F-2

----

 

**Thisis a copy of the report previously issued by Arthur Andersen LLP. Thereport has not been reissued by Arthur Andersen LLP nor has ArthurAndersen LLP provided a consent to the inclusion of its report in thisprospectus.**

 

**REPORTOF INDEPENDENT CHARTERED ACCOUNTANTS**

 

To the Shareholders of NovAtel Inc.,

 

We have audited the consolidated balance sheets of NovAtel Inc. asat December 31, 2001 and 2000 and the consolidated statements ofoperations, shareholders’ equity and cash flows for each of the three years inthe period ended December 31, 2001. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with generally accepted auditingstandards in Canada and the United States. Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.

 

In our opinion, these consolidated financial statements present fairly,in all material respects, the financial position of the Company as atDecember 31, 2001 and 2000 and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2001 inaccordance with Canadian generally accepted accounting principles.

 
| Calgary, Canada       | ARTHUR ANDERSEN LLP |
|-----------------------|--------------------------|
| February 1, 2002 | Chartered Accountants    |

 

F-3

----

 

**NOVATELINC.**

 

**CONSOLIDATED BALANCESHEETS**

 

**(inthousands, Canadian dollars)**

 
|                                                                                                                                                      |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                                      |   | **2003**              |   | **2002** |   |
|                                                                                                                                                      |   |                  |   |   |   |
| **ASSETS**                                                                                                                                                |   |                  |   |   |   |
| Current assets:                                                                                                                                           |   |                  |   |   |   |
| Cash and short-term investments  (Note 8) (includes compensating balances of $3,278 at December 31,  2003 and $3,455 at December 31, 2002) |   | $                     | 13,000 |   | $ | 6,572 |   |
| Accounts receivable (Notes 3  and 12)                                                                                                           |   | 6,383                 |   | 9,634 |   |
| Related party receivables (Note 15)                                                                                                                  |   | 1,081                 |   | 730 |   |
| Related party notes receivable  (Note 15)                                                                                                            |   | 1,721                 |   | 1,932 |   |
| Inventories (Note 4)                                                                                                                                 |   | 4,782                 |   | 4,780 |   |
| Prepaid expenses and deposits                                                                                                                             |   | 357                   |   | 284 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Total current assets                                                                                                                                      |   | 27,324                |   | 23,932 |   |
| Capital assets (Note 5)                                                                                                                              |   | 3,700                 |   | 2,460 |   |
| Intangible assets (Notes 6 and 9)                                                                                                               |   | 1,991                 |   | 1,902 |   |
| Deferred development costs (Note 7)                                                                                                                  |   | 2,557                 |   | 2,596 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Total assets                                                                                                                                              |   | $                     | 35,572 |   | $ | 30,890 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                             |   |                  |   |   |   |
| Current liabilities:                                                                                                                                      |   |                  |   |   |   |
| Accounts payable and accrued liabilities                                                                                                                  |   | $                     | 5,868  |   | $ | 5,848 |   |
| Related party payables (Note 15)                                                                                                                     |   | 935                   |   | 327 |   |
| Notes payable (Note 16)                                                                                                                              |   | 1,721                 |   | 2,418 |   |
| Deferred revenue and customer deposits                                                                                                                    |   | 312                   |   | 531 |   |
| Provision for future warranty costs                                                                                                                       |   | 410                   |   | 344 |   |
| Capital lease obligations — current  portion (Note 9)                                                                                      |   | 100                   |   | 92 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Total current liabilities                                                                                                                                 |   | 9,346                 |   | 9,560 |   |
| Deferred gain on sale/leaseback of capital  assets (Note 5)                                                                                          |   | 567                   |   | 685 |   |
| Capital lease obligations — long-term  portion (Note 9)                                                                                    |   | —                |   | 98 |   |
| Related party payables — long-term  portion (Note 15)                                                                                      |   | 212                   |   | — |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Total liabilities                                                                                                                                         |   | 10,125                |   | 10,343 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Commitments, contingencies and guarantees (Note 9)                                                                                                   |   |                  |   |   |   |
| Shareholders’ equity (Note 11):                                                                                                                 |   |                  |   |   |   |
| Capital stock (Common shares issued and  outstanding: 7,984 at December 31, 2003 and 7,685 at December 31,  2002 respectively)                  |   | 37,012                |   | 35,572 |   |
| Contributed surplus                                                                                                                                       |   | 13                    |   | 13 |   |
| Deficit                                                                                                                                                   |   | (11,578               | )      | (15,038 | ) |
|                                                                                                                                                      |   |                  |   |   |   |
| Total shareholders’ equity                                                                                                                           |   | 25,447                |   | 20,547 |   |
|                                                                                                                                                      |   |                  |   |   |   |
| Total liabilities and shareholders’ equity                                                                                                           |   | $                     | 35,572 |   | $ | 30,890 |   |

 

The following amounts relating to discontinued operations are includedin the consolidated balance sheet (Note 17).

 
| Current assets of discontinued operations           |   | $ | — |   | $ | 132    |   |
|-----------------------------------------------------|--------|---|--------|--------|---|--------|--------|
| Non-current assets of discontinued  operations      |   | $ | — |   | $ | 285    |   |
| Current liabilities of discontinued  operations     |   | $ | 40     |   | $ | 892    |   |
| Non-current liabilities of discontinued  operations |   | $ | — |   | $ | — |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

F-4

----

 

**NOVATELINC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(inthousands, except per share data, Canadian dollars)**

 
|                                                       |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                       |   |                              |   |   |   |   |   |
| Revenues (Notes 12 and 15)                       |   |                              |   |   |   |   |   |
| Product sales                                              |   | $                                 | 32,138 |   | $ | 26,967 |   | $ | 23,241 |   |
| NRE fees                                                   |   | 6,546                             |   | 6,179 |   | 4,996 |   |
|                                                       |   |                              |   |   |   |   |   |
| Total revenues                                             |   | 38,684                            |   | 33,146 |   | 28,237 |   |
|                                                       |   |                              |   |   |   |   |   |
| Cost of sales (Note 15)                               |   |                              |   |   |   |   |   |
| Cost of product sales                                      |   | 14,805                            |   | 11,885 |   | 10,730 |   |
| Cost of NRE fees                                           |   | 3,565                             |   | 4,055 |   | 2,542 |   |
|                                                       |   |                              |   |   |   |   |   |
| Total cost of sales                                        |   | 18,370                            |   | 15,940 |   | 13,272 |   |
|                                                       |   |                              |   |   |   |   |   |
| Gross profit                                               |   | 20,314                            |   | 17,206 |   | 14,965 |   |
|                                                       |   |                              |   |   |   |   |   |
| Operating expenses:                                        |   |                              |   |   |   |   |   |
| Research and development                                   |   | 7,123                             |   | 5,334 |   | 6,571 |   |
| Selling and marketing                                      |   | 5,269                             |   | 5,361 |   | 3,612 |   |
| General and administration                                 |   | 4,280                             |   | 4,045 |   | 3,711 |   |
|                                                       |   |                              |   |   |   |   |   |
| Total operating expenses                                   |   | 16,672                            |   | 14,740 |   | 13,894 |   |
|                                                       |   |                              |   |   |   |   |   |
| Operating income                                           |   | 3,642                             |   | 2,466 |   | 1,071 |   |
| Interest income, net                                       |   | 174                               |   | 84 |   | 131 |   |
| Other expense (Note 13)                               |   | (664                              | )      | (328 | ) | (123 | ) |
|                                                       |   |                              |   |   |   |   |   |
| Income from continuing operations before  income taxes     |   | 3,152                             |   | 2,222 |   | 1,079 |   |
| Provision for income taxes (Note 14)                  |   | 52                                |   | 77 |   | 13 |   |
|                                                       |   |                              |   |   |   |   |   |
| Net income from continuing operations                      |   | 3,100                             |   | 2,145 |   | 1,066 |   |
| Income (loss) from discontinued operations  (Note 17) |   | 360                               |   | (648 | ) | (956 | ) |
|                                                       |   |                              |   |   |   |   |   |
| Net income                                                 |   | $                                 | 3,460  |   | $ | 1,497 |   | $ | 110 |   |
|                                                       |   |                              |   |   |   |   |   |
| Net income (loss) per share (basic)  (Note 11)        |   |                              |   |   |   |   |   |
| Continuing operations                                      |   | $                                 | 0.40   |   | $ | 0.28 |   | $ | 0.14 |   |
| Discontinued operations                                    |   | 0.05                              |   | (0.09 | ) | (0.13 | ) |
|                                                       |   |                              |   |   |   |   |   |
| Net income per share (basic)                               |   | $                                 | 0.45   |   | $ | 0.19 |   | $ | 0.01 |   |
|                                                       |   |                              |   |   |   |   |   |
| Weighted average shares outstanding (basic)                |   | 7,723                             |   | 7,681 |   | 7,690 |   |
|                                                       |   |                              |   |   |   |   |   |
| Net income (loss) per share (diluted)  (Note 11)      |   |                              |   |   |   |   |   |
| Continuing operations                                      |   | $                                 | 0.39   |   | $ | 0.27 |   | $ | 0.14 |   |
| Discontinued operations                                    |   | 0.04                              |   | (0.08 | ) | (0.13 | ) |
|                                                       |   |                              |   |   |   |   |   |
| Net income per share (diluted)                             |   | $                                 | 0.43   |   | $ | 0.19 |   | $ | 0.01 |   |
|                                                       |   |                              |   |   |   |   |   |
| Weighted average shares outstanding  (diluted)             |   | 7,983                             |   | 7,824 |   | 7,704 |   |

 

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

 

F-5

----

 

**NOVATELINC.**

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’****EQUITY**

 

**(inthousands, Canadian dollars)**

 
|                   |   | **Common  Shares  (Note 11)** |   |       |   |                     |   |        |   |
|------------------------|--------|------------------------------------|--------|------------|--------|--------------------------|--------|-------------|--------|
|                   |   | **Number**                         |   | **Amount** |   | **Contributed  Surplus** |   | **Deficit** |   | **Total  Shareholders’  Equity** |   |
|                   |   |                               |   |       |   |                     |   |        |   |   |   |
| January 1, 2001   |   | 7,678                              |   | $          | 35,614 |                     | $      | —      |   | $ | (16,645 | ) | $ | 18,969 |   |
| Common shares issued   |   | 17                                 |   | 35         |   | —                   |   | —      |   | 35 |   |
| Repurchase of shares   |   | (12                                | )      | (53        | )      | 25                       |   | —      |   | (28 | ) |
| Net income             |   | —                             |   | —     |   | —                   |   | 110         |   | 110 |   |
|                   |   |                               |   |       |   |                     |   |        |   |   |   |
| December 31, 2001 |   | 7,683                              |   | $          | 35,596 |                     | $      | 25          |   | $ | (16,535 | ) | $ | 19,086 |   |
| Common shares issued   |   | 14                                 |   | 31         |   | —                   |   | —      |   | 31 |   |
| Repurchase of shares   |   | (12                                | )      | (55        | )      | (12                      | )      | —      |   | (67 | ) |
| Net income             |   | —                             |   | —     |   | —                   |   | 1,497       |   | 1,497 |   |
|                   |   |                               |   |       |   |                     |   |        |   |   |   |
| December 31, 2002 |   | 7,685                              |   | $          | 35,572 |                     | $      | 13          |   | $ | (15,038 | ) | $ | 20,547 |   |
| Common shares issued   |   | 301                                |   | 1,449      |   | —                   |   | —      |   | 1,449 |   |
| Repurchase of shares   |   | (2                                 | )      | (9         | )      | —                   |   | —      |   | (9 | ) |
| Net income             |   | —                             |   | —     |   | —                   |   | 3,460       |   | 3,460 |   |
|                   |   |                               |   |       |   |                     |   |        |   |   |   |
| December 31, 2003 |   | 7,984                              |   | $          | 37,012 |                     | $      | 13          |   | $ | (11,578 | ) | $ | 25,447 |   |

 

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

 

F-6

----

 

**NOVATELINC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(inthousands, Canadian dollars)**

 
|                                                                               |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                                               |   |                              |   |   |   |   |   |
| Operating activities:                                                              |   |                              |   |   |   |   |   |
| Net income from continuing operations                                              |   | $                                 | 3,100  |   | $ | 2,145 |   | $ | 1,066 |   |
| Income (loss) from discontinued operations                                         |   | 360                               |   | (648 | ) | (956 | ) |
| Charges and credits to operations not  involving an outlay of cash:                |   |                              |   |   |   |   |   |
| Amortization                                                                       |   | 1,807                             |   | 2,127 |   | 2,415 |   |
| Gain on disposal of capital assets                                                 |   | (66                               | )      | (23 | ) | (5 | ) |
| Gain on dilution of equity interest in  Mezure, Inc. (Note 17)           |   | —                            |   | (121 | ) | — |   |
| Gain on liquidation of Mezure assets and  liabilities (Note 17)               |   | (379                              | )      | — |   | — |   |
| Amortization of deferred gain on  sale/leaseback of capital assets                 |   | (118                              | )      | (129 | ) | (130 | ) |
| Non-controlling interest                                                           |   | —                            |   | — |   | (11 | ) |
| Net change in non-cash working capital  related to operations (Note 19)       |   | 3,309                             |   | (189 | ) | (2,802 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Cash provided by (used in) operating  activities                                   |   | 8,013                             |   | 3,162 |   | (423 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Financing activities:                                                              |   |                              |   |   |   |   |   |
| Issuance of shares (Note 11)                                                  |   | 1,449                             |   | 31 |   | 35 |   |
| Repurchase of shares (Note 11)                                                |   | (9                                | )      | (67 | ) | (28 | ) |
| Equity financing of joint venture  (Note 16)                                  |   | —                            |   | 588 |   | — |   |
| Related party notes receivable                                                     |   | (140                              | )      | (346 | ) | (76 | ) |
| Notes payable                                                                      |   | 172                               |   | 626 |   | 76 |   |
| (Decrease) increase in capital lease  obligations (Note 5)                    |   | (90                               | )      | (393 | ) | 48 |   |
| Effect of exchange rate changes on  financing activities                           |   | (74                               | )      | (4 | ) | 15 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Cash provided by financing activities                                              |   | 1,308                             |   | 435 |   | 70 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Increase (decrease) in cash before  investing activities                           |   | 9,321                             |   | 3,597 |   | (353 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Investing activities:                                                              |   |                              |   |   |   |   |   |
| Purchase of capital and intangible assets                                          |   | (2,656                            | )      | (1,204 | ) | (937 | ) |
| Proceeds from disposal of capital assets                                           |   | 157                               |   | 98 |   | 36 |   |
| Investment in Point, Inc.  (Note 16)                                     |   | —                            |   | (588 | ) | — |   |
| Investment in Mezure, Inc.  (Note 17)                                    |   | —                            |   | — |   | (3 | ) |
| Acquisition of CMC Electronics’ OEM GPS  business (Note 18)              |   | (155                              | )      | — |   | — |   |
| Royalty payment relating to CMC  Electronics’ OEM GPS business (Note 18) |   | (82                               | )      | — |   | — |   |
| Deferred development costs                                                         |   | (157                              | )      | (125 | ) | (4 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Cash used in investing activities                                                  |   | (2,893                            | )      | (1,819 | ) | (908 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Increase (decrease) in cash and short-term  investments                            |   | 6,428                             |   | 1,778 |   | (1,261 | ) |
| Cash and short-term investments, beginning  of year                                |   | 6,572                             |   | 4,794 |   | 6,055 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Cash and short-term investments, end of  year                                      |   | $                                 | 13,000 |   | $ | 6,572 |   | $ | 4,794 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Cash and short-term investments consisted  of:                                     |   |                              |   |   |   |   |   |
| Cash and cash equivalents                                                          |   | $                                 | 2,445  |   | $ | 1,700 |   | $ | 1,938 |   |
| Restricted short-term investments                                                  |   | 3,278                             |   | 3,455 |   | 2,827 |   |
| Other short-term investments                                                       |   | 7,277                             |   | 1,417 |   | 29 |   |
|                                                                               |   |                              |   |   |   |   |   |
|                                                                               |   | $                                 | 13,000 |   | $ | 6,572 |   | $ | 4,794 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Interest paid related to bank advances and  capital lease obligations              |   | $                                 | 10     |   | $ | 27 |   | $ | 33 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Income taxes paid                                                                  |   | $                                 | 83     |   | $ | 40 |   | $ | 71 |   |

 

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

 

F-7

----

 

**NOVATELINC.**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMEN****TS(in thousands of Canadian dollars, except share and per share data and unlessotherwise stated)**

 

**NOTE 1  NATURE OF BUSINESS**

 

NovAtel Inc. (NovAtel or the Company) is incorporated under thelaws of Canada. The Company designs, markets and supports a broad range ofproducts that determine precise geographic locations using the GlobalPositioning System (GPS).

 

On July 20, 1999, the Company and Sokkia Co., Ltd.formed a company, Point, Inc. to develop and distribute GPS based productsfor surveying, mapping, geographical information systems, construction andconstruction machine control applications, on a world-wide basis (seeNote 16).

 

On April 17, 1998, CMC Electronics Inc. (CMC Electronics),formerly BAE SYSTEMS CANADA INC., acquired 58.3% of the Company’soutstanding 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).

 

As of December 31, 2003, the Company owned a 70% equity interestin Mezure, Inc., a company that had been developing a GPS, wirelesscommunication and Internet based product for deformation monitoring of manmadeand natural structures. On April 8, 2003, the shareholders of Mezure votedunanimously to proceed with a Chapter 7 bankruptcy filing for Mezure,which was concluded on September 24, 2003. Consequently, the Company istreating Mezure as a discontinued operation and accordingly has restated theconsolidated statement of operations for prior periods (see Note 17).

 

**NOTE 2  SIGNIFICANT ACCOUNTING POLICIES**

 

The consolidated financial statements have been prepared by managementin accordance with generally accepted accounting principles in Canada and arestated in Canadian dollars. The material differences between Canadian andUnited States of America (U.S.) generally accepted accounting principlesare described in Note 21. The preparation of financial statements inaccordance with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements, and revenues and expenses during the reportingperiod. Actual results could differ from those estimated.

 

a)  ***Principles of Consolidation***

 

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

 

b)  ***Foreign Currency Translation***

 

Foreign subsidiaries and Point, Inc. are considered financiallyand operationally dependent on the Company and are translated into Canadiandollars using current rates of exchange for monetary assets and liabilities,historical rates of exchange for non-monetary assets and liabilities, andaverage rates for the period for revenues and expenses, except amortization andcost of sales, which are translated at the rate of exchange applicable to therelated assets. Gains and losses resulting from these translation adjustmentsare included in other income (expense).

 

Transactions and monetary balances denominated in a currency other thanthe Canadian dollar are translated into Canadian dollars using yearly averageand year-end exchange rates, respectively. Gains and losses arising from thistranslation process are included in income.

 

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

 

Cash and cash equivalents include highly liquid investments which haveoriginal maturities of 90 days or less. Short-term investments includehighly liquid investments which have original maturities of 91 days to12 months.

 

d)  ***Inventories***

 

Raw materials and components, work-in-progress, and finished goodsinventories are recorded at the lower of cost or net realizable value. Cost isdetermined on a first-in, first-out basis and includes materials, labour andmanufacturing overhead.

 

F-8

----

 

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

 

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

 

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

 
| Computer and ancillary equipment   |   | 4 years                |   |
|------------------------------------|--------|-----------------------------|--------|
| Research and development equipment |   | 4 years                |   |
| Production equipment               |   | 5 years                |   |
| Leasehold improvements             |   | over term of leases         |   |
| Furniture and fixtures             |   | 10 years               |   |
| Product tooling                    |   | 2 - 4 years  |   |
| Patents and other intangibles      |   | 4 - 10 years |   |

 

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

 

f)  ***Revenue Recognition***

 

Revenues from product sales are recognized at the time of shipment tothe customer. Revenues from non-recurring engineering (“NRE”) fees arerecognized at the time services are rendered. On long-term contracts, in whichthe customer pays established rates for time and materials, revenue isrecognized as services are rendered and costs are incurred. On certainlong-term contracts, revenue is recognized using the proportional performancemethod relative to customer milestones achieved or total costs incurred.Revisions in cost and profit estimates during the course of work are reflectedin the period in which the need for revision becomes known. Losses, if any, arerecognized fully when first anticipated. Some contracts contain penaltyprovisions based on performance relative to established targets. Such penaltiesare included in revenue or cost estimates when amounts can be reasonablydetermined.

 

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

 

Research costs are charged to operations as incurred. Developmentcosts, including software development costs, are charged to operations asincurred unless they meet specific criteria related to technical, market andfinancial feasibility. In these circumstances, the costs are deferred andamortized on a systematic basis, subject to an estimate of recoverability.

 

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

 

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

 

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

 

The Company has stock-based compensation plans (see Note 11).Effective January 1, 2002, the Company adopted the provisions ofSection 3870 of the Handbook of the Canadian Institute of CharteredAccountants with respect to accounting for stock-based compensation and otherstock-based payments. The Company has elected to continue to use the intrinsicvalue based method of accounting for stock-based compensation arrangements andto disclose the pro forma results of using the fair value based method.Accordingly, the net earnings for the reported periods remain unchanged and thepro forma results of using the fair value based method are disclosed inNote 20. The Company is applying the new recommendations to all optionsgranted.

 

j)  ***Income Taxes***

 

The Company follows the liability method of accounting for incometaxes. Under this method, current income taxes are recognized for the estimatedincome taxes payable for the current year. Future income tax assets and liabilitiesare recognized for temporary differences between the tax and accounting basesof assets and liabilities as well as for the benefit of losses available to becarried forward to future years for tax purposes that are more likely than notto be realized (see Note 14).

 

F-9

----

 

k)  ***Investment Tax Credits***

 

Investment tax credits relating to scientific research and developmentand capital expenditures are accounted for using the cost reduction method asthey are received, as there is not a high degree of assurance that the Companywill be able to realize the benefit from these credits.

 

l)  ***Post Employment Benefits***

 

The Company currently provides certain life insurance and extendedhealth care benefits for employees as they retire. Substantially all of thehealth care benefits are self-insured, while life insurance benefits areprovided through an insurance contract. The Company recognizes the cost ofproviding such benefits as the related services are rendered by employees.

 

m)  ***Earnings Per Share***

 

Basic earnings per share is calculated by dividing the net earningsavailable to common shareholders by the weighted average number of commonshares outstanding. Diluted earnings per share reflects the potential dilutionthat would occur if stock options were exercised. The treasury stock method isused in calculating diluted earnings per share, which assumes that any proceedsreceived from the exercise of in-the-money stock options would be used topurchase common shares at the average market price for the period.

 

n)  ***Goodwill***

 

Effective July 1, 2001, the Company adopted the provisions ofSection 3062 of the Handbook of the Canadian Institute of CharteredAccountants with respect to goodwill and intangibles. Goodwill arising afterJuly 1, 2001 is recorded at cost and is not subject to amortization.Effective January 1, 2002, goodwill is subject to a fair value impairmenttest at least annually.

 

o)  ***Comparative Figures***

 

Certain of the comparative figures have been reclassified to conformwith the financial statement presentation adopted in 2003. Thisreclassification pertains primarily to the treatment of Mezure, Inc. as adiscontinued operation (see Note 17).

 

**NOTE 3  ACCOUNTS RECEIVABLE**

 
|                              |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-----------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                              |   |                        |   |                        |   |
| Trade receivables, net            |   | $                           | 5,930  |                        | $      | 9,215 |   |
| Goods and Services Tax receivable |   | 366                         |   | 279                         |   |
| Other                             |   | 87                          |   | 140                         |   |
|                              |   |                        |   |                        |   |
|                              |   | $                           | 6,383  |                        | $      | 9,634 |   |

 

The receivable balances are net of an allowance for doubtful accountsand sales returns of $1,078 at December 31, 2003 and $1,077 atDecember 31, 2002.

 

**NOTE 4  INVENTORIES**

 
|                         |   | **December 31,  2003** |   | **December 31,  2002** |   |
|------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                         |   |                        |   |                        |   |
| Raw materials and components |   | $                           | 1,948  |                        | $      | 1,257 |   |
| Work-in-progress             |   | 280                         |   | 207                         |   |
| Finished goods               |   | 2,554                       |   | 3,316                       |   |
|                         |   |                        |   |                        |   |
|                         |   | $                           | 4,782  |                        | $      | 4,780 |   |

 

F-10

----

 

The inventory balances are net of a provision for excess and obsoleteinventory of $1,697 at December 31, 2003 and $1,461 at December 31,2002.

 

**NOTE 5  CAPITAL ASSETS**

 
|                                            |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                            |   |                        |   | **Accumulated**             |   |   |   |   |   | **Accumulated** |   |   |   |
|                                            |   | **Cost**                    |   | **Amortization**            |   | **Net** |   | **Cost** |   | **Amortization** |   | **Net** |   |
|                                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |
| Computer and ancillary equipment                |   | $                           | 6,503  |                        | $      | 5,024 |   | $ | 1,479 |   | $ | 5,534 |   | $ | 4,779 |   | $ | 755 |   |
| Production, research and development  equipment |   | 3,589                       |   | 2,517                       |   | 1,072 |   | 2,898 |   | 2,238 |   | 660 |   |
| Leasehold improvements                          |   | 116                         |   | 50                          |   | 66 |   | 111 |   | 32 |   | 79 |   |
| Furniture and fixtures                          |   | 1,713                       |   | 1,150                       |   | 563 |   | 1,778 |   | 1,013 |   | 765 |   |
| Product tooling                                 |   | 1,631                       |   | 1,161                       |   | 470 |   | 1,136 |   | 1,047 |   | 89 |   |
| Equipment under capital lease                   |   | 299                         |   | 249                         |   | 50 |   | 296 |   | 184 |   | 112 |   |
|                                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |
|                                            |   | $                           | 13,851 |                        | $      | 10,151 |   | $ | 3,700 |   | $ | 11,753 |   | $ | 9,293 |   | $ | 2,460 |   |

 

On January 29, 1999, the Company concluded a sale/leasebackarrangement 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 hasbeen deferred and is being amortized over the ten year term of the lease.

 

On September 28, 2001, the Company entered into a sale/leasebacktransaction with HSBC Leasing, whereby certain tooling and computer equipmentwas sold for $300 and a three year lease obligation.

 

**NOTE 6  INTANGIBLE ASSETS**

 

Intangible assets subject to amortization are as set out below:

 
|                                                                |   | **December 31,  2003** |   | **December 31,  2002** |   |
|---------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                                                |   | **Gross**                   |   | **Accumulated**             |   | **Net Book** |   | **Gross** |   | **Accumulated** |   | **Net Book** |   |
|                                                                |   | **Value**                   |   | **Amortization**            |   | **Value** |   | **Value** |   | **Amortization** |   | **Value** |   |
|                                                                |   |                        |   |                        |   |   |   |   |   |   |   |   |   |
| Patents and trademarks                                              |   | $                           | 3,586  |                        | $      | 2,117 |   | $ | 1,469 |   | $ | 3,442 |   | $ | 1,769 |   | $ | 1,673 |   |
| Technology                                                          |   | 2,341                       |   | 2,124                       |   | 217 |   | 2,124 |   | 2,087 |   | 37 |   |
| Market presence of CMC Electronics’  OEM GPS product line |   | 348                         |   | 43                          |   | 305 |   | — |   | — |   | — |   |
|                                                                |   |                        |   |                        |   |   |   |   |   |   |   |   |   |
| Total intangibles                                                   |   | $                           | 6,275  |                        | $      | 4,284 |   | $ | 1,991 |   | $ | 5,566 |   | $ | 3,856 |   | $ | 1,710 |   |

 

In addition to the above, at December 31, 2002, there was $192goodwill relating to Mezure, Inc. (see Note 17).

 

For the years ended December 31, 2003, 2002 and 2001, amortizationexpense of intangibles was $428, $750 and $721, respectively. The weighted-average amortization period is 7.7 years.

 

The estimated aggregate amortization expense for the five succeedingyears, is as follows:

 
| 2004 |   | $   | 495    |   |
|------|--------|-----|--------|--------|
| 2005 |   | 499 |   |
| 2006 |   | 433 |   |
| 2007 |   | 292 |   |
| 2008 |   | 222 |   |

 

F-11

----

 

**NOTE 7  DEFERRED DEVELOPMENT COSTS**

 
|                       |   | **December 31,  2003** |   | **December 31,  2002** |   |
|----------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                       |   |                        |   |                        |   |
| Deferred development costs |   | $                           | 2,846  |                        | $      | 2,689 |   |
| Accumulated amortization   |   | (289                        | )      | (93                         | )      |
|                       |   |                        |   |                        |   |
|                       |   | $                           | 2,557  |                        | $      | 2,596 |   |

 

In the year ended December 31, 2003, the Company deferred $157 ofdevelopment costs related to the development of a certified aviation GPSreceiver, compared to $125 in 2002 and $4 in 2001. With the GPS receiverreaching the commercialization stage for certain applications, the Company hascommenced amortizing these deferred costs, using a method similar to theunit-of-production method of amortization. The Company amortized $196 of thesedeferred costs in the year ended December 31, 2003 ($57 in 2002 and $36 in2001).

 

At December 31, 2003, the Company had deferred $2,557 ofdevelopment costs. The continued deferral of these costs is subject torecoverability based on estimates of future sales of the certified aviation GPSreceiver. Should future actual sales of this receiver be materially lower fromthe current estimated sales, all or a portion of the deferred development costswould be charged to results of operations.

 

**NOTE 8  BANK ADVANCES**

 

At December 31, 2003, lines of credit were available with the HSBCBank Canada and the Toronto Dominion Bank. The lines of credit are payable ondemand and are secured by $3,278 of short-term investments held as compensatingbalances. The bank advances bear interest at the banks’ prime rate(December 31, 2003 — 4.5%) on Canadian dollar advances.

 

In aggregate, the Company can borrow up to $1,650 for day-to-dayoperating requirements and $1,770 to support the margin requirements related tothe purchase of up to approximately US $6,500 of forward foreign exchange contracts(depending on the maturity date of the contracts). At December 31, 2003,portions of the lines of credit were utilized to support $65 of letters ofcredit ($79 at December 31, 2002) leaving $1,585 available for day-to-dayoperating requirements and the margin capacity available to enter intoapproximately US $6,500 in forward foreign exchange contracts (depending on thematurity date of the contracts).

 

**NOTE 9  COMMITMENTS, CONTINGENCIES AND GUARANTEES**

 

a)                                      AtDecember 31, 2003, purchase commitments were outstanding for approximately$8.1 million pertaining primarily to the acquisition of inventory,supplies and services in the normal course of business.

 

b)                                     The Company’sfacilities and certain computer equipment, office equipment and furniture areleased for various periods up to 2010. Payments under the leasing arrangementsare as follows:

 
|                                                     |   | **Capital  Leases** |   | **Operating  Leases** |   |
|----------------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                                     |   |                |   |                  |   |
| 2004                                                     |   | $                   | 103    |                  | $      | 970 |   |
| 2005                                                     |   | —              |   | 905                   |   |
| 2006                                                     |   | —              |   | 905                   |   |
| 2007                                                     |   | —              |   | 884                   |   |
| 2008                                                     |   | —              |   | 884                   |   |
| 2009 and beyond                                          |   | —              |   | 111                   |   |
|                                                     |   |                |   |                  |   |
| Total future minimum lease payments                      |   | 103                 |   | $                     | 4,659  |   |
|                                                     |   |                |   |                  |   |
| Less: imputed interest (7.0%)                            |   | (3                  | )      |                  |   |
| Balance of capital lease obligations                     |   | 100                 |   |                  |   |
| Less: current portion                                    |   | (100                | )      |                  |   |
| Capital lease obligations — long-term  portion |   | $                   | — |                  |   |   |

 

The Company’s rent expense associated with its facilities was $859 in2003, $909 in 2002 and $848 in 2001.

 

c)                                      As atDecember 31, 2003, intangible assets included $354 related to theCompany’s 1996 settlement agreement with Trimble Navigation Limited (Trimble).This settlement agreement with Trimble includes a provision that Trimble may,at its sole option, terminate rights granted thereunder, including licenses,should the Company undergo a direct change in control. On June 26, 2001,the Company received notice from Trimble terminating the licenses and rightsunder the

 

F-12

----

 

settlement agreement in connection with the share acquisition by CMCElectronics in April 1998. The Company has sought legal advice regardingTrimble’s termination rights under the 1996 settlement agreement and iscontinuing to evaluate the impact, if any, of Trimble’s notice of termination.As this matter has not been resolved as of December 31, 2003, the Companyhas not provided for any impairment of these intangible assets.

 

d)                                     The Company issubject to legal proceedings and other claims which arise in the ordinarycourse of its business. The Company has sought legal advice on these matters.In the opinion of management, the ultimate liability with respect to theresolution of these actions is not expected to materially affect the financialposition or results of operations.

 

e)                                      In the normalcourse of operations, the Company provides indemnifications that are oftenstandard contractual terms to counterparties in transactions such as purchaseand sale contracts and service agreements. These indemnification agreements mayrequire the Company to compensate the counterparties for costs incurred as aresult of various events, changes in (or in the interpretation of) laws andregulations, or as a result of litigation claims or statutory sanctions thatmay be suffered by the counterparty as a consequence of the transaction. Theterms of these indemnification agreements will vary based upon the contract,the nature of which prevents the Company from making a reasonable estimate ofthe maximum potential amount it could be required to pay counterparties.Historically, the Company has not made any payments under such indemnificationsand no amounts have been accrued in the accompanying consolidated financialstatements with respect to these indemnification guarantees.

 

F-13

----

 

**NOTE 10  FINANCIAL INSTRUMENTS**

 

In the normal course of business, the Company uses foreign currencyoptions and forward foreign currency contracts to reduce its exposure tofluctuations in the U.S. dollar to Canadian dollar exchange rates. TheCompany documents the relationship between hedging instruments and hedgeditems, as well as its risk management objective for undertaking hedgingtransactions. The process includes linking hedging instruments to assets andliabilities on the balance sheet or to forecasted transactions. The Companyalso assesses, both at the hedge’s inception and on an ongoing basis, whetherthe foreign currency contracts that are used in hedging transactions areeffective 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 hedgesof a portion of the Company’s U.S. dollar denominated revenues. Thecontracts are not used for trading or speculative purposes. Foreign exchangegains and losses on foreign currency contracts used to hedge current foreigncurrency assets and liabilities are accrued under current assets or liabilitieson the balance sheet and recognized currently in other income/expense, net,offsetting the respective translation gains and losses recognized on theunderlying asset or liability.

 

Foreign exchange gains and losses on foreign currency contracts used tohedge anticipated U.S. dollar revenues beyond 60 days are appliedagainst the underlying revenue when these revenues are recognized.

 

At December 31, 2003, the Company’s forward foreign currencycontracts had all matured. In January 2004, the Company entered intoadditional forward currency contracts to sell US $7,500 betweenJanuary 31, 2004 and December 31, 2004 at an average rate of $0.7622per Canadian dollar.

 

The carrying values of other financial instruments, which include cashand short-term investments, accounts receivable, related party receivables andadvances, related party notes receivable, accounts payable, related partypayables and notes payable approximate their fair value because of the near-termmaturity of these instruments. The carrying value of capital lease obligationsapproximate their fair value, as the imputed interest rates on theseobligations approximate market rates.

 

**NOTE 11  SHAREHOLDERS’ EQUITY**

 

The Company has authorized an unlimited number of common shares andfirst preference shares, of which 7,984 common shares are outstanding as ofDecember 31, 2003 (7,685 in 2002 and 7,683 in 2001).

 

Net income (loss) per share figures presented in the Company’sfinancial statements are based upon the weighted average number of sharesoutstanding. Diluted net income (loss) per share figures are computed as if thedilutive instruments were exercised at the beginning of the period (or the timeof issuance, if later) and the funds obtained were used to purchase commonshares at the average market price during the period.

 

On September 4, 2001, the Company implemented a share repurchaseprogram, under which the Company could repurchase up to 3% of the outstandingshares over the following twelve month period. By the time the program expiredon September 3, 2002, the Company had repurchased 23 shares.

 

On June 12, 2003, the Company implemented a new share repurchaseprogram under which the Company can repurchase up to 3% of the outstandingcommon shares over a twelve month period. From June 12, 2003 throughDecember 31, 2003, the Company repurchased 2 shares.

 

The Company maintains stock option plans for employees and members ofthe Board of Directors. Under the plans, participants are granted options topurchase common shares at no less than the market value on the date of thegrant. The options have vesting periods ranging from three to four years andexpire ten years from the date of the grant. As of December 31, 2003, theCompany had authorized the granting of up to 1,261 options to purchase commonshares of the Company under the stock option plans, of which 339 had beenexercised.

 

A summary of the status of the Company’s stock option plans as ofDecember 31, 2003, 2002 and 2001, and changes during the years ending onthose dates is presented below:

 
|                               |   | **2003**               |   | **2002**                             |   | **2001**               |   |
|------------------------------------|--------|------------------------|--------|--------------------------------------|--------|------------------------|--------|
| **Options**                        |   | **Number of  Options** |   | **Weighted-Average  Exercise Price** |   | **Number of  Options** |   | **Weighted-Average  Exercise Price** |   | **Number of  Options** |   | **Weighted-Average  Exercise Price** |   |
|                               |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |
| Outstanding at beginning of year   |   | 974                    |   | US $                                 | 4.59   |                   | 834    |   | US $ | 5.08 |   | 954 |   | US $ | 6.19 |   |
| Granted                            |   | 186                    |   | 2.29                                 |   | 198                    |   | 2.41 |   | 175 |   | 1.74 |   |
| Exercised                          |   | (301                   | )      | 3.69                                 |   | (13                    | )      | 1.47 |   | (17 | ) | 1.38 |   |
| Forfeited                          |   | (4                     | )      | 3.85                                 |   | (45                    | )      | 4.87 |   | (278 | ) | 6.99 |   |
|                               |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |
| Outstanding at end of year         |   | 855                    |   | US $                                 | 4.42   |                   | 974    |   | US $ | 4.59 |   | 834 |   | US $ | 5.08 |   |
|                               |   |                   |   |                                 |   |                   |   |   |   |   |   |   |   |
| Options exercisable at end of year |   | 449                    |   | US $                                 | 6.35   |                   | 624    |   | US $ | 5.94 |   | 553 |   | US $ | 6.47 |   |

 

F-14

----

 

The following table summarizes information about the stock option plansas of December 31, 2003:

 
|                          |   |                    |   | **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** |   |
|                          |   |                    |   |                                              |   |                                 |   |   |   |   |   |
| US $7.50 to $11.25       |   | 338                     |   | 3.4 years                                         |   | US $                            | 7.70   |   | 338 |   | US $ | 7.70 |   |
| $4.00 to $4.94                |   | 5                       |   | 9.0                                               |   | 4.44                                 |   | 1 |   | 4.00 |   |
| $2.25 to $3.44                |   | 403                     |   | 8.3                                               |   | 2.41                                 |   | 64 |   | 2.75 |   |
| $1.38 to $2.00                |   | 109                     |   | 6.7                                               |   | 1.64                                 |   | 46 |   | 1.57 |   |
|                          |   |                    |   |                                              |   |                                 |   |   |   |   |   |
| US $1.38 to $11.25       |   | 855                     |   | 6.2                                               |   | US $                            | 4.42   |   | 449 |   | US $ | 6.35 |   |

 

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

 
|                                                  |   | **Number of  Common Shares**      |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|
|                                                  |   | **Year Ended  December 31,** |   |
|                                                  |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                  |   |                              |   |   |   |   |   |
| Weighted average common shares outstanding  (basic)   |   | 7,723                             |   | 7,681 |   | 7,690 |   |
| Dilutive effect of options                            |   | 260                               |   | 143 |   | 14 |   |
|                                                  |   |                              |   |   |   |   |   |
| Weighted average common shares outstanding  (diluted) |   | 7,983                             |   | 7,824 |   | 7,704 |   |

 

In the years ended December 31, 2003, 2002 and 2001, there were338, 534 and 701 options excluded from the calculation, due to an anti-dilutiveeffect as a result of the exercise price being higher than the market price ofthe stock in the period.

 

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

 

Certain major customers accounted for significant portions of the salesfrom continuing operations. The table below reflects customers whose purchasesrepresented more than 10% of the Company’s total revenues in any of the periodsindicated.

 
|                        |   | **Sales by  Major Customer**      |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **Year Ended  December 31,** |   |
|                        |   | **2003**                          |   | **2002** |   | **2001** |   |
|                        |   |                              |   |   |   |   |   |
| Customer A                  |   | $                                 | 4,631  |   | $ | 3,151 |   | $ | 6,108 |   |
| Customer B                  |   | 4,219                             |   | 3,431 |   | 1,546 |   |
| Customer C                  |   | —                            |   | 3,781 |   | 2,035 |   |
| Customer D                  |   | 15                                |   | 1,091 |   | 2,919 |   |
|                        |   |                              |   |   |   |   |   |
|                        |   | $                                 | 8,865  |   | $ | 11,454 |   | $ | 12,608 |   |
|                        |   |                              |   |   |   |   |   |
| Percentage of total revenue |   | 23                                | %      | 35 | % | 45 | % |

 

Accounts receivable and related party receivables related to thesemajor customers at December 31 were $1,720 in 2003 and $5,255 in 2002.

 

F-15

----

 
|           |   | **Sales by  Geographic Market**   |   |
|----------------|--------|-----------------------------------|--------|
|           |   | **Year Ended  December 31,** |   |
|           |   | **2003**                          |   | **2002** |   | **2001** |   |
|           |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| U.S.A          |   | $                                 | 19,437 |   | 50 | % | $ | 13,887 |   | 42 | % | $ | 12,163 |   | 43 | % |
| Europe         |   | 7,793                             |   | 20 | % | 5,515 |   | 17 | % | 6,027 |   | 21 | % |
| Asia/Australia |   | 8,367                             |   | 22 | % | 10,646 |   | 32 | % | 7,537 |   | 27 | % |
| Canada         |   | 2,753                             |   | 7 | % | 2,681 |   | 8 | % | 2,495 |   | 9 | % |
| Other          |   | 334                               |   | 1 | % | 417 |   | 1 | % | 15 |   | — | % |
|           |   | 38,684                            |   | 100 | % | 33,146 |   | 100 | % | 28,237 |   | 100 | % |
|                |        |                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**NOTE 13  OTHER EXPENSE**

 
|                               |   | **Year Ended  December 31,** |   |
|------------------------------------|--------|-----------------------------------|--------|
|                               |   | **2003**                          |   | **2002** |   | **2001** |   |
|                               |   |                              |   |   |   |   |   |
| Employee relocation                |   | $                                 | — |   | $ | (128 | ) | $ | — |   |
| Employee termination               |   | —                            |   | (84 | ) | — |   |
| Foreign exchange                   |   | (527                              | )      | (49 | ) | 5 |   |
| Financing charge on sales by Point |   | (83                               | )      | (47 | ) | (164 | ) |
| Miscellaneous                      |   | (54                               | )      | (20 | ) | 36 |   |
|                               |   | $                                 | 664    |   | (328 | ) | (123 | ) |
|                                    |        |                                   |        |  |  |  |  |  |  |  |

 

**NOTE 14  INCOME TAXES**

 

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

 
|                                       |   | **December 31,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                       |   |                        |   |                        |   |
| Future income tax assets                   |   |                        |   |                        |   |
| Loss carryforwards                         |   | $                           | 4,500  |                        | $      | 8,100 |   |
| Scientific research deductions and credits |   | 54,700                      |   | 50,400                      |   |
| Reserves not currently deductible for tax  |   | 1,400                       |   | 850                         |   |
| Capital assets                             |   | 850                         |   | 500                         |   |
| Deferred gain on sale of building          |   | 200                         |   | 250                         |   |
|                                       |   | 61,650                      |   | 60,100                      |   |
| Future income tax liabilities              |   |                        |   |                        |   |
| Intangible assets                          |   | (250                        | )      | (300                        | )      |
| Deferred development costs                 |   | (900                        | )      | (400                        | )      |
| Leased assets                              |   | —                      |   | (50                         | )      |
|                                       |   | (1,150                      | )      | (750                        | )      |
| Valuation allowance                        |   | (60,500                     | )      | (59,350                     | )      |
|                                       |   | —                      |   | —                      |   |
|                                            |        |                             |        |                             |        |  |  |

 

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

 

F-16

----

 
|                                                         |   | **Year ended  December 31,** |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                         |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                         |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations before  income taxes       |   | $                                 | 3,152  |   |   |   | $ | 2,222 |   |   |   | $ | 1,079 |   |   |   |
|                                                         |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Statutory income tax expense                                 |   | $                                 | 1,169  |   | 37.1% |   | $ | 873 |   | 39.3% |   | $ | 454 |   | 42.1 | % |
| Adjusted for the effects of:                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Amortization expense                                         |   | 644                               |   |   |   | 638 |   |   |   | 857 |   |   |   |
| Research & development costs                        |   | 984                               |   |   |   | 1,160 |   |   |   | 1,399 |   |   |   |
| Terminal loss on capital assets upon  acquisition of control |   | —                            |   |   |   | — |   |   |   | (861 | ) |   |   |
| Discontinued operations                                      |   | 134                               |   |   |   | (254 | ) |   |   | (402 | ) |   |   |
| Other                                                        |   | 561                               |   |   |   | (48 | ) |   |   | 274 |   |   |   |
| Tax loss carryforward                                        |   | (3,499                            | )      |   |   | (2,369 | ) |   |   | (1,760 | ) |   |   |
| Large corporation tax                                        |   | 59                                |   |   |   | 77 |   |   |   | 52 |   |   |   |
|                                                         |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Provision for income tax                                     |   | $                                 | 52     |   | 1.6% |   | $ | 77 |   | 3.5% |   | $ | 13 |   | 1.2 | % |

 

a)  ***Canadian Income Taxes***

 

At December 31, 2003, losses were available for Canadian incometax purposes that can be carried forward to reduce future Canadian taxableincome. These losses expire as follows:

 
| 2004   |   | $      | 6,300  |   |
|--------|--------|--------|--------|--------|
| 2005   |   | — |   |
| 2006   |   | 1,600  |   |
|   |   |   |   |
|   |   | $      | 7,900  |   |

 

In addition, the Company has approximately $145 million ofresearch and development costs deducted in the accounts, in excess of amountsclaimed for Canadian income tax purposes.

 

The Company also has unutilized investment tax credits of$6.5 million available to reduce future Canadian income taxes. Thesecredits expire as follows:

 
| 2004   |   | 1,600  |   |
|--------|--------|--------|--------|
| 2005   |   | 700    |   |
| 2006   |   | 400    |   |
| 2007   |   | 200    |   |
| 2008   |   | 600    |   |
| 2009   |   | 400    |   |
| 2010   |   | 500    |   |
| 2011   |   | 100    |   |
| 2012   |   | 700    |   |
| 2013   |   | 900    |   |
| 2014   |   | 400    |   |
|   |   |   |   |
|   |   | $      | 6,500  |   |
|        |        |        |        |  |

 

The Company has determined that CMC Electronics’ acquisition of amajority of the common shares of the Company on April 17, 1998, BAESYSTEMS p.l.c.’s acquisition of the majority of the common shares of CMCElectronics on November 29, 1999 and ONCAP’s acquisition of the commonshares of CMC Electronics on April 11, 2001, constituteacquisitions-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 taxbenefits described above may be dependent upon future Canada Customs andRevenue Agency audits. An adverse determination could result in a significantdecrease in the availability and amount of the tax benefits described above.

 

b)  ***U.S. Income Taxes***

 

The Company’s fully-owned U.S. subsidiaries have net operatingloss carryforwards totalling approximately US $38.0 million which expirein 2007 and 2008. However, these operating loss carryforwards will besubstantially limited due to the acquisitions-of-control by CMC Electronics,BAE SYSTEMS p.l.c. and ONCAP.

 

F-17

----

 

**NOTE 15  RELATED PARTY TRANSACTIONS**

 

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

 
|                                                                                    |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                    |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                                                    |   |                              |   |   |   |   |   |
| Product sales to Point, Inc.                                                       |   | $                                 | 1,590  |   | $ | 740 |   | $ | 727 |   |
| Services provided to Point, Inc.                                                   |   | 133                               |   | 186 |   | 149 |   |
| Royalty income from Point, Inc.                                                    |   | —                            |   | 54 |   | 69 |   |
| Engineering and other services charged by  Point, Inc.                             |   | 87                                |   | 58 |   | 6 |   |
| Inventory purchases from CMC Electronics  and Point, Inc.                          |   | 2,809                             |   | 703 |   | 188 |   |
| Contracted development costs charged by CMC  Electronics                                |   | 523                               |   | 125 |   | 154 |   |
| Product sales and engineering services  charged to CMC Electronics                      |   | 54                                |   | 220 |   | 33 |   |
| Other charges from CMC Electronics                                                      |   | 408                               |   | 162 |   | 103 |   |
| Royalties charged to CMC Electronics                                                    |   | 261                               |   | 76 |   | 42 |   |
| Royalties charged by CMC Electronics                                                    |   | 82                                |   | — |   | — |   |
| Consulting fees charged by Dave Vaughn,  after resignation as CEO in February 2002 |   | 38                                |   | 105 |   | — |   |
|                                                                                         |        |                                   |        |  |  |  |  |  |  |  |

 

Significant related party receivables at December 31, 2003 consistof $1,027 from Point, Inc. ($673 at December 31, 2002) and $54 fromCMC Electronics ($57 at December 31, 2002). Related party payables atDecember 31, 2003 were comprised of amounts due to CMC Electronics of$1,139 ($318 at December 31, 2002) and $8 to Point, Inc. ($9 atDecember 31, 2002).

 

The related party notes receivable of $1,721 ($1,932 atDecember 31, 2002) reflects the Company’s proportionate joint ventureinterest in the aggregate borrowings by Point, Inc. from NovAtel andSokkia Co., Ltd. (Sokkia) of US $5,330. The loans are secured by theassets of Point, Inc. and bore interest at 3% during 2003 (between 3% and6% in 2002 and 6% in 2001). On January 26, 2004, the Company and Sokkiaagreed to extend the due dates on the loans to August 31, 2004 (seeNote 16).

 

During 2003, the Company and Sokkia advanced US $500 in new loans toPoint, Inc. (US $830 in 2002), with the Company’s share being US $245(US$407 in 2002). In 2002, the Company and Sokkia provided US $1,500 in equityfinancing to Point, Inc. of which the Company’s share was US $735 and theCompany’s equity interest in Point, Inc. remained at 49% (seeNote 16).

 

On May 14, 2003, the Company acquired CMC Electronics’non-aviation Global Positioning System (GPS) OEM product line. The purchaseprice was comprised of $150 at closing and $600 payable over time as a royaltyon the revenue generated by this product line (see Note 18). The fairvalue of net assets acquired is as follows:

 
| Capital assets   |   | $      | 150    |   |
|------------------|--------|--------|--------|--------|
| Intangibles      |   | 497    |   |
|             |   |   |   |
| Total investment |   | $      | 647    |   |

 

**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 forsurveying, mapping, geographical information systems, construction andconstruction machine control applications, on a worldwide basis. Theconsolidated financial statements presented herein include the Company’sproportionate share of the accounts of Point, Inc.

 

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

 

F-18

----

 
|                                                     |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
|                                                     |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                     |   |                              |   |   |   |   |   |
| Current assets                                           |   | $                                 | 1,728  |   | $ | 2,247 |   | $ | 1,630 |   |
| Non-current assets                                       |   | 100                               |   | 139 |   | 143 |   |
|                                                     |   |                              |   |   |   |   |   |
| Total assets                                             |   | $                                 | 1,828  |   | $ | 2,386 |   | $ | 1,773 |   |
|                                                     |   |                              |   |   |   |   |   |
| Current liabilities                                      |   | $                                 | 2,818  |   | $ | 3,477 |   | $ | 3,072 |   |
| Long-term liabilities                                    |   | —                            |   | — |   | — |   |
|                                                     |   |                              |   |   |   |   |   |
| Total liabilities                                        |   | $                                 | 2,818  |   | $ | 3,477 |   | $ | 3,072 |   |
|                                                     |   |                              |   |   |   |   |   |
| Revenues                                                 |   | $                                 | 6,097  |   | $ | 4,635 |   | $ | 5,458 |   |
| Gross profit                                             |   | $                                 | 1,501  |   | $ | 1,203 |   | $ | 1,625 |   |
| Expenses                                                 |   | $                                 | 1,535  |   | $ | 2,644 |   | $ | 3,066 |   |
| Income (loss)                                            |   | $                                 | (34    | ) | $ | (1,441 | ) | $ | (1,441 | ) |
|                                                     |   |                              |   |   |   |   |   |   |   |   |
| Cash provided by (used in)                               |   |                              |   |   |   |   |   |
| Operating activities                                     |   | $                                 | 32     |   | $ | (1,929 | ) | $ | (202 | ) |
| Investing activities                                     |   | $                                 | (7     | ) | $ | (48 | ) | $ | (128 | ) |
| Financing activities                                     |   | $                                 | 142    |   | $ | 932 |   | $ | 76 |   |
| Effect of exchange rate changes on  financing activities |   | $                                 | (351   | ) | $ | (9 | ) | $ | 93 |   |

 

Included in current liabilities is the Company’s share of notes payableby Point, Inc. to Sokkia, in the amount of $1,721 ($1,932 atDecember 31, 2002). The loans are secured by the assets ofPoint, Inc., and bore interest at 3% during 2003 (between 3% and 6% in2002 and 6% in 2001). On January 26, 2004, the Company and Sokkia agreedto extend the due dates on the loans to August 31, 2004.

 

During 2003, the Company and Sokkia advanced US $500 in new loans toPoint, Inc. (US $830 in 2002), with the Company’s share being US $245 (US$407 in 2002). In addition in 2002, the Company and Sokkia provided US $1,500in equity financing to Point, Inc. The Company’s share of the equityfinancing was US $735 and the Company’s equity interest in Point, Inc.remained at 49%.

 

Point, Inc. is dependent on the Company and Sokkia for productsupply, distribution and financing. Should Sokkia and the Company discontinuetheir support, Point, Inc.’s ability to continue as a going concern wouldbe impaired. If the existing loans to Point, Inc. of US $5,330 were ultimatelynot repaid by Point, Inc. to the Company and Sokkia, or ifPoint, Inc. were liquidated in an orderly wind-down, the Company believesthat its maximum loss exposure in the statement of operations toPoint, Inc., as of December 31, 2003, after consideration of theeffects of the proportionate consolidation of Point, Inc., would beapproximately $700, comprised primarily of working capital related items andthe costs that would be incurred to cease operations. These financialstatements do not reflect any adjustment that would be required ifPoint, Inc.’s operations were discontinued.

 

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

 

As of December 31, 2003, the Company owned a 70% equity interestin Mezure, Inc. (“Mezure”), a company that had been developing a GPS,wireless communication and Internet-based product for deformation monitoring ofmanmade and natural structures.

 

During the latter part of 2002, the Company discontinued its financialsupport of Mezure. In February 2003, Mezure was informed that the minorityshareholder who had been providing financial support required to fund Mezure’soperating activities would discontinue such support.

 

On April 8, 2003, the shareholders of Mezure voted unanimously toproceed 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 theUnited States Bankruptcy Court, District Oregon (Portland). Consequently,the Company is treating Mezure as a discontinued operation and accordingly hasrestated the statement of operations for prior periods.

 

With the Chapter 7 bankruptcy filing concluding, the Companyrecognized a gain of $379 relating to the liquidation of the residual assets andliabilities of Mezure in the year ended December 31, 2003. While Mezureoperated as a separate corporation, Mezure’s third party creditors couldpotentially attempt to satisfy their claims with Mezure by pursuing theseclaims against the Company. The Company believes that these claims would not bevalid and that the ultimate liability with respect to the resolution of theseactions is not expected to materially affect the Company’s financial positionor results of operations.

 

The income (loss) from discontinued operations pertaining to Mezure forthe year ended on December 31, 2003, 2002 and 2001 is as set forth below.

 

F-19

----

 
|                                           |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |     |   |
| Revenues                                       |   | $        | 34     |     | $      | 288      |   | $ | — |   |
| Cost of sales                                  |   | (1       | )      | (135     | )      | —   |   |
| Research and development expenses              |   | (27      | )      | (185     | )      | (256     | )      |
| Selling and marketing expenses                 |   | (32      | )      | (356     | )      | (247     | )      |
| General and administration expenses            |   | (112     | )      | (388     | )      | (459     | )      |
| Interest income                                |   | —   |   | —   |   | 7        |   |
| Other income (expense)                         |   | 119      |   | 128      |   | (1       | )      |
| Gain on liquidation of assets and  liabilities |   | 379      |   | —   |   | —   |   |
|                                           |   |     |   |     |   |     |   |
| Income (loss) from discontinued operations     |   | $        | 360    |     | $      | (648     | )      | $ | (956 | ) |

 

The consolidated balance sheets as of December 31, 2003 andDecember 31, 2002 include residual assets and liabilities related todiscontinued operations as follows:

 
|                                     |   | **December 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                                     |   |                        |   |                        |   |
| Cash and short term investments          |   | $                           | — |                        | $      | 1 |   |
| Accounts receivable                      |   | —                      |   | 28                          |   |
| Inventories                              |   | —                      |   | 90                          |   |
| Prepaid expenses and deposits            |   | —                      |   | 13                          |   |
| Capital assets                           |   | —                      |   | 93                          |   |
| Intangible assets                        |   | —                      |   | 192                         |   |
| Accounts payable and accrued liabilities |   | 40                          |   | 365                         |   |
| Notes payable                            |   | —                      |   | 486                         |   |
| Deferred revenue and customer deposits   |   | —                      |   | 41                          |   |
|                                          |        |                             |        |                             |        |  |  |

 

**NOTE 18  ACQUISITION OF CMC ELECTRONICS’ L1 OEM GPSPRODUCT LINE**

 

On May 14, 2003, the Company acquired CMC Electronics Inc.’snon-aviation Global Positioning System (GPS) OEM product line. The purchaseprice was comprised of $150 at closing and $600 payable over time as a royaltyon the revenue generated by this business. The fair value of net assetsacquired is as follows:

 
| Capital assets   |   | $      | 150    |   |
|------------------|--------|--------|--------|--------|
| Intangibles      |   | 497    |   |
|             |   |   |   |
| Total investment |   | $      | 647    |   |

 

The intangibles are comprised primarily of technology and anestablished market presence to which the Company has assigned values of $149and $348 respectively. The Company estimates that these intangibles will havean expected useful life of 4 years and will be amortized using thestraight-line method.

 

At the time of the acquisition, CMC Electronics owned approximately 58%of the Company’s outstanding common shares and accordingly is a related party.The acquisition of the CMC Electronics’ L1 GPS OEM product line was reviewedand approved by a committee of independent directors established by theCompany’s Board of Directors.

 

**NOTE 19  CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

The net changes in non-cash working capital related to operationsinclude:

 
|                                                                                     |   | **Year ended  December 31,** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                     |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                                                     |   |                              |   |   |   |   |   |
| Decrease (increase) in accounts receivable  and related party receivables                |   | $                                 | 2,876  |   | $ | (3,649 | ) | $ | (1,304 | ) |
| (Increase) decrease in inventories                                                       |   | (71                               | )      | 1,782 |   | (30 | ) |
| (Increase) decrease in prepaid expenses and  deposits                                    |   | (84                               | )      | 2 |   | 135 |   |
| Increase (decrease) in accounts payable,  accrued liabilities and related party payables |   | 714                               |   | 1,288 |   | (1,577 | ) |
| (Decrease) increase in deferred revenue                                                  |   | (192                              | )      | 329 |   | (43 | ) |
| Increase in provision for future warranty  costs                                         |   | 66                                |   | 59 |   | 17 |   |
|                                                                                     |   |                              |   |   |   |   |   |
| Net change in non-cash working capital                                                   |   | 3,309                             |   | (189 | ) | (2,802 | ) |
|                                                                                          |        |                                   |        |  |  |  |  |  |  |  |

 

F-20

----

 

**NOTE 20  STOCK-BASED COMPENSATION**

 

At December 31, 2003, the Company had 855 options outstanding thathad been issued to employees and directors to purchase common shares under itsstock-based compensation plans (see Note 11). As the Company accounts forstock based compensation arrangements based on the intrinsic value of thetransactions, no compensation cost was recognized within the statement ofoperations for the year ended December 31, 2003, 2002 and 2001. Hadcompensation cost for the Company’s stock-based compensation plans beendetermined based on the fair value of the options at the grant dates, theCompany’s pro forma net income (loss) and net income (loss) per sharewould have been as follows:

 
|                                                     |   |           |   | **Year Ended  December 31, 2003** |       |
|----------------------------------------------------------|--------|----------------|--------|----------------------------------------|------------|
|                                                     |   |           |   | **2003**                               |       | **2002** |   | **2001** |   |
|                                                     |   |           |   |                                   |       |   |   |   |   |
| Net income from continuing operations                    |   | As reported    |   | $                                      | 3,100      |   | $ | 2,145 |   | $ | 1,066 |   |
|                                                     |   | Pro forma |   | $                                      | 2,637      |   | $ | 1,755 |   | $ | 579 |   |
|                                                     |   |           |   |                                   |       |   |   |   |   |   |   |   |
| Basic net income from continuing operations  per share   |   | As reported    |   | $                                      | 0.40  |   | $ | 0.28 |   | $ | 0.14  |   |
|                                                     |   | Pro forma |   | $                                      | 0.34       |   | $ | 0.23 |   | $ | 0.08 |   |
|                                                     |   |           |   |                                   |       |   |   |   |   |   |   |
| Diluted net income from continuing  operations per share |   | As reported    |   | $                                      | 0.39       |   | $ | 0.27 |   | $ | 0.14 |   |
|                                                     |   | Pro forma |   | $                                      | 0.33       |   | $ | 0.22 |   | $ | 0.08 |   |
|                                                     |   |           |   |                                   |       |   |   |   |   |   |   |   |
| Net income (loss)                                        |   | As reported    |   | $                                      | 3,460      |   | $ | 1,497 |   | $ | 110 |   |
|                                                     |   | Pro forma |   | $                                      | 2,997      |   | $ | 1,107 |   | $ | (377 | ) |
|                                                     |   |           |   |                                   |       |   |   |   |   |   |   |   |
| Basic net income (loss) per share                        |   | As reported    |   | $                                      | 0.45       |   | $ | 0.19 |   | $ | 0.01 |   |
|                                                     |   | Pro forma |   | $                                      | 0.39       |   | $ | 0.14 |   | $ | (0.05 | ) |
|                                                     |   |           |   |                                   |       |   |   |   |   |   |   |   |
| Diluted net income (loss) per share                      |   | As reported    |   | $                                      | 0.43       |   | $ | 0.19 |   | $ | 0.01 |   |
|                                                     |   | Pro forma |   | $                                      | 0.38       |   | $ | 0.14 |   | $ | (0.05 | ) |
|                                                          |        |                |        |                                        |            |  |  |  |  |  |  |  |  |

 

The fair value of each option granted is estimated using theBlack-Scholes option pricing model with the following weighted-averageassumptions used for options granted in 2003, 2002 and 2001: dividend yield of0%; expected lives of 10 years; a risk free interest rate of 4.3%, andexpected volatility of 98% in 2003, 135% in 2002 and 2001.

 

**NOTE 21****                                             DIFFERENCESBETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES**

 

The consolidated financial statements have been prepared in accordancewith generally accepted accounting principles in Canada (Canadian GAAP orCanadian principles). The significant differences from U.S. generallyaccepted accounting principles (U.S. GAAP or U.S. principles) are asfollows:

 

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

 

In the year ended December 31, 2003, the Company deferred $157 ofdevelopment costs ($125 in 2002 and $4 in 2001) in accordance with CanadianGAAP. Under U.S. GAAP, these costs would be expensed as incurred asresearch and development costs.

 

In the year ended December 31, 2003, the Company amortized $196 ofdeferred development costs ($57 in 2002 and $36 in 2001) in accordance withCanadian GAAP. Under U.S. GAAP, these costs would have been expensed inthe periods when the originating expenditures were incurred.

 

Further, for U.S. GAAP purposes, the Company would haverecharacterized the goodwill acquired on the Mezure, Inc. shareacquisition of $231 as development related costs, and these costs would havebeen expensed on acquisition in 2001.

 

b)  ***Derivatives and Hedging Activities***

 

The Company has historically entered into foreign exchange options andforward contracts to manage its exposure to foreign currency fluctuations.Under U.S. GAAP the accounting for derivative instruments and hedgingactivities is contained in the Statement of Financial Accounting Standard(“SFAS”) No. 133, as amended by SFAS 137 and SFAS 138(“SFAS 133”). SFAS 133 establishes accounting and reporting standardsrequiring that all derivative instruments be recorded in the balance sheet aseither an asset or a liability measured at fair value and requires that changesin the fair value be recognized currently in earnings unless specific hedgeaccounting criteria are met. For cash flow hedges, changes in the fair value ofthe derivative instrument are recognized in net earnings in the same period asthe hedged item and any changes in the fair value prior to that period arerecognized in other comprehensive income. For fair value hedges, both thederivative instrument and the underlying commitment are recognized on thebalance sheet at their fair value and any changes in the fair value arerecognized currently in net earnings. The Company’s foreign exchange contractshave been accounted for as cash flow hedges.

 

F-21

----

 

c)  ***Investment in Joint Ventures***

 

The accounts of the Company’s 49.0% joint venture interest inPoint, Inc. and former 48.7% joint venture interest in Mezure, Inc.(prior to the Company acquiring a 74% controlling interest on July 23,2001) are proportionately consolidated as required under Canadian GAAP. UnderU.S. GAAP, proportionate consolidation is not permitted, and the Company’sinvestment in these joint ventures would be accounted for using the equitymethod. As permitted by SEC guidance, the effects of this difference inaccounting principles have not been reflected in the accompanying tables.

 

In 2002, the Company recognized a gain of $121 related to the reductionof its equity interest in Mezure from approximately 74% to 70%. UnderU.S. GAAP, the Company would have reflected the effects of thistransaction as a direct increase in shareholders’ equity of $160 after considerationof the impact of previous U.S. GAAP adjustments.

 

In addition, in 2003, the Company recognized a gain of $379 related tothe liquidation of the remaining assets and liabilities of Mezure (seeNote 17). Under U.S. GAAP, this gain would have been $571, since $192characterized as goodwill under Canadian GAAP would have expensed onacquisition in 2001 (see Note 21(a)).

 

d)  ***Intangibles Related to Acquisition of CMC Electronics OEMGPS Business***

 

On May 14, 2003, the Company acquired the CMC Electronics non-aviationGPS product line (see Note 18). The fair value of the net assets acquiredincluded $497 in intangibles, comprised primarily of technology, productdesign, customer relationships and an established market presence. UnderU.S. GAAP, when accounting for transfer of assets between entities undercommon control, the entity that receives the net assets or the equity interestwould initially recognize the assets and liabilities transferred at theircarrying amounts at the date of transfer. Any excess of consideration givenover the controlling shareholders’ carrying value would be accounted for as areduction of equity.

 

e)  ***Classification of Employee Relocation and Termination Costs***

 

In the year ended December 31, 2002, the Company included $128 ofemployee relocation and $84 of employee termination costs within Other expensein the consolidated statement of operations (see Note 13). UnderU.S. GAAP, these costs would be included within operating expenses.

 

F-22

----

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

 

The changes in the provision for future warranty costs during each ofthe years ended December 31, 2003, 2002 and 2001 are as follows:

 
|                                 |   | **Year Ended  December 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2003**                          |   | **2002** | ** ** | **2001** | ** ** |
|                                 |   |                              |   |   |   |   |   |
| Opening balance, beginning of period |   | $                                 | 344    |   | $ | 285 |   | $ | 268 |   |
| Additions to provision               |   | 220                               |   | 203 |   | 148 |   |
| Costs incurred                       |   | (154                              | )      | (144 | ) | (131 | ) |
|                                 |   |                              |   |   |   |   |   |
| Ending balance, end of period        |   | $                                 | 410    |   | $ | 344 |   | $ | 285 |   |

 

g)  ***Comprehensive Income***

 

U.S. GAAP utilizes the concept of comprehensive income, whichincludes net income and other comprehensive income. Currently, there is nosimilar concept under Canadian GAAP. Other comprehensive income represents thechange in equity during the period from transactions and other events fromnon-owner sources and includes such items as changes in the fair value of cashflow hedges.

 

h)  ***New U.S. GAAP Accounting Pronouncements***

 

In August 2001, the Financial Accounting Standards Board (“FASB”)approved for issuance SFAS 143, “Accounting for Asset RetirementObligations.” This statement is effective for fiscal years beginning afterJune 15, 2002. This statement requires that the fair value of theliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.Associated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The adoption of SFAS 143 inJanuary 2003 did not have had a material impact on the Company’s financialstatements.

 

In November 2002, the FASB issued Interpretation No. 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45elaborates on the disclosures the Company must make about the Company’sobligations under certain guarantees that the Company has issued. It alsorequires the Company to recognize, at the inception of a guarantee, a liabilityfor the fair value of the obligations the Company has undertaken in issuing theguarantee. The initial recognition and initial measurement provisions are to beapplied only to guarantees issued or modified after December 31, 2002.Adoption of these provisions did not have had a material impact on theCompany’s financial position or results of operations.

 

In December 2002, the FASB issued Statement No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure, anAmendment of FASB Statement No. 123” (SFAS 148). SFAS 148 amendsSFAS 123 “Accounting for Stock-Based Compensation”, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, SFAS 148amends the disclosure requirements of SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the methodfor accounting for stock-based employee compensation and the effect of themethod used on reported results. SFAS 148 has no material impact on theCompany’s financial statements, as the Company does not plan to adopt the fairvalue method of accounting for stock options at the current time.

 

On April 30, 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”SFAS 149 amends and clarifies the accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.” The provisions of this statement aregenerally effective for contracts entered into or modified after June 30,2003. The adoption of SFAS No. 149 did not have a material impact onthe Company’s financial statements.

 

On May 15, 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” The provisions of this statement are effective for all financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003. SFAS No. 150 establishes standards dealing withthe classification of certain financial instruments with characteristics ofboth liabilities and equity. Financial instruments issued in the form of sharesthat are mandatorily redeemable, those that require the issuer to buy backshares in exchange for cash or other assets, and instruments that

 

F-23

----

 

can be settled with shares at a specific or determinable date andvaluation, are required to be classified as liabilities. The adoption ofSFAS 150 did not have had a material impact on the Company’s financialstatements.

 

The following standards issued by the FASB do not impact the Company atthis time:

 

_                 StatementNo. 145 — “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections”,effective for financial statements issued on or after May 15, 2002;

 

_                 StatementNo. 146 — “Accounting for Costs Associated with Exit or DisposalActivities”, effective for exit or disposal activities initiated afterDecember 31, 2002;

 

_                 InterpretationNo. 46 — “Consolidation of Variable Interest Entities”, effective forfinancial statements issued after January 31, 2003.

 

i)  ***Summary of the Differences Between Canadian andU.S. GAAP***

 

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

 
|                                                                      |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                      |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                                      |   |                              |   |   |   |   |   |
| **Net income from  continuing operations — Canadian GAAP**      |   | $                                 | 3,100  |   | $ | 2,145 |   | $ | 1,066 |   |
| Adjustments to U.S. GAAP                                             |   |                              |   |   |   |   |   |
| Deferred development costs (a)                                            |   | (157                              | )      | (125 | ) | (4 | ) |
| Amortization of deferred development costs  (a)                           |   | 196                               |   | 57 |   | 36 |   |
| Amortization of intangibles acquired from  CMC Electronics (d)            |   | 62                                |   | — |   | — |   |
|                                                                      |   |                              |   |   |   |   |   |
| **Net income from  continuing operations — U.S. GAAP**     |   | $                                 | 3,201  |   | $ | 2,077 |   | $ | 1,098 |   |
|                                                                      |   |                              |   |   |   |   |   |
| Net income (loss) from discontinued  operations — Canadian GAAP |   | 360                               |   | (648 | ) | (956 | ) |
| Adjustment to U.S. GAAP                                              |   |                              |   |   |   |   |   |
| Gain on liquidation of Mezure, Inc.  (c)                             |   | 192                               |   | — |   | — |   |
| Gain on dilution of equity in  Mezure, Inc. (c)                      |   | —                            |   | (121 | ) | — |   |
| Write-off of Mezure, Inc. development  related costs (a)             |   | —                            |   | — |   | (231 | ) |
|                                                                      |   |                              |   |   |   |   |   |
| Income (loss) from discontinued  operations — U.S. GAAP    |   | 552                               |   | (769 | ) | (1,187 | ) |
|                                                                      |   |                              |   |   |   |   |   |
| **Net income  (loss) — U.S. GAAP**                         |   | 3,753                             |   | 1,308 |   | (89 | ) |
|                                                                      |   |                              |   |   |   |   |   |
| Net unrealised gain (loss) on foreign  exchange contracts (b)             |   | —                            |   | (48 | ) | 1 |   |
| Reclassification to income of gains and  losses on cash flow hedges       |   | 48                                |   | (1 | ) | — |   |
|                                                                      |   |                              |   |   |   |   |   |
| **Comprehensive  income (loss)**                                          |   | $                                 | 3,801  |   | $ | 1,259 |   | $ | (88 | ) |

 
|                                                                               |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2003**                          |   | **2002** |   |
|                                                                               |   |                              |   |   |   |
| **Total Assets**                                                                   |   |                              |   |   |   |
| Canadian GAAP                                                                      |   | $                                 | 35,572 |   | $ | 30,890 |   |
| Adjustments to U.S. GAAP                                                      |   |                              |   |   |   |
| Deferred development costs (a)                                                     |   | (2,557                            | )      | (2,596 | ) |
| Fair value of financial instruments (b)                                            |   | —                            |   | (48 | ) |
| Write-off of development related costs on  Mezure acquisition (a)                  |   | —                            |   | (192 | ) |
| Reduction of intangibles acquired from CMC  Electronics to carrying value (d) |   | (430                              | )      | — |   |
|                                                                               |   |                              |   |   |   |
| U.S. GAAP                                                                     |   | $                                 | 32,585 |   | $ | 28,054 |   |
|                                                                               |   |                              |   |   |   |
| **Total Shareholders’  Equity**                                               |   |                              |   |   |   |
| Canadian GAAP                                                                      |   | $                                 | 25,447 |   | $ | 20,547 |   |
| Adjustments to U.S. GAAP                                                      |   |                              |   |   |   |
| Deferred development costs (a)                                                     |   | (2,557                            | )      | (2,596 | ) |
| Write-off of development related costs on  Mezure acquisition (a)                  |   | —                            |   | (192 | ) |
| Reduction of intangibles acquired from CMC  Electronics to carrying value (d) |   | (492                              | )      | — |   |
| Amortization of intangibles acquired from  CMC Electronics (d)                     |   | 62                                |   | — |   |
|                                                                               |   |                              |   |   |   |
| U.S. GAAP — before other  comprehensive income                      |   | 22,460                            |   | 17,759 |   |
|                                                                               |   |                              |   |   |   |
| Accumulated other comprehensive (loss)  income                                     |   | —                            |   | (48 | ) |
|                                                                               |   |                              |   |   |   |
| U.S. GAAP — including accumulated  other comprehensive income       |   | $                                 | 22,460 |   | $ | 17,711 |   |

 

F-24

----

 

j)  ***Net Income (Loss) per Share***

 

Net income (loss) per share as computed under Canadian andU.S. principles is as set forth below for the following periods:

 
|                        |   | **Year Ended  December 31,**                  |   |
|-----------------------------|--------|----------------------------------------------------|--------|
|                        |   | **Canadian  GAAP**                                 |   | **U.S. GAAP** |   |
|                        |   | **Net Income  (Loss) per Share — Basic** |   | **Net Income  (Loss) per Share — Basic** |   |
|                        |   | **2003**                                           |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                        |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations       |   | $                                                  | 0.40   |   | $ | 0.28 |   | $ | 0.14 |   | $ | 0.41 |   | $ | 0.27 |   | $ | 0.14 |   |
| Discontinued operations     |   | 0.05                                               |   | (0.09 | ) | (0.13 | ) | 0.08 |   | (0.10 | ) | (0.15 | ) |
|                        |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share |   | $                                                  | 0.45   |   | $ | 0.19 |   | $ | 0.01 |   | $ | 0.49 |   | $ | 0.17 |   | $ | (0.01 | ) |

 
|                        |   | **Net Income  (Loss) per Share —  Diluted** |   | **Net Income  (Loss) per Share —  Diluted** |   |
|-----------------------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                        |   | **2003**                                              |   | **2002**                                              |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                        |   |                                                  |   |                                                  |   |   |   |   |   |   |   |   |   |
| Continuing operations       |   | $                                                     | 0.39   |                                                  | $      | 0.27 |   | $ | 0.14 |   | $ | 0.40 |   | $ | 0.27 |   | $ | 0.14 |   |
| Discontinued operations     |   | 0.04                                                  |   | (0.08                                                 | )      | (0.13 | ) | 0.07 |   | (0.10 | ) | (0.15 | ) |
|                        |   |                                                  |   |                                                  |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share |   | $                                                     | 0.43   |                                                  | $      | 0.19 |   | $ | 0.01 |   | $ | 0.47 |   | $ | 0.17 |   | $ | (0.01 | ) |

 

k)  ***Stock-Based Compensation***

 

Statement of Financial Accounting Standards (SFAS) 123 “Accounting forStock-Based Compensation” establishes a fair value based method of accountingfor stock-based compensation. Companies have the option of including the effectof this pronouncement in determining their net income, or alternatively, maycontinue to apply the accounting provisions of APB Opinion 25, but must complywith the disclosure requirements of SFAS 123. Had the Company prepared itsconsolidated financial statements in accordance with U.S. GAAP, theCompany would have accounted for its stock-based compensation in accordancewith APB Opinion 25.

 

At December 31, 2003, the Company had issued to employees anddirectors 855 options (974 in 2002 and 834 in 2001) to purchase common sharesunder its stock-based compensation plans (see Note 11). As the Companywould have applied APB Opinion 25 and related Interpretations in accounting forits plans, no compensation cost would have been recognized within the statementof operations under U.S. principles in 2003, 2002 and 2001. Hadcompensation cost for the Company’s stock-based compensation plans beendetermined based on the fair value of the options at the grant dates, theCompany’s pro forma net income (loss) from continuing operations and netincome (loss) per share would have been as follows:

 

F-25

----

 

l)  ***Pro Forma Earnings — Fair Value Method ofAccounting for Stock Options — U.S. GAAP***

 
|                                                                            |   |           |   | **Year Ended  December 31** |   |
|---------------------------------------------------------------------------------|--------|----------------|--------|----------------------------------|--------|
|                                                                            |   |           |   | **2003**                         |   | **2002** |   | **2001** |   |
|                                                                            |   |           |   |                             |   |   |   |   |   |
| Net income from continuing  operations — U.S. GAAP               |   | As reported    |   | $                                | 3,201  |   | $ | 2,077 |   | $ | 1,098 |   |
| Less: Fair value of stock options                                               |   |           |   | 463                              |   | 390 |   | 487 |   |
| Net income from continuing  operations — U.S. GAAP               |   | Pro forma |   | $                                | 2,738  |   | $ | 1,687 |   | $ | 611 |   |
|                                                                            |   |           |   |                             |   |   |   |   |   |
| Net income from continuing  operations — earnings per share (basic)   |   | As reported    |   | $                                | 0.41   |   | $ | 0.27 |   | $ | 0.14 |   |
|                                                                            |   | Pro forma |   | $                                | 0.35   |   | $ | 0.22 |   | $ | 0.08 |   |
| Net income from continuing  operations — earnings per share (diluted) |   | As reported    |   | $                                | 0.40   |   | $ | 0.27 |   | $ | 0.14 |   |
|                                                                            |   | Pro forma |   | $                                | 0.34   |   | $ | 0.22 |   | $ | 0.08 |   |
|                                                                            |   |           |   |                             |   |   |   |   |   |   |   |   |
| Net income (loss) — U.S. GAAP                                    |   | As reported    |   | $                                | 3,753  |   | $ | 1,308 |   | $ | (89 | ) |
| Less: Fair value of stock options                                               |   |           |   | 463                              |   | 390 |   | 487 |   |
| Net income (loss) — U.S. GAAP                                    |   | Pro forma |   | $                                | 3,290  |   | $ | 918 |   | $ | (576 | ) |
|                                                                            |   |           |   |                             |   |   |   |   |   |   |   |   |
| Net income (loss) — earnings per share  (basic)                       |   | As reported    |   | $                                | 0.49   |   | $ | 0.17 |   | $ | (0.01 | ) |
|                                                                            |   | Pro forma |   | $                                | 0.43   |   | $ | 0.12 |   | $ | (0.07 | ) |
|                                                                            |   |           |   |                             |   |   |   |   |   |   |   |   |
| Net income (loss) — earnings per share  (diluted)                     |   | As reported    |   | $                                | 0.47   |   | $ | 0.17 |   | $ | (0.01 | ) |
|                                                                            |   | Pro forma |   | $                                | 0.41   |   | $ | 0.12 |   | $ | (0.07 | ) |

 

The fair value of each option granted is estimated using theBlack-Scholes option pricing model with the following weighted-averageassumptions used for options granted in 2003, 2002 and 2001: dividend yield of0%; expected lives of 10 years; a risk free interest rate of 4.3%, andexpected volatility of 98% in 2003, 135% in 2002 and 2001.

 

m)  ***Consolidated Statement of Cash Flows***

 

Under Canadian GAAP, the Company classifies short-term investments aspart of cash and short-term investments in the consolidated statement of cashflows. Under U.S. GAAP, cash flow changes associated with short-terminvestments would be classified as part of cash flows from investing activities.

 

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

 
|                                                                   |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                   |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                                   |   |                              |   |   |   |   |   |
| Cash flow provided by (used in)  operations — Canadian GAAP  |   | $                                 | 8,013  |   | $ | 3,162 |   | $ | (423 | ) |
| Adjustments to U.S. GAAP                                          |   |                              |   |   |   |   |   |
| Deferred development costs (a)                                         |   | (157                              | )      | (125 | ) | (4 | ) |
|                                                                   |   |                              |   |   |   |   |   |
| Cash flow provided by (used in)  operations — U.S. GAAP |   | $                                 | 7,856  |   | $ | 3,037 |   | $ | (427 | ) |
|                                                                   |   |                              |   |   |   |   |   |
| Cash flow provided by financing  activities — Canadian GAAP  |   | $                                 | 1,308  |   | $ | 435 |   | $ | 70 |   |
| Adjustments to U.S. GAAP                                          |   | —                            |   | — |   | — |   |
|                                                                   |   |                              |   |   |   |   |   |
| Cash flow provided by financing  activities — U.S. GAAP |   | $                                 | 1,308  |   | $ | 435 |   | $ | 70 |   |
|                                                                   |   |                              |   |   |   |   |   |
| Cash used in investing activities —  Canadian GAAP           |   | $                                 | (2,893 | ) | $ | (1,819 | ) | $ | (908 | ) |
| Adjustments to U.S. GAAP                                          |   |                              |   |   |   |   |   |
| Deferred development costs (a)                                         |   | 157                               |   | 125 |   | 4 |   |
| (Increase) decrease in short-term  investments                         |   | (5,683                            | )      | (2,016 | ) | 1,304 |   |
|                                                                   |   |                              |   |   |   |   |   |
| Cash used in investing activities —  U.S. GAAP          |   | $                                 | (8,419 | ) | $ | (3,710 | ) | $ | 400 |   |
|                                                                   |   |                              |   |   |   |   |   |
| Increase in cash and cash equivalents                                  |   | $                                 | 745    |   | $ | (238 | ) | $ | 43 |   |
| Cash and cash equivalents, beginning of  year                          |   | 1,700                             |   | 1,938 |   | 1,895 |   |
|                                                                   |   |                              |   |   |   |   |   |
| Cash and cash equivalents, end of year                                 |   | $                                 | 2,445  |   | $ | 1,700 |   | $ | 1,938 |   |

 

F-26

----

 

n)  ***Accounts Payable and Accrued Liabilities***

 

The following is the breakdown of accounts payable and accruedliabilities:

 
|                                                                      |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                      |   | **2003**                          |   | **2002** |   |
|                                                                      |   |                              |   |   |   |
| Accounts payable and accrued trade liabilities                            |   | $                                 | 3,632  |   | $ | 3,359 |   |
| Accrued salaries, incentive plans and other  employee-related obligations |   | 1,745                             |   | 1,570 |   |
| Accrued dealer and agent commissions                                      |   | 137                               |   | 552 |   |
| Other                                                                     |   | 354                               |   | 367 |   |
|                                                                      |   |                              |   |   |   |
| TOTAL                                                                     |   | $                                 | 5,868  |   | $ | 5,848 |   |

 

F-27

----

 

REPORT OF INDEPENDENT AUDITORS

 

To the Shareholders of NovAtelInc.,

 

We have audited theconsolidated financial statements of NovAtel Inc. as of December 31, 2003 and2002, and for the years then ended, and have issued our reports thereon datedJanuary 30, 2004 (which audit report expresses an unqualified opinion andincludes an explanatory paragraph concerning the application of proceduresrelating to certain reclassifications of financial statement amounts related tothe 2001 financial statements that were audited by other auditors who haveceased operations); such financial statements and reports are included in the2003 Annual Report on Form 20-F.  Ouraudits also included the 2003 and 2002 financial statement schedules of NovAtelInc.  These financial statementschedules are the responsibility of the Company’s management.  Our responsibility is to express an opinionbased on our audits.  In our opinion,the 2003 and 2002 financial statement schedules, when considered in relation tothe 2003 and 2002 basic financial statements taken as a whole, present fairly,in all material respects, the information set forth therein.

 
| /s/ Deloitte  & Touche LLP |   |
|--------------------------------|--------|
| Deloitte  & Touche LLP     |
| Calgary,  Canada               |
| January 30,  2004              |

 

 

----

 

# **SCHEDULE II**

**Valuation and Qualifying Accounts**

 
| **2001**                                    |   | **Balance at  beginning  of period** |   | **Additions** |   | **Deductions** |   | **Balance at    end of  period** |   |
|---------------------------------------------|--------|--------------------------------------|--------|---------------|--------|----------------|--------|----------------------------------|--------|
| Provision for excess and obsolete inventory |   | $                                    | 801    |          | 518    |           | (355   | )                                | $      | 964 |   |
|                                        |   |                                 |   |          |   |           |   |                             |   |   |   |
| Allowance for doubtful accounts             |   | $                                    | 539    |          | 307    |           | (170   | )                                | $      | 676 |   |
|                                        |   |                                 |   |          |   |           |   |                             |   |   |   |
| Provision for future warranty costs         |   | $                                    | 268    |          | 148    |           | (131   | )                                | $      | 285 |   |

 
| **2002**                                    |   | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at end of  period** | ** ** |
|---------------------------------------------|--------|--------------------------------------|------------|---------------|------------|----------------|------------|------------------------------------|------------|
| Provision for excess and obsolete inventory |   | $                                    | 964        |          | 777        |           | (280       | )                                  | $          | 1,461 |   |
|                                        |   |                                 |       |          |       |           |       |                               |       |   |   |
| Allowance for doubtful accounts             |   | $                                    | 676        |          | 587        |           | (186       | )                                  | $          | 1,077 |   |
|                                        |   |                                 |       |          |       |           |       |                               |       |   |   |
| Provision for future warranty costs         |   | $                                    | 285        |          | 203        |           | (144       | )                                  | $          | 344 |   |

 
| **2003**                                    |   | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at    end of  period** | ** ** |
|---------------------------------------------|--------|--------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------|------------|
| Provision for excess and obsolete inventory |   | $                                    | 1,461      |          | 691        |           | (455       | )                                | $          | 1,697 |   |
|                                        |   |                                 |       |          |       |           |       |                             |       |   |   |
| Allowance for doubtful accounts             |   | $                                    | 1,077      |          | 430        |           | (429       | )                                | $          | 1,078 |   |
|                                        |   |                                 |       |          |       |           |       |                             |       |   |   |
| Provision for future warranty costs         |   | $                                    | 344        |          | 220        |           | (154       | )                                | $          | 410 |   |

 

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Exhibit**                                                                                                                                |
|--------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                                       |
| 3.1                      |   | Restated Articles of Incorporation of Registrant.(1)                                                                                       |
| 3.2                      |   | Restated Bylaws of Registrant.                                                                                                             |
| 4.1                      |   | Form of Common Stock Certificate.(1)                                                                                                       |
| 10.1                     |   | Directors Stock Option Plan.(1)                                                                                                            |
| 10.2                     |   | Stock Option Plan with form of stock option agreement.(1)                                                                                  |
| 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.(2)                                   |
| 10.6                     |   | Agreement made effective July 20, 1999 between NovAtel Inc. and  Sokkia Co., Ltd.(4)                                                  |
| 10.7                     |   | License Agreement made effective August 1, 1999 between NovAtel  Inc., Sokkia Co., Ltd. and Point, Inc.(4)                            |
| 10.8                     |   | Operating Loan Credit Facility Letter from HSBC Bank Canada made  effective November 6, 2000.(5)                                      |
| 10.9                     |   | Amendment No. 1 to Definitive Project Agreement made effective  November 15, 2000 between NovAtel Inc. and BAE Systems Canada Inc.(5) |
| 10.10                    |   | Amendment made effective January 26, 2001 to Operating Loan  Credit Facility Letter from HSBC Bank Canada.(5)                         |
| 10.11                    |   | Employment Agreement dated April 5, 2004 between NovAtel Inc.  and Jonathan W. Ladd.                                                  |
| 10.12                    |   | Operating Line of Credit Facility Letter from The Toronto Dominion  Bank dated June 5, 2002. (6)                                      |
| 10.13                    |   | Employment Agreement dated November 20, 1996 between NovAtel  Inc. and Patrick C. Fenton.                                             |
| *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. |
| 21.1                     |   | List of Subsidiaries.                                                                                                                      |
| 23.1                     |   | Consent of Deloitte & Touche LLP.                                                                                                      |
| 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)                                  Incorporatedby reference to Registrant’s registration statement on Form F-1 (RegistrationStatement No. 333-6088).

(2)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1998.

(3)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1997.

(4)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 1999.

(5)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 2000.

(6)                                  Incorporatedby reference to Registrant’s annual report on Form 20-F for the year endedDecember 31, 2002.

 

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

 

----