Norsat International 20F/A 2005 Annual report (foreign) (amended)

OMB Number: 3235-0288

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F/A

NORSAT INTERNATIONAL INC.

British Columbia, Canada

[norsat20f033106002.gif]

(Mark One)


	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
X	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31^st, 2005
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ________________

Commission file number: 0-12600

Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class		Name of each exchange on which registered
N/A		N/A

Securities registered or to be registered pursuant to Section 12(g) of the Act.

N/A

Title of Class

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Common Shares

Title of Class

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 42,708,082 common shares.

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

[X] Yes [ ] No

Indicate by check mark which financial statement item the registrant has elected to follow.

[X] Item 17 [ ] Item 18

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer___

Accelerated filer___

Non-accelerated filer X

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

[ ] Yes [ ] No

Table Of Contents

1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	5
2.	OFFER STATISTICS AND EXPECTED TIMETABLE	5
3.	KEY INFORMATION	5
A.	SELECTED FINANCIAL DATA	5
B.	CAPITALIZATION AND INDEBTEDNESS	7
C.	REASONS FOR THE OFFER AND USE OF PROCEEDS	7
D.	RISK FACTORS	7
4.	INFORMATION ON THE COMPANY	10
A.	HISTORY AND DEVELOPMENT OF THE COMPANY	10
B.	BUSINESS OVERVIEW	14
C.	ORGANIZATIONAL STRUCTURE	18
D.	PROPERTY, PLANTS AND EQUIPMENT	18
4A.	UNRESOLVED STAFF COMMENTS	18
5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	19
A.	OPERATING RESULTS	19
B.	LIQUIDITY AND CAPITAL RESOURCES	32
C.	RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC	32
D.	TREND INFORMATION	33
E.	OFF-BALANCE SHEET ARRANGEMENTS	34
F.	TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS	34
G.	SAFE HARBOR	34
6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	35
A.	DIRECTORS AND SENIOR MANAGEMENT	35
B.	COMPENSATION	37
C.	BOARD PRACTICES	38
D.	EMPLOYEES	43
E.	SHARE OWNERSHIP	43
7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	45
A.	MAJOR SHAREHOLDERS	45
B.	RELATED PARTY TRANSACTIONS	45
C.	INTERESTS OF EXPERTS AND COUNSEL	45
8.	FINANCIAL INFORMATION	46
A.	CONSOLIDATED FINANCIAL STATEMENTS	46
B.	SIGNIFICANT CHANGES	79
9.	THE OFFER AND LISTING	80
10.	ADDITIONAL INFORMATION	81
A.	SHARE CAPITAL	81
B.	MEMORANDUM AND ARTICLES OF ASSOCIATION	81
C.	MATERIAL CONTRACTS	83
D.	EXCHANGE CONTROLS	83
E.	TAXATION	84
F.	DIVIDENDS AND PAYING AGENTS	87
G.	STATEMENT BY EXPERTS	87
H.	DOCUMENTS ON DISPLAY	87
I.	SUBSIDIARY INFORMATION	88

11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	88
12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	88
PART II		89
13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	89
14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
	PROCEEDS	89
15.	CONTROLS AND PROCEDURES	89
16.	[RESERVED]	89
A.	AUDIT COMMITTEE FINANCIAL EXPERT	89
B.	CODE OF ETHICS	89
C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	89
B.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	89
PART III		90
17.	FINANCIAL STATEMENTS	90
18.	FINANCIAL STATEMENTS	90
19.	EXHIBITS	90

Note:

All dollar amounts presented in the Annual Report on Form 20-F are presented in Canadian dollars unless otherwise indicated. Reference should be made to Item 3A for information on exchange rates between the Canadian dollar and the United States dollar.

PART I

Identity of Directors, Senior Management and Advisers

Not applicable.

Offer Statistics and Expected Timetable

Not applicable.

Key Information

A. Selected financial data

Table 1 below summarizes selected consolidated financial data for the Company calculated in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). Table 2 below summarizes certain corresponding information calculated in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The information for each of the years in the three year period ended December 31, 2005 and as at December 31, 2005 and 2004 have been extracted from the more detailed consolidated financial statements and related notes included herein and should be read in conjunction with such financial statements appearing under the heading "Item 8 - Financial Information" and with the information appearing under the heading "Item 5 - Operating and Financial Review and Prospects". Reference is made to Note 22 of the consolidated financial statements of Norsat included herein for a discussion of the material differences between Canadian GAAP and U.S. GAAP, and their effect on the Company's financial statements. Information for the years ended December 31, 2002 and 2001 and as at December 31, 2002, and 2001 has been extracted from audited consolidated financial statements not disclosed elsewhere herein.

Table 1: Selected Financial Information according to Canadian GAAP


Year Ended December 31	2005	2004	2003	2002	2001
Sales ($000's)	18,116	17,521	12,980	14,675	20,599
Earnings (loss) from continuing operations ($000's)	(5,888)	429	(8,169)	(6,182)	(22,598)
Net earnings (loss) ($000's)	(5,889)	1,153	(8,245)	(6,270)	(22,572)
Earnings (loss) per share from continuing operations - basic and diluted ($)	(0.14)	0.01	(0.23)	(0.18)	(0.71)
Earnings (loss) per share - basic and diluted ($)	(0.14)	0.03	(0.23)	(0.19)	(0.71)
Weighted average number of shares - basic (000s)	42,518	40,282	36,101	33,501	31,803
Weighted average number of shares - diluted (000s)	42,518	40,721	36,101	33,501	31,803
Dividends per share	-	-	-	-	-
As at December 31
Total assets ($000s)	10,524	12,199	9,515	17,026	20,025
Net assets ($000s)	3,554	8,096	5,175	8,971	11,376
Long-term debt (excluding current portion) ($000s)	2,008	1,468	1,271	1,251	-
Capital Stock ($000s)	41,416	40,901	39,153	34,715	33,974

Table 2: Selected Financial Information according to US GAAP.



Year Ended December 31	2005	2004	2003	2002	2001
Sales ($000's)	18,116	17,521	12,980	14,675	20,599
Earnings (loss) from continuing operations ($000's)	(5,858)	897	(7,349)	(5,811)	(19,873)
Net earnings (loss) ($000's)	(5,858)	1,622	(7,425)	(5,899)	(19,848)
Earnings (loss) per share from continuing operations - basic and diluted ($)	(0.12)	0.02	(0.21)	(0.17)	(0.62)
Earnings (loss) per share - basic and diluted ($)	(0.12)	0.04	(0.21)	(0.17)	(0.62)
Weighted average number of shares - basic (000s)	42,518	40,282	36,101	33,501	31,803
Weighted average number of shares - diluted (000s)	42,518	40,721	36,101	33,501	31,803
Dividends per share	-	-	-	-	-
As at December 31
Total assets ($000s)	10,869	12,632	9,991	17,276	19,909
Net assets ($000s)	2,956	7,593	4,330	7,317	11,281
Long-term debt (excluding current portion ($000s)	2,941	2,404	2,593	3,155	-
Capital Stock ($000s)	116,401	115,535	113,788	109,350	108,608

In this Form 20-F Annual Report unless otherwise specified, all monetary amounts are expressed in Canadian dollars. The following tables set out the exchange rates, based on the noon buying rates for the Bank of Canada, for the conversion of United States dollars into Canadian dollars in effect at the closing rate on March 30, 2006, the range of high and low exchange rates for such periods, and the average exchange rates (based on the average of the noon day exchange rates) on each day of the year in such periods.

The close of business on March 29, 2006: 1.1724


	Last Six Months Ended
	2006		2005
	Feb.	Jan.	Dec.	Nov.	Oct.	Sep.
High for period	1.1352	1.1372	1.1734	1.1961	1.1887	1.1882
Low for period	1.1614	1.1794	1.1507	1.1657	1.1659	1.1611


	Year Ended December 31
	2005	2004	2003	2002	2001
Average for period	1.2116	1.3015	1.4015	1.5704	1.5484

Capitalization and indebtedness

Not applicable.

Reasons for the offer and use of proceeds

Not applicable.

Risk factors

Investors should carefully consider the risks and uncertainties described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or operating results could be materially harmed. This could cause the trading price of our common shares to decline, and you may lose all or part of your investment.

Risks Associated With Our Financial Results

Our inability to generate sufficient cash flows may result in us not being a going concern. Our consolidated financial statements have been prepared on the going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations. The application of the going concern basis is dependent upon the Company having sufficient available cash resources and achieving profitable operations to generate sufficient cash flows to fund continued operations, or, in the absence of adequate cash flows from operations, obtaining additional financing. For the year ended December 31, 2005, the Company was not profitable. The Company has previously reported losses and negative cash flows from operations in four of the last five fiscal years. While management believes the Company has sufficient cash flows to continue operations for the next 12 months, the Company may need to rely on a dditional funding to sustain operations after that point.

Our inability to accurately forecast our results from quarter to quarter may affect our cash resources and result in wide fluctuations in the market price of our stock. Our operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are described below. Due to these and other factors, most of which are outside of our control, our quarterly revenues and operating results are difficult to forecast. As a result, we may not be able to accurately predict our necessary cash expenditures during each quarter or obtain financing in a timely manner to cover any shortfalls. We also believe that period-to-period comparisons of our operating results may not be meaningful and one should not rely on any such comparisons as an indication of our future performance.

Risks Associated With Our Business And Operations

We cannot be sure we will be able to identify emerging technology and market trends, enhance our existing technologies or develop new technologies in order to effectively compete in the satellite communications industry. The satellite communications industry is characterized by rapid technological changes, short technology and product life cycles, pressure to provide improved solutions at increasingly lower prices and frequent introduction of new technologies and products. To succeed, we must be able to identify emerging trends and enhance our existing technologies and develop new technologies and products to meet market requirements. To drive sales, our satellite products must meet the needs of our customers and potential customers and must be competitively priced. Additionally, there must be sufficient interest in and demand for our products. If we do not develop these new technologies and products in a timely and cost ef fective manner, or if others develop new technologies before us, we will not achieve profitability in the satellite communications industry and we may not be able to participate in selling these new technologies or products.

We have customer and supplier concentration. A significant portion of our revenues has been recognized from a limited number of customers. For example, during 2005, the Satellite Systems business unit generated approximately 74% (2004: 87%) of its sales from the United States government. We expect that a majority of our Satellite Systems revenues will continue to depend on sales of products to a small number of customers. We also expect that customers will vary from period-to-period. If we fail to successfully sell our products to one or more targeted customers in any particular period, or are unable to diversify our number of customers and segments, our revenues and profits will be adversely affected. The Company purchases substantially all of its microwave products from four suppliers, and certain critical components for its Omnilink product from sole source suppliers. If any of t hese suppliers is unable or unwilling to supply to us and at prices that we deem fair, and we are unable to diversify our number and range of suppliers to mitigate this risk, our revenues and profits will be adversely affected.

We cannot be sure that we will be able to compete effectively with our current competitors. The satellite communications industry is intensely competitive. Our competitors have technologies, products and resources that may be more advantageous and they compete directly with us. Some of these competitors are large, established companies which have significantly greater resources than we have. Our ability to compete effectively will depend on our ability to increase sales and attract new customers in a timely and cost effective manner and market and sell these products at competitive prices. We are dependent on others for the supply and manufacture of components and products we sell. We have outsourced substantially all of the manufacturing of the microwave products we sell and, with the progression of the portable terminals from development to production, we rely on our suppliers to provide components for the production of t erminal products. If either the manufacturers or suppliers cannot deliver products to us on time, and at competitive pricing, our revenues and profits will be adversely affected.

We have limited intellectual property protection. Our success and ability to compete are dependent, in part, upon proprietary technology. Due to the rapid technological changes in our markets and since our technology is, in part, proprietary, we rely primarily on trade secrets and we do not have adequate patent applications to protect our technology. We are however continuing to apply for new patent protection as it relates to Globetrekker products. We also enter into confidentiality, and non-compete agreements with our employees and limit the access to and distribution of our product design documentation and other proprietary information. We cannot be sure that these efforts will deter misappropriation or prevent an unauthorized third party from obtaining or using information, which we deem to be proprietary. Although we believe that our technology does not currently infringe upon patents held by others, we cannot be sure that such in fringements do not exist or will not exist in the future, particularly as the number of products and competitors in our industry segment grows.

If we experience rapid growth and do not manage it effectively, this may impact our profitability. If our technologies and products achieve wide acceptance we may experience rapid growth. We may have to hire more employees, including additional management, improve our financial control systems, and expand and manage our technical, sales and support service operations. We would need increased revenues and additional funding to operate these increased activities. If we do not manage our growth effectively, profitability may be impacted.

We depend on our key employees and we cannot be sure that we will be able to keep these employees or hire and train replacements. Our success depends on the skills, experience and performance of our senior management and other key personnel. While we offer competitive compensation packages and stock options to attract key employees, we do not carry key person insurance on these employees. Highly skilled technical employees and management in the satellite communications industry are in demand and the market for such persons is highly competitive. We cannot be sure that we will be able to retain these employees or hire replacements. If we do not successfully retain our key personnel or hire and train replacements

we will be unable to develop the new products and technologies necessary to compete in our markets or to effectively manage our business.

We may be subject to product liability claims, which are not fully covered by insurance. The manufacture sale and marketing of our satellite products expose us to the risk of product liability claims. Given the complex nature of our products, they may contain undetected errors or performance problems, particularly when new products are introduced. Although our products undergo extensive testing prior to introduction to the market, it is typical in the satellite communications industry for such products to contain errors and performance problems, which are discovered after commercial introduction. If these defects and errors are discovered after shipment, they could result in a loss of sales revenues, delay in market acceptance, product returns, warranty claims and the loss of a potential market. In addition, components and other products manufactured and distributed by others, which are incorporated into our products, may also contain such defects and errors, which could substantially reduce the performance of our products. We are also at risk of exposure to potential product liability claims from distributors and end-users for damages resulting from defects in products that we distribute. Although product defects have not been a significant factor, we maintain product liability insurance. We cannot be sure that this insurance will be adequate to cover all claims brought against us or that this insurance will continue to be available to us on acceptable terms. If these claims are not fully covered by our product liability insurance, they could severely and negatively impact our business liability insurance coverage and our available cash resources. A product liability claim, even one without merit or for which we have substantial coverage, could result in significant legal defence costs, thereby increasing our expenses, lowering our earnings and, depending on revenues, potentially resulting in additional losses.

Since we sell our products around the world, we face financial risks associated with currency fluctuations and other risks relating to our international operations, which may adversely impact our business and results of operations. To be successful, we believe we must expand our international operations. Therefore, we expect to commit significant resources in order to expand our international sales and marketing activities, including the hiring of an international sales force and agents. If we do not maintain or increase international market demand for our products, our business will be negatively impacted. We are increasingly subject to a number of risks associated with international business activities, which may increase our costs, lengthen our sales cycle and require significant management attention. These risks include:

Increased expenses associated with marketing services in foreign countries;

General economic conditions in international markets;

Unexpected changes in regulatory requirements resulting in unanticipated costs and delays;

Tariffs, export controls and other trade barriers;

Longer accounts receivable payment cycles and difficulties in collecting accounts receivable; and

Potentially adverse tax consequences, including restrictions on the repatriation of earnings.

While we expect our international revenues and expenses to be denominated primarily in US dollars, a portion of our international revenues and expenses may be denominated in other foreign currencies in the future. Accordingly, as our reporting currency is the Canadian dollar, we could experience the risks of fluctuating currencies and could choose to engage in currency hedging activities, which may be unsuccessful and expensive.

Risks That May Affect The Value Of Norsat Shares

The exercise of our existing outstanding options, warrants, warrants to be issued, conversion of long-term debt and the number of shares available for future issuance may substantially dilute the value of our common shares. The Company has 75,000,000 shares of Common Stock authorized, of which 42,708,082 were outstanding at December 31, 2005 and an additional 6,666,961 shares have been reserved for issuance upon the exercise of outstanding options or warrants or warrants to be issued or conversion of long-term debt as of such date. Although our Board of Directors has no present intention to do so, it has the authority, within parameters set by the Toronto Stock Exchange (the "TSX"), without action by the shareholders, to issue authorized and unissued shares of Common Stock. Any series of Preferred Stock, if and when established and issued, could also have rights superior to shares of our Common Stock, particularly in regard to voting, the payment of dividends and upon liquidation of Norsat. Convertible debt, if issued to raise additional working capital for the company could also have dilutive effect on the shareholders.

Information on the Company

History and development of the Company

The Company was incorporated in Canada under the name "Norsat International Inc." on October 15, 1982 pursuant to theCompany Act (British Columbia). Effective September 27, 1989, the Company changed its name to NII Norsat International, Inc. At the Company's Annual General Meeting held on June 9, 1999, shareholders passed a special resolution to change the Company's name back to Norsat International Inc. Since July 2, 1999, the Company has operated under the name Norsat International Inc.

Head Office Contact Information

The Company's head office is located at:

300-4401 Still Creek Drive

Burnaby, British Columbia

Canada V5C 6G9

Telephone: 604-292-9000

Fax: 604-292-9100

Email: investor@norsat.com

www.norsat.com

Important Events

Throughout the year, we focused our attention on growing revenues from both our satellite systems and microwave components business units despite an increasingly price-conscious and competitive market. The following were important events during the year:

In 2005, Norsat focused its research and development efforts to design and develop a family of ultra-portable satellite systems known as the Norsat GLOBETrekker^TM. The product was launched in Q3 2005 and production units are scheduled to roll out in the second quarter of 2006.

By November 2005, the Company had delivered its OmniLink portable satellite systems to Ireland's Department of Defense in conjunction with NextiraOne.

In October 2005, the Company announced a partnership with Arrowhead Global Solutions, a Native American-owned small business provider of commercial satellite products, bandwidth and services to the United States Department of Defense.

On September 19, 2005, the Board of Directors and Audit Committee of the Board announced the retention of Ernst & Young LLP as its auditing firm for the fiscal year ending December 31, 2005.

In September 2005, the Company announced that it had expanded its portfolio of microwave products to include Block-up Converters in the extended Ku-band, Ka and X-band low noise block down-converters, and custom block down-converters.

On September 29, 2005, the Company announced that it had fulfilled an order to supply portable satellite systems to the 1^st Calvary Division of the U.S. Army. The order was in excess of US$800,000. Troops from the 1st Cavalry Division based out of Fort Hood, Texas, used the portable satellite systems to transmit high fidelity data and video, as part of their engagement in Joint Task Force Katrina.

In August 2005, the Company announced that it had successfully leveraged its strong supply record to the U.S. Army to secure an order for a portable satellite system with the U.S. Marine Corps.

On June 30, 2005, the Company announced it had been awarded a US $3.3 million order by the U.S. Army Forces Central Command. The order called for the supply of Norsat NewsLink ^TM portable satellite terminals, spares, training and maintenance to support the expansion of the U.S. Army's DVIDS (Digital Video and Imagery Distribution) System.

In May 2005, an Asian military customer became the first non-US military customer to have placed an order for the Company's OmniLink portable satellite systems to be used for in-theater operations.

In the second quarter of 2005, Norsat appointed both a new Board and new executive team.

Norsat introduced the first commercialized highly stable phase locked loop low noise block downconverters (PLL LBN's) for X and Ka frequencies.

Norsat partnered with UAE-based Atlas Telecom to penetrate the markets in the Gulf Cooperation Countries.

In February 2005, Norsat introduced a product family of solid state high power amplifiers.

Norsat received proceeds from financing activities of $0.5 million. All of these proceeds were through the exercise of share purchase options at various times during the year.

Business Development

In 2005, Norsat experienced continued and growing demand for its portable satellite systems, driven in part by the global war on terror and the net-centric transformation of the militaries of Allied Nations. In response to this demand increase, Norsat accelerated its sales and marketing activities across both business units to execute against an aggressive growth strategy to capture a greater share of this growing market.

The following principles have been central to this growth strategy:

Leverage the Company's Reliable Supply Record

Norsat is the primary supplier of portable satellite systems to the US Army's DVIDS (Digital Video and Imagery Distribution System) program and enjoys a reliable supply record. The DVIDS Program enables Norsat satellite systems to be used by multiple U.S. Armed Services engaged in peacekeeping and reconstruction activities. In 2005, Norsat successfully leveraged its supply record with the U.S. Army to secure orders from other services within the U.S. military, most notably the U.S. Marine Corps and more recently, the U.S. Air Force.

In 2005, an active effort to focus on the Company's reliable supply record with the US Army also enabled it to gain a beachhead with other nations' militaries. Through one of Norsat's partners, NextiraOne, Norsat is upgrading the Irish Department of Defence's capabilities to meet both their defence and emergency planning requirements. Norsat is also supplying satellite systems to an Asian military currently involved in peacekeeping operations. Norsat continues to leverage its relationship with the aforementioned military placements and with other agencies engaged in the global war on terror both directly and through its network of alternate distribution channels.

Norsat has also similarly expanded its presence within the broadcast industry. Among those media corporations acquiring Norsat systems to enhance their ability to report breaking new stories, were ITN, the largest British broadcaster, CBS affiliate KTVA in Alaska and an Australian broadcaster.

Recruit and Nurture Strategic Channel Partners

Recognizing that partnerships are a key to sustained growth, Norsat has been actively pursuing strategic relationships with players in both the United States and elsewhere.

As part of this coordinated thrust to recruit strategic partners, the Company has:

entered into a partnership with Arrowhead Global Solutions to jointly bid on significant, multi-year opportunities sponsored by the U.S. Department of Defense;

ii.

successfully signed a frame agreement with one of the world's largest satellite service providers and;

iii.

been engaged in discussions with one of the world's largest defense integrators about an OEM arrangement, wherein the GLOBEtrekker would become part of their product line.

In a strategic move to rapidly establish partnerships necessary to penetrate certain sectors of the market, Norsat accelerated its sales, marketing and product development activities with the goal of bringing the industry's first broadband-capable, backpackable system, the GLOBETrekker, to market. The capabilities of the GLOBETrekker have been sought after in both, the defense and broadcast sectors.

The demand for highly portable satellite systems in the defence segment is strong as the U.S. military and those of other Allied Nations reorganize themselves into a more net-centric force capable of dealing with asymmetric terrorist threats.

Multiply Trade Show Presence

In an effort to showcase the capabilities of Norsat's Omnilink portfolio of products, Norsat employed a mixture of direct sales efforts, partnerships with industry leaders, and participation in industry leading trade shows.

The introduction of GLOBEtrekker, heralded a significant change in how Norsat participated in trade shows. Launched in Amsterdam at IBC and in London two weeks later at the Defence Systems and Equipment International (DSEI) show, the product was then exhibited in the display areas of three (3) strategic partners at Milcom 2005 where Norsat did not have its own booth.

Norsat intends to continue this approach to trade shows in the future as a means to gain broader access to client opportunities through partnerships and reduce the cost of trade show participation by Norsat.

Promote Microwave Products

While "word-of-mouth" referrals and a global network of distributors had traditionally been the primary means of lead generation in the more mature microwave components business the Company added a number of new initiatives to help growth of the microwave components business unit. These initiatives included:

adding a sales resource and launching a "win-back" program;

designing a product catalogue; and

participating in the National Association of Broadcasters (NAB) show.

Research and Development

Research and development activities and projects were focused on those that produced near-term and tangible results, with the main development being the GLOBETrekker family of products.

GLOBETrekker

We focused our efforts on developing the next generation of ultra portable satellite systems, the GLOBEtrekker. Significant R&D effort was expended on this new backpackable ultra portable system. The GLOBETrekker product is suited for "Grab and Go" missions where users may be required to deploy to a site and set up at a location on short notice.

Human Resources

Employee Productivity

We continued to focus on improving employee productivity. In 2004, we implemented an employee incentive program to assign personal goals in support of the overall corporate strategy and, further to align those goals with shareholder objectives. Particular attention was paid to ensuring that the personal and corporate goals were challenging, clearly defined and assessable by management. This program was continued and further refined during 2005.

Leadership

In 2005 we recruited new members to our executive team.

Mr. William J. Coyne III joined the Company on May 16, 2005 as President & Chief Executive Officer. Mr. Coyne previously held executive level positions at several international telecommunications organizations including Sprint and Cable & Wireless. During his 10-year tenure with Sprint, he was the Vice President & General Manager - Northeast Division Mr. Coyne was then recruited by Cable & Wireless. Mr. Coyne's 9 years with Cable & Wireless included multiple executive level positions culminating in being named COO of the U.S. operation. Mr. Coyne then went on to assist several private, entrepreneurial companies in their efforts to be more efficient and productive in their Sales, Marketing and Customer Service business units.

William Comerford was hired as Senior VP Global sales in August 2005.

Bill Comerford has more than 25 years of senior level experience in sales marketing human resources and operations in both private and public communication corporations. Mr. Comerford's experience includes senior positions with Cable & Wireless and Sprint/Global One. Mr. Comerford has an MBA from George Washington University and a BSc in Marketing from Pennsylvania State University.

Mr. George Dorin joined the Company on September 28, 2005 as Chief Financial Officer. Mr. Dorin is a member of the Institute of Chartered Accountants of BC and has a Masters degree in Finance from the London School of Economics in England and degrees in Science and Accounting from the University of British Columbia. Mr. Dorin has over 25 years of national and international experience in financial management, strategic planning, Corporate development and corporate finances and most recently served as CFO and Corporate Secretary of GPS Industries, a wireless technology company with offices in Canada, the United States and England. Mr. Dorin also currently serves on the Board of Directors and is Chair of the Audit Committee of Cantronic Systems, a public technology company in Coquitlam, B.C.

Capital Expenditure

A description of the Company's principal Capital Expenditures over the last three years is as follows:

During 2005, 2004, and 2003 the Company made net purchases of property and equipment in the amounts of $290,048, $185,332, and $98,497 respectively, primarily relating to the purchase of an upgraded ERP system and test equipment.

Business overview

Company Overview

Founded in 1977, Canadian based Norsat International Inc. designs, develops and markets satellite ground equipment which enables high speed transmission of data, audio and video over satellite.

While Norsat International's products have traditionally addressed the government and broadcast television markets, there is growing focus for its portable satellite systems in the disaster recovery, business continuity and tele-health markets.

Product Line

The Company's portfolio of satellite ground equipment comprises primarily of microwave components and portable satellite systems. These components and systems are designed to interoperate with geostationary satellites orbiting the earth.

Microwave Components

Microwave components enable the transmission, reception and amplification of signals to and from satellites. The Company's product portfolio of microwave components includes a comprehensive range of satellite receivers (LNBs), transmitters (BUCs), transceivers, solid state power amplifiers (SSPAs) and other customized products.

Satellite Systems

Portable satellite systems provide rapidly deployable broadband connectivity over satellite where traditional communications infrastructure is insufficient, unreliable, damaged or non-existent. The Company's product portfolio of portable satellite systems include the Norsat GLOBETrekker and OmniLink satellite systems.

The GLOBETrekker is an intelligent, ultra-portable satellite system that enables users to establish a reliable broadband connection on short notice. It is designed to be carried in a backpack, is airline checkable, and fits in small vehicles. The GLOBETrekker is ideal for users who are highly mobile and need to establish broadband connectivity on short notice. Examples of such users include Special Forces, first responders, business continuity managers, Search and Rescue personnel and journalists.

The OmniLink^TM product family also addresses the demanding needs of users seeking to establish broadband connectivity on a temporary basis but for longer periods of time. This product line is ideal for use by government and peace-keeping agencies, broadcasters, resource exploration companies, distance education institutions, financial institutions, and large corporations.

Innovation in Technology

In September 2005, Norsat launched the GLOBETrekker, the industry's first intelligent, backpackable, broadband-capable satellite system. Production units are scheduled to roll out in the first half of 2006.

Early in the year, Norsat led the microwave components industry by introducing new transmitters in the extended Ku-band, C-band and Ka-Band.

Customers

Norsat's extensive customer list includes various government, educational and financial institutions, broadcasters and Fortune 1000 companies. Recent customers include the US Military, including the US Air Force, US Army, US Marines, CBS Affiliate KTVA Anchorage and the Irish Department of Defence.

Norsat distributes its products and services to its worldwide customer base from offices in North America and Europe, and through a global network of partners and distributors.

Two business units

Norsat operates two strategic business units: Microwave Products and Satellite Systems. While both business units provide core elements of the satellite ground infrastructure, the characteristics and dynamics of the markets in which the two business units operate are markedly dissimilar.

Microwave Products Business Unit

Norsat's Microwave Products are typically used in commercial settings as components of a complete system or as replacement parts for existing systems. The product line includes a full range of radio frequency (RF) and associated components including Norsat's traditional satellite receivers (LNBs) and accessories as well as satellite transmitters, transceivers, and custom satellite outdoor units.

Product Overview

Low Noise Block down converters ("LNBs"), are required by every satellite antenna (or "dish") irrespective of aperture or location. The LNB is mounted at the focal point of the dish to convert incoming microwave signals into electrical signals that are routed to the remote receiver or indoor unit. Reliability is critical for these products as they are used in remote areas around the world.

Satellite transmitters or Block Up Converters ("BUCs") and transceivers provide a complementary offering to Norsat's traditional LNB business. Norsat provides Ku and Ka-band BUCs and transceiver products, which are required for two-way satellite networks.

The satellite BUCs convert electrical signals into microwave signals that can be transmitted to an orbiting satellite. Norsat's transceiver provides customers with an easy to install solution that consists of the BUC, LNB, filters and other hardware.

Market Profile

Norsat's primary customers include resellers, system integrators, antenna manufacturers and service providers located in North America, Europe and Asia. These customers integrate Norsat's components into a complete satellite solution for end user customers located all over the world. On the microwave components side of the business, we will be focusing on the solid-state amplifier line and on military satellite components.

Satellite Systems Business Unit

Product Overview

The Norsat GLOBETrekker^TM is an intelligent, ultra-portable satellite system that enables users to establish a reliable broadband connection on short notice - anywhere in the world - even in harsh and hostile conditions. It is sleekly designed to be carried in a backpack, is airline checkable, fits in small vehicles and is even helicopter- and parachute- friendly.

The Norsat OmniLink^TM family of portable satellite terminals combines Norsat's expertise in radio frequency (RF), video transmission, and satellite data networking technologies. The OmniLink^TM products enable the broadband transmission of large amounts of data and images, quickly and easily, without access to a telecommunications network or infrastructure.

In 2005, the Company's Satellite revenues were derived primarily from the sale of the OmniLink portable satellite systems; a video version (Norsat NewsLink^TM) and a data version (Norsat SecureLink^TM). These products are two of the smallest and most lightweight Ku-band, two-way communication devices available. The Norsat portable satellite terminals can be carried in three suitcases and deployed and set up easily in the field in several minutes without tools. They allow for the transmission of broadcast quality MPEG-2 video via DVB-S over satellite. The terminals are ideally suited for the transmission of video, voice, and IP data to and from remote or hostile environments.

Market Profile

The market for portable satellite communications comprises of users that need to establish broadband connectivity on short notice or redeploy their telecommunications infrastructure following an engagement. The primary markets for portable satellite systems are defense, emergency services (first responders, homeland security), and broadcasters. There has been growing interest from Fortune 1000 companies to employ such systems as part of a business continuity program wherein such systems would be used as a "backup measure" should their primary means of communications fail in the event of a natural disaster, an outage or a terrorist attack.

The overall market is going through a significant transformation due to the growth in the government sector. This change in demand is attributable to measures being taken by governments and corporations to counter the threat of terrorism.

The improved demand for portable satellite communications equipment stems from an initiative to "transform" the armed forces. With the onset of Operation Iraqi Freedom in 2003, the need to accelerate the "transformation" has become a top priority. Under this initiative, field units are being equipped with communications gear that will give them real-time access to the same information available at command and control centers.

Most programs within the government and broadcast sectors tend follow a formal competitive tendering process. From time to time, the government may indicate a preference for certain classes of vendors in the interest of social policy or national security objectives. It is thus, critical that a vendor such as Norsat align themselves with such pre-qualified contractors.

Organizational structure

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All subsidiary Companies are 100% owned by Norsat International Inc.

Norsat Atlanta Inc. and Norsat America Inc. are inactive companies.

Property, plants and equipment

Description of Property

Our Company's head office and principal place of business since June 1, 1999 has been located in Burnaby, British Columbia, Canada. The current lease expires September 30, 2006. The Company has negotiated a new lease on new building and will be relocating to Richmond, British Columbia, Canada in September 2006.

The new lease will be for approximately 23,400 square feet of space, and will house the Company's corporate office, engineering and production department and include warehouse space. The company existing warehouse facility is approximately 5,000 square feet, located in Burnaby and the lease will expire at the end of September, 2006.

The monthly rent for this space will be approximately $ 35,000 and is for a term of five years. The Company has the option for a further five year term at the end of this lease, with a new rate to be negotiated.

In addition to the minimum rent, the Company is responsible to pay maintenance, utilities and taxes.

The location of the Company's head office and warehouse is well situated for access to labour and transportation, being readily accessible to the United States border and to the Vancouver International Airport and a short haul distance from the major sea ports of Vancouver and Seattle. Norsat also operates out of leased premises in Lincoln, England, Great Britain.

4A.

Unresolved Staff Comments

Not applicable

Operating and Financial Review and Prospects

Operating results

The following information should be read in conjunction with the Company's 2005 consolidated financial statements and related notes included therein, which are prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP). These principles differ in certain respects from generally accepted accounting principles in the United States (U.S. GAAP). The differences as they affect the financial statements of the Company are described in Note 22 to the Company's audited consolidated financial statements. All amounts following are expressed in Canadian Dollars unless otherwise indicated.

The Company has expanded its operations to include the development and production of complete satellite terminals, broadband software management systems and integration services. Since 2002, Norsat has focused its marketing and development efforts on producing high-speed portable satellite terminals geared to meet customers' needs in several promising new areas with particular focus on Government, Broadcast & Commercial markets.

Today, the Company generates revenue from two business units, Microwave Products and Satellite Systems:

The Microwave business supplies satellite signal receivers, transmitters and other ground station products for the worldwide commercial market. Over the past several years, the Microwave business has been maturing. Markets for microwave products continue to be subject to increased competition and price erosion. The Company is committed to maintaining its strong position in this market.

The Satellite Systems business designs, manufactures and markets the OmniLink and GLOBETrekker family of products, portable satellite systems. These satellite systems provide rapidly deployable broadband satellite data and video connectivity in areas where traditional communications infrastructure is insufficient, damaged, or non-existent. For 2005 the Company had two core products available: a "video" version of the OmniLink called Norsat NewsLink^TM and a "data" version, the Norsat SecureLink^TM.

Results of Operations

Fiscal 2005 Compared to Fiscal 2004


*Quarterly Financial Data (unaudited)* *(Expressed in thousands of dollars, except per share amounts)*
	Three Months Ended
	Mar 31	Jun 30	Sep 30	Dec 31
*2005*
Sales	$2,519	$6,155	$4,721	$4,721
Earnings (loss) from continuing operations	($1,187)	($1,241)	($1,377)	($2,083)
Net earnings (loss)	($1,188)	($1,241)	($1,377)	($2,083)
Earnings (loss) per share from continuing operations - Basic	($0.03)	($0.03)	($0.03)	($0.05)
- Diluted	($0.03)	($0.03)	($0.03)	($0.05)
Earnings (loss) per share - Basic	($0.03)	($0.03)	($0.03)	($0.05)
Weighted average common shares outstanding
basic and diluted	42,052	42,052	42,259	42,646

*2004*
Sales	$4,358	$3,371	$5,005	$4,787
Earnings (loss) from continuing operations	12	($355)	$1,006	($233)
Net earnings (loss)	$ 732	($355)	$1,008	($232)
Earnings (loss) per share from continuing operations - Basic	($0.00)	($0.01)	$0.03	($0.01)
- Diluted	($0.00)	($0.01)	$0.02	($0.01)
Earnings (loss) per share - Basic	($0.02)	($0.01)	$0.03	($0.01)
- Diluted	($0.02)	($0.01)	$0.02	($0.01)
Weighted average common shares outstanding - basic	39,715	39,880	40,037	41,512
- diluted	41,495	39,880	40,638	41,512

Results of Operations


Sales ($000's)	Three Months Ended (2005)				Year Ended
Sales ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2005	2005
Microwave	$1,945	$1,938	$2,839	$3,330	$ 10,052	$ 9,493
Satellite Systems:
Portable Terminals	574	4,217	1,881	1,392	8,064	8,028

	574	4,217	1,881	1,392	8,064	8,028
	$2,519	$6,155	$4,720	$4,722	$18,116	$17,521

Revenues for 2005 were $18.1 million, up from the $17.5 million earned in 2004

The Microwave business maintained stable revenue levels through the year. Despite continued pricing pressures, and the erosion of the US dollar revenues increased by 5.9%. The majority of our business is from repeat customers. We also introduced several new lines of transmitters targeted on the emerging two-way satellite networks

The Satellite Systems business unit revenues were flat year over year. The Company has continued to benefit from a growing need for portable transmission equipment, including satellite newsgathering companies and the military. Forty nine satellite systems, with various options and service packs were sold in 2005 compared to forty four satellite systems in 2004. These portable satellite systems are being used for a number of applications including the transmission of time-sensitive field reports, video footage, and closed two-way video-based communications.


Gross Margin	Three Months Ended (2005)				Year Ended
Gross Margin	Mar 31	Jun 30	Sep 30	Dec 31	2005	2004
Microwave	36%	43%	50%	30%	45%	36%
Satellite Systems	46%	54%	64%	37%	44%	57%
Combined	38%	50%	55%	32%	45%	45%

Gross margins in 2005 were 45% compared to 45% in the prior year.

The Microwave business margins remained stable over the prior year due to continuing initiatives to achieve significant reductions in the cost of product. However, margins declined in the later part of the year as a result of market pricing pressures. For fiscal 2006, the Company is expecting margins to be under continuing pressure.

The Satellite Systems business also achieved stable margins year to year reflecting that a majority of the Company's revenues were direct sales to the end customer rather than through our reseller and channel partners. For fiscal 2006, the Company is expecting margins to remain strong especially with the introduction of the new GLOBETrekker family of products.


Operating Costs ($000's)	Three Months Ended (2005)				Year Ended
Operating Costs ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2005	2004
S G & A	$1,478	$3,026	$2,760	$2,358	$9,622	$5,251
Product development	409	506	735	626	2,276	1,495
Amortization	159	174	181	112	626	621
TPC Funding						(620)
	$2,046	$3,706	$3,676	$3,095	$12,524	$6,747

Selling and marketing efforts were focused on addressing our customers needs, and developing partnerships with resellers in key markets in order to realize sales growth. A significant amount of the increased selling costs during 2005 was attributable to the hiring and compensation of a senior sales force with their related travel and entertainment costs. These costs are expected to decline in 2006 and should support revenue growth. Included in these increased costs was the attendance at three additional International tradeshows to introduce the Company's new GLOBETrekker satellite system. This is twice the number of shows regularly attended by the Company.

Increased administrative costs incurred during 2005 include significant additional legal fees and consulting costs related to staff turnover and regulatory compliance. Also, in 2005 we paid a severance of $270k to the former CEO as per a settlement agreement dated May 1, 2005. Included in administrative expenses is a charge for stock based compensation of $833,116 in 2005, compared with a charge of $135,890 in 2004.

During 2004 the Company signed an amendment to its Technology Partnerships Canada (TPC) agreement with the federal government. The amendment provided for an increase in funding of $620,000 and was recognized in full in fiscal 2004. In 2004 the Company recorded a recovery from discontinued operations totaling $724,166, which arose substantially from a settlement of a liability with a supplier. Both one-time items reduced the administrative costs for 2004.


	Three Months Ended (2005)				Year Ended
	Mar 31	Jun 30	Sep 30	Dec 31	2005	2004
Earnings (loss) from continuing operations before other expenses	$(1,087)	($607)	$(1,065)	$(1,641)	$(4,400)	$1,177
Other expenses	$470	$262	$311	$445	$1,488	$754
Earnings (loss) from continuing operations before income taxes	$(1,557)	($869)	$(1,376)	$(2,086)	$(5,888)	$424

As shown in the consolidated statement of operations, the net effect of the above factors was a loss from continuing operations before other expenses of $4.4 million, compared to earnings of $1.2 million in 2004.

Other expenses for 2005 were $1.5 million compared to $0.8 million during 2004. This increase was primarily due to the write off of goodwill of $0.4 million in 2005, and the modification of convertible debt causing another $0.4m increase in other expenses.

The combined effect of the above resulted in a net loss from continuing operations for 2005 of $5.9 million or $ 0.14 per share compared to net earnings of $ 0.4 million, or $ 0.01 in 2004

For 2005, the net loss was $5.9 million or $0.14 per share - basic and diluted, compared to net earnings of $1.2 million or $0.03 per share - basic and diluted for 2004.

Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada, and makes estimates and assumptions that affect its reported amounts of assets, liabilities, revenue and expenses, and the related disclosures of contingent liabilities. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable in the circumstances. Actual results may differ from these estimates.

Management has discussed the development and selection of the Company's critical accounting estimates with the Audit Committee of the Company's Board of Directors, and the Audit Committee has reviewed the following disclosures.

The following critical accounting policies reflect the Company's more significant estimates and assumptions used in preparing its consolidated financial statements:

The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of outstanding customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms when making estimates of the uncollectability of the Company's accounts receivable balance. If the Company determines that the financial condition of any of its customers deteriorates, increases in the allowance may be made. At December 31, 2005 the Company has recorded an allowance for doubtful accounts in the amount of $ 255,000 (2004 - $28,000) as a reduction to accounts receivable.

The Company values its finished goods and work-in-process inventories at the lower of weighted average cost and net realizable value. Net realizable value reflects the current estimated net selling price or value in use of the item in inventory in a non-forced sale. The Company assesses the need for inventory write-downs based on its assessment of estimated net realizable value using assumptions about future demand and market conditions. When the results of these assumptions differ from the Company's projections, an additional inventory write-down may be required. In addition, changes in the underlying factors used in the company's projections may necessitate additional write-downs in the future. Market factors are generally outside of the Company's control. At December 31, 2005 the Company has recorded an estimate for obsolescence in the amount of $ 1,050,000 (2004 - $1,168,000) as a reduction to inventory.

The Company assesses the impairment of goodwill on an annual basis and identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstance indicate that the carrying value may not be recoverable. Factors the Company considers important, which could trigger an impairment review, include significant underperformance relative to plan, a change in the Company's business strategy, or significant negative industry or economic trends. When the Company believes that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of potential impairment, the Company determines what impairment, if any, exists based on projected net undiscounted and discounted cash flows expected to be generated from these assets. Effective January 1, 2002, the Company adopted CICA section 3062 "Goodwill and Other Intangible Assets". Under this section, goodwill is no longer amortized, but is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Additionally, the Company designated December 31 as the date for annual impairment reviews. At December 31, 2005, a write-down of goodwill of $440,000 was required (2004 - nil) based on this review.

The Company generates a portion of its revenue from multiple elements sales arrangements. Revenue is allocated under these arrangements by the residual value method whereby the fair value of undelivered elements is determined by reference to objective evidence from comparable arrangements with the balance of the fees assigned to the delivered elements. Revenue is recognized for each element when there are no remaining performance obligations required and is based on their relative fair value at the inception of the sales arrangement. To date, the

Company has obtained objective evidence of fair value of the undelivered elements in sales arrangements to support the use of the residual method of allocating revenue. If in the future fair value cannot be determined, either due to changes in contract elements or other factors, it will necessary to defer revenue until objective evidence of fair value exists or when the final elements are delivered.

Related Party Transactions

During the year ended December 31, 2005, the Company entered into an joint strategic marketing agreement with a US New York based private company involved in the business of selling, financing and leasing medical equipment technologies and telemedicine services to hospitals, medical facilities on a worldwide basis. Two of the directors of the Company at the time of entering into the agreement were partners in a firm which has a controlling equity interest in the New York company. In accordance with the agreement Norsat International Inc. was to pay monthly amount of $35,000 USD to this company retroactively from June 15^th, till November 1, 2007. Subsequently, cancellation notice was given and the agreement was terminated September 1^st, 2005. A total of $87,000 USD was paid for the period of June 15^th to September 1^st, 2005.

During 2005, Norsat International Inc. paid $22,637 GBP ($45,842 CDN Equivalent) to a legal firm based in London, England for corporate legal services specific to the Company's UK Subsidiary. A director of the Company is a partner in the UK firm.

Recent Accounting Pronouncements

On January 27, 2005, the Canadian Institute of Chartered Accountants (the "CICA") issued CICA Handbook Section 1530 Comprehensive Income, Section 3855 Financial Instruments - Recognition and Measurement, and Section 3865 Hedges. These standards will be effective for us from January 1, 2007. The impact of implementing these new standards is not yet determinable as it will be dependent on our outstanding positions and their fair values at the time of transition.

On January 1, 2004, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") issued section 3063, "Impairment of Long-Lived Assets". The section provides accounting guidance for the determination of a long-lived asset impairment as well as recognition, measurement and disclosure of impairment. The adoption of this section did not have a material affect on the Company's financial results.

In 2003, CICA section 3870 "Stock-Based Compensation and Other Stock-Based Payments" was amended to require the fair value method to be applied to all employee stock-based compensation awards for fiscal years beginning on or after January 1, 2004. During the fourth quarter of 2003, the Company elected to early adopt the fair value method to their employee awards, granted on or after January 1, 2003. Prior stock option grants were and continue to be accounted for by the settlement method under which generally no compensation expense is assigned on the grant. In 2005 the total compensation expensed was $833,116 and is included in selling, general and administrative expense based on the following assumptions: expected annual volatility of 78% and a risk free interest rate of 3.3%, During 2005 the Company granted stock options having a weighted average fair values of $0.99 per option. (2004 $0.82) The fair values were determined using the Black-Scholes option-pricing model. The total compensation expensed in 2004 was $135,890. In 2004 there were 327,000 options granted and in 2005 1,877,500 options were granted to employees, advisors and directors of the Company.

In December 2003, the Emerging Issues Committee issued EIC-141, “Revenue Recognition” and EIC-142, “Revenue Arrangements with Multiple Deliverables”. In 1999, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”). In 2003 the SEC updated SAB 101 and issued SAB 103, which generally deals with similar revenue recognition issues. SAB 103 provides the SEC’s views in applying US generally accepted accounting principles to selected revenue recognition issues. Various securities regulators in Canada had previously indicated, that it was their view, that these SAB’s were consistent with CICA 3400, and that they would look to these SAB’s when determining whether Canadian reporting issuers have complied with Canadian GAAP. EIC-141 provides general interpretive guidance on the application of CICA 3400 by summarizing the principles set forth in SAB 103 that, in the Committee’s view, are generally appropriate as interpretive guidance on the application of CICA 3400. EIC-142 addresses how to determine whether an arrangement, for instance a sales arrangement, involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be measured and allocated. As the Company had already been accounting for its revenue contracts in accordance with the principles of these abstracts, their adoption did not have a material affect on the Company's financial results

Fiscal 2004 Compared to Fiscal 2003


Sales ($000's)	Three Months Ended (2004)				Year Ended
Sales ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2004	2003
Microwave	$2,655	$2,238	$2,030	$2,570	$ 9,493	$ 9,542
Satellite Systems:
Portable Terminals	1,703	1,133	2,975	2,217	8,028	1,542
Other Systems	-	-	-	-	-	1,896
	1,703	1,133	2,975	2,217	8,028	3,438
	$4,358	$3,371	$5,005	$4,787	$17,521	$12,980

Revenues for 2004 were $17.5 million, up 35% from the $13.0 million earned in 2003.

The Microwave business maintained stable revenue levels through the year. Although unit volumes increased over 2003, continued pricing pressures, and the erosion of the US dollar resulted in revenues being flat year-over-year. The majority of our business is from repeat customers demanding high quality, reliable product that Norsat delivers. We also introduced several new lines of transmitters targeted on the emerging two-way satellite networks.

Looking into fiscal 2005, the Company is well positioned with very competitively priced products, and plans to introduce several new lines of solid-state power amplifiers and low noise blockers to satisfy the continued emergence of two-way networks around the world.

The Satellite Systems business revenues reflect the effect of a full year of our portable terminal business following its successful launch in the fourth quarter of 2003. The Company has benefited from a growing need for portable transmission equipment, including satellite newsgathering companies and the military. Over 40 terminals, with various options and service packs were sold in 2004. These portable terminals are being used for a number of applications including the transmission of time-sensitive field reports, quality video footage and closed two-way video-based communications. The 2003 results also include revenue from smaller custom system sales which were not present in 2004.


Gross Margin	Three Months Ended (2004)				Year Ended
Gross Margin	Mar 31	Jun 30	Sep 30	Dec 31	2004	2003
Microwave	45%	44%	37%	20%	36%	25%
Satellite Systems	50%	53%	65%	53%	57%	39%
Combined	47%	47%	52%	35%	45%	28%

Gross margins in 2004 were 45% compared to 28% in the prior year.

The Microwave business margins improved significantly over the prior year due to initiatives in the latter part of 2003 to achieve significant reductions in the cost of product. However, margins declined in the later part of the year as a result of market pricing pressures, and the impact of a declining US dollar. Margins in 2003 reflect a conscious effort to reduce inventory levels through a number of higher volume lower margin contracts as well as the higher cost of product in the first part of 2003. For fiscal 2005, the Company is expecting margins to remain strong.

The Satellite Systems business achieved strong margins throughout the year reflecting that a majority of the Company's revenues were direct sales to the end customer rather than through our reseller and channel partners. Margins in 2003 include a number of lower margin demonstration equipment

sales to resellers and sales of terminals through our reseller and channel partners. For fiscal 2005, the Company is expecting margins to remain strong.


Operating Costs ($000's)	Three Months Ended (2004)				Year Ended
Operating Costs ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2004	2003
S G & A	$1,425	$1,205	$1,376	$1,245	$5,251	$ 5,745
Product development	361	435	370	329	1,495	3,313
Amortization	150	154	154	163	621	1,102
Restructuring charge	-	-	-	-	-	1,233
	$1,936	$1,794	$1,900	$1,737	$7,367	$11,393

Selling, general and administrative (SG&A) expenses decreased by 9% to $5.3 million from $5.7 million in 2003. We continue to focus on tight cost control and while we believe our costs are appropriate for the size of the company, we will continue to seek opportunities to address administrative costs wherever possible, however the increasing cost of regulatory compliance may hinder these efforts.

Selling and marketing efforts continue to be focused on our customers needs, and developing strong partnerships with resellers in key markets to help leverage further sales to these customers. These costs are expected to increase in 2005 to support revenue growth.

Product development activities decreased 55% to $1.5 million from $3.3 million in 2003. The significant reduction reflects the closure of the Company's Winnipeg research and development center in 2003 and the commercial release of the Norsat NewsLink^TM Model 3200 and the Norsat SecureLink^TM Model 3210 in 2003. On-going development activities are focused on projects generating near-term revenue from our line of portable terminals.

Amortization declined 44% to $0.6 million compared to $1.1 million in the previous year, reflecting the Company's efforts to minimize capital expenditures and the closure of our Winnipeg operations in 2003.

In 2004 the Company incurred no restructuring charges compared to $1.2 million, in 2003. The 2003 cost reflects the severance and related benefits for approximately 40 employees.

During 2004 the Company signed an amendment to its Technology Partnerships Canada (TPC) agreement with the federal government. The amendment provided for an increase in funding of approximately $620,000 and a revision to the royalty period to commence January 1, 2004 and expire on December 31, 2011. All $620,000 of the contributions were recognized in fiscal 2004 and the current program is complete.


	Three Months Ended (2004)				Year Ended
	Mar 31	Jun 30	Sep 30	Dec 31	2004	2003
Earnings (loss) from continuing operations before other expenses and income taxes	$113	($209)	$1,220	$53	$1,177	($7,038)

As shown on the consolidated statement of operations, the net effect of the above factors were earnings from continuing operations before other expenses of $1.2 million compared to a loss of $7.0 million in 2003.

Other expenses for 2004 were $0.8 million compared to $1.1 million during 2003. This cost reduction was primarily due to lower foreign currency losses and the effects of the loss on disposal of equipment in 2003, resulting from the closure of our Winnipeg operations.

The combined effect of the above resulted in net earnings from continuing operations for 2004 of $0.4 million or $0.01 per share compared to a loss of $8.2 million or $0.23 in 2003

Discontinued operations realized a recovery of $0.7 million compared to a loss of $0.1 million during 2003. The recovery was a result of a settlement on a liability with a supplier during the first quarter.

For 2004 net earnings were $1.2 million or $0.03 per share - basic and diluted, compared to a net loss of $8.2 million or $0.23 per share - basic and diluted for 2003.

Fiscal 2003 Compared to Fiscal 2002


Revenues ($000's)	Three Months Ended (2003)				Year Ended
Revenues ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2003	2002
Microwave	$2,789	$2,159	$2,238	$2,356	$9,542	$10,794
Satellite Systems:
Portable Terminals	-	300	198	1,044	1,542	-
Other Systems	577	54	1,265	-	1,896	3,881
	577	354	1,463	1,044	3,438	3,881
	$3,366	$2,513	$3,701	$3,400	$12,980	$14,675

Revenues for 2003 were $12.9 million, down 12% from the $14.7 million earned in 2002. Microwave sales experienced significant pricing pressures during the first half of the year resulting from increased price competition, a declining US dollar and a focused effort to reduce inventory levels. Although the Company did experience pricing pressures, it was able to maintain stable revenue levels through the year by increasing market share and consequently increasing volume. In addition, the Company was able to drastically reduce its higher cost inventory, and subsequently reduce the cost of its products by as much as 70%. Looking into fiscal 2004, the Company is well positioned with very competitively priced products, and plans to introduce several new lines of transmitters focused on the emerging two-way satellite networks.

The Satellite Systems segment continued to generate revenue from smaller custom system sales throughout the first three quarters of fiscal 2003. During the fourth quarter, the Company launched the commercial release of its portable terminals and immediately realized revenues in excess of $1 million. The 2002 comparative Satellite Systems revenues included a $1.5 million Open Networks system sale and a $2.3 million dollar custom project. Looking into fiscal 2004, the Company has successfully launched its line of portable satellite terminals. The Company is now selling two types of satellite terminals, a "video" version named the Norsat NewsLink^TM and a "data" version named the Norsat SecureLink^TM. With channel partners now in place in major markets around the world, the Company is well positioned to globally offer portable satellite terminals into the broadcast, military, homeland security, disaster relief, medical, and resource markets. The portable terminals provide a competitive advantage where communications infrastructure does not exist.


Gross Margin	Three Months Ended (2003)				Year Ended
Gross Margin	Mar 31	Jun 30	Sep 30	Dec 31	2003	2002
Microwave	16%	24%	28%	32%	25%	38%
Satellite Systems	52%	-2%	42%	42%	39%	51%
	22%	20%	34%	35%	28%	41%

Gross margins in 2003 were 28% compared to 41% in the prior year. Microwave margins suffered early in the year as a result of market pricing pressures, focused efforts to reduce inventory levels and the impact of a falling US dollar. The Company was able to counter these negative events through significant reductions in the cost of product. These efforts are now being realized with Microwave margins steadily increasing from 16% in Q1 to 24% in Q2, 28% in Q3 and finally 32% in Q4. For Fiscal 2004, the Company is expecting margins to continue to improve as the Company's sales of the lower-cost product continue.

Satellite Systems margins fluctuated during the first half of the year, as the Company was partnering with broadcasters during the war in Iraq to obtain direct customer feedback. The launch of the portable terminals in the fourth quarter resulted in stronger margins, however, they were offset by a

number of lower margin demonstration equipment sales to resellers. Looking into 2004, with the successful launch of the portable terminals, the Company expects the margins to continue to improve.


Operating Costs ($000's)	Three Months Ended (2003)				Year Ended
Operating Costs ($000's)	Mar 31	Jun 30	Sep 30	Dec 31	2003	2002
S G & A	1,719	1,677	1,286	1,063	5,745	5,830
Product Development	1,249	1,049	651	367	3,313	5,103
	$2,968	$2,723	$1,937	$1,430	$9,058	$10,933

Selling, general and administrative (SG&A) expenses remained relatively unchanged decreasing by 1% to $5.7 million from $5.8 million in 2002. However, on a quarterly basis expenses were substantially less in the third and fourth quarters, primarily due to a continued reduction in administrative costs and tight cost control. Selling and marketing efforts were focused on developing strong partnerships with resellers in key markets around the world to help leverage further sales.

Product development activities decreased 35% to $3.3 million from $5.1 million in 2002. The reduction was a result of the Company having completed the commercial release of the Norsat NewsLink^TM Model 3200 and the Norsat SecureLink^TM Model 3210 during the end of the third quarter.

In addition, as a result of the agreement with Novra Technologies Inc. to assume development and support costs associated with DVB Open Networks technology, the Company was able to close its Winnipeg research and development center. This agreement allowed the Company to further reduce its operating costs, while maintaining the ability to pursue opportunistic revenues in the future. Fourth quarter and on-going development activities are focused on projects generating near-term revenue from the line of portable terminals.

During the fourth quarter of fiscal 2003, the Company reduced its quarterly operating costs by more than one-half of what it was spending in the early part of the year.

The funding segment of the agreement between the Company and Technology Partnerships Canada ("TPC") has been completed and, as a result, contributions for 2003 were $667,000 compared to $2.8 million for 2002.

During the year, the Company incurred additional restructuring charges of $1.2 million, a 26% reduction from the $1.7 million recorded in 2002. Amortization declined 38% to $1.1 million compared to $1.8 million in the previous year, which reflected the Company's efforts to minimize capital expenditures and the closure of the Winnipeg office.


	Three Months Ended (2003)				Year Ended
	Mar 31	Jun 30	Sep 30	Dec 31	2003	2002
Loss from continuing operations before other expenses and income taxes	($2,432)	($2,466)	($1,724)	($416)	($7,038)	($5,446)

As shown on the consolidated statement of operations, the net effect of the above factors was a loss from continuing operations before other expenses and income taxes of $7.0 million compared to $5.4 million in 2002.

Other expenses for 2003 were $1.1 million, up from the $730,000 in the previous year. This change was primarily due to foreign currency losses and losses on disposal of equipment during the year, resulting from the closure of the Winnipeg office.

The net loss for 2003 was $8.2 million, or $0.23 per share, compared to $6.3 million, or $0.19 per share in fiscal 2002.


*Quarterly Financial Data* *(Expressed in thousands of dollars, except per share amounts)*
	Three Months Ended
	Mar 31	Jun 30	Sep 30	Dec 31
*2005*
Sales	$2,519	$6,155	$4,721	$4,721
Earnings (loss) from continuing operations	($1,187)	($1,241)	($1,377)	($2,083)
Net earnings (loss)	($1,188)	($1,241)	($1,377)	($2,083)
Earnings (loss) per share from continuing operations - basic	($0.03)	($0.03)	($0.03)	($0.05)
- diluted	($0.03)	($0.03)	($0.03)	($0.05)
Earnings (loss) per share - basic	($0.03)	($0.03)	($0.03)	($0.05)
- diluted	($0.03)	($0.03)	($0.03)	($0.05)
Weighted average common shares outstanding - basic	42,052	42,052	42,259	42,646
- diluted	42,052	42,052	42,259	42,646

*2004*
Sales	$4,358	$3,371	$5,005	$4,787
Loss from continuing operations	$ 12	($355)	$1,006	($233)
Net loss	$ 732	($355)	$1,008	($232)
Loss per share from continuing operations, basic and diluted	$0.00	($0.01)	$0.03	($0.01)
Net loss per share, basic	$0.08	$0.07	$0.06	$0.02
diluted	$0.00	($0.01)	$0.02	($0.01)
Weighted average common shares outstanding, basic	39,715	39,880	40,037	41,512
diluted	41,495	39,880	40,638	41,512

Liquidity and capital resources

The Company's cash and short-term investments balance at December 31, 2005 was $2.5 million, compared to $5.1 million at December 31, 2004, a decrease of $2.6 million. This change resulted primarily from cash used in operations of $2.8 million, capital purchases of $0.3 million, partially offset by proceeds on exercise of options of $0.5 million.

The Company's cash requirements through the end of 2006 are primarily to fund operations, product development, capital expenditures and debt service costs.

The cash required to support these requirements will come from operations, the balance of cash on hand, working capital and, if necessary, additional external financing. As described in note 23 (subsequent events) to the financial statements, the Company closed a private placement with gross proceeds of approximately US$3 million in March 2006. The Company may be required to raise additional funds during 2006.

As at December 31, 2005, there are 42,708,082 common shares of the Company issued and outstanding. In addition, there are 2,536,811 share purchase warrants and 2,530,150 stock options outstanding that entitle the holder to purchase one common share of the company at various prices per share. 2,209,233 of the stock options are exercisable at this time. Also, the Company's long-term debt is convertible at the option of the holder into 1,600,000 common shares of the Company.

As at March 30, 2006, additional shares had been issued as a result of the private placement which closed on March 6, 2006, additional options had been issued to new employees, options have expired and a total of 1,926,400 options and 5,602,043 share purchase warrants that entitle their holder to purchase one common share of the Company at various prices were outstanding.

Research and development, patents and licenses, etc.

During 2002, Norsat began to focus its development resources on the portable satellite terminal product line, refining the original pico-Terminal for military markets (now renamed Norsat OmniLink^TM) and introducing a terminal designed specifically for the satellite newsgathering business. Substantially all $5.1 million spent in 2002 on product development, focused on the Norsat OmniLink^TM product line development and enhancements.

During 2003, the Company incurred an additional $3.3 million of research and development cost which culminated in the release of a second-generation version of its Norsat NewsLink^TM, featuring a number of significant product enhancements improving on the ease of use, portability, functionality and performance of the product.

During 2004 Norsat revisited its value chain and focused efforts where they could provide the greatest value. This focus resulted in $1.5 million being invested into product refinements such as improved monitor control functionality and additional ruggedization of the OmniLink products. Norsat leveraged off the strengths of existing partners and invested its resources in areas of core competency in order to get to market quickly.

During 2005 Norsat introduced the first commercially produced phase locked loop low noiseblock downconverters (PLL LNB's) operating at X and Ka frequency bands and released its new line of solid state power amplifiers. Norsat expanded its portfolio of microwave products to include Block-up Converters in the extended Ku-band, Ka and X-band low noise block down-converters, and custom block down-converters. The development of the new Ka and X-band external reference low noise block down-converters will complement plans by the U.S. Department of Defense for a 2006 launch of high-powered Wideband Gapfiller Satellites, which are expected to provide more than 10 times the capacity of current satellites.

Norsat also introduced the new GLOBETrekker line of products. GLOBETrekker is an intelligent ultraportable satellite system that enables users to establish a reliable broadband connection on short notice. GLOBETrekker is designed to be carried in a backpack, is airline checkable, fits in small vehicles and is helicopter and parachute friendly.

These strategic product development activities resulted in the following research and development expenditures:


2005	$2,275,766
2004	$1,494,756
2003	$3,313,171

Trend information

The overall market for broadband satellite communications has gone through a significant transformation due to the growth in the government sector. While the U.S. comprises more than 70% of the worldwide government market, there is healthy demand for satellite broadband equipment in many other countries throughout Europe and Asia. This demand is attributable to measures being taken by governments and corporations to counter the threat of terrorism and to the increasingly multilateral composition of combat and peacekeeping missions around the world.

Another favourable trend enabling these opportunities is the growing acceptance of COTS ("Commercial-Off-The-Shelf") equipment among militaries. Both of Norsat's business units are benefiting from this change in policy.

Customers are increasingly price sensitive for microwave components. The Company continues to face aggressive new competitors and is attempting to find ways to further reduce product costs without sacrificing quality. Certain competitors have decided to merge and others have decided to focus on certain niches. We expect consolidation to continue among our competitors.

There is an emerging need to provide broadband connectivity to users in military and broadcast markets who are "on-the-move." For example, broadcasters are seeking satellite terminals mounted on vehicles so that they can cover news stories, special and sports events on a local, regional and global basis.

The market for portable satellite systems is increasingly more competitive. We continue to face competition from the traditional providers of portable satellite systems including: Swe-Dish, VisLink PLC's Advent business unit, ND SatCom, GCS, AVL Technologies, TCS, GigaSat, Holkirk Communications and SisLink. At times, we face competition from systems integrators who construct systems on a custom basis for military and broadcast customers. We also face some competition from government integrators (such as Thales, Finmecchanica, Raytheon and L3) and from INMARSAT satellite system providers. Traditional satellite system providers who are exploring the portable systems arena and who may eventually choose to enter our business (ViaSat, Hughes and Gilat) are also expected to be competitors.

Off-balance sheet arrangements.

The Company has no off-balance sheet arrangements that have not been reported in the audited financial statements for the year ended December 31, 2005.

Tabular disclosure of contractual obligations.

As of December 31, 2005, the impact that our contractual obligations are expected to have on our liquidity and cash flow in future periods is as follows:


($000's)	Total	Less than 1 year	1-3 years	4-5 years	After 5 years
Operating Lease Obligations	$2,519	$ 784	$ 1,314	$ 421	-
Inventory Purchase Obligations	$2,956	$2,956	-	-	-
Long Term- Debt Obligations	$2,326	-	$2,326	-	-
	$7,831	$3,770	$3,640	$ 421	-

Safe harbor

Statements in this report relating to matters that are not historical fact are forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, changes in technology, reliance on third party manufacturing, managing rapid growth, global sales risks, limited intellectual property protection and other risks and uncertainties described in Norsat's public filings with securities regulatory authorities.

Directors, Senior Management and Employees

Directors and Senior Management

Directors

The following section sets forth the information on our directors:

Ugo A. Doninelli

Director and Chairman of the Board.

Mr. Doninelli became a director of Norsat in May 1988. He is the General Manager and CEO of Prismafin S.A., an international investment organization with offices in Chiasso and Zurich, Switzerland. He exercises direction over the 1,985,575 Norsat common shares held by Prismafin S.A. He also serves as a Director for Nexmedia Technologies Inc., a multimedia software developer. He became Chairman on the Company on November 30, 2005.

James Sharpe

Director, Vice Chairman of the Board, and Chairman of the Audit Committee.

Mr. Sharpe became a director of Norsat in May 2005. James Sharpe has over twenty-five years of senior-level management experience in the public and private sectors as a chief executive officer and as a chief financial officer for small to large complex organizations. He is currently the President of Sharpe Associates, a Washington State firm that provides a wide spectrum of financial management services to small and medium-sized private firms, and public entities. Mr. Sharpe holds a BA in accounting from the University of Washington, a MBA from Pepperdine University and a MS in International Business for the University of Strathclyde, Scotland.

Joseph Caprio

Director and Chairman of the compensation Committee

Mr. Caprio became a director of Norsat in May 2005. Mr. Caprio is a former Dean at Colgate University, Hamilton, NY and has served as a management consultant and as an operating officer of several businesses. Mr. Caprio holds a BS degree in management from the University of Rhode Island, and a MA degree from Colgate University, Hamilton, NY.

Dan Dixon

Director

Mr. Dixon became a director of Norsat in May 2005.

Mr. Dixon has more than 20 years of senior management experience. Mr. Dixon was a founding partner of Cambridge Partners LLC, of The Celadon Group Inc, a business development subsidiary of Foster Pepper & Shefelman, a Seattle based law fim, and of iCopyright Inc. Mr. Dixon is a Director on the Board of Advisors for the Seattle Heart and Vascular Institute. Mr. Dixon holds a BA in Anthropology from Oberlin College and a JD degree from the University of San Francisco School of Law.

Christopher Hoyle

Director

Mr. Hoyle became a director of Norsat in May 2005.

Mr.Hoyle's experience has included service as in house legal counsel for IBM (UK), a former partner at McGrigors, formerly Klegal, the legal arm of KPMG. He is currently a partner at Beachcroft Wansbroughs in Bristol, UK. Mr. Hoyle holds a Masters degree in Law from Cambridge University, a LLB (Hons) degree from the University of Canterbury, New Zealand and a Diploma in Intellectual Property Law from the University of London.

Kenneth Crump

Former Director and Former Chairman of the Board.

Mr. Crump became a director of Norsat in June 2002 and resigned as a Director of the Company on April 29, 2005.

Brian Nixon

Former Director

Mr. Nixon was appointed to the board in February 2004 and Chairman of the Audit Committee in March 2004. Mr. Nixon resigned as a Director of the Company on May 1, 2005.

Senior Management

William Coyne

Director, President and Chief Executive Officer

Mr. Coyne joined the Company in May 2005 as President and CEO of the Company.

Prior to joining Norsat, Mr. Coyne was the Vice President & General Manager at Sprint Communications Northeast Division. Mr. Coyne holds a BA from St Joseph's University in Philadelphia where he received a Presidential Scholarship.

George Dorin

Chief Financial Officer, Corporate Secretary, and Director.

Mr. Dorin joined the Company in September 2005 as Chief Financial Officer and was appointed the Corporate Secretary on February 1, 2006.

Prior to joining Norsat Mr. Dorin was CFO and Corporate Secretary of GPS Industries Inc.

Mr. Dorin is a Chartered Accountant and currently serves on the Board of Directors of Cantronic Systems.

Dr. Amiee Chan, Vice-President of Operations

Dr. Chan rejoined the Company in April 2004 as VP of Operations. She was Product Manager at CREO from October 2002 to March 2004 and Director of Research and Development at Norsat International from April 1998 to May 2002.

Dr. Chan received her Executive MBA from Simon Fraser University in 2003. In 2000 she received her Doctorate of Philosophy degree in Electrical Engineering and in 1992, her Bachelor's degree in Electrical Engineering, both from the University of British Columbia.

William Comerford

Senior Vice President, Global Sales & Marketing

Mr. Comerford joined the Company in August 2005.

Prior to joining Norsat Mr. Comerford held senior level management positions with Cable & Wireless, and Sprint Communications. Mr. Comerford holds an MBA from George Washington University and a BSc in Marketing from Pennsylvania State University.

Cameron Hunter

Former President and Chief Executive Officer

Mr Hunter resigned from the Company on April 28, 2005

Troy Bullock
Former Chief Financial Officer, Corporate Secretary, and Director

Mr. Bullock resigned from the Company on February 28, 2005

Compensation

Compensation of Directors

The following table sets forth, all annual and long-term compensation earned from the Company and its subsidiaries for the year ended December 31, 2005 by each director:


Name	Total Compensation	Directors Fees	Benefits
Ugo Doninelli	38,000	38,000	Nil
Dan Dixon¹	28,333	28,333	Nil
Joseph Caprio²	24,333	24,333	Nil
James Sharpe³	24,625	24,625	Nil
Christopher Hoyle⁴	19,333	19,333	Nil
George King⁵	37,083	37,083	Nil
Ken Crump⁶	16,167	16,667	Nil
Brian Nixon⁷	15,333	15,333	Nil

NOTES:

(1) Became a director on May 2, 2005

(2) Became a director on May 30, 2005

(3) Became a director on May 20, 2005

(4) Became a director on May 3, 2005

(5) Became a director on April 8, 2005, resigned as a director on November 30, 2005

(6) Resigned as a director on April 29, 2005

(7) Resigned as a director on May 1, 2005

Compensation of Senior Management

The following table sets forth, all annual and long term compensation earned from the Company and its subsidiaries for the year ended December 31, 2005 by each member of senior management:


		Annual Compensation			Long Term Compensation
					Awards		Payouts
Name and Principal Position (a)	Year (b)	Salary ($) (c)	Bonus ($) (d)	Other Annual Compensation ($)⁽¹⁾ (e)	Securities Under Options/ SARs Granted (#) (f)	Restricted Shares or Restricted Share Units ($) (g)	LTIP Payouts ($) (h)	All Other Compensation ($) (i)
William Coyne III² President and Chief Executive Officer	2005	132,045	53,747	8,640	100,000 / Nil	N/A	N/A	Nil
George Dorin³ Chief Financial Officer	2005	42,087	9,267	Nil	Nil / Nil	N/A	N/A	2,087
William Comerford⁴ VP Global Sales	2005	56,639	14,696	Nil	70,000 / Nil	N/A	N/A	Nil
Dr. Amiee Chan, Chief Operating Officer	2005 2004	141,453 91,907	26,063 34,400	4,500 6,000	15,000 75,000 / Nil	N/A	N/A	9,213 6,315
Cameron Hunter,⁵ Former President and CEO.	2005 2004 2003	319,005 200,000 155,986	Nil 219,025 103,894	2,400 7,200 6,200	Nil / Nil Nil / Nil 500,000 / Nil	N/A	N/A	Nil 20,951 12,041
Troy Bullock⁶ Former Chief Financial Officer	2005 2004 2003	23,589 150,000 150,000	Nil 85,650 7,889	1,000 6,000 31,000	Nil / Nil Nil / Nil 150,000 / Nil	N/A	N/A	5,474 11,783 7,894

NOTES:

(1)

Car allowance unless otherwise stated

(2)

Mr. Coyne was hired on May 18, 2005 and his annual compensation figures reflect pro-rated amounts

(3)

Mr. Dorin was hired on September, 2005 and his annual compensation figures reflect pro-rated amounts

(4)

Mr. Comerford was hired on August 8, 2005 and his annual compensation figures reflect pro-rated amounts

(5)

Mr. Hunter left the Company on April 28, 2005

(6)

Mr. Bullock left the Company on Feb 28, 2005

For the period September 15, 2005 to December 31, 2005 senior employees had a temporary salary reduction as follows; Bill Coyne salary reduced to US$150,000, Bill Comerford salary reduced to US$ 120,000, Amiee Chan salary reduced to $125,000. All Salaries were reinstated effective January 1, 2005

The bonus amounts were paid pursuant to the Company's Employee Compensation Plan. The plan remunerates employees based on successful completion of both personal and corporate objectives and each employee is tiered to a level to match their responsibilities within the Company.

Reference is also made to item C immediately below - specifically "Change in Responsibilities and Employment Contracts".

Board practices

Mandate of the Board

The Board of Directors is responsible for the stewardship of the Company and endorses a system of corporate governance designed to effectively manage and supervise the management of the business and the affairs of the Company. The Board also provides considerable guidance to Management in pursuit of the Company's objectives.

The Board acknowledges that good corporate governance is important to the effective performance of the Company and plays a key role in protecting the interests of shareholders.

The Board continues to review the existing or proposed amendments to governance guidelines and practices in order to implement the most effective corporate governance policies and practices for the Company. The Board plans to adopt changes to their governance guidelines and practices as necessary to comply with the United States Sarbanes-Oxley Act of 2002 and any new rules issued by the United States Securities and Exchange Commission, the Ontario Securities Commission, the Toronto Stock Exchange, and other applicable securities regulatory authorities.

Decisions Requiring Board Approval

In general, the Company's management operates the business on a day-to-day basis. The Board approves the annual budget and strategic plans and reviews the performance of senior management against those standards. In addition, the Board approves all major acquisitions, dispositions, financings, both debt and equity, and changes in the structure of the Company. The Board also determines the responsibility and compensation of the Chief Executive Officer based on the recommendations of the Compensation Committee. The Board appoints the officers of the Company. The Directors also determine the directors' compensation and consider the declaration of dividends.

Composition of the Board

The Board is currently composed of five (5) directors, all five (5) of whom are considered "unrelated" to the Company by TSX guidelines - which state an "unrelated" director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the Company, other than interests and relationships arising from shareholdings.

Recruiting of New Directors

If vacancies occur on the Board, the Board as a group considers replacements and reviews the qualifications of prospective members and determines their relevance, taking into consideration the current Board composition and the skills required to round out the capabilities of the Board and makes recommendation to the board for approval.

The Board meets at least quarterly to carry out its duties and members of the board who are not management meet on an informal basis during the year to discuss the Company's progress and management.

Measures for Receiving Shareholder Feedback

Management has been asked to make the Board aware on an ongoing basis of any significant shareholder concerns communicated to management. Currently the CEO & CFO respond to shareholder inquiries and direct appropriate matters to senior management. Senior management will meet with shareholders to discuss their concerns where appropriate.

The Board's Expectation of Management

The Board expects management to operate the Company in accordance with good, prudent business practices. Management is expected to report to the Board on financial and operating matters and to make the Board aware of all important issues and major business developments. The Board also expects management to find new business opportunities for business acquisitions and expansion and to make the appropriate reports to the Board regarding those opportunities.

Directors' and Officers' Liability Insurance

The 2005 premiums for directors' and officers' liability insurance coverage, in the amount of $10,000,000, amounted to $175,000 (2004 $ 293,000).

Director's Service Contracts

The term of office for each of the present directors expires at the Annual General Meeting. The current directors have served as such as follows: Mr. Doninelli since May 1988; Messrs. Sharpe, Dixon, Caprio and Hoyle since May 2005.

The Company does not provide benefits for its non-executive directors.

Board Committees

The Board currently has two standing committees: the Audit Committee and the Corporate Governance and Compensation Committee.

Audit Committee

The Company's Audit Committee is comprised of three (3) directors: Messrs. Sharpe (Chair), Caprio, Dixon, (each of whom is independent and an "unrelated" director). Each member of the Audit Committee considers himself financially literate and capable of reading and understanding financial statements, and Mr. Sharpe has an accounting degree and related financial expertise. The board has adopted a formal written charter for the Audit Committee under which the committee is responsible for, among other things, reviewing the Company's annual and quarterly financial statements, financial reporting procedures, internal controls and performance and independence of the Company's external auditors. The Audit Committee is directly responsible for the appointment, compensation and oversight of the auditors including pre-approving all non-audit services provided by the audit firm.

During fiscal 2005, the Audit Committee met four (4) times to carry out its responsibilities. The committee schedules its meetings with a view to ensuring that it devotes appropriate attention to all of its tasks.

As part of its oversight of the Company's financial statements, the committee reviewed and discussed with both management and the Company's external auditors the annual financial statements, and with management the quarterly financial statements, prior to their issuance. Management advised the Audit Committee in each case that all financial statements were prepared in accordance with generally accepted accounting principles, and reviewed significant accounting issues with the committee.

Resignation of KPMG

On June 21, 2005, the audit firm KPMG informed the Company of its determination to not accept the appointment as auditors of the Company for the fiscal year ending December 31, 2005. There has been no reservation on the Company's financial statements on which KPMG issued a report and KPMG's decision does not result from any disagreement with Company management.

Appointment of Ernst & Young

On September 19, 2005, the Board of Directors and Audit Committee of the Board announced the retention of Ernst & Young LLP as its auditing firm for the fiscal year ending December 31, 2005.

The Audit Committee also discussed with the external auditors matters relating to its independence, including a review of audit and non-audit fees and the disclosures made to the Committee pursuant to Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).

The following table sets forth fees paid by the Company to Ernst &Young (in 2005) and KPMG LLP (prior to 2005) for all services in 2005, 2004 and 2003


	Audit Fees	Audit Related Fees	Tax Fees	Other Fees
2005	$130,000	$19,100	$0	$0
2004	$85,000	$11,575	$19,450	$0
2003	$86,000	$19,650	$59,950	$0

Audit Fees

Audit fees are for the audit of our annual consolidated financial statements.

Audit Related Fees

Audit related fees are primarily for services related to review of other statutory filings.

Tax Fees

Tax fees are primarily for the preparation of our Canadian and U.S. corporate tax returns and assistance with tax planning.

Taking all of these reviews and discussions into account, the Audit Committee recommended to the Board of Directors that the Board approve the inclusion of the Company's audited financial statements in the Company's annual report for the fiscal year ended December 31, 2005.

Corporate Governance and Compensation Committee

The Corporate Governance and Compensation Committee of the Board of Directors is comprised of three directors: From January 1, 2005 to April 29, 2005 the directors were: Messrs. Crump (Chair), Nixon and Doninelli. With Mr. Crump's and Mr. Nixon's resignations from the Board on April 29, 2005 and May 1, 2005 respectively, Mr. Caprio became Chair and Mr. Dixon and Mr. Sharpe joined the committee. All of the members of the committee are independent of management. None of the members of the Committee has any indebtedness to the Company, nor do they have any material interest in any actual or proposed transaction in the last financial year that has materially affected or would materially affect the Company.

The Committee reviews and makes recommendations to the Board with respect to Norsat's Executive Compensation Plan and Stock Option Plan. The Committee recommends to the Board the compensation of the Chief Executive Officer, reviews and approves management's recommendations for compensation and bonuses for senior management and grants of stock options. The Committee is also responsible for reviewing executive management succession and development plans. The Committee reports to the Board and the Board gives final approval on compensation matters.

Compensation Objectives

In January 2004 the Company introduced a "results oriented" compensation plan creating a significant variable component to compensation that is linked to key operating metrics. The Company's compensation plan is comprised of a combination of base salary and benefits, an annual incentive compensation and long term equity participation through its Stock Option Plan. To ensure competitiveness, the Company participates in annual compensation surveys, conducted by independent consultants, of salaries, benefits and other incentive programs in the high technology industry in Canada.

Base Salary and Benefits

Base salaries for the executives are targeted, on average at the 75th percentile of the comparator group (see above) and other relevant external market data as well as the individual's skill performance, and experience. The Company's benefit package is designed to be competitive with its peer group in the industry in terms of revenues and number of employees.

Performance Bonus

In recent history the Company has not provided a formal Performance Bonus Plan due to the lack of profitability performance. In January 2004, an annual incentive compensation plan was introduced to all employees based on the objectives previously discussed. Payments under this plan are determined based on the Company's performance and success in achieving specific operating targets together with the performance of the employee relative to key individual performance objectives. The significant considerations in determining bonuses for the executive officers include revenue and income objectives as well as personal achievements that contribute to the company's success. Seventy percent of the executive's bonus is determined by corporate results and thirty percent is based on individual performance.

Equity Participation

The Board believes that all employees should have a stake in Norsat's future and that their interests should be aligned with the interests of the shareholders. To this end, the Board determines the overall amount of the stock option grant and the Committee reviews and recommends to the Board the allocation of such grant to directors, officers and employees, primarily based on whose decisions and actions can have the greatest impact on the Company's performance.

Options are issued at the market price of the stock at the date of the grant. The options typically have a five (5) year term and vest after 2 years.

Compensation of the Chief Executive Officer

The compensation of the Chief Executive Officer is reviewed annually by the Committee and approved by the Board of Directors. For fiscal 2005, Mr. Coyne as the Chief Executive Officer, received an annual salary of US$200,000 prorated, a bonus of $46,334, 5% pension contribution, $7,200 yearly for car allowance totalling in 2005, US $ 188,734

Change in Responsibilities and Employment Contracts

The Company has entered into an employment agreement with Mr. William Coyne dated May 16, 2005 pursuant to which he acts as the Company's Chief Executive Officer, effective May 16, 2005. The agreement is for an indefinite period. Mr. Coyne receives an annual base salary of US$200,000 plus benefits totalling approximately $20,000, and is entitled to participate in the Company's bonus program. If Mr. Coyne's employment is terminated without cause, he will receive ten (10) months of his annual compensation, plus one month for each year of service, in lieu of notice of termination of employment. Upon termination of his employment, Mr. Coyne's incentive stock options will continue to vest and he will be entitled to exercise them for a period of two years from the date of his termination.

The Company entered into an employment agreement with Mr. William Comerford dated August 8, 2005, pursuant to which he acts as the Company's Senior Vice President of Global Sales, effective August 8, 2005. The agreement is for an indefinite period. Mr. Comerford receives an annual base salary of US$175,000 (with no benefits) and is entitled to participate in the Company's bonus program. If Mr. Comerford's employment is terminated without cause, he will receive six (6) months of his annual compensation, plus one month for each year of service, in lieu of notice of termination of employment.

The Company entered into an employment agreement with Mr. George Dorin dated September 28, 2005, pursuant to which he acts as the Company's Chief Financial Officer, effective September 28, 2005. The agreement is for an indefinite period. Mr. Dorin receives an annual base salary of $160,000 plus benefits totalling approximately $24,000 and is entitled to participate in the Company's bonus program. If Mr. Dorin's employment is terminated without cause, he will receive six (6) months of his annual compensation, plus one month for each year of service, in lieu of notice of termination of employment.

The Company has entered into an employment agreement with Dr. Amiee Chan dated April 5, 2004 pursuant to which she acts as the Company's Vice President of Operations, effective April 5, 2004. The agreement is for an indefinite period. Dr. Chan receives an annual base salary of $150,000 plus benefits totalling approximately $15,000, and is entitled to participate in the Company's bonus program. If Dr. Chan's employment is terminated without cause, she will receive six (6) months of her annual compensation, plus one month for each year of service, in lieu of notice of termination of employment. Upon termination of her employment, Dr. Chan's incentive stock options will continue to vest and she will be entitled to exercise them for a period of two years from the date of her termination.

Employees

The following table shows the number of employees by geographical location at the end of each year ending December 31:


	Canada	United States	Other	Total
2005	48	2	3	53
2004	39	1	3	43
2003	40	1	1	42

We believe that our work force is highly skilled, capable and motivated and that our relations with our employees are good. Our work force is not unionized or part of any collective labour agreement.

Share ownership

The following table sets forth stock owned or controlled by Directors and Officers of the Company as at December 31, 2005:


Name, Position and Country of Residence	Number of common shares owned ⁽¹⁾	Number of common share warrants owned
Ugo A. Doninelli⁽²⁾ (Chairman) Switzerland	1,985,575⁽²⁾	Nil
James Sharpe (Vice Chairman) USA	Nil	Nil
Joseph Caprio (Director) USA	Nil	Nil
Dan Dixon (Director) USA	Nil	Nil
Christopher Hoyle (Director) UK	Nil	Nil
William Coyne (President & CEO) USA	Nil	Nil
George Dorin CFO & Corporate Secretary Canada	Nil	Nil


Name, Position and Country of Residence	Number of common shares owned ⁽¹⁾	Number of common share warrants owned
William Comerford (Senior VP Sales) USA	Nil	Nil
Amiee Chan (VP Operations) Canada	10.000	Nil

(1)

The information as to common shares beneficially owned or over which a director or nominee exercises control or direction, not being within the knowledge of the Company, has been furnished by the respective directors or nominees individually. See "Voting Shares and Principal Holders Thereof".

(2)

Mr. Doninelli, by virtue of his position as General Manager and Chief Executive Officer of Prismafin S.A., exercises direction over 1,985,575 common shares of the Company held by Prismafin S.A.

The following table sets forth stock options to purchase one common share of the Company granted during the year ended December 31, 2005, and awarded to each of the Directors and Named Executive Officers:


Name	Number of common shares Under Options Granted	% of Total Options Granted in 2005	Average Exercise Price ($/common share)	Market Value of common shares Underlying Options on the Date of Grant ($/common share)	Expiration Date
Ugo Doninelli	50,000	2.66%	US$0.65	US$0.65	May 2, 2010
Ugo Doninelli	150,000	7.99%	US$0.92	US$0.92	May 19,2010
George King	50,000	2.66%	US$0.49	US$0.49	March 23, 2010
George King	200,000	10.65%	US$0.65	US$0.65	May 2, 2010
Dan Dixon	50,000	2.66%	US$0.65	US$0.65	April 16, 2010
Dan Dixon	50,000	2.66%	US$0.65	US$0.65	May 2, 2010
Joseph Caprio	100,000	5.33%	US$0.65	US$0.65	May 2, 2010
Christopher Hoyle	100,000	5.33%	US$0.69	US$0.69	May 2, 2010
James Sharpe	100,000	5.33%	US$0.90	US$0.90	May 18, 2010
William Coyne	100,000	5.33%	US$0.69	US$0.69	May 2, 2010
Amiee Chan	15,000	0.80%	$1.16	$1.16	May 16, 2010
William Comerford	70,000	3.73%	US$1.22	US$1.22	August 5, 2010
George Dorin	Nil	Nil	Nil	Nil

The following table sets forth details of all exercises of stock options during the year ended December 31, 2005 by the Directors and Named Executive Officers of the Company and the fiscal year-end value of unexercised options on an aggregated basis:


Name	Securities Acquired on Exercise (#)⁽¹⁾	Aggregate Value Realized ($)⁽²⁾	Unexercised Options at Fiscal Year-End (#) Exercisable/Unexercisable	Value of Unexercised In-the-Money Options at Fiscal Year-End ($)⁽³⁾ Exercisable/ Unexercisable
Ugo Doninelli	Nil	Nil	325,000 / Nil	29,576 / Nil
James Sharpe	Nil	Nil	100,000 / Nil	Nil / Nil
Joseph Caprio	Nil	Nil	100,000 / Nil	22,152 / Nil
Dan Dixon	Nil	Nil	100,000 / Nil	22,152 / Nil
Christopher Hoyle	Nil	Nil	100,000 / Nil	17,488 / Nil
George King	Nil	Nil	Nil / Nil	Nil / Nil
William Coyne	Nil	Nil	Nil / 100,000	Nil / 17,488
Amiee Chan	Nil	Nil	Nil / 90,000	Nil / 6,750
William Comerford	Nil	Nil	35,000 / 35,000	Nil / Nil
George Dorin	Nil	Nil	Nil / Nil	Nil / Nil
Kenneth Crump	100,000	39,500	Nil / Nil	Nil / Nil
Brian Nixon	25,000	17,250	Nil / Nil	Nil / Nil
Cameron Hunter	350,000	216,500	150,000 / Nil	Nil / Nil
Troy Bullock	150,000	69,750	175,000 / Nil	Nil / Nil

NOTES:

(1)

Number of common shares of the Company acquired on the exercise of stock options.

(2)

Calculated using the closing price of common shares of the Company on the Toronto Stock Exchange on the date(s) of exercise, less the exercise price of the stock option(s).

(3)

Value of unexercised in-the-money options calculated using the closing price of common shares of the Company on the Toronto Stock Exchange on December 31, 2005, less the exercise price of in-the-money stock options.

Major Shareholders and Related Party Transactions

Major shareholders

The Company's authorized capital consists of 75,000,000 common shares without par value, of which 46,795,058 common shares are issued and outstanding as at March 25, 2006.

To the knowledge of the directors and senior officers of the Company, there are no persons or companies who beneficially own, directly or indirectly, or exercise control or direction over shares carrying 5% or more of the voting rights attached to all outstanding common shares of the Company.

Related party transactions

Reference is made under "Item 8 Financial Information", specifically note 17.

Interests of experts and counsel

Not applicable.

Financial Information

Consolidated Financial Statements

STATEMENT OF MANAGEMENT'S RESPONSIBILITY

The management of Norsat International Inc. is responsible for the preparation of the accompanying consolidated financial statements and the preparation and presentation of all information in the Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada and are considered by management to present fairly the financial position and operating results of the Company.

The Company maintains various systems of internal control to provide reasonable assurance that transactions are appropriately authorized and recorded, that assets are safeguarded, and that financial records are properly maintained to provide accurate and reliable financial statements.

The Company's audit committee is composed of three non-management directors who are appointed by the Board of Directors annually. The committee meets periodically with the Company's management and independent auditors to review financial reporting matters and internal controls and to review the consolidated financial statements and the independent auditors' report. The audit committee reported its findings to the Board of Directors who have approved the consolidated financial statements.

The Company's independent auditors, Ernst & Young LLP, have audited the consolidated financial statements and their report follows.


/s/ William Coyne	/s/ George Dorin
William Coyne	George Dorin
President and Chief Executive Officer	Chief Financial Officer

AUDITORS' REPORT

To the Shareholders of

Norsat International Inc.

We have audited the consolidated balance sheet ofNorsat International Inc. as at December 31, 2005 and the consolidated statement of operations and deficit and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion in the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and the results of its operations and its cash flows for the year ended December 31, 2005 in conformity with Canadian generally accepted accounting principles.

The comparative figures for the preceding years ended December 31, 2004 and 2003 were audited by other auditors who expressed an opinion without reservation on those statements in their report dated February 11, 2005.

[financials002.gif]

Vancouver, Canada

March 6, 2006.

Chartered Accountants

NORSAT INTERNATIONAL INC.

Consolidated Balance Sheets

(Expressed in Canadian dollars)

December 31, 2005 and 2004

		2005		2004


Assets

Current assets:
Cash and cash equivalents (note 3(b))	$	1,789,857	$	4,978,210
Cash Held in Trust (note 3(a))		668,281		-
Short-term investments - restricted (note 2(h))		37,000		72,000
Accounts receivable (note 4)		2,954,784		1,966,298
Inventory (note 5)		3,973,806		3,433,155
Prepaid expenses and other		369,789		228,178
		9,793,518		10,677,841

Property and equipment (note 6)		713,500		1,049,267

Goodwill (note 7)		-		440,095

Deferred finance costs		17,054		31,727

	$	10,524,072	$	12,198,930


Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	2,641,129	$	729,661
Accrued liabilities (note 11)		1,870,211		1,780,970
Liabilities from discontinued operations (note 13)		52,112		51,648
Deferred revenue (note 2(e))		398,337		73,271
		4,961,789		2,635,550

Long-term debt (note 9)		2,007,942		1,467,594

Shareholders' equity:
Share capital (note 10)		41,415,794		40,901,057
Contributed surplus (note 10)		1,771,473		1,220,009
Equity component of long-term debt (note 9)		2,190,779		1,909,127
Deficit		(41,823,705)		(35,934,407)
		3,554,341		8,095,786

	$	10,524,072	$	12,198,930

Commitments (note 15)

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

&nb sp;

Ugo A. Doninelli

James Sharpe

NORSAT INTERNATIONAL INC.

Consolidated Statements of Operations and Deficit

(Expressed in Canadian dollars)

Years ended December 31, 2005, 2004 and 2003

		2005		2004		2003

Sales	$	18,116,470	$	17,520,675	$	12,980,269
Cost of sales		9,992,401		9,595,855		9,292,628
		8,124,069		7,924,820		3,687,641
Expenses:
Selling, general and administrative		9,621,993		5,251,451		5,744,876
Product development		2,275,766		1,494,756		3,313,171
Technology Partnerships Canada funding (note 8)		-		(620,000)		(667,467)
Amortization		625,814		621,220		1,101,998
Restructuring charge (note 11)		-		-		1,232,680
		12,523,573		6,747,427		10,725,258

Earnings (loss) from continuing operations before
Other expenses and income taxes		(4,399,504)		1,177,393		(7,037,617)

Other expenses (note 19)		1,488,003		753,515		1,077,871

Earnings (loss) from continuing operations before
income taxes		(5,887,507)		423,878		(8,115,488)

Income tax expense (recovery) (note 12)		1,791		(5,344)		53,241

Earnings (loss) from continuing operations		(5,889,298)		429,222		(8,168,729)

Recovery (loss) from discontinued
operations (note 13)		-		724,116		(76,295)

Net earnings (loss)		(5,889,298)		1,153,338		(8,245,024)

Deficit, beginning of year		(35,934,407)		(37,087,745)		(28,842,721)

Deficit, end of year	$ (41,823,705)		$ (35,934,407)		$ (37,087,745)

Earnings (loss) per share - basic and diluted
(note 2(i)):
Continuing operations	$	(0.14)	$	0.01	$	(0.23)
Discontinued operations	$	-	$	0.02	$	-
Net earnings (loss)	$	(0.14)	$	0.03	$	(0.23)

See accompanying notes to consolidated financial statements.

NORSAT INTERNATIONAL INC.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

Years ended December 31, 2005, 2004 and 2003

		2005		2004		2003

Cash provided by (used in):

Operations:
Earnings (loss) from continuing operations	$	(5,889,298)	$	429,222	$	(8,168,729)
Items not involving cash:
Amortization		625,814		621,220		1,101,998
Loss (gain) on disposal of property and
equipment		-		(2,411)		281,450
Interest accreted on long-term debt and
deferred finance cost amortization (note 19)		261,100		330,046		299,785
Write off of goodwill (note 7)		440,095		-		-
Change in conversion price of Note (note 9(b))		374,818		-		-
Foreign exchange (gain) loss		25,570		(22,213)		141,268
Stock-based compensation		833,116		135,890		11,367
Changes in non-cash operating working
capital (note 18)		655,027		(509,131)		2,153,422
Cash provided (used in) continuing operations		(2,673,758)		982,623		(4,179,439)

Recovery (loss) from discontinued operations		-		724,116		(76,295)
Items not involving cash:
Changes in non-cash working capital and other		464		(840,174)		158,685
Cash provided by (used in) discontinued operations		464		(116,058)		82,390
		(2,673,294)		866,565		(4,097,049)

Investments:
Net purchase of property and equipment		(290,048)		(185,332)		(98,497)
Redemption (purchase) of short-term investments		35,000		178,000		(178,035)
		(255,048)		(7,332)		(276,532)

Financing:
Proceeds on exercise of warrants		514,737		1,631,569		17,416
Issue of common shares and units		-		-		4,420,715
Receipt of restricted cash for private placement		(668,281)		-		-
		(153,544)		1,631,569		4,438,131

Effect of change in exchange rates on cash		(106,467)		(93,733)		(391,220)

Increase (decrease) in cash and cash equivalents		(3,188,353)		2,397,069		(326,670)

Cash and cash equivalents, beginning of year		4,978,210		2,581,141		2,907,811

Cash and cash equivalents, end of year	$	1,789,857	$	4,978,210	$	2,581,141

Supplemental cash flow disclosure (note 18)

See accompanying notes to consolidated financial statements.

NORSAT INTERNATIONAL INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

Years ended December 31, 2005, 2004 and 2003

Nature of business and continuing operations:

The Company is incorporated under the laws of the Province of British Columbia, Canada and its principal business activities include the marketing, design and sales of microwave products and portable satellite products that provide rapidly deployable broadband satellite data and video continuity in areas where traditional communication infrastructure is insufficient, damaged or non-existent.

Significant accounting policies:

These financial statements have been prepared in accordance with generally accepted accounting principles in Canada, which materially conform with those established in the United States, except as explained in note 22.

(a)

Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Norsat America Inc., Norsat International (United Kingdom) Limited, and Norsat Atlanta Inc. All material intercompany balances and transactions have been eliminated.

(b)

Stock-based compensation:

Effective January 1, 2002 the Company adopted the fair value based method of accounting prescribed by the Canadian Institute of Chartered Accountants ("CICA") section 3870, "Stock-Based Compensation and Other Stock-Based Payments", for stock-based payments to non-employees.

In 2003, CICA section 3870 was amended to require the fair value method to be applied to all employee stock-based compensation awards for fiscal years beginning on or after January 1, 2004. During the fourth quarter of 2003, the Company elected to early adopt the fair value method to their employee awards, effective January 1, 2003. Under the prospective method of adoption selected by the Company, the fair value method is applied to all employee awards granted on or after January 1, 2003. During 2004 and 2003, the Company granted stock options to employees having weighted average fair values of $0.42 and $0.24 per option, respectively. The fair values were determined using the Black-Scholes option pricing model and the following weighted average assumptions: option life of three years (2003 - three years), no dividends (2003 - no dividends), ex pected annual volatility of 78% (2003 - 89%), and risk free interest rate of 3.3% (2003 - 3.0%). The total compensation expensed in 2004 was $135,890 (2003 - $11,367) and is included in selling, general and administrative expense. The total compensation expensed in 2005 was $833,116 (2004 - $135,890) and is included in selling, general and administrative expense.

Significant accounting policies (continued):

(b)

Stock-based compensation (continued):

If compensation cost for the Company's employee awards issued during the year ended December 31, 2002 had been determined based on the fair value method at the applicable grant dates, the Company's pro forma net loss for the year ended December 31, 2005 would have increased by $48,875 to $5,938,173 and net earnings per common share would remain unchanged. Comparatively If compensation cost for the Company's employee awards issued during the year ended December 31, 2002 had been determined based on the fair value method at the applicable grant dates, the Company's pro forma net earnings for the year ended December 31, 2004 would have decreased by $48,875 to $1,104,463 and net earnings per common share would remain unchanged.

The weighted average fair value of options granted during 2002 was $0.90. The fair value of options was determined using the Black-Scholes option pricing model assuming an average option life of three years, no dividends, expected annual volatility of 93%, and risk-free interest rates of 3%.

The Company's stock-based compensation plan is described in note 10(d).

(c)

Cash and cash equivalents:

Cash equivalents include short-term deposits, which are all liquid securities with terms to maturity of three months or less when acquired.

(d)

Inventory:

Parts and supplies inventory is stated at the lower of weighted average cost and replacement cost. Finished goods and work-in-process inventory include materials, labour and manufacturing overhead and are stated at the lower of weighted average cost and net realizable value. Inventory is recorded net of any obsolescence provisions.

(e)

Revenue recognition:

The Company generates revenue from the sale of microwave products and portable terminal hardware and services.

Hardware sales are recognized when goods are shipped and the title passes, there is persuasive evidence of an arrangement, collection is probable and the fee is fixed or determinable. Provisions are established for product returns and warranty costs at the time revenue is recognized. If there is a requirement for customer acceptance of any products shipped, revenue is only recognized after customer acceptance has been received. For multiple element sales arrangements, revenue is allocated by the residual value method whereby the fair value of undelivered elements is determined by reference to objective evidence at the inception of the arrangement from comparable arrangements with the balance of the fees assigned to the delivered elements. Revenue is recognized for each element when all of the criteria for revenue recognition have been met. When fair value cannot be determined, revenue is deferred until objective evidence exists or recognized as the final elements are delivered. Elements included in multiple element arrangements may consist of some hardware, training and installation services, and post contract support services.

Significant accounting policies (continued):

(e)

Revenue recognition (continued):

For long-term contracts, revenue is recognized on a percentage-of-completion basis based upon achievement of specifically identifiable milestones as set out in the contractual arrangement.

Revenue that has been paid but does not yet qualify for recognition under the Company's policies are reflected as deferred revenue. As at December 31, 2005, the Company has $398,337 (2004 - $73,271) of deferred revenue.

(f)

Property and equipment:

Property and equipment are stated at cost less applicable tax credits and government assistance. Amortization of property and equipment is recorded on a straight-line basis at the following annual rates, which approximate the useful life of the assets:


Asset	Period

Equipment and software	3 to 10 years
Furniture and fixtures	10 years

Leasehold improvements are amortized over the shorter of the term of the lease or their estimated useful life.

Property and equipment are assessed for future recoverability on an annual basis or when events or circumstances indicate that estimating future undiscounted cash flows may impair the asset. When the net carrying amount of a capital asset exceeds its estimated net recoverable amount, the asset is written down with a charge to income.

(g)

Goodwill and other intangible assets:

Goodwill represents the excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is no longer amortized, but is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

(h)

Short-term investments:

Included in short-term investments are securities with terms to maturity of in excess of three months when acquired. The investments are restricted and secure issued letters of guarantee.

Significant accounting policies (continued):

(i)

Net earnings (loss) per share:

Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.

Diluted net earnings (loss) per share is computed using the treasury stock method, which assumes that all dilutive options and warrants were exercised at the beginning of the period and the proceeds to be received were applied to repurchase common shares at the average market price for the period. Stock options and warrants are dilutive when the average market price of the common shares during the period exceeds the exercise price of the options and warrants and when the Company generates income from continuing operations.

The table below is a reconciliation of the denominator used in the calculation of the weighted average number of basic and diluted earnings per common share outstanding from continuing operations. There is no impact on the numerator.


	2005	2004	2003

Weighted-average number of common
shares outstanding - basic	42,517,878	40,282,436	36,100,784

Assumed exercise of stock options	-	21,903	-
Assumed exercise of warrants	-	416,275	-

Weighted-average number of common
shares outstanding - diluted	42,517,878	40,720,614	36,100,784

The calculation of assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. Where its effect was anti-dilutive, assumed exercise of those particular stock options were not included. The calculation of assumed exercise of stock options and warrants exclude all anti-dilutive options and warrants. These are options and warrants that would not be recognized because their exercise price is higher than the average market price of the Company's common share for each of the periods shown in the table.

The calculations also do not include assumed conversion of the convertible long-term debt, as its effect would be anti-dilutive.

The 2003 & 2005 balances do not include any assumed conversions as net losses were reported for this period and therefore their effect would be anti-dilutive.

Significant accounting policies (continued):

(j)

Use of estimates:

The preparation of consolidated financial statements requires the Company's management to make estimates and assumptions that affect amounts reported in the financial statements and notes thereto. Significant areas requiring the use of management estimates relate to the determination of the net recoverable value of assets, including inventory obsolescence provisions, allowance for doubtful accounts, asset impairment, the valuation of future income tax assets, useful lives for depreciation and amortization, and provisions for warranties and contingencies. Actual amounts may ultimately differ from these estimates.

(k)

Research and development costs:

Research costs are expensed as incurred. Development costs are deferred if the product or process and its market or usefulness is clearly defined, the product or process has reached technical feasibility, adequate resources exist or are expected to exist to complete the project and management intends to market or use the product or process. If these criteria are not met, the development costs are expensed as incurred. For fiscal 2005, 2004 and 2003, all development costs have been expensed.

Government funding of eligible research and development expenditures are credited when earned against product development expenses or the cost of property and equipment, to which the funding related.

(l)

Deferred finance costs:

Deferred finance costs represent the unamortized cost of obtaining debt financing. Amortization is provided on a straight-line basis over the term of the related debt and is included in interest expense for the year.

(m)

Income taxes:

The Company follows the asset and liability method of accounting for income taxes. Under this method, the Company recognizes and measures, as assets and liabilities, income taxes currently payable or recoverable as well as future taxes, which will arise from the realization of assets or settlement of liabilities at carrying amounts which differ from their tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. A valuation allowance is recognized to the extent the recoverability of future income tax assets is not considered to be more likely than not. Future tax assets and liabilities are presented net by current and non-current classifications except to the extent that they cannot be offset due to different tax jurisdictions.

Significant accounting policies (continued):

(n)

Foreign currency translation:

The reporting and functional currency of the Company is the Canadian dollar. Foreign currency transactions entered into directly by the Company, as well as the accounts of the integrated foreign subsidiary operations, are translated using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates and other balance sheet items are translated at historical exchange rates. Income statement items are translated at the rate in effect at the time of the transaction.

Cash and Cash Equivalents:

(a)

Cash Held in Trust:

Cash held in trust represents share subscription proceeds received in advance of the private placement financing completed subsequent to December 31, 2005, as disclosed in note 23, Subsequent event. The funds were segregated and held in trust until the receipt of final regulatory approval. The balance of $668,281 is also included in Accounts Payable at December 31, 2005.

(b)

Credit Facility:

The Company has a credit facility with a major Canadian financial institution. The facility includes a line of credit in the amount of $700,000 available through cash or letters of credit or letters of guarantee. The facility bears interest at prime plus 1.75% per annum. The security under this facility consists of a first security interest over all of the Company's assets. The lender may cancel the credit facility at any time. The Company is currently unable to access this facility, as it is not in compliance with one of the three required covenants. As at December 31, 2005 no amounts have been drawn under this facility. (December 31, 2004 -nil)

Allowance for doubtful accounts:

Accounts receivable are disclosed net of allowance for doubtful accounts. Changes in the allowance for each of the periods presented are as follows:


		2005		2004		2003
Balance, beginning of year	$	28,329	$	63,704	$	263,663
Allowance (Recovery)		226,465		(35,375)		(199,959)
Balance, end of year	$	254,794	$	28,329	$	63,704

Inventory:


		2005		2004

Parts and supplies	$	1,881,962	$	1,093,876
Work-in-process		255,069		78,026
Finished goods		1,836,775		2,261,253

Balance, end of year	$	3,973,806	$	3,433,155

Property and equipment:


			Accumulated			Net book
2005		Cost	amortization			value

Equipment and software	$	8,513,655	$	8,122,185	$	391,469
Furniture and fixtures		1,054,030		875,863		178,167
Leasehold improvements		682,041		538,178		143,864

	$ 10,249,726		$	9,536,226	$	713,500


			Accumulated			Net book
2004		Cost	amortization			value

Equipment and software	$	8,273,534	$	7,665,354	$	608,180
Furniture and fixtures		1,010,747		801,265		209,482
Leasehold improvements		682,041		450,436		231,605

	$	9,966,322	$	8,917,055	$	1,049,267

Goodwill:

Goodwill relating to the Company's microwave products operating segment was written off during the year, (2004 - $440,095). The goodwill relates to a business line no longer being serviced.

Technology Partnerships Canada funding:

On October 17, 2000, the Company entered into an agreement with Technology Partnerships Canada ("TPC") whereby TPC would provide funding of 33 1/3% of eligible spending related to the research and development of a communications Satellite Interactive Terminal ("SIT") technology development project to a maximum cumulative funding amount of $9,379,700.

In return for funding, the Company was obligated to issue TPC $1,000,000 in value of share purchase warrants prior to March 31, 2004. The warrants were to have a life of five years and were to be priced at the market price on the date of issue with the number of warrants issued to be determined using the Black-Scholes pricing model. The Company recorded the fair value of the required obligation to issue warrants as a $1,000,000 deferred royalty payment in other assets and as an addition to contributed surplus. The deferred royalty was amortized pro-rata as funding was receivable under the contract.

Beginning January 1, 2003, the Company was to accrue royalty obligations in the amount of 1.88% of revenue on legacy products up to a maximum of $4,689,850, and a royalty of 1.28% of new SIT technology products. The royalty period began on January 1, 2003 and ends on the earliest of the following dates:

the date before December 31, 2006, for which cumulative royalties accrued reach $15 million

on December 31, 2006, or the date after, if by that date the cumulative royalties accrued equal or exceed $13,171,300

otherwise on December 31, 2009.

Technology Partnerships Canada funding (continued):

In the event and at the time that the warrants are issued as required above, the SIT royalty will be reduced from 1.28% to 1.03%. As the warrants were issued on April 28, 2004 the royalty was reduced effective the same date.

On April 28, 2004, the Company issued 1,206,811-share purchase warrants to TPC under the terms described above with an exercise price of $1.09 per share. The Black-Scholes valuation model was applied using assumptions of an average option life of five years, no dividends, expected annual volatility of 100%, and risk-free interest rates of 3.8%.

On September 28, 2004 the Company amended this agreement with TPC. Under the amended agreement the cumulative funding amount was increased to $9,999,700 representing additional funding of $620,000. In addition, the royalty payment period was amended to commence on January 1, 2004 and end on the earliest of the following dates:

the date before December 31, 2007, for which cumulative royalties accrued reach $15 million;

on December 31, 2007, or the date after, if by that date the cumulative royalties accrued equal or exceed $13,171,300; and

otherwise on December 31, 2011.

During 2004 the Company recognized TPC funding in the amount of $620,000 (2003 - 667,467) representing the final funding under the Company's amended agreement. Cumulative funding as at December 31, 2004 was $9,999,700 (2003 - $9,379,700) of which $102,527 was included in accounts receivable.

As at December 31, 2005, the Company has expensed and accrued for royalty payments in the amount of $202,963 (2004 - $218,224). This amount is included in accrued liabilities. The royalties are recorded and expensed as the related sales occurred. During 2004, as a result of the amendment, the 2003 accrued royalty payable of $220,390 was recovered to income.

Long-term debt:

(a)

Long-term debt:


		2005		2004
Face value of long-term debt	$	2,326,052	$	2,404,000
Less: unamortized discount from conversion option		318,110		936,406
Carrying value, December 31	$	2,007,942	$	1,467,594

On March 28, 2002, the Company completed a financing agreement (US$2,000,000) for net cash proceeds of $2,953,188. The financing consisted of 8% per annum unsecured convertible notes maturing March 31, 2007. The notes are convertible into common shares of the Company at a price of US$1.70 per share at the holder's option at any time. At March 28, 2002, the market price of the Company's common shares was US$1.64 per share.

The Company is allowed to force the conversion of the notes into common shares of the Company if the shares

trade above US$3.40 for two consecutive days over the term to maturity of the notes. The cost of the financing totalled $307,966 and included 50,000-share purchase warrants with a fair value of $72,751 calculated using a Black-Scholes valuation model. The share purchase warrants expire after three years, and entitle the holder to purchase one common share of the company for US$1.70. At December 31, 2005 the share purchase warrants remain unexercised (note 10(e)). The Company's effective interest rate under this financing is approximately 16%.

Financing costs of $93,509 were recorded as deferred finance costs on the balance sheet, with the balance of $214,457 recorded as a charge against the equity component of long-term debt. The proceeds of the financing allocated to the estimated fair value of the conversion option of $2,123,584 have been recorded as the equity component of long-term debt on the consolidated balance sheet at $1,909,127, being net of financing costs of $214,457. The carrying amount of the debt has been reduced on issuance by the value assigned to the conversion option and is being accreted to its face value over the term to maturity through charges to non-cash interest expense.

(b) Reduction in the conversion price of Long-term debt:

On June 24, 2005, the Company announced a reduction in the conversion price from US$1.70 per common share to US$1.25 per common share as an inducement for early conversion of the notes.

As such, the Company has revalued the convertible debenture based on the amended terms of the debenture agreement. According, $374,818 was allocated to debt and $281,652 was allocated to the equity component of the debenture. This difference between the revised book value and original carrying value of the debenture of $374,818 was charged to other expenses (note 19) and the difference between the value of the revised conversion feature and original carrying value of the conversion feature of $281,652 was charged to the contributed surplus of the Company (Note 10).

10.

Share capital and contributed surplus:

The Company is authorized to issue 75,000,000 (2004 - 75,000,000; 2003 - 75,000,000) common shares without par value.

Common shares issued and fully paid:


	Number
Share capital	of shares		Amount
Balance at December 31, 2002	34,177,164	$	34,715,367
For cash:
Upon issue for private placements	4,792,000		4,420,715
Upon exercise of share purchase warrants	31,667		17,416
Balance at December 31, 2003	39,000,831		39,153,498
For cash:
Upon exercise of share purchase warrants (note 10(e))	3,051,001		1,631,569
For non-cash:
Reclassification of contributed surplus upon
exercise of warrants	-		115,990
Balance at December 31, 2004	42,051,832		40,901,057
For cash:
Upon exercise of share purchase options (note 10(d))	656,250		514,737

Balance at December 31, 2005	42,708,082	$	41,415,794

Contributed surplus			Amount
Balance, December 31, 2002		$	1,188,742
Stock-based compensation (note 2(b))			11,367
Balance, December 31, 2003			1,200,109
Stock-based compensation (note 2(b))			135,890
Less: reclassification to share capital upon exercise of warrants			(115,990)
Balance, December 31, 2004			1,220,009
Stock-based compensation (note 2(b))			833,116
Less: change in conversion price (note 9(b))			(281,652)
Balance, December 31, 2005		$	1,771,473

10.

Share capital and contributed surplus (continued):

(a)

On April 8, 2003, the Company entered into private placement agreements totaling 2,000,000 units at US$1.00 per unit, for cash proceeds of US$1,981,033 (CDN$2,919,290) net of share issue costs of US$18,967 (CDN$27,881). Each unit consists of one common share of the Company and one share purchase warrant. The warrants expire after three years, and entitle the holder to purchase one additional common share of the Company for US$1.00. During 2003, the existing agreements for 670,000 of these warrants were amended to reduce the exercise price and shorten the expiry date (note 10(e)).

(b)

On October 31, 2003, the Company entered into private placement agreements totaling 2,792,000 units at $0.55 per unit, for cash proceeds of $1,501,425 net of share issue costs of $34,175. The financing included participation by certain senior management of the Company of 332,000 units. Each unit consists of one common share of the Company and one share purchase warrant. The warrants expire after one year and entitle the holder to purchase one additional common share of the Company for $0.55 (US$0.42). During 2004 2,262,000 warrants were exercised for cash proceeds of $1,197,618 and the balance of 530,000 expired unexercised (note 10(e)).

(c)

Stock option plan:

The Company has reserved 6,306,505 common shares under its 1999 (amended) incentive share option plan of which 1,306,505 common shares have previously been issued. The plan provides for the granting of stock options at the fair market value of the Company's shares at the grant date, with terms to a maximum of ten years and vesting provisions to be determined by the board of directors.

10.

Share capital and contributed surplus (continued):

(d)

Stock option plan (continued):

For each of the periods presented, the following stock options were outstanding:


2005	2004	2003	Exercise price
	Number of shares		per share	Expiry date

-	75,000	75,000	15.00	2005
135,250	669,500	896,500	0.55	2008
-	5,000	5,000	0.57	2008
33,000	41,000	-	0.60	2009
31,000	81,000	-	0.82	2009
75,000	75,000	-	0.83	2009
19,750	20,000	-	1.25	2009
16,000	-	-	0.50	2010
250,000	-	-	0.52	2010
103,000	-	-	0.55	2010
50,000	-	-	0.65	2010
300,000	-	-	0.82	2010
100,000	-	-	0.87	2010
3,000	-	-	1.12	2010
100,000	-	-	1.14	2010
265,000	-	-	1.16	2010
10,000	-	-	1.31	2010
1,000	-	-	1.35	2010
5,000	-	-	1.39	2010
10,000	-	-	1.46	2010
5,000	-	-	1.47	2010
70,000	-	-	1.48	2010
50,000	-	-	1.55	2010
60,000	-	-	1.60	2010
5,000	-	-	1.61	2010
60,000	-	-	1.62	2010
20,000	-	-	1.63	2010
10,500	-	-	1.71	2010
1,000	-	-	1.74	2010
50,000	-	-	1.76	2010
87,750	115,000	229,750	2.50	2011
87,500	115,000	229,750	3.40	2011
87,500	115,000	229,750	4.50	2011
87,750	115,000	170,000	6.15	2011
193,650	569,150	1,062,350	1.50	2012
5,000	5,000	5,000	1.19	2013
-	3,500	3,500	1.28	2013
-	-	10,000	1.25	2013
-	100,000	100,000	1.45	2013
142,500	169,200	169,200	1.50	2013

2,530,150	2,273,350	3,185,800

A summary of changes to issued stock options is as follows:


	Number of	Weighted-average
	shares	exercise price

Balance, December 31, 2003	3,185,800		2.22
Granted	327,000		0.82
Expired/cancelled	(1,239,450)		2.02

Balance, December 31, 2004	2,273,350		2.13
Granted	1,877,500		0.99
Exercised	(656,250)		0.78
Expired/cancelled	(964,450)		2.24

Balance, December 31, 2005	2,530,150	$	1.59

10.

Share capital and contributed surplus (continued):

(d)

Stock option plan (continued):

Options outstanding and exercisable at December 31, 2005 totaled 2,209,233 (2004 - 1,829,300; 2003 - 1,543,017) and have a weighted average exercise price of $1.96 (2004 - $2.36; 2003 - $2.83).

(e)

Share purchase warrants:

During 2003, the Company made an offer to all existing warrant holders, with the exception of senior management and board members, and came to an agreement with 820,668 common share purchase warrant holders to amend their existing warrant agreements to reduce the exercise price to US$0.42 (CDN$0.55) and shorten the expiry date to January 15, 2004. None of these warrants had been issued pursuant to employment arrangements. During 2004, 789,001 (2003 - 31,667), of these amended warrants were exercised for cash proceeds of $433,951 (2003 - $17,416).

For each of the periods presented, the following warrants for the purchase of one common share per warrant at the following prices per common share and expiry dates were outstanding:


2005	2004	2003	Exercise price
	Number of warrants		per share	Expiry date

-	-	3,581,001	US$0.42	2004
-	50,000	50,000	US$1.70	2005
-	560,000	560,000	$1.50	2005
1,330,000	1,330,000	1,330,000	US$1.00	2006
1,206,811	1,206,811	-	$1.09	2009

2,536,811	3,146,811	5,521,001

A summary of changes to number of issued warrants is as follows:


Balance, December 31, 2003	5,521,001
Issued	1,206,811
Exercised	(3,051,001)
Expired	(530,000)

Balance, December 31, 2004	3,146,811
Expired	(610,000)

Balance, December 31, 2005	2,536,811

11.

Restructuring charge:


	Workforce reduction	Premises	Total

Liability balance, December 31, 2002	449,921	399,300	849,221
Incurred and expensed	1,232,680	-	1,232,680
Costs paid or settled and adjustments	(1,409,855)	(108,920)	(1,518,775)

Liability balance, December 31, 2003	272,746	290,380	563,126
Costs paid or settled and adjustments	(158,798)	(91,990)	(250,788)

Liability balance, December 31, 2004	113,948	198,390	312,338
Costs paid or settled and adjustments	(97,944)	(104,115)	(202,059)

Liability balance, December 31, 2005	16,004	94,275	110,279

During 2002, management made decisions to restructure its operations including reducing its workforce. The workforce reduction charge primarily relates to severance and related benefits for termination of approximately 40 employees. The Company also incurred lease costs, net of estimated subleasing recoveries.

During 2003, management continued to reduce its cost of operations by terminating a further 30 employees. The workforce reduction charge relates to severance and related benefits.

During 2004 and 2005 no restructuring actions were undertaken.

At December 31, 2005, $110,279 (2004 - $312,338) of these costs is included in accrued liabilities.

12.

Income taxes:

(a)

Future income tax assets:

The tax effect of the temporary differences that give rise to future tax assets are presented below:


		2005		2004

Future tax assets:
Non-capital loss carry forwards	$	11,393,692	$	10,457,580
Scientific Research and Development Expenditure Pool		2,763,488		2,884,977
Tax value of capital asset expenditure in excess
of book value		3,097,844		2,941,689
Net capital loss carry forwards		1,884,330		1,967,170
Temporary differences in working capital		825,846		1,097,740
Total gross future tax assets		19,965,200		19,349,156

Valuation allowance		(19,965,200)		(19,349,156)

Total future tax assets	$	-	$	-

Management believes that it is not more likely than not that it will create sufficient taxable income to realize its future tax assets. As a result, a full valuation allowance has been recognized.

12.

Income taxes (continued):

(b)

Loss carry forwards and investment tax credits:

At December 31, 2005, the Company has approximately $33,393,000 of non-capital loss carry forwards available until 2015 to reduce future years' income for income tax purposes. Also, the Company has investment tax credits of approximately $980,000 available to reduce Canadian federal taxes payable. The amounts expire as follows:


Year of	Non-capital		Investment
Expiry	loss carry forwards		tax credits

2006	$ 2,988,000	$	19,000
2007	9,872,000		18,000
2008	5,238,000		-
2009	3,845,000		138,000
2010	7,416,000		-
2011	-		192,000
2012	-		313,000
2013	-		300,000
2015	4,034,000		-

	$ 33,393,000	$	980,000

The Company also has available $11,290,000 (2004 - $ 11,290,000) net capital losses to be applied against future capital gains. The tax effect of these carry forwards has not been recorded in the financial statements. In addition, the Company has accumulated Scientific Research and Development Expenditures pool that are available for indefinite carry forward as discretionary deductions of approximately $8,099,000 (2004 - $8,099,000; 2003 - $8,640,000).

Not included in the above tables are non-capital losses of US $3,478,000 (2004 - $3,478,000), as at December 31, 2005 related to Norsat America Inc. The Company utilized approximately US $650,000 in 2004 to offset taxes otherwise owing on income earned from discontinued operations. No income was earned from discontinued operations during 2005. Management believes that it is more likely than not that it will not create sufficient taxable income to realize these future tax assets. A full valuation allowance has been recognized.

12.

Income taxes (continued):

(c)

Income tax expense:

The income tax expense differs from the expected expense if Canadian statutory rates were applied to the loss from continuing operations before income taxes. The principal factors causing these differences are shown below:


		2005		2004		2003

Income tax expense (recovery) at expected rate of
34.9% (2004 - 35.6%, 2003-37.6%)
	$(2,052,000)		$	151,000	$	(3,051,400)
Non-allowable (non-taxable) expenses or income		591,000		7,400		11,100
Temporary differences, including amortization,
research and development costs and other		42,000		191,700		453,500
Unrecognized (Utilization of) non-capital loss carry
forwards		1,414,000		(381,600)		2,624,900
Rate difference between Canadian rate and rates
applicable to subsidiaries		6,791		26,200		-
Other		-		(44)		15,141

Income tax expense	$	1,791	$	(5,344)	$	53,241

13.

Discontinued operations:

On August 23, 2000, the Company adopted a formal plan to discontinue the business operations of its Norsat America Inc. distribution business. The Company incurred a loss of $76,295 and $88,684 in 2003 and 2002, respectively, resulting primarily from changes in estimates or the settlement of liabilities or recovery of assets at amounts different from original estimates.

For 2004, the Company recorded a recovery from discontinued operations totaling $724,116, which arose substantially from a settlement of a liability with a supplier.

At December 31, 2005, the Company recorded a liability of $52,112 (2004 - $51,648) representing additional liabilities from the closure of the Norsat America Inc. distribution business.

14.

Segmented and other information:

The Company's two business segments are: Microwave and Satellite Systems.

The Microwave segment supplies satellite signal receivers, transmitters and other ground station products. During 2002, the Open Networks segment expanded from delivering open standard Digital Video Broadcasting ("DVB") Data Hub Systems to also include portable satellite terminals. The segment was renamed to Satellite Systems.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The key operating decision maker evaluates performance based on the following:


2005		Microwave	Satellite Systems			Consolidated

Sales to external customers	$	10,052,278	$	8,064,192	$	18,116,470
Gross profit	$	4,556,458	$	3,567,611	$	8,124,069
Total assets related to continuing operations	$	3,050,147	$	7,473,925	$	10,524,072
Property and equipment	$	61,195	$	652,305	$	713,500


2004		Microwave	Satellite Systems			Consolidated

Sales to external customers	$	9,492,846	$	8,027,829	$	17,520,675
Gross profit	$	3,378,782	$	4,546,038	$	7,924,820
Total assets related to continuing operations	$	5,268,524	$	6,930,406	$	12,198,930
Property and equipment	$	207,030	$	842,237	$	1,049,267
Goodwill	$	440,095	$	-	$	440,095


2003		Microwave	Satellite Systems			Consolidated

Sales to external customers	$	9,541,803	$	3,438,466	$	12,980,269
Gross profit	$	2,342,639	$	1,345,002	$	3,687,641
Total assets related to continuing operations	$	4,737,202	$	4,735,853	$	9,473,055
Property and equipment	$	392,750	$	1,089,994	$	1,482,744
Goodwill	$	440,095	$	-	$	440,095

14.

Segmented and other information (continued):

The Company generated revenues from external customers located in the following geographic locations:


		2005		2004		2003

Canada	$	448,521	$	647,954	$	1,172,224
United States		15,596,375		13,132,986		6,150,610
Europe and other		2,071,574		3,739,735		5,657,435

	$	18,116,470	$	17,520,675	$	12,980,269

Substantially all property and equipment are located in Canada.

15.

Commitments:

Future minimum payments at December 31, 2005 under various purchasing commitments and operating lease agreements for each of the next five fiscal years are approximately as follows:


2006	$	3,769,644
2007		450,373
2008		442,892
2009		420,692
2010		420,692

Rent expense for the Company was approximately $960,000 (2004 - $893,000; 2003 - $945,000).

In the normal course of operations the Company is subject to actual or alleged claims and enters into purchase commitments. The Company has accrued for estimated losses, if any, when determinable, including losses on disputed purchase commitments with suppliers. Substantially, all commitments for 2006 and 2007 relate to purchase commitments.

16.

Financial instruments:

(a)

Fair value:

The Company's financial instruments include cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and accrued liabilities. The carrying value of these instruments approximates their fair value due to their immediate or short-term to maturity or their ability for liquidation at comparable amounts.

The Company's long-term debt is also a financial instrument. The carrying value of this instrument approximates its fair value. Fair value was determined based on estimated future cash flows discounted using the current market rate for debt under similar circumstances with similar terms and remaining maturities.

Interest on the Company's long-term debt is based on a fixed rate. This exposes the Company to market value risk. The Company has not entered into any derivative agreements to mitigate this risk.

(b)

Concentration of credit risk:

The Company revenues are dependent on customers in the satellite communication industry. As these sales are geographically dispersed and among a large number of customers, concentration of credit risk is considered to be limited.

(c)

Exchange risk:

The Company is exposed to currency exchange risk as a result of its "sales" and "cost of sales" being predominately denominated in United States dollars. To manage its exchange risk, the Company has entered into financing in United States dollars. The Company has not entered into any derivative agreements to further mitigate this risk.

17.

Related party transactions:

During the year ended December 31, 2005, the Company entered into an joint strategic marketing agreement with a US New York based private company involved in the business of selling, financing and leasing medical equipment technologies and telemedicine services to hospitals, medical facilities on a worldwide basis. Two of the directors of the Company at the time of entering into the agreement were partners in a firm that has a controlling equity interest in the New York Company. In accordance with the agreement Norsat International Inc. was to pay monthly amount of $35,000 USD to this company retroactively from June 15^th, till November 1, 2007. Subsequently, cancellation notice was given and the agreement was terminated September 1^st, 2005. A total of $87,000 USD was paid for the period of June 15^th to September 1^st, 2005.

18.

Supplemental cash flow and other disclosures:


		2005		2004		2003

Changes in non-cash operating working capital:
Accounts receivable	$	(988,486)	$	(129,572)	$	2,477,693
Inventory		(540,651)		(776,506)		2,832,164
Prepaid and other expenses		(141,611)		(51,909)		243,658
Accounts payable and accrued liabilities		2,000,709		375,585		(3,066,251)
Deferred revenue		325,066		73,271		(333,842)

	$	655,027	$	(509,131)	$	2,153,422

Supplementary information:
Interest paid	$	190,768	$	206,400	$	227,200
Income taxes paid		1,791		15,124		14,205
Non-cash transactions:
Value assigned to common shares and
warrants issued, net of cash acquired:
Issue of common shares for
settlement of debt		-		-		-
Issue of common shares and
warrants for financing services		-		-		-
Reclassification of exercised warrants
from contributed surplus to share capital		-		115,990		-

19.

Other expenses:


	2005		2004		2003

Net interest and bank charges	$ 204,029	$	314,890	$	264,813
Interest - non-cash	261,100		330,046		299,785
Foreign currency loss (gain)	249,181		110,990		231,823
Loss (gain) on disposal of property and equipment	-		(2,411)		281,450
Write off of goodwill (note 7)	440,095		-		-
Change in conversion price (note 9(b))	374,818		-		-
Other	(41,220)		-		-

	$ 1,488,003	$	753,515	$	1,077,871

20.

Economic dependence:

The Company purchases substantially all of its microwave products from four suppliers.

During 2005, the Satellite Systems segment generated approximately 74% of its sales from the United States government. This represents approximately 33% of total sales. No other customer exceeds 10% of total sales.

21.

Comparative figures:

Certain comparative figures have also been reclassified to conform to the financial statement presentation adopted in 2004.

22.

Reconciliation to United States accounting principles:

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") which differ in certain respects from those principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP").


		2005		2004		2003

Earnings (loss) from continuing
operations under Canadian GAAP	$	(5,889,298)	$	429,222	$	(8,168,729)
Write-down of property and equipment (b)		-		-		270,091
Beneficial conversion feature (e)		(74,432)
Goodwill (a)		(337,000)
Deferred Financing Costs (e)		(70,669)
Long-term debt (e)		242,566		342,505		538,424
Employee stock-based compensation (d)		271,033		125,693		11,367

Earnings (loss) from continuing
operations according to US GAAP		(5,857,800)		897,420		(7,348,847)

Recovery (loss) from discontinued operations		-		(724,116)		(76,295

Total comprehensive earnings (loss)
according to US GAAP	$	(5,857,800)	$	1,621,536	$	(7,425,142)

Basic and diluted net earnings (loss)
per share from continuing operations
according to US GAAP	$	(0.14)	$	0.02	$	(0.21)

Basic and diluted net earnings
per share from discontinued operations
according to US GAAP	$	-	$	0.02	$	-

Basic and diluted net earnings (loss)
per share according to US GAAP	$	(0.14)	$	0.04	$	(0.21)

22.

Reconciliation to United States accounting principles (continued):

The amounts in the consolidated balance sheets that differ significantly from those reported under Canadian GAAP are as follows:


		December 31, 2005				December 31, 2004
		Canadian		US		Canadian		US
		GAAP		GAAP		GAAP		GAAP

Property and equipment (b)	$	713,500	$	713,500	$	1,049,267	$	1,049,267
Goodwill (a)		-		-		440,095		777,095
Deferred finance costs (e)		17,054		-		31,727		128,233
Long-term debt (e)		2,007,942		2,940,543		1,467,594		2,404,000
Share capital (e), (f) and (g)		41,415,794		116,401,073		40,901,057		115,535,312
Contributed surplus (e)		1,771,473		1,437,812		1,220,009		1,082,949
Equity component of
long-term debt (e)		2,190,779		-		1,909,127		-
Deficit (a) - (f)		(41,823,705)		(114,883,174)		(35,934,407)		(109,025,374)

The following are the material measurement variations in accounting principles, practices and methods used in preparing these financial statements from those generally accepted in the United States (US):

(a)

IMT Communications Inc. acquisition:

The valuation of the shares relating to the acquisition of IMT Communications Inc. in 1998 was adjusted by a 25% discount in recognition of the shares held in escrow under Canadian GAAP. For US GAAP purposes, the share value is recorded at market value. This results in an increase in goodwill of $540,000 all of which relate to the microwave products operating segment. Cumulative amortization relating to this additional goodwill was $203,000 at December 31, 2001. For fiscal 2002 to 2004, no reconciling differences to the statement of operations arise as under both Canadian and US GAAP, goodwill is no longer amortized but is instead now subject to an annual impairment test. In 2005, goodwill related to this acquisition was written off during the year.

(b)

SpectraWorks acquisition:

For Canadian GAAP purposes, the valuation of the shares relating to the acquisition of SpectraWorks Inc. on April 4, 2000 was adjusted by a 10% discount relating to a one year hold period on escrowed shares and a general market discount. For US GAAP purposes, the share value would not reflect these discounts. This results in an increase in goodwill recorded at acquisition of $3,630,040, which, in 2000, would have been written off.

For US GAAP purposes, the acquired in-process research and development pursuant to the SpectraWorks Inc. acquisition would have been expensed on acquisition. Under Canadian GAAP acquired in-process research and development is amortized over a period of five years. As a result, under US GAAP additional amortization would be recognized.

22.

Reconciliation to United States accounting principles (continued):

(b)

SpectraWorks acquisition (continued):

During 2001, the Company recorded an impairment charge under Canadian GAAP relating to goodwill and other intangible assets acquired pursuant to the SpectraWorks Inc. acquisition. The impairment charge under US GAAP in 2001 would also include an additional write-down of property and equipment of $452,699. Amortization and impairment charge relating to goodwill and other intangible assets related to the SpectaWorks Inc. acquisition would be lower under US GAAP by $3,287,250 due to the expense of in-process research and development costs on acquisition and additional impairment charge related to goodwill under US GAAP prior to 2001.

For 2003 and 2002, as a result of the additional US GAAP write-down of property and equipment of $452,699 in 2001, amortization and write-down under US GAAP would be reduced by $270,071 and $182,608, respectively.

(c)

Income taxes:

Under Canadian GAAP, future tax assets and liabilities are recorded at substantially enacted tax rates. Under US GAAP, deferred tax assets and liabilities are recorded at enacted tax rates. Recording Canadian future tax assets and liabilities at enacted tax rates would not change recorded net assets or shareholders' equity under US GAAP.

(d)

Stock-based compensation:

The Company has granted stock options to certain directors and employees for services provided to the Company. The Company, for US GAAP purposes, has elected under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" to continue to measure compensation cost by the intrinsic value method set out in APB Opinion No. 25 and related interpretations. As fixed options are granted at exercise prices based on the market value of the Company's share at the date of grant, no adjustment for compensation expense is required. Awards granted where vesting is contingent on the Company's share price are treated as variable awards. The measurement date is the date the contingency is met. Compensation expense is recognized when it is probable that the performance criteria will be met and is re-measured at each reporting date until the measurement date, with the amount equal to be the excess of the then fair value of the underlying common stock over the exercise price with changes in value recognized in the determination of income.

22.

Reconciliation to United States accounting principles (continued):

(d)

Stock-based compensation (continued):

As described in note 2(b), the Company adopted the CICA section 3870, "Stock-Based Compensation and Other Stock-Based Payments" and effective January 1, 2003, elected to apply the fair value method. Under US GAAP there is no compensation cost for stock options issued by the Company issued to employee prior to January 1, 2003.

As required under SFAS 123, supplementary pro-forma information is provided below as if the fair value method was applied. The pro-forma stock compensation expense has been determined by reference to an option-pricing model using the following weighted average assumptions:


	2005	2004	2003

Volatility percentage	78%	78%	89%
Risk-free interest rate	3.3%	3.3%	3.0%
Dividend yield	-	-	-
Expected life of options	3.0 years	3.0 years	3.0 years

The weighted average grant date fair value of options granted during the year was $0.95 (2004 - $0.42; 2003 - $0.24).

Pro-forma information with respect to impact of the fair value of stock options at the date of grant on reported loss for the periods presented is as follows:


		2005		2004		2003

Net earnings (loss), US GAAP	$	(5,857,800)	$	1,621,536	$	(7,425,142)
Additional stock compensation
recovery (expense)		(271,033)		(327,916)		(942,428)

Pro-forma net loss, US GAAP	$	(6,128,833)	$	1,293,620	$	(8,367,570)


Pro-forma basic and fully diluted net
earnings (loss) per share, US GAAP	$	(0.15)	$	0.03	$	(0.23)

22.

Reconciliation to United States accounting principles (continued):

(e)

Long-term debt:

Under Canadian GAAP, the proceeds of the financing allocated to the estimated fair value of the conversion feature of the debt are recorded as an equity component of the debt (note 9(b)). Under US GAAP, a value is assigned to the conversion feature only if the conversion rate is less than the market price of the common stock at the date of issuance. Accordingly, no value would be assigned under US GAAP to the conversion feature on the promissory note issued in 2002. In addition, under Canadian GAAP a portion of the deferred finance costs has been allocated to equity and not amortized, while under US GAAP all costs would be identified as deferred finance costs and amortized over the term of the debt. Furthermore, under Canadian GAAP, interest on long-term debt required to be paid through the issuance of common shares is recorded at fair value as an equity component and accreted as a charge to retained earnings. For US GAAP purposes, all interest is expensed as accrued.

Applying US GAAP, long-term debt at December 31, 2005 would be recorded at its face value of $2,326,000 (US $2,000,000) and no value would be assigned to an equity component of long-term debt. In addition, accretion on the calculated debt discount on the promissory note and the long-term debt under Canadian GAAP aggregating $246,939 (2004 - $312,342) for the year ended December 31, 2005 would not have been recorded, reducing interest expense by an equivalent amount. Additional interest expense of $42,891 (2004 - $42,891) would be recorded in 2005 on amortization of amounts reclassified to deferred finance costs, and as a result of the modification, the remaining deferred financing cost of $70,669 would be realized during the year under US GAAP, and a foreign exchange gain on the long-term debt of $38,518 (2004 - $73,054) would have been realized. In addition, a s a result of the modification, the Company has recorded a beneficial conversion feature of $74,432 under US GAAP. Under Canadian GAAP no such amount has been recorded.

(f)

Elimination of deficit:

In prior years, the Company reduced its paid-up capital by $66,332,136 to eliminate the deficit from preceding years. In order to effect these reductions under Canadian GAAP, it was not necessary to revalue the assets of the Company. As a consequence, all conditions necessary under the US GAAP quasi-reorganization rules were not met and the recapitalization of the deficit is not recorded.

(g)

Release of escrow shares:

Under US GAAP, the fiscal year 1999 release of shares from escrow representing compensation relating to the achievement by management of securing specific contracts results in the settlement of a contingency and therefore the shares should be valued at the date the contingency was resolved. This results in a charge to earnings and credit to share capital of $4,132,079.

22.

Reconciliation to United States accounting principles (continued):

(h)

Pronouncements:

FASB issued a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The compensation cost is to be recognized over the service period, which is determined by the vesting period. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

23.

Subsequent event:

On February 16, 2006, the Company's Board of Directors approved the terms of a private placement financing for gross proceeds of approximately US$3 million. The private placement was subject to regulatory approval and the Company closed the private placement on March 6th 2006. The private placement called for the sale of 1,021,744 units at US$3.00 per unit. Each unit consists of four common shares and three common share purchase warrants each convertible into one common share at an exercise price of US$0.75 and a term to maturity of two years.

Other Information

Export Sales

The majority of our component sales are made outside of Canada, primarily in the United States, Europe and Asia. Our portable terminal sales are made primarily in the US and Europe.

Legal Proceedings

The Company has commenced legal proceedings to recover a loan balance from Mr. Johnson who left the employ of Norsat America Inc. in December 2000. The loan, in the amount of CDN$450,000 been provided for.

Dividend Policy

Holders of our common shares are entitled to receive such dividends as may be declared from time to time by our board of directors. There can be no assurance that any dividend will be declared, or if declared, what the amounts of dividend will be or whether such dividends, once declared, will continue for any future period.

B. �� Significant Changes

Significant changes since year-end to March 22, 2005 include:

On February 16, 2006, the Company's Board of Directors approved the terms on a private placement financing for gross proceeds of approximately US$3 million. The private placement is subject to regulatory approval, and closed on March 6, 2006 . The private placement included the sale of 1,021,744 units at US$3.00 per unit. Each unit consists of four common shares and three common share purchase warrants. Each warrant has an exercise price of US$0.75 and a term of two years.

9. The Offer and Listing

Our common shares trade on the TSX under the symbol NII and on the OTC Bulletin Board under the symbol NSATF.

The high and low sales prices (in Canadian dollars) for the Company's common shares on the Toronto Stock Exchange, the Nasdaq Exchange and the OTC Bulletin Board for a) the five most recent full financial years. b) the two most recent financial years by quarter and any subsequent full quarter, c) the most recent six months are listed below:


			TSX		NASDAQ		OTC BB
			(CDN. Dollars)		(U.S. Dollars)		(U.S. Dollars)
			High	Low	High	Low	High	Low

a)	2005		1.90	0.55	N/A	N/A	1.51	0.43
	2004		1.26	0.56	N/A	N/A	0.95	0.40
	2003		1.59	0.50	1.05	0.61	0.70	0.38
	2002		4.00	1.27	2.45	0.71	N/A	N/A
	2001		5.50	1.20	3.69	0.61	N/A	N/A

b)	2005
	Fourth quarter		1.35	0.82			1.19	0.70
	Third quarter		1.76	0.77			1.47	0.67
	Second quarter		1.90	0.51			1.51	0.43
	First Quarter		0.70	0.50			0.56	0.43
	2004
	Fourth quarter		0.85	0.57			0.68	0.46
	Third quarter		0.81	0.59			0.63	0.46
	Second quarter		1.10	0.74			0.83	0.55
	First Quarter		1.26	0.56			0.95	0.40

c)	February	2006
	January	2006
	December	2005	1.02	0.82			0.90	0.70
	November	2005	1.19	0.85			1.00	0.77
	October	2005	1.35	0.85			1.19	0.86
	September	2005	1.28	0.77			1.05	0.67

10.

Additional Information

Share capital

Reference is made to Item 8: Financial Information and specifically A. Consolidated Financial Statements, Note 10. Share Capital.

Memorandum and Articles of Association

Incorporation

The Company was incorporated on October 15, 1982 under theCompany Act (the "Act") of the Province of British Columbia under the name Norsat International Inc. Effective September 27, 1989, the name of the Company was changed to NII Norsat International Inc., and on July 2, 1999 was further amended to its present name, Norsat International Inc. Our incorporation number is 255727. Our memorandum of incorporation (the "Memorandum") and our articles (the "Articles") were included as exhibits in Item 3.1 and 3.2 with our Annual Report filed in June 2000.

Powers and Functions of the Directors

Our Articles state that it is the duty of any of our directors who are directly or indirectly interested in a contract or proposed contract with us to declare the nature of their interest in accordance with the provisions of the Act. Our Articles also state that a director shall not vote in respect of the approval of any contract or transaction with our Company in which he is interested and if he shall do so his vote shall not be counted, but shall be counted in the quorum present at the meeting at which the vote is taken.

Directors Power to Vote on Compensation for Themselves

Subject to the Act, our Articles provide that the directors may determine to be paid out of our funds or capital as remuneration for their service. The directors may also determine the proportions and manner that the remuneration will be divided among them.

Directors Borrowing Powers

Our Articles provide that the directors, on our behalf, may:

borrow money in any manner or amounts, on any security from any source and upon any terms and conditions;

issue bonds, debentures and other debt obligations as security for any liability or obligation of the Company or any other persons; and

mortgage, charge, whether by way of specific or floating charge, or give other security on the whole or any part of the assets of the Company

Retirement of Directors Under an Age Limit Requirement

Our Articles do not require directors to retire pursuant to an age limit.

Number of Shares Required for a Director's Qualification

Our Articles do not provide for a requirement of shares for a director's qualification.

Share Capital

The authorized share capital of our Company consists of 75,000,000 Common Shares.

Common Shares

The Holders of our Common Shares are entitled to dividends if, as and when declared by the Board of Directors, to one vote per Common Share and, upon dissolution of the Company, to receive the remaining property and the assets of the Company available for distribution.

Dividend Record

Our Company has not paid any dividends during the past eight years. The Company has no fixed dividend policy. Payment of dividends in the future will depend upon, among other factors, the Company's earnings, capital requirements and financial condition. The Company does not anticipate that dividends will be paid in the foreseeable future.

Alteration of Share Rights

A special resolution is required to effect a change in the rights of shareholders. A special resolution is a resolution passed by a three-quarters majority of the vote cast by shareholders of the Company who being entitled to do so, vote in person or by proxy at a meeting of the shareholders of the Company, or a resolution in writing signed by every shareholder of the Company who would have been entitled to vote at a meeting of the shareholders of the Company.

Meetings of Shareholders: Annual Meetings

The annual general meeting of our shareholders is held at such time and on such day in each year as the directors of the Company may, from time to time, determine for the purpose of receiving the reports and statements required by the Act to be presented to the annual meeting, electing directors, appointing auditors and for the transaction of such other business as may properly be brought before the meeting. Annual general meetings are required to be held once in every calendar year at a time, not being more than 13 months after the holding of the last preceeding annual general meeting.

General or Extraordinary Meetings

The directors of the Company may, at any time, call a general or extraordinary meeting of the shareholders of the Company, for the transaction of any business, which may properly be brought before such a meeting of shareholders.

Place of Meetings

Meetings of shareholders of the Company are to be held at such place within Canada as the directors of the Company, from time to time, determine.

Notice of Meetings

Notice of the time and place of each meeting of shareholders of the Company is required to be sent to our shareholders not less than 21 days before the date of the meeting.

A shareholder of the Company and any other person entitled to attend a meeting of shareholders of the Company may, in any manner and at any time, waive notice of or otherwise consent to a meeting of shareholders of the Company.

Quorum

No business will be transacted at any general meeting unless the requisite quorum is present at the commencement of the business. Subject to the Act, if we have two or more shareholders, a quorum for the transaction of business at a general meeting shall be two persons present in person, or by proxy, and holding or representing by proxy, not less than five percent (5%) of the shares entitled to vote at the general meeting.

Foreign Ownership Limitations

Neither the Act nor the constating documents of the Company impose limitations on the rights, including the right of non-resident or foreign shareholders, to hold or exercise voting rights attached to the Common Shares.

Change of Control

No provisions of the Company's Articles exist that would have the effect of delaying, deferring or preventing a change in control of the Company or that would operate with respect to any proposed merger, acquisition or corporate restructuring of the Company.

Share Ownership Reporting Obligations

No provision of the Company's Articles imposes any requirements on shareholders requiring share ownership to be disclosed. The securities laws of the Company's home jurisdiction require disclosure of shareholdings by: (a) persons who are directors or senior officers of the Company; and (b) a person who has direct or indirect beneficial ownership of, control or direction over, or a combination of direct or indirect beneficial ownership of and control over securities of the Company carrying more than 10% of the voting rights attached to all of the Company's outstanding voting securities.

Securities legislation in Canada requires that shareholder ownership must be disclosed once a person owns beneficially or has control or direction over greater than 10% of the issued shares of the Company. This threshold is higher than the 5% threshold under U.S. securities legislation at which shareholders must report their share ownership.

Material Contracts

Reference is made under Exhibit 4.1 "Employment Contract between Norsat International and Bill Coyne/George /Bill Comerford. (contracts to be appended)

Exchange controls

There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of the Registrant's common shares. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (10% if the shareholder is a corporation owning at least 10% of the outstanding common shares of the Registrant) pursuant to Article X of the reciprocal tax treaty between Canada and the United States.

Except as provided in the Investment Canada Act (the "Act"), there are no limitations under the laws of Canada, the Province of British Columbia or in the charter or any other constituent documents of the Registrant on the right of foreigners to hold or vote the common shares of the Registrant.

To the best of the Company's knowledge, there are no governmental laws, decrees, or regulations in Canada (i) relating to restrictions on import/export of capital or (ii) affecting the remittance of interest, dividends, or other payments to non-resident holders of the Common Shares. Any such remittance to United States residents, however, is generally subject to a 15% withholding tax pursuant to the Canada - United States Income tax Convention.

Taxation

United States Federal Income Tax Consequences

The following summary describes certain of the material U.S. federal income tax consequences to U.S. Holders (as defined below) arising from the purchase, ownership and disposition of Common Shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect.

This summary does not deal with all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders in light of their particular circumstances, or to U.S. Holders subject to special rules, including, without limitation, certain retirement plans, insurance companies, U.S. Holders of securities held as part of a "straddle," "synthetic security," "hedge," "conversion transaction" or other integrated investment, persons that enter into "constructive sales" involving Common Shares or substantially identical property with other investments, U.S. Holders whose functional currency is not the United States dollar, certain expatriates or former long-term residents of the United States, financial institutions, broker-dealers, tax-exempt organizations and U.S. Holders who own (directly, indirectly or through attribution) 10% or more of the Company's outstanding voting stock. The following discussion does not address the effect of any applicable state, local or foreign tax laws. This summary does not consider the tax treatment of persons who own Common Shares through a partnership or other pass-through entity, and deals only with Common Shares held as "capital assets" as defined in Section 1221 of the Code.

This discussion is addressed only to "U.S. Holders." A U.S. Holder is a holder of Common Shares that is a U.S. citizen, an individual resident in the United States for U.S. federal income tax purposes, a domestic corporation, an estate the income of which is includible in its gross income for U.S. federal income tax purposes without regard to its source, or a trust if either: (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust or (ii) the trust was in existence on August 20, 1996 and, in general, would have been treated as a U.S. Holder under rules applicable prior to such time, provided the trust elects to continue such treatment thereafter.

U.S. holders of common shares are advised to consult with their own Tax advisors with respect to the U.S federal, state and local tax consequences, as well as the tax consequences in other jurisdictions, of the Purchase, ownership and sale of common shares applicable in their particular Tax situations.

Sale or Exchange of Common Shares

A U.S. Holder's sale or exchange of Common Shares generally will result in the recognition of capital gain or loss by such U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's tax basis in the Common Shares sold. If a U.S. Holder's holding period on the date of the sale or exchange is more than one year, such gain or loss will be long-term capital gain or loss. The Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998 Act") includes substantial changes to the federal income taxation of capital gains by non-corporate U.S. Holders. Under the 1998 Act, long-term capital gains realized on the sale of

Common Shares by non-corporate U.S. Holders will be subject to a maximum 20% federal income tax rate if the Common Shares sold have been held for more than one year at the time of the sale or exchange. U.S. Holders who are corporations would be subject to a maximum federal income tax rate of 35% regardless of their holding period. If the U.S. Holder's holding period on the date of the sale or exchange was one year or less, such gain or loss will be short-term capital gain (generally subject to the same effective federal income tax rates as ordinary income) or loss. See "Certain Canadian Federal Income Tax Considerations-Taxation of Capital Gains on Sale of Common Shares" for a discussion of taxation by Canada of capital gains realized on the sale or exchange of Common Shares. In general, any capital gain recognized by a U.S. Holder upon the sale or exchange of Common Shares will be treated as U.S. sou rce income for U.S. foreign tax credit purposes. Capital losses realized upon the sale, exchange or other disposition of Common Shares generally are deductible only against capital gains and not against ordinary income, except that in the case of non-corporate taxpayers, a capital loss is deductible only to the extent of capital gains plus ordinary income of up to $3,000 ($1,500 if married and filing separately).

A U.S. Holder's tax basis in his, her or its Common Shares generally will be the purchase price paid therefore by such U.S. Holder. The holding period of each Common Share owned by a U.S. Holder will commence on the day following the date of the U.S. Holder's purchase of such Common Share and will include the day on which such U.S. Holder sells the Common Share.

Treatment of Dividend Distributions

For U.S. federal income tax purposes, the gross amount of any distribution made with respect to, or in some cases a partial purchase or redemption of, Common Shares (including the amount of any Canadian taxes withheld therefrom) will be included in a U.S. Holder's income as ordinary dividend income to the extent that the dividends are paid out of current or accumulated earnings and profits of the Company, as determined based on U.S. tax principles. Such dividends will not be eligible for the dividends received deduction allowed to U.S. corporations under Section 243 of the Code. Dividend distributions in excess of the Company's current and accumulated earnings and profits will be treated first as a non-taxable return of the U.S. Holder's tax basis in his, her or its Common Shares to the extent thereof and then as a gain from the sale of Common Shares. Dividends paid in Canadian dollars will be includible in income in a U.S. dollar amount based on the exchange rate at the time of their receipt. Any gain or loss resulting from currency fluctuations during the period from the date a dividend is paid to the date such payment is converted into U.S. dollars generally will be treated as ordinary income or loss.

Dividends paid to a U.S. Holder with respect to Common Shares will be treated as foreign source dividend income for U.S. foreign tax credit limitation purposes. Subject to certain conditions and limitations, any Canadian withholding tax imposed on such dividends generally will be eligible for credit against such U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's election, may be claimed as a deduction against income in determining such tax liability. The limitations on claiming a foreign tax credit include computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends with respect to the Common Shares generally will be classified as "passive income" for purposes of computing the foreign tax credit limitation. Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90%.

In addition, a U.S. Holder generally will not be entitled to claim a credit for Canadian tax withheld unless the U.S. Holder has held the Common Shares for at least 16 days within the 30 day period beginning 15 days before the applicable ex-dividend date. The calculation of allowable foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign taxes, the availability of

deductions for foreign taxes paid involve the application of rules that depend on a U.S. Holder's particular circumstances. Accordingly, U.S. Holders should consult their own tax advisors regarding their eligibility for foreign tax credits or deductions.

Information Reporting and Backup Withholding

Any dividends paid on the Common Shares to U.S. Holders may be subject to U.S. information reporting requirements and the 30% U.S. backup withholding tax. In addition, the proceeds of a U.S. Holder's sale of Common Shares may be subject to information reporting and the 30% U.S. backup withholding tax. Backup withholding will not apply if the holder (i) is a corporation or other exempt recipient or (ii) the holder provides a U.S. taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with any applicable backup withholding requirements. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder's U.S. federal income tax, provided the required information is furnished to the U.S. Internal Revenue Service.

Canadian Federal Income Tax Considerations

The following discussion summarizes the material Canadian Federal income tax considerations relevant to an investment in the Common Shares by a holder who, for income tax purposes, is resident in the United States and not in Canada, holds the Common Shares as capital property, deals at arm's length with the Company, does not use or hold the Common Shares in carrying on a business through a permanent establishment or in connection with a fixed base in Canada and, in the case of an individual investor, is also a United States citizen. The tax consequences of an investment in the Common Shares by an investor who is not as described above may be expected to differ from the tax consequences discussed herein.

This discussion is based upon the provisions of the Income Tax Act (Canada) (the "Tax Act"), regulations under the Tax Act, specific proposals to amend the Tax Act publicly announced prior to the date hereof, the Canada-United States Income Tax Convention (1980), as amended (the "Convention"), and administrative practices published by Canada Custom and Revenue Agency, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to a holder as otherwise described herein. The discussion does not take in account the tax laws of the various provinces or territories of Canada.

Taxation of Distributions from the Company

Dividends paid or credited on the Common Shares to U.S. residents will be subject to a Canadian withholding tax. Under the Convention, the rate of withholding tax generally applicable is 15% of the gross amount of the dividends, including stock dividends and payments deemed to be dividends upon the repurchase of Common Shares by the Company, as described below. The rate of withholding tax is reduced if the beneficial owner of the dividend is a company, which owns at least 10% of the voting stock of the Company at the time the dividend, is paid. In this case, the rate is 5% of the gross amount of the dividends.

If Common Shares are purchased by the Company a holder will be deemed to have received a dividend to the extent that the amount paid on the repurchase exceeds the paid-up capital, as defined in the Tax Act, of the Common Shares acquired. The portion, if any, of the acquisition proceeds that are deemed to be a dividend will be subject to Canadian withholding tax on dividends, as described above. Further, the holder will be deemed to have disposed of the Common Shares for the amount paid by the Company for the Common Shares less the amount deemed to have been received as a dividend. If this results in a capital gain to a holder, the tax consequences will be as described below.

Taxation of Capital Gains on Sale of Common Shares

Under the Tax Act, a holder will not be subject to Canadian tax on any capital gain realized on an actual or deemed disposition of a common share, including a deemed disposition at death, provided that he did not hold the Common Share as capital property used in carrying on a business in Canada, or that neither he nor persons with whom he did not deal at arm's length alone or together owned 25% or more of the issued shares of any class of the Company at any time in the five years immediately preceding the disposition.

A holder who otherwise would be liable for Canadian tax in respect of a capital gain realized on an actual or deemed disposition of a Common Share will be relieved under the Convention from such liability unless:

the Common Share formed part of the business property of a permanent establishment in Canada that the Holder had within the twelve-month period preceding the disposition; or

the holder

is an individual and was resident in Canada for 120 months during any 20-year period preceding the disposition,

ii.

was resident in Canada at any time during the 10 years immediately preceding the disposition; and owned the Common Share when he ceased to be a resident of Canada

Dividends and paying agents

Not applicable.

Statement by experts

Not applicable.

Documents on display

Copies of the most recent annual report, financial statements for the year ended December 31, 2005 and subsequent interim financial statements of the Company may be obtained, upon request, from the Secretary of the Company. The Company may require the payment of a reasonable fee in respect of a request therefore made by a person who is not a security holder of the Company.

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and file reports and other information with the SEC. You may read and copy any of our reports and other information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of the SEC's regional offices at 7 World Trade Center, Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We are required to file reports and other information with the securities commission in all provinces of Canada. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval

(SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC's electronic document gathering and retrieval system. We ''incorporate by reference'' information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this report and more recent information automatically updates and supersedes more dated information contained or incorporated by reference in this report. Our SEC file number is 0-12600. As a foreign private issuer, we are exempt from the rules under the Securities Exchange act of 1934, as amended, prescribing the furnishing and content of proxy statements to shareholders. We have included in this report certain information disclosed in our Proxy Statement prepared under Canadian securities rules. We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: Norsat International Inc., 300-4401 Still Creek Drive, Burnaby, British Columbia, Canada V5C 6G9 Attention Corporate Secretary.

Subsidiary Information

Reference is made under "Item 4c. Organization Structure".

11.

Quantitative and Qualitative Disclosures About Market Risk

Risks Associated with Foreign Exchange

The Company is exposed to foreign exchange fluctuations in the U.S. dollar. A stronger Canadian dollar reduces U.S. dollar-denominated revenues and expenses. Net income is also reduced because a higher percentage of revenues than expenses are generated in U.S. dollars. The Company has arranged its long-term debt in U.S. dollars to partially hedge against a stronger Canadian dollar. The Company does not engage in any formal hedging transaction.

During 2005 the Canadian dollar strengthened by approximately 6% year-over-year against the U.S. dollar. The impact of this foreign exchange rate fluctuation on the Company's financial results is reflected in the Statement of Operations and the Balance Sheet.

Foreign Exchange Effect on Income Statement. The Company's "Sales" and "Cost of Sales" are predominately denominated in U.S. dollars and the Company's "Operating Expenses" are predominately denominated in Canadian dollars. Foreign currency revenues and expenses are translated at the exchange rate in effect on the dates of the related transactions, with the impact being reflected immediately in Net Income. Based on 2005 revenues, a one-cent change in the Canadian dollar will affect Revenue by approximately $200,000 and net income by approximately $90,000.

Foreign Exchange Effect on Balance Sheet. U.S. dollar denominated balance sheet accounts are translated into Canadian dollars at the year-end exchange rate for monetary items such as accounts receivable, accounts payable, long-term debt and cash, and at historical exchange rates for non-monetary items. Unrealized gains and losses arising from the translation of the monetary items are included in income immediately as foreign exchange gains/(losses) in the consolidated statement of operations.

12.

Description of Securities Other than Equity Securities

Not applicable.

PART II

13.

Defaults, Dividend Arrearages and Delinquencies

None.

14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

15.

Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005 and have concluded that these disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. There were no significant changes in our internal controls over financial reporting during the financial year ended December 31, 2004 that could materially affect internal controls over financial reporting subsequent to the date of their evaluation

16.

[Reserved]

Audit Committee Financial Expert

Reference is made under "Item 6-C - Board Practices". Norsat's Board of Directors has determined that it has at least one audit committee financial expert serving on its Audit Committee. Mr. James Sharpe has been determined to be such audit committee financial expert. The commission has indicated that the designation of Mr. Sharpe as an audit committee financial expert does not make Mr. Sharpe an "expert" for any other purpose, impose any duties, obligations or liability on Mr. Sharpe that are greater than those imposed on members of the Audit Committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the Audit Committee. Check with Jim on this

Code of Ethics

Norsat's Code of Ethics, which provides guidelines for the behaviour of all directors, officers and employees, including Norsat's principal executive officer, principal financial officer and principal accounting officer, in carrying out their responsibilities is posted on the Company web site atwww.norsat.com under the heading Investor Information, Corporate Governance, Charters and Policies.

Principal Accountant Fees and Services

The following table sets forth fees paid by the Company to Ernst &Young (in 2005) and KPMG LLP (prior to 2005) for all services in 2005, 2004 and 2003


	Audit Fees	Audit Related Fees	Tax Fees	Other Fees
2005	$130,000	$19,100	$0	$0
2004	$85,000	$11,575	$19,450	$0
2003	$86,000	$19,650	$59,950	$0

Audit fees are for the audit of our annual consolidated financial statements.

Audit related fees are primarily for services related to review of other statutory filings.

Tax fees are primarily for the preparation of our Canadian and U.S. corporate tax returns and assistance with tax planning.

Exemptions from the listing standards for Audit Committees

Not applicable

PART III

17.

Financial Statements

Reference is made under Item 8 "Financial Information".

18.

Financial Statements

Not applicable. See Item 17.

19.

Exhibits

1.0

Memorandum and Articles of Incorporation of Norsat International Inc.

4.1

Employment Contract dated May 5, 2005 between the Company and Bill Coyne.

4.2

Employment Contract dated September 16, 2005 between the Company and George Dorin.

4.3

Employment contract Bill Comerford

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, William Coyne

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, George Dorin


SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration statement [annual report] on its behalf.
		Norsat International Inc.
		(Registrant)
		"George Dorin"
Date:	April 5, 2006	George Dorin, Chief Financial Officer

Exhibit 4.1 to 20-F submission for Norsat International Inc.

THIS EMPLOYMENT AGREEMENT, dated as of May 5, 2005, is made between Norsat International Inc., a company incorporated under the laws of British Columbia ("Norsat") and Bill Coyne (the "Executive"). The agreement supersedes all other previous agreements between Norsat and the Executive.

WHEREAS Norsat is engaged in the business of design, manufacture, sales and servicing of satellite technology and communication products;

AND WHEREAS the Executive has agreed to accept Norsat's offer of employment as President & C.E.O, upon the terms and conditions hereinafter set forth;

THE PARTIES HERETO COVENANT AND AGREE AS FOLLOWS:

POSITION AND DUTIES

1.1

Norsat will employ the Executive as its President & C.E.O., effective May 16, 2005.

1.2

Norsat may, by mutual agreement, change the position in which the Executive is employed.

1.3

The Executive will report to the Board of Directors (the "Board") of the Company.

1.4

The Executive shall:

(a)

have full power and authority to manage and direct the business and affairs of the Company (except only the matters and duties as by law must be transacted or performed by the Board or by the shareholders of the Company in general meeting) in a manner consistent with the policies determined from time to time by the Board;

(b)

provide advice and information to the Company with respect to the establishment of operational guidelines and policies; and

(c)

generally perform the functions that are commensurate with the position of chief executive officer of a technology company comparable in size to the Company.

COMPENSATION AND BENEFITS

2.1

Norsat will pay the Executive an annual base salary of $200,000.00 (U.S.).

The Executive shall be entitled to participate, at the President level, in any bonus, profit sharing and incentive compensation programs established by Norsat in the future.

2.2

Bonus

(a)

The Executive shall be entitled to participate, at the President level, in any bonus, profit sharing and incentive compensation programs established by the Company.

(b)

A specific bonus program for the Executive will be designed by the parties and will be documented in a definitive amendment to this agreement,which the parties agree will occur within 60 days of the date hereof. Any bonus program for the Executive will be subject to the approval of such program by the compensation committee of the Board.

2.3

Stock Options

On May 2, 2005, the Company shall grant the Executive, an option to purchase 100,000 common shares in the capital stock of the Company. These options will have an exercise price of $0.69 (U.S.), and will vest annually over three years, in accordance with the Company's Employee Stock Option Plan.

2.4

The Executive will be entitled to participate in all benefit plans that may be provided by Norsat to its employees.

2.5

The Executive shall be entitled to receive a monthly car allowance of $600.00 (U.S.).

2.6

Norsat shall reimburse the Executive for all reasonable and customary business expenses incurred by him in the performance of his duties hereunder, provided that the Executive shall submit vouchers and other supporting data to substantiate the amount of said expenses in accordance with Norsat's corporate policies as implemented from time to time.

2.7

The Executive shall be entitled to four (4) weeks of vacation each calendar year to be taken at such times as are reasonably acceptable to Norsat.

2.8

Norsat operates a RRSP program executed by matching employee contributions to a Group RRSP plan under Company administration. Norsat will continue to enhance the

Executive's contributions (providing the Executive is contributing a minimum of 2% of his annual salary) by contributing 5% of paid semi-monthly earned income - such company contribution not to exceed the annual limits established by Revenue Canada.

CONFIDENTIAL INFORMATION

3.1

Without restricting any other provision of this Agreement, all confidential, proprietary and trade secret information of Norsat and its subsidiary, associated and affiliated entities, including, but without limiting the generality of the foregoing, information concerning the technology, research, test procedures and results, machinery, equipment, hardware, software, programs, manufacturing processes and products, assembly, services used, identity and description of components, purchasing, accounting, engineering, marketing, selling and servicing or business methods used, manufactured or developed by or for Norsat and information concerning suppliers or customers thereof (all herein called "Confidential Information") disclosed or otherwise revealed to the Executive from time to time, shall be and remain the property of Norsat or its subsidiaries or affiliates (as the case may be) and shall be held by the Executive in strict confidence for the sole benefit of Norsat. The Executive shall ~~neither~~ not use, disclose, reveal, copy nor appropriate any Confidential Information whatsoever, nor cause or permit any other person to do so except as specifically permitted by Norsat, either during the term of this Agreement or following the termination thereof. The foregoing shall not prevent the Executive from using or disclosing any portion of the Confidential Information which:

(a)

was known to the Executive prior to his receipt of the Confidential Information from Norsat and was not originally learned by or disclosed to Norsat in his capacity or in connection with his duties as an employee of Norsat;

(b)

was or becomes generally available to the public independently of Norsat; or

(c)

is rightfully disclosed to the Executive by any third party independently of Norsat.

3.2

The Executive acknowledges and covenants to observe and be bound by the terms of Norsat's Employment Internet and E-Mail Usage Policy, a copy of which is attached hereto as Appendix "A", Norsat's Employee Agreement Respecting Confidentiality and Intellectual Property as Appendix "B": and Agreement to Assign Inventions and Norsat's Insider Trading Policy as Appendix "C" which form a part of this Agreement.

UNFAIR COMPETITION

4.1

The Executive covenants and agrees that he will not, during the term of this agreement and for a period of one year following the date of termination of this Agreement, directly or indirectly,

(a)

be connected as an officer, employee, consultant, owner, partner or otherwise of any business within Canada or the United States that directly or indirectly competes with the business carried on by Norsat or any of its associated, affiliated or subsidiary entities;

(b)

assist any other person or entity to hire or otherwise seek to induce employees of Norsat, or any of its associated, affiliated and subsidiary entities, to terminate their employment;

(c)

solicit or induce, or assist any other person or entity to solicit or induce, any customer of Norsat, or any of its associated, affiliated and subsidiary companies, to buy goods and services similar in function or nature to goods and services supplied by Norsat or any of its associated, affiliated or subsidiary entities;

(d)

submit, or assist any other person or entity to submit, a tender for the supply of goods or services if Norsat, or any of its associated, affiliated and subsidiary entities, is also submitting a tender for the supply of such goods or services.

4.2

The Executive confirms and agrees that the covenants and restrictions contained in the preceding Article 4.1, are reasonable and valid and that Norsat would suffer irreparable injury in the event of any breach of the Executive's obligations therein. Accordingly, the Executive acknowledges and agrees that damages would be an inadequate remedy at law in connection with any such breach and that Norsat shall be entitled to obtain, in addition to any other remedy at law or equity, temporary and permanent injunctive relief enjoining and restraining the Executive from any such breach.

4.3

Any claim or cause of action by the Executive against Norsat, whether predicated on this Agreement or otherwise, shall not constitute a defence to the enforcement by Norsat of the covenants and restrictions set out in Article 4.1 hereof.

4.4

In the event a Court of competent jurisdiction determines that the period and geographical area set out in Article 4.1 hereof is unreasonable and that such provision would for that reason be void and unenforceable, the parties will request the Court to substitute such

shorter period or such other geographical area as would provide the maximum protection to Norsat consistent with the enforceability of that provision.

4.5

In the event a Court of competent jurisdiction should hold the covenants and restrictions set out in Article 4.1 hereof to be illegal, invalid or unenforceable in any jurisdiction, such decision shall not affect any other covenant or provision of this Agreement or the application of any other covenant or provision.

TERMINATION

5.1

Apart from any separation pursuant to Article 4.1 above, Tthe Executive may terminate his employment by giving four weeks of written notice to Norsat. On receipt of such notice, Norsat may waive the notice period in whole or in part, and set an earlier date on which the Executive's resignation shall become effective. In such case, Norsat will compensate the Executive for the balance of the resignation notice.

5.2

Apart from any separation pursuant to Article 4.1 above, Norsat may terminate the Executive's employment forthwith in the event of Just Cause for dismissal, in which case the Executive is not entitled to notice or payment in lieu thereof. When used in this Agreement, the term "Just Cause" ~~means~~ includes a) the Executive's failure to perform his employment duties hereunder after reasonable notice to the Executive by the Board, specifying such failure and providing the Executive with a reasonable opportunity to cure such failure given the content of the circumstances, as determined by the Board in the exercise of its reasonable discretion, b) the Executive's breach of covenants or agreements contained in this Agreement, the Proprietary Rights Agreement, or any of the other material agreement or undertaking of the Executive, c) the Executive's commission of a felony or any crime involving moral turpitude, fraud or misrepresentation, whether or not related to the business or property of Norsat, d) any act of the Executive against Norsat intended to enrich the Executive in derogation of his duties to Norsat, or e) any wilful or purposeful act or omission (or any act or omission taken in bad faith) of the Executive having the effect of injuring the business or business relationships of Norsat.

5.3

Apart from any separation pursuant to Article 4.1 above, and inIn the absence of Just Cause, Norsat may terminate the Executive's employment in accordance with the terms outlined in the Severance Agreement (Appendix "D").

MISCELLANEOUS

6.1

This Agreement shall be interpreted in accordance with and governed by the laws of the Province of British Columbia.

6.2

This Agreement constitutes the entire agreement between the parties hereto and supersedes all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter of this Agreement, and without limiting the generality of the foregoing, this Agreement supersedes any previous agreements of employment entered into between Norsat (or any of its predecessor, subsidiary or associated companies or divisions) and the Executive.

6.3

No delay, omission or forbearance on the part of Norsat with respect to the enforcement of any of the provisions of this Agreement, or any renewal thereof, in relation to an act or omission by the Executive, shall constitute a waiver of the right of Norsat to enforce such provision in relation to that act or omission.

6.4

This Agreement may not be amended or modified except by written agreement of the parties.

6.5

Either party may, after attempting to resolve a dispute by negotiation, submit such dispute to arbitration in Vancouver, British Columbia, in accordance with the rules of the Commercial Arbitration Act (British Columbia).

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement and agree that it is to be effective on the date first above written.

NORSAT INTERNATIONAL INC.

By:

Authorized Signatory


EXECUTED by BILL COYNE	) ) )
	)
in the presence of :	)
	)
	)
Signature	)
	)
	)
Print Name	)
	)	BILL COYNE

APPENDIX

SEVERANCE AGREEMENT

1.1

If Norsat terminates the Executive other than for just cause, Norsat shall give the Executive ~~_______~~ ten months notice, (based on the Executive's base salary at the time of termination), plus a further month of notice, (based on the Executive's base salary at the time of termination), for each full year of service - and prorated if notice of termination is given during a partial year of service - that the Executive has with Norsat, up to a maximum of 24 months. "Base salary", for the purposes of this agreement, is not reflective of any salary reductions, whether short-or long-term, i.e. salary reductions will have no effect on the Executive's severance. Base salary does not include any bonus or other performance incentive compensation to which the Executive may be entitled.

1.2

Upon receipt of written termination:

Stock options allocated to the Executive will vest immediately on

the date on which he is given notice of termination and he will have

two years from the date on which he is given notice of termination within which

to exercise the stock options.

1.3

The Executive will also be entitled to the extended vesting and exercise periods set out in paragraph 1.2 if he subsequently resigns from Norsat.

1.4

In addition, the Company will arrange for the Executive to be provided with outplacement services up to $10,000 (U.S.). Payment will be made directly to the firm providing the service.


Signed:
Date:
Witnessed by:
Signed:
Date:

Exhibit 4.2 to 20-F submission for Norsat International Inc.

Exhibit 4.3 to 20-F submission for Norsat International Inc.

PRIVATE AND CONFIDENTIAL

July 11,2005

Mr. Bill Comerford

billcomerford@aol.com

Dear Bill:

I am delighted to offer you the position of Senior VP-Global Sales & Marketing of Norsat International, Inc. effective from August 8, 2005. You will be reporting directly to the CEO.

The terms are listed below:

Compensation and Incentives:

The salary for this position is $ 175,000.00 (USD) per annum.

You will receive an award of 70,000 stock options out of which 35,000 to be vested immediately and the remaining 35,000 to be vested after an year

You will receive full reimbursement of all expenses incurred while performing duties on behalf of Norsat International, Inc.

Norsat International, Inc. agrees to permit full expense reimbursement for COBRA coverage for continuation of your current health insurance plan until a suitable alternative can be obtained and also continuation of your existing life insurance under the same conditions.

Probationary Period:

Please note that your first three months of employment with Norsat International will be viewed as a mutual period of evaluation. While we anticipate this to be a positive process, during this probationary period we assume both parties will undertake to clearly convey and resolve any concerns relating to performance, training and orientation or other related issues. At any time during the Probationary Period, the company can terminate your employment with or without cause

Page 1 of 2

Termination:

After completion of 90 days of service and any time thereafter, the company may terminate your employment for cause without notice or further liability. In the absence of cause, after completion of 90 days of service, the Company may terminate your employment at any time without further liability by providing to you only the greater of the following:

(a)

1 week's pay or 1 week's notice in lieu of pay, or a combination of 1 week's notice and pay, for each year of continuous service; or

(b)

The minimum notice or pay, or combination of notice and pay, if any, required by the provisions of the employment standards legislation that governs your employment.

In the event of termination, with or without cause, the terms of the stock option agreement you sign will govern the disposition of all stock options to which you are entitled. Entitlement to further vesting of options ceases on the effective date of termination.

Benefits:

Subject to the terms of the plans, you will be eligible to participate in the Norsat's Employee Benefit Programs. You will be entitled to four weeks annual vacation based on your start date.

Confidentiality Agreement:

This offer is subject to your signing the enclosed "Employee Agreement Respecting Confidential and Intellectual Property" and your acceptance of the offer below. In accepting this offer, you agree that you will not disclose, either during or after your employment with the company, any confidential information; client lists, pricing data and information regarding customer operations obtained as a result of your employment.

If these terms are understood and agreed to by you, please complete the "Acceptance" section of this letter, sign/date and return one copy of the letter with a signed copy of the confidentiality agreement either in person, by mail, courier or fax to:

Bill Coyne

President & CEO

Norsat International Inc.

300 - - 4401 Still Creek Drive

Burnaby, BC V5C 6G9

Fax: 604-292-9107

In anticipation of your acceptance, we look forward to having you join us as part of the Norsat team.

If you have any questions in the meantime, please do not hesitate to contact me.

Yours truly,

NORSAT INTERNATIONAL INC.

Bill Coyne, President & CEO

Page 2 of 2

Exhibit 31.1 to 20-F submission for Norsat International Inc.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Norsat International Inc. (the “Company”) on Form 20F for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William Coyne, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



Date:	March 31, 2006	“William Coyne”
		William Coyne
		President & Chief Executive Officer

Exhibit 31.2 to 20-F submission for Norsat International Inc.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Norsat International Inc. (the “Company”) on Form 20F for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George Dorin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



Date:	March 31, 2006	“George Dorin”
		George Dorin
		Chief Financial Officer

Exhibit 32.1 to 20-F submission for Norsat International Inc.

I, William Coyne, certify that:

I have reviewed this annual report on Form 20-F of Norsat International Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the end of the period covered by this report;

Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this report;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



Date:	March 31, 2006	“William Coyne”
		William Coyne
		President & Chief Executive Officer

Exhibit 32.2 to 20-F submission for Norsat International Inc.

I, George Dorin, certify that:

I have reviewed this annual report on Form 20-F of Norsat International Inc.;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the end of the period covered by this report;

Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this report;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



Date:	March 31, 2006	“George Dorin”
		George Dorin
		Chief Financial Officer

Norsat International Inactive 20-F/A2005 FY Annual report (foreign) (amended)