CT Filed by Filing Services Canada Inc. 403-717-3898

Norsat International Inc.

Management's Discussion & Analysis

5.0 Off Balance Sheet Arrangements

As at December 31, 2012 and March 5, 2013, we did not have any off balance sheet arrangements.

6.0 Transactions with Related Parties

Compensation of key management personnel including our President and Chief Executive Officer, Chief Financial Officer, General Manager and former President of a significant subsidiary are as follows:

('000s)	Three months ended December 31				Year ended December 31
	2012		2011		2012		2011
Short-term employee benefits	$	576	$	1,795	$	2,115	$	2,586
Share based payments		21		7		73		17
Total	$	597	$	1,802	$	2,188	$	2,603

The amounts disclosed in the table above are the amounts recognized as an expense during the reporting period related to key management personnel.

7.0 Proposed Transactions

As at December 31, 2012 and March 5, 2013, we had not committed to any asset or business acquisitions or dispositions.

8.0 Critical Accounting Estimates and Accounting Policies

Accounting Estimates

We have discussed the development and selection of our critical accounting estimates and policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the following disclosures.

Significant Management Judgement and Estimation Uncertainty

The preparation of consolidated financial statements in conformity with IFRS requires our management to undertake a number of judgements, estimates and assumptions that affect amounts reported in the consolidated financial statements and notes thereto. Actual amounts may ultimately differ from these estimates.

Significant Management Judgement

The following are significant management judgements in applying accounting policies of the Company that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses:

Recognition of deferred tax assets

The extent to which deferred tax assets can be recognized is based on an assessment of the probability of our future taxable income against which the deferred tax assets can be utilized. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions.

Recognition of service and contract revenues

Determining when to recognize revenues from after-sales services requires an understanding of the customer’s use of the related products, historical experience and knowledge of the market. Recognizing construction contract revenue also requires significant judgement in determining milestones, actual work performed and the estimated costs to complete the work.

Norsat International Inc.

Management's Discussion & Analysis

Recognition of Government contributions

We recognize Government contributions of eligible expenditures when there is reasonable assurance that we will comply with the conditions attached to the grant and the grant will be received. We estimate Government contributions based on labour costs and expenses incurred and our belief of what will ultimately be approved for payment by Government agencies. Uncertainty relates to the acceptability of the contribution amounts claimed, actual timing and ultimate collectability that can vary from our estimation.

Estimation Uncertainty

Information about estimates and assumptions that have the most significant effect on the recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

Selling prices of multi-element sales arrangements

Determining selling prices for multi-element arrangement follows a hierarchy of selling prices. If vendor-specific objective evidence and third-party evidence of selling price do not exist, then management’s best estimate of selling price for the deliverable is used. This requires significant judgement in determining the selling price based on an understanding of the customer’s use of the related product or service, historical experience and knowledge of the market.

Impairment of long-lived assets

In assessing impairment, management estimates the recoverable amount of each asset or cash generating units based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate. In 2012, we did not recognize any impairment losses of long-lived assets.

Useful lives of depreciable assets

We review our estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utilization of certain software and equipment.

Inventories

We estimate the net realizable values of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices.

Business combinations

We use valuation techniques in determining fair values of the various elements of a business combination based on future expected cash flows and a discount rate. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate.

Share-based payment - stock options

We measure the cost of equity-settled share-based transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about them.

Norsat International Inc.

Management's Discussion & Analysis

Share-based payment - restricted share units

We measure the cost of equity-settled share-based transactions by reference to the fair value of the equity instruments at the date at which they are granted. For restricted share units, we use the TSX share price at grant date as fair value of the restricted share units. The resulting fair value of the restricted share units is then adjusted for an estimated forfeiture amount. Determining the forfeiture rate is based on historical experience. Actual number of restricted share units that vest is likely to be different from estimation.

Provision for warranties

We provide for warranty expenses by analyzing historical failure rates, warranty claims, current sales levels and current information available about returns based on warranty periods. Uncertainty relates to the timing and amount of actual warranty claims that can vary from our estimation.

Allowance account for credit losses

We provide for bad debt by analyzing the historical default experience and current information available about customer’s credit worthiness on an account by account basis. Uncertainty relates to the actual collectivity of customer balances that can vary.

Accounting Policies

The following critical accounting policies reflect our more significant policies used in preparing our consolidated financial statements:

Business Combinations

Business combinations are accounted for using the acquisition method. The cost of the business combination is measured as the aggregate of the consideration transferred, measured at the acquisition date at fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the appropriate share of the acquiree’s identifiable net assets. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognized at their fair values at the acquisition date. Acquisition costs are expensed in the period that they are incurred.

Goodwill is initially measured at cost being the excess of the consideration transferred over the net identifiable assets acquired and liabilities assumed. If the consideration transferred is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the Consolidated Statements of Earnings and Comprehensive Income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Foreign Currency Translation

Functional and presentation currency

Our consolidated financial statements are presented in United States dollars, which is also our Company’s functional currency.

Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency of the respective currency of the entity or division, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items denominated in foreign currency at period-end exchange rates are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

Norsat International Inc.

Management's Discussion & Analysis

Non-monetary items that are not re-translated at period end and are measured at historical cost (translated using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are translated using the exchange rates as at the date when fair value was determined.

Foreign operations

In our financial statements, all assets, liabilities and transactions of our foreign operations with a functional currency other than US dollars are translated into US dollars upon consolidation.

Each of our foreign operations determine their own functional currency and items included in the financial statements of each foreign operation are measured using that functional currency and presented in US dollars.

The functional currency of our foreign operations has remained unchanged during the reporting period.

On consolidation, assets and liabilities have been translated into US dollars at the closing rate at the reporting date. Goodwill and intangible assets arising from acquisition of a foreign operation have been treated as assets and liabilities of the foreign operation and translated into US dollars at the closing rate. Income and expenses have been translated into US dollar at the average rate over the reporting period. Exchange differences are charged/ credited to other comprehensive income and recognized in the currency translation reserve in equity. On disposal of a foreign operation, the related cumulative translation differences recognized in equity are reclassified to profit or loss and are recognized as part of the gain or loss on disposal.

Share-Based Payments

Stock Options

We grant stock options to buy common shares of the Company to directors, senior officers, employees and service providers pursuant to an incentive share option plan. The Board of Directors grants such options for periods of up to 5 years, with vesting periods determined at its sole discretion and at prices equal to the closing market price on the day the options were granted.

Under this method, we recognize compensation expense for stock options awarded based on the fair value of the options at the grant date using the Black-Scholes option pricing model. Measurement inputs include the price of the common shares on the grant date, exercise price of the option, expected volatility of our common shares (based on weighted average historic volatility), weighted average expected life of the option (based on historical experience and general option holder behavior) and the risk-free interest rate. The fair value of the options is amortized over the vesting period and is included in operating expenses with a corresponding increase in contributed surplus. The amount recognized as an expense is adjusted to reflect the number of share options expected to eventually vest. When options are exercised, the proceeds are credited to issued capital.

Restricted Share Units

We grant restricted share units (“RSUs”) to directors, senior officers and employees pursuant to an incentive restricted share unit plan. The RSU plan gives the eligible persons the right to receive, at the discretion of the Board, common shares, which are not to be issued from treasury, without any monetary consideration payable to us. The vesting of the RSUs is subject to time-based vesting terms, condition and restrictions as determined by the Board in its sole discretion. Each RSU is convertible into one common share.

We recognize compensation expenses for RSUs awarded based on the fair value of the common shares at the grant date. The fair value, which is determined by multiplying our share price by the number of RSUs granted, is amortized over the vesting period and is included in operating expenses with a corresponding increase in equity. The amount recognized as an expense is adjusted to reflect the number of RSUs expected to eventually vest.

Norsat International Inc.

Management's Discussion & Analysis

Shares issued under Employee Share Ownership Plan (“ESOP”)

We issue common shares in connection with an ESOP offering under the Employee Investment Act (British Columbia) to directors, senior officers and employees. The shares are issued at a discount from share market price as approved by the Toronto Stock Exchange. We recognize compensation expense for the difference between issue price and market price.

Treasury Shares

When we reacquire our own shares, the amount of the consideration paid is recognized as a deduction from shareholders’ equity. No gains or losses are recognized in the Consolidated Statements of Earnings and Comprehensive Income on the purchase, sale, issue or cancellation of the Company’s own shares. Repurchased shares are classified as treasury shares and are presented as a deduction from total shareholders’ equity. We have granted restricted share units as part of our long term incentive plan. We shall purchase common shares in the open market to satisfy the delivery of these share units. Treasury shares are recorded at the cost of the shares acquired in the open market. When treasury shares are sold or released subsequently, the amount received is recognized as an increase in treasury shares, and the resulting surplus or deficit on the transaction is transferred to/from retained earnings.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid interest bearing term deposits that are readily convertible to known amounts of cash with terms to maturity of up to three months. The cash and cash equivalents act as our primary source of cash and fluctuate directly as a result of our cash flows from operating, investing and financing activities.

Allowance Account for Credit Losses

All of our trade and other receivables have been reviewed for indicators of impairment. We maintain an allowance account for credit losses for estimated losses that may arise if any of our customers are unable to make required payments. We provide for bad debts by setting aside a percentage of sales towards the allowance account. The percentage is based on our historical default experience and is reviewed periodically to ensure consistency with default experience. In addition, periodically throughout the fiscal year, we specifically analyze the age of outstanding customer balances, historical bad debt experience, customer credit-worthiness and changes in customer payment terms to evaluate estimates of collectability of our trade and other receivables balance. The allowance set aside is then adjusted to align with the specific analysis performed.

Inventories

Parts and supplies inventory is stated at the lower of weighted average cost and net realizable value. Finished goods and work in process inventories include parts and supplies, 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. When there is a significant change in economic circumstances, inventory that had been previously written down below cost may be written back up provided the reversal does not exceed the original write-down.

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the Consolidated Statements of Earnings and Comprehensive Income.

Norsat International Inc.

Management's Discussion & Analysis

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

Gains or losses arising from disposal of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the Consolidated Statements of Earnings and Comprehensive Income when the asset is derecognized.

We record amortization of intangible assets on a straight-line basis at the following annual rates, which approximate the useful lives of the assets:

Assets		Period

Software		1 to 3 years
Customer relationships		5 to 12 years
Product designs		20 years
Brand		Indefinite
Other		1.5 to 15 years

Brand is developed through years of advertising, promotional campaign and customer satisfaction. It contains beneficial elements to the Company that have been created over time and continue to create value for us. Hence, brand which reflects consumer awareness and recognition is considered indefinite in nature.

For the purpose of annual impairment testing, brand is allocated to Sinclair Technologies - the operating segment expected to benefit from the synergies of the business combination in which the brand arises.

Impairment of Long-Lived Assets

At each reporting date, we assess whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount.

The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognized when the carrying amount of an asset, or its cash-generating unit, exceeds its recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairment losses are recognized in the Consolidated Statements of Earnings and Comprehensive Income.

An impairment loss is reversed if there is an indication that an impairment loss recognized in prior periods may no longer exist. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized previously. Such reversal is recognized in the Consolidated Statements of Earnings and Comprehensive Income.

The following criteria are also applied in assessing impairment of specific assets:

Goodwill is tested for impairment annually or when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than their carrying amount an impairment loss is recognized to the extent the carrying amount exceeds the recoverable amount. Impairment losses relating to goodwill are not reversed in future periods.

Norsat International Inc.

Management's Discussion & Analysis

Intangible assets with indefinite lives are tested for impairment annually either individually or at the cash generating unit level, as appropriate, or when circumstances indicate that the carrying value may be impaired.

Goodwill

Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. See Section 4.6 for information on how goodwill is initially determined. Goodwill is carried at cost less accumulated impairment losses.

Deferred Revenue

Revenue that has been paid for by customers but will qualify for recognition within the next year under our policies is reflected in current liabilities as deferred revenue (revenue that can be recognized in one year or less). Included in deferred revenue are amounts related to installation, training, extended warranty, airtime and post contract support associated with the sale of our products.

Revenue Recognition

Our revenues consist of sales of hardware, software, consulting, bandwidth, installation, training, extended warranty and post contract customer support. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of services. Multiple deliverable revenue arrangements are to be divided into more than one unit of accounting and the criteria for revenue recognition are considered separately for each accounting unit if the following criteria are met:

Ø	the delivered item(s) has standalone value and

Ø	when a general right of return exists for the delivered item, the delivery or performance of undelivered item is probable and substantially in our control.

For those contracts where the services are not essential to the functionality of any other element of transaction, we determine selling price for these services based on a hierarchy of selling prices:

Ø	Vendor-specific objective evidence (“VSOE”) of selling price,

Ø	If VSOE does not exist then third-party evidence of selling price (“TPE”) is used, or

Ø	If neither VSOE nor TPE exist, then management’s best estimate of selling price for the deliverable is used.

Arrangement consideration is allocated to all deliverables based on their relative selling prices. As a result of the hierarchy of selling prices, we are required to determine the selling price for each deliverable provided the conditions for separation have been met.

Hardware is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by us and (2) there is no general right of return on products and the delivery or performance of the undelivered item is probable and substantially in our control. In establishing selling price for hardware, we rely on third-party evidence based on stand-alone sales of largely interchangeable products. Our hardware components are customized in nature and specific to a customer’s order requirements. As a result, establishing VSOE of selling price would not be possible.

We recognize revenue from the sale of hardware products upon the later of transfer of title or upon shipment of the hardware product to the customer; so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

Our multiple-element sales arrangements include arrangements where hardware with embedded software licenses and the associated post contract customer support (“PCS”) are sold together. We use VSOE to determine selling price of the undelivered PCS elements based on fair value labour rates and consistent renewal rates.

Norsat International Inc.

Management's Discussion & Analysis

Our multiple-element sales arrangements include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices, are consistent with the initial price in the original multiple-element sales arrangement, and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms and periods.

PCS revenue associated with hardware is recognized ratably over the term of the PCS period, which typically is one year. PCS revenue includes support levels that provide customers with access to telephone support for trouble-shooting, diagnosis and extends to on-site repair of products. PCS is considered a separate unit of accounting because (1) the delivered item has standalone value to customers as it is sold separately by us and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in our control.

Extended warranty of one-to-three years can be purchased separately by customers. Revenue on extended warranty is deferred and recognized in income on a straight-line basis over the contracted period. Extended warranty revenue is recognized after our one-year manufacturer’s warranty expires.

Revenue is recognized on installation, training, and consulting services when these services have been performed. Selling price on these items is determined by reference to third-party evidence of comparable services. Installation, training and consulting services are separate units of accounting because (1) the delivered item has standalone value to customers as it is sold separately by us and (2) there is no general right of return and the delivery or performance of the undelivered item is probable and substantially in our control.

Revenue that has been received but does not yet qualify for recognition under our policies is reflected as either deferred revenue (revenue that can be recognized in less than one year) or long-term deferred revenue (revenue that can be recognized in more than one year).

For reseller arrangements, fees are fixed or determinable on delivery to the reseller because our agreements with customers and resellers do not contain product return rights.

Construction Contracts

We also earn revenue from fixed-price construction contracts. These contracts specifically negotiated for the construction of a combination of products and services are awarded at agreed prices. Revenue from fixed-price contracts is recognized under the percentage-of-completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Contract revenue is recognized as revenue in profit or loss in the accounting periods in which the work is performed. Contract costs are usually recognized as an expense in the Consolidated Statement of Earnings and Comprehensive Income in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognized as an expense immediately.

If circumstances arise that change the original estimates of revenues, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in the Consolidated Statement of Earnings and Comprehensive Income in the period in which the circumstances that give rise to the revision become known by management. Provisions for estimated losses, if any, are recognized in the year or period in which the loss is determined. Contract losses are measured as the amount by which the estimated costs of the contract exceed the estimated total revenue from the contract. Contract work-in-progress revenue is recorded to the extent that revenue has been recognized, but not yet billed to the customer.

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.

Norsat International Inc.

Management's Discussion & Analysis

Government Contributions

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 relate. We amortize the cost of the related property and equipment over its useful life according to our accounting policy relating to property and equipment. We recognize government grants only when there is reasonable assurance that we will comply with the conditions attached to the grant and the grant will be received. We present the grant as a deduction of the carrying amount of the asset the grant relates to in the Consolidated Statements of Financial Position. The grant is recognized in the Consolidated Statements of Earnings and Comprehensive Income over the life of the depreciable assets as a reduced depreciation expense.

Income Taxes

Income tax expense consists of current and deferred income tax expense. Income tax expense is recognized in the Consolidated Statement of Earnings and Comprehensive Income.

Current income tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.

Deferred income taxes are recorded using the statement of financial position liability method. Under this method, deferred income tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability is settled.

The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that substantive enactment occurs.

A deferred income tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that we do not consider it probable that a future tax asset will be recovered, we provide a valuation allowance against the excess.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority, and when we intend to settle our current tax assets and liabilities on a net basis.

We account for income tax credits in accordance with IAS 12 Income taxes.

Profit or Loss from Discontinued Operations

A discontinued operation is a component of the Company that either has been disposed or, or is classified as held for sale, and:

Ø	represents a separate major line of business or geographical area of operations

Ø	is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or

Ø	is a subsidiary acquired exclusively with a view to resale.

Profit or loss from discontinued operations, including prior year components of profit or loss, is presented in a single amount in the Consolidated Statements of Earnings and Comprehensive Income. This amount, which comprises the post-tax profit or loss of discontinued operations and the post-tax gain or loss resulting from the measurement and disposal of assets classified as held for sale, is further analyzed in Section 11.0 “Discontinued Operations”.

The disclosure for the discontinued operations in the prior year relate to all operations that have been discontinued by the end of the reporting period for the latest period presented.

Norsat International Inc.

Management's Discussion & Analysis

Net Earnings Per share

Basic net earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period.

Diluted net earnings per share is computed similar to basic net earnings per shares, except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants at the beginning of the reporting period, if dilutive. The number of additional shares is calculated assuming that outstanding stock options and warrants were exercised and the proceeds from such exercises were used to repurchase common shares at the average market price during the reporting period. Stock options and warrants are dilutive when the market price of the common shares at the end of the period exceeds the exercise price of the options and warrants and when we generate net earnings.

Provisions and Contingent Liabilities

Provisions for product warranties, legal claims, onerous contracts or other claims are recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Timing or amount of the outflow may still be uncertain. The expense relating to any provision is presented in the Consolidated Statements of Earnings and Comprehensive Income, net of any reimbursement.

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.

In those cases where the possible outflow of economic resources as a result of present obligations is considered improbably or remote, no liability is recognized.

Changes in Accounting Policies and Future Accounting Pronouncements

In 2012, we early adopted the Annual Improvements to IFRSs 2009-2011 Cycle of IAS 1 Presentation of Financial Statements. The amendments to IAS 1 clarifies the requirements for comparative information when entities apply accounting policies retrospectively, makes a retrospective restatement of items in the financial statements, or when items are reclassified in our financial statements. By early adopting the standard, we determined that we are not required to present a third statement of financial position for items that have been reclassified retrospectively. The amendments are effective for annual periods beginning on or after January 1, 2013, but can be applied earlier.

The following new accounting pronouncements have been issued but are not effective and may have an impact on our business:

Effective for annual periods beginning on or after January 1, 2013:

The International Accounting Standards Board (IASB) has issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities). The amendments clarify the transition guidance in IFRS 10 Consolidated Financial Statements. The effective date of the amendments is annual periods beginning on or after January 1, 2013, which is aligned with the effective date of IFRS 10, 11 and 12.

IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 Consolidated Financial Statements replaces SIC-12 Consolidation-Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. Based on current facts and circumstances, we do not expect to be materially affected by the application of this standard.

Norsat International Inc.

Management's Discussion & Analysis

IFRS 11 Joint Arrangements provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities-Non-monetary Contributions by Venturers. Based on current facts and circumstances, we do not have any joint arrangements as defined by IFRS 11, and hence, do not expect to be affected by the application of this standard.

IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The effective date is annual periods beginning on or after January 1, 2013. Based on current facts and circumstances, we do not expect to be materially affected by the application of this standard.

IFRS 13 Fair Value Measurements explains how to measure fair value by providing a clear definition and introducing a single set of guidance for (almost) all fair value measurements. It clarifies how to measure fair value when a market becomes less active and improves transparency through additional disclosures. The effective date is annual periods beginning on or after January 1, 2013. Based on current facts and circumstances, we do not expect to be materially affected by the application of this standard.

Effective for annual periods beginning on or after January 1, 2015:

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement, and is currently being developed in stages by the IASB. The IASB has decided to delay implementation until periods beginning on or after January 1, 2015, with early application permitted. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 has also been amended not to require the restatement of comparative period financial statements for the initial application of the classification and measuring requirements of IFRS 9, but instead requires modified disclosures on transition to IFRS 9. We have not early adopted this standard and we are currently assessing the impact that this standard will have on our consolidated financial statements.

9.0 Financial Instruments and Risk Exposures

Fair value measurement

Our financial assets include cash and cash equivalents, short-term investments, and trade and other receivables. Our financial liabilities include trade and other accounts payable, accrued liabilities, acquisition loan, and promissory note payable.

We have classified our cash and cash equivalents, short-term investments, and trade and other receivables, as loans and receivables, measured at amortized cost using the effective interest rate method. Trade and other payables, accrued liabilities, acquisition loan, and promissory note payable are classified as other financial liabilities, measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability.

The carrying value of our financial assets and liabilities is considered to be a reasonable approximation of fair value due to their immediate or short term maturity, or their ability for liquidation at comparable amounts.

Credit Risk

Credit risk is the risk of a financial loss if a customer or counterparty to a financial instrument fails to meet its obligations under a contract. This risk primarily arises from our receivables from customers.

Norsat International Inc.

Management's Discussion & Analysis

Our exposure to credit risk is dependent upon the characteristics of each customer. Each customer is assessed for credit worthiness, using third party credit scores and through direct monitoring of their financial well-being on a continual basis. In some cases, where customers fail to meet our credit worthiness benchmark, we may choose to transact with the customer on a prepayment basis.

We do not have credit insurance or other financial instruments to mitigate our credit risk as management has determined that the exposure is minimal due to the composition of our customer base.

We regularly review the collectability of our trade and other receivables and establish an allowance account for credit losses based on our best estimate of any potentially uncollectible accounts. As at December 31, 2012, the balance of the allowance account for credit losses was $71,744 (2011-$65,553).

Pursuant to their respective terms, net trade and other receivables was aged as follows as at December 31, 2012 and 2011:

('000s)	As at December 31
	2011		2011
0-30 days	$	3,854	$	4,178
31-60 days		1,803		1,689
61-90 days		1,176		1,004
Greater than 90 days		260		1,065
Total trade and other receivables	$	7,093	$	7,936

There is a possibility of increased customer credit risk due to the ongoing financial global recessionary trends. As at December 31, 2012, our trade accounts receivable are made up of approximately 15% (2011– 25%) government trade receivables and the balance of the outstanding trade accounts receivable are spread over a large number of customers.

In 2011, we recognized $300,985 in contract work-in progress relating to construction type revenue recognized but not yet billed to the customer. During the second quarter of 2012, we gained final acceptance from the customer and recognized the revenue in full.

We may also have credit risk relating to cash and cash equivalents, which we manage by dealing with large banks and investing in highly liquid investments. Our objective is to minimize our exposure to credit risk in order to prevent losses on financial assets by placing our investments in highly liquid investments such as guaranteed investment funds. Our cash and cash equivalents carrying value as at December 31, 2012 totaled $5.1 million (2011- $4.2 million), and trade and other receivables of $7.1 million (2011- $7.9 million), representing the maximum exposure to credit risk of these financial assets.

Liquidity risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due.

We have a planning and budgeting process which helps determine the funds required to ensure we have the appropriate liquidity to meet our operating and growth objectives.

To manage this risk, we maintain an operating line of credit which provides access to funds in Canadian and or United States dollars to meet short-term financing obligations.

Norsat International Inc.

Management's Discussion & Analysis

As at December 31, 2012, we had cash and cash equivalents of $5.1 million and trade and other receivables of $7.1 million for a total of $12.1 million. The liquidity and maturity timing of these assets are adequate for the settlement of the short-term financial obligations:

	2013
Acquisition loan	$	3,000
Promissory note payable		755
Accrued liabilities		3,483
Trade and other payables		2,341
Provisions		386
Taxes payable		175
Total	$	10,140

Although the acquisition loan is due on demand, we do not believe that the demand feature will be exercised. Assuming payment of the acquisition loan is not demanded, scheduled repayment on the acquisition loan over the next five years is shown under Section 4.9 “Contractual Obligations and Contingencies”.

Currency risk

Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates.

We are exposed to currency risk as a result of components of cost being denominated in currencies other than the United States dollar, primarily the Canadian dollar. We hold cash and have liabilities (primarily trade and other payables, accrued liabilities, acquisition loan and provisions) in currencies other than the United States dollar, primarily the Canadian dollar. In addition, we also have Canadian dollar-denominated trade and other receivables that are subject to currency risk.

We manage currency risk by holding cash in foreign currencies to support forecasted foreign currency denominated liabilities and do not use derivative instruments to reduce our exposure to foreign currency risk.

A 1% appreciation (depreciation) in the United States dollar price of Canadian dollars would result in gain (loss) of approximately $180,000 (2011-177,000, 2010 - $90,000).

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our acquisition loan subject to floating interest rates. We do not enter into any interest rate swaps to mitigate interest rate risk.

10.0 Outstanding Share Data

We have 100,000,000 shares of Common Stock authorized, of which 58,316,532, were outstanding at December 31, 2012 and at March 5, 2013.

As at March 5, 2013, we had 1,775,400 options outstanding to acquire common shares at exercise prices ranging from Cdn$0.48 to Cdn$1.51 per share.

11.0 Discontinued Operations

On July 17, 2012, we sold Norsat Italia S.r.l., a wholly owned subsidiary of the Company for cash consideration of Euro 70,000 ($85,764). Norsat Italia S.r.l operated our vessel monitoring unit which formed part of our Maritime segment. The unit was not considered a discontinued operation or classified as held for sale at June 30, 2012 or December 31, 2011. We were committed to a plan to sell the unit following June 30, 2012. The Consolidated Statements of Earnings and Comprehensive Income have been re-presented to show the discontinued operation separately from continued operations.

Norsat International Inc.

Management's Discussion & Analysis

	Year Ended December 31
	2012			2011			2010
Results of discontinued operation
Revenue	$	278		$	564		$	415
Expenses		291			624			519
Results from operating activities		(13	)		(60	)		(104	)

Gain on sale of discontinued operation		94			-			-
Net earnings (loss) for the period - from discontinued operations	$	81		$	(60	)	$	(104	)

Net earnings (loss) per share - basic		0.00			(0.00	)		(0.00	)
Net earnings (loss) per share - diluted		0.00			(0.00	)		(0.00	)

Weighted average number of shares outstanding
Basic		58,183			58,046			53,567
Diluted		58,185			58,165			53,651

Cash flows provided by (used in) discontinued operation
Net cash provided by (used in) operating activities		84			31			(66	)
Net cash provided by investing activities Net cash provided by financing activites		25			-			-
Net cash flows for the period	$	109		$	31		$	(66	)

12.0 Risks and Uncertainties

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. The items of the following list of risk factors are in no particular order or priority to the Company.

12.1 Risks Associated with Financial Results

Our inability to generate sufficient cash flows from our operations may affect our ability to continue as a going concern. Our consolidated financial statements have been prepared on a 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 us having sufficient available cash resources and achieving profitable operations to generate sufficient cash flows to fund continued operations. Should we fail to generate sufficient cash flows from operations, we will require additional financing to remain a going concern. At December 31, 2012, we had accumulated a deficit of $19,779,153. Although we generated net profit from our continued operations throughout 2012, in the third quarter of 2011 and from the fourth quarter of 2006 through to the fourth quarter of 2010, we have also reported losses in the first, second and fourth quarters of 2011. This past performance cannot be used as an indication of our future performance.

Norsat International Inc.

Management's Discussion & Analysis

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.

12.2 Risks Associated with Business and Operations

Our exposure to business and operation risks includes but is not limited to the following:

We recognize the threats posed by operating in an uncertain global economic environment. The uncertain global economy and financial markets continue to limit overall visibility to end markets. This uncertainty may continue to impact our industry, resulting in lower demand for some of the products we manufacture and limiting end-market visibility for our customers. This environment can pose significant risk to our business by impacting demand for our customers’ products, the financial condition of our customers or suppliers, as well as the level of customer consolidations. A deterioration in economic environment may accelerate the effect of the various risk factors described in this MD&A, as well as result in other unforeseen events that will impact our business and financial condition.

To succeed, we must be able to control spending and prudently allocate financial resources to optimize value. To drive sales, our products must meet the needs of existing and potential customers and be competitively priced; additional judgement will need to be exercised if the granting of credit to customers is required to close the transaction. In view of the current difficulty, both in obtaining credit and accessing the capital markets, stewardship of cash continues to be critical to our success.

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 communications industry. The 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 products must meet the needs of existing and potential customers and 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 effective manner, or if others develop new technologies ahead of us, we may not achieve profitability in the communications industry and may not be able to participate in selling these new technologies or products. While we are able to continue to develop products with funding contributions from the Canadian Federal Government through the SADI program; without the SADI program contribution, our Company’s product development costs would not be sustainable, thereby jeopardizing our ability to maintain product innovation and leadership. Our current SADI program ended December 31, 2012. We are in the process of applying for a new SADI program, however, we cannot be certain that an agreement will be signed.

We have customer concentration in our business. A significant portion of our revenues have been recognized from a limited number of customers. A decline in revenue from the customers on which we are dependent or the loss of a large customer could have a material effect on our financial condition and operating results.

During 2012, one customer of our Sinclair Technologies division represented 11% of our total revenue (2011 and 2010 – no customer above 10%).

While we have been diversifying our customer base, the efforts to date may be insufficient to offset the effects of the quarterly variance of sales and delays associated with selling to the Government sector. We expect that a majority of the Satellite Systems revenues will continue to be dependent on sales to a small number of customers. We also expect that customers will vary from period-to-period as existing customers are under no obligation to continue buying from Norsat.

Norsat International Inc.

Management's Discussion & Analysis

We cannot be sure that we will be able to compete effectively with our current competitors. Our markets are intensely competitive. Some competitors have technologies and products that may be more advantageous and compete directly with us. Some of these competitors are large, established companies which have significantly greater resources than we do.

Aggressive pricing is a common business dynamic in our markets. Some of our competitors have greater scale as well as a broader service offering than we have. Some of our current or potential competitors may also increase or shift their presence in new lower-cost regions to try to offset the continuous competitive pressure and increasing labor costs, may develop or acquire services comparable or superior to those we develop, combine or merge to form larger competitors, or adapt more quickly than we may to new technologies, evolving industry trends and changing customer requirements.

Our ability to compete effectively will depend on our ability to increase sales, attract new customers in a timely and cost effective manner, and sell our 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. We also rely on our suppliers to provide components for the production of other products. If either the manufacturers or suppliers cannot deliver products to us on time, 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 our proprietary technology, brand and reputation in the marketplace, and customer relationships. While we currently holds four patents (US Patents# 6931245; 7218289; 8200150; 8125400;) and have applied for patent protection on certain other parts of our technology, we rely primarily on trade secrets and do not have adequate trademark and patent protection on all of our technology. We enter into confidentiality and non-compete agreements with our employees and limit the access to and distribution of the product design documentation and other proprietary information. However, we cannot be sure that these efforts will deter misappropriation or prevent an unauthorized third party, including former associates and former employees, from obtaining or using information, which we deem to be proprietary. Although we believe that our technology does not currently infringe upon patents or trademarks held by others, we cannot be sure that such infringements 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, profitability may be affected. If our technologies and products achieve widespread acceptance, we may experience rapid growth. This growth may require us to hire more employees, recruit 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 growth effectively, our profitability may be impacted.

We depend on 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 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 the 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 intend to expand our international operations, and thus faces a number of risks including tariffs, export controls and other trade barriers; political and economic instability in foreign markets; and fluctuations in foreign currencies. These external risks may not be under our control. Additional human and financial resources may be required for this expansion which we may not be able to attract or afford. Failure to expand internationally may impact our Company’s prospects for revenue growth and profitability.

We may encounter difficulties completing or integrating our acquisitions which could adversely affect our operating results. We expect to expand our presence in new end-markets or expand our capabilities, some of which may occur through acquisitions. These transactions may involve acquisitions of entire companies and/or acquisitions of selected assets of companies. Potential difficulties related to our acquisitions include:

Norsat International Inc.

Management's Discussion & Analysis

Ø	integrating acquired operations, systems and businesses;

Ø	retaining customer, supplier, employee or other business relationships of acquired operations;

Ø	addressing unforeseen liabilities of acquired businesses;

Ø	limited experience with new technologies; and

Ø	not achieving anticipated business volumes.

Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, including additional revenue, operational synergies and economies of scale. Our failure to realize the anticipated benefits of acquisitions could adversely affect our business and operating results. Our acquisition of Sinclair Technologies Holdings Inc. in 2011 has resulted in the recording of a significant amount of goodwill and intangible assets at the time of acquisition. Our failure to support the carrying value of goodwill and intangible assets in periods subsequent to the acquisitions could require write-downs that adversely affect our operating results.

We sell products which may, in certain instances, be subject to export and/or re-export restrictions. The export laws of the governments of Canada and United States apply to products that we sell. The United States Department of Commerce, through its Export Administration Regulations, and the Government of Canada, through its Export Controls Division, regulate exports and re-exports of "dual-use" items, i.e., goods, software and technologies with commercial and proliferation/ military applications. In ascertaining whether such items may be subject to export control restrictions, we are sometimes forced to rely on information in the specifications of certain components from the manufacturers and vendors. Should this information later prove to be incorrect, we may be subjected to penalties and fines. We may also be subjected to penalties and fines should there be a breach in the processes.

We buy components and products which may, in certain instances, be subject to contractual obligations to purchase minimum quantities during a given period, maintain resale records and abide by certain resale restrictions. Failure to fulfill any or all of these may negatively impact liquidity should we be forced to take ownership of any un-purchased units. It may also affect our ability to continue supplying products as originally specified and thus affect obligations to fulfill orders.

We may be subject to product liability claims, which are not fully covered by insurance. The manufacture, sale and marketing of our products expose us to the risk of product liability claims. Given the complex nature of our products, the products may contain undetected errors or performance problems may arise. Although our products undergo testing prior to release into the market, it is possible that such products may yet still contain errors and performance problems, which are discovered only 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 the 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 comprehensive general liability insurance which provides limited coverage against claims originating in product failure. 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 the business liability insurance coverage and the 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 the expenses, lowering the earnings and, depending on revenues, potentially resulting in additional losses.

Our operations may be disrupted by natural disasters and extreme weather conditions. Our headquarters are located in the Greater Vancouver region which has, in recent times, been subjected to high winds and extreme weather conditions. While we have managed to continue operating through some of these conditions, employee productivity during these periods is negatively impacted.

Long sales and implementation cycles for our products may adversely affect our operating results. Our customers generally devote substantial time, money and other resources to their purchasing decisions. Typically, the larger the potential sale, the more time, money and other resources will be invested. As a result, it may take many months or a few years after the first contact with a customer before a sale may actually be completed. We may invest significant sales and other resources in a potential customer that may not generate revenue for a substantial period of time, if at all. Long sales and implementation cycles may affect the size or timing of the order or even cause it to be cancelled. For example, purchasing decisions may be postponed, or large purchases reduced, during periods of economic uncertainty; we or our competitors may announce or introduce new products; or the customer’s own budget and purchasing needs may change. In addition, long sales and implementation cycles may impact the margins we earn on our products. It may cost us more to produce our products by the time the purchasing decision is made due to increased supply costs or currency fluctuations. If these events were to occur, sales of our products may be cancelled or delayed, which would reduce its revenue.

Norsat International Inc.

Management's Discussion & Analysis

Mergers or other strategic transactions by competitors could weaken our competitive position or reduce our revenue. If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen co-operative relationships with existing or prospective clients, thereby limiting our ability to promote our products and services. Disruptions in our business caused by these events could reduce ours competitiveness and ultimately our revenue.

If our suppliers do not supply us with a sufficient amount and quality of components at acceptable prices, and in a timely manner, our ability to manufacture our products would be harmed and the business would suffer. We rely on third-party suppliers to provide components and product subassemblies. A supplier’s failure to supply components or product subassemblies in a timely manner, or failure to supply components or product subassemblies that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components or product subassemblies in a timely manner or on terms acceptable to us, could adversely affect our ability to manufacture or source products. We may experience delays in the manufacture or sourcing of products and our business and financial results would suffer if we fail to identify alternate suppliers, or if our supply is interrupted or reduced or if there is a significant increase in cost.

Our level of indebtedness and failure to comply with its indebtedness arrangements may adversely affect our business and operations. We rely on the availability of indebtedness arrangements with our lenders. The arrangements contain numerous restrictive covenants that limit our discretion with respect to certain business matters. These covenants place significant restrictions on our ability to pledge or create liens or other encumbrances on our assets. These financial covenants require that we meet certain financial ratios and financial condition tests. If the lender was to demand or cancel these facilities, there can be no assurance that our assets would be sufficient to repay in full the indebtedness. It is possible that we will not have sufficient funds at the time to fund our operations. In addition, there can be no assurance that future borrowings or equity financing will be available to us or available on acceptable terms, in an amount sufficient to meet our repayment obligations. In the event that the lending arrangements cannot be refinanced, or if they can only be refinanced on terms that are less favourable than the current terms, our business and operations may be adversely affected.

We are subject to the risk of increased income taxes and our ability to successfully defend tax audits could adversely affect our financial condition and operating results. We conduct business operations in a number of countries. We develop our tax filing positions based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions currently in effect in the jurisdictions in which we have assets or conduct business, all of which are subject to change or differing interpretations, possibly with retroactive effect. In addition, certain of our subsidiaries provide financing, products and services to, and may from time-to-time undertake certain significant transactions with, other subsidiaries in different jurisdictions. Moreover, several jurisdictions in which we operate have tax laws with detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles, and that contemporaneous documentation must exist to support such pricing.

We are subject to tax audits and reviews by local tax authorities of historical information and our contemporaneous documentation which could result in additional tax expense in future periods relating to prior results. Any such increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.

Any failure to successfully manage our international operations would have a material adverse effect on our financial condition and operating results. We have operations in numerous countries, including Canada, United States, United Kingdom and Switzerland. International operations are subject to inherent risks which may adversely affect us, including:

Norsat International Inc.

Management's Discussion & Analysis

Ø	labor unrest and differences in regulations and statutes governing employee relations;

Ø	changes in regulatory requirements;

Ø	inflation and rising costs;

Ø	difficulty in staffing and managing foreign operations;

Ø	ability to build infrastructure to support operations;

Ø	changes in local tax rates or adverse tax consequences, including the repatriation of earnings;

Ø	compliance with a variety of foreign laws, including changing import and export regulations;

Ø	adverse changes in trade policies between countries in which we maintain operations;

Ø	economic and political instability;

Ø	potential restrictions on the transfer of funds; and

Ø	foreign exchange risks.

12.3 Risks Associated with the Value of Shares

The exercise of the existing outstanding options may substantially dilute the value of our common shares. The Company has 100,000,000 shares of Common Stock authorized, of which 58,316,532 were outstanding at March 5, 2013. Although the 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 us, could also have dilutive effect for shareholders.

The current financial market volatility can result in wide fluctuations in the market price of our stock. Although we have reported profitability in all four quarters of 2012, the third quarter of 2011 and in 17 consecutive quarters starting from the fourth quarter of 2006, we have also reported losses in the first, second and fourth quarters of 2011. Despite the previously mentioned profitable results, the uncertainty and volatility in current financial markets can 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.

12.4 Risks Associated with Foreign Exchange

Our operations are heavily exposed to fluctuations in foreign currencies. Most of our international sales are denominated primarily in US dollars, Euros and Great British pounds. While we expect our international revenues and expenses will continue 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. As the functional currency is the United States dollar, we could experience and have experienced the risks of fluctuating currencies. A stronger Canadian dollar increases operating expenses on conversion to the U.S. dollar. From time to time we may choose to engage in currency hedging activities, which may be unsuccessful and expensive.

A 1% appreciation (depreciation) in the United States dollar price of Canadian dollars would result in gain (loss) of approximately $180,000 (2011 – $177,000, 2010 - $90,000).

12.5 Risks Associated with Interest Rates

Borrowings under our operating line of credit bear interest at LIBOR or Prime rate plus a margin. If we borrow under this facility, we are exposed to interest rate risks due to fluctuations in these rates. A one-percentage increase in these rates would increase interest expense by approximately $47,000 annually, assuming we borrow a maximum of $4.7 million under our undrawn credit facilities.

In addition, borrowings under our acquisition loan bear interest at LIBOR or Prime rate plus a margin. We are exposed to interest rate risks due to fluctuations in these rates. A one-percentage increase in these rates would increase interest expense by approximately $70,000, based on a principal amount of $7.0 million, which is the balance outstanding as at December 31, 2012.

Norsat International Inc.

Management's Discussion & Analysis

13.0 Disclosure Controls and Internal Controls over Financial Reporting

13.1 Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files under the Act is recorded, processed, summarized and reported, within the time limits specified in the Commission’s rules and forms and that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. The CEO and the CFO have evaluated the effectiveness of the Company’s disclosure controls and procedures. They have concluded that our disclosure controls and procedures were effective as at December 31, 2012, at a reasonable assurance level.

13.2 Internal Controls over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in U.S. Exchange Act Rule 13a-15(f). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards and the requirements of the Securities and Exchange Commission in the United States, as applicable. Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Company. Our CEO and CFO have assessed the effectiveness of our internal control over financial reporting as at December 31, 2012, in accordance with Internal Control over Financial Reporting – Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our CEO and CFO have determined that our internal control over financial reporting is effective to meet the requirements of Rules13a-15(f) as at December 31, 2012.

While our CEO and CFO believe that our internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.

13.3 Changes in Internal Controls over Financial Reporting

During 2012, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

14.0 Events After Reporting Date

Effective February 1, 2013, the NRC extended the August DTAPP agreement from March 15, 2013 to September 30, 2013 with all other terms and conditions remaining unchanged.

As part of the Sinclair acquisition, $1,000,000 of the cash consideration was held in escrow and acted as a security for certain events should we be subject to any liabilities, claims or similar arising from representation or warranties made by the vendors. The $1,000,000, less claimed amounts, if any, were to be releasable to the vendors on January 21, 2013. As at March 5, 2013, all funds have been released from escrow.

1.0 INTRODUCTION		3
2.0 BUSINESS OVERVIEW		3
	2.1 OVERVIEW OF THE BUSINESS	3
	2.2 COMPANY PRODUCTS AND SERVICES	4
	2.3 MARKETS AND TRENDS	6
	2.4 STRATEGY	8
3.0 OVERVIEW		10
3.1 OUTLOOK		10
4.0 FINANCIAL REVIEW		11
	4.1 NON-IFRS MEASUREMENTS	11
	4.2 SELECTED ANNUAL INFORMATION	13
	4.3 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2012	13
	4.4 RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2012	15
	4.5 SUMMARY OF QUARTERLY RESULTS	18
	4.6 ACQUISITION OF SINCLAIR	18
	4.7 LIQUIDITY AND FINANCIAL CONDITION	20
	4.8 CAPITAL RESOURCES	22
	4.9 CONTRACTUAL OBLIGATIONS AND CONTINGENCIES	25
	4.10 ISSUED CAPITAL	25
5.0 OFF BALANCE SHEET ARRANGEMENTS		27
6.0 TRANSACTIONS WITH RELATED PARTIES		27
7.0 PROPOSED TRANSACTIONS		27
8.0 CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES		27
9.0 FINANCIAL INSTRUMENTS AND RISK EXPOSURES		37
10.0 OUTSTANDING SHARE DATA		39
11.0 DISCONTINUED OPERATIONS		39
12.0 RISKS AND UNCERTAINTIES		40
	12.1 RISKS ASSOCIATED WITH FINANCIAL RESULTS	40
	12.2 RISKS ASSOCIATED WITH BUSINESS AND OPERATIONS	41
	12.3 RISKS ASSOCIATED WITH THE VALUE OF SHARES	45
	12.4 RISKS ASSOCIATED WITH FOREIGN EXCHANGE	45
	12.5 RISKS ASSOCIATED WITH INTEREST RATES	45
13.0 DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING		46
	13.1 DISCLOSURE CONTROLS AND PROCEDURES	46
	13.2 INTERNAL CONTROLS OVER FINANCIAL REPORTING	46
	13.3 CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING	46
14.0 EVENTS AFTER REPORTING DATE		46

EBITDA (1)
('000)	Three months ended December 31
	2012			2011			Change
EBITDA	$	1,266		$	919		$	347			38	%
Interest expense		(152	)		(124	)		(28	)		23	%
Amortization and depreciation		(358	)		(428	)		70			(16	%)
Tax recovery/(expense)		6			(168	)		174		>100		%
Foreign exchange (loss)/gain		110			(461	)		571		>100		%
Discontinued operations		-			42			(42	)		100	%
Net earnings for (loss) for the period	$	872		$	(220	)	$	1,092		>100		%

EBITDA (1)
('000)	Year ended December 31
	2012			2011			Change
EBITDA	$	4,815		$	4,209		$	606			14	%
Interest expense		(536	)		(533	)		(3	)		1	%
Amortization and depreciation		(1,476	)		(1,525	)		49			(3	%)
Tax recovery/(expense)		2,501			(1,290	)		3,791		>100		%
Foreign exchange (loss)/gain		(250	)		100			(350	)	>(100		%)
Discontinued operations		81			(60	)		141		>100		%
Reorganization		-			(490	)		490		>(100		%)
Net earnings for the period	$	5,135		$	411		$	4,724		>100		%

('000), except per share amounts	Year ended December 31
	2012			2011		2010
	$			$		$
Sales		42,429			37,792		19,818
Earnings before income taxes		2,553			1,761		2,159
Current income tax expense		782			811		140
Deferred income tax (recovery)/expense		(3,283	)		479		(224	)
Earnings from continuing operations		5,054			471		2,244
Net earnings		5,135			411		2,140
Earnings from continuing operations and
net earnings per share - basic and diluted		0.09			0.01		0.04
EBITDA (1)		4,815			4,209		2,767
Total assets		40,882			40,261		20,414
Total non-current liabilities		2,387			3,362		396
Cash dividends		-			-		-

	Three months ended December 31
	2012			2011			Change
Sales (in '000s)
Sinclair Technologies	$	5,662		$	5,240		$	422		8	%
Satellite Solutions		2,463			1,950			513		26	%
Microwave Products		2,473			2,280			193		8	%
Total	$	10,598		$	9,470		$	1,128		12	%

Gross Profit Margin
Sinclair Technologies		45	%		48	%		(3	%)
Satellite Solutions		38	%		29	%		9	%
Microwave Products		46	%		42	%		4	%
Total		44	%		41	%		3	%


	Forward Looking Statements The following discussion and analysis of the financial conditions and results of operations contains forward-looking statements concerning anticipated developments in our operations in future periods, the adequacy of our financial resources and other events or conditions that may occur in the future. Forward-looking statements are frequently, but not always, identified by words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,”, “predicts,” “potential,” “targeted,” “plans,” “possible” and similar expressions, or statements that events, conditions or results “will,” “may,” “could” or “should” occur or be achieved. These forward-looking statements include, without limitation, statements about our market opportunities, strategies, competition, expected activities and expenditures as we pursue our business plan, the adequacy of our available cash resources and other statements about future events or results. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, such as business and economic risks and uncertainties. Our forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made. Consequently, all forward-looking statements made in this discussion and analysis of the financial conditions and results of operations or the documents incorporated by reference are qualified by this cautionary statement and there can be no assurance that actual results or developments we anticipate will be realized. Some of these risks, uncertainties and other factors are described herein under the heading “Risks and Uncertainties” and in the most recent Annual Report on Form 20-F, under the heading “Risk Factors” available at www.sec.gov. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.

('000s), except per share amounts	Three months ended December 31
	2012			2011			Change
Earnings (loss) before income taxes	$	866		$	(94	)	$	960		>100		%
Income tax (recovery)/expense		(6	)		168			(174	)	>(100		%)
Net earnings (loss) from
continuing operations	$	872		$	(262	)	$	1,134		>100		%
Net earnings from
discontinued oprations	$	-		$	42		$	(42	)	> 100		%
Net earnings (loss) for the peirod	$	872		$	(220	)	$	1,092		>100		%

Basic earnings (loss) per share
Earnings (loss) from continuing operations	$	0.02		$	(0.00	)	$	0.02		>100		%
Earnings (loss) from discontinued operations	$	-		$	0.00		$	(0.00	)		-
Total	$	0.02		$	(0.00	)	$	0.02		>100		%
Diluted earnings (loss) per share
Earnings (loss) from continuing operations	$	0.02		$	(0.00	)	$	0.02		>100		%
Earnings from discontinued operations	$	-		$	0.00		$	(0.00	)		-
Total	$	0.02		$	(0.00	)	$	0.02		>100		%

Quarterly Financial Data
('000s), except for earnings per share	Three months ended
	Mar 31			Jun 30			Sep 30		Dec 31
2012	$								$
Sales		10,409			10,425			10,997		10,598
EBITDA (1)		1,156			734			1,659		1,266
Net earnings for the period -from continuing operations		556			2,805			822		872
Net earnings for the period		518			2,771			975		871
Earnings per share from continuing operations and
net earnings per share - basic and diluted		0.01			0.05			0.01		0.02
Weighted average common shares outstanding -		#			#			#
Basic ('000s)		58,317			58,197			58,037		58,037
Diluted ('000s)		58,343			58,197			58,039		58,039

2011	$			$			$		$
Sales		8,599			8,427			11,298		9,468
EBITDA (1)		1,088			412			1,790		919
Net (loss) earnings for the period -from continuing operations		(115	)		(362	)		1,208		(261	)
Net (loss) earnings for the period		(187	)		(285	)		1,102		(219	)
(Loss) earnings per share from continuing operations and
net (loss) earnings per share - basic and diluted		(0.00	)		(0.00	)		0.02		(0.00	)
Weighted average common shares outstanding -		#			#			#		#
Basic ('000s)		57,082			58,364			58,351		58,317
Diluted ('000s)		57,082			58,364			58,380		58,317

Fair value recognized on acquisition
Assets
Cash and cash equivalents	$	726
Short-term investments		30
Trade and other receivables		2,301
Inventories		4,845
Prepaid expenses and other		153
Property and equipment, net		598
Intangible assets, net		10,138
Deferred income tax assets		67
Total Assets		18,858

Liabilities
Trade and other payables		2,065
Deferred income tax liabilities		2,910
Taxes payable		741
Total Liabilities		5,716

Total identifiable net assets at fair value	$	13,142

Goodwill on acquisition of Sinclair		5,360

Purchase consideration transferred	$	18,502


('000s)
Cash	$	15,962
Shares issued, at fair value		2,037
Promissory notes payable		503
Total purchase consideration	$	18,502


Risk-free interest rate		1.70	%
Expected life	1.57 years
Vesting period	Immediately
Expected volatility		60.4	%
Expected dividends	nil

('000s)	2013		2014		2015		2016		2017 and after		Total
Acquisition loan	$	3,000	$	3,000	$	953	$	-	$	-	$	6,953
Promissory note p ay able		755		-		-		-		-		755
Inventory p urchase obligations		3,264		190		-		-		-		3,454
Op erating lease obligations		841		855		465		428		8		2,597
Total	$	7,860	$	4,045	$	1,418	$	428	$	8	$	13,759