the president's report - unique broadband systems, inc

Unique Broadband Systems has emerged overthe past fiscal year as an industry leader inbroadband wireless solutions. The success ofthe Company can be attributed to an increasedfocus on the global market. Over the past yearUnique Broadband Systems has opened a satel-lite office, formed strategic partnerships andsigned strong distributor agreements all with theintent of furthering our interests worldwide. Thesatellite office was chosen to take advantage ofthe emerging opportunities in the developingEastern European market while the distributoragreements focused on Latin America.

Over the past fiscal year Unique BroadbandSystems has entered into contracts with some ofthe most influential organizations in the industry.The most notable of these have been with LookCommunications, Bell Canada and Lucent DigitalVideo. The contracts with both Bell and Lucentwere based on the development of new equip-ment and technologies and both represent astrong confirmation of the Company's superiortechnological capabilities. The project with BellCanada has given Unique Broadband Systems acompetitive advantage in the area of high-speedwireless data transmission. The contract withLucent is an ongoing developmental agreementwhich is of benefit to both parties and will ensureUnique Broadband Systems' leadership positionin the MMDS marketplace. The exclusive con-tract the Company signed with LookCommunications also confirms UniqueBroadband Systems' strong leadership positionin the MMDS industry and has also led to thedevelopment of new products such as the bi-directional repeater.

Unique Broadband Systems views research anddevelopment as one of the key components to asuccessful company. As in previous years, theCompany will continue to aggressively expandand manage its product portfolio. We have anongoing commitment to anticipate industry needsand respond with the highest quality productsand the most advanced technologies. This yearUnique Broadband Systems reaped the benefitsof some of our previous research and develop-ment efforts particularly in the areas of DigitalRadio for both the US and Canadian markets.Unique Broadband Systems is the only NorthAmerican company to have developed a

complete in-house end-to-end solution for DAB,as well as a terrestrial repeater network forSDARS. As a result, the Company is an industryleader in the global Digital Radio marketplace.

The state of the broadband wireless industry ofthe future will be similar to the state of the indus-try today -- fast paced and competitive. With ourcomprehensive and evolving product portfolioand strong commitment from our employees andpartners, Unique Broadband Systems is ideallypositioned to capitalize on emerging opportuni-ties. Look for the greatest growth opportunitiesto be in Digital Radio, MMDS, wireless voice anddata markets.

We thank you for your continued support andlook forward to a profitable and successful 2000.

Alex DolgonosPresident & Chief Executive Office

THE PRESIDENT'S REPORT

Sales of products increased 282% in Fiscal1999 over Fiscal 1998. The Company contin-ues to strengthen its position in the DigitalAudio Broadcast (DAB) industry. Fiscal 1999proved to be a pivotal year for the Company,due to its penetration of the US SatelliteDigital Audio Radio Systems (SDARS) market-place.

As at May 31, 1999 Unique BroadbandSystems, Inc. had 93 employees, a modestincrease over the employment level of 72 atMay 31, 1998. As in the past, much of the hir-ing was focused on research and development(R&D). Management expects to continue withits aggressive research and development cam-paign for the future, in order to facilitate thegrowing demand for wireless broadband solu-tions.

In addition to investments in R&D programs,the Company spent $2.4 million on selling andadministrative activities during Fiscal 1999,which was in line with Fiscal 1998.

During Fiscal 1999, the Company announcedthat it had entered into a Memorandum ofUnderstanding with Lucent Digital Video. Thepurpose of this alliance was to jointly developa solution to address the renewed demand forproducts in the MMDS frequency, particularlythe major telecommunications companiesinterest in high-speed wireless data transmis-sion. Our exclusive contract entered into withLook Communications is yet another validationof our MMDS technology.

In summary, Fiscal 1999 represented ourstrongest financial performance and achievedthe expectations of management.Management believes that with its comprehen-sive offering of products and technologies,Unique Broadband Systems, Inc. is in a strongposition to capitalize on the many opportuni-ties available within the telecommunicationsand broadcast industries. With our commit-ment to the development of strong strategicalliances and the penetration of new markets,Management of the Company looks to the

future with excitement and the desire to con-tinue on our road to success.

For a more detailed analysis of the Company’sresults for Fiscal 1999, please refer toManagement’s Discussion and Analysis ofFinancial Condition and Results of Operations,which is contained in this annual report.

Stephen J. RosenChief Financial Officer

THE CHIEF FINANCIAL OFFICER'S REPORT

Unique Broadband Systems is a leader

in the design, development and

manufacture of broadband wireless

solutions. The Company was incorporated

in 1990 to take advantage of opportunities

in both the military and private sectors with

relation to waveguide and microwave

components. Unique Broadband Systems

has since expanded its product portfolio to

include (MMDS, LMDS, MVDS) wireless

solutions, and (DAB, SDARS) systems.

The Company's comprehensive product

portfolio is combined with system design

services, ongoing technical support and

other related services to provide our

customers with complete system solutions.

The diverse and evolving product lines are

the result of the Company's commitment to

the development of new products and

technologies, and the emphasis which

Unique Broadband Systems places on

satisfying the future needs of our

customers. Some of Unique Broadband

Systems’ key product lines are highlighted

in the following pages.

Leading Edge ProductsFor a changing world

Engineering

the Future...

SDARS systems operate in the S-band

frequency range and have the ability to

provide nationwide CD quality audio

programming. The SDARS service

providers transmit the signal from their

uplink facility to the satellite where it is then

relayed from the satellite to the individual

receivers. Due to the line-of-site limitations

of a satellite transmission, it is necessary to

also have a terrestrial transmission system

to reach cities and densely populated areas

and to gain in-building coverage.

As the industry leading manufacturer of

wireless transmission equipment in L-Band,

S-Band, KA-Band and COFDM modulation

technology, the introduction of SDARS

systems presented opportunities that were

uniquely suited to our capabilities. After

three years of research and development

Unique Broadband Systems has designed a

terrestrial transmission network that

includes S-Band exciters, transmitters, and

repeaters. This network will rebroadcast the

signal to cities and heavily populated areas

creating terrestrial coverage for SDARS

providers. Unlike any satellite system built

to date, this

system

penetrates

buildings and

allows for

unconditional

continuous

reception.

ETI

10 BaseT

OTHER ENSEMBLEMULTIPLEXERS

WINDOWS NTCONTROL

WORK STATION

ETI(NA)RF

Analog

Analog

WG1/WG2

AES/EBU

AES/EBU

Data

Data

AUDIOSOURCE

ENCODER 1

AUDIOSOURCE

ENCODER N

COFDMMODULATOR

AMP

DAB-100-UENDAB-100-UEN

DAB-100-UMX

DAB-100-UMD

DAB-100-UTXDAB-100-UTX

Digital Audio Broadcast (DAB) is a new

technology for the transmission of radio

signals. Some of the benefits of DAB are

the ability of providing CD quality

interference free sound as well as the

transmission of a visual component.

(PAD) allows

broadcasters to send out additional

information such as song lyrics, traffic

reports, stock quotes and detailed

advertising information. DAB is in operation

worldwide with the widest coverage and

most advanced service across Europe,

Canada and Asia.

Unique Broadband Systems offers ETS 300

401 and EU 147 compliant end-to-end DAB

solutions, including transmitters, COFDM

modulators, multiplexers, source encoders

and PAD encoder software. Unique was

the first and only Canadian manufacturer to

offer broadcasters complete DAB systems

combined with system design, integration

and maintenance capability. Our system

solution approach has positioned us as an

industry leader with

our DAB equipment

supporting every

station currently

broadcasting a DAB

signal in Canada.

Program Associated Data

DAB (Digital Audio Broadcast)

SDARS (Satellite Digital Audio Radio Services)

QAM Regenerating ProcessorQAM Modulator QAM Demodulator

Over the past year Unique Broadband

Systems has experienced an increased

demand for our QAM series of products.

This is due mainly to the growing number of

wireless providers and consumers

broadening acceptance of wireless service.

Another contributing factor to the growth of

the QAM series is the decision by the CATV

industry to move towards digital

transmissions.

Unique Broadband Systems offers the QAM

series of products for MPEG 2 digital video

transmission applications in both the MMDS

and CATV industries. The QAM product

line consists of a modulator, demodulator

and regenerating processor. The

equipment is DVB and DAVIC compliant

and is available in QPSK, QAM 16, 32, 64,

128 and 256 modulation schemes.

The is used in MMDS and

CATV applications where there is a need to

modulate an MPEG 2 bit stream onto an RF

carrier for MMDS transmission or carriage

on a CATV system. The modulator is

available in either an IF version or 50 Mhz

to 750 Mhz.

The is ideal for use in

facilities where demodulation of an MPEG 2

bit stream is required to further process or

source digital video signals. The

demodulator is available in an IF version or

50 Mhz to 800 Mhz.

The

provides the user with all the power and

capabilities of a QAM modulator and

demodulator in one single compact unit.

The innovative design allows the user to

perform functions such as digital signal

regeneration, drop and insert multiplexing

and frequency division multiplex channel

shifting.QAM Modulator

QAM Demodulator

QAM Regenerating Processor

Wireless Cable / Cable Products (CATV)

QAM Demodon Cable

Studio

QAM Modon Cable

QAMRegenon Cable

MMDS, also known as wireless cable,

began as an alternative method to cable for

the transmission of television signals. Now

with digital capabilities MMDS has become

more cost effective and has expanded

beyond video into the transmission of

wireless voice and data. Wireless

technology is experiencing growth

worldwide. In developing countries MMDS

systems are quickly becoming the primary

method of television transmission while

countries with an established infrastructure

are also realizing the benefits and cost

savings of MMDS.

Unique Broadband Systems provides

complete end-to-end wireless video, voice

and data solutions. The product line

features a complete line of indoor and

outdoor transmitters and repeaters as well

as all the necessary accessories including

redundant switching, system monitoring and

LNA's. Unique

Broadband

Systems’ Digital

MMDS Series

allows wireless

providers to

increase revenue

by expanding their

coverage area

and offering

subscribers new

services.

MMDS (Multi-channel Multipoint Distribution System)

Micro Repeater(Beam Bender)SolutionsOutdoor Applications

Master HeadendSolutions forIndoor ChannelizedIndoor BroadbandOutdoor BroadbandApplications

VideoServer

TVRO

Status Monitoring& Network Management

FutureBroadbandBi-directionalServices

RepeaterSolutionsforIndoororOutdoorApplications

MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Unique Broadband Systems, Inc.'s revenuereached a record high in Fiscal 1999 due tothe strong performance of our Digital AudioBroadcast (DAB) product line. Total revenuegrew by 282% to $9,268,000 in Fiscal 1999from $3,444,000 in Fiscal 1998.

The Company reported net income of $80,000or $0.001 per share, for the year ended May31, 1999, a significant improvement from thenet loss for the year ended May 31, 1998 of$4,129,000.

During Fiscal 1999, the Company entered intoa Memorandum of Understanding with LucentDigital Video for the integration of a completedigital MMDS head-end solution. At the pre-sent time, the Company is prepared to unveilthe completed system, with demonstrationsset to commence in the Republic of China andBrazil within the next few months. TheCompany has also made significant inroadswith its operation in Russia. Deposits havebeen received from customers and theCompany is currently producing wirelesstransmission products for the ever-growingmarketplace in Eastern Europe. TheCompany has also entered into a number ofdistribution agreements, the result of which willgive us a presence in new markets such asLatin America. The completion of a number ofother research and development projects hascreated many wireless opportunities for theCompany throughout the world.

The following discussion and analysis explainstrends in the Company's financial conditionand results of operations for the year endedMay 31, 1999 compared with the prior year,and is intended to help shareholders and otherreaders understand the dynamics of theCompany's business and the key factorsunderlying its financial results. Certain state-ments in this management's discussion and

analysis constitute forward-looking statements.Such forward-looking statements involveknown and unknown risks, uncertainties andother factors which may cause the actualresults, performance or achievements of theCompany to be materially different from anyfuture performance or achievementsexpressed or implied by such forward-lookingstatements. Such risks, uncertainties andassumptions include, among others, the fol-lowing: general economic business conditions,import protection and regulation, rapid technol-ogy development and changes, timing of prod-uct introductions, the mix of products/services,industry competition, the industry trends andthe Company's ability to attract and retain keyemployees.

The consolidated financial statements, notesto the consolidated financial statements andsupplementary information constitute an inte-gral part of, and should be read in conjunctionwith this management's discussion and analy-sis.

RESULTS OF OPERATIONS

Unique Broadband Systems, Inc.'s business isglobal and comprises of the design, develop-ment and manufacture of wireless solutions forthe telecommunications and broadcast indus-tries. These products and related servicesinclude active and passive microwave compo-nents and complete end-to-end digital audio,video and high-speed data transmission sys-tems.

The Company sells its products through bothdirect and indirect channels of distribution.Factors affecting the choice of distribution,among others, include: end-customer type, thelevel of product complexity and integrationrequirements, geographic presence and loca-tion of markets, the stage of product introduc-tion and volume levels.

REVENUE

Revenue in Fiscal 1999 increased by approxi-mately $6,000,000 or 282%, over Fiscal 1998.The increase in sales for the year reflects: theCompany's success in penetrating the digitalaudio marketplace in the United States, thegeographic expansion into the Russian mar-ketplace, and the introduction of several newproducts. Going forward, the Companyexpects that its DAB line of products will main-tain a comparable percentage of total dollarsales as in Fiscal 1999. With the introductionof several new offerings from our Digital VideoBroadcast division and the many wirelessopportunities that are being pursued, theCompany expects revenues to continue toincrease at a rapid pace. If total units sold donot increase in sufficient quantities, theCompany's total sales may be adverselyimpacted. In addition, increasing competitionin the digital audio and digital video markethas resulted in continuing pressure on pricingand margins. To the extent that this competi-tion and price pressure continues, theCompany's total sales may be adverselyimpacted.

Sales to OEM customers continue to be oneof the Company's strengths and these relation-ships will continue to be integral to the growthof the Company. It is the intention ofManagement to develop further OEM relation-ships, in order to develop new markets for ourinnovative wireless offerings.

COST OF SALES AND OVERHEAD

Due to length of our research and develop-ment cycle, cost of sales may, from year toyear differ significantly. As the Company'sproduct line matures and the level of produc-tion increases from its present level to fullcommercial rollouts, the cost of sales andgross profit will be more meaningful.

EXPENSES

Selling and administrative expenses remainedconstant with those of Fiscal 1998, butdeclined as a percentage of sales - 26% inFiscal 1999 versus 69% in Fiscal 1998.Management does anticipate that selling andadministrative expenses will increase in totaldollars, in order to support anticipated salesgrowth and continued market expansion.

Research and development expensesdecreased slightly in Fiscal 1999 from Fiscal1998. As a percentage of sales, research anddevelopment expenses were 23% in Fiscal1999, compared with 72% in Fiscal 1998. Thisis mainly due to the increase level of produc-tion during Fiscal 1999, resulting in a highersales base. It is the intention of Managementto continue with a strong commitment to theCompany's research and development pro-gram, however, as a percentage of sales, ourfuture goal is to maintain a level equal toapproximately 15%. Unique BroadbandSystems, Inc.'s research and developmentprogram consists of upgrade initiatives forexisting products as well as research anddevelopment work in emerging wireless tech-nologies.

INVESTMENT TAX CREDITS

The Company earns ITC's in its operations.ITC's are credits related to specific qualifyingexpenditures that are prescribed by CanadianIncome Tax legislation. In Unique BroadbandSystems, Inc.'s case, these ITC's relate pri-marily to research and development expenses.The ITC's are recorded only when theCompany has made the qualifying expendi-tures, provided there is a reasonable assur-ance that the benefits will be realized.

LIQUIDITY AND CAPITAL RESOURCES

The Company had a cash balance in theamount of $1,643,000 as at May 31, 1999compared to $308,000 as at May 31, 1998.The increase in cash on hand is mainly due toa private placement in May 1999 in theamount of $2,000,000.

Management believes that the existing netcash resources and anticipated cash flow fromoperations may not be sufficient to support theCompany's projected working capital and capi-tal expenditure requirements. It is therefore,anticipated that the Company will go to themarket for a further financing within Fiscal2000. The amount of the proposed financingis not known at this time.

Accounts receivable increased by $1,550,000over Fiscal 1998. This substantial increaseover the prior year is mainly due to large salesof the Company's products in the fourth quar-ter.

The level of inventory increased by approxi-mately 13% over Fiscal 1998. Managementbelieves that due to the expected increase insales in the future, the Company will be

required to maintain a higher level of rawmaterials for higher volume production.

Capital additions in Fiscal 1999 totaled$535,000. The bulk of these expenditureswere related to computer hardware and soft-ware, which also supports ongoing researchand development activities.

Overall, Fiscal 1999 proved to be a pivotalyear for the Company. With the commercial-ization of a number of research and develop-ment efforts, the Company achieved its salesgoal for the year, resulting in a net income of$80,000 compared with a loss of $4,129,000in fiscal 1998. The balance sheet reflects thestrong turnaround made during this Fiscalyear. Working capital as at May 31, 1999 was$3,000,000 compared with a deficiency of$1,000,000 in Fiscal 1998. In Fiscal 1998, theCompany was in default of the covenants onits term loans and the long-term portion wastherefore classified as current on the 1998financial statements. In the current year theCompany is no longer in default of thecovenants on the term loans, therefore thecurrent portion has been reflected in the 1999financial statements accordingly.

MANAGEMENT RESPONSIBILITY FOR CONSOLIDA TED FINANCIAL STATEMENTS

Management of Unique Broadband Systems, Inc. is responsible for the integrity of the accompa-nying consolidated financial statements and all other information in this Annual Report. Theconsolidated financial statements have been prepared by management in accordance withappropriately selected accounting principles generally accepted in Canada. Their preparationnecessarily involves the use of management's best estimates and careful judgement. All infor-mation in the Annual Report is consistent with the consolidated financial statements.

To discharge its responsibilities for financial reporting and safeguarding of assets, managementbelieves that it has established appropriate systems of internal accounting control, which providereasonable assurance that the financial records are reliable and form a proper basis for thetimely and reliable preparation of financial statements. Management further assures the qualityof the financial statements through a program of internal audits, careful selection and training ofpersonnel, and the adoption and communication of financial and other relevant policies, includ-ing code of business conduct.

The consolidated financial statements were reviewed by the Audit Committee and approved bythe Board of Directors.

The consolidated financial statements have been audited by BDO Dunwoody, who wereappointed by the shareholders at the Annual General Meeting. Their report is presented on thefollowing page.

Alex DolgonosPresident & Chief Executive Office

Stephen J. RosenVice-President & Chief Financial Officer

Unique Broadband Systems, Inc. Consolidated Financial Statements For the years ended May 31, 1999 and 1998

Contents

Auditors' Report 12 Consolidated Financial Statements

Balance Sheets 13

Statements of Operations and Deficit 14

Statements of Changes in Financial Position 15

Summary of Significant Accounting Policies 16 - 17

Notes to Financial Statements 18 - 24

Auditors' Report

To the Shareholders of Unique Broadband Systems, Inc. We have audited the consolidated balance sheets of Unique Broadband Systems, Inc. as at May 31, 1999 and 1998 and the consolidated statements of operations and deficit and changes in financial position for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at May 31, 1999 and 1998 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. Chartered Accountants Toronto, Ontario August 13, 1999

The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.

Unique Broadband Systems, Inc.

Consolidated Balance Sheets May 31 1999 1998

Assets Current

Cash $ 1,643,511 $ 308,514 Accounts receivable 1,868,380 330,125 Inventory (Note 2) 1,454,980 1,230,681 Prepaid expenses 66,002 25,907

5,032,873 1,895,227 Capital assets (Note 3) 1,562,077 1,434,527 Income tax recoverable (Note 4) 1,772,585 1,406,901 Due from shareholders (Note 5) 358,455 370,123

$ 8,725,990 $ 5,106,778

Liabilities and Shareholders' Equity Current

Accounts payable $ 1,296,930 $ 1,469,643 Customer deposits 175,556 71,581 Obligations under capital leases - current portion (Note 6) 318,107 252,078 Long term debt - current portion (Note 7) 249,323 1,090,468

2,039,916 2,883,770 Convertible debt (Note 8) 457,283 1,055,186 Obligations under capital leases (Note 6) 301,335 357,335 Long term debt (Note 7) 616,823 -

3,415,357 4,296,291

Shareholders' equity Other paid in capital (Note 8) 75,558 184,814 Share capital (Note 9) 8,683,591 4,154,944

Contributed surplus 150,000 150,000 Deficit (3,598,516) (3,679,271)

5,310,633 810,487

$ 8,725,990 $ 5,106,778 On behalf of the Board: Director Director



Consolidated Statements of Operations and Deficit For the years ended May 31 1999 1998 Sales $ 9,267,952 $ 3,443,661 Cost of sales and overhead 4,209,740 2,093,053

Gross profit 5,058,212 1,350,608

Research expenses 2,171,658 2,473,431 Selling and administrative expenses 2,398,251 2,386,972 Amortization 407,548 618,933

4,977,457 5,479,336 Net earnings (loss) for the year 80,755 (4,128,728) Retained earnings (deficit), beginning of year (3,679,271) 449,457

Deficit, end of year $ (3,598,516) $ (3,679,271) Earnings (loss) per share (Note 13) $ 0.001 $ (0.078)



Consolidated Statements of Changes in Financial Position For the years ended May 31 1999 1998

Cash provided by (used in) Operating activities

Net earnings (loss) for the year $ 80,755 $ (4,128,728) Items not involving cash

Amortization 407,548 618,933 Loss on sale of capital assets - 55,608

488,303 (3,454,187)

Changes in non-cash working capital balances Accounts receivable (1,538,255) 219,772 Inventory (224,299) (115,436) Income tax recoverable (365,684) (633,712) Prepaid expenses (40,095) 155,946 Accounts payable (172,713) 492,417 Customer deposits 103,975 (81,322)

(1,748,768) (3,416,522)

Investing activities

Purchase of capital assets (535,098) (301,578) Due from shareholders 11,668 (962) Proceeds on sale of assets - 2,341,492 Net assets acquired (net of cash) - (3,476,276)

(523,430) (1,437,324)

Financing activities

Share capital 2,800,000 3,086,094 Options exercised 756,614 1,068,750 Debt converted 972,033 - Other paid in capital (109,256) - Obligations under capital leases 10,029 (10,961) Advances from PCS Wireless Inc. - 750,000 Convertible debt (597,903) 1,240,000 Long term debt (224,322) (1,309,648)

3,607,195 4,824,235

Increase (decrease) in cash during the year 1,334,997 (29,611) Cash, beginning of year 308,514 338,125

Cash, end of year $ 1,643,511 $ 308,514


Summary of Significant Accounting Policies May 31, 1999 and 1998

Nature of Business The Company's principal business activity involves the design, manufacture and marketing of digital wireless communication systems. The Company has four main product lines: Digital MMDS, Digital Audio Broadcast, Point to Point Transmission, and Point to Multi Point Transmission. The Company invests in research in order that it will maintain its position in the worldwide market place in the current areas of expertise.

Inventory Raw materials are valued at the lower of cost, determined using the first-in, first-out method, and replacement cost. Work in process and inventory of finished goods are valued at the lower of cost determined on a specific item basis and net realizable value.

Capital Assets Capital assets are recorded at cost less accumulated amortization. Amortization is provided as follows:

Computer equipment - 30% declining balance basis Furniture and fixtures - 20% declining balance basis Leasehold improvements - straight line over term of lease Manufacturing equipment - 20% declining balance basis Other equipment - 20% declining balance basis

Foreign Currency Translation Monetary assets and monetary liabilities in foreign currencies have been translated at exchange rates in effect at the year-end. Transactions are translated at the average rate of exchange for the year. Exchange gains or losses from such translation practices are reflected in the statement of operations.

Research and Development All research costs are charged against income in the year of

expenditure. Development costs are capitalized if they meet the criteria for capitalization and amortized over the period of the expected life. Development costs are written off when there is no longer expectation of future benefits.

Assets Under Capital Leases Leases that transfer substantially all the benefits and risks of ownership of the property to the Company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation. Assets recorded under capital leases are amortized using rates that are consistent with similar Company-owned assets.

Investment Tax Credits Investment tax credits arise as a result of the Company incurring eligible research and development expenses and are recorded when there is reasonable assurance that they will be realized as a reduction of the expense.

Revenue Recognition Revenue is recognized on a completed contract basis.


Summary of Significant Accounting Policies May 31, 1999 and 1998

Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated.

Financial Instruments Unless otherwise noted, it is management’s opinion that the

Company is not exposed to significant interest rate or credit risks arising from its financial instruments. It is management’s opinion that the fair value of the financial instruments with short term maturities approximates the carrying values. The fair value of long term debt, obligations under capital leases and convertible debt, which have fixed rates of interest, approximate carrying amounts since the interest rates on these instruments approximate the current market rates offered to the Company.


Notes to Consolidated Financial Statements May 31, 1999 and 1998 1. Share Exchange and Principles of Consolidation

Pursuant to an agreement dated September 23, 1997, PCS Wireless, Inc (“PCS”) agreed to exchange 29,709,677 of its common shares for all of the issued shares of Unique Systems Inc. (the “Transaction”). Unique Systems Inc. became the legal subsidiary of PCS. Effective May 22, 1998, PCS was continued under the provisions of the Business Corporations Act (Ontario) as Unique Broadband Systems, Inc. Effective June 1, 1998 the Company amalgamated with Unique Systems Inc. 100% wholly-owned and inactive subsidiaries of the Company included PCS Microcell International, PCS Hong Kong and PCS IP Co. On December 2, 1997 Unique Systems Inc. incorporated Digital Audio Networks Inc, A 100% wholly owned subsidiary for future sales efforts in Eastern Ontario.

The Transaction resulted in the former shareholders of Unique Systems Inc. acquiring control of PCS. Accordingly, the share exchange has been treated for accounting purposes as an acquisition of PCS by Unique Systems Inc., referred to as a “reverse take-over”. Application of “reverse take-over” accounting results in the following:

(i) Unique Systems Inc. is deemed to be the acquirer for accounting purposes; its assets and liabilities are included in the consolidated balance sheet at their carrying values.

(ii) The consolidated balance sheet combines the assets and liabilities of PCS as an acquisition under the purchase method. The net assets acquired at fair values are September 23, 1997 are as follows:

Assets Cash $ 230,210 Accounts receivable 391,828 Inventory 474,869 Prepaid expenses 157,120 Capital assets 1,965,408 Due from Unique Systems Inc. 750,000

$ 3,969,435 Less: Liabilities assumed Accounts payable 221,979 Obligations under capital lease 40,970

262,949

Total consideration attributed to PCS $ 3,706,486

Representing: 29,706,677 shares of PCS $ 3,086,094 Costs of transaction 620,392

$ 3,706,486

2. Inventory 1999 1998

Raw materials $ 997,548 $ 792,301 Work in process 301,212 182,908 Finished goods 156,220 255,472

$ 1,454,980 $ 1,230,681


Notes to Consolidated Financial Statements May 31, 1999 and 1998 3. Capital Assets 1999 1998

Accumulated Accumulated

Cost Amortization Cost Amortization

Computer equipment $ 634,993 $ 346,331 $ 484,461 $ 254,877 Furniture and fixtures 199,659 89,122 192,703 62,780 Leasehold improvements 238,452 170,543 238,452 116,584 Manufacturing equipment 907,688 562,770 830,569 486,180 Other equipment 65,570 39,309 61,174 33,294 Computer equipment under capital lease 105,716 53,915 105,716 31,715 Manufacturing equipment under capital lease 1,178,099 506,110 882,004 375,122

$ 3,330,177 1,768,100 $ 2,795,079 $ 1,360,552 Net book value $ 1,562,077 $ 1,434,527

4. Income Taxes and Investment Tax Credits

The Company has Federal non-capital losses of approximately $7,500,000 that may be applied against future taxable income. The right to claim these losses expires, $500,000 in 2001, $2,700,000 in 2002, $300,000 in 2003, $100,000 in 2004, $3,900,000 in 2005. The Company has recorded amortization in the financial statements in excess of capital cost allowance claimed for income tax purposes of approximately $100,000.

The Company has Ontario non-capital losses of approximately $800,000 that may be applied against future taxable income. The right to claim these losses expires in 2005. During the year the Company recorded a recovery of investment tax credits of approximately $440,000 (1998 - $630,000) which has been applied to reduce research expenses. As at May 31, 1999 the Company has research and development expenses not claimed for income tax purposes of approximately $10,068,000 with no expiry date. The Company has unclaimed research and development income tax credits of $2,795,000 of which $1,772,585 (1998 - $1,406,901) has been reflected in these financial statements. These credits expire as follows:

2002 $ 51,600 2003 230,300

2004 264,500 2005 172,000

2006 562,600 2007 192,900

2008 584,700 2009 736,400

$ 2,795,000


Notes to Consolidated Financial Statements May 31, 1999 and 1998

4. Income Taxes and Investment Tax Credits (continued)

These amounts represent management’s best estimate based on its interpretation of current legislation. However, Revenue Canada has not yet assessed these claims and therefore the amount ultimately could be materially different from the amount recorded.

5. Due from Shareholders

The loan was advanced to assist the shareholder to purchase a principal residence. Interest is being charged at 7.75% per annum over a term of five years and amortized over 20 years.

6. Commitments (a) Capital and Operating Leases on Equipment

1999 1998

Total capital lease payments $ 619,442 $ 609,413 Less: Current portion due within one year 318,107 252,078 Long term portion of obligations under capital leases $ 301,335 $ 357,335 Interest rates implicit in the above capital leases range from 7% - 10% and the lease expiry dates range between July 18, 2000 and January 27, 2002.

The Company is committed to minimum future lease payments as follows:

Capital Operating Leases Leases

2000 $ 318,107 $ 109,157 2001 206,293 83,391 2002 95,042 54,724 2003 - 50,493

$ 619,442 $ 297,765

(b) Lease on Rented Premises

The Company is committed to minimum lease payments in respect of its land and buildings as follows:

2000 $ 114,414 2001 91,431

$ 205,845



7. Long Term Debt 1999 1998

Term loan, repayable monthly at $12,500 plus interest at prime plus 1% $ 128,645 $ 152,968

Term loan, repayable monthly at $6,250 plus interest at prime plus 1%, due February 2003. The maximum facility of the loan is $425,000 275,000 350,000

Term loan, repayable monthly at $12,500 plus interest at 12.7%, due January 2001. The maximum facility of this loan is $630,000 462,500 587,500 866,145 1,090,468 Less: Current portion 249,322 1,090,468

$ 616,823 $ - This first term loan is secured by a general security agreement covering all assets and real property. The last two term loans are secured by a personal property security agreement from the Company on specific equipment, a personal guarantee by one of the directors in the amount of $300,000 and the assignment of $900,000 of life insurance on this director. The Company was in default of the covenants on the term loans as at May 31, 1998 and the long-term debt was therefore classified as current in the 1998 financial statements. In the current year the Company is no longer in default of the covenants on the term loans, therefore the current portion has been reflected accordingly.

8. Convertible Debt 1999 1998

Special note convertible into common shares at a deemed exercise price of $0.35 in year two, $0.40 in year three, $0.45 in year four and $0.50 in year five, bears interest at 8.5%, payable only semi-annually, with the balance due April 1, 2003. Face value of $240,000 (1998 – $1,240,000) $ 204,225 $ 1,055,186

Special note convertible into 1,000,000,common shares at an exercise price of $0.30 per share until March 2000 and 857,143 shares at a conversion price of $0.35 per share until March 2001, bears interest at 5%, payable semi-annually. Face value of $300,000. 253,058 -

$ 457,283 $ 1,055,186 The notes are secured by a general security agreement.

A component of the special notes has been recorded as other paid in capital in the amount of $75,558 (1998 - $184,814) and represents the value attributable to the convertibility feature of the notes.



9. Share Capital

(a) Authorized

Unlimited number of common shares

1999 1998

(b) Issued Number of Stated Number of Stated Shares Capital Shares Capital

Opening balance 65,044,653 $4,154,944 31,494,491 $ 100 Shares issued: Reverse takeover - - 29,706,677 3,086,094 Options exercised 2,059,247 756,614 3,843,485 1,068,750 Conversion of debt 3,322,767 972,033 - - Private placements 9,000,000 2,800,000 - -

Ending balance 79,426,667 $8,683,591 65,044,653 $4,154,944

(c) Stock Option Plan

The Company has established various stock option plans for its shareholders, employees, officers and directors. The options are exercisable into an equivalent of 9,253,550 shares (1998 - 7,035,000) at exercise prices ranging between $0.31 and $0.52. The expiration dates of these options expire between the dates of December 9, 2001 and March 25, 2004.

(d) Warrants

The Company has warrants outstanding exercisable into an equivalent of 7,470,767 shares at prices ranging between $0.20 and $0.46. The expiration dates of these warrants expire between December 16, 2000 and May 3, 2001,

(e) Related Party Transactions

During the year the Company issued a private placement of 4,000,000 units at $0.20 per unit to one of the directors in the Company. Each unit consists of one share and one half of a non-transferable share purchase warrant. Each whole warrant will entitle the holder thereof to purchase an additional share for two years at a price of $0.20 in the first year and $0.25 in the second year.



10. Segmented Information

The Company operates in one operating segment with four product lines. It was impracticable to present the amount of revenue by product as the necessary information is not available and the cost to develop it would be excessive. The following is the information by geographic area: United Canada States Total 1999 Sales $2,571,249 $6,696,703 $9,267,952 Capital assets 1,562,077 - 1,562,077 1998 Sales $1,960,371 $1,483,290 $3,443,661 Capital assets 1,434,527 - 1,434,527

The Company has one major customer that accounts for 54% of total sales.

11. Financial Instruments

The Company’s bank accounts are held at one financial institution. The bank accounts earn interest from 0% to 3.4%. The Company carries out a portion of transactions in foreign currencies. As at May 31, the Company had the following U.S. dollar balances with unrelated entities.

1999 1998 Cash $168,987 $ 73,618 Accounts receivable 898,773 69,795 Accounts payable 171,002 220,667



12. Uncertainty Due to the Year 2000 Issue

The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems, which use certain dates in 1999 to represent something other than a date. the effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000.

If the Year 2000 Issue is not addressed by the Company and its major customers, suppliers and other third party business associates, the impact on the Company's operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved.

13. Earnings Per Share

Earnings per share are calculated using the weighted average number of common shares outstanding during the year of 69,860,158 (1998 – 52,619,942). Fully diluted earnings per share are calculated on the assumption that outstanding options, warrants and convertible debentures were exercised/converted at date of issue and the funds derived therefrom were invested at the Company’s annual after-tax cost of financing. For both fiscal years presented the effect of exercise and conversion of the above would be anti-dilutive. The loss per share for May 31, 1998 was calculated on the basis of the weighted average number of common shares outstanding during the year 52,619,942. The number of shares outstanding for the period from the beginning of the year to the date of the reverse takeover is the number of shares issued by PCS to the shareholders of Unique. The number of shares outstanding for the period from the date of the reverse takeover to the end of the year is the actual number of shares of PCS outstanding in that period. The weighted average number of shares used for the comparative period is the number of shares issued by PCS to the shareholders of Unique in the reverse takeover transaction, 29,709,677.

the president's report - unique broadband systems, inc

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