**EXHIBIT 99.6**

 

AUDITED ANNUALFINANCIAL STATEMENTS

 

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**MANAGEMENT’SSTATEMENT OF RESPONSIBILITIES**

 

The management of Sierra Wireless, Inc. is responsible for thepreparation of the accompanying consolidated financial statements and thepreparation and presentation of information in the Annual Report. Theconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States and areconsidered by management to present fairly the financial position and operatingresults of the Company.

 

The Company maintains various systems of internal controls to providereasonable assurance that transactions are appropriately authorized andrecorded, that assets are safeguarded and that financial reports are properlymaintained to provide accurate and reliable financial statements.

 

The Company’s audit committee is comprised entirely of non-managementdirectors and is appointed by the Board of Directors annually. The committeemeets periodically with the Company’s management and independent auditors toreview the consolidated financial statements and the independent auditors’report. The audit committee reported its findings to the Board of Directors,which has approved the consolidated financial statements.

 

The Company’s independent auditors, KPMG LLP, have examined theconsolidated financial statements and their report follows.

 

| Jason W. Cohenour                     |   | David G. McLennan       |
|---------------------------------------|--------|-------------------------|
| President and Chief Executive Officer |   | Chief Financial Officer |
| January 26,  2006                |   |                    |

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THESHAREHOLDERS

 

We have audited the consolidated balance sheets of Sierra Wireless, Inc.as at December 31, 2005 and 2004 and the consolidated statements ofoperations, shareholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards established by the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are freefrom material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of the Companyas at December 31, 2005 and 2004 and the results of its operations and itscash flows for each of the years in the three-year period ended December 31,2005 in accordance with U.S. generally accepted accounting principles.

 
| /s/ KPMG LLP          |   |
|-----------------------|--------|
| Chartered Accountants |
| Vancouver, Canada     |
| January 26, 2006 |

 

1

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**SIERRA WIRELESS, INC.**

 

**Consolidated Statements ofOperations**

(Expressed in thousands of UnitedStates dollars, except per share amounts)

(Prepared in accordance withUnited States generally accepted accounting principles (GAAP))

 
| ** **                                | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenue                                   |       | $                                           | 101,709    |   | $ | 211,205 |   | $ | 107,144 |   |
| Cost of goods sold                        |       | 60,551                                      |       | 127,600 |   | 81,848 |   |
| Gross margin                              |       | 41,158                                      |       | 83,605 |   | 25,296 |   |
|                                      |       |                                        |       |   |   |   |   |
| Expenses:                                 |       |                                        |       |   |   |   |   |
| Sales and marketing                       |       | 11,585                                      |       | 20,029 |   | 15,551 |   |
| Research and  development, net (note 15)  |       | 15,994                                      |       | 24,527 |   | 30,365 |   |
| Administration                            |       | 6,597                                       |       | 8,993 |   | 10,818 |   |
| Restructuring and  other charges (note 4) |       | 1,220                                       |       | — |   | 5,255 |   |
| Integration costs  (note 5)               |       | 1,947                                       |       | — |   | — |   |
| Amortization                              |       | 2,327                                       |       | 2,438 |   | 2,997 |   |
|                                      |       | 39,670                                      |       | 55,987 |   | 64,986 |   |
| Earnings (loss)  from operations          |       | 1,488                                       |       | 27,618 |   | (39,690 | ) |
| Other income                              |       | 965                                         |       | 1,700 |   | 2,277 |   |
| Earnings (loss)  before income taxes      |       | 2,453                                       |       | 29,318 |   | (37,413 | ) |
| Income tax expense  (recovery) (note 14)  |       | 198                                         |       | 4,398 |   | (945 | ) |
| Net earnings (loss)                       |       | $                                           | 2,255      |   | $ | 24,920 |   | $ | (36,468 | ) |
|                                      |       |                                        |       |   |   |   |   |
| Earnings (loss) per  share (note 16):     |       |                                        |       |   |   |   |   |
| Basic                                     |       | $                                           | 0.12       |   | $ | 0.99 |   | $ | (1.44 | ) |
| Diluted                                   |       | $                                           | 0.12       |   | $ | 0.96 |   | $ | (1.44 | ) |

 

See accompanying notes to consolidated financial statements.

 

2

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**SIERRA WIRELESS, INC.**

 

**Consolidated Balance Sheets**

(Expressed in thousands ofUnited States dollars, except number of shares)

(Prepared in accordance withUnited States GAAP)

 
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                          | ** ** | **2004**              | ** ** | **2005** | ** ** |
| **Assets**                                                                                                                                          |       |                  |       |   |   |
| Current assets:                                                                                                                                     |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                          |       | $                     | 131,846    |   | $ | 64,611 |   |
| Short-term investments  (note 6)                                                                                                                    |       | —                |       | 24,724 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,561 (2004 - $2,468)                                                         |       | 22,506                |       | 20,540 |   |
| Inventories (note  7)                                                                                                                               |       | 11,090                |       | 3,316 |   |
| Prepaid expenses                                                                                                                                    |       | 5,021                 |       | 3,974 |   |
|                                                                                                                                                |       | 170,463               |       | 117,165 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Long-term investments  (note 6)                                                                                                                     |       | —                |       | 14,762 |   |
| Fixed assets (note  8)                                                                                                                              |       | 10,044                |       | 11,647 |   |
| Intangible assets  (note 9)                                                                                                                         |       | 14,208                |       | 10,693 |   |
| Goodwill (note 9)                                                                                                                                   |       | 19,227                |       | 19,227 |   |
| Deferred income  taxes (note 14)                                                                                                                    |       | 500                   |       | — |   |
| Other assets                                                                                                                                        |       | 1,152                 |       | 486 |   |
|                                                                                                                                                |       | $                     | 215,594    |   | $ | 173,980 |   |
|                                                                                                                                                |       |                  |       |   |   |
| **Liabilities and  Shareholders’ Equity**                                                                                                      |       |                  |       |   |   |
| Current  liabilities:                                                                                                                               |       |                  |       |   |   |
| Accounts payable                                                                                                                                    |       | $                     | 4,122      |   | $ | 3,971 |   |
| Accrued liabilities                                                                                                                                 |       | 33,890                |       | 28,644 |   |
| Deferred revenue  and credits                                                                                                                       |       | 461                   |       | 422 |   |
| Current portion of  long-term liabilities (note 10)                                                                                                 |       | 758                   |       | 894 |   |
| Current portion of  obligations under capital lease (note 11)                                                                                       |       | 664                   |       | 304 |   |
|                                                                                                                                                |       | 39,895                |       | 34,235 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Long-term  liabilities (note 10)                                                                                                                    |       | 1,747                 |       | 1,926 |   |
| Obligations under  capital lease (note 11)                                                                                                          |       | 287                   |       | 4 |   |
|                                                                                                                                                |       |                  |       |   |   |
| Shareholders’ equity:                                                                                                                          |       |                  |       |   |   |
| Share capital (note  12)                                                                                                                            |       |                  |       |   |   |
| Authorized                                                                                                                                          |       |                  |       |   |   |
| Unlimited number of  common and preference shares with no par value Common shares, 25,476,447 (2004 – 25,357,231)  issued and outstanding |       | 218,805               |       | 219,398 |   |
| Additional paid-in  capital                                                                                                                         |       | 440                   |       | 556 |   |
| Warrants                                                                                                                                            |       | 1,538                 |       | 1,538 |   |
| Deficit                                                                                                                                             |       | (46,389               | )          | (82,857 | ) |
| Accumulated other  comprehensive loss                                                                                                               |       | (729                  | )          | (820 | ) |
|                                                                                                                                                |       | 173,665               |       | 137,815 |   |
|                                                                                                                                                |       | $                     | 215,594    |   | $ | 173,980 |   |

 

Commitments and contingencies (note 17)

 

See accompanying notes to consolidated financial statements.

 

| JASON W. COHENOUR |   | S. JANE ROWE |
|-------------------|--------|--------------|
| Director          |   | Director     |

 

3

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**SIERRA WIRELESS, INC.**

 

**Consolidated Statements ofShareholders’ Equity**

(Expressed in thousands ofUnited States dollars, except number of shares)

(Prepared in accordance withUnited States GAAP)

 
| ** **                               | ** ** | ** **             | ** ** | ** **         | ** ** | ** **   | ** ** | ** ** | ** ** | ** **           | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------------------|------------|--------------------|------------|--------------|------------|------------|------------|----------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| ** **                               | ** ** | ** **             | ** ** |               | ** ** | **Addit-**   | ** ** | ** ** | ** ** | ** **           | ** ** | ** **  | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Common Shares** | ** ** | **ional  Paid-in** | ** ** | **Warrants** | ** ** | ** ** | ** ** | **Comprehen-  sive** | ** ** | ** **  | ** ** |
| ** **                               | ** ** | **Number**             | ** ** | **Amount**         | ** ** | **Capital**  | ** ** | **Number** | ** ** | **Amount**           | ** ** | **Deficit** | ** ** | **Loss**        | ** ** | **Total**  | ** ** |
|                                     |       |                   |       |               |       |         |       |       |       |                 |       |        |       |            |       |       |       |
| Balance December 31,  2002          |       | 16,345,396             |       | $                  | 123,047    |         | $          | —     |       | —               |       | $           | —     |            | $          | (73,564    | )          | $ | (729 | ) | $ | 48,754 |   |
| Net and  comprehensive earnings     |       | —                 |       | —             |       | —       |       | —     |       | —               |       | 2,255       |       | —          |       | 2,255      |       |
| Issued for  acquisitions (note 3)   |       | 3,708,521              |       | 22,377             |       | —       |       | —     |       | —               |       | —      |       | —          |       | 22,377     |       |
| Issued for cash  (note 12)               |       | 4,442,222              |       | 72,186             |       | —       |       | —     |       | —               |       | —      |       | —          |       | 72,186     |       |
| Share issue costs                        |       | —                 |       | (4,761             | )          | —       |       | —     |       | —               |       | —      |       | —          |       | (4,761     | )          |
| Stock option  exercises                  |       | 325,932                |       | 1,198              |       | —       |       | —     |       | —               |       | —      |       | —          |       | 1,198      |       |
| Warrants issued                          |       | —                 |       | —             |       | —       |       | 138,696    |       | 1,538                |       | —      |       | —          |       | 1,538      |       |
| Balance December 31,  2003          |       | 24,822,071             |       | 214,047            |       | —       |       | 138,696    |       | 1,538                |       | (71,309     | )          | (729            | )          | 143,547    |       |
| Net and  comprehensive earnings     |       | —                 |       | —             |       | —       |       | —     |       | —               |       | 24,920      |       | —          |       | 24,920     |       |
| Stock option tax  benefit                |       | —                 |       | —             |       | 440          |       | —     |       | —               |       | —      |       | —          |       | 440        |       |
| Stock option  exercises                  |       | 535,160                |       | 4,758              |       | —       |       | —     |       | —               |       | —      |       | —          |       | 4,758      |       |
| Balance December 31,  2004          |       | 25,357,231             |       | $                  | 218,805    |         | $          | 440        |       | 138,696              |       | $           | 1,538      |            | $          | (46,389    | )          | $ | (729 | ) | $ | 173,665 |   |
| Net loss                                 |       | —                 |       | —             |       | —       |       | —     |       | —               |       | (36,468     | )          | —          |       | (36,468    | )          |
| Loss on short and  long term investments |       | —                 |       | —             |       | —       |       | —     |       | —               |       | —      |       | (91             | )          | (91        | )          |
| Comprehensive loss                       |       | —                 |       | —             |       | —       |       | —     |       | —               |       | —      |       | —          |       | (36,559    | )          |
| Stock option tax  benefit                |       | —                 |       | —             |       | 116          |       | —     |       | —               |       | —      |       | —          |       | 116        |       |
| Stock option  exercises                  |       | 119,216                |       | 593                |       | —       |       | —     |       | —               |       | —      |       | —          |       | 593        |       |
| Balance December 31,  2005          |       | 25,476,447             |       | $                  | 219,398    |         | $          | 556        |       | 138,696              |       | $           | 1,538      |            | $          | (82,857_   | )          | $ | (820 | ) | $ | 137,815 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**SIERRA WIRELESS, INC.**

 

Consolidated Statements of Cash Flows

 

(Expressed in thousands ofUnited States dollars)

(Prepared in accordance withUnited States GAAP)

 
| ** **                                                                                      | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                          |       |                                        |       |   |   |   |   |
| Net earnings (loss)                                                                             |       | $                                           | 2,255      |   | $ | 24,920 |   | $ | (36,468 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities |       |                                        |       |   |   |   |   |
| Amortization                                                                                    |       | 5,669                                       |       | 6,915 |   | 9,012 |   |
| Tax benefit related  to stock option deduction                                                  |       | —                                      |       | 440 |   | 116 |   |
| Non-cash restructuring  and other charges                                                       |       | 895                                         |       | — |   | 12,329 |   |
| Loss (gain) on  disposal                                                                        |       | 2                                           |       | (66 | ) | (41 | ) |
| Accrued warrants                                                                                |       | 386                                         |       | — |   | — |   |
| Changes in  operating assets and liabilities                                                    |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                             |       | (5,360                                      | )          | (1,384 | ) | 1,967 |   |
| Inventories                                                                                     |       | 5,878                                       |       | (9,579 | ) | 219 |   |
| Prepaid expenses                                                                                |       | (1,087                                      | )          | (2,798 | ) | 891 |   |
| Accounts payable                                                                                |       | 225                                         |       | (1,844 | ) | (151 | ) |
| Accrued liabilities                                                                             |       | 5,296                                       |       | 12,437 |   | (5,149 | ) |
| Deferred revenue  and credits                                                                   |       | 101                                         |       | 62 |   | 75 |   |
| Net cash provided  by (used in) operating activities                                            |       | 14,260                                      |       | 29,103 |   | (17,200 | ) |
|                                                                                            |       |                                        |       |   |   |   |   |
| Cash flows from  investing activities:                                                          |       |                                        |       |   |   |   |   |
| Business  acquisitions (note 3)                                                                 |       | 33                                          |       | — |   | — |   |
| Proceeds on  disposal                                                                           |       | 4                                           |       | 69 |   | 48 |   |
| Purchase of fixed  assets                                                                       |       | (1,972                                      | )          | (7,120 | ) | (8,292 | ) |
| Increase in  intangible assets                                                                  |       | (4,077                                      | )          | (2,123 | ) | (2,138 | ) |
| Increase in other  assets                                                                       |       | —                                      |       | (1,152 | ) | — |   |
| Purchase of  long-term investments                                                              |       | (24,639                                     | )          | (21,369 | ) | (14,851 | ) |
| Proceeds on  disposal of long-term investments                                                  |       | —                                      |       | 46,186 |   | — |   |
| Purchase of  short-term investments                                                             |       | (25,103                                     | )          | (21,305 | ) | (88,320 | ) |
| Proceeds on  maturity of short-term investments                                                 |       | 10,492                                      |       | 36,247 |   | 63,593 |   |
| Net cash (used in)  provided by investing activities                                            |       | (45,262                                     | )          | 29,433 |   | (49,960 | ) |
|                                                                                            |       |                                        |       |   |   |   |   |
| Cash flows from  financing activities:                                                          |       |                                        |       |   |   |   |   |
| Issue of common  shares, net of share issue costs                                               |       | 68,623                                      |       | 4,758 |   | 592 |   |
| Repayment of  long-term liabilities                                                             |       | (2,104                                      | )          | (1,806 | ) | (667 | ) |
| Net cash provided  by (used in) financing activities                                            |       | 66,519                                      |       | 2,952 |   | (75 | ) |
|                                                                                            |       |                                        |       |   |   |   |   |
| Net increase in  cash and cash equivalents                                                      |       | 35,517                                      |       | 61,488 |   | (67,235 | ) |
| Cash and cash  equivalents, beginning of year                                                   |       | 34,841                                      |       | 70,358 |   | 131,846 |   |
| Cash and cash  equivalents, end of year                                                         |       | $                                           | 70,358     |   | $ | 131,846 |   | $ | 64,611 |   |

 

See supplementary cash flow information (note 18)

 

See accompanying notes to consolidated financial statements.

 

5

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**SIERRA WIRELESS, INC.**

 

**Notes to ConsolidatedFinancial Statements**

 

Years ended December 31,2003, 2004 and 2005

(Expressed in thousands ofUnited States dollars, except share and per share amounts and number of shares)

(Prepared in accordance withUnited States GAAP)

 

**1.****              Nature of operations**

 

We wereincorporated under the Canada Business Corporations Act on May 31, 1993. We provideleading edge wireless wide-area modem solutions for mobile computing overcellular networks. We develop and market a range of products that includewireless modems for mobile computers, embedded modules for original equipmentmanufacturers, and rugged vehicle-mounted modems. Our products permit users toaccess wireless data and voice communications networks using laptop computers,handheld mobile computing devices, or vehicle-based systems.

 

**2.****              Significant accounting policies**

 

Management has prepared these consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States.

 

*(a)**       **Principles of consolidation***

 

Our consolidated financial statements include the accounts of SierraWireless, Inc. and its wholly-owned subsidiaries Sierra Wireless America, Inc.(formerly AirPrime, Inc. and Sierra Wireless Data, Inc.), SierraWireless (UK) Limited, Sierra Wireless (Asia Pacific) Limited, Sierra WirelessSRL and Sierra Wireless ULC from their respective dates of formation oracquisition. We have eliminated all significant intercompany balances andtransactions.

 

*(b)**       **Foreign Currency Translation***

 

Our functional or primary operating currency is the U.S. dollar. Wetranslate transactions in currencies other than the U.S. dollar at the exchangerate in effect on the transaction date. Monetary assets and liabilitiesdenominated in a currency other than the U.S. dollar are translated at theexchange rates in effect at the balance sheet date. The resulting exchange rategains and losses are recognized in earnings.

 

*(c)**        **Use of estimates***

 

In preparing the financial statements inconformity with U.S. generally accepted accounting principles (“U.S. GAAP”),management makes estimates and assumptions that affect the reported amounts ofassets, particularly the recoverability of inventory, fixed assets, intangibleassets, goodwill and deferred income taxes, and warranty accruals and otherliabilities, and disclosures of contingent liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from the estimates.

 

*(d)**       **Cash equivalents***

 

Cash equivalents include short-term deposits,which are all highly liquid securities having a term to maturity of threemonths or less when acquired. We value our short-term deposits at amortizedcost.

 

*(e)**        **Short-term investments***

 

Short-term investments, all of which wecategorize as available-for-sale, are carried at quoted market value. Wereflect unrealized holding gains (losses) related to available-for-saleinvestments, after deducting amounts allocable

 

6

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to income taxes, as part of accumulatedother comprehensive income, a separate component of shareholders’ equity. Thesegains (losses) are removed from comprehensive income (loss) when theinvestments mature or are sold on an item-by-item basis.

 

*(f)**           **Inventories***

 

Inventories consist of electronic components andfinished goods and are valued at the lower of cost, determined on afirst-in-first-out basis, and estimated net realizable value.

 

*(g)**       **Research and development***

 

We expense research and development costs as theyare incurred. To date we have had no significant software development coststhat would be required to be capitalized pursuant to Financial AccountingStandards (“FAS”) No. 86, “Accounting for the Costs of Computer Softwareto Be Sold, Leased or Otherwise Marketed”.

 

We follow the cost reduction method of accountingfor government research and development funding, whereby the benefit of thefunding is recognized as a reduction in the cost of the related expenditurewhen certain criteria stipulated under the terms of those funding agreementshave been met, and there is reasonable assurance the research and developmentfunding will be received. Certain research and development funding is repayableonly on the occurrence of specified future events. If such events do not occur,no repayment is required. We recognize the liability to repay research anddevelopment funding in the period in which conditions arise that will causeresearch and development funding to be repayable.

 

*(h)**       **Long-term investments***

 

Long-term investments are categorized asavailable-for-sale and are carried at quoted market value. We reflectunrealized holding gains (losses) related to available-for-sale investments,after deducting amounts allocable to income taxes, as part of accumulatedother comprehensive income (loss), a separate component of shareholders’equity.

 

*(i)**          **Fixed assets***

 

We initially record fixed assets at cost. Wesubsequently provide amortization on a straight-line basis over the followingperiods:

 
| Furniture and fixtures             |   | 5 years   |
|------------------------------------|--------|-----------|
| Research and development equipment |   | 3 years   |
| Tooling                            |   | 3 years   |
| Software                           |   | 3-5 years |
| Office equipment                   |   | 5 years   |

 

 

We amortize leasehold improvements on a straight-linebasis over the lower of their useful lives or lease terms.

 

*(j)**           **Intangible assets***

 

*Patents and trademarks*

 

Consideration paid for patents and trademarks isamortized on a straight-line basis over three to five years commencing with thedate the patents or trademarks are granted.

 

*License fees*

 

Consideration paid for license fees is amortizedon a straight-line basis over the shorter of the term of the license or anestimate of their useful life, ranging from five to ten years.

 

7

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*Intellectual property, customer relationships anddatabases*

 

Consideration paid for intellectual property,customer relationships and databases is amortized on a straight-line basis overthree to five years.

 

Each of these intangible assets is subject to animpairment test as described in note 2(k).

 

*(k)**       **Goodwill***

 

Goodwill represents the excess of the purchaseprice of an acquired enterprise over the fair value assigned to assets acquiredand liabilities assumed in a business combination. Goodwill is allocated as ofthe date of the business combination to the reporting units that are expectedto benefit from the synergies of the business combination.

 

Goodwill has an indefinite life, is not amortizedand at least annually is subject to a two-step impairment test. The first stepcompares the fair value of the reporting unit to its carrying amount, whichincludes the goodwill. When the fair value of a reporting unit exceeds itscarrying amount, goodwill of the reporting unit is considered not to beimpaired and the second step of the impairment test is unnecessary. If thecarrying amount exceeds the fair value, the second part of the test isperformed to measure the amount of the impairment loss. The second stepcompares the implied fair value of the reporting unit goodwill with thecarrying amount of the goodwill. If the carrying amount exceeds the fair valueof the goodwill, an impairment loss is recognized equal to that excess.

 

*(l)**          **Impairment of long-livedassets***

 

We monitor the recoverability of long-livedassets, which includes fixed assets and intangible assets, other than goodwill,based on factors such as future asset utilization and the future undiscountedcash flows expected to result from the use of the related assets. Our policy isto record an impairment loss in the period when we determine that the carryingamount of the asset will not be recoverable. At that time the carrying amountis written down to fair value.

 

*(m)**     **Income taxes***

 

Weaccount for income taxes in accordance with FAS No. 109, “Accounting forIncome Taxes”, which requires the use of the asset and liability method. Underthis method, deferred income taxes are recognized for the future income taxconsequences attributable to differences between the financial statementcarrying values and their respective income tax bases (temporary differences).Changes in the net deferred tax asset or liability are generally included inearnings. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which temporarydifferences are expected to be recovered or settled. The effect on deferredincome tax assets and liabilities of a change in tax rates is included inincome in the period that includes the enactment date. Deferred income taxassets are evaluated and if their realization is not considered “more-likely-than-not”,a valuation allowance is provided.

 

*(n)**       **Stock-based compensation***

 

We haveelected under FAS No. 123, “Accounting for Stock-based Compensation”, toaccount for employee stock options using the intrinsic value method. Thismethod is described in Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees”, and related interpretations. As wegrant all stock options with an exercise price equal to the market value of theunderlying common shares on the date of the grant, no compensation expense isrequired to be recognized under APB 25. FAS No. 123 uses a fair valuemethod of calculating the cost of stock option grants. Had compensation costfor our employee stock option plan been determined by this method, our netearnings (loss) and earnings (loss) per share would have been as follows:

 

8

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| ** **                                                                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net earnings  (loss):                                                                                                |       |                                        |       |   |   |   |   |
| As reported                                                                                                          |       | $                                           | 2,255      |   | $ | 24,920 |   | $ | (36,468 | ) |
| Less: Total  stock-based employee compensation expense determined under fair value based method for  all awards |       | (14,775                                     | )          | (5,591 | ) | (7,615 | ) |
| Pro forma                                                                                                            |       | $                                           | (12,520    | ) | $ | 19,329 |   | $ | (44,083 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Basic earnings  (loss) per share:                                                                                    |       |                                        |       |   |   |   |   |
| As reported                                                                                                          |       | $                                           | 0.12       |   | $ | 0.99 |   | $ | (1.44 | ) |
| Pro-forma                                                                                                            |       | (0.68                                       | )          | 0.77 |   | (1.74 | ) |
|                                                                                                                 |       |                                        |       |   |   |   |   |
| Diluted earnings  (loss) per share:                                                                                  |       |                                        |       |   |   |   |   |
| As reported                                                                                                          |       | $                                           | 0.12       |   | $ | 0.96 |   | $ | (1.44 | ) |
| Pro-forma                                                                                                            |       | (0.68                                       | )          | 0.75 |   | (1.74 | ) |

 

We recognize the calculated benefit at the date of granting thestock options on a straight-line basis over the vesting period.

 

In 2005 the Board of Directors approved theaccelerated vesting of certain “out-of-the-money” stock options previouslygranted under the Company’s stock option plan to participants other than boardmembers and executive officers of the Company. In aggregate, the vesting ofstock options to purchase a total of 175,650 common shares with an exerciseprice of US$14.25 (CAD$16.82) per share or higher, being 25% above thetrading price at the time of the Board of Directors’ approved this initiative,was accelerated and these became fully exercisable in November 2005. Theseoptions would otherwise have vested over time periods ranging up to December 2008.By taking this accelerated vesting initiative, anincremental value of approximately $2.3 million is included in the 2005stock-based compensation shown above.

 

As a result of a voluntary option surrender initiative,the unrecognized stock compensation fair value of approximately $6.0 millionrelated to the surrendered options was expensed in the year ended December 31,2003 in our pro forma disclosure.

 

We have estimated the fair value of each option on thedate of the grant using the Black-Scholes option-pricing model with thefollowing assumptions:

 
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| Expected dividend  yield         |       | 0                                           |       | 0 |   | 0 |   |
| Expected stock  price volatility |       | 102                                         | %          | 93 | % | 85 | % |
| Risk-free interest  rate         |       | 3.83                                        | %          | 3.76 | % | 3.43 | % |
| Expected life of  options        |       | 4 years                                     |       | 4 years |   | 4 years |   |

 

The average fair value of stock options grantedduring the year was $5.94 (2004 – $16.71, 2003 - $7.56).

 

*(o)**       **Revenue recognition***

 

Werecognize revenue from sales of products and services upon the later oftransfer of title or upon shipment of the product to the customer or renderingof the service, so long as collectibility is reasonably assured. Customersinclude resellers, original equipment manufacturers, wireless service providersand end-users. We record deferred revenue when we receive cash in advance ofthe revenue recognition criteria being met.

 

We recognize revenue on the portion of sales tocertain resellers that are subject to contract provisions allowing variousrights of return and stock rotation when the rights have expired or theproducts have been reported as sold by the resellers.

 

9

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Funding from research and development agreements,other than government research and development arrangements, is recognized asrevenue when certain criteria stipulated under the terms of those fundingagreements have been met, and when there is reasonable assurance the fundingwill be received. Certain research and development funding will be repayableonly on the occurrence of specified future events. If such events do not occur,no repayment would be required. We will recognize the liability to repayresearch and development funding in the period in which conditions arise thatwould cause research and development funding to be repayable.

 

Revenues from contracts with multiple-elementarrangements, such as those including technical support services, arerecognized as each element is earned based on the relative fair value of eachelement and only when there are no undelivered elements that are essential tothe functionality of the delivered elements.

 

Revenue from licensed software is recognized atthe inception of the license term and in accordance with Statement of Position97-2, “Software Revenue Recognition”. Revenue from software maintenance,unspecified upgrades and technical support contracts is recognized over theperiod such items are delivered or services are provided. Technical supportcontracts extending beyond the current period are recorded as deferred revenue.

 

*(p)**       **Warranty costs***

 

We accrue warranty costs upon the recognition ofrelated revenue, based on our best estimates, with reference to past andexpected future experience (see note 17 (b)(v)).

 

*(q)**       **Market development costs***

 

We accrue for co-op advertising costs upon thelater of the recognition date of the related revenue or date at which the co-opadvertising is available. Market development costs are recorded as marketingexpense in accordance with the criteria in Emerging Issues Task Force 01-9, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller ofVendor’s Products)”.

 

*(r)**         **Share issue costs***

 

We reduce the value of consideration assigned toshares issued by the direct costs, net of income tax recoveries, of issuing theshares.

 

*(s)**         **Earnings (loss) per commonshare***

 

We calculate basic earnings (loss) per sharebased on the weighted-average number of common shares outstanding for the year.If, in a reporting period, we have had outstanding dilutive stock options andwarrants, we calculate diluted earnings (loss) per share using the treasurystock method.

 

*(t)**          **Comprehensive income***

 

Under FAS No. 130, “Reporting ComprehensiveIncome”, we are required to report comprehensive income (loss), which includesour net earnings (loss) as well as changes in equity from other non-ownersources. In our case, the other changes in equity included in comprehensiveincome (loss) are comprised of the foreign currency cumulative translationadjustments and unrealized gains or losses on available-for-sale investments.Comprehensive income (loss) is presented in the consolidated statements ofshareholders’ equity.

 

*(u)**       **Investment tax credits***

 

Investment tax credits are now accounted for usingthe flow through method whereby such credits are accounted for as a reductionof income tax expense in the period in which the credit arises.

 

*(v)**        **Comparative figures***

 

We have reclassified certain of the figurespresented for comparative purposes to conform to the financial statement

 

10

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presentation we adopted for the current year.

 

*(w)**     **Recent accountingpronouncements***

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued revised Statement of Financial Accounting Standards No. 123Rentitled “Share-Based Payment” (“FAS No. 123R”). This revised statementaddresses accounting for stock-based compensation and results in the fair valueof all stock-based compensation arrangements, including options, beingrecognized as an expense in a company’s financial statements as opposed tosupplemental disclosure in the notes to financial statements. The revisedStatement eliminates the ability to account for stock-based compensationtransactions using APB Opinion No. 25. FAS No. 123R is effective forpublic entities that do not file as small business issuers as of the beginningof the first fiscal year that begins after June 15, 2005. We intend to adopt this standard inthe period commencing January 1, 2006. The impact of FAS No. 123 onthe year ended December 31, 2005 is disclosed in note 2(m). The impact ofFAS No. 123R in 2006 is not yet determinable.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements—An Amendment of APB Opinion No. 28.” SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application, unless such anapproach is impracticable in which case prospective application of the changeis appropriate, as the required method for reporting a change in accountingprinciple and the reporting of a correction of an error. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and is required to be adopted in our first quarterof fiscal 2006. Prior to SFAS 154, most accounting changes were recordedeffective at the beginning of the year of change, with the cumulative effect atthe beginning of the year of change recorded as a charge or credit to earningsin the period a change was adopted. The impact of the adoption of SFAS 154 willhave on our consolidated financial statements is not yet determinable.

 

In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” (“FSP 115-1”), which provides guidance on determining wheninvestments in certain debt and equity securities are considered impaired,whether that impairment is other-than- temporary, and on measuring suchimpairment loss. FSP 115-1 also includes accounting considerations subsequentto the recognition of an other-than temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. FSP 115-1 is required to be applied toreporting periods beginning after December 15, 2005 and is required to beadopted in our first quarter of fiscal 2006. The impact of the adoption of FSP115-1 will have on our consolidated financial statements is not yet determinable.

 

**3.****              Acquisition of AirPrime, Inc.**

 

On August 12, 2003 we acquired 100 percent of the outstandingsecurities of AirPrime, Inc. (“AirPrime”), a privately-held supplier ofhigh-speed CDMA wireless products located in Carlsbad, California. Wesubsequently changed the name of AirPrime to Sierra Wireless America, Inc.The results of AirPrime’s operations have been included in our consolidatedfinancial statements since that date.

 

The aggregate purchase price was $23,825, including common sharesvalued at $22,377 and costs related to the acquisition of $1,448. The fairvalue of the 3,708,521 common shares issued was determined based on the averagemarket price of Sierra Wireless, Inc.’s common shares over the two-dayperiod before and after June 16, 2003, which was the date the terms of theacquisition were agreed to and announced. Under the terms of the escrowagreement dated August 12, 2003, 927,129 common shares were deposited intoescrow. Of that number, 310,355 have been released and the balance of 616,774common shares continue to be held in escrow.

 

11

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The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition.

 
| Current assets          |   | $      | 4,716  |   |
|-------------------------|--------|--------|--------|--------|
| Property and  equipment |   | 1,352  |   |
| Intangible assets       |   | 5,270  |   |
| Goodwill                |   | 19,706 |   |
| Total assets  acquired  |   | 31,044 |   |
|                    |   |   |   |
| Current liabilities     |   | 7,219  |   |
|                    |   |   |   |
| Net assets acquired     |   | $      | 23,825 |   |

 

The following table presents details of the purchased intangible assets:

 
| ** **                         | ** ** | **Estimated   Useful Life (in  years)** | ** ** | **Aug 12,   2003****   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Net****   Amount** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
| Intellectual  property             |       | 5                                                      |       | $                                              | 3,780      |                                | $          | 1,795                     |       | $ | 1,985 |   |
| Customer  relationships            |       | 5                                                      |       | 940                                            |       | 446                                 |       | 494                       |       |
| Licenses                           |       | 5                                                      |       | 400                                            |       | 195                                 |       | 205                       |       |
| Databases                          |       | 5                                                      |       | 150                                            |       | 71                                  |       | 79                        |       |
| Total purchased  intangible assets |       |                                                   |       | $                                              | 5,270      |                                | $          | 2,507                     |       | $ | 2,763 |   |

 

The estimated future amortization expense of purchased intangible assets is as follows:

 
| **Fiscal Year** | ** ** | **Net****   Amount** | ** ** |
|-----------------|------------|---------------------------|------------|
| 2006            |       | 1,054                     |       |
| 2007            |       | 1,054                     |       |
| 2008            |       | 655                       |       |
| Total           |       | $                         | 2,763      |   |
|                 |            |                           |            |  |

 

If the acquisition of AirPrime had occurred as of January 1, 2002, the pro forma operating results may have been as follows:

 
| ** **     | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|
|           |       |     |       |
| Revenue        |       | $        | 118,514    |   |
| Net loss       |       | (1,166   | )          |
| Loss per share |       | $        | (0.05      | ) |

 

**4.****              Restructuring and other charges**

 

***(a) 2005 Restructuring***

 

In thesecond quarter 2005, we announced our decision to exit our Voq professionalphone initiative. In addition to the exit of the Voq initiative, we made somenon-Voq related reductions to our operating expenses and assets. During thequarter ended June 30, 2005, we incurred restructuring and other chargesof $18,206. In the fourth quarter of 2005 we recorded additional net charges of $279, primarily related to a change inestimate of our facilities restructuring originally announced in the secondquarter of 2005. In total, we incurred restructuring and other charges of$18,485 as follows:

 

12

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| ** **                             | ** ** | ** ** | ** ** | **Included in:**                   | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **Total**  | ** ** | **Cost of Goods   Sold** | ** ** | **Income Tax   Expense** | ** ** | **Restructuring  and Other** | ** ** | **Other   Expenses** | ** ** |
| Inventory writedown                    |       | $          | 8,556      |                                    | $          | 8,556 |   | $ | — |   | $ | — |   | $ | — |   |
| Provision for  royalty commitments     |       | 2,749      |       | 2,749                                   |       | — |   | — |   | — |   |
| Intangible assets  writedown           |       | 2,435      |       | —                                  |       | — |   | 2,435 |   | — |   |
| Workforce reduction                    |       | 1,507      |       | 60                                      |       | — |   | 1,447 |   | — |   |
| Fixed assets  writedown                |       | 913        |       | 715                                     |       | — |   | 198 |   | — |   |
| Facilities  restructuring              |       | 1,135      |       | —                                  |       | — |   | 1,091 |   | 44 |   |
| Deferred tax asset  writedown          |       | 500        |       | —                                  |       | 500 |   | — |   | — |   |
| Other                                  |       | 690        |       | 606                                     |       | — |   | 84 |   | — |   |
| Total restructuring  and other charges |       | $          | 18,485     |                                    | $          | 12,686 |   | $ | 500 |   | $ | 5,255 |   | $ | 44 |   |

 

The inventory writedown of $8,556 is related to thewritedown of Voq components and finished goods.

 

The provision forroyalty commitments of $2,749 related to a writedown of prepaid royalties inthe amount of $937 and a further provision of $1,812 for contractual royaltycommitments.

 

Fixed and intangibleassets impairment charges of $913 and $2,435, respectively, consisted ofwritedowns primarily for research and development equipment, test equipment andresearch and development licenses. The fixed assets and intangible assets, whichwere no longer required, were written down to nil.

 

We reduced ourworkforce by 51 employees, of which 32 were terminated during the secondquarter of 2005 and 19 were on working notice. Workforce reduction charges of$1,507 were related to the cost of severance and benefits associated with the32 employees terminated during the second quarter of 2005. The 19 employees onworking notice all ceased employment with us prior to year-end.

 

As a result of theabove noted workforce reduction, an initial facilities restructuring provisionof $711 was recorded in the second quarter of 2005 to reflect the costs relatedto the leased facilities that are greater than our current requirements. Aslittle progress was made on the facilities restructuring during the year, inthe fourth quarter of 2005 an additional facilitiesrestructuring charge of $380 was recorded. This, coupled with a $44 foreignexchange loss that is netted against Other Income (Expenses), results in atotal charge for the year of $1,135.

 

We have increased ourdeferred tax asset valuation allowance by $500, thereby reducing our deferredtax asset to nil, to reflect the reduction in the portion of our deferred taxassets that we do not believe is more likely than not to be realized.

 

Other charges of $690include provisions for tooling purchase commitments that are no longer useableand professional fees incurred in connection with the restructuring activities.

 

Of the total $18,485restructuring and other charges, $6,270 represents cash disbursements, of which$5,876 were incurred in the second quarter of 2005 and an additional $394 ofwhich were incurred in the balance of the year. The following table summarizes the activityrelated to the cash portion of the 2005 restructuring and other charges duringthe period and the balance of the provisionat December 31, 2005:

 
| ** **                                     | ** ** | **Total** | ** ** | **Cost of Goods   Sold** | ** ** | **Restructuring   and Other** | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Second quarter 2005  restructuring             |       | $         | 5,876      |                                    | $          | 3,568                                   |       | $ | 2,308 |   |
| Additional  facilities restructuring provision |       | 380       |       | —                                  |       | 380                                     |       |
| Other adjustments                              |       | 14        |       | (93                                     | )          | 107                                     |       |
| Cash payments                                  |       | (4,719    | )          | (2,848                                  | )          | (1,871                                  | )          |
| Balance at December 31,  2005             |       | $         | 1,551      |                                    | $          | 627                                     |       | $ | 924 |   |

 

13

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***(b) PriorRestructurings***

 

In the third quarter of 2003, we incurred restructuring andother charges as a result of our acquisition of AirPrime. During the year endedDecember 31, 2003, we recorded restructuring and other charges of $1,220as follows:

 
| Fixed and  intangible asset writedowns |   | $   | 605    |   |
|----------------------------------------|--------|-----|--------|--------|
| Workforce reductions                   |   | 325 |   |
| Facilities  restructuring              |   | 290 |   |
| Total restructuring  and other charges |   | $   | 1,220  |   |

 

The writedowns of fixed and intangible assets of $605 wereprimarily for research and development equipment, test equipment and researchand development licenses, which were no longer required. These assets werewritten down to nil. Workforce reduction charges of $325 were related to thecost of severance and benefits associated with 11 employees whose employmentwas terminated. As of December 31, 2003, there were no remainingrestructuring amounts to be paid related to workforce reductions. We alsorecorded an additional restructuring charge on facilities of $290 as we madelittle progress in 2003 on a facilities restructuring that was originallyannounced in 2002.

 

In the last half of 2003, we also incurred integration costsof $1,947 related to travel, facilities and costs related to eight existingemployees who were retained for the transition period. These eight employeescompleted their integration activities and were terminated as of December 31,2003 (see note 5).

 

The following table summarizes the provision for businessrestructuring programs initiated prior to 2005 and the balance of the provisionat December 31, 2005 and December 31, 2004.

 

| ** **                         | ** ** | **Facilities   Restructuring** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| Balance at December 31,  2003 |       | $                                   | 3,594      |   |
| Foreign exchange  adjustment       |       | 289                                 |       |
| Cash payments                      |       | (1,378                              | )          |
| Balance at December 31,  2004 |       | 2,505                               |       |
| Foreign exchange  adjustment       |       | 154                                 |       |
| Cash payments                      |       | (759                                | )          |
| Balance at December 31,  2005 |       | $                                   | 1,900      |   |

 

**5.****              Integration costs**

 

In the third quarter of 2003, we also incurredintegration costs related to the AirPrime acquisition of $1,947, which includedthe costs of eight existing employees retained for the transition period. Allof these employees completed their integration activities and were terminatedas of December 31, 2003.

 

**6.****             ****Investments**

 

Investments, all of which are classified asavailable-for-sale, were comprised as follows:

 
| ** **                 | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
|----------------------------|------------|----------------|------------|---------------|------------|
| ** **                 | ** ** | **2004**       | ** ** | **2005**      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Government treasury  bills |       | $              | —     |          | $          | 4,439 |   | $ | — |   | $ | — |   |
| Commercial paper           |       | —         |       | 20,285        |       | — |   | — |   |
| Government bonds           |       | —         |       | —        |       | — |   | 14,762 |   |
|                       |       | $              | —     |          | $          | 24,724 |   | $ | — |   | $ | 14,762 |   |

 

Our short-terminvestments of $24,724 (December 31, 2004 – nil) have contractualmaturities ranging from three to

 

14

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twelve months from thedate of purchase. Our long-term investments of $14,762 (December 31, 2004– nil) have contractual maturities of one to two years when purchased.

 

**7.****              Inventories**

 
| ** **             | ** ** | **2004** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Electronic  components |       | $        | 5,276      |     | $          | 1,675 |   |
| Finished goods         |       | 5,814    |       | 1,641    |       |
|                   |       | $        | 11,090     |     | $          | 3,316 |   |

 

**8.****              Fixed assets**

 
| ** **                          | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **Cost** | ** ** | **Accumulated   Amortization   and   Writedown** | ** ** | **Net Book Value** | ** ** |
|                                |       |     |       |   |   |   |   |
| Furniture and  fixtures             |       | $        | 2,957      |   | $ | 2,278 |   | $ | 679 |   |
| Research and  development equipment |       | 15,478   |       | 9,842 |   | 5,636 |   |
| Tooling                             |       | 11,097   |       | 8,326 |   | 2,771 |   |
| Software                            |       | 7,081    |       | 5,399 |   | 1,682 |   |
| Leasehold  improvements             |       | 2,451    |       | 1,916 |   | 535 |   |
| Office equipment                    |       | 688      |       | 344 |   | 344 |   |
|                                |       | $        | 39,752     |   | $ | 28,105 |   | $ | 11,647 |   |

 
| ** **                          | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **Cost** | ** ** | **Accumulated   Amortization   and   Writedown** | ** ** | **Net  Book  Value** | ** ** |
|                                |       |     |       |   |   |   |   |
| Furniture and  fixtures             |       | $        | 2,825      |   | $ | 1,802 |   | $ | 1,023 |   |
| Research and  development equipment |       | 11,393   |       | 8,324 |   | 3,069 |   |
| Tooling                             |       | 11,155   |       | 7,472 |   | 3,683 |   |
| Software                            |       | 6,095    |       | 4,401 |   | 1,694 |   |
| Leasehold  improvements             |       | 2,288    |       | 1,757 |   | 531 |   |
| Office equipment                    |       | 350      |       | 306 |   | 44 |   |
|                                |       | $        | 34,106     |   | $ | 24,062 |   | $ | 10,044 |   |

 

As at December 31, 2005, assets under acapital lease with a cost of $1,201 (2004 - $1,222) and accumulated amortizationof $563 (2004 - $179) are included in fixed assets.

 

**9.****              Goodwill and intangible assets**

 

Included in the acquisition of AirPrime in 2003 (see note 3) isgoodwill of $19,706and intangible assets of $5,270. The intangible assets acquired consisted ofintellectual property, customer relationships, licenses, and databases. During 2004, goodwill decreased by$479 due to the utilization of previously unrecognized pre-acquisition taxlosses and certain purchase price adjustments.

 

The components of intangibleassets at December 31, 2005 and 2004 are as follows:

 

15

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| ** **              | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|
| ** **              | ** ** | **Cost** | ** ** | **Accumulated   Amortization   and   Writedown** | ** ** | **Net  Book  Value** | ** ** |
|                    |       |     |       |   |   |   |   |
| Patents and  trademarks |       | $        | 3,933      |   | $ | 803 |   | $ | 3,130 |   |
| Licenses                |       | 13,051   |       | 8,046 |   | 5,005 |   |
| Intellectual  property  |       | 4,214    |       | 2,230 |   | 1,984 |   |
| Customer  relationships |       | 940      |       | 445 |   | 495 |   |
| Databases               |       | 150      |       | 71 |   | 79 |   |
|                    |       | $        | 22,288     |   | $ | 11,595 |   | $ | 10,693 |   |

 
| ** **              | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|
| ** **              | ** ** | **Cost** | ** ** | **Accumulated   Amortization   and   Writedown** | ** ** | **Net  Book  Value** | ** ** |
|                    |       |     |       |   |   |   |   |
| Patents and  trademarks |       | $        | 3,482      |   | $ | 382 |   | $ | 3,100 |   |
| Licenses                |       | 16,401   |       | 8,824 |   | 7,577 |   |
| Intellectual  property  |       | 4,214    |       | 1,474 |   | 2,740 |   |
| Customer  relationships |       | 940      |       | 258 |   | 682 |   |
| Databases               |       | 150      |       | 41 |   | 109 |   |
|                    |       | $        | 25,187     |   | $ | 10,979 |   | $ | 14,208 |   |

 

The estimated aggregateamortization expense for each of the next five years is expected to be $2,139 per year.

 

**10.****       Long-term liabilities**

 
| ** **            | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Facilities (note 4)   |       | $        | 2,505      |     | $          | 2,820 |   |
| Less current  portion |       | 758      |       | 894      |       |
|                  |       | $        | 1,747      |     | $          | 1,926 |   |

 

Of the balanceoutstanding as at December 31, 2005, $920 is from the 2005 restructuringand $1,900 arises from prior restructurings (2004 – nil and $2,505,respectively).

 

**11.****       Obligations under capital lease**

 

Welease research and development equipment, computer equipment and officefurniture under capital leases, denominated in Cdn. dollars, and expiring atvarious dates in 2006 and 2007. As at December 31, 2005 our future minimumlease payments under capital leases were as follows:

 
| ** **                                                | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|-----------|------------|
| 2006                                                      |       | $         | 361        |      | $          | 310 |   |
| 2007                                                      |       | 8         |       | 7         |       |
|                                                      |       | 369       |       | 317       |       |
| Less amount  representing interest at approximately 11.8% |       | 10        |       | 9         |       |
|                                                      |       | 359       |       | 308       |       |
| Less current  portion                                     |       | 354       |       | 304       |       |
|                                                      |       | $         | 5          |      | $          | 4 |   |

 

16

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Interestexpense on capital lease obligations for the year ended December 31, 2005is $43 (2004 - $28).

 

**12.****       Share capital**

 

***Stock option plan***

 

Under the terms of our employee stock optionplan, our Board of Directors may grant options to employees, officers anddirectors. The plan provides for granting of options at the fair market valueof our stock at the grant date. Options generally vest over four years, withthe first 25% vesting at the first anniversary date of the grant and thebalance vesting in equal amounts at the end of each month thereafter. Wedetermine the term of each option at the time it is granted, with optionshaving a five year or a ten year term. Since February 1999, options havebeen granted with a five year term. During 2005,shareholders approved an amendment to the plan whereby the maximum number ofshares available for issue under the plan is a rolling number equal to 10% ofthe number of issued and outstanding common shares from time to time, providedthat no more than 1,600,000 common shares will be added to the number of commonshares currently available for issue under the plan without the Company firstobtaining shareholder approval. Prior to this amendment the number of sharesavailable for issuance was a specified, fixed amount. Based on the number ofshares outstanding as at December 31, 2005, stock options exercisable into748,212 common shares are available for future allocation under the plan. Sincethis amendment to the plan through to December 31, 2005, 126,791 commonshares have been added to the number of common shares currently available forissue under the plan, to be applied against the limit of 1,600,000 commonshares.

 

Stock option activity since December 31,2002 is presented below:

 
| ** **                           | ** ** | **Number of****   Shares** | ** ** | **Weighted Average****   Exercise Price** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | **Cdn.$**                                                | ** ** | **U.S.$** | ** ** |
|                                 |       |                                 |       |                                                     |       |   |   |
| Outstanding, December 31,  2002 |       | 2,550,564                            |       | 19.83                                                    |       | 12.55 |   |
| Granted                              |       | 609,300                              |       | 14.79                                                    |       | 11.46 |   |
| Exercised                            |       | (325,932                             | )          | 4.90                                                     |       | 3.80 |   |
| Forfeited                            |       | (1,107,572                           | )          | 54.86                                                    |       | 42.53 |   |
| Outstanding, December 31,  2003 |       | 1,726,360                            |       | 11.58                                                    |       | 8.98 |   |
| Granted                              |       | 566,813                              |       | 30.77                                                    |       | 25.43 |   |
| Exercised                            |       | (535,160                             | )          | 11.74                                                    |       | 9.70 |   |
| Forfeited                            |       | (52,442                              | )          | 25.98                                                    |       | 21.47 |   |
| Outstanding, December 31,  2004 |       | 1,705,571                            |       | 20.71                                                    |       | 17.12 |   |
| Granted                              |       | 575,422                              |       | 10.70                                                    |       | 9.18 |   |
| Exercised                            |       | (119,216                             | )          | 5.34                                                     |       | 4.58 |   |
| Forfeited                            |       | (362,344                             | )          | 31.71                                                    |       | 27.21 |   |
| Outstanding, December 31,  2005 |       | 1,799,433                            |       | 18.48                                                    |       | 15.86 |   |

 

17

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| **December 31,** | ** ** | **Exercisable,****   end of year** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|
|                  |       |                                              |       |
| 2003                  |       | 714,345                                           |       |
| 2004                  |       | 545,382                                           |       |
| 2005                  |       | 959,717                                           |       |

 

The following table summarizes the stock optionsoutstanding at December 31, 2005:

 
| ** **                                        | ** ** | **Options Outstanding**         | ** ** | **Options Exercisable**                                              | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Range of****   Exercise Prices** | ** ** | **Number****   of Shares** | ** ** | **Weighted****   Average   Remaining   Contractual  Life** | ** ** | **Weighted****   Average   Exercise Price** | ** ** | **Number****   Exercisable** | ** ** | **Weighted****   Average   Exercise Price** | ** ** |
| ** **                                        | ** ** | ** **                           | ** ** | **In years**                                                         | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** | ** ** | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|                                              |       |                                 |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| $0.77 - $1.28   (Cdn.$0.90 - Cdn.$1.50)           |       | 21,398                               |       | 2.0                                                                       |       | $ | 1.50 |   | $ | 1.29 |   | 21,398 |   | $ | 1.50 |   | $ | 1.29 |   |
| $1.29 - $3.00   (Cdn.$1.51 - Cdn.$3.50)           |       | 203,830                              |       | 1.6                                                                       |       | 3.45 |   | 2.96 |   | 194,549 |   | 3.31 |   | 2.84 |   |
| $3.01 - $10.30   (Cdn.$3.51 – Cdn.$12.00)    |       | 373,319                              |       | 3.6                                                                       |       | 9.29 |   | 7.97 |   | 109,702 |   | 8.13 |   | 6.98 |   |
| $10.30 - $17.16   (Cdn.$12.01 – Cdn.$20.00)  |       | 437,958                              |       | 3.6                                                                       |       | 15.34 |   | 13.16 |   | 121,593 |   | 15.73 |   | 13.50 |   |
| $17.17 - $25.74   (Cdn.$20.01 - Cdn.$30.00)       |       | 459,178                              |       | 2.6                                                                       |       | 23.51 |   | 20.17 |   | 373,797 |   | 22.93 |   | 19.67 |   |
| $25.75 - $151.04   (Cdn.$30.01 - Cdn.$176.05)     |       | 303,750                              |       | 3.1                                                                       |       | 38.01 |   | 32.61 |   | 138,678 |   | 35.41 |   | 30.38 |   |
|                                              |       | 1,799,433                            |       | 3.0                                                                       |       | 18.48 |   | 15.86 |   | 959,717 |   | 17.67 |   | 15.16 |   |
|                                                   |            |                                      |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options outstanding at December 31, 2005expire between March 9, 2006 and October 28, 2010.

 

***Employee Stock Purchase Plan***

 

During 2005 weestablished employee stock purchase plans for U.S. and Canadian and other non-U.Semployees (together, the “ESPP Plans”) to enable eligible employees and directors to acquire Common Shares over the facilitiesof the Toronto Stock Exchange and Nasdaq. The ESPP Plans do not allow theissuance of Common Shares from treasury. Eligible employees and directors may contributeup to 10% of base compensation to purchase Common Shares on the public markets.Under the U.S. plan, the purchase price to be paid by an eligibleemployee is 85% of the fair market value of the Common Shares, with us contributingthe other 15%, plus any applicable commissions or transactional costs. Themaximum number of Common Shares that can be purchased under the U.S. plan is50,000 Common Shares. Under the non-U.S. plan we contribute an amount equal to 20% of the employee’scontribution, plus any applicable commissions or transactional costs. TheESPP Plans purchase shares at certain plan-defined dates. In 2005 participantspurchased at total of 17,832 Common Shares at a weighted-average price ofU.S.$9.25 per share.

 

***Warrants***

 

There areoutstanding warrants to purchase 138,696 of our common shares at Cdn. $20.49per share. The warrants are exercisable for a term of five years from December 30,2003. The warrants were issued under our agreement with the Government of Canada’s TechnologyPartnerships Canada (“TPC”) program (see note 17(b)(iv)).

 

18

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**13.****       Financial instruments**

 

***Fair value of financialinstruments***

 

The carrying amounts of certain of our financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable, accrued liabilities and current portions of long-term liabilities,approximate their fair value due to their short maturities. Short and long terminvestments are carried at fair market value; their book values for December 31,2005 were $24,724 (2004 – nil) and $14,762 (2004 – nil), respectively. Based onborrowing rates currently available to us for loans with similar terms, thecarrying value of our obligations under capital lease and long-term liabilitiesapproximates their fair value.

 

***Concentrations of business risk***

 

We depend on a small number of customers for asignificant portion of our revenue. In 2005, two customers accountedindividually for more than 10% of our revenue and, in aggregate, thesecustomers represented 35% of our revenue. In the years ended 2004 and 2003,three different customers individually accounted for more than 10% of ourrevenue.

 

We maintain substantially all of our cash andcash equivalents with major financial institutions or government instruments.Corporate paper is uninsured. Our deposits with banks may exceed theamount of insurance provided on such deposits.

 

Weoutsource manufacturing of our products to third parties. We are dependent uponthe development and deployment by third parties of their manufacturingabilities. The inability of any supplier or manufacturer to fulfill our supplyrequirements could impact future results. We have supply commitments to ouroutsource manufacturers based on our estimates of customer and market demand. Whereactual results vary from our estimates, whether due to execution on our part ormarket conditions, we are at risk.

 

Financial instruments that potentially subject usto concentrations of credit risk are primarily accounts receivable. We perform on-goingcredit evaluations of our customer’s financial condition and require letters ofcredit or other guarantees whenever deemed appropriate.

 

Although substantially all of our revenues arereceived in U.S. dollars, we incur operating costs and have obligations undercapital leases that are denominated in Cdn. dollars. Fluctuations in theexchange rates between these currencies could have a material effect on ourbusiness, financial condition and results of operations. We mitigate this riskby denominating many of our payment obligations in U.S. dollars.

 

***Line of credit***

 

During2005, we had anunsecured revolving demand facility for $10,000, which bears interest at primeper annum. The balance at December 31, 2005 and2004 was nil and this facility was not utilized at all during either of fiscal2005 or fiscal 2004.

 

19

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**14.****       Income taxes**

 

Thecomposition of our deferred tax assets at December 31 is as follows:

 
| ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets  (liabilities)       |       |     |       |     |       |
| Fixed assets                                  |       | $        | (1,026     | )        | $          | 933 |   |
| Loss carryforwards                            |       | 6,623    |       | 19,601   |       |
| Scientific research  and development expenses |       | 9,975    |       | 13,715   |       |
| Share issue costs                             |       | 1,110    |       | 737      |       |
| Reserves and other                            |       | 3,357    |       | 3,287    |       |
| Total gross  deferred tax assets              |       | 20,039   |       | 38,273   |       |
| Less valuation  allowance                     |       | 19,539   |       | 38,273   |       |
| Net deferred tax  assets                      |       | $        | 500        |     | $          | — |   |

 

We believe that realization of our net deferred taxassets is currently not more likely than not. In assessing the realizability ofour deferred tax assets, we considered whether it is more likely than not thatsome portion or all of our deferred tax assets will not be realized. Theultimate realization of our deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which temporarydifferences become deductible. We considered projected future taxable incomeand tax planning strategies in making our assessment.

 

At December 31, 2005, we had approximately$26,741 of non-capital loss carryforwards for Canadian tax purposes that, ifunutilized, will expire at various dates beginning in fiscal 2009 and ending infiscal 2015. As well, we have approximately $33,830 of scientific research anddevelopment expenditures available to be deducted against future Canadiantaxable income that may be carried forward indefinitely and investment taxcredits of approximately $20,564 available to offset future Canadian federaland provincial income taxes payable. The investment tax credits expire commencingin 2010 until 2015.

 

In addition, at December 31,2005, net operating loss carryforwards for our foreign subsidiaries were$28,285 for United States income tax purposes and $2,882 for U.K. income taxpurposes. These carryforwards expire in various amounts commencing in 2019through 2025. Our foreign subsidiaries may be limited in their ability touse foreign net operating losses in any single year depending on their abilityto generate significant taxable income.

 

***Effective tax rate***

 

Our income tax expense for the year ended December 31differs from that calculated by applying statutory rates for the followingreasons:

 
| ** **                                                                                                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Combined Canadian  federal and provincial income taxes at expected rate of 34.85% (2004 - 35.6%, 2003 —  37.6%) |       | $        | 923        |     | $          | 10,437   |       | $ | (13,038 | ) |
| Permanent and other  differences                                                                                          |       | (9       | )          | (126     | )          | 468      |       |
| Unrecognized tax  assets                                                                                                  |       | (635     | )          | (5,780   | )          | 10,965   |       |
| (Income) loss  subject to tax at rates lower than statutory rate                                                          |       | (81      | )          | (133     | )          | 160      |       |
| Writedown of  deferred tax asset                                                                                          |       | —   |       | —   |       | 500      |       |
|                                                                                                                      |       | $        | 198        |     | $          | 4,398    |       | $ | (945 | ) |

 

20

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Our provisions for income taxes consist of thefollowing:

 
| ** **            | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Current Canadian |       | $        | 198        |     | $          | 357      |       | $ | (42 | ) |
| Foreign               |       | —   |       | 4,041    |       | (1,403   | )          |
| Total current         |       | 198      |       | 4,398    |       | (1,445   | )          |
| Deferred              |       |     |       |     |       |     |       |
| Canadian              |       | —   |       | (500     | )          | 500      |       |
| Foreign               |       | —   |       | 500      |       | —   |       |
| Total deferred        |       | —   |       | —   |       | 500      |       |
| Income tax expense    |       | $        | 198        |     | $          | 4,398    |       | $ | (945 | ) |

 

**15.****       Research and development**

 
| ** **                                        | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross research and  development                   |       | $        | 16,471     |     | $          | 27,170   |       | $ | 31,258 |   |
| Less government  research and development funding |       | 477      |       | 2,643    |       | 893      |       |
|                                              |       | $        | 15,994     |     | $          | 24,527   |       | $ | 30,365 |   |

 

Included in our grossresearch and development expense was a repayment of funding of $865 (2004 -$1,970; 2003 - $258).

 

**16.****       Earnings (loss) per share**

 

The weighted-average number of shares outstanding(in thousands) used in the computation of earnings (loss) per share were asfollows:

 
| ** **                                                                        | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted-average  shares used in computation of basic earnings (loss) per share   |       | 18,442   |       | 25,212   |       | 25,385   |       |
| Weighted-average  shares from assumed conversion of dilutive options              |       | 547      |       | 852      |       | —   |       |
| Weighted-average  shares used in computation of diluted earnings (loss) per share |       | 18,989   |       | 26,064   |       | 25,385   |       |

 

**17.****       Commitments and contingencies**

 

***(a)  Operating leases***

 

We lease equipment and premises with minimumfuture lease payments denominated in Cdn. dollars at December 31, 2005 asfollows:

 
| ** ** | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|------------|------------|-----------|------------|-----------|------------|
| 2006       |       | $         | 3,316      |      | $          | 2,845 |   |
| 2007       |       | 3,406     |       | 2,922     |       |
| 2008       |       | 3,388     |       | 2,907     |       |
| 2009       |       | 2,597     |       | 2,228     |       |
| 2010       |       | 2,588     |       | 2,219     |       |
| Thereafter |       | 1,565     |       | 1,343     |       |
|       |       | $         | 16,860     |      | $          | 14,464 |   |

 

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***(b)  Contingent liability onsale of products***

 

(i)             Under license agreements,we are committed to make royalty payments based on the sales of products usingcertain technologies. We recognize royalty obligations as determinable inaccordance with agreement terms. Where agreements are not finalized, we haverecognized our current best estimate of the obligation. When the agreements arefinalized, the estimate will be revised accordingly.

 

(ii)          We are a party to a varietyof agreements in the ordinary course of business under which we may beobligated to indemnify a third party with respect to certain matters. Typically,these obligations arise as a result of contracts for sale of our products tocustomers where we provide indemnification against losses arising from matterssuch as potential intellectual property infringements and product liabilities. Theimpact on our future financial results is not subject to reasonable estimationbecause considerable uncertainty exists as to whether claims will be made andthe final outcome of potential claims. To date, we have not incurred materialcosts related to these types of indemnifications.

 

(iii)       Under certain research anddevelopment funding agreements, we are contingently liable to repay up to$3,262. Repayment under these agreements is contingent upon reaching certainrevenue levels for specified products.

 

(iv)      Under an agreement with theGovernment of Canada’s Technology Partnerships Canada (“TPC”) program, we have received Cdn. $9,999 to support thedevelopment of a range of third generation wireless technologies. Under theterms of the agreement, an amount up to a maximum of Cdn. $13,000 is to berepaid based on annual sales, in excess of certain minimum amounts, ofspecified products commencing in 2004. As all funds available under thisprogram were earned prior to 2004, during the years ended December 31,2005 and 2004, we claimed nil. During the year ended December 31, 2005, wehave recorded, in research and development expense, the accrued repaymentof  $847 (2004 – $1,940; 2003 – nil). Inaddition, we issued warrants to TPC to purchase 138,696 common shares on December 30,2003, valued at Cdn. $2,000 based on the Black-Scholes option pricing model. The warrants areexercisable at Cdn. $20.49 per share for a term of five years from December 30,2003. As of December 31, 2005, no warrants have been exercised.

 

In March 2004,we entered into a second agreement with TPC under which we are eligible toreceive conditionally repayable research and development funding up to Cdn.$9,540 to support the development of a range of third generation wirelesstechnologies. The agreement is effective April 2003. During the year endedDecember 31, 2005, we have claimed $893 (2004 – $2,643), which has beenrecorded as a reduction of research and development expense. Unless the secondagreement is otherwise renegotiated, with the termination of the Voqprofessional phone initiative in the second quarter of 2005 no further TPCfunding is anticipated. Duringthe year ended December 31, 2005, we have recorded, in research anddevelopment expense, the accrued repayment of $18 (2004 – nil). Underthe terms of the agreement, repayment based on a percentage of annual sales, inexcess of certain minimum amounts, will be made over the period from April 2003to December 2011. The funding is repayable upon the occurrence of certainevents of default, which include material change or insolvency events. If thepayments during this period are less than Cdn. $16,455, payments will continuesubsequent to December 2011 until the earlier of when the amount isreached or December 2014. No repayments were made in 2005.

 

(v)         We accrue product warrantycosts, when we sell the related products, to provide for the repair orreplacement of defective products. Our accrual is based on an assessment ofhistorical experience and on management’s estimates. An analysis of changes inthe liability for product warranties follows:

 

| Balance, December 31,  2002      |   | $      | 1,163  |   |
|---------------------------------------|--------|--------|--------|--------|
| Provisions                            |   | 1,939  |   |
| Increase due to  acquisition (note 3) |   | 418    |   |
| Expenditures                          |   | (1,179 | )      |
| Balance, December 31,  2003      |   | 2,341  |   |
| Provisions                            |   | 2,785  |   |
| Expenditures                          |   | (2,185 | )      |
| Balance, December 31,  2004      |   | $      | 2,941  |   |
| Provisions                            |   | 1,898  |   |
| Expenditures                          |   | (2,206 | )      |
| Balance, December 31,  2005      |   | $      | 2,633  |   |

 

22

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***(c)   Other commitments***

 

We have entered into purchase commitments totaling approximately$32,803 with certain contract manufacturers under which we have committed tobuy a minimum amount of designated products between January 2006 and March 2006.In certain of these agreements, we may be required to acquire and pay forsuch products up to the prescribed minimum or forecasted purchases.

 

***(d)******         Legal proceedings***

 

(i)             Sierra Wireless America, Inc.,as successor to AirPrime, Inc., along with other defendants, has beenserved with the complaint of Joshua Cohen and David Beardsley and others, filedin the U.S. District Court for the Central District of California for allegedviolations of federal and state securities laws allegedly occurring prior tothe time AirPrime, Inc. was acquired by the Company. The plaintiffs filedthe third amended complaint on July 7, 2005. In November of 2005, theDistrict Court dismissed the third amended complaint, without prejudice, withrespect to the Company and most of the other defendants. The plaintiffs did notfile a fourth amended complaint and sought an order from the District Courtdismissing the federal actions as to all defendants, with prejudice for thepurposes of final judgment, however without prejudice to the state claims inthe third amended complaint. The District Court so ordered on February 27,2006. The plaintiffs filed a notice of appeal to the U.S. Court of Appeals forthe Ninth Circuit on March 8, 2006. We expect that it will be severalmonths before they file their appeal brief. In December 2005, we wereserved with a similar class action complaint of David Beardsley andothers, filed in the Superior Court of the State of California, County of SanDiego, for alleged violations of state securities laws in connection with thesame alleged facts. On February 6, 2006, we filed a Motion to Stay thestate court action pending resolution of the nearly identical federal action. Weexpect the Motion to Stay will be heard by the San Diego Superior Court in lateMarch, 2006. We have given notice to our liability insurance carrier, which hasagreed to pay our costs of defense that exceed the policy’s retention amount,subject to a reservation of rights in the event it is determined that thecarrier has no liability for this litigation and without conceding anyliability for payment of loss. We have also submitted an escrow claim noticeunder the escrow agreement dated August 12, 2003 relating to theacquisition of AirPrime and the escrow shareholders are disputing theirobligations with respect to this complaint. Although there can be no assurancethat an unfavourable outcome of the dispute would not have a material adverseeffect on our operating results, liquidity or financial position, we believethe claims are without merit and will vigorously defend them. The Company hasdetermined that it is not possible to establish a reasonable estimate of thepossible loss, or range of possible loss, if any.

 

(ii)          The Company andcertain of our current and former officers were named as defendants in several class actioncomplaints filed in the U.S. District Court for the Southern District of NewYork and the U.S. District Court for the Southern District of California foralleged violations of federal securities laws. The actions filed in the U.S.District Court for the Southern District of California have been transferred tothe U.S. District Court for the Southern District of New York. By order dated December 16,2005, the U.S. District Court for the Southern District of New Yorkconsolidated all of the actions for pretrial purposes, appointed co-leadplaintiffs in the consolidated action, and approved the selection of co-leadcounsel. The plaintiffs filed their consolidated amended complaint on February 21,2006 and the defendants have until early April to file their Motion toDismiss. We have given notice to our liability insurance carrier, which hasagreed to pay our costs of defense that exceed the policy’s retention amount,subject to a reservation of rights in the event that it is determined that thecarrier has no liability for this litigation. Although there can be noassurance that an unfavourable outcome would not have a material adverse effecton our operating results, liquidity or financial position, we believe theclaims are without merit and will vigorously defend the lawsuits. The Companyhas determined that it is not possible to establish a reasonable estimate ofthe possible loss, or range of possible loss, if any. However, the Companybelieves that it is probable that the legal costs related to these complaints may exceedour policy retention amount of $1,000. Accordingly, we

 

23

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accrued $1,000 in our results of operations for the year ended December 31,2005.

 

(iii)       On February 8, 2005, Sierra Wireless, Inc.was served with the first amended complaint of MLR, LLC filed in the U.S.District Court for the Northern District of Illinois Eastern Division foralleged patent infringement relating to our line of professional phones. Wewere added as a defendant in existing civil action No. 04 C 7044 MLR, LLCv. Kyocera Wireless Corporation and Novatel Wireless, Inc. Since thatdate, we have reached an agreement with MLR, under which we receivednon-royalty bearing licenses to use all of MLR’s present and future patents forall of our products and MLR released us from all claims related to their patentportfolio. MLR has dismissed all claims against us in the lawsuit.

 

(iv)      In July 2001, Metricom, Inc.(“Metricom”), one of our customers, filed a Chapter 11 reorganization under theU.S. bankruptcy laws. We filed a proof of claim for amounts due to us totaling$13,745. During 2002, we executed a global settlement with thereorganized debtor under which we agreed to reduce our general unsecured claimto $10,250. We received a settlement of $2,321 in 2003, of which $513 wasincluded in the determination of our net income for 2003 (2002 — $1,808). In 2004, we received anadditional $513 that was included in our net income for 2004. In 2005, we havenot received any additional proceeds from this settlement.

 

(v)         We are engaged in certain legal actions in the ordinary course ofbusiness and believe that the ultimate outcome of these actions will not have amaterial adverse effect on our operating results, liquidity or financialposition.

 

**18.****       Supplementary information**

 
| ** **                                                               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ***(a) Cash  flow information:***                                   |       |     |       |     |       |     |       |
| Cash received                                                       |       |     |       |     |       |     |       |   |   |   |
| Interest                                                                 |       | $        | 500        |     | $          | 1,660    |       | $ | 2,792 |   |
| Income taxes                                                             |       | 24       |       | 4        |       | 1,590    |       |
| Cash paid for                                                       |       |     |       |     |       |     |       |
| Interest                                                                 |       | 62       |       | 32       |       | 59       |       |
| Income taxes                                                             |       | 62       |       | 2,649    |       | 470      |       |
| Non-cash financing  activities                                           |       |     |       |     |       |     |       |
| Purchase of fixed  assets funded by obligations under capital lease |       | 113      |       | 1,238    |       | 24       |       |
| Issuance of common  shares on acquisition (note 3)                       |       | 22,377   |       | —   |       | —   |       |
|                                                                     |       |     |       |     |       |     |       |
| ***(b) Allowance  for doubtful accounts:***                         |       |     |       |     |       |     |       |
| Opening balance                                                          |       | $        | 3,068      |     | $          | 2,230    |       | $ | 2,468 |   |
| Acquisitions                                                             |       | 62       |       | —   |       | —   |       |
| Bad debt expense                                                         |       | 375      |       | 366      |       | (36      | )          |
| Write offs and  settlements                                              |       | (1,275   | )          | (128     | )          | (871     | )          |
| Closing balance                                                          |       | $        | 2,230      |     | $          | 2,468    |       | $ | 1,561 |   |
|                                                                     |       |     |       |     |       |     |       |
| ***(c) Other:***                                                    |       |     |       |     |       |     |       |
| Rent expense                                                             |       | $        | 1,603      |     | $          | 2,004    |       | $ | 2,168 |   |
| Foreign exchange  gain (loss)                                            |       | 439      |       | 333      |       | (951     | )          |

 

**19.****       Segmented information**

 

We operate in the wireless communicationssolutions industry and all sales of our products and services are made in thissegment. Management makes decisions about allocating resources based on the oneoperating segment.

 

Revenues by product were as follows:

 

24

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| ** **                        | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Mobile                            |       | $        | 6,183      |     | $          | 10,451   |       | $ | 14,154 |   |
| PC card                           |       | 71,060   |       | 125,604  |       | 74,495   |       |
| Embedded modules                  |       | 20,961   |       | 70,044   |       | 13,419   |       |
| Other                             |       | 2,845    |       | 3,718    |       | 5,076    |       |
| Research and  development funding |       | 660      |       | 1,388    |       | —   |       |
|                              |       | $        | 101,709    |     | $          | 211,205  |       | $ | 107,144 |   |

 

As at December 31, 2005, 43% (2004 - 47%) ofour fixed assets are in Canada. In the year ended December 31, 2005,product sales in the Americas were 69% (2004 - 89%; 2003 - 73%).

 

We sell certain products through resellers,original equipment manufacturers, and wireless service providers who sell theseproducts to end-users. The approximate sales to the significant channels are asfollows:

 
| ** ** | ** ** | **2003**     | ** ** | **2004**     | ** **   | **2005**     | ** **   |
|------------|------------|--------------|------------|--------------|--------------|--------------|--------------|
| Customer A |       | less than 10 | %          | less than 10 | %            | $            | 17,545       |   |
| Customer B |       | less than 10 | %          | less than 10 | %            | 20,585       |         |
| Customer C |       | less than 10 | %          | $            | 55,718       |         | less than 10 | % |
| Customer D |       | less than 10 | %          | 52,755       |         | less than 10 | %            |
| Customer E |       | $            | 18,044     |         | less than 10 | %            | less than 10 | % |
|            |            |              |            |              |              |              |              |  |  |  |

 

**20.****       Differences Between United States andCanadian Generally Accepted Accounting Principles (GAAP)**

 

NewCanadian securities regulations provide that financial statements filed by anSEC issuer may be prepared in accordance with United States GAAP providedthat, if the SEC issuer previously filed or included in a prospectus financialstatements prepared in accordance with Canadian GAAP, the issuer complies withcertain disclosure requirements. Those requirements include explaining andquantifying the differences between Canadian and U.S. GAAP for the current andcomparative periods presented.

 

Theconsolidated financial statements have been prepared in accordance with U.S.GAAP, which differ in certain material respects from those principles thatwould have been followed had our consolidated financial statements beenprepared in accordance with Canadian GAAP. The following is a reconciliation ofthe net earnings (loss) between U.S. GAAP and Canadian GAAP for the years endedDecember 31, 2005, 2004, and 2003:

 

The Canadian GAAPconsolidated financial statements follow the same accounting policies andmethods of application as our annual consolidated financial statements.

 

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| ** **                                              | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                    |       |                                      |       |   |   |   |   |
| Net earnings (loss) under U.S. GAAP                     |       | $                                         | 2,255      |   | $ | 24,920 |   | $ | (36,468 | ) |
| Stock-based compensation expense (a)                    |       | (14,775                                   | )          | (5,591 | ) | (7,615 | ) |
| Unrealized loss on short and long-term  investments (d) |       | —                                    |       | — |   | (91 | ) |
| Stock option tax benefit difference (h)                 |       | —                                    |       | 51 |   | 75 |   |
| Net earnings (loss) under Canadian GAAP                 |       | $                                         | (12,520    | ) | $ | 19,380 |   | $ | (44,099 | ) |
|                                                    |       |                                      |       |   |   |   |   |
| Earnings (loss) per  share under Canadian GAAP          |       |                                      |       |   |   |   |   |
| Basic                                                   |       | $                                         | (0.68      | ) | $ | 0.77 |   | $ | (1.74 | ) |
| Diluted                                                 |       | $                                         | (0.68      | ) | $ | 0.75 |   | $ | (1.74 | ) |

 

Themost significant balance sheet differences between U.S. GAAP and Canadian GAAPare as follows:

 
| ** **                                                   | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                   | ** ** | **2004**             | ** ** | **2005** | ** ** |
|                                                         |       |                 |       |   |   |
| Share Capital, U.S. GAAP                                     |       | $                    | 218,805    |   | $ | 219,398 |   |
| Stock-based compensation expense (a)                         |       | 3,762                |       | 4,250 |   |
| Foreign currency translation (g)                             |       | (1,223               | )          | (1,223 | ) |
| Share Capital, Cdn. GAAP                                     |       | $                    | 221,344    |   | $ | 222,425 |   |
|                                                         |       |                 |       |   |   |
| Additional paid-in capital, U.S. GAAP                        |       | $                    | 440        |   | $ | 556 |   |
| Stock-based compensation expense (a)                         |       | 40,833               |       | 47,960 |   |
| Stock option tax benefit difference (h)                      |       | (51                  | )          | (126 | ) |
| Additional paid-in capital (Contributed  surplus), Cdn. GAAP |       | $                    | 41,222     |   | $ | 48,390 |   |
|                                                         |       |                 |       |   |   |
| Deficit, U.S. GAAP                                           |       | $                    | (46,389    | ) | $ | (82,857 | ) |
| Foreign currency translation (g)                             |       | 978                  |       | 978 |   |
| Stock-based compensation expense (a)(i)                      |       | (44,595              | )          | (52,210 | ) |
| Unrealized loss on short and long-term  investments (d)      |       | —               |       | (91 | ) |
| Stock option tax benefit difference (h)                      |       | 51                   |       | 126 |   |
| Deficit, Cdn. GAAP                                           |       | $                    | (89,955    | ) | $ | (134,054 | ) |
|                                                         |       |                 |       |   |   |
| Cumulative translation adjustments, U.S.  GAAP               |       | $                    | (729       | ) | $ | (820 | ) |
| Foreign currency translation (g)                             |       | 245                  |       | 245 |   |
| Loss on short and long-term investments  (d)                 |       | —               |       | 91 |   |
| Cumulative translation adjustments, Cdn.  GAAP               |       | $                    | (484       | ) | $ | (484 | ) |

 

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***(a)******         Stock-based compensation***

 

(i).          Under U.S. GAAP, we haveelected under FAS No. 123, “Accounting for Stock-based Compensation”, toaccount for employee stock options using the intrinsic value method. Thismethod is described in Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees”, and related interpretations. As wegrant all stock options with an exercise price equal to the market value of theunderlying common shares on the date of the grant, no compensation expense isrequired to be recognized under APB 25.

 

(ii).       Effective January 1, 2004,under Canadian GAAP, we adopted the fair value recognition provisions of theamended Canadian Institute of Chartered Accountants Handbook (“HB”) 3870, “Stock-basedCompensation and Other Stock-based Payments” (“HB 3870”), which requiresrecognition of an estimate 

 

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of thefair value of stock-based awards in earnings. We have retroactively applied HB3870, with restatement of prior periods to record the compensation cost thatwould have been recognized had the fair value recognition provisions of HB 3870been applied to all awards granted to employees since the inception of thestock option plan.

 

***(b)******         Research and development***

 

Under U.S. GAAP, weexpense research and development costs as they are incurred. Under CanadianGAAP, we expense research costs as they are incurred. Development costs areexpensed unless they meet certain specified criteria for deferral andamortization. No development costs have been deferred during the years ended December 31,2005, 2004, and 2003, as the criteria for deferral were not met.

 

***(c)******          Other comprehensive income***

 

Under U.S. GAAP, wereport comprehensive income or loss in accordance with the provisions ofStatement of Financial Accounting Standards No. 130 entitled “ReportingComprehensive Income”. Under Canadian GAAP, we are not required to reportcomprehensive income or loss.

 

***(d)******         Short and long-term investments***

 

UnderU.S. GAAP, Statement of Financial Accounting Standards No. 115 entitled “Accountingfor Certain Investments in Debt and Equity Securities”, prescribes thatavailable-for-sale investments are marked to market with the resultingunrealized gains (losses) being recorded in other comprehensive income, andsubsequently reclassified to earnings at the time they are realized. UnderCanadian GAAP, these investments are carried at the lower of cost and quotedmarket value, with unrealized losses recorded in net earnings (loss).

 

***(e)******          Future income taxes***

 

Under U.S. GAAP, taxrates applied in the calculation of future income taxes are those rates thatare passed into law. Under Canadian GAAP, substantively enacted tax rates areused. There has been no impact to any of the numbers in the years ended December 31,2003, 2004 and 2005.

 

***(f)******            Investment tax credits***

 

Under U.S. GAAP,investment tax credits are accounted for using the flow through method wherebysuch credits are accounted for as a reduction of income tax expense in theperiod in which the credit arises. Under Canadian GAAP, investment tax creditsare accounted for using the cost reduction method whereby such credits arededucted from the expenses or assets to which they relate in the period inwhich their recoverability is reasonably assured. During the years ended December 31,2003, 2004 and 2005, no investment tax credits were recorded.

 

***(g)******         Foreign currency translation***

 

During the year ended December 31,1999, the Company changed its reporting and functional currency from Canadiandollars to U.S. dollars. Under U.S. GAAP, the shareholders’ equity accountswere translated into U.S. dollars at the rate in effect at the originaltransaction date, while under Canadian GAAP, all amounts were translated intoU.S. dollars at the rate in effect on December 31, 1999.

 

***(h)******         Stock option tax deduction***

 

The tax benefit relatedto the stock option deduction is calculated as the difference between thecumulative accounting deduction and the tax deduction. Because the accountingdeduction is calculated differently under U.S. and Canadian GAAP, as discussedin note 20(a), the tax benefit recorded for accounting purposes is alsodifferent under each GAAP.

 

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