**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 PUBLICACCOUNTING FIRM TO THE SHAREHOLDERS

 

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 conductedour audits in accordance with the standards established by the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free from material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for 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 of Operations**

(Expressedin thousands of United States dollars, except per share amounts)

(Preparedin accordance with United 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 consolidatedfinancial statements.

 

2

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**SIERRA WIRELESS, INC.**

** **

**Consolidated Balance Sheets**

(Expressedin thousands of United States dollars, except number of shares)

(Preparedin accordance with United 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 financialstatements.

 

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

 

3

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**SIERRA WIRELESS, INC.**

** **

**Consolidated Statements of Shareholders’ Equity**

(Expressedin thousands of United States dollars, except number of shares)

(Preparedin accordance with United States GAAP)

 
| ** **                              | ** ** | ** **        | ** ** | ** **  | ** ** | **Addit-**   | ** ** | ** ** | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------|------------|--------------|------------|------------|------------|-------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| ** **                              | ** ** | ** **        | ** ** | **ional**   | ** ** | ** **   | ** ** | ** ** | ** ** | **Other**         | ** ** | ** **  | ** ** |
| ** **                              | ** ** | **Common Shares** | ** ** | **Paid-in** | ** ** | **Warrants** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | ** **  | ** ** |
| ** **                              | ** ** | **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 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**SIERRA WIRELESS, INC.**

** **

Consolidated Statements of Cash Flows

 

(Expressedin thousands of United States dollars)

(Preparedin accordance with United 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 |   |
|                                                                                            |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

Seesupplementary cash flow information (note 18)

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**SIERRA WIRELESS, INC.**

** **

**Notes to Consolidated Financial Statements**

** **

Yearsended December 31, 2003, 2004 and 2005

(Expressedin thousands of United States dollars, except share and per share amounts andnumber of shares)

(Preparedin accordance with United States GAAP)

 

**1.****              Natureof operations**

** **

We wereincorporated under the Canada Business Corporations Act on May 31,1993.  We provide leading edgewireless wide-area modem solutions for mobile computing over cellularnetworks.  We develop and market a rangeof products that include wireless modems for mobile computers, embedded modulesfor original equipment manufacturers, and rugged vehicle-mounted modems.  Our products permit users to access wirelessdata and voice communications networks using laptop computers, handheld mobilecomputing devices, or vehicle-based systems.

 

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

** **

Management hasprepared these consolidated financial statements in accordance with accountingprinciples generally accepted in the United States.

*** ***

*(a)**       **Principlesof consolidation***

*** ***

Our consolidated financial statements includethe accounts of Sierra Wireless, Inc. and its wholly-owned subsidiariesSierra Wireless America, Inc. (formerly AirPrime, Inc. and SierraWireless Data, Inc.), Sierra Wireless (UK) Limited, Sierra Wireless (AsiaPacific) Limited, Sierra Wireless SRL and Sierra Wireless ULC from theirrespective dates of formation or acquisition. We have eliminated all significant intercompany balances andtransactions.

 

*(b)**       **ForeignCurrency Translation***

*** ***

Our functional or primary operating currencyis the U.S. dollar. We translate transactions in currencies other than the U.S.dollar at the exchange rate in effect on the transaction date.  Monetary assets and liabilities denominatedin a currency other than the U.S. dollar are translated at the exchange ratesin effect at the balance sheet date.  Theresulting exchange rate gains and losses are recognized in earnings.

*** ***

*(c)**        **Useof estimates***

*** ***

In preparing thefinancial statements in conformity with U.S. generally accepted accountingprinciples (“U.S. GAAP”), management makes estimates and assumptions thataffect the reported amounts of assets, particularly the recoverability ofinventory, fixed assets, intangible assets, goodwill and deferred income taxes,and warranty accruals and other liabilities, and disclosures of contingentliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom the estimates.

 

*(d)**       **Cashequivalents***

*** ***

Cash equivalentsinclude short-term deposits, which are all highly liquid securities having aterm to maturity of three months or less when acquired. We value our short-termdeposits at amortized cost.

 

*(e)**        **Short-terminvestments***

*** ***

Short-terminvestments, all of which we categorize as available-for-sale, are carried atquoted market value. We reflect unrealized holding gains (losses) related toavailable-for-sale investments, after deducting amounts allocable 

 

6

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to income taxes,as part of accumulated other comprehensive income, a separate component ofshareholders’ equity.  These gains(losses) are removed from comprehensive income (loss) when the investmentsmature or are sold on an item-by-item basis.

 

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

*** ***

Inventoriesconsist of electronic components and finished goods and are valued at the lowerof cost, determined on a first-in-first-out basis, and estimated net realizablevalue.

 

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

*** ***

We expenseresearch and development costs as they are incurred. To date we have had nosignificant software development costs that would be required to be capitalizedpursuant to Financial Accounting Standards (“FAS”) No. 86, “Accounting forthe Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”.

 

We follow thecost reduction method of accounting for government research and developmentfunding, whereby the benefit of the funding is recognized as a reduction in thecost of the related expenditure when certain criteria stipulated under theterms of those funding agreements have been met, and there is reasonableassurance the research and development funding will be received.  Certain research and development funding isrepayable only on the occurrence of specified future events.  If such events do not occur, no repayment isrequired.  We recognize the liability torepay research and development funding in the period in which conditions arisethat will cause research and development funding to be repayable.

 

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

*** ***

Long-terminvestments are categorized as available-for-sale and are carried at quotedmarket value. We reflect unrealized holding gains (losses) related to available-for-saleinvestments, after deducting amounts allocable to income taxes, as part ofaccumulated other comprehensive income (loss), a separate component ofshareholders’ equity. 

 

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

*** ***

We initiallyrecord fixed assets at cost. We subsequently provide amortization on astraight-line basis over the following periods:

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

 

We amortizeleasehold improvements on a straight-line basis over the lower of their usefullives or lease terms.

 

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

*** ***

*Patents and trademarks*

* *

Considerationpaid for patents and trademarks is amortized on a straight-line basis overthree to five years commencing with the date the patents or trademarks aregranted.  

 

*License fees*

* *

Considerationpaid for license fees is amortized on a straight-line basis over the shorter ofthe term of the license or an estimate of their useful life, ranging from fiveto ten years.  

 

7

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*Intellectual property, customerrelationships and databases*

* *

Considerationpaid for intellectual property, customer relationships and databases isamortized on a straight-line basis over three to five years.  

 

Each of theseintangible assets is subject to an impairment test as described in note 2(k).

 

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

*** ***

Goodwillrepresents the excess of the purchase price of an acquired enterprise over thefair value assigned to assets acquired and liabilities assumed in a businesscombination.  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 anindefinite life, is not amortized and at least annually is subject to atwo-step impairment test.   The firststep compares the fair value of the reporting unit to its carrying amount,which includes the goodwill.  When thefair value of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not to be impaired and the second step of theimpairment 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 step compares the implied fairvalue of the reporting unit goodwill with the carrying amount of thegoodwill.  If the carrying amount exceedsthe fair value of the goodwill, an impairment loss is recognized equal to thatexcess.

 

*(l)**          **Impairment of long-lived assets***

*** ***

We monitor therecoverability of long-lived assets, which includes fixed assets and intangibleassets, other than goodwill, based on factors such as future asset utilizationand the future undiscounted cash flows expected to result from the use of therelated assets. Our policy is to record an impairment loss in the period whenwe determine that the carrying amount of the asset will not be recoverable. Atthat time the carrying amount is 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 thecalculated benefit at the date of granting the stock options on a straight-linebasis over the vesting period.

 

In 2005 the Board of Directors approved the acceleratedvesting of certain “out-of-the-money” stock options previously granted underthe Company’s stock option plan to participants other than board members andexecutive officers of the Company. In aggregate, the vesting of stock optionsto purchase a total of 175,650 common shares with an exercise price of US$14.25(CAD$16.82) per share or higher, being 25% above the trading price at the timeof the Board of Directors’ approved this initiative, was accelerated and thesebecame fully exercisable in November 2005. These options would otherwisehave vested over time periods ranging up to December 2008. Bytaking this accelerated vesting initiative, an incremental value ofapproximately $2.3 million is included in the 2005 stock-based compensationshown above.

 

As a result of avoluntary option surrender initiative, the unrecognized stock compensation fairvalue of approximately $6.0 million related to the surrendered options wasexpensed in the year ended December 31, 2003 in our pro forma disclosure.

 

We haveestimated the fair value of each option on the date of the grant using theBlack-Scholes option-pricing model with the following 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 fairvalue of stock options granted during 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 recognizerevenue on the portion of sales to certain resellers that are subject tocontract provisions allowing various rights of return and stock rotation whenthe rights have expired or the products have been reported as sold by theresellers.

 

9

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Funding fromresearch and development agreements, other than government research anddevelopment arrangements, is recognized as revenue when certain criteriastipulated under the terms of those funding agreements have been met, and whenthere is reasonable assurance the funding will be received. Certain researchand development funding will be repayable only on the occurrence of specifiedfuture events.  If such events do notoccur, no repayment would be required. We will recognize the liability to repay research and development fundingin the period in which conditions arise that would cause research anddevelopment funding to be repayable.

 

Revenues fromcontracts with multiple-element arrangements, such as those including technicalsupport services, are recognized as each element is earned based on therelative fair value of each element and only when there are no undeliveredelements that are essential to the functionality of the delivered elements. 

 

Revenue fromlicensed software is recognized at the inception of the license term and inaccordance with Statement of Position 97-2, “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 support contracts extending beyondthe current period are recorded as deferred revenue.

 

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

*** ***

We accruewarranty costs upon the recognition of related revenue, based on our bestestimates, with reference to past and expected future experience (see note 17(b)(v)).

 

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

*** ***

We accrue forco-op advertising costs upon the later of the recognition date of the relatedrevenue or date at which the co-op advertising is available.  Market development costs are recorded asmarketing expense in accordance with the criteria in Emerging Issues Task Force01-9, “Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of Vendor’s Products)”.

 

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

*** ***

We reduce thevalue of consideration assigned to shares issued by the direct costs, net ofincome tax recoveries, of issuing the shares.

 

*(s)**         **Earnings (loss) per common share***

*** ***

We calculatebasic earnings (loss) per share based on the weighted-average number of commonshares outstanding for the year. If, in a reporting period, we have hadoutstanding dilutive stock options and warrants, we calculate diluted earnings(loss) per share using the treasury stock method.

 

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

*** ***

Under FAS No. 130,“Reporting Comprehensive Income”, we are required to report comprehensiveincome (loss), which includes our net earnings (loss) as well as changes inequity from other non-owner sources. In our case, the other changes in equityincluded in comprehensive income (loss) are comprised of the foreign currencycumulative translation adjustments and unrealized gains or losses onavailable-for-sale investments. Comprehensive income (loss) is presented in theconsolidated statements of shareholders’ equity.

 

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

*** ***

Investment taxcredits are now accounted for using the flow through method whereby suchcredits are accounted for as a reduction of income tax expense in the period inwhich the credit arises.  

 

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

*** ***

We havereclassified certain of the figures presented for comparative purposes toconform to the financial statement 

 

10

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presentation weadopted for the current year.

 

**(w)****        Recent accounting pronouncements**

*** ***

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued revised Statement of FinancialAccounting Standards No. 123R entitled “Share-Based Payment” (“FAS No. 123R”).  This revised statement addresses accountingfor stock-based compensation and results in the fair value of all stock-basedcompensation arrangements, including options, being recognized as an expense ina company’s financial statements as opposed to supplemental disclosure in thenotes to financial statements. The revised Statement eliminates the ability toaccount for stock-based compensation transactions using APB Opinion No. 25.FAS No. 123R is effective for public entities that do not file as smallbusiness issuers as of the beginning of the first fiscal year that begins afterJune 15, 2005.  We intend to adopt this standard in the periodcommencing January 1, 2006.  Theimpact of FAS No. 123 on the year ended December 31, 2005 isdisclosed in note 2(m).  The impact ofFAS No. 123R in 2006 is not yet determinable.

 

In May 2005, the FASB issued SFAS No. 154,‘‘Accounting Changes and Error Corrections’’ (‘‘SFAS 154’’), which replaces APBOpinion No. 20 ‘‘Accounting Changes’’ and SFAS No. 3, ‘‘ReportingAccounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28.’’SFAS 154 provides guidance on the accounting for and reporting of accountingchanges and error corrections. It establishes retrospective application, unlesssuch an approach is impracticable in which case prospective application of thechange is appropriate, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005 and is required to be adopted in ourfirst quarter of fiscal 2006.  Prior toSFAS 154, most accounting changes were recorded effective at the beginning ofthe year of change, with the cumulative effect at the beginning of the year ofchange recorded as a charge or credit to earnings in the period a change wasadopted.  The impact of the adoption ofSFAS 154 will have on our consolidated financial statements is not yet determinable.

 

In November 2005, the FASB issued FSPFAS 115-1 and FAS 124-1, ‘‘The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments’’ (‘‘FSP 115-1’’), which providesguidance on determining when investments in certain debt and equity securitiesare considered impaired, whether that impairment is other-than- temporary, andon measuring such impairment loss. FSP 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than temporaryimpairment and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. FSP 115-1 is requiredto be applied to reporting periods beginning after December 15, 2005 andis required to be adopted in our first quarter of fiscal 2006. The impact ofthe adoption of FSP 115-1 will have on our consolidated financial statements is not yet determinable.

 

**3.****              Acquisitionof AirPrime, Inc.**

** **

On August 12, 2003 we acquired 100percent of the outstanding securities of AirPrime, Inc. (“AirPrime”), aprivately-held supplier of high-speed CDMA wireless products located inCarlsbad, California.  We subsequentlychanged the name of AirPrime to Sierra Wireless America, Inc.  The results of AirPrime’s operations havebeen included in our consolidated financial statements since that date.  

 

The aggregate purchase price was $23,825,including common shares valued at $22,377 and costs related to the acquisitionof $1,448.  The fair value of the3,708,521 common shares issued was determined based on the average market priceof Sierra Wireless, Inc.’s common shares over the two-day period beforeand after June 16, 2003, which was the date the terms of the acquisitionwere agreed to and announced.  Under theterms of the escrow agreement dated August 12, 2003, 927,129 common shareswere deposited into escrow.  Of thatnumber, 310,355 have been released and the balance of 616,774 common sharescontinue to be held in escrow.

 

11

----

 

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.****              Restructuringand other charges**

** **

***(a) 2005 Restructuring***

*** ***

In thesecond quarter 2005, we announced our decision to exit our Voq professionalphone initiative.  In addition to theexit of the Voq initiative, we made some non-Voq related reductions to ouroperating expenses and assets.  Duringthe quarter ended June 30, 2005, we incurred restructuring and othercharges of $18,206.  In thefourth quarter of 2005 we recorded additional netcharges of $279, primarily related to a change in estimate of our facilitiesrestructuring originally announced in the second quarter of 2005.  In total, we incurred restructuring and othercharges 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 for royalty commitments of $2,749 related to a writedownof prepaid royalties in the amount of $937 and a further provision of $1,812for contractual royalty commitments.

 

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

 

We reduced our workforce by 51 employees, of which 32 were terminatedduring the second quarter of 2005 and 19 were on working notice.  Workforce reduction charges of $1,507 wererelated to the cost of severance and benefits associated with the 32 employeesterminated during the second quarter of 2005. The 19 employees on working notice all ceased employment with us priorto year-end.

 

As a result of the above noted workforce reduction, an initialfacilities restructuring provision of $711 was recorded in the second quarterof 2005 to reflect the costs related to the leased facilities that are greaterthan our current requirements.  As littleprogress was made on the facilities restructuring during the year, in thefourth quarter of 2005 an additional facilities restructuringcharge of $380 was recorded.  This,coupled with a $44 foreign exchange loss that is netted against Other Income(Expenses), results in a total charge for the year of $1,135.

 

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

 

Other charges of $690 include provisions for tooling purchasecommitments that are no longer useable and professional fees incurred inconnection with the restructuring activities.

 

Of the total $18,485 restructuring and other charges, $6,270 representscash disbursements, of which $5,876 were incurred in the second quarter of 2005and an additional $394 of which 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 incurredrestructuring and other charges as a result of our acquisition ofAirPrime.  During the year ended December 31,2003, we recorded restructuring and other charges of $1,220 as 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 intangibleassets of $605 were primarily for research and development equipment, testequipment and research and development licenses, which were no longerrequired.  These assets were written downto nil.  Workforce reduction charges of$325 were related to the cost of severance and benefits associated with 11employees whose employment was terminated. As of December 31, 2003, there were no remaining restructuringamounts to be paid related to workforce reductions.  We also recorded an additional restructuringcharge on facilities of $290 as we made little progress in 2003 on a facilitiesrestructuring that was originally announced in 2002.

 

In the last half of 2003, we also incurredintegration costs of $1,947 related to travel, facilities and costs related toeight existing employees who were retained for the transition period.  These eight employees completed theirintegration activities and were terminated as of December 31, 2003 (seenote 5).

 

The following table summarizes theprovision for business restructuring programs initiated prior to 2005 and thebalance of the provision at 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.****              Integrationcosts**

 

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.  All of these employees completed theirintegration activities and were terminated as 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-term investments of $24,724 (December 31, 2004 – nil)have contractual maturities ranging from three to

 

14

----

 

twelve months from the date 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.****              Fixedassets**

** **
| ** **                          | ** ** | **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 a capital lease with a cost of $1,201 (2004 - $1,222) andaccumulated amortization of $563 (2004 - $179) are included in fixed assets.

 

**9.****              Goodwilland intangible assets**

** **

Included in the acquisition of AirPrime in2003 (see note 3) is goodwill of $19,706 and intangible assets of $5,270.  The intangible assets acquired consisted ofintellectual property, customer relationships, licenses, and databases.  During 2004, goodwill decreased by $479 due tothe utilization of previously unrecognized pre-acquisition tax losses andcertain purchase price adjustments.

 

The components of intangible assets at December 31, 2005 and 2004are 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 aggregate amortization expense for each of the next fiveyears is expected to be $2,139per year.

 

**10.****       Long-termliabilities**

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

** **

Of the balance outstanding as at December 31, 2005, $920 is fromthe 2005 restructuring and $1,900 arises from prior restructurings (2004 – niland $2,505, respectively).

 

**11.****       Obligationsunder 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 minimum lease 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.****       Sharecapital**

** **

***Stock option plan***

 

Under the termsof our employee stock option plan, our Board of Directors may grant options toemployees, officers and directors.  Theplan provides for granting of options at the fair market value of our stock atthe grant date.  Options generally vestover four years, with the first 25% vesting at the first anniversary date ofthe grant and the balance vesting in equal amounts at the end of each monththereafter.  We determine the term ofeach option at the time it is granted, with options having a five year or a tenyear term.  Since February 1999, optionshave been granted with a five year term. During 2005, shareholders approved an amendment to theplan whereby the maximum number of shares available for issue under the plan isa rolling number equal to 10% of the number of issued and outstanding commonshares from time to time, provided that no more than 1,600,000 common shareswill be added to the number of common shares currently available for issueunder the plan without the Company first obtaining shareholder approval.  Prior to this amendment the number of sharesavailable for issuance was a specified, fixed amount.  Based on the number of shares outstanding asat December 31, 2005, stock options exercisable into 748,212 common sharesare available for future allocation under the plan.  Since this amendment to the plan through to December 31,2005, 126,791 common shares have been added to the number of common sharescurrently available for issue under the plan, to be applied against the limitof 1,600,000 common shares. 

 

Stock optionactivity 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 followingtable summarizes the stock options outstanding 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 optionsoutstanding at December 31, 2005 expire between March 9, 2006 and October 28,2010.

 

***Employee Stock Purchase Plan***

*** ***

During 2005 we established employee stock purchase plans for U.S. andCanadian and other non-U.S employees (together, the “ESPP Plans”) to enableeligible employees and directors to acquire Common Shares overthe facilities of the Toronto Stock Exchange and Nasdaq.  The ESPP Plans do not allow theissuance of Common Shares from treasury. Eligible employees and directors maycontribute up to 10% of base compensation to purchase Common Shares on thepublic markets.  Under the U.S. plan, thepurchase price to be paid by an eligible employee is 85% of the fair marketvalue of the Common Shares, with us contributing the other 15%, plus anyapplicable commissions or transactional costs. The maximum number of Common Shares that can be purchased under the U.S.plan is 50,000 Common Shares.  Under the non-U.S.plan we contribute an amount equal to 20% of the employee’s contribution,plus any applicable commissions or transactional costs.  The ESPP Plans purchase shares at certainplan-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 are outstanding warrants to purchase 138,696 of our common sharesat Cdn. $20.49 per share.  The warrantsare exercisable for a term of five years from December 30, 2003.  The warrants were issued under our agreement with the Government of Canada’sTechnology Partnerships Canada (“TPC”) program (see note 17(b)(iv)).

 

18

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

*** ***

***Fairvalue of financial instruments***

*** ***

The carryingamounts of certain of our financial instruments, including cash and cashequivalents, accounts receivable, accounts payable, accrued liabilities andcurrent portions of long-term liabilities, approximate their fair value due totheir short maturities. Short and long term investments are carried at fairmarket value; their book values for December 31, 2005 were $24,724 (2004 –nil) and $14,762 (2004 – nil), respectively. Based on borrowing rates currently available to us for loans withsimilar terms, the carrying value of our obligations under capital lease andlong-term liabilities approximates their fair value. 

 

***Concentrationsof business risk***

*** ***

We depend on asmall number of customers for a significant portion of our revenue.  In 2005, two customers accounted individuallyfor more than 10% of our revenue and, in aggregate, these customers represented35% of our revenue.  In the years ended2004 and 2003, three different customers individually accounted for more than10% of our revenue.  

 

We maintainsubstantially all of our cash and cash equivalents with major financialinstitutions or government instruments. Corporate paper is uninsured.  Our deposits with banks may exceed the amountof insurance provided on such deposits.

 

We outsourcemanufacturing of our products to third parties. We are dependent upon thedevelopment and deployment by third parties of their manufacturing abilities.The inability of any supplier or manufacturer to fulfill our supplyrequirements could impact future results. We have supply commitments to our outsource manufacturers based on ourestimates of customer and market demand. Where actual results vary from our estimates, whether due to executionon our part or market conditions, we are at risk.  

 

Financialinstruments that potentially subject us to concentrations of credit risk areprimarily accounts receivable.** **We perform on-going creditevaluations of our customer’s financial condition and require letters of creditor other guarantees whenever deemed appropriate.

 

Althoughsubstantially all of our revenues are received in U.S. dollars, we incuroperating costs and have obligations under capital leases that are denominatedin Cdn. dollars. Fluctuations in the exchange rates between these currencies couldhave a material effect on our business, financial condition and results ofoperations. We mitigate this risk by denominating many of our paymentobligations in U.S. dollars.

 

***Lineof credit***

*** ***

During2005, we had anunsecured revolving demand facility for $10,000, which bears interest at primeper annum.  Thebalance at December 31, 2005 and 2004 was nil and this facility was notutilized at all during either of fiscal 2005 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. The ultimaterealization of our deferred tax assets is dependent upon the generation offuture taxable income during the periods in which temporary differences becomedeductible. We considered projected future taxable income and tax planningstrategies 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 and development expenditures available to bededucted against future Canadian taxable income that may be carried forwardindefinitely and investment tax credits of approximately $20,564 available tooffset future Canadian federal and 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 invarious amounts commencing in 2019 through 2025.  Our foreign subsidiaries may be limited intheir ability to use foreign net operating losses in any single year dependingon their ability to generate significant taxable income.

 

***Effectivetax rate***

*** ***

Our income taxexpense for the year ended December 31 differs from that calculated byapplying statutory rates for the following reasons:

 
| ** **                                                                                                          | ** ** | **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 anddevelopment**

** **
| ** **                                        | ** ** | **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 gross research and development expense was a repaymentof funding of $865 (2004 - $1,970; 2003 - $258).

 

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

** **

Theweighted-average number of shares outstanding (in thousands) used in thecomputation of earnings (loss) per share were as follows:

 
| ** **                                                                        | ** ** | **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.****       Commitmentsand contingencies**

** **

***(a) Operating leases***

*** ***

We leaseequipment and premises with minimum future lease payments denominated in Cdn.dollars at December 31, 2005 as follows:

 
| ** ** | ** ** | **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 |   |

 

21

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***(b) Contingent liability on sale of products***

*** ***

(i)             Under licenseagreements, we are committed to make royalty payments based on the sales ofproducts using certain technologies.  Werecognize royalty obligations as determinable in accordance with agreementterms.  Where agreements are notfinalized, we have recognized our current best estimate of the obligation.  When the agreements are finalized, theestimate will be revised accordingly.

 

(ii)          We are a party to avariety of 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 aresult of contracts for sale of our products to customers where we provideindemnification against losses arising from matters such as potentialintellectual property infringements and product liabilities.  The impact on our future financial results isnot subject to reasonable estimation because considerable uncertainty exists asto whether claims will be made and the final outcome of potential claims.  To date, we have not incurred material costsrelated 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 agreementsis contingent upon reaching certain revenue 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 the terms of the agreement, an amountup to a maximum of Cdn. $13,000 is to be repaid based on annual sales, inexcess of certain minimum amounts, of specified products commencing in2004.  As all funds available under thisprogram were earned prior to 2004, during the years ended December 31,2005 and 2004, we claimed nil.  Duringthe year ended December 31, 2005, we have recorded, in research anddevelopment expense, the accrued repayment of $847 (2004 – $1,940; 2003 – nil). In addition, we issued warrants to TPC to purchase 138,696 common shareson December 30, 2003, valued at Cdn. $2,000 based on the Black-Scholesoption 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, nowarrants have been exercised.

 

In March 2004, we entered into a second agreement with TPC underwhich we are eligible to receive conditionally repayable research and developmentfunding up to Cdn. $9,540 to support the development of a range of thirdgeneration wireless technologies.   Theagreement is effective April 2003. During the year ended December 31, 2005, we have claimed $893 (2004– $2,643), which has been recorded as a reduction of research and developmentexpense.  Unless the second agreement isotherwise renegotiated, with the termination of the Voq professional phoneinitiative in the second quarter of 2005 no further TPC funding isanticipated.  During the year ended December 31, 2005, wehave recorded, in research and development expense, the accrued repayment of$18 (2004 – nil).  Under the terms ofthe agreement, repayment based on a percentage of annual sales, in excess ofcertain minimum amounts, will be made over the period from April 2003 to December 2011.  The funding is repayable upon the occurrenceof certain events of default, which include material change or insolvencyevents.  If the payments during thisperiod are less than Cdn. $16,455, payments will continue subsequent to December 2011until the earlier of when the amount is reached or December 2014.  No repayments were made in 2005.  

 

(v)         We accrue productwarranty costs, when we sell the related products, to provide for the repair orreplacement of defective products.  Ouraccrual is based on an assessment of historical experience and on management’s estimates.  An analysis of changes in the liability forproduct 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 commitmentstotaling approximately $32,803 with certain contract manufacturers under whichwe have committed to buy a minimum amount of designated products between January 2006and March 2006.  In certain of theseagreements, we may be required to acquire and pay for such products up to theprescribed minimum or forecasted purchases.  

 

***(d)******    Legalproceedings ***

*** ***

(i)                  Sierra WirelessAmerica, Inc., as successor to AirPrime, Inc., along with otherdefendants, has been served with the complaint of Joshua Cohen and DavidBeardsley and others, filed in the U.S. District Court for the Central Districtof California for alleged violations of federal and state securities lawsallegedly occurring prior to the time AirPrime, Inc. was acquired by theCompany.  The plaintiffs filed the thirdamended complaint on July 7, 2005. In November of 2005, the District Court dismissed the third amendedcomplaint, without prejudice, with respect to the Company and most of the otherdefendants.  The plaintiffs did not filea 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.  TheDistrict Court so ordered on February 27, 2006.  The plaintiffs filed a notice of appeal tothe U.S. Court of Appeals for the Ninth Circuit on March 8, 2006. Weexpect that it will be several months before they file their appeal brief.  In December 2005, we were served with asimilar class action complaint of David Beardsley and others, filed in theSuperior Court of the State of California, County of San Diego, for allegedviolations of state securities laws in connection with the same allegedfacts.  On February 6, 2006, wefiled a Motion to Stay the state court action pending resolution of the nearlyidentical federal action. ** **We expect the Motion to Stay willbe heard by the San Diego Superior Court in late March, 2006.  We have given notice to our liabilityinsurance carrier, which has agreed to pay our costs of defense that exceed thepolicy’s retention amount, subject to a reservation of rights in the event itis determined that the carrier has no liability for this litigation and withoutconceding any liability for payment of loss. We have also submitted an escrow claim notice under the escrow agreementdated August 12, 2003 relating to the acquisition of AirPrime and theescrow shareholders are disputing their obligations with respect to thiscomplaint.  Although there can be noassurance that an unfavourable outcome of the dispute would not have a materialadverse effect on our operating results, liquidity or financial position, webelieve the claims are without merit and will vigorously defend them.  The Company has determined that it is notpossible to establish a reasonable estimate of the possible loss, or range ofpossible loss, if any. 

 

(ii)               The Company and certain of our currentand former officers were named as defendants in several class action complaintsfiled in the U.S. District Court for the Southern District of New York and theU.S. District Court for the Southern District of California for allegedviolations of federal securities laws. The actions filed in the U.S. District Court for the Southern Districtof California have been transferred to the U.S. District Court for the SouthernDistrict 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 theirconsolidated amended complaint on February 21, 2006 and the defendantshave until early April to file their Motion to Dismiss.  We have given notice to our liabilityinsurance carrier, which has agreed to pay our costs of defense that exceed thepolicy’s retention amount, subject to a reservation of rights in the event thatit is determined that the carrier has no liability for this litigation.  Although there can be no assurance that anunfavourable outcome would not have a material adverse effect on our operatingresults, liquidity or financial position, we believe the claims are withoutmerit and will vigorously defend the lawsuits. The Company has determined that it is not possible to establish a reasonableestimate of the possible loss, or range of possible loss, if any. However, theCompany believes that it is probable that the legal costs related to thesecomplaints may exceed our policy retention amount of $1,000.  Accordingly, we 

 

23

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accrued $1,000 in our results of operationsfor 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.  We were added as a defendant in existingcivil action No. 04 C 7044 MLR, LLC v. Kyocera Wireless Corporation andNovatel Wireless, Inc.  Since that date, we have reached an agreement with MLR,under which we received non-royalty bearing licenses to use all of MLR’spresent and future patents for all of our products and MLR released us from allclaims related to their patent portfolio. MLR has dismissed all claims against us in the lawsuit. 

 

(iv)           In July 2001,Metricom, Inc. (“Metricom”), one of our customers, filed a Chapter 11reorganization under the U.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 the reorganized debtor underwhich we agreed to reduce our general unsecured claim to $10,250.  We received a settlement of $2,321 in 2003,of which $513 was included in the determination of our net income for 2003 (2002 — $1,808).  In 2004, we received an additional $513 thatwas included in our net income for 2004. In 2005, we have not received any additional proceeds from thissettlement.  

 

(v)              We are engaged in certain legal actions inthe ordinary course of business and believe that the ultimate outcome of theseactions will not have a materialadverse effect on our operating results, liquidity or financial position. 

 

**18.****       Supplementaryinformation**

** **
| ** **                                                          | ** ** | **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.****       Segmentedinformation**

** **

We operate inthe wireless communications solutions industry and all sales of our productsand services are made in this segment. Management makes decisions aboutallocating resources based on the one operating segment.

 

Revenues byproduct 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%) of our 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 certainproducts through resellers, original equipment manufacturers, and wirelessservice providers who sell these products to end-users.  The approximate sales to the significantchannels are as follows:

 
| ** ** | ** ** | **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.****       DifferencesBetween United States and Canadian 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 provided that,if the SEC issuer previously filed or included in a prospectus financialstatements prepared in accordance with Canadian GAAP, the issuer complies withcertain disclosure requirements.  Thoserequirements include explaining and quantifying the differences betweenCanadian and U.S. GAAP for the current and comparative 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 of the net earnings (loss) betweenU.S. GAAP and Canadian GAAP for the years ended December 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 | ) |

 

***(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 HB 3870, with restatement of prior periodsto record the compensation cost that would have been recognized had the fairvalue recognition provisions of HB 3870 been applied to all awards granted toemployees since the inception of the stock option plan.  

 

***(b)******              Researchand development***

*** ***

UnderU.S. GAAP, we expense research and development costs as they are incurred.  Under Canadian GAAP, we expense researchcosts as they are incurred.  Developmentcosts are expensed unless they meet certain specified criteria for deferral andamortization.  No development costs havebeen deferred during the years ended December 31, 2005, 2004, and 2003, asthe criteria for deferral were not met.

 

***(c)******               Othercomprehensive income***

*** ***

UnderU.S. GAAP, we report comprehensive income or loss in accordance with theprovisions of Statement of Financial Accounting Standards No. 130 entitled“Reporting Comprehensive Income”.  UnderCanadian GAAP, we are not required to report comprehensive income or loss.

 

***(d)******              Shortand long-term investments***

*** ***

Under U.S. GAAP, Statement of Financial AccountingStandards No. 115 entitled “Accounting for Certain Investments in Debt andEquity Securities”, prescribes that available-for-sale investments are markedto market with the resulting unrealized gains (losses) being recorded in othercomprehensive income, and subsequently reclassified to earnings at the timethey are realized.  Under Canadian GAAP,these investments are carried at the lower of cost and quoted market value,with unrealized losses recorded in net earnings (loss).

 

***(e)******               Futureincome taxes***

*** ***

UnderU.S. GAAP, tax rates applied in the calculation of future income taxes arethose rates that are passed into law. Under Canadian GAAP, substantively enacted tax rates are used.  There has been no impact to any of thenumbers in the years ended December 31, 2003, 2004 and 2005.

 

***(f)******                 Investmenttax credits***

*** ***

UnderU.S. GAAP, investment tax credits are accounted for using the flow throughmethod whereby such credits are accounted for as a reduction of income taxexpense in the period 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)******              Foreigncurrency translation***

*** ***

Duringthe year ended December 31, 1999, the Company changed its reporting andfunctional currency from Canadian dollars to U.S. dollars.  Under U.S. GAAP, the shareholders’ equityaccounts were translated into U.S. dollars at the rate in effect at theoriginal transaction date, while under Canadian GAAP, all amounts weretranslated into U.S. dollars at the rate in effect on December 31, 1999. 

 

***(h)******              Stockoption tax deduction***

*** ***

Thetax benefit related to the stock option deduction is calculated as thedifference between the cumulative accounting deduction and the taxdeduction.  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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