**Exhibit 99.6**

 

## ***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 control 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 to reviewthe consolidated financial statements and the independent auditors’ report. Theaudit committee reported its findings to the Board of Directors who haveapproved the consolidated financial statements.

 

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

 
| /s/ David B. Sutcliffe                                                          |                                       | /s/ David G. McLennan |   |
|---------------------------------------------------------------------------------|--------------------------------------------|-----------------------|--------|
| David B. Sutcliffe  Chairman and Chief Executive Officer  January 21, 2005 | David G. McLennan  Chief Financial Officer |

 

**REPORTOF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM TO THESHAREHOLDERS**

 

We have audited the consolidated balance sheets of Sierra Wireless, Inc.as at December 31, 2004 and 2003 and the consolidated statements ofoperations, shareholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2004. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with the standards established bythe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free from material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating 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, 2004 and 2003 and the results of its operations and itscash flows for each of the years in the three-year period ended December 31,2004 in accordance with U.S. generally accepted accounting principles.

 

On January 21, 2005, except as to Notes 17(d)(i) and 20, whichare as of March 4, 2005, we reported separately to the shareholders of theCompany on the consolidated financial statements as at and for the periods presentedabove, which consolidated financial statements were prepared in accordance withCanadian generally accepted accounting principles.

 
| /s/ KPMG LLP                                                                                                                                   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Chartered Accountants  Vancouver, Canada  January 21, 2005, except as to Notes 17(d)(i) and  20, which are as of March 4, 2005. |

 

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**SIERRA WIRELESS, INC.**

 

**Consolidated Statements of Operations**(Expressed inthousands of United States dollars, except per share amounts)(Prepared in accordance with United States generally accepted accountingprinciples (GAAP))

 
| ** **                               | ** ** | **Years ended  December 31,** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue                                  |       | $                                  | 77,259     |   | $ | 101,709 |   | $ | 211,205 |   |
| Cost of goods sold                       |       | 69,261                             |       | 60,551 |   | 127,600 |   |
| Gross margin                             |       | 7,998                              |       | 41,158 |   | 83,605 |   |
|                                     |       |                               |       |   |   |   |   |
| Expenses:                                |       |                               |       |   |   |   |   |
| Sales and marketing                      |       | 11,564                             |       | 11,585 |   | 20,029 |   |
| Research and development, net (note 15)  |       | 14,896                             |       | 15,994 |   | 24,527 |   |
| Administration                           |       | 4,785                              |       | 6,597 |   | 8,993 |   |
| Restructuring and other charges (note 4) |       | 12,869                             |       | 1,220 |   | 289 |   |
| Integration costs (note 5)               |       | —                             |       | 1,947 |   | — |   |
| Amortization                             |       | 2,331                              |       | 2,327 |   | 2,438 |   |
|                                     |       | 46,445                             |       | 39,670 |   | 56,276 |   |
| Earnings (loss) from operations          |       | (38,447                            | )          | 1,488 |   | 27,329 |   |
| Other income                             |       | 247                                |       | 965 |   | 1,989 |   |
| Earnings (loss) before income taxes      |       | (38,200                            | )          | 2,453 |   | 29,318 |   |
| Income tax expense (note 14)             |       | 3,463                              |       | 198 |   | 4,398 |   |
| Net earnings (loss)                      |       | $                                  | (41,663    | ) | $ | 2,255 |   | $ | 24,920 |   |
|                                     |       |                               |       |   |   |   |   |
| Earnings (loss) per share (note 16):     |       |                               |       |   |   |   |   |
| Basic                                    |       | $                                  | (2.56      | ) | $ | 0.12 |   | $ | 0.99 |   |
| Diluted                                  |       | $                                  | (2.56      | ) | $ | 0.12 |   | $ | 0.96 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SIERRA WIRELESS, INC.**

 

**Consolidated Balance Sheets**

(Expressed in thousands of United States dollars)(Prepared in accordance with United States GAAP)

 
| ** **                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2003**              | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                      |       |                  |       |   |   |
| Current assets:                                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                       |       | $                     | 70,358     |   | $ | 131,846 |   |
| Short-term investments (note 6)                                                                                                                                                 |       | 14,760                |       | — |   |
| Accounts receivable, net of allowance for doubtful accounts  of $2,468 (2003 — $2,230)                                                                                     |       | 21,566                |       | 22,506 |   |
| Inventories (note 7)                                                                                                                                                            |       | 1,511                 |       | 11,090 |   |
| Prepaid expenses                                                                                                                                                                |       | 2,223                 |       | 5,021 |   |
|                                                                                                                                                                            |       | 110,418               |       | 170,463 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Long-term investments (note 6)                                                                                                                                                  |       | 24,639                |       | — |   |
| Fixed assets (note 8)                                                                                                                                                           |       | 5,985                 |       | 10,044 |   |
| Intangible assets (note 9)                                                                                                                                                      |       | 14,620                |       | 14,208 |   |
| Goodwill (note 9)                                                                                                                                                               |       | 19,706                |       | 19,227 |   |
| Deferred income taxes (note 14)                                                                                                                                                 |       | 500                   |       | 500 |   |
| Other                                                                                                                                                                           |       | —                |       | 1,152 |   |
|                                                                                                                                                                            |       | $                     | 175,868    |   | $ | 215,594 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| **Liabilities and Shareholders’ Equity**                                                                                                                                   |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                |       | $                     | 5,966      |   | $ | 4,122 |   |
| Accrued liabilities                                                                                                                                                             |       | 22,221                |       | 33,890 |   |
| Deferred revenue and credits                                                                                                                                                    |       | 399                   |       | 461 |   |
| Current portion of long-term liabilities (note 10)                                                                                                                              |       | 1,328                 |       | 758 |   |
| Current portion of obligations under capital lease  (note 11)                                                                                                                   |       | 141                   |       | 664 |   |
|                                                                                                                                                                            |       | 30,055                |       | 39,895 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Long-term liabilities (note 10)                                                                                                                                                 |       | 2,266                 |       | 1,747 |   |
| Obligations under capital lease (note 11)                                                                                                                                       |       | —                |       | 287 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Shareholders’ equity:                                                                                                                                                      |       |                  |       |   |   |
| Share capital (note 12)                                                                                                                                                         |       |                  |       |   |   |
| Authorized 

   Unlimited number of common and  preference shares with no par value 

Common shares, 25,357,231 (2003 – 24,822,071) issued  and outstanding |       | 214,047               |       | 218,805 |   |
| Additional paid-in capital                                                                                                                                                      |       | —                |       | 440 |   |
| Warrants                                                                                                                                                                        |       | 1,538                 |       | 1,538 |   |
| Deficit                                                                                                                                                                         |       | (71,309               | )          | (46,389 | ) |
| Accumulated other comprehensive loss 

   Cumulative translation adjustments                                                                                |       | (729                  | )          | (729 | ) |
|                                                                                                                                                                            |       | 143,547               |       | 173,665 |   |
|                                                                                                                                                                            |       | $                     | 175,868    |   | $ | 215,594 |   |

 

Commitments and contingencies (note 17)

See accompanying notes to consolidated financial statements.

 
|   | /s/ David B. Sutcliffe   |               | /s/ S. Jane Rowe |   |
|--------|--------------------------|--------------------|------------------|--------|
|   |  DAVID B. SUTCLIFFE |  S. JANE ROWE |
|   |  Director           |  Director     |

 

----

 

**SIERRA WIRELESS, INC.**

 

**Consolidated Statements of Shareholders’ Equity**(Expressed inthousands of United States dollars, except number of shares)(Prepared in accordance with United States GAAP)

 
| ** **                             | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|------------|------------|-------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| ** **                             | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **  | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Common Shares** | ** ** | **Paid-in** | ** ** | **Warrants**   | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | ** **  | ** ** |
| ** **                             | ** ** | **Number**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Number** | ** ** | **Amount**        | ** ** | **Deficit** | ** ** | **(Loss)**      | ** ** | **Total**  | ** ** |
|                                   |       |              |       |        |       |           |       |       |       |              |       |        |       |            |       |       |       |
| Balance December 31, 2001         |       | 16,185,770        |       | $           | 122,673    |           | $          | —     |       | —            |       | $           | —     |            | $          | (31,901    | )          | $ | (729 | ) | $ | 90,043 |   |
| Net and comprehensive loss             |       | —            |       | —      |       | —         |       | —     |       | —            |       | (41,663     | )          | —          |       | (41,663    | )          |
| Stock option exercises                 |       | 159,626           |       | 374         |       | —         |       | —     |       | —            |       | —      |       | —          |       | 374        |       |
| 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     |       |
| Additional paid-in capital             |       | —            |       | —      |       | 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 |   |

 

See accompanying notes to consolidated financial statements.

 

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**SIERRA WIRELESS, INC.**ConsolidatedStatements of Cash Flows

 

(Expressed in thousands of United States dollars)(Prepared in accordance with United States GAAP)

 
| ** **                                                                                            | ** ** | **Years ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                            | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                                 |       |                               |       |   |   |   |   |
| Net earnings (loss)                                                                                   |       | $                                  | (41,663    | ) | $ | 2,255 |   | $ | 24,920 |   |
| Adjustments to reconcile net earnings (loss) to net cash provided by  operating activities  |       |                               |       |   |   |   |   |
| Amortization                                                                                          |       | 6,788                              |       | 5,669 |   | 6,915 |   |
| Tax benefit related to stock option deduction                                                         |       | —                             |       | — |   | 440 |   |
| Non-cash restructuring and other charges                                                              |       | 28,593                             |       | 895 |   | 289 |   |
| Loss (gain) on disposal                                                                               |       | 597                                |       | 2 |   | (66 | ) |
| Deferred income taxes                                                                                 |       | 3,754                              |       | — |   | — |   |
| Accrued warrants                                                                                      |       | 481                                |       | 386 |   | — |   |
| Changes in operating assets and liabilities                                                      |       |                               |       |   |   |   |   |
| Accounts receivable                                                                                   |       | (3,361                             | )          | (5,360 | ) | (1,384 | ) |
| Inventories                                                                                           |       | 2,517                              |       | 5,878 |   | (9,579 | ) |
| Prepaid expenses                                                                                      |       | 159                                |       | (1,087 | ) | (2,798 | ) |
| Accounts payable                                                                                      |       | (1,339                             | )          | 225 |   | (1,844 | ) |
| Accrued liabilities                                                                                   |       | (463                               | )          | 5,296 |   | 12,148 |   |
| Deferred revenue and credits                                                                          |       | (753                               | )          | 101 |   | 62 |   |
| Net cash provided by (used in) operating activities                                                   |       | (4,690                             | )          | 14,260 |   | 29,103 |   |
|                                                                                                  |       |                               |       |   |   |   |   |
| Cash flows from investing activities:                                                                 |       |                               |       |   |   |   |   |
| Business acquisitions (note 3)                                                                        |       | —                             |       | 33 |   | — |   |
| Proceeds on disposal                                                                                  |       | 338                                |       | 4 |   | 69 |   |
| Purchase of fixed assets                                                                              |       | (2,219                             | )          | (1,972 | ) | (7,120 | ) |
| Increase in intangible assets                                                                         |       | (1,431                             | )          | (4,077 | ) | (2,123 | ) |
| Increase in other assets                                                                              |       | —                             |       | — |   | (1,152 | ) |
| Purchase of long-term investments                                                                     |       | —                             |       | (24,639 | ) | (21,369 | ) |
| Proceeds on disposal of long-term investments                                                         |       | —                             |       | — |   | 46,186 |   |
| Purchase of short-term investments                                                                    |       | (14,662                            | )          | (25,103 | ) | (21,305 | ) |
| Proceeds on maturity of short-term investments                                                        |       | 46,541                             |       | 10,492 |   | 36,247 |   |
| Net cash provided by (used in) investing activities                                                   |       | 28,567                             |       | (45,262 | ) | 29,433 |   |
|                                                                                                  |       |                               |       |   |   |   |   |
| Cash flows from financing activities:                                                                 |       |                               |       |   |   |   |   |
| Issue of common shares, net of share issue costs                                                      |       | 374                                |       | 68,623 |   | 4,758 |   |
| Repayment of long-term liabilities                                                                    |       | (1,495                             | )          | (2,104 | ) | (1,806 | ) |
| Net cash provided by (used in) financing activities                                                   |       | (1,121                             | )          | 66,519 |   | 2,952 |   |
|                                                                                                  |       |                               |       |   |   |   |   |
| Net increase in cash and cash equivalents                                                             |       | 22,756                             |       | 35,517 |   | 61,488 |   |
| Cash and cash equivalents, beginning of year                                                          |       | 12,085                             |       | 34,841 |   | 70,358 |   |
| Cash and cash equivalents, end of year                                                                |       | $                                  | 34,841     |   | $ | 70,358 |   | $ | 131,846 |   |

 

See supplementary cash flow information (note 18)

 

See accompanying notes to consolidated financial statements.

 

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**SIERRA WIRELESS, INC.**

 

**Notes to Consolidated Financial Statements**

 

Years ended December 31, 2002, 2003 and 2004(Expressed in thousands of United States dollars, except per share amounts andnumber of shares)(Prepared in accordance with United States GAAP)

 

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

 

We wereincorporated under the Canada Business Corporations Act on May 31, 1993.We develop and market a broad range of products that include wireless datamodems for portable computers, embedded modules for original equipmentmanufacturers, or OEMs, rugged vehicle-mounted modems and mobile phones.  Our products permit users to access wirelessdata and voice networks using notebook computers, personal digital assistants,or PDAs, vehicle-based systems and mobile phones.

 

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

 

Management has prepared these consolidated financial statements inaccordance with accounting principles generally accepted in the United States.

 

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

 

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

 

*(b)**       **Use of estimates***

 

In preparing the financial statements in conformity with generallyaccepted accounting principles, management makes estimates and assumptions thataffect the reported amounts of assets, particularly the recoverability of fixedassets, intangible assets, goodwill and deferred income taxes, and warrantyaccruals and other liabilities, and disclosures of contingent liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theestimates.

 

*(c)**        **Cash equivalents***

 

Cash equivalents include short-term deposits, which are all highly liquidsecurities having a term to maturity of three months or less when acquired. Wevalue our short-term deposits at amortized cost.

 

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

 

Short-term investments, all of which we categorize as available-for-sale,are carried at quoted market value. We reflect unrealized holding gains(losses) related to available-for-sale investments, after deducting amountsallocable to income taxes, as part of accumulated other comprehensive income, aseparate component of shareholders’ equity. There were no significantunrealized holding gains or losses on available-for-sale securities during thethree-year period ending December 31, 2004.

 

*(e)**        **Inventories***

 

Inventories consist of electronic components and finished goods and arevalued at the lower of cost, determined on a first-in-first-out basis, andestimated net realizable value.

 

----

 

*(f)**           **Research and development***

 

We expense research and development costs as they are incurred. To datewe have had no significant software development costs that would be required tobe capitalized pursuant to Financial Accounting Standards (“FAS”) No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”.

 

We follow the cost reduction method of accounting for government researchand development funding, whereby the benefit of the funding is recognized as areduction in the cost of the related expenditure when certain criteria stipulatedunder the terms of those funding agreements have been met, and there isreasonable assurance the research and development funding will bereceived.  Certain research anddevelopment funding is repayable only on the occurrence of specified futureevents.  If such events do not occur, norepayment is required.  We recognize theliability to repay research and development funding in the period in whichconditions arise that will cause research and development funding to berepayable.

 

*(g)**       **Long-term investments***

 

Long-term investments, all of which we categorize as available-for-sale,are carried at quoted market value. We reflect unrealized holding gains(losses) related to available-for-sale investments, after deducting amountsallocable to income taxes, as part of accumulated other comprehensive income, aseparate component of shareholders’ equity. There were no significantunrealized holding gains or losses on available-for-sale securities at December 31,2004.

 

*(h)**       **Fixed assets***

 

We initially record fixed assets at cost. We subsequently provideamortization on a straight-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 amortize leasehold improvements on a straight-line basis over thelower of their useful lives or lease terms.

 

*(i)**          **Intangible assets***

 

*Patents and trademarks*

 

Consideration paid for patents and trademarks is amortized on astraight-line basis over three to five years commencing with the date thepatents or trademarks are granted.

 

*License fees*

 

Consideration paid for license fees is amortized on a straight-line basisover the shorter of the term of the license or five years.

 

*Intellectual property, customer relationships anddatabases*

 

Consideration paid for intellectual property, customer relationships anddatabases is amortized on a straight-line basis over three to five years.  Each of these intangible assets is subject toan impairment test as described in note 2(k).

 

*(j)**           **Goodwill***

 

Goodwill represents the excess of the purchase price of an acquiredenterprise over the fair 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 an indefinite life, is not amortized and is subject to atwo-step impairment test at least annually. The first step compares the fair value of the reporting unit to itscarrying amount, which includes the goodwill. When the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not to be impaired and the secondstep of the impairment test is unnecessary. If the carrying amount exceeds the fair value, the second part of thetest is performed 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.

 

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

 

We monitor the recoverability of long-lived assets, which includes fixedassets and intangible assets, other than goodwill, based on factors such asfuture asset utilization and the future undiscounted cash flows expected toresult from the use of the related assets. Our policy is to record animpairment loss in the period when we determine that the carrying amount of theasset will not be recoverable. At that time the carrying amount is written downto fair value.

 

*(l)**          **Income taxes***

 

We account forincome taxes in accordance with FAS No. 109, “Accounting for Income Taxes”,which requires the use of the asset and liability method. Under this method,deferred income taxes are recognized for the future income tax consequencesattributable to differences between the financial statement carrying values andtheir respective income tax bases (temporary differences). Changes in the netdeferred tax asset or liability are generally included in earnings. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which temporary differences areexpected to be recovered or settled. The effect on deferred income tax assetsand liabilities of a change in tax rates is included in income in the periodthat includes the enactment date. Deferred income tax assets are evaluated andif their realization is not considered “more likely than not”, a valuationallowance is provided.

 

*(m)**     **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 usesa fair value method of calculating the cost of stock option grants. Hadcompensation cost for our employee stock option plan been determined by thismethod, our net earnings (loss) and earnings (loss) per share would have beenas follows:

 

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| ** **                                                                                                          | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net earnings (loss):                                                                                                |       |                               |       |   |   |   |   |
| As reported                                                                                                         |       | $                                  | (41,663    | ) | $ | 2,255 |   | $ | 24,920 |   |
| Less: Total stock-based employee compensation expense determined under fair value  based method for all awards |       | (7,817                             | )          | (14,775 | ) | (5,591 | ) |
| Pro forma                                                                                                           |       | $                                  | (49,480    | ) | $ | (12,520 | ) | $ | 19,329 |   |
|                                                                                                                |       |                               |       |   |   |   |   |
| Basic earnings (loss) per share:                                                                                    |       |                               |       |   |   |   |   |
| As reported                                                                                                         |       | $                                  | (2.56      | ) | $ | 0.12 |   | $ | 0.99 |   |
| Pro-forma                                                                                                           |       | (3.03                              | )          | (0.68 | ) | 0.77 |   |
|                                                                                                                |       |                               |       |   |   |   |   |
| Diluted earnings (loss) per share:                                                                                  |       |                               |       |   |   |   |   |
| As reported                                                                                                         |       | $                                  | (2.56      | ) | $ | 0.12 |   | $ | 0.96 |   |
| Pro-forma                                                                                                           |       | (3.03                              | )          | (0.68 | ) | 0.75 |   |

 

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

 

As a result of our voluntary option surrender initiative, theunrecognized stock compensation fair value of $5,956 related to the surrenderedoptions was expensed in the year ended December 31, 2003 in our pro formadisclosure.

 

We have estimated the fair value of each option on the date of the grantusing the Black-Scholes option-pricing model with the following assumptions:

 
| ** **                      | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Expected dividend yield         |       | 0                                  |       | 0 |   | 0 |   |
| Expected stock price volatility |       | 107                                | %          | 102 | % | 93 | % |
| Risk-free interest rate         |       | 4.48                               | %          | 3.83 | % | 3.76 | % |
| Expected life of options        |       | 4 years                            |       | 4 years |   | 4 years |   |

 

The fair value of stock options granted during the year was $16.71 (2003– $7.56, 2002 - $4.58).

 

*(n)**       **Revenue recognition***

 

We recognizerevenue from sales of products and services upon the later of transfer of titleor upon shipment of the product to the customer or rendering of the service, solong as collectibility is reasonably assured. Customers include resellers,original equipment manufacturers, wireless service providers and end-users. Werecord deferred revenue when we receive cash in advance of the revenuerecognition criteria being met.

 

We recognize revenue on the portion of sales to certain resellers thatare subject to provisions allowing various rights of return and stock rotationwhen the rights have expired or the products have been reported as sold by theresellers.

 

Funding from research and development agreements, other than governmentresearch and development arrangements, is recognized as revenue when certaincriteria stipulated under the terms of those funding agreements have been met,and when there is reasonable assurance the funding will be received. Certainresearch and development funding will be repayable only on the occurrence ofspecified future events.  If such eventsdo not occur, no repayment would be required. We will recognize the liability to repay research and developmentfunding in the period in which conditions arise that would cause research anddevelopment funding to be repayable.

 

Revenues from contracts with multiple-element arrangements, such as thoseincluding technical support services, are recognized as each element is earnedbased on the relative fair value of each element and only when there are noundelivered elements that are essential to the functionality of the deliveredelements.

 

----

 

Revenue from licensed software is recognized at the inception of thelicense term and in accordance with Statement of Position 97-2, “SoftwareRevenue Recognition”.  Revenue fromsoftware maintenance, unspecified upgrades and technical support contracts is recognizedover the period such items are delivered or services are provided.  Technical support contracts extending beyondthe current period are recorded as deferred revenue.

 

*(o)**       **Warranty costs***

 

We accrue warranty costs upon the recognition of related revenue, basedon our best estimates, with reference to past experience.

 

*(p)**       **Market development costs***

 

We accrue for co-op advertising costs upon the later of the recognitiondate of the related revenue or date at which the co-op advertising isavailable.  Market development costs arerecorded as marketing expense in accordance with the criteria in EmergingIssues Task Force 01-9, “Accounting for Consideration Given by a Vendorto a Customer (Including a Reseller of Vendor’s Products)”.

 

*(q)**       **Share issue costs***

 

We reduce the value of consideration assigned to shares issued by thedirect costs, net of income tax recoveries, of issuing the shares.

 

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

 

We calculate basic earnings (loss) per share based on theweighted-average number of common shares outstanding for the year. If, in areporting period, we have had outstanding dilutive stock options and warrants,we calculate diluted earnings (loss) per share using the treasury stock method.

 

*(s)**         **Comprehensive income***

 

Under FAS No. 130, “Reporting Comprehensive Income”, we are requiredto report comprehensive income (loss), which includes our net earnings (loss)as well as changes in equity from other non-owner sources. In our case, theother changes in equity included in comprehensive income (loss) comprise theforeign currency cumulative translation adjustments. Comprehensive income(loss) is presented in the consolidated statements of shareholders’ equity.

 

*(t)**          **Investment tax credits***

 

Investment tax credits are now accounted for using the flow through methodwhereby such credits are accounted for as a reduction of income tax expense inthe period in which the credit arises. Prior to 2004, we used the cost reduction method whereby such creditsare accounted for as a reduction of the related asset or expenditure.  As no investment tax credits were claimed in2002 or 2003, the change in policy has no impact on the amounts presented.

 

*(u)**       **Comparative figures***

 

We have reclassified certain of the figures presented for comparativepurposes to conform to the financial statement presentation we adopted for thecurrent year.

 

*(v)**        **Recent accounting pronouncements***

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued revised Statement ofFinancial Accounting Standards No. 123 entitled “Share-Based Payment” (“FASNo. 123”).  This revised statementaddresses accounting for stock-based compensation and results in the fair valueof all stock-based compensation arrangements, including options, beingrecognized as an expense in a company’s financial statements as opposed tosupplemental disclosure in the notes to financial statements. The revisedStatement eliminates the ability to account for stock-based compensationtransactions using APB Opinion No. 25. FAS No. 123 is effective for public entities that do not file assmall business issuers as of the beginning of the first interim or annualreporting period that begins after June 15, 2005.

 

----

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 151 entitled “Inventory Costs – an amendment ofARB No. 43, Chapter 4” (“FAS No. 151”).  This statement amends the guidance in ARB No. 43to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and spoilage. FAS No. 151 requires that these items be recognized as currentperiod charges.  We have adopted FAS No. 151,which had no effect on our consolidated financial statements

 

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

 

On August 12,2003 we acquired 100 percent of the outstanding securities of AirPrime, Inc.(“AirPrime”), a privately-held supplier of high-speed CDMA wireless productslocated in Carlsbad, California.  Wesubsequently changed 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 aggregatepurchase price was $23,825, including common shares valued at $22,377 and costsrelated to the acquisition of $1,448. The fair value of the 3,708,521 common shares issued was determinedbased on the average market price of Sierra Wireless, Inc.’s common sharesover the two-day period before and after June 16, 2003, which was the datethe terms of the acquisition were agreed to and announced.  Under the terms of the escrow agreement datedAugust 12, 2003, 927,129 common shares were deposited into escrow.  Of that number, 309,064 common shares havebeen released and the balance continue to be held inescrow.

 

The followingtable summarizes the fair value of the assets acquired and liabilities assumedat 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 followingtable 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      |                          | $          | 1,040           |       | $ | 2,740 |   |
| Customer relationships            |       | 5                                     |       | 940                      |       | 258                           |       | 682             |       |
| Licenses                          |       | 5                                     |       | 400                      |       | 114                           |       | 286             |       |
| Databases                         |       | 5                                     |       | 150                      |       | 41                            |       | 109             |       |
| Total purchased intangible assets |       |                                  |       | $                        | 5,270      |                          | $          | 1,453           |       | $ | 3,817 |   |

 

----

 

The estimatedfuture amortization expense of purchased intangible assets is as follows:

 
| **Fiscal  Year** | ** ** | **Net  Amount** | ** ** |
|------------------|------------|-----------------|------------|
| 2005             |       | $               | 1,054      |   |
| 2006             |       | 1,054           |       |
| 2007             |       | 1,054           |       |
| 2008             |       | 655             |       |
| Total            |       | $               | 3,817      |   |

 

If theacquisition of AirPrime had occurred as of January 1, 2002, the pro formaoperating results may have been as follows:

 
| ** **     | ** ** | **2002** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
|           |       |     |       |     |       |
| Revenue        |       | $        | 96,282     |     | $          | 118,514 |   |
| Net loss       |       | (58,775  | )          | (1,166   | )          |
| Loss per share |       | $        | (2.94      | )        | $          | (0.05 | ) |

 

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

 

In the thirdquarter of 2004, we recorded an additional facilitiesrestructuring charge of $289 related to a change in estimate of the futureoperating expenses and the foreign exchange loss on the Canadian dollardenominated liability.

 

In the thirdquarter of 2003, we incurred restructuring and other charges as a result of ouracquisition of AirPrime.  During the yearended 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 writedownsof fixed and intangible assets of $605 were primarily for research anddevelopment equipment, test equipment and research and development licenses,which were no longer required.  Theseassets were written down to nil. Workforce reduction charges of $325 were related to the cost ofseverance and benefits associated with 11 employees whose employment wasterminated.  Of the 11 employees, sevenwere in product development and four were in manufacturing.  As of December 31, 2003, there were noremaining restructuring amounts to be paid out related to workforcereductions.  We also recorded anadditional facilities restructuring charge of $290 as we made little progressin 2003 on the facilities restructuring 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).

 

In the secondquarter of 2002, we announced and implemented a business restructuring programunder which we reduced operating expensesand asset levels as a result of our assessment of current and visible futuredemand.  During 2002, we recordedrestructuring and other charges of $37,707 associated with the writedown ofCDPD and 2G CDMA inventory, fixed and intangible asset impairment charges,workforce reductions, charges related to excess facilities and other assets,and an increase in our deferred tax asset valuation allowance.  We substantially completed implementation ofour restructuring program at December 31, 2002.

 

The followingtable summarizes the provision for the 2002 business restructuring program andthe balance of the provision at December 31, 2004 and December 31,2003.  

 

----

 
| ** **                        | ** ** | **Facilities  Restructuring** | ** ** | **Workforce  Reduction** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|--------------------------|------------|-----------|------------|-----------|------------|
| Balance at December 31, 2002 |       | $                             | 4,547      |                     | $          | 54        |       | $         | 164        |   | $ | 4,765 |   |
| Additional charges                |       | 290                           |       | —                   |       | —    |       | 290       |       |
| Cash payments                     |       | (1,243                        | )          | (54                      | )          | (87       | )          | (1,384    | )          |
| Balance at December 31, 2003 |       | 3,594                         |       | —                   |       | 77        |       | 3,671     |       |
| Additional charges                |       | 289                           |       | —                   |       | —    |       | 289       |       |
| Cash payments                     |       | (1,378                        | )          | —                   |       | (26       | )          | (1,404    | )          |
| Balance at December 31, 2004 |       | $                             | 2,505      |                     | $          | —    |       | $         | 51         |   | $ | 2,556 |   |

 

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

 

In the thirdquarter of 2003, we also incurred integration costs related to the AirPrimeacquisition of $1,947, which included the costs of eight existing employeesretained for the transition period.  Allof these employees have completed their integration activities and wereterminated as of December 31, 2003.

 

**6.****              Investments**

 

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

 
| ** **                | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
|---------------------------|------------|----------------|------------|---------------|------------|
| ** **                | ** ** | **2003**       | ** ** | **2004**      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Government treasury bills |       | $              | 11,827     |          | $          | — |   | $ | — |   | $ | — |   |
| Bankers acceptances       |       | 1,937          |       | —        |       | — |   | — |   |
| Commercial paper          |       | 996            |       | —        |       | — |   | — |   |
| Government bonds          |       | —         |       | —        |       | 24,639 |   | — |   |
|                      |       | $              | 14,760     |          | $          | — |   | $ | 24,639 |   | $ | — |   |

 

In 2003, our short-term investments of $14,760 all had contractualmaturities of less than one year.  Ourlong-term investments of $24,639 all had contractual maturities of one to fiveyears.

 

**7.****              Inventories**

 
| ** **            | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Electronic components |       | $        | 782        |     | $          | 5,276 |   |
| Finished goods        |       | 729      |       | 5,814    |       |
|                  |       | $        | 1,511      |     | $          | 11,090 |   |

 

----

 

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

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

 
| ** **                         | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **Cost** | ** ** | **Accumulated  Amortization and  Writedown** | ** ** | **Net Book Value** | ** ** |
|                               |       |     |       |   |   |   |   |
| Furniture and fixtures             |       | $        | 2,478      |   | $ | 1,361 |   | $ | 1,117 |   |
| Research and development equipment |       | 9,047    |       | 7,622 |   | 1,425 |   |
| Tooling                            |       | 7,280    |       | 6,024 |   | 1,256 |   |
| Software                           |       | 5,450    |       | 3,452 |   | 1,998 |   |
| Leasehold improvements             |       | 1,742    |       | 1,624 |   | 118 |   |
| Office equipment                   |       | 340      |       | 269 |   | 71 |   |
|                               |       | $        | 26,337     |   | $ | 20,352 |   | $ | 5,985 |   |

 

As at December 31, 2004, assets under a capital lease with a cost of$1,222 (2003 — $484) and accumulated amortization of $179 (2003 — $310) areincluded in fixed assets.

 

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

 

Goodwill was acquired in 2003 as a result of the acquisition of AirPrime(note 3).  An annual impairment test hasbeen performed which resulted in no impairmentloss.  We assessed the realizability ofgoodwill related to our reporting unit during the fourth quarter of 2004 anddetermined that the fair value amount exceeded the carrying value amount by asubstantial margin, therefore the second step of the impairment test is notrequired.  During 2004, goodwilldecreased by $479 due to the utilization of previously unrecognizedpre-acquisition tax losses and certain purchase price adjustments.

 

The components of intangible assets at December 31, 2004 and 2003are as follows:

 
| ** **             | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|
| ** **             | ** ** | **Cost** | ** ** | **Accumulated  Amortization and  Writedown** | ** ** | **Net Book Value** | ** ** |
|                   |       |     |       |   |   |   |   |
| Patents and trademarks |       | $        | 3,482      |   | $ | 382 |   | $ | 3,100 |   |
| License fees           |       | 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 |   |

 

----

 
| ** **             | ** ** | **2003** | ** ** |
|------------------------|------------|----------|------------|
| ** **             | ** ** | **Cost** | ** ** | **Accumulated  Amortization and  Writedown** | ** ** | **Net Book Value** | ** ** |
|                   |       |     |       |   |   |   |   |
| Patents and trademarks |       | $        | 2,604      |   | $ | 241 |   | $ | 2,363 |   |
| License fees           |       | 15,156   |       | 7,404 |   | 7,752 |   |
| Intellectual property  |       | 4,214    |       | 718 |   | 3,496 |   |
| Customer relationships |       | 940      |       | 70 |   | 870 |   |
| Databases              |       | 150      |       | 11 |   | 139 |   |
|                   |       | $        | 23,064     |   | $ | 8,444 |   | $ | 14,620 |   |

 

The estimated aggregate amortization expense for each of the next fiveyears is expected to be $2,842 per year.

 

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

 
| ** **           | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Facilities (note 4)  |       | $        | 3,594      |     | $          | 2,505 |   |
| Less current portion |       | 1,328    |       | 758      |       |
|                 |       | $        | 2,266      |     | $          | 1,747 |   |

 

**11.****       Obligationsunder capital lease**

 

We lease research and development equipment, computer equipment andoffice furniture under capital leases, denominated in Cdn. dollars, andexpiring at various dates in 2006.  As atDecember 31, 2004 our future minimum lease payments under capital leaseswere as follows:

 
| ** **                                               | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|-----------|------------|
| 2005                                                     |       | $         | 859        |      | $          | 710 |   |
| 2006                                                     |       | 355       |       | 293       |       |
|                                                     |       | 1,214     |       | 1,003     |       |
| Less amount representing interest at approximately  8.3% |       | 63        |       | 52        |       |
|                                                     |       | 1,151     |       | 951       |       |
| Less current portion                                     |       | 803       |       | 664       |       |
|                                                     |       | $         | 348        |      | $          | 287 |   |

 

Interestexpense on capital lease obligations for the year ended December 31, 2004is $28 (2003 — $63).

 

**12.****       Sharecapital**

 

***Public offering***

 

On November 14,2003, we completed a public offering of 4,600,000 common shares in the UnitedStates and Canada at a price of $16.25 per share.  Under the offering, which included the sharesissuable upon the exercise by the underwriters of the over-allotment option, wesold 4,442,222 common shares from treasury, and two retiring officers sold anaggregate of 157,778 common shares by way of a secondary offering.

 

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

 

On August 12,2003, we issued 3,708,521 common shares to acquire AirPrime.  The value of the shares was determined basedon the average market price of Sierra Wireless, Inc.’s common shares overthe two-day period before and after June 16, 2003, which was the date theterms of the acquisition were agreed to and announced.

 

----

 

***Stock option plan***

 

Under the terms of our employee stock option plan, our board of directorsmay grant options to employees, officers and directors.  The plan provides for the granting of optionsat the fair market value of our stock at the grant date.  Options generally vest over four years, withthe first 25% vesting at the first anniversary date of the grant and thebalance vesting in equal amounts at the end of each month thereafter.  We determine the term of each option at thetime it is granted, with options having a five year or a ten year term.  Since February 1999, options have beengranted with a five year term.  We havereserved 3,882,233 options for issuance under our employee stock optionplan.  Stock options have been granted inCanadian and U.S. dollars.

 

Stock option activity since December 31, 2001 is presented below:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | ** **            | ** ** | **Cdn.$**                            | ** ** | **U.S.$** | ** ** |
|                                |       |                  |       |                                 |       |   |   |
| Outstanding, December 31, 2001 |       | 2,443,449             |       | $                                    | 39.57      |   | $ | 24.78 |   |
| Granted                             |       | 732,250               |       | 9.79                                 |       | 6.20 |   |
| Exercised                           |       | (159,626              | )          | 3.73                                 |       | 2.36 |   |
| Forfeited                           |       | (465,509              | )          | 50.22                                |       | 31.78 |   |
| 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 |   |
|                                     |            |                       |            |                                      |            |  |  |  |  |

 
| **December 31,** | ** ** | **Exercisable,  end of year** | ** ** |
|-----------------------|------------|-------------------------------|------------|
|                  |       |                          |       |
| 2002                  |       | 1,378,101                     |       |
| 2003                  |       | 714,345                       |       |
| 2004                  |       | 545,382                       |       |

 

----

 

The following table summarizes the stock options outstanding at December 31,2004:

 
| ** **                                  | ** ** | **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.$** | ** ** | **U.S.$** | ** ** |
|                                        |       |                    |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| $0.74 - $1.24 (Cdn.$0.90 - Cdn.$1.50)       |       | 33,164                  |       | 2.7                                                |       | $ | 1.30 |   | $ | 1.08 |   | 33,164 |   | $ | 1.30 |   | $ | 1.08 |   |
| $1.25 - $2.89 (Cdn.$1.51 - Cdn.$3.50)       |       | 323,115                 |       | 2.6                                                |       | 3.34 |   | 2.76 |   | 161,395 |   | 3.29 |   | 2.72 |   |
| $2.90 - $9.92 (Cdn.$3.51 - Cdn.$12.00)      |       | 272,833                 |       | 3.6                                                |       | 9.16 |   | 7.56 |   | 90,468 |   | 8.73 |   | 7.22 |   |
| $9.93 - $16.53 (Cdn.$12.01 - Cdn.$20.00)    |       | 126,672                 |       | 3.1                                                |       | 16.24 |   | 13.42 |   | 68,070 |   | 15.00 |   | 12.40 |   |
| $16.54 - $24.79 (Cdn.$20.01 - Cdn.$30.00)   |       | 501,007                 |       | 3.7                                                |       | 22.12 |   | 18.28 |   | 141,539 |   | 22.55 |   | 18.64 |   |
| $24.80 - $145.50 (Cdn.$30.01 - Cdn.$176.05) |       | 448,780                 |       | 3.7                                                |       | 41.37 |   | 34.19 |   | 50,746 |   | 100.25 |   | 82.85 |   |
|                                        |       | 1,705,571               |       | 3.4                                                |       | 20.71 |   | 17.12 |   | 545,382 |   | 19.55 |   | 16.16 |   |
|                                             |            |                         |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options outstanding at December 31, 2004 expire between March 9,2005 and December 31, 2009.

 

***Warrants***

 

There areoutstanding warrants to purchase 138,696 of our common shares at Cdn $20.49 pershare.  The warrants are exercisable fora 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 (note 17(b)).

 

**13.****       Financialinstruments**

 

***Fair value of financial instruments***

 

The carrying amounts of certain of our financial instruments, includingcash and cash equivalents, short-term investments, accounts receivable,accounts payable, accrued liabilities and current portions of long-termliabilities, approximate their fair value due to their short maturities. Basedon borrowing rates currently available to us for loans with similar terms, thecarrying value of our obligations under capital lease and long-term liabilitiesapproximates their fair value.

 

***Concentrations of business risk***

 

We depend on a small number of customers for a significant portion of ourrevenue.  In the last three fiscal years,there have been four different customers that individually accounted for morethan 10% of our revenue.  In the twelvemonths ended December 31, 2004, two customers individually accounted formore than 10% of our revenue and in aggregate, these two customers represented51% of our revenue.

 

We maintain substantially all of our cash and cash equivalents with majorfinancial institutions or government instruments. Corporate paper isuninsured.  Our deposits with banks mayexceed the amount of 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.

 

Financial instruments that potentially subject us to concentrations ofcredit risk are primarily accounts receivable. We perform 

 

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on-going credit evaluations of our customer’sfinancial condition and require letters of credit or other guarantees wheneverdeemed appropriate.

 

Although substantially all of our revenues are received in U.S. dollars,we incur operating costs and have obligations under capital leases that aredenominated in Cdn. dollars. Fluctuations in the exchange rates between thesecurrencies could have a material effect on our business, financial conditionand results of operations. We mitigate this risk by denominating many of ourpayment obligations in U.S. dollars.

 

***Line of credit***

 

During 2004,we had an operating line of credit of $10,000, which bore interest at primeplus 1.25% per annum. This line of credit was secured by a general securityagreement providing a first charge against all assets.  On December 31, 2004, we renegotiatedour line of credit and now have an unsecured revolving demand facility for $10,000,which bears interest at prime per annum. The balance at December 31, 2004 was nil (2003 — nil).

 

**14.****       Incometaxes**

 

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

 
| ** **                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets (liabilities)            |       |     |       |     |       |
| Fixed assets                                 |       | $        | (350       | )        | $          | (1,026 | ) |
| Loss carryforwards                           |       | 11,995   |       | 6,623    |       |
| Scientific research and development expenses |       | 10,538   |       | 9,975    |       |
| Share issue costs                            |       | 1,812    |       | 1,110    |       |
| Reserves and other                           |       | 3,708    |       | 3,357    |       |
| Total gross deferred tax assets              |       | 27,703   |       | 20,039   |       |
| Less valuation allowance                     |       | 27,203   |       | 19,539   |       |
| Net deferred tax assets                      |       | $        | 500        |     | $          | 500 |   |

 

We believethat realization of our net deferred tax assets is more likely than not. Inassessing the realizability of our deferred tax assets, we considered whetherit is more likely than not that some portion or all of our deferred tax assetswill not be realized. The ultimate realization of our deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich temporary differences become deductible. We considered projected futuretaxable income and tax planning strategies in making our assessment.

 

At December 31, 2004, we hadapproximately $22,174 of scientific research and development expendituresavailable to be deducted against future Canadian taxable income that may becarried forward indefinitely, and investment tax credits of approximately$18,468 available to offset future Canadian federal and provincial income taxespayable.  The investment tax creditsexpire commencing in 2006 until 2014.

 

In addition, at December 31, 2004, netoperating loss carryforwards for our foreign subsidiaries were $17,661 forUnited States income tax purposes and $2,061 for U.K. income tax purposes.  These carryforwards expire in various amountsthrough 2019.  Our foreign subsidiariesmay be limited in their ability to use foreign net operating losses in anysingle year depending on their ability to generate significant taxable income.

 

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***Effective tax rate***

 

Our income tax expense for the year ended December 31 differs fromthat calculated by applying statutory rates for the following reasons:

 
| ** **                                                                                                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Combined Canadian federal and provincial income taxes  at expected rate of 35.6% (2003 - 37.6%, 2002 – 39.6%) |       | $        | (15,127    | )        | $          | 923      |       | $ | 10,437 |   |
| Permanent and other differences                                                                                    |       | 1,381    |       | (9       | )          | (126     | )          |
| Unrecognized tax assets                                                                                            |       | 8,826    |       | (635     | )          | (5,780   | )          |
| Change in enacted tax rates                                                                                        |       | —   |       | —   |       | —   |       |
| Loss (income) subject to tax at rates lower than  statutory rate                                                   |       | 4,629    |       | (81      | )          | (133     | )          |
| Writedown of deferred tax asset                                                                                    |       | 3,754    |       | —   |       | —   |       |
|                                                                                                               |       | $        | 3,463      |     | $          | 198      |       | $ | 4,398 |   |

 

Our provisionsfor income taxes consist of the following:

 
| ** **         | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current            |       |     |       |     |       |     |       |
| Canadian           |       | $        | 94         |     | $          | 198      |       | $ | 357 |   |
| Foreign            |       | (385     | )          | —   |       | 4,041    |       |
| Total current      |       | (291     | )          | 198      |       | 4,398    |       |
| Deferred           |       |     |       |     |       |     |       |
| Canadian           |       | 3,754    |       | —   |       | (500     | )          |
| Foreign            |       | —   |       | —   |       | 500      |       |
| Total deferred     |       | 3,754    |       | —   |       | —   |       |
| Income tax expense |       | $        | 3,463      |     | $          | 198      |       | $ | 4,398 |   |

 

**15.****       Researchand development**

 
| ** **                                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Research and development                         |       | $        | 16,795     |     | $          | 16,471   |       | $ | 27,170 |   |
| Less government research and development funding |       | 1,899    |       | 477      |       | 2,643    |       |
|                                             |       | $        | 14,896     |     | $          | 15,994   |       | $ | 24,527 |   |

 

Included in our gross research and development expense was a repayment offunding of $1,970 (2003 - $258; 2002 - $193).

 

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

 

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

 
| ** **                                                                        | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted-average shares used in computation of basic  earnings (loss) per share   |       | 16,304   |       | 18,442   |       | 25,212   |       |
| Weighted-average shares from assumed conversion of  dilutive options              |       | —   |       | 547      |       | 852      |       |
| Weighted-average shares used in computation of diluted  earnings (loss) per share |       | 16,304   |       | 18,989   |       | 26,064   |       |

 

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**17.****       Commitmentsand contingencies**

 

***(a)******         Operating leases***

 

We lease equipment and premises with minimum future lease paymentsdenominated in Cdn. dollars at December 31, 2004 as follows:

 
| ** ** | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|------------|------------|-----------|------------|-----------|------------|
| 2005       |       | $         | 3,441      |      | $          | 2,844 |   |
| 2006       |       | 3,301     |       | 2,728     |       |
| 2007       |       | 3,390     |       | 2,802     |       |
| 2008       |       | 3,407     |       | 2,816     |       |
| 2009       |       | 2,597     |       | 2,146     |       |
| Thereafter |       | 4,153     |       | 3,432     |       |
|       |       | $         | 20,289     |      | $          | 16,768 |   |

 

***(b)******         Contingent liability on sale ofproducts***

 

(i)                                    Under license agreements, we are committed to royalty payments basedon the sales of products using certain technologies.  We recognize royalty obligations asdeterminable in accordance with agreement terms.  Where agreements are not finalized, we haverecognized our current best estimate of the obligation.  When the agreements are finalized, theestimate will be revised accordingly.

 

(ii)                                 We are a party to a variety of agreements in the ordinary course ofbusiness under which we may be obligated to indemnify a third party withrespect to certain matters.  Typically,these obligations arise as a result of contracts for sale of our products tocustomers where we provide indemnification against losses arising from matterssuch as potential intellectual property infringements and productliabilities.  The impact on our future financialresults is not subject to reasonable estimation because considerableuncertainty exists as to whether claims will be made and the final outcome ofpotential claims.  To date, we have notincurred material costs related to these types of indemnifications.

 

(iii)                              Under certain research and development funding agreements, we arecontingently liable to repay up to $3,262. Repayment for certain of the research and development funding 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.  During the year ended December 31,2004, we claimed nil (2003 — $477) that has been recorded as a reduction ofresearch and development expense.  Duringthe year ended December 31, 2004, we have recorded, in research anddevelopment expense, the repayment of $1,904 (2003 – nil).  In addition, we issued warrants to TPC topurchase 138,696 common shares on December 30, 2003, valued at Cdn. $2,000based on the Black-Scholes pricing model. The warrants are exercisable at Cdn $20.49 per share for a termof five years from December 30, 2003. As of December 31, 2004, no warrants have been exercised.

 

In March 2004, we entered into a secondagreement with TPC under which we are eligible to receive conditionallyrepayable research and development funding up to Cdn. $9,540 to support thedevelopment of a range of third generation wireless technologies.  The agreement is effective April 2003.  During the year ended December 31, 2004,we have claimed $2,643 (2003 – nil), which has been recorded as a reduction ofresearch and development expense.  Underthe terms of the agreement, repayment based on a percentage of annual sales, inexcess of certain minimum amounts, will be made over the period from April 2003to December 2011.  If the paymentsduring this period are less than Cdn. $16,455, payments will continuesubsequent to December 2011 until the earlier of when the amount isreached or December 2014.  No repaymentswere made in the year.

 

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

 
| Balance, January 1, 2002        |   | $      | 1,251  |   |
|--------------------------------------|--------|--------|--------|--------|
| Provisions                           |   | 819    |   |
| Expenditures                         |   | (907   | )      |
| 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  |   |

 

***(c)******          Other commitments***

 

We have entered into purchase commitments totaling approximately $12,600 withcertain contract manufacturers under which we have committed to buy a minimumamount of designated products between January 2005 and March 2005.  In certain of these agreements, we may berequired to acquire and pay for such products up to the prescribed minimum orforecasted purchases.

 

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

 

(i)                                    Sierra Wireless America, Inc., as successor to AirPrime, Inc.,along with other defendants, has been served with the first amended complaintfiled September 13, 2004 and second amended complaint filed January 3,2005 (collectively the “Complaint”) of Joshua Cohen and David Beardsley onbehalf of themselves and others similarly situated, which was filed in the U.S.District Court for the Central District of California for alleged violations offederal and state securities laws allegedly occurring prior to the timeAirPrime, Inc. was acquired by the Company.  On March 4, 2005, the defendants filedmotions to dismiss the Complaint.  Thehearing is expected to occur in May 2005. We have given notice to our liability insurance carriers and submittedan escrow claim notice under the escrow agreement dated August 12, 2003relating to the acquisition of AirPrime. Both the insurance carrier and escrow shareholders are disputing their obligationswith respect to this Complaint.  Althoughthere can be no assurance that an unfavourable outcome of the dispute would nothave a material adverse effect on our operating results, liquidity or financialposition, we believe the claims are without merit and will vigorously defendthem.

 

(ii)                                 In July 2001, we learned that Metricom, Inc. (“Metricom”),one of our customers, had filed a Chapter 11reorganization under the U.S. bankruptcy laws. We filed a proof of claim for amounts due to us totaling $13,745.  Metricom objected to that claim assertingthat all but $2,254 should be disallowed. Metricom also filed an adversary complaint against us in the U.S.bankruptcy court seeking return of payments totaling $1,900 made to us within90 days of the bankruptcy filing, alleging that the payments are avoidable as “preferences”.  We contended that the payments were in theordinary course of business and that we supplied additional product to Metricomafter receiving the payments, which would offset any preference liability.  During 2002, we executed a global settlementwith the reorganized debtor under which we agreed to reduce our generalunsecured claim to $10,250, and Metricom agreed to dismiss the preferenceclaims.  We received a settlement of$2,321 in 2003, of which $513 was included in the determination of our netincome for 2003 (2002 — $1,808).  In 2004, we received an additional $513 thatwas included in our net income for 2004.

 

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

 

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**18.****       Supplementaryinformation**

 
| ** **                                                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ***(a)  Cash flow  information:***                                 |       |     |       |     |       |     |       |
| Cash received                                                           |       |     |       |     |       |     |       |
| Interest                                                                |       | $        | 912        |     | $          | 500      |       | $ | 1,660 |   |
| Income taxes                                                            |       | 905      |       | 24       |       | 4        |       |
| Cash paid for                                                           |       |     |       |     |       |     |       |
| Interest                                                                |       | 323      |       | 62       |       | 32       |       |
| Income taxes                                                            |       | 57       |       | 62       |       | 2,649    |       |
| Non-cash financing activities                                           |       |     |       |     |       |     |       |
| Purchase of fixed assets funded by obligations under capital lease |       | 328      |       | 113      |       | 1,238    |       |
| Issuance of common shares on acquisition (note 3)                       |       | —   |       | 22,377   |       | —   |       |
|                                                                    |       |     |       |     |       |     |       |
| ***(b)  Allowance for  doubtful accounts:***                       |       |     |       |     |       |     |       |
| Opening balance                                                         |       | $        | 5,169      |     | $          | 3,068    |       | $ | 2,230 |   |
| Acquisitions                                                            |       | —   |       | 62       |       | —   |       |
| Bad debt expense                                                        |       | 623      |       | 375      |       | 366      |       |
| Write offs and settlements                                              |       | (2,724   | )          | (1,275   | )          | (128     | )          |
| Closing balance                                                         |       | $        | 3,068      |     | $          | 2,230    |       | $ | 2,468 |   |
|                                                                    |       |     |       |     |       |     |       |
| ***(c)  Other:***                                                  |       |     |       |     |       |     |       |
| Rent expense                                                            |       | $        | 1,599      |     | $          | 1,603    |       | $ | 2,004 |   |
| Foreign exchange gain                                                   |       | 77       |       | 439      |       | 333      |       |

 

**19.****       Segmentedinformation**

 

We operate in the wireless communications solutions industry and allsales of our products and services are made in this segment. Management makesdecisions about allocating resources based on the one operating segment.

 

Revenues by product were as follows:

 
| ** **                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Mobile                           |       | $        | 7,781      |     | $          | 6,183    |       | $ | 10,451 |   |
| PC card                          |       | 44,616   |       | 71,060   |       | 125,604  |       |
| Embedded modules                 |       | 19,025   |       | 20,961   |       | 70,044   |       |
| Voq                              |       | —   |       | —   |       | 1,893    |       |
| Other                            |       | 2,113    |       | 2,845    |       | 1,825    |       |
| Research and development funding |       | 3,724    |       | 660      |       | 1,388    |       |
|                             |       | $        | 77,259     |     | $          | 101,709  |       | $ | 211,205 |   |

 

47% (2003 — 65%) of our fixed assets are in Canada.  Product sales in the Americas were 89% (2003— 73%; 2002 — 87%).

 

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We sell certain products through resellers, original equipmentmanufacturers, and wireless service providers who sell these products toend-users.  The approximate sales to thesignificant channels are as follows:

 
| ** ** | ** ** | **2002**      | ** ** | **2003**      | ** **    | **2004** | ** **    |
|------------|------------|---------------|------------|---------------|---------------|----------|---------------|
| Customer A |       | less than 10% |       | less than 10% |          | $        | 55,718        |   |
| Customer B |       | less than 10% |       | less than 10% |          | 52,755   |          |
| Customer C |       | $             | 17,808     |          | $             | 18,044   |          | less than 10% |   |
| Customer D |       | $             | 15,605     |          | less than 10% |     | less than 10% |   |
|            |            |               |            |               |               |          |               |  |  |  |

 

**20.****       Subsequentevents**

 

Subsequent to December 31,2004, we became aware of certain alleged securities class action lawsuits filedagainst the Company and certain of our officers in the U.S. District CourtSouthern District of New York and the U.S. District Court Southern District ofCalifornia.  On February 22, 2005,we were served with one of the complaints filed in the Southern District ofCalifornia.  We are assessing thecomplaints and have not yet been required to file our response.  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 areasonable estimate of the possible loss, or range of possible loss, if any.

 

On February 8,2005, Sierra Wireless, Inc. was served with the first amended complaint ofMLR, LLC filed in the U.S. District Court for the Northern District of IllinoisEastern Division for alleged patent infringement relating to our line ofprofessional phones.  We have been addedas a defendant in existing civil action no. 04 C 7044 MLR, LLC v. KyoceraWireless Corporation and Novatel Wireless, Inc.  We are assessing the complaint and have notyet been required to file our response. Although there can be no assurance that an unfavourable outcome of thedispute would not have a material adverse effect on our operating results,liquidity or financial position, we believe the claims are without merit andwill vigorously defend the action. The Company has determined that it is notpossible to establish a reasonable estimate of the possible loss, or range ofpossible loss, if any.

 

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