6-K

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of July 2007

SR Telecom Inc.

(Translation of registrant's name into English)

 

Corporate Head Office 8150 Trans-Canada Hwy, Montreal, QC H4S 1M5

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 Form 20-F  x  Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 Yes o  No  x

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

Signatures 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SR Telecom Inc.
Date: July 12, 2007	By:	/s/ Serge Fortin
		Serge Fortin
		President and CEO

Exhibit Index

Exhibit #	Description of Exhibit
99.1	Annual Consolidated Financial Statements 2006
99.2	SR Telecom 2006 Fourth Quarter Report
99.3	Cortication of Annual Filing (Form 52-109F1) CEO
99.4	Cortication of Annual Filing (Form 52-109F1) CFO

EX-99.1

Consolidated Financial Statements 2006

Report of Independent Registered Chartered Accountants

To the Shareholders and Board of Directors of

SR Telecom Inc.

We have audited the consolidated balance sheets of SR Telecom Inc. (the “Company”) as at December 31, 2006 and 2005 and December 1, 2005, and the consolidated statements of operations, deficit and cash flows for each of the periods in the three year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005 and December 1, 2005, and the results of its operations and its cash flows for each of the periods in the three year period ended December 31, 2006 in accordance with Canadian generally accepted accounting principles.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Montreal, Canada

June 11, 2007, except as to Notes 2 and 32(a), which are as of July 3, 2007

Comments by Auditor on Canada-United States of America Reporting Differences

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph when there are changes in accounting principles that have a material effect on the comparability of the Company’s consolidated financial statements, such as those discussed in Note 3a) and 31h), as well as when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 2 to the consolidated financial statements. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report to the Shareholders and Board of Directors dated June 11, 2007, except as to Notes 2 and 32(a), which are as of July 3, 2007 is expressed in accordance with Canadian reporting standards, which do not require references to such change in accounting policies in the auditors’ report when the change is properly accounted for and adequately disclosed in the financial statements, nor permit a reference to such conditions and events in the auditors’ report when these are adequately disclosed in the financial statements.

Montreal, Canada

June 11, 2007, except as to Notes 2 and 32(a), which are as of July 3, 2007

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

2

CONSOLIDATED BALANCE SHEETS

								December 1,
As at			December 31,  2006		December 31,  2005			2005 (note 1)
(in thousands of Canadian dollars)	Notes			$		$			$
Assets
Current assets
Cash and cash equivalents				19,250		9,479			4,796
Restricted cash and short-term investments		8		7,838		732			442
Accounts receivable, net		4		26,940		33,011			40,314
Taxes receivable				1,613		2,484			2,248
Inventory		6		12,026		30,863			33,932
Prepaid expenses and deposits				5,828		4,340			5,580
Total current assets				73,495		80,909			87,312
Investment tax credits		18		-		4,616			4,616
Long-term accounts receivable, net		5		2,365		-			-
Long-term prepaid expenses and deposits				399		-			-
Property, plant and equipment, net		7		43,738		57,842			58,958
Intangible assets, net		9		27,794		41,904			42,614
Other assets, net		10		2,762		2,280			2,467
Total assets				150,553		187,551			195,967
Liabilities
Current liabilities
Accounts payable and accrued liabilities		11		35,935		35,478			34,913
Customer advances				3,131		1,227			1,771
Current portion of lease liability		16		-		4,197			4,202
Current portion of long-term debt		12		33,211		34,581			34,667
Total current liabilities				72,277		75,483			75,553
Credit facility		13		52,941		47,862			47,551
Convertible term loan		15		10,487		-			-
Long-term debt		12		381		479			488
Convertible redeemable secured debentures		14		1,785		40,630			39,987
Other long-term liability		24(c-iii)		1,749		1,749			1,752
Total liabilities				139,620		166,203			165,331
Commitments and contingencies		24
Shareholders' Equity
Capital stock		17		352,174		230,086			229,927
Equity component of convertible redeemable   secured debentures		14		1,008		27,785			27,851
Equity component of convertible term loan		15		9,645		-			-
Contributed surplus				1,911		-			-
Deficit, pre-fresh start accounting		1		(227,142		(227,142	)		(227,142	)
Deficit				(126,663		(9,381	)		-
Total shareholders' equity				10,933		21,348			30,636
Total liabilities and shareholders' equity				150,553		187,551			195,967

The accompanying notes are an integral part of these consolidated financial statements.

Approved by the Board

Lionel Hurtubise	Serge Fortin
Director	President and Chief Executive Officer

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

3

CONSOLIDATED STATEMENTS OF OPERATIONS

									Pre-fresh start (note 1)
			Year ended			One  month ended			Eleven months ended			Year ended
(in thousands of Canadian dollars,			December 31, 2006			December 31, 2005			November 30, 2005			December 31, 2004
except per share and share information)	Notes			$			$			$			$
Revenue
Equipment				62,363			5,055			45,712			67,598
Services				5,904			583			5,630			12,892
Telecommunications				19,188			1,734			17,670			18,584
Total revenue				87,455			7,372			69,012			99,074
Cost of revenue
Equipment				64,520			4,306			40,103			47,209
Services				4,831			467			2,536			8,685
Total cost of revenue				69,351			4,773			42,639			55,894
Gross profit				18,104			2,599			26,373			43,180
Agent commissions				903			61			1,660			4,724
Selling, general and administrative expenses				50,796			2,634			31,749			39,962
Research and development expenses, net		18		20,954			990			20,610			30,159
Telecommunications operating expenses				15,298			1,446			19,462			18,670
Restructuring, asset impairment and other charges		22		31,515			-			17,200			7,701
Operating loss from continuing operations				(101,362	)		(2,532	)		(64,308	)		(58,036	)
Finance charges, net		20		(14,860	)		(2,316	)		(17,069	)		(8,083	)
Gain on sale of long-term investment		19		-			-			-			3,444
Gain on settlement of claim		16/24(d)		-			-			2,670			4,583
Gain (loss) on foreign exchange				543			(289	)		1,591			2,254
Loss from continuing operations before income taxes				(115,679	)		(5,137	)		(77,116	)		(55,838	)
Income tax (expense) recovery		21		(736	)		(23	)		109			(21,104	)
Loss from continuing operations				(116,415	)		(5,160	)		(77,007	)		(76,942	)
Earnings (loss) from discontinued operations,
net of income taxes		23		788			(4,221	)		(4,758	)		(9,192	)
Net loss				(115,627	)		(9,381	)		(81,765	)		(86,134	)
Basic and diluted		17
Loss per share from continuing operations				(0.17	)		(0.08	)		(4.34	)		(4.62	)
Loss per share from discontinued operations				-			(0.06	)		(0.27	)		(0.55	)
Net loss per share				(0.17	)		(0.14	)		(4.61	)		(5.17	)
Basic and diluted weighted average number of
common shares outstanding				671,477,773			65,385,505			17,751,817			16,661,454

The accompanying notes are an integral part of these consolidated financial statements.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

4

CONSOLIDATED STATEMENTS OF DEFICIT

									Pre-fresh start (note 1)
			Year ended			One month ended			Eleven months ended			Year ended
(in thousands of Canadian dollars)			December 31, 2006			December 31, 2005			November 30, 2005			December 31, 2004
	Notes			$			$			$
Balance, beginning of period				(9,381	)		-			(180,561	)		(90,941	)
Fresh start accounting adjustments		1		-			-			35,184			-
Cumulative effect of adoption of new
accounting policies		3		-			-			-			(272	)
Deficit, beginning of period, as restated				(9,381	)		-			(145,377	)		(91,213	)
Net loss				(115,627	)		(9,381	)		(81,765	)		(86,134	)
Issue costs of equity component of convertible term loan				(690	)		-			-			-
Share issue costs				(965	)		-			-			(3,214	)
Balance, end of period				(126,663	)		(9,381	)		(227,142	)		(180,561	)

The accompanying notes are an integral part of these consolidated financial statements.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

5

CONSOLIDATED STATEMENTS OF CASH FLOWS

									Pre-fresh start (note 1)
			Year ended			One  month ended			Eleven months ended			Year ended
(in thousands of Canadian dollars)			December 31, 2006			December 31, 2005			November 30, 2005			December 31, 2004
	Notes			$			$			$			$
Cash flows provided by (used in) continuing operating activities
Loss from continuing operations				(116,415	)		(5,160	)		(77,007	)		(76,942	)
Adjustments to reconcile net loss to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization				15,431			1,464			10,550			12,193
Restructuring, asset impairment and other charges		22		30,106			-			14,001			1,681
Loss (gain) on disposal of property, plant
and equipment				774			21			603			(166	)
Financing charges				6,659			823			11,211			-
Increase in lease liability				-			-			-			1,586
Gain on sale of long-term investment		19		-			-			-			(3,444	)
Gain on settlement of claim		16		-			-			(2,670	)		(4,583	)
Stock-based compensation				3,019			-			728			247
Future income taxes				-			-			-			20,275
Changes in operating assets and liabilities:
(Increase) decrease in long-term
accounts receivable				(2,365	)		-			3,727			(4,073	)
Decrease (increase) in non-cash
working capital items		25		17,740			9,802			(8,271	)		14,430
Unrealized foreign exchange (gain) loss				(169	)		126			(868	)		(3,236	)
				(45,220	)		7,076			(47,996	)		(42,032	)
Cash flows provided by continuing financing activities
Repayment of bank indebtedness				-			-			-			(3,000	)
Issuance of credit facility		13		-			-			48,127			-
Repayment of long-term debt and lease liability				(5,863	)		-			(1,314	)		(12,536	)
Issuance of convertible term loan		15		20,000			-			-			-
Proceeds from issue of shares and warrants,
net of share issue costs		17		53,310			-			-			46,787
Financing costs				(1,581	)		-			(5,392	)		-
				65,866			-			41,421			31,251
Cash flows (used in) provided by continuing investing activities
(Increase) decrease in restricted cash and short-term investments				(7,106	)		(290	)		952			5,191
Purchase of short-term investments				-			-			-			(45,439	)
Proceeds on sale of short-term investments				-			-			-			48,796
Purchase of property, plant and equipment				(4,331	)		(757	)		(3,331	)		(6,092	)
Proceeds on disposal of property, plant
and equipment				562			7			1,418			859
Proceeds on sale of long-term investment				-			-			-			3,444
Other				-			-			-			(579	)
				(10,875	)		(1,040	)		(961	)		6,180
Increase (decrease) in cash and cash equivalents
Continuing operations				9,771			6,036			(7,536	)		(4,601	)
Discontinued operations		23		-			(1,353	)		7,783			716
Increase (decrease) in cash and cash equivalents				9,771			4,683			247			(3,885	)
Cash and cash equivalents, beginning of period				9,479			4,796			4,549			8,434
Cash and cash equivalents, end of period				19,250			9,479			4,796			4,549

The accompanying notes are an integral part of these consolidated financial statements.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

1.   Description of business, fresh start accounting and basis of presentation

Description of business

SR Telecom Inc. (SR Telecom or the Company) was incorporated on February 17, 1981, under the Canada Business Corporations Act. SR Telecom designs, delivers and deploys advanced, field-proven Broadband Fixed Wireless Access solutions. SR Telecom products are used by large telephone and Internet service providers to supply broadband data and carrier-class voice services to end-users in urban, suburban and remote areas around the globe. SR Telecom also provides full turnkey services to its customers. Most of SR Telecom’s sales are international, with its fixed wireless systems currently being used by telecommunications service providers worldwide. These customers include large incumbent local exchange carriers in the countries they serve, as well as competitive local exchange carriers and private operators of telecommunications systems. In addition, through its majority-owned subsidiary, Comunicacion y Telefonia Rural S.A. (CTR), SR Telecom provides local telephone services to residential, commercial and institutional customers as well as a network of payphones in a large, predominantly rural area of Chile. On February 1, 2007, the Company announced the closing of the sale of CTR (see note 32).

Fresh start accounting and basis of presentation

On November 30, 2005, pursuant to the terms of the Convertible Debentures (see note 14), a $10.0 million principal amount of the Convertible Debentures and accrued interest payable in kind thereon were converted on a pro rata basis among all holders of Convertible Debentures into approximately 47.3 million common shares at the conversion price of approximately $0.217 per common share. Immediately after the conversion, the holders of the Convertible Debentures held approximately 72.9% of the then outstanding common shares. This conversion resulted in a substantial realignment of the interests in the Company between the creditors and shareholders.

Effective November 30, 2005, the date of the conversion, the Company adopted fresh start accounting. Accordingly, the Company reclassified the deficit that arose prior to the conversion to a separate account within shareholders’ equity and re-valued its assets and liabilities to their estimated fair values. The revaluation adjustments have been accounted for as a capital transaction and are recorded within the pre-fresh start accounting deficit.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The following table summarizes the adjustments recorded to implement the fresh start basis of accounting:

	Prior to the adoption of fresh start accounting November 30, 2005			Fresh start adjustments			Notes		After adjustments December 1, 2005
		$		$				$		$
Assets
Current assets		86,727			585		(i)			87,312
Property, plant and equipment		77,581			(18,623	)	(ii)			58,958
Intangible assets		3,668			38,946		(iii)			42,614
Investment tax credits		4,616			-					4,616
Other assets		2,467			-					2,467
		175,059			20,908					195,967
Liabilities
Current liabilities		75,553			-					75,553
Credit facility		47,551			-					47,551
Long-term debt		488			-					488
Convertible redeemable secured debentures		40,261			(274	)	(v)			39,987
Other long-term liability		1,752			-					1,752
		165,605			(274	)				165,331
Shareholders' Equity
Capital stock		219,653			10,274		(v)			229,927
Warrants		13,029			(13,029	)	(iv)			-
Equity component of convertible redeemable
secured debentures		37,851			(10,000	)	(v)			27,851
Contributed surplus		1,247			(1,247	)	(iv)			-
Deficit pre-fresh start accounting		(262,326	)		35,184		(vi)			(227,142	)
		9,454			21,182					30,636
		175,059			20,908					195,967

Summary of adjustments

The Company revalued its assets and liabilities and adjusted their carrying values to reflect the enterprise value of the Company following the substantial realignment of the interests between the shareholders and the creditors of the Company.

(i)   The revaluation resulted in an increase in the current assets, mainly reflecting work-in-process and finished goods inventory. The work-in-process fair value was determined using management’s best estimate of selling price less cost to sell and complete. The finished goods inventory fair value was determined using management’s best estimate of selling price less cost to sell.

(ii)   The revaluation resulted in a net decrease in property, plant and equipment. This decrease related primarily to the property, plant and equipment of CTR. $26.0 million of the decrease was the result of management’s best estimate of the fair value of CTR as a whole and the allocation of its fair value to the assets and liabilities. The property, plant and equipment in the Wireless business segment was valued based on fair market value in continued use of the assets, resulting in a $7.4 million increase in the value of these assets.

(iii)   The revaluation resulted in the Company assigning a value to its technology, using the relief-from-royalties method, calculated using projections developed by management. As well, as part of the revaluation, a value was attributed to customer relationships based on the related revenue and cash flows expected to be generated from these customers determined using projections developed by management.

(iv)   The value of contributed surplus and warrants was determined to be nil at the revaluation date. This value was determined using the Black-Scholes option pricing model.

(v)   Pursuant to the terms of the Convertible Debentures, $10.0 million principal amount, plus accrued interest thereon, classified in equity at the issuance date, was reclassified to capital stock upon their conversion to common shares.

(vi)   The adjustment reflects the increase in net assets of the Company as a result of the revaluation.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Comparative figures

Comparative financial statements for periods prior to December 1, 2005 have been presented pursuant to regulatory requirements. In reviewing these comparative financial statements, readers are reminded that they do not reflect the effects of the application of fresh start accounting.

Certain comparative figures have been reclassified in order to conform to the presentation adopted in 2006. These reclassifications related to not presenting assets of discontinued operations separately from assets of continuing operations in the balance sheets as at December 31, 2005 and December 1, 2005.

2.   Going concern uncertainty

The accompanying consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

There is substantial doubt about the appropriateness of the use of the going concern assumption because of the Company’s losses for the current and prior years, negative cash flows, reduced availability of supplier credit and lack of operating credit facilities. As such, the realization of assets and the discharge of liabilities and commitments in the ordinary course of business are subject to significant uncertainty.

For the year ended December 31, 2006, the Company incurred a net loss of $115.6 million ($9.4 million for the month ended December 31, 2005 and $81.8 million for the eleven months ended November 30, 2005) and used cash of $45.2 million ($7.1 million for the month ended December 31, 2005 and $48.0 million for the eleven months ended November 30, 2005) in its continuing operating activities. Going forward, the Company will continue to require substantial funds as it continues the development of its WiMAX product offering.

The Company has taken the following steps to address the going concern uncertainty:

On February 1, 2007, the Company completed the sale of the shares of its Chilean subsidiary, CTR, for proceeds of nil (see note 12). As part of this transaction, the Company has been fully released from all of its obligations with respect to CTR, including liabilities in respect of loans to CTR amounting to approximately US$28.0 million for which SR Telecom was guaranteeing up to US$12.0 million. The divestiture of this non-core asset marked another important step in the Company’s plan to strengthen its financial position by streamlining its balance sheet and focus on its WiMAX strategy.

On March 6, 2007, the Company concluded the conversion/redemption of the remaining Convertible Debentures, allowing for the release of $4.7 million of restricted cash.

On April 12, 2007, the Company closed the sale and leaseback of its property located in Montréal (Québec), Canada for gross proceeds of $8.6 million.

On April 16, 2007, the Company announced a plan to reorganize its internal operations, including the wind-up of legacy product operations and centralization of activities. In conjunction with the implementation of this plan, the Company will be eliminating approximately 75 positions worldwide.

On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing (see note 32, subsequent events).

The Company’s successful execution of its business plan is dependent upon a number of factors that involve risks and uncertainties. In particular, the development and commercialization of both fixed and mobile WiMAX are key elements of the Company’s strategic plan and of its future success and profitability. If either or both of fixed and/or mobile WiMAX prove not to be commercially viable or less commercially viable than is currently anticipated or compared to alternative solutions, or if the Company’s WiMAX products are less commercially viable or competitive than those developed by other companies, the Company will experience significant adverse effects on its liquidity, financial condition and ability to continue as a going concern.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The consolidated financial statements do not reflect any adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, significant adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

3.   Significant accounting policies

These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and include the accounts of SR Telecom Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.

(a) Adoption of new accounting policies

Consolidation of Variable Interest Entities

The Canadian Institute of Charted Accountants (“CICA”) issued Accounting Guideline 15, Consolidation of Variable Interest Entities. The guideline presents the views of the Accounting Standards Board on the application of consolidation principles to certain entities that are subject to control on a basis other than ownership of voting interest. This guideline provides certain guidance for determining when an enterprise includes assets, liabilities and results of activities of such an entity (a “variable interest entity”) in its consolidated financial statements. This guideline applied to the Company as of January 1, 2005. Adoption of this guideline did not have an impact on the results of operations or financial position of the Company.

Financial Instruments – Disclosure and Presentation

The CICA issued revisions to section 3860 of the CICA Handbook, Financial Instruments - Disclosure and Presentation. The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equity. These revisions came into effect on January 1, 2005. These recommendations did not have an impact on the results of operations or financial position of the Company at the time of adoption.

Non-Monetary Transactions

The CICA issued in June 2005 Section 3831, Non-Monetary Transactions, which establishes the standards for the measurement and disclosure of non-monetary transactions. The requirement to measure an asset or liability exchanged or transferred in a non-monetary transaction at fair value has remained unchanged from the former Section 3830.  However, an asset or liability exchanged or transferred in a non-monetary transaction is measured at its carrying value when “the transaction lacks commercial substance”, which replaces the “culmination of the earnings process” criterion in the former Section 3830. The new requirements are effective for non-monetary transactions initiated in periods beginning on or after January 1, 2006. Earlier adoption was permitted for non-monetary transactions initiated in periods beginning on or after July 1, 2005. The Company chose early adoption of these standards. Adoption of this guideline did not have an impact on the results of operations or financial position of the Company.

Stock-Based Compensation and Other Stock-Based Payments

The CICA issued Section 3870, Stock-Based Compensation and Other Stock-Based Payments. The Company has adopted the transitional provisions of this section, effective January 1, 2004, where compensation expense is recognized on all issued and outstanding stock options granted to employees after January 1 2002, in accordance with the fair value method of accounting. This provision was applied retroactively, without restatement of prior periods. As a result, opening deficit increased by $0.3 million and contributed surplus was increased by the same amount at January 1, 2004.

(b) Cash and cash equivalents

Cash and cash equivalents include all cash on-hand and balances with banks as well as all highly liquid short-term investments, with original maturities of three months or less at the time of purchase. 

(c) Inventory

Inventories are valued at the lower of cost and net realizable value or replacement cost, with cost computed at standard, which approximates actual cost computed on a first in, first out basis. Inventory is comprised of raw materials, work-in-process and finished goods. 

             

(d) Income taxes

Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted and substantially enacted tax rates which will be in effect when the differences are expected to reverse. A valuation allowance is provided for the amount of future income tax assets that are not considered more likely than not to be realized.

     

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

(e) Property, plant and equipment

Property, plant and equipment are recorded at cost (see note 1) and are depreciated or amortized over their estimated useful lives on the following bases:

Telecommunications network equipment	straight-line over 20 years
Building and improvements	straight-line over 20 and 10 years
Leasehold improvements	straight-line over term of lease
Machinery, equipment and fixtures	20% diminishing balance and straight-line over 3 years
Computer equipment and licences	30% diminishing balance and straight-line over 5 years

(f) Intangible assets

Intangible assets are recorded at cost (see note 1) and amortized on a straight-line basis over their estimated useful lives on the following bases:

     

Customer relationships	straight-line over 5 years
Technology	straight-line over 5 years

(g) Deferred charges

Costs incurred to issue debt are deferred and amortized over the term of the obligation.

 

(h) Impairment of long-lived assets

Long-lived assets, including property, plant and equipment and intangible assets, subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the use of the asset and its eventual disposal. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized at the amount by which the carrying amount of the asset exceeds the fair value of the asset.

(i) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Translation gains and losses are reflected in the statement of operations. Revenue and expenses are translated at average exchange rates prevailing during the period.

Subsidiaries that are financially or operationally dependent on the parent Company are accounted for under the temporal method of foreign currency translation. Under this method, monetary assets and liabilities are translated at exchange rates in effect at the balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the average rates for the period. Translation gains and losses of such subsidiaries’ accounts are reflected in the statement of operations.  

(j) Revenue

Revenue is recognized when persuasive evidence of an agreement exists, delivery has occurred or the service has been performed, the fee is fixed and determinable and collection of the receivable is reasonably assured.

The principal revenue recognition guidance used by SR Telecom is the US Securities and Exchange Commission’s Staff Accounting Bulletins No. 101 and 104, Revenue Recognition in Financial Statements (SAB 101 and SAB 104) and  the Emerging Issues Committee (EIC) issued abstracts on revenue recognition: EIC 141, Revenue Recognition, and EIC 142, Revenue Arrangements with Multiple Deliverables.

 

More specifically, revenue for hardware sold on a stand-alone basis is recognized upon delivery, when all significant contractual obligations have been satisfied and collection is reasonably assured. For contracts involving multiple elements, the Company determines if the elements within the arrangement can be separated amongst its different elements, using guidance under Canadian and US generally accepted accounting principles. That is, (i) the product or service represents a separate earnings process; (ii) objective, reliable and verifiable evidence of fair value exists; and (iii) the undelivered elements are not essential to the functionality of the delivered elements. Under this guideline, the Company recognizes revenue for each element based on relative fair values. Telecommunications service revenue is recognized as the services are rendered.

 

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The Company’s products and services are generally sold pursuant to contracts or purchase orders. Revenue is recognized in the same manner as when the products and services are sold separately. Hardware revenue is recognized upon delivery, and service revenue is recognized as the services are performed. In order to determine if there is a loss on services in a contract, estimates of the costs to complete these services are updated on a monthly basis and are based on actual costs to date. These costs are analyzed against the expected remaining service revenue. If the remaining costs exceed the remaining revenue, a loss is immediately recognized in the financial statements.

The Company is, pursuant to certain arrangements, subject to late delivery penalties on equipment sales. Penalties are recorded as a reduction of revenue, when the revenue is recognized.

The Company’s customary trade terms include, from time to time, holdbacks on contracts (retainages on contracts) that are due for periods extending beyond one year and are included in long-term accounts receivable (see note 5). Performance of the Company’s obligations under contracts is independent of the repayment terms. Revenue associated with holdbacks is recorded in the same manner as described above.

The Company ensures collection of its revenue through the use of insurance companies, letters of credit and the analysis of the credit worthiness of its customers.

The Company’s products are not generally sold through resellers and distributors.

Accruals for warranty costs, sales returns and other allowances at the time of shipment are based on contract terms and experience from prior claims.

(k) Research and development

The Company incurs costs relating to the research and development of new products. Research costs are expensed as incurred. Development costs are expensed as incurred unless specific criteria for deferral, in accordance with Canadian GAAP, are met. The development costs are not considered deferrable at this time. Government grants and recognized investment tax credits are netted against such costs. 

(l) Derivative financial instruments

Derivative financial instruments are utilized by the Company in the management of its foreign currency risk. The Company does not enter into financial instruments for trading or speculative purposes. The Company enters into offsetting forward exchange contracts when it is deemed appropriate. The Company does not use hedge accounting for these transactions. The derivatives are recorded at fair value on the balance sheet with changes in fair value recorded in the statement of operations under gain (loss) on foreign exchange. Changes in the fair values of the forward contracts partially offset the corresponding translation gains and losses on the related foreign currency denominated monetary assets and liabilities. No such contracts exist as at December 31, 2006.

(m) Earnings per share

The Company presents both basic and diluted earnings per share on the face of the statement of operations regardless of the materiality of the difference between them, and uses the treasury stock method to compute the dilutive effect of options, warrants and conversion features of other instruments. 

(n) Employee benefit plan

SR Telecom maintains a defined contribution retirement program covering the majority of its employees. A compensation expense is recognized for the Company’s portion of the contributions made under the plan. This plan was suspended effective January 1, 2006.

(o) Advertising costs

Advertising costs are expensed as incurred. Amounts expensed were nominal for each of the periods presented.

(p) Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent liabilities in these financial statements. Actual results could differ from those estimates. Balances and transactions that are subject to a high degree of estimation are: fair value determination of assets and liabilities; revenue recognition for long-term contracts; allowance for doubtful accounts receivable; inventory obsolescence; product warranty; amortization; asset valuations; impairment assessments; income taxes; restructuring costs; stock-based compensation; convertible debt; and other provisions and contingencies.

 

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

(q) New accounting recommendations

New accounting recommendations

Financial instruments

The CICA issued Section 3855 of the CICA Handbook, Financial Instruments – Recognition and Measurement, which describes the standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. This section requires that (i) all financial assets be measured at fair value, with some exceptions such as loans, receivables and investments that are classified as held to maturity, (ii) other financial liabilities be measured at amortized cost or classified as held for trading purposes, and (iii) all derivative financial instruments be measured at fair value, even when they are part of a hedging relationship. The CICA also reissued Section 3860 (as Section 3861) of the CICA Handbook, Financial Instruments – Disclosure and Presentation, which establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. These revisions come into effect for years beginning on or after October 1, 2006. The Company will adopt these new sections effective January 1, 2007.

As a result of adopting Section 3855, the Company’s deferred financing costs on the credit facility and convertible term loan, currently presented in other assets on the consolidated balance sheet, will be reclassified against long-term debt as of January 1, 2007. In addition, completion fees on the credit facility and convertible term loan, currently presented in accounts payable and accrued liabilities on the balance sheet, will also be reclassified to long-term debt as of January 1, 2007. As a result of the application of Section 3855, approximately $0.3 million will be recorded in opening deficit as at January 1, 2007 to reflect the difference between the straight-line and the effective interest methods of amortization.

Furthermore, as a result of adopting Section 3855, the Company’s long-term accounts receivable will be discounted to their amortized cost January 1, 2007. Approximately $0.6 million will be recorded in opening deficit as at January 1, 2007 to reflect the difference between the amortized cost and the carrying value of the long-term accounts receivable.

In accordance with the transitional provisions, prior periods will not be restated as a result of adopting this new accounting standard.

Hedges

The CICA issued Section 3865 of the CICA Handbook, Hedges. The section is effective for years beginning on or after October 1, 2006. It describes when and how hedge accounting may be applied. Hedging is an activity used by a company to change an exposure to one or more risks by creating an offset between changes in the fair value of a hedged item and a hedging item, changes in the cash flows attributable to a hedged item and a hedging item, or changes resulting from a risk exposure relating to a hedged item and a hedging item. Hedge accounting changes the normal basis for recording gains, losses, revenues and expenses associated with a hedged item or a hedging item in a company’s statement of operations. It ensures that all offsetting gains, losses, revenues and expenses are recorded in the same period. The adoption of Section 3865 as of January 1, 2007 will not have a material impact on the Company’s consolidated financial statements.

Comprehensive income

The CICA issued Section 1530 of the CICA Handbook, Comprehensive Income. The section is effective for years beginning on or after October 1, 2006. It describes how to report and disclose comprehensive income and its components.

Comprehensive income is the change in a company’s net assets that results from transactions, events and circumstances from sources other than just the company’s shareholders. It includes items that would be excluded from net earnings, such as changes in the currency translation adjustment relating to self-sustaining foreign operations, the unrealized gains or losses on available-for-sale investments and the unrealized gains and losses on derivatives in cash flow hedging relationships.

The CICA also made changes to Section 3250 of the CICA Handbook, Surplus, and reissued it as Section 3251, Equity. The section is also effective for years beginning on or after October 1, 2006. The changes in how to report and disclose equity and changes in equity are consistent with new requirements of Section 1530, Comprehensive Income.

Adopting these sections on January 1, 2007 will require the Company to start reporting, to the extent that they are relevant, the following items in the consolidated financial statements:

Ø   Comprehensive income and its components

Ø   Accumulated other comprehensive income and its components

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

4.   Accounts receivable, net

	December 31, 2006			December 31, 2005			December 1, 2005
		$			$			$
Trade		25,407			33,525			40,969
Trade, unbilled		856			882			550
Other (i)		7,153			7,029			6,948
Allowance for doubtful accounts (i)		(6,476	)		(8,425	)		(8,153	)
		26,940			33,011			40,314

(i)  Includes an account receivable from Teleco de Haiti as follows:

	December 31, 2006						December 31, 2005						December 1, 2005
		$		US$				$		US$				$		US$
Account receivable		5,452			4,679			5,455			4,679			5,461			4,679
Allowance for doubtful accounts		(3,121	)		(2,679	)		(3,706	)		(3,179	)		(3,710	)		(3,179	)
		2,331			2,000			1,749			1,500			1,751			1,500

In December 2001, SR Telecom filed a statement of claim in New York for US$4.9 million against MCI International and Telecommunications d'Haiti, S.A.M. (Teleco de Haiti). The claim was filed pursuant to a clause mandating three-party arbitration before the International Court of Arbitration in respect of funds that ceased flowing to SR Telecom under a Tripartite Agreement between Teleco de Haiti, MCI International and SR Telecom. The agreement provided for the financing of a contract between SR Telecom and Teleco de Haiti pursuant to which SR Telecom was to supply and install certain telecommunications equipment to Teleco de Haiti for approximately US$12.9 million. In the eleven-month period ended November 30, 2005, following various proceedings and actions during 2002 to 2005, the Company determined that the most likely outcome would not result in the full recovery of the receivable and accordingly recorded a provision for doubtful accounts in the amount of $3.7 million (US$3.2 million).

In the fourth quarter of 2005, SR Telecom came to a settlement with MCI and Teleco de Haiti. The settlement was signed by SR Telecom and MCI, but was not signed by Teleco de Haiti. Teleco de Haiti did not agree to execute the settlement agreement despite the fact that it agreed to the terms of the settlement in December 2005. As a result, the case was returned to litigation and its outcome remained uncertain. Management believed that the most likely outcome would not result in the recovery of the receivable and accordingly, in the third quarter of 2006, increased its provision for doubtful account for the entire balance outstanding of $5.5 million.

In March 2007, SR Telecom reached a settlement with MCI and Teleco de Haiti in the amount of $2.3 million (US$2.0 million). SR Telecom received the settlement amount in late March 2007. As such, the provision for doubtful accounts as at December 31, 2006 was adjusted to reflect the settled amount.

5.   Long-term accounts receivable, net

The long-term accounts receivable of $2.4 million as at December 31, 2006 (nil as at December 31, 2005 and December 1, 2005), is comprised of holdbacks (retainages) on contracts that are due in 2009 and 2010.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

6.   Inventory

	December 31, 2006			December 31, 2005			December 1, 2005
		$			$			$
Raw materials		17,572			25,983			25,321
Work-in-process		529			1,574			2,315
Finished goods		4,914			3,428			6,296
Reserve for obsolescence		(10,989	)		(122	)		-
		12,026			30,863			33,932

During the year, charges to adjust inventory cost to its net realizable value were incurred (see note 22).

7.   Property, plant and equipment

	December 31, 2006			December 31, 2005			December 1, 2005
	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/  amortization	Net book value
	$	$	$	$	$	$	$	$	$
Land	2,234	-	2,234	2,234	-	2,234	2,234	-	2,234
Telecommunications
network equipment	31,581	2,835	28,746	36,063	212	35,851	35,585	-	35,585
Building, improvements
and fixtures	5,166	712	4,454	5,608	51	5,557	5,603	-	5,603
Machinery and equipment	7,475	1,623	5,852	11,511	178	11,333	12,363	-	12,363
Computer equipment
and licences	3,451	999	2,452	2,936	69	2,867	3,173	-	3,173
	49,907	6,169	43,738	58,352	510	57,842	58,958	-	58,958

During the year, charges to adjust inventory cost to its net realizable value were incurred (see note 22).

Property, plant and equipment includes $0.3 million of machinery assets held under capital leases as at December 31, 2006 ($0.2 million as at December 31, 2005 and December 1, 2005), and $0.1 million of accumulated depreciation as at December 31, 2006 ($0.01 million as at December 31, 2005 and nil as at December 1, 2005). Computer equipment and licences include software licences of $1.6 million as at December 31, 2006 ($1.5 million as at December 31, 2005 and $1.4 million as at December 1, 2005), and accumulated depreciation of $0.5 million as at December 31, 2006 ($0.03 million as at December 31, 2005 and nil as at December 1, 2005).

Depreciation expense taken in the year ended December 31, 2006 amounted to $6.3 million ($0.5 million in the one month ended December 31, 2005, $8.5 million in the eleven months ended November 30, 2005 and $10.3 million in the year ended December 31, 2004).

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

8.   Restricted cash and short term investments

	December 31, 2006		December 31, 2005		December 1, 2005
		$		$		$
Guaranteed Investment Certificates pledged in support of letters of
guarantee issued by Canadian and foreign chartered banks, bearing
interest at rates ranging from 3.0% to 3.15% (ranging from 1.65% to
1.95% in 2005), maturing through November 2007		173		439		439
Restricted cash held by the Corporation's financial institution as part
of the first ranking moveable hypothec over the Corporation's cash
and credit balances held at the financial institution		7,546		-		-
Cash sweep accounts in trust in Chile to meet interest and
principal obligations		119		293		3
		7,838		732		442

 

9.   Intangible assets, net

	December 31, 2006			December 31, 2005			December 1, 2005
	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/ amortization	Net book value
	$	$	$	$	$	$	$	$	$
Customer relationships	3,160	1,185	1,975	9,653	161	9,492	9,653	-	9,653
Technology	32,961	7,142	25,819	32,961	549	32,412	32,961	-	32,961
	36,121	8,327	27,794	42,614	710	41,904	42,614	-	42,614

An impairment charge of $5.4 million ($6.5 million, net of $1.1 million of accumulated amortization) for customer relationships was recorded in the third quarter of 2006 (see note 22). This charge resulted from management’s continued restructuring activities, including the realignment of its business on performing products. As a result, customer relationships directly related to products that the Company is either discontinuing or phasing out over time were written down to their estimated fair value determined as the present value of related estimated future cash flows.

Amortization expense taken in the year ended December 31, 2006 amounted to $8.7 million ($0.7 million in the one month ended December 31, 2005, $0.8 million in the eleven months ended November 30, 2005 and $0.9 million in the year ended December 31, 2004).

10.   Other assets, net

	December 31, 2006			December 31, 2005			December 1, 2005
	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/ amortization	Net book value	Cost	Accumulated depreciation/ amortization	Net book value
	$	$	$	$	$	$	$	$	$
Deferred charges	3,384	622	2,762	2,493	213	2,280	2,467	-	2,467

As at December 31, 2006, other assets are comprised of professional fees of $3.4 million ($2.5 million as at December 31, 2005 and December 1, 2005) primarily relating to the establishment of the credit facility in 2005 and the amount allocated to the debt component of the convertible term loan obtained in 2006. The Company is amortizing these costs over the terms of the credit facility and the convertible term loan.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

11.   Accounts payable and accrued liabilities

	December 31, 2006		December 31, 2005		December 1, 2005
		$		$		$
Trade accounts		20,887		20,475		18,684
Commissions		4,572		5,291		5,929
Accrued payroll and related expenses		3,681		3,186		4,107
Income taxes		749		344		355
Restructuring provision (note 22)		380		928		1,158
Accrued interest		526		471		188
Other		5,140		4,783		4,492
		35,935		35,478		34,913

In February 2006, the Company reached settlements with certain trade suppliers on outstanding accounts payable.  These trade suppliers were also former contract manufacturers for certain of the Company’s products. As a result of these transactions, a gain on settlement was recorded in cost of sales in the amount of $0.8 million (US$0.7 million) as of November 30, 2005.

12.   Long-term debt

	December 31,  2006	December 31,  2005	December 1, 2005
	$	$	$
Notes payable issued by CTR, under a term loan facility (i)	18,336	18,159	18,180
Notes payable issued by CTR, under a term loan facility (i)	14,780	16,288	16,307
Obligations under capital leases, bearing interest at rates ranging from
8.8% to 12.0%, repayable at various dates to April 2009	206	343	398
Senior unsecured debentures issued by the Corporation, due October 15, 2011,
bearing interest at 8.15% payable semi-annually, redeemable at the option
of the Company at a price equal to the greater of i) 100% of the principal
amount and ii) the Canadian yield price (as defined in the trust indenture),
together in each case with accrued interest, if any, to the date fixed for
redemption (ii)	270	270	270
	33,592	35,060	35,155
Current portion	33,211	34,581	34,667
	381	479	488

(i)   On February 1, 2007, the Company announced the closing of the sale of CTR. As a result of the sale, the Company was fully released from all of its obligations with respect to CTR, including liabilities in respect of loans to CTR and capital lease obligations of CTR, and thus, the Company will not be required to make any payments for such liabilities.

Pursuant to the terms of an Amendment Agreement dated May 19, 2005, the CTR lenders agreed to restructure the repayment schedule of their loans and to postpone the maturity of the loans until May 17, 2008. As at December 31, 2006, a principal amount of $32.6 million or US$28.0 million ($34.3 million or US$29.5 million as at December 31, 2005 and December 1, 2005) was outstanding. The interest rate was at LIBOR plus 4.5%, and an additional 1% per year, payable in kind at maturity, which, at December 31, 2006, is included in long-term debt in the amount of $0.5 million ($0.1 million as at December 31, 2005 and December 1, 2005). SR Telecom continued to guarantee the performance of the obligations of CTR to the CTR lenders up to an amount of US$12.0 million. This guarantee was secured against the assets of SR Telecom, ranked pari passu with the Convertible Debentures and was subordinate to the security for the credit facility.

These notes were secured by a pledge of all the assets of CTR and a pledge of the shares of the intermediate holding companies. The Company had agreed to support CTR, including the completion of the network and the maintenance of the Company’s initial equity investment in CTR. SR Telecom had agreed to provide CTR with the appropriate funds and resources required to complete the construction of the network as originally planned at the time of the signing of the loan agreements in 1999. Equally, SR Telecom could repatriate its equity funds from Chile to Canada over and above the amount of the initial equity and SR Telecom’s loans to CTR were subordinated to the notes payable. Guarantees were provided by the Company that, in certain circumstances, were limited to an amount of US$12.0 million. As at December 31, 2006, the lenders had full recourse against SR Telecom for the complete amount of the loans.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

These notes were subject to a number of performance, financial performance and financial position covenants, which were in default at December 31, 2006. In accordance with GAAP, these notes were classified as current liabilities. The covenants under the notes fell into two main categories: (1) the financial covenants required the achievement of specific objectives for the current ratio, debt service coverage ratio, debt to equity ratio, minimum earnings before income taxes, depreciation and amortization, minimum recurring revenues and receivables turnover; (2) the performance covenants focused on timely completion of the network and timely achievement of financial independence for the project. While the foregoing is not an exhaustive list of covenants, it includes the majority of non-reporting covenant requirements.

(ii)   All but $0.3 million face value of the senior unsecured debentures were exchanged for the Convertible Debentures in August 2005 (see note 14).

13.   Credit facility

On May 19, 2005, SR Telecom entered into a US dollar denominated Credit Agreement providing for a credit facility of up to US$39.6 million with a syndicate of lenders, comprised of certain previous holders of the 8.15% debentures and subsequent shareholders of the Company, and BNY Trust Company of Canada as administrative and collateral agent. The credit facility was revolving until October 1, 2006, followed by a non-revolving term that extends to October 2, 2011. The credit facility is secured by a first priority lien on all of the existing and after-acquired assets of the Company.

The credit facility of US$39.6 million was fully drawn as at December 31, 2006, December 31, 2005 and December 1, 2005 in the amount of $46.2 million, $46.3 million and $46.2 million, respectively. The interest on the credit facility is comprised of a cash portion, which is the greater of 6.5% and the three-month US Dollar LIBOR rate plus 3.85%, and additional interest payable in kind, which is the greater of 7.5% and the three-month US Dollar LIBOR rate plus 4.85%.  The additional interest is accrued and included in the Credit Facility as at December 31, 2006, December 31, 2005 and December 1, 2005, in the amounts of $6.8 million, $1.7 million and $1.3 million, respectively. As of February 2007, the Company entered into an agreement with the syndicate of lenders whereby the cash portion of the interest would be payable in kind until December 2007. In addition, the financial terms of the credit facility include the following: a 2% commitment fee based on the facility as it becomes available and a payout fee of either, at the option of the lenders, 5% of the US$39.6 million maximum loan or 2% of distributable value, as defined in the Credit Agreement (which approximates the market capitalization of the Company), at maturity, payable by issuing debt or equity. All 2% commitment fees were paid upon initial draw down of the credit facility amounts. The 5% payout fee is included in accrued liabilities as at December 31, 2006 in the amount of $0.6 million (US$0.5 million) and as at December 31, 2005 and December 1, 2005 in the amount of $0.2 million (US$0.2 million).

14.   Convertible redeemable secured debentures

On July 21, 2005 the Company issued a private offering memorandum to its debenture holders to exchange all of the 8.15% senior unsecured debentures and accrued interest into 10% convertible redeemable secured debentures (“Convertible Debentures”), due October 15, 2011. On August 24, 2005, all but $0.3 million face value of the 8.15% debentures were exchanged for $75.5 million face value of Convertible Debentures.

Interest on the Convertible Debentures is payable in cash or in kind by the issuance of additional convertible debentures, at the option of the Company. The Convertible Debentures are secured by a charge over substantially all of the assets of the Company, ranking behind the security interest granted to the lenders under the Credit Facility and pari passu with the CTR notes, and are subject to the terms of an Inter-Creditor agreement entered into between the credit facility lenders, under the terms of the Credit Facility, the Convertible Debenture holders and the CTR lenders, which set out certain rights and obligations between them.

The Convertible Debentures are convertible into common shares at a rate of 4,606 common shares per $1,000 in principal amount of Convertible Debentures, representing a conversion price at closing of approximately $0.217 per common share.

In accordance with their terms, on November 30, 2005, $10.0 million in principal amount of the Convertible Debentures plus accrued interest thereon payable in kind were converted into 47,322,829 common shares at the conversion price of approximately $0.217 per common share. Immediately after the conversion, the holders of the Convertible Debentures held approximately 72.9% of the then outstanding common shares.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

On February 2, 2006, the Company converted approximately $61.8 million of Convertible Debentures, including accrued interest payable in kind thereon, into 280,881,314 common shares. In addition, on February 27, 2006, the Company converted approximately $4.5 million of Convertible Debentures, including accrued interest payable in kind thereon, into 20,391,019 common shares. Other conversions of Convertible Debentures and accrued interest payable in kind thereon took place throughout the first quarter of 2006. In aggregate, these conversions resulted in the reclassification of  $39.7 million from the debt component and $26.6 million from the equity component to capital stock.

During the three months ended June 30, 2006, the Company converted $0.4 million of Convertible Debentures, including accrued interest payable in kind thereon, into 1,763,286 common shares, which resulted in the reclassification of $0.2 million from the debt component and $0.2 million from the equity component to capital stock.

In accordance with Canadian GAAP, the Convertible Debentures were accounted for on the basis of their substance and are presented in their component parts of debt and equity.  The debt component was measured at the issue date as the present value of the cash payments of interest and principal due under the terms of the Convertible Debentures discounted at an interest rate of 21%, which approximated the estimated interest rate of a similar non-convertible financial instrument with comparable terms and risk. The difference between the value as determined and the face value of the Convertible Debentures was allocated to equity. The debt component is accreted to its face value through a charge to earnings over its term.

As at December 31, 2006, the debt component was $1.8 million ($40.6 million as at December 31, 2005 and $40.0 million as at December 1, 2005), including $0.1 million of accreted interest ($0.7 million as at December 31, 2005 and $0.6 million as at December 1, 2005) and interest payable in kind in the amount of $0.3 million ($2.3 million as at December 31, 2005 and $1.8 million as at December 1, 2005), and the equity component was $1.0 million ($27.8 million as at December 31, 2005 and $27.9 million as at December 1, 2005).

15.   Convertible term loan

On December 16, 2006, the Company obtained a $20.0 million convertible term loan from a syndicate of lenders comprised of shareholders of the Company. The convertible term loan bears cash interest at a rate equal to the greater of 6.5% or the three-month US dollar LIBOR rate plus 3.85% and additional interest that may be paid in cash or in kind, at the option of the Company, at a rate equal to the greater of 7.5% or the three-month US dollar LIBOR rate plus 4.85%. As of February 2007, the Company entered into an agreement with the syndicate of lenders whereby the cash portion of the interest would be payable in kind until December 2007. The convertible term loan has a five-year term and is secured by the assets of the Company, subordinated only to the existing credit facility. The holders of the convertible term loan have the right to convert, at any time, the convertible term loan, all “in kind” interest and other accrued but unpaid interest thereon, into common shares of the Company at the conversion rate of $0.17 per common share. The financial terms of the convertible term loan include an up-front, 2% commitment fee and a payout fee of 5% of the convertible term loan due at maturity. As at December 31, 2006, the commitment fee of $0.4 million has been paid and $0.02 million has been accrued for the payout fee.

In accordance with Canadian GAAP, the convertible term loan is accounted for on the basis of its substance and is presented in its component parts of debt and equity.  The debt component was measured, prior to adjustment, at the issue date as the present value of the cash payments of interest and principal due under the terms of the convertible term loan using a discount rate of 22%, which approximates the estimated interest rate of a similar non-convertible financial instrument with comparable terms and risk. The equity component was measured, prior to adjustment, at the issue date using the Black-Scholes option pricing model using the following assumptions: dividend yield of 0.0%; volatility of 100.0%; risk-free interest rate of 3.9%; and expected life of 5 years. Both components, individually valued as described above, were adjusted, on a prorated basis, to arrive at each component of the convertible term loan. The debt component is accreted to its face value through a charge to earnings over its term.

As at December 31, 2006, the debt component is $10.5 million, including $0.04 million of accreted interest and interest payable in kind in the amount of $0.1 million, and the equity component is $9.6 million.

Issue costs amounting to $1.4 million have been allocated between the debt and equity components of the convertible term loan: $0.7 million was allocated to the debt component and has been included in deferred costs; and $0.7 million was allocated to the equity component and has been included in deficit.

16.   Lease liability

With the acquisition of Netro Corporation in 2003, the Company assumed SR Telecom USA Inc.’s San Jose, California operating lease. As this location was not in use by SR Telecom USA Inc., at the time of acquisition in 2003, a lease liability of $8.6 million was recorded as the fair value of future lease payments, less expected sub-leasing revenue. The Company had been unable to sub-lease the premises, nor did it expect to be able to sublease the premises in the near term. As such, in the fourth quarter of 2004, the Company revised its estimate of expected sub-lease revenue, resulting in a $1.6 million charge in the statement of operations and a corresponding increase in the lease liability.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

In 2005, the landlord of the lease filed a lawsuit against SR Telecom USA Inc., seeking payment for rent and damages. On January 13, 2006, the Company reached a US$3.6 million settlement with the landlord for the full discharge of the lease liability, resulting in a gain of $2.7 million being recorded in the eleven months ended November 30, 2005. As at      December 1, 2005 and December 31, 2005, the Company’s lease liability was $4.2 million (US$3.6 million) reflecting the settlement payable. This settlement was paid in the first quarter of 2006. As at December 31, 2006, the Company’s lease liability was nil.

17.   Capital stock and warrants

Authorized

An unlimited number of common shares

An unlimited number of preferred shares issuable in series

	Issued and outstanding		Capital stock
	common shares
			$
Opening balance as at January 1, 2004	10,467,283		180,866
February 18, 2004
Public offering (a)	5,714,287		31,029
Private placement (a)	571,500		3,104
February 24, 2004, over-allotment option related to public offering (a)	857,142		4,654
Termination of Employee Stock Purchase Plan - cancellation of common shares (b)	(80	)	-
Closing balance as at December 31, 2004	17,610,132		219,653
November 30, 2005 mandatory conversion of Convertible Debentures (c)	47,322,829		10,274
Closing balance as at December 1, 2005	64,932,961		229,927
Conversions of debentures during the fourth quarter of 2005 (c)	734,000		159
Closing balance as at December 31, 2005	65,666,961		230,086
February 2, 2006
Private placement (d)	333,333,333		50,000
Conversion of debentures (d)	280,881,314		61,806
February 27, 2006
Private placement (d)	28,498,302		4,275
Conversion of debentures (d)	20,391,019		4,485
Conversion of debentures during the first quarter of 2006	89,269		21
Conversions of debentures during the second quarter of 2006	1,763,286		393
July 24, 2006 issuance of shares (e)	2,769,576		1,108
Closing balance as at December 31, 2006	733,393,060		352,174

(a)   On February 18, 2004, the Company completed a public offering and a private placement of Units. Each Unit issued was comprised of one common share and one-half of one common share purchase warrant. Each whole warrant entitled the holder to acquire one common share at a price of $9 per common share until the end of February 2006. On February 24, 2004, the over-allotment option related to the public offering was exercised. The total net proceeds to the Company amounted to $46.8 million after deducting share issue costs of $3.2 million.

The gross proceeds of $50.0 million were allocated between common shares and warrants based on their then fair market values. Accordingly, $38.8 million was allocated to common shares and $11.2 million to the warrants. The fair value of the warrants was determined using the Black-Scholes option pricing model, assuming a weighted average risk-free interest rate of 4.3%, a dividend yield of 0%, expected volatility of 72.5% and expected life of the warrants of two years.

(b)   The Company effectively terminated its Employee Stock Purchase Plan as of January 1, 2004 and cancelled 80 common shares in 2004.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

(c)   On November 30, 2005, pursuant to the terms of the Convertible Debentures, $10.0 million in principal amount of the Convertible Debentures and $0.3 million of accrued interest payable in kind thereon were converted into common shares. Other conversions of Convertible Debentures took place in 2005.

(d)   On February 2, 2006, the Company completed a private placement and converted Convertible Debentures, including accrued interest payable in kind thereon, into common shares. On February 27, 2006, the Company completed a similar private placement and converted Convertible Debentures, including interest payable in kind thereon, into common shares. Share issue costs amounted to $1.0 million.

(e)   On July 24, 2006, the Company issued common shares to its former Interim President and Chief Executive Officer as per the terms of an agreement. Compensation expense of $1.1 million, as well as $0.7 million for all applicable taxes, was included in selling, general and administrative expenses in 2006.

Warrants

	December 31, 2006		December 31, 2005		December 1, 2005
	Number of warrants		Number of warrants		Number of warrants
Warrants issued in July 2003
Exercise price of $10 per common share,
expiring on July 18, 2008 and August 27, 2008		352,941		352,941		352,941
Warrants issued in February 2004
Exercise price of $9 per common share,
expired on February 20, 2006		-		3,571,465		3,571,465
Issued and outstanding warrants		352,941		3,924,406		3,924,406

Upon the adoption of fresh start accounting on December 1, 2005, the value of the warrants was determined to be nil as at the revaluation date (see note 1). This value was determined using the Black Scholes option pricing model.

Stock-Based Compensation Plan

The following table summarizes the activity in the Employee Stock Option Plan:

					Pre-fresh start (note 1)
	Year ended December 31, 2006		One month ended December 31, 2005		Eleven months ended November 30, 2005		Year ended December 31, 2004
	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price
		$		$		$		$
Outstanding,
beginning of period	232,480	30.17	285,430	27.23	406,580	25.03	306,310	32.96
Granted	27,435,835	0.32	-	-	-	-	149,000	7.47
Forfeited/expired	(2,867,600)	0.91	(52,950)	14.32	(121,150)	19.85	(48,730)	21.17
Outstanding,
end of period	24,800,715	0.54	232,480	30.17	285,430	27.23	406,580	25.03
Options exerciseable,
end of period	170,180	30.55	201,730	32.94	249,580	29.45	168,940	40.61

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The following table summarizes information about the Company's outstanding and exercisable stock options as at December 31, 2006:

Range of exercise prices	Options outstanding	Weighted average remaining contractual life	Weighted average exercise prices	Options exercisable	Weighted average exercise prices
$			$		$
0.18 to 0.24	1,609,400	6.9 years	0.21	-	-
0.32 to 0.41	23,008,735	6.4 years	0.33	-	-
6.64 to 8.80	78,000	7.1 years	7.62	66,900	7.64
16.40 to 22.90	35,250	4.7 years	18.11	33,950	18.06
45.30 to 57.80	53,830	3.1 years	51.07	53,830	51.07
83.30 to 89.70	15,500	2.5 years	85.57	15,500	85.57
	24,800,715	6.4 years	0.54	170,180	30.55

Stock options under the Employee Stock Option Plan (old ESOP) may be granted to officers and other key employees of the Company to purchase common shares of the Company at an exercise price equal to the weighted-average trading price of all common shares for the five days preceding the grant date. The options are exercisable during a period not to exceed ten years. The right to exercise options generally vests over a period of four to five years.

In March 2006, the Board of Directors approved a new employee and director stock option plan (new ESOP). The plan was approved by the shareholders of the Company at the Annual General Meeting of Shareholders held on June 8, 2006. Options are granted to directors and employees at the discretion of the Board of Directors. All stock options granted to employees under this plan vest over four years and expire seven years from the grant date. All stock options granted to directors under this plan vest over one year and expire seven years from the grant date. The exercise price of stock options granted under this plan shall be determined by the Board of Directors, but shall not be lower than the greater of the following: (a) the volume weighted average trading price of the common shares on the TSX for the five trading days immediately preceding the date of grant of the option; and (b) the average closing price of the shares on the TSX for the fifteen trading days immediately preceding the date of the grant of the option.

The number of shares reserved for issuance under both plans cannot exceed 10% of issued and outstanding securities of the Company at any time. As at December 31, 2006, 73.3 million shares were reserved for issuance.  The Company intends to issue new shares upon any share option exercise.

Effective January 1, 2004, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants relating to stock-based compensation and other stock-based payments. The Company determined compensation cost of stock options using the fair value method and applied this change retroactively without restatement of prior periods (see note 3).

The following amounts are recognized as compensation expense in the statement of operations for awards granted since January 1, 2002:

	$
For the year ended December 31, 2004	247
For the eleven months ended November 30, 2005	728
For the one month ended December 31, 2005	-
For the year ended December 31, 2006	1,911

The fair value of direct awards of stock is determined based on the quoted market price of the Company’s stock, and the fair value of stock options is determined using the Black-Scholes option pricing model, using the following weighted average assumptions. The estimated fair value of options is amortized to expense over the option-vesting period.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

				One month		Eleven months
	Year ended			ended		ended		Year ended
	December 31,			December 31,		November 30,		December 31,
	2006			2005		2005		2004
Options granted		27,435,835			-		-		149,000
Weighted average exercise price		$0.32			-		-		$7.47
Dividend yield		0.0	%		-		-		0.0	%
Volatility		100.0	%		-		-		72.5	%
Risk-free interest rate		4.22	%		-		-		4.10	%
Expected life	5 years				-		-	5 years
Fair value per option granted		$0.29			-		-		$6.33

Loss per share

The Company has outstanding options, warrants, Convertible Debentures and a convertible term loan that could potentially dilute the earnings per outstanding share in the future, but these were excluded from the calculation of diluted net loss per share for the periods presented, as they would have been anti-dilutive. As at December 31, 2006, the amount of common shares that could be issued: (1) from the exercise of all outstanding options is 24,800,715; (2) from the exercise of all outstanding warrants is 352,941; (3) from the conversion of the outstanding Convertible Debentures plus accrued interest payable in kind is 12,343,189; and (4) from the conversion of the outstanding convertible term loan plus accrued interest payable in kind is 118,181,182.

18.   Research and development expenses, net

Investment tax credits netted against research and development expenses amounted to approximately $0.9 million for the year ended December 31, 2006 ($0.1 million, $1.0 million and $2.1 million, respectively, for the one month ended December 31, 2005, the eleven months ended November 30, 2005 and the year ended December 31, 2004).

The Canadian federal government offers a tax incentive to companies performing research and development (“R&D”) activities in Canada. This tax incentive is calculated based on pre-determined formulas and rates, which consider eligible R&D expenditures, and can be used to reduce federal income taxes otherwise payable in Canada. Such credits, if not used in the year earned, can be carried forward for a period of twenty years. The Quebec provincial government offers a similar incentive, except that it is receivable in cash instead of a credit used to reduce taxes otherwise payable. The cash credit is awarded regardless of whether or not there are Quebec provincial taxes payable. The provincial credit is recorded as income taxes receivable until the payment is received. The federal credit was recognized on the balance sheet as investment tax credits to be used in future periods. As of July 1, 2003, the Company ceased the recognition of further federal investment tax credits.

In December 2006, the Company determined that there was insufficient evidence of reasonable assurance that investment tax credits in the amount of $4.6 million (nil in the one month ended December 31, 2005, $8.5 million in the eleven months ended November 30, 2005 and $4.2 million in the year ended December 31, 2004) would be realized within their remaining lives. Accordingly, a reduction of this amount was recorded resulting in a corresponding charge to the statement of operations.

19.   Gain on sale of long-term investment

During the third quarter of 2004, the Company sold a long-term investment acquired as part of the acquisition of Netro Corporation in 2003 for cash proceeds of $3.4 million (US$2.7 million). This long-term investment had been recorded at an estimated fair value of nil at the time of the Netro acquisition.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

20.   Finance charges, net

						Pre-fresh start (note 1)
	Year ended			One month ended		Eleven months ended		Year ended
	December 31, 2006			December 31, 2005		November 30, 2005		December 31, 2004
							$		$
Financing charges		882			582		5,035		-
Interest on long-term debt		3,698			283		6,571		8,474
Interest on credit facility		9,336			684		2,475		-
Interest on convertible redeemable secured debentures		1,082			737		2,586		-
Interest on convertible term loan		214			-		-		-
Other interest, net		(352	)		30		402		(391	)
		14,860			2,316		17,069		8,083

Non-cash financing expenses of $6.7 million, comprised of accreted interest on the convertible debentures and convertible term loan as well as interest paid in kind on the credit facility, convertible debentures, convertible term loan and CTR’s long-term debt, are included in financing expenses for 2006 ($0.8 million in the one month ended December 31, 2005 and $11.2 million in the eleven months ended November 30, 2005).

Commitment fees of $0.4 million on the credit facility and the convertible term loan are included in financing charges for 2006 ($0.2 million in the one month ended December 31, 2005 and $0.2 million in the eleven months ended November 30, 2005).

21.   Income taxes

							Pre-fresh start (note 1)
	Year ended			One month ended			Eleven months ended			Year ended
	December 31, 2006			December 31, 2005			November 30, 2005			December 31, 2004
		$			$			$			$
Income tax recovery at statutory rates		37,041			1,593			23,921			17,273
Decrease relating to non-deductible items		(2,781	)		(536	)		(1,131	)		(830	)
Reversal of temporary differences relating to subsidiaries		-			-			-			(994	)
Benefit of losses not previously recognized		85			83			914			-
Decrease due to non-recognition of losses carried forward		(31,651	)		(1,093	)		(20,222	)		(11,833	)
Write-off of future tax assets		(1,478	)		-			(2,647	)		(24,997	)
Other		(1,952	)		(70	)		(726	)		277
Income tax (expense) recovery		(736	)		(23	)		109			(21,104	)

The Company is currently appealing a tax assessment in the Kingdom of Saudi Arabia. The Company has accrued $0.9 million in relation to this matter for taxes and penalties. The appeal committee has not yet issued a decision on this matter.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Future income taxes consist of the following temporary differences:

	As at			As at			As at
	December 31, 2006			December 31, 2005			December 1, 2005
		$			$			$
Investment tax credits		-			(1,571	)		(1,571	)
Excess of tax value over book value of property, plant
and equipment and intangible assets		11,513			11,585			11,482
Holdbacks		(853	)		(173	)		(173	)
Unclaimed research and development expenses		28,629			30,921			30,708
Losses carried forward		89,406			55,144			53,725
Other		2,524			3,012			2,966
Valuation allowance		(131,219	)		(98,918	)		(97,137	)
		-			-			-

The timing difference arising from investment tax credits is due to the recognition of these tax credits for accounting purposes versus the non-recognition for tax purposes, resulting in future income taxes since in the year that investment tax credits are used, they are subject to income taxes.

Certain research and development expenditures incurred in Canada, in the amount of approximately $74.0 million, can be carried forward indefinitely to reduce future taxable income. The timing difference arising from unclaimed research and development expenditures is the amount that has yet to be claimed for tax purposes and can be carried forward indefinitely to reduce future taxable income.

During the fourth quarter of 2004, as a result of continued losses and the significant uncertainties surrounding the future prospects of the Company, management determined that a valuation allowance on all the future income tax assets was appropriate.

The expiry dates of the Company’s losses carried forward for tax purposes by principal jurisdiction are in the approximate amounts as follows:

	Amount		Expiry date
	$
Canada		177,000		2010 - 2026
Chile		58,000	Indefinite
United States		53,000		2023 - 2024

Due to ownership changes for US income tax purposes in September 2003, the Company’s use of its net operating losses and tax credits, which were incurred prior to and including the date of ownership change, is subject to an annual limitation.

The Company also has unrecorded investment tax credits that can be used to reduce future income taxes payable, expiring at various dates and in different tax jurisdictions as follows:

	Amount		Expiry date
	$
Canada		24,000		2010 - 2026
United States		7,000	2018

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The components of income tax (expense) recovery are as follows:

							Pre-fresh start (note 1)
	Year ended			One  month ended			Eleven months ended		Year ended
	December 31, 2006			December 31, 2005			November 30, 2005		December 31, 2004
		$			$			$		$
Current expense (recovery)		(736	)		(23	)		109		(829	)
Future expense		-			-			-		(20,275	)
		(736	)		(23	)		109		(21,104	)

22.   Restructuring, asset impairment and other charges

2006 Restructuring, asset impairment and other charges

For the year ended December 31, 2006, restructuring charges of $31.5 million were incurred.

The Wireless Telecommunications Product segment includes acharge of $13.9 million to adjust inventory to its realizable value, an impairment charge for intangible assets of $5.4 million and an impairment charge for property, plant and equipment of $2.3 million, which took place in the third quarter of 2006. The charges result from management’s continued restructuring activities, which include the realignment of the business on performing products. As a result, inventory, property, plant and equipment and intangible assets directly related to products that the Company is either discontinuing or phasing out over time were written down. Inventory was written down to management’s best estimate of net realizable value. The intangible assets, comprised of customer relationships, were written down to their estimated fair value determined based on the present value of the related estimated future cash flows. The property, plant and equipment was written down to its estimated fair value based on the estimated sale price for such assets.

In the third quarter of 2006, an impairment charge of $7.2 million on property, plant and equipment was recorded in the Telecommunications Service Provider segment. In light of performance below par and non-binding purchase offers received, the Company tested CTR’s net assets for recoverability. Total estimated future cash flows on an undiscounted basis were less than the carrying value of the net assets. The impairment loss of $7.2 million was measured as the difference between the fair value, based on discounted estimated future cash flows, and the carrying value of the net assets.

During the first six months of 2006, restructuring charges included $1.2 million of severance and termination benefits in relation to the Company’s ongoing efforts to reduce its cost structure. A revision to these estimates was made in the fourth quarter of 2006 based on new information related to the terminations, resulting in additional charges of $0.1 million. These costs primarily related to the Company’s decision to outsource its manufacturing operations and to a reduction of employees in its France subsidiary. In total, 74 employees were terminated, including 67 operations employees, 4 administration employees and 3 sales and marketing employees.

Pursuant to the Company’s decision to outsource manufacturing operations of non-WiMAX products, the Company agreed to sell, during the second quarter of 2006, certain manufacturing assets with a carrying amount of $1.7 million to the contract manufacturer for $0.4 million. This sale, which was concluded on May 5, 2006, resulted in an impairment charge of $1.3 million recorded during the first quarter of 2006.

During the second quarter of 2006, $0.1 million was accrued as a result of a reduction in expected sub-lease revenue related to a Montreal facility that was vacated.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The following table summarizes the 2006 restructuring charges:

	Severance and termination			Asset impairment and other costs			Total
		$			$			$
Liability as at December 31, 2005		908			20			928
Additions		1,255			30,260			31,515
Amounts paid/written-down		(1,783	)		(30,280	)		(32,063	)
Liability as at December 31, 2006		380			-			380

2005 Restructuring, asset impairment and other charges

For the eleven months ended November 30, 2005, restructuring charges of $17.2 million were incurred.

These charges were comprised of $3.0 million related to severance and termination benefits for the termination of employees originally laid-off in January 2005 in the Canadian location, and salary continuance for a period ranging from eighteen to twenty-four months relating to the termination of employment contracts for certain executives. These charges were taken by the Company to continue to reduce its cost structure in line with current and projected revenue levels. In total, 95 employees were terminated including 41 research and development employees, 16 project management employees, 9 sales and marketing employees, 19 operations employees and 10 administration employees.

During the second quarter of 2005, as part of its restructuring efforts, the Company undertook a review of certain aspects of its operations and its intended future direction. Accordingly, the Company decided that it would manufacture discontinue certain product lines, no longer support prior versions of certain products and change its approach to repairs. As a result, inventory comprised mostly of raw materials and repair stock, totalling $19.9 million offset by an inventory provision of $3.3 million, was written off or written down to its estimated net realizable value. The inventory affected was located primarily in Canada and France. The inventory write-down related to France, in the amount of $2.8 million, is included in discontinued operations (see note 23).

During 2005, the Company determined that certain satellite-related assets to be deployed had deteriorated.  Accordingly, a charge of $0.3 million was recorded to write-down such assets to their fair market value.  In addition, $0.1 million was accrued for lease charges related to a Montréal (Québec) manufacturing facility that was vacated in November 2005.

The following table summarizes the 2005 restructuring charges:

	Severance and termination			Asset impairment and other costs			Total
		$			$			$
Liability as at December 31, 2004		280			664			944
Additions		3,038			14,162			17,200
Amounts paid/written-down		(2,255	)		(14,731	)		(16,986	)
Liability as at December 1, 2005		1,063			95			1,158
Amounts paid/written-down		(155	)		(75	)		(230	)
Liability as at December 31, 2005		908			20			928

2004 Restructuring, asset impairment and other charges

During the second and third quarter of 2004, restructuring charges of $7.7 million were incurred.

These charges were undertaken by the Company to reduce its cost structure in line with current and projected revenue levels. These costs were comprised primarily of severance and termination benefits, write-off of specific inventory and other assets and accrued lease charges and operating costs related to the U.S. facilities in Washington, as well as losses on the sale of redundant assets.In total, 45 employees were terminated including 28 research and development employees, 1 project management employee, 6 sales and marketing employees, 4 operations employees and 6 administration employees.

Management decided that it would no longer pursue the development and sale of the Stride 2400 product line.  As a result, the Company recorded the write-off of certain inventory of $1.1 million and deferred charges of $0.3 million in the second quarter of 2004.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The following table summarizes the 2004 restructuring charges:

	Severance and termination			Asset impairment and other costs			Total
		$			$			$
Liability as at December 31, 2003		944			-			944
Additions		3,436			4,265			7,701
Amounts paid/written-down		(4,100	)		(3,601	)		(7,701	)
Liability as at December 31, 2004		280			664			944

23.   Discontinued operations

Effective December 1, 2005, the Company sold substantially all of the assets and operations of its subsidiary in France, as well as its Australian subsidiary to a subsidiary of Duons Systèmes of Paris, France (Purchaser). With this transaction, the Company effectively disposed of its Swing product line operations.

The sale price, as per the agreement, was to be established between one euro and €4 million, based on the performance of the sold businesses for the year ended November 30, 2006. The Company agreed to indemnify the Purchaser should the sold businesses realize a loss in the year ended November 30, 2006, up to a maximum of €0.8 million. As of the third quarter of 2006, management estimated, with the available information, that the sold businesses would generate a loss in excess of  €0.8 million and as such, recorded a provision of $1.1 million (€0.8 million ) in the third quarter of 2006. However, following negotiations, an agreement was reached with the Purchaser resulting in no amounts payable. As such, the provision established in the third quarter of 2006 was reversed in the fourth quarter.  

As a result of the sale transaction, the Company recorded the following charges in the one month ended December 31, 2005 as part of discontinued operations: a write-down of $0.4 million of the remaining fixed assets of its France subsidiary that were deemed to have no future use as well as a write-off of $0.6 million for remaining Swing-related inventory not taken by the Purchaser that was estimated to be unrecoverable.

Following the disposal of substantially all of the assets and operations of the France subsidiary, the Company has redirected the remaining operations of the subsidiary to act as a sales office in France for the Company’s other products. The Company entered into negotiations with the landlord of the subsidiary’s premises to terminate the lease in order to find premises more suited to its needs. An agreement was reached in March 2006. The Company accrued, as part of discontinued operations, the settlement of the lease termination as at December 31, 2005 in the amount of $1.5 million (€1.1 million) in the one month ended December 31, 2005. The Company vacated the premises in April 2006.

The results of operations and the cash flows of the Swing product line operations have been presented in the consolidated financial statements as discontinued operations. Prior to their sale, Swing product line operations were presented as part of the Wireless Telecommunications Products segment.

The results of discontinued operations are as follows:

						Pre-fresh start (note 1)
			One			Eleven
	Year ended		month ended			months ended			Year ended
	December 31,		December 31,			November 30,			December 31,
	2006		2005			2005			2004
		$		$			$			$
Revenue of discontinued operations		-		254			13,918			24,862
Loss on disposal of discontinued operations		-		(1,761	)		-			-
Pretax earnings (loss) of discontinued operations		788		(4,221	)		(4,583	)		(7,741	)
Earnings (loss) from discontinued operations		788		(4,221	)		(4,758	)		(9,192	)

In conjunction with the sale of its Swing-related operations in December 2005, the Company signed an agreement that provides for royalty payments based on revenue earned on certain specific contracts transferred to the Purchaser. During the year ended December 31, 2006, the Company earned royalties of $0.8 million.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The cash flows from discontinued operations are summarized as follows:

						Pre-fresh start (note 1)
			One			Eleven
	Year ended		month ended			months ended			Year ended
	December 31,		December 31,			November 30,			December 31,
	2006		2005			2005			2004
		$		$			$			$
Cash flows (used in) provided by operating activities		-		(2,115	)		7,791			841
Cash flows provided by (used in) investing activities		-		762			(8	)		(125	)
(Decrease) increase in cash and cash equivalents from
discontinued operations		-		(1,353	)		7,783			716

The net assets of discontinued operations are summarized as follows:

	As at		As at			As at
	December 31,		December 31,			December 1,
	2006		2005			2005
		$		$			$
Accounts receivable, net		-		5,809			5,235
Inventory		-		-			1,019
Other		-		250			880
Current assets		-		6,059			7,134
Property, plant and equipment, net		-		53			1,385
Accounts payable and accrued liabilities		-		(8,365	)		(7,621	)
Customer advances		-		(75	)		(362	)
Current liabilities		-		(8,440	)		(7,983	)
Net (liabilities) assets of discontinued operations		-		(2,328	)		536

24.   Commitments and contingencies

(a)  Leases

The Company leases land, buildings and equipment under non-cancellable operating leases. Future minimum lease payments for the forthcoming years are as follows, per business segment:

	Wireless Telecommunications Products	Telecommunications Service Provider	Consolidated
	$	$	$
2007	428	3,772	4,200
2008	168	3,473	3,641
2009	65	1,557	1,622
2010	33	132	165
2011	1	71	72
Thereafter	1	80	81
	696	9,085	9,781

With the closing of the sale of CTR on February 1, 2007, the Company was fully released from all of its obligations.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

(b)

Bonds

SR Telecom has entered into bid and performance-related bonds associated with various customer contracts.  Performance bonds generally have a term of twelve months while bid bonds generally have a much shorter term. The potential payments due under these bonds are related to SR Telecom’s performance under applicable customer contracts. The total amount of bid and performance-related bonds that were available and drawn down at December 31, 2006 is $2.9 million ($2.0 million as at December 31, 2005 and $2.2 million as at December 1, 2005).

(c)	Guarantees
	The Company has the following major types of guarantees:

(i)   As part of the normal sale of products, the Company has provided its customers with product warranties that generally extend for one year to two years for larger contracts.  As at December 31, 2006, the warranty provision is $0.9 million ($0.5 million as at December 31, 2005 and $0.5 million as at December 1, 2005). The following summarizes the accrual of product warranties that is recorded as part of accounts payable and accrued liabilities in the accompanying consolidated balance sheets:

							Pre-fresh start (note 1)
	Year Ended			One month ended			Eleven months ended
	December 31, 2006			December 31,  2005			November 30, 2005
		$			$			$
Balance, beginning of period		543			470			815
Payments made during the period		(875	)		(291	)		(1,471	)
Warranties accrued during the period		1,219			364			747
Less: Reduction in provision		-			-			379
Balance, end of period		887			543			470

(ii)   The Company also indemnifies its customers against actions from third parties related to intellectual property claims arising from the use of the Company’s products.  Claims under such indemnifications are rare and the associated fair value of the liability is not material.

(iii)   Pursuant to the acquisition of Netro, the Company has agreed to indemnify and hold harmless the directors and officers of Netro for a period of six years to 2009.

(d)   Litigation

The Company included in its accounts payable and accrued liabilities or income taxes payable, as at December 31, 2006, as at December 31, 2005 and as at December 1, 2005, management’s best estimate of the outcome of several litigations, described as follows:

Solectron Arbitration:

On December 19, 2002, Solectron California Corporation filed for arbitration against Netro Corporation for disputes arising under its 1998 “Manufacturing Agreement”. Solectron claimed that in 2000, it purchased materials on the basis of Netro’s forecasts which were not supported by sales orders. The arbitration with Solectron resulted in the purchase of  US$4,000,000 of inventory by SR Telecom, where US$2,000,000 was paid on August 27, 2004. The remainder was to be paid in three installments in 2005, without any interest accruing. As a result of the settlement with Solectron, the Corporation realized a gain of $4,583,000 (US$3,500,000) in the third quarter of 2004.

The Corporation did not meet its February 2005 payment obligation, pursuant to the settlement agreement, resulting in Solectron serving a judicial citation of US$1,450,000 on March 11, 2005. The Corporation has subsequently come to an agreement with Solectron and has paid the then overdue amount of US$550,000 including interest and fees on June 15, 2005. The remaining balance of US$900,000 due on August 26, 2005, was paid on September 7, 2005. No further obligations existed at December 31, 2005.

Future Communications Company (“FCC”) Litigation

The dispute with FCC relates to the alleged improper drawdown by SR Telecom USA, Inc., a wholly-owned subsidiary, of a letter of credit, opened by FCC, with the Bank of Kuwait and the Middle East, and the alleged refusal by SR Telecom USA, Inc. to accept return of inventory provided to FCC. The Kuwait Appeal Court rejected the appeal, filed on March 2, 2005, and the Company appealed this decision to the highest of the Kuwait Courts on July 4, 2005. On January 7, 2007, the Kuwait Appeal Court handed down its decision which was in favor of FCC for an amount of US$1.0 million plus court fees.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

32

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Employee Related Litigation

As a result of past restructuring efforts, certain employees were terminated and given notices and severances according to local labour laws. Some of these employees are claiming that they did not receive an appropriate amount of severance and/or notice period. The Company intends to vigorously defend itself against these claims with all available defences.

Tax matters

In the normal course of business, the Company’s tax returns are subject to examination by various domestic and foreign taxing authorities. Such examinations may result in future tax and interest assessments on the Company. The Company has received notice of assessments by foreign governments for sales taxes and corporate taxes, and by Canadian and provincial governments for research and development tax credits relating to prior years. The Company has reviewed these assessments and determined the likely amounts to be paid. Such amounts have been accrued in their respective classification on the statement of operations, including research and development expenses, income tax expense and selling, general and administrative expenses.

General

The Company is involved in various legal proceedings in the ordinary course of business. The Company is not currently involved in any additional litigation that, in management's opinion, would have a materially adverse effect on its business, cash flows, operating results or financial condition; however, there can be no assurance that any such proceeding will not escalate or otherwise become material to the Company's business in the future.

(e)   Registration Rights

In connection with the issuance of the convertible redeemable secured debentures and convertible loan (collectively the “convertible debt”), the Company entered into a Registration Rights Agreement (the “Agreement”). Pursuant to the terms of the Agreement, the Company is required to cause the common shares issuable or issued pursuant to the terms of the convertible debt, to be registered under the United States Securities Act of 1933 upon request by the holders thereof. In the event that the Company does not comply with the request and other related conditions within the time limits provided in the Agreement, penalties will be payable by the Company at rates ranging from 0.5% to 2% of the common share amounts.

25.   Statements of cash flows

Non-cash working capital items

							Pre-fresh start (note 1)
	Year ended			One  month ended			Eleven months ended			Year ended
	December 31, 2006			December 31, 2005			November 30, 2005			December 31, 2004
		$			$			$			$
Decrease in accounts receivable		6,859			7,819			2,028			28,179
Decrease (increase) in income taxes receivable		1,620			(236	)		(1,337	)		978
Decrease (increase) in inventory		4,920			2,044			571			(10,532	)
(Increase) decrease in prepaid expenses		(1,887	)		610			(1,883	)		1,724
Decrease in investment tax credits		4,616			-			8,534			4,995
Decrease in accounts payable and  accrued liabilities		(367	)		(103	)		(15,954	)		(8,875	)
Increase (decrease) in customer advances		1,979			(332	)		(230	)		(2,039	)
		17,740			9,802			(8,271	)		14,430

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

					Pre-fresh start (note 1)
	Year ended		One  month ended		Eleven months ended			Year ended
	December 31, 2006		December 31, 2005		November 30, 2005			December 31, 2004
		$		$		$			$
Cash and cash equivalents are comprised of the following:
Cash in bank		19,250		9,479		4,796			4,549
Supplementary cash flow information
Non-cash financing and investing activities:
Exchange of 8.15% senior unsecured debentures		-		-		(70,730	)		-
Issuance of 10% redeemable secured Convertible Debentures		-		-		75,526			-
Shares issued upon conversion of 10% redeemable secured
Convertible Debentures		66,705		159		10,274			-
Shares issued in connection with compensation expense		1,108		-		-			-
		67,813		159		15,070			-
Cash paid for:
Interest		7,798		275		3,758			8,461
Income taxes		269		2		130			450
Discontinued operations:
Cash flows from discontinued operations		788		-		-			-

26.   Related party transactions

			Pre-fresh start (note 1)
	Year ended	One  month ended	Eleven months ended	Year ended
	December 31, 2006	December 31, 2005	November 30, 2005	December 31, 2004
			$	$
Accounts payable	-	-	-	19
Directors' fees payable	-	-	-	90
Interest and financing fees payable	609	310	245	1,110
Purchases	254	-	37	199
Directors' fees	448	17	572	260
Interest on debt	10,654	1,402	8,793	5,732
Financing fees	882	582	5,035	-

Most of the credit facility, debentures, Convertible Debentures and convertible term loan interest expense relate to amounts due to current shareholders and the debenture conversions took place with current shareholders. Furthermore, the Company has entered into transactions involving, primarily, professional services with members of its Board of Directors and their affiliated companies. During 2006, the Company entered into a consulting agreement with a former member of its board. The Company continues to pay director fees to its board members.

27.   Derivative financial instruments

At December 31, 2006, December 1, 2005 and December 31, 2005, the Company had no forward contracts.

In March 2004, the Company sold its US$2.0 million forward contract at a rate of 1.4203, which resulted in a realized foreign exchange gain of $0.2 million, recorded in the statements of operations.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

28.   Employee benefit plan

The Company maintained a defined contribution retirement program covering the majority of its employees. As of January 2006, the Company suspended the employer contributions to the Retirement Savings Plan with Group Retirement Services as part of its cost cutting initiatives. For the one month ended December 31, 2005, the eleven months ended November 30, 2005, and the year ended December 31, 2004, the Company contributed to the plan and recorded an expense of approximately $0.1 million, $0.8 million and $1.1 million, respectively.

As of January 1, 2005, the Company terminated its employee savings plan covering its US employees (plan qualifying under Section 401(k) of the Internal Revenue Code (“the Code”)). The plan allowed employees to make pre-tax contributions in specified percentages up to the maximum dollar limitations prescribed by the Code. The Company had contributed to this plan in 2004 and accordingly, recorded $0.2 million (US$0.2 million) in 2004 in expenses in the statements of operations.

29.   Business segments and concentrations

As at December 31, 2006, SR Telecom operated in two business segments. The first is the designing, building and deployment of advanced, field-proven broadband fixed Wireless Access solutions, as well as providing full turnkey services to customers. These products are used by large telephone and Internet service providers to supply broadband data and carrier-class voice services to end-users in urban, suburban and remote areas around the globe.  The second business segment, carried out by CTR in Chile, provides local telephone services to residential, commercial and institutional customers as well as a network of payphones in a large, predominantly rural area of Chile. On February 1, 2007, the Company sold CTR (see note 32).

The accounting policies and methods applied to each of the segments is the same as those described for the consolidated group. Inter-segment eliminations for the balance sheet represent primarily the elimination of investments in subsidiaries and inter-segment amounts receivable.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Wireless Telecommunications Products		Telecommunications  Service Provider		Inter-Segment Eliminations		Consolidated
2006	2005	2006	2005	2006	2005	2006	2005

	$	$	$	$	$	$	$	$
As at December 31:
Balance Sheets
Property, plant
and equipment, net	14,356	21,292	29,382	36,550	-	-	43,738	57,842
Intagible assets, net	27,794	41,904	-	-	-	-	27,794	41,904
Other assets, net	2,762	2,280	-	-	-	-	2,762	2,280
Total assets	200,860	229,915	98,832	108,541	(149,139)	(150,905)	150,553	187,551
For the year ended December 31, 2006 and the one-month period ended December 31, 2005:
Statements of operations
External revenue	68,267	5,638	19,188	1,734	-	-	87,455	7,372
Inter-segment revenue	440	24	-	-	(440)	(24)	-	-
Gross profit (loss)	(1,084)	865	19,188	1,734	-	-	18,104	2,599
Finance charges, net	11,184	2,014	3,676	302	-	-	14,860	2,316
Amortization and
depreciation of
property, plant
and equipment	3,636	292	2,686	218	-	-	6,322	510
Amortization and
depreciation of
other assets	409	244	-	-	-	-	409	244
Amortization and
depreciation of
intangible assets	8,700	710	-	-	-	-	8,700	710
Restructuring, asset
impairment and
other charges	24,313	-	7,202	-	-	-	31,515	-
Income tax expense	736	23	-	-	-	-	736	23
Loss from continuing
operations	109,285	5,146	7,130	14	-	-	116,415	5,160
Net loss	108,497	9,367	7,130	14	-	-	115,627	9,381
Purchase of property,
plant and equipment	1,571	251	2,760	506	-	-	4,331	757

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

	Wireless Telecommunications Products	Telecommunications Service Provider	Inter-Segment Eliminations	Consolidated
	2005	2005	2005	2005
	$	$	$	$
As at December 1:
Balance Sheets
Property, plant
and equipment, net	22,694	36,264	-	58,958
Intagible assets, net	42,614	-	-	42,614
Other assets, net	2,467	-	-	2,467
Total assets	238,324	108,179	(150,536)	195,967

For the eleven months ended November 30, 2005 and the year ended December 31, 2004:

(pre-fresh start accounting, see note 1)

	Nov 2005	Dec 2004	Nov 2005	Dec 2004	Nov 2005	Dec 2004	Nov 2005	Dec 2004
	$	$	$	$	$	$	$	$
Statements of operations
External revenue	51,342	80,490	17,670	18,584	-	-	69,012	99,074
Inter-segment revenue	937	782	-	-	(937)	(782)	-	-
Gross profit	8,703	24,596	17,670	18,584	-	-	26,373	43,180
Finance charges, net	14,230	5,341	2,839	2,742	-	-	17,069	8,083
Amortization and
depreciation of
property, plant
and equipment	3,205	4,320	5,328	6,875	-	(942)	8,533	10,253
Amortization and
depreciation of
other assets	1,191	477	-	598	-	(49)	1,191	1,026
Amortization and
depreciation of
intangible assets	826	914	-	-	-	-	826	914
Restructuring, asset
impairment and
other charges	16,878	7,701	322	-	-	-	17,200	7,701
Gain on sale of
long-term investments	-	3,444	-	-	-	-	-	3,444
Gain on settlement
of claim	2,670	4,583	-	-	-	-	2,670	4,583
Income tax recovery
(expense)	109	(12,610)	-	(8,494)	-	-	109	(21,104)
Loss from continuing
operations	73,190	67,933	3,817	9,009	-	-	77,007	76,942
Net loss	77,948	77,125	3,817	9,009	-	-	81,765	86,134
Purchase of property,
plant and equipment	1,127	2,827	2,223	2,253	(19)	1,012	3,331	6,092

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Geographic Information

The Company's basis for attributing revenue from external customers is based on the customer’s location. Telecommunication service revenue is generated entirely in Chile. Sales to customers located outside of Canada was approximately 98% of revenue or $86.0 million for the year ended December 31, 2006 (99% of revenue or $7.3 million for the one-month period ended December 31, 2005, 98% of revenue or $67.5 million for the eleven-month period ended November 30, 2005 and 92% or $91.0 million for the year ended December 31, 2004). The following sets forth external revenue from continuing operations by individual foreign countries where the revenue exceeds 10% of the total consolidated revenue from continuing operations for the period indicated:

For the year ended December 31, 2006:

	Revenue	% of revenue
	$
Canada	1,425	2%
Argentina	10,847	12%
Spain	12,812	15%
Chile	19,220	22%
Mexico	19,735	22%
Others	23,416	27%
Total	87,455	100%

For the one-month period ended December 31, 2005:

	Revenue	% of revenue
	$
Canada	56	1%
Thailand	1,047	14%
Chile	1,734	24%
Mexico	1,771	24%
Argentina	1,999	27%
Others	765	10%
Total	7,372	100%

For the eleven-month period ended November 30, 2005, pre-fresh start accounting (note 1):

	Revenue	% of revenue
	$
Canada	1,538	2%
Mexico	10,262	15%
Spain	10,953	16%
Chile	17,670	26%
Others	28,589	41%
Total	69,012	100%

For the year ended December 31, 2004, pre-fresh start accounting (note 1):

	Revenue	% of revenue
	$
Canada	8,026	8%
Thailand	10,576	11%
Chile	18,622	19%
Others	61,850	62%
Total	99,074	100%

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The following sets forth external revenue from continuing operations by individual customer where the revenue exceeds 10% of the total consolidated revenue from continuing operations for the period indicated. All of these customers, except those listed as Others, are part of the Wireless Telecommunications Products business segment.

For the year ended December 31, 2006:

	Revenue	% of revenue
	$
Techtel LMDS Communicaciones	10,844	12%
Siemens S.A.	12,812	15%
Axtel S.A. de C.V.	16,632	19%
Others	47,167	54%
Total	87,455	100%

For the one-month period ended December 31, 2005:

	Revenue	% of revenue
	$
RTS (2003) Company Ltd.	964	13%
Telefones de Mexico, S.A. de C.V.	1,385	19%
Techtel LMDS Communicaciones	1,999	27%
Others	3,024	41%
Total	7,372	100%

For the eleven-month period ended November 30, 2005, pre-fresh start accounting (note 1):

	Revenue	% of revenue
	$
Telefones de Mexico, S.A. de C.V.	9,857	14%
Siemens S.A.	10,953	16%
Others	48,202	70%
Total	69,012	100%

For the year ended December 31, 2004, there were no individual customers exceeding 10% of total consolidated revenue from continuing operations.

Intangible assets are located entirely in Canada. The following sets forth the property, plant and equipment of continuing operations by location.

	As at	As at	As at
	December 31, 2006	December 31, 2005	December 1, 2005
	$	$	$
Canada	14,109	19,673	19,736
Chile	29,382	36,550	36,264
Other	247	1,619	2,958
	43,738	57,842	58,958

30.   Financial instruments

The Company operates internationally, exposing it to significant market risks from changes in interest rates and foreign exchange rates. The Company may use derivative financial instruments to reduce these risks but does not hold or issue financial instruments for trading purposes. These financial instruments are subject to normal credit standards, financial controls, risk management and monitoring procedures.

Interest rate risk

The Company has exposure to interest rate risk for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Currency risk

The Company has currency exposure arising from significant operations and contracts in multiple jurisdictions. The Company has limited currency exposure to freely tradable and liquid currencies of first world countries. Where practical, the net exposure is reduced through operational hedging practices.

Monetary assets and liabilities denominated in foreign currencies are as follows:

	As at	As at	As at
	December 31, 2006	December 31, 2005	December 1, 2005
	$	$	$
Cash and restricted cash	9,035	10,044	3,883
Accounts receivable, net	25,387	25,665	33,436
Accounts payable	24,041	16,017	15,615
Long-term credit facility	52,941	47,862	47,551
Long-term debt	33,116	34,447	34,487

Credit risk

The Company has credit risk exposure equal to the carrying amount of financial assets. Wherever practicable, the Company requires accounts receivable to be insured by an export credit agency and/or by confirmed irrevocable letters of credit. The amount due from four customers represents approximately 65% of the total trade receivable as at December 31, 2006 (as at December 31, 2005 - two customers represented 25%; as at December 1, 2005 - two customers represented 43%).

Fair value

As of December 1, 2005, all assets and liabilities were revalued pursuant to the comprehensive revaluation. Accordingly, management believes that all its financial instruments’ carrying values approximate their fair value as at December 31, 2005.

As at December 31, 2006, the following methods and assumptions have been used to estimate the fair value of the financial instruments:

Ø   Current financial assets and liabilities and capital leases approximate their fair values due to their short-term nature.

Ø   The long-term accounts receivable are valued using estimated discounted future cash flows expected to be generated.

Ø   Debentures and notes payable are valued using year-end market prices for the instruments or similar freely traded instruments.

The fair value and carrying amount of these financial instruments were as follows:

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

40

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

	December 31, 2006
	Carrying amount	Fair value
	$	$
Long-term accounts receivable, net	2,365	1,782
8.15% Debentures	270	176
10% Convertible redeemable secured debentures (debt and equity components)	2,793	3,296
Long-term credit facility	52,941	52,941
Convertible term loan (debt and equity components)	20,132	20,132

Fair value information for the CTR notes payable has not been presented. As at February 1, 2007, the Company closed the sale of CTR. As a result of this sale, the CTR notes have been assumed by the Purchaser.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

41

31.   Reconciliation of amounts reported in accordance with Canadian GAAP to United States GAAP and other supplementary United States GAAP disclosures

These consolidated financial statements are prepared in accordance with Canadian GAAP, which differ in certain material respects from United States GAAP (US GAAP). While the information is not a comprehensive summary of all differences between Canadian and US GAAP, other differences are considered unlikely to have a significant impact on the consolidated net loss and shareholders’ equity of the Company.

All material differences between Canadian and US GAAP and the effect on net loss, comprehensive loss and balance sheet amounts are presented in the following tables with an explanation of the adjustments.

Reconciliation of consolidated net loss and comprehensive loss

	Year ended December 31,
	2006			2005			2004
		$			$			$
Net loss - Canadian GAAP		(115,627	)		(91,146	)		(86,134	)
Adjustments
Fresh start accounting and asset impairment 2006 (b)		6,009			1,225			-
Asset impairment 2001 (c)		1,666			1,666			1,666
Convertible redeemable secured debentures (d)		(63,370	)		(11,146	)		-
Convertible term loan (e)		17			-			-
Bid costs, deferred charges and start-up costs (f)		-			987			722
Derivative instruments (g)		329			(345	)		(380	)
Stock-based compensation (h)		-			209			247
Tax effect of the above adjustments (*)		-			-			(907	)
Net loss - US GAAP		(170,976	)		(98,550	)		(84,786	)
Basic and diluted loss per share - US GAAP		(0.25	)		(4.52	)		(5.09	)

The weighted average number of common shares outstanding for purposes of determining basic and diluted loss per share are the same as those used for Canadian GAAP purposes.

(*)  The Company ceased recognizing all benefits of tax loss carry forwards in 2004 and as such the reconciling items between Canadian and US GAAP are not tax effected after that date.

Statement of comprehensive loss

Comprehensive loss is the same as net loss and accordingly, a statement of comprehensive loss is not presented.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

42

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Reconciliation of reported amounts on consolidated balance sheets

Reconciliation of material selected balance sheet accounts between Canadian and US GAAP are as follows:

	Canadian GAAP			Adjustments (b)			All other Adjustments			US GAAP
		$			$			$			$
As at December 31, 2006
Accounts receivable, net (g)		26,940			-			626			27,566
Property, plant and equipment, net (c)		43,738			11,646			(15,728	)		39,656
Intangible assets, net		27,794			(25,617	)		-			2,177
Other assets, net (e)		2,762			298			686			3,746
Accounts payable (g) (e)		35,935			-			537			36,472
Convertible term loan (e)		10,487			-			6,104			16,591
Convertible redeemable secured debentures (e)		1,785			-			893			2,678
Capital stock (d) (i)		352,174			-			68,411			420,585
Warrants (i)		-			1,815			(764	)		1,051
Equity component of convertible   redeemable secured debentures (d)		1,008			-			(1,008	)		-
Equity component of convertible term loan (e)		9,645			-			(9,645	)		-
Contributed surplus/additional paid-in capital (d) (e)		1,911			21,867			(4,751	)		19,027
Deficit, pre-fresh start accounting		(227,142	)		227,142			-			-
Deficit (c) (d) (e) (g) (i)		(126,663	)		(253,844	)		(84,848	)		(465,355	)

	Canadian GAAP			Adjustments (b)			All other Adjustments			US GAAP
	$				$			$			$
As at December 31, 2005
Property, plant and equipment, net (c)		57,842			18,361			(17,394	)		58,809
Intangible assets, net		41,904			(38,311	)		-			3,593
Other assets, net		2,280			637			-			2,917
Convertible redeemable secured debentures (d)		40,630			-			(36,595	)		4,035
Capital stock (d) (i)		230,086			-			7,273			237,359
Warrants (i)		-			13,029			(764	)		12,265
Equity component of convertible   redeemable secured debentures (d)		27,785			-			(27,785	)		-
Contributed surplus/additional paid-in capital (d)		-			1,247			64,124			65,371
Deficit, pre-fresh start accounting		(227,142	)		227,142			-			-
Deficit (c) (d) (g) (i)		(9,381	)		(259,854	)		(25,144	)		(294,379	)

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

43

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Additional disclosures required under US GAAP are as follows:

(a)      Consolidated statement of changes in shareholders’ equity in accordance with US GAAP:

	Common stock					Warrants					Additional paid-in capital		Deficit		Total
	Common stock					Warrants
	$			$		$			$		$		$		$
Balance, December 31, 2003		10,467,283		180,074			352,941		1,656		-		(111,043	)	70,687
Secondary public offering and   private placement		7,142,929		38,787			3,571,465		11,214		-		-		50,001
Share issue costs		-		(2,090	)		-		(605	)	-		-		(2,695	)
Cancellation of shares		(80	)	-			-		-		-		-		-
Net loss		-		-			-		-		-		(84,786	)	(84,786	)
Balance, December 31, 2004		17,610,132		216,771			3,924,406		12,265		-		(195,829	)	33,207
Value of beneficial conversion   feature recognized on   Convertible Debentures		-		-			-		-		75,526		-		75,526
Shares issued upon   mandatory conversion of   Convertible Debentures and   related accrued interest		47,322,829		20,274			-		-		(10,000	)	-		10,274
Shares issued on subsequent   conversion of Convertible   Debentures		734,000		314			-		-		(155	)	-		159
Net loss		-		-			-		-		-		(98,550	)	(98,550	)
Balance, December 31, 2005		65,666,961		237,359			3,924,406		12,265		65,371		(294,379	)	20,616
Value of beneficial conversion   feature recognized on   convertible term loan		-		-			-		-		3,529		-		3,529
Expiry of warrants		-		-			(3,571,465	)	(11,214	)	11,214		-		-
Private placement		361,831,635		54,275			-		-		-		-		54,275
Issuance of shares to   former CEO		2,769,576		1,108			-		-		-		-		1,108
Shares issued upon   conversion of convertible   debentures		303,124,888		128,808			-		-		(62,998	)	-		65,810
Share issue costs		-		(965	)		-		-		-		-		(965	)
Stock-based compensation		-		-			-		-		1,911		-		1,911
Net loss		-		-			-		-		-		(170,976	)	(170,976	)
Balance, December 31, 2006		733,393,060		420,585			352,941		1,051		19,027		(465,355	)	(24,692	)

 (b)  Fresh start accounting and asset impairment 2006 In accordance with Canadian GAAP, effective November 30, 2005, the Company adopted fresh start accounting (see Note 1). The Company reclassified the deficit that arose prior to the conversion to a separate account within shareholder’s equity and re-valued its assets and liabilities to their estimated fair values. The revaluation adjustments were accounted for as a capital transaction and are recorded within the pre-fresh start accounting deficit.

Under US GAAP, the transaction did not qualify as a capital reorganization and accordingly, fresh start accounting was not adopted.  The adjustments reflect the reversal of fresh start accounting adjustments recorded under Canadian GAAP and the related effect on current period depreciation, amortization and cost of revenue in the amounts of $2,6 million, $7.9 million and $ 0.1 million, respectively.

In addition, under Canadian GAAP, the asset impairments recorded in 2006 was based on the excess of the fresh start accounting carrying value of property, plant and equipment and intangible assets over their estimated fair value.  Under US GAAP, the impairment charges were determined as the excess of the historical carrying value of such assets, excluding any fresh start accounting, over their estimated fair value.  Fair value was determined as the present value of estimated future net cash flows.  The asset impairment under US GAAP in excess of that recorded under Canadian GAAP is $7.0 million.

The balance sheet adjustments are net of related depreciation, amortization and impairment charge adjustments.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

44

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Estimated future amortization expense, for the intangible assets of $2.2 million under US GAAP, will be $0.6 million per year from 2007 to 2009 and $0.4 million for 2010.

(c)  Asset impairment 2001 Under Canadian GAAP, an asset impairment charge recorded in 2001 was based on the difference between the carrying value of certain assets and the undiscounted future net cash flows. Under US GAAP, the impairment charge was calculated as the amount by which the carrying value of the assets exceeded their fair value. Fair value was determined as the present value of estimated future net cash flows. The resulting adjustment is net of the impact of depreciation. 

(d)  Convertible redeemable secured debentures Under Canadian GAAP, the convertible redeemable secured debentures are accounted for as described in note 14.  Under US GAAP, the issuance of Convertible Debentures in 2005 resulted in the recognition of a beneficial conversion feature measured at the date of issuance. The total value of the feature on August 18, 2005 was $75.5 million and $65.5 million was recognized on that date when the Convertible Debentures were issued and credited to additional paid-in capital. This amount is accreted over the life of the Convertible Debentures using the effective yield method.  As at December 31, 2006 and December 31, 2005, $65.4 million and $1.7 million, respectively, were accreted to the Convertible Debenture liability.

The remaining $10.0 million of Convertible Debentures were subject to a mandatory conversion clause, the date of which was contingent on a number of factors, and were initially credited to a liability. The beneficial conversion feature of this portion, being $10.0 million, was only recognized when the contingency was resolved, on November 30, 2005, and on that date it was reclassified from the liability account to additional paid-in capital. On the same date, pursuant to the mandatory conversion feature, an expense of $10.0 million was recognized and recorded as the convertible debenture liability, since the accretion of these debentures was accelerated by the conversion. Upon conversion, $10.0 million of Convertible Debentures, and $10.0 million of additional paid-in capital, were credited to share capital.

The terms and conditions of the Convertible Debentures were examined to determine if any of these terms and conditions created embedded derivatives. These features did not result in the recognition of any such embedded derivatives.

During the year ended December 31, 2006, $63.0 million of the Convertible Debentures were converted, of which $2.2 million had already been accreted and an additional $60.8 million was recognized as accretion expense and credited to the debenture liability. In addition, $63.0 million of Convertible Debentures and $63.0 million of additional-paid in capital were credited to share capital. As at December 31, 2006 and December 31, 2005, interest accrued on these debentures, payable through the issuance of additional debentures not yet issued, amounted to $0.3 million and $2.3 million, respectively.

(e) Convertible term loan Under Canadian GAAP, the convertible term loan is accounted for as described in note 15.  Under US GAAP, the issuance of the convertible term loan in 2006, resulted in the recognition of a beneficial conversion feature measured at the date of issuance. The total value of this feature on December 16, 2006 was $3.5 million. This amount will be accreted over the life of the convertible term loan using the effective yield method. As at December 31, 2006, $29 thousand was accreted to the convertible term loan.

The terms and conditions of the convertible term loan were examined to determine if any features of these terms and conditions created embedded derivatives. These features did not result in the recognition of any such embedded derivatives. 

(f) Bid costs, deferred charges and start-up costs Under Canadian GAAP, bid costs, deferred charges and start-up costs that satisfy specified criteria for recoverability are deferred and amortized. Under US GAAP, such costs are expensed as incurred. The resulting adjustments are net of the amounts amortized under Canadian GAAP. For the year ended December 31, 2006, there were no such costs.

(g)  Derivative instruments Under US GAAP, all derivative instruments, including those embedded in contracts, are recorded on the balance sheet at fair value with gains or losses recognized in earnings. The estimated fair value of foreign exchange embedded derivative net assets is $0.08 million at December 31, 2006 and net liabilities of $0.3 million at December 31, 2005.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

45

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

(h) Stock-based compensation Under Canadian GAAP, the Company accounts for stock-based compensation to employees and directors as described in note 17.  Under US GAAP, the intrinsic value method was used to account for stock-based compensation of employees to December 31, 2005. Compensation expense recognized under Canadian GAAP, using the fair value method, for the 2004 and 2005 periods would not be recognized under US GAAP. All stock options issued had an exercise price equal to or greater than the market value of the underlying shares at the date of grant; therefore, there is no expense under the intrinsic value method for US GAAP purposes for the one month ended December 31, 2005, eleven months ended November 30, 2005 and year ended December 31, 2004.

In December 2004, the Financial Accounting Standards Board (FASB) published Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payments.  SFAS No. 123 amends SFAS 123, Stock-Based Compensation issued in 1995 and supercedes Accounting Principals Board opinion (APB) No. 25 issued in 1972. Beginning on January 1, 2006, the Company applied SFAS No. 123R using the modified version of the prospective application for the stock options granted. Under that transition method, compensation expense is generally recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). Compensation cost is recognized beginning on the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. Stock-based compensation expense recognized for the year ended December 31, 2006 was $1.9 million. As of January 1, 2006, the total remaining unrecognized compensation cost related to non-vested stock options was nominal.  The financial statements of prior periods do not reflect any restated amounts resulting from the adoption of FAS 123R.

Supplementary disclosures follow: 

	Year ended December 31, 2006
	Number of options	Weighted- average grant date fair value
Nonvested stock options at the beginning of the year	30,750	$7.23
Nonvested stock options at the end of the year	24,630,535	$0.29
Stock options granted	27,435,835	$0.29
Stock options vested	10,150	$8.07
Stock options forfeited	2,867,600	$0.91

As of December 31, 2006, the total stock option compensation expense to be recognized in the statement of operations for the next five years is $2.3 million, $1.1 million, $0.5 million, $0.1 million and , $nil, respectively.

The 170,180 stock options exercisable at December 31, 2006 have an intrinsic value of nil.

Had costs for the stock-based compensation plans been determined based on the fair value at the grant dates for awards consistent with SFAS 123, the Company’s pro forma net loss and loss per share for the years ended December 31, 2005 and 2004 would have been as follows:

 

	December 31,
	2005	2004
	$	$
Net loss - US GAAP - as reported	(98,550)	(84,786)
Fair value of stock-based compensation	(754)	(980)
Net loss - pro forma	(99,304)	(85,766)
Basic and diluted loss per share - US GAAP - as reported	(4.52)	(5.09)
Basic and diluted loss per share - US GAAP - pro forma	(4.56)	(5.15)

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

46

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model, using the following weighted average assumptions:

	Years ended December 31,
	2005	2004
Dividend yield	n/a	0.0%
Expected volatility	n/a	72.5%
Weighted average risk-free interest rate	n/a	4.1%
Expected life	n/a	5 years

The weighted average fair value per option granted for all options outstanding as of December 31, 2005 and 2004 is $11.17 and $11.81, respectively.

(i)  Share issue costs, restructuring costs and gross profit relating to CTR Under Canadian GAAP, share issue costs may be charged to retained earnings. Under US GAAP, share issue costs must be deducted from the proceeds of issue. In 2006, share issue costs deducted from retained earnings amounted to $965 thousand ($3.6 million in 2005).

For US reporting purposes, inventory write-downs in the nature described in note 22 would be included as a component of cost of revenue and not included in restructuring charges.

Under Canadian reporting, telecommunications operating expenses have not been included in the determination of gross profit. Under US reporting, all operating costs related to CTR would be included in the determination of gross profit. The resulting gross (loss) profit (including the impact of other items described in this note that affect gross profit) under US GAAP for the years ended 2006, 2005 and 2004 was ($9.9) million, $1.3 million and $29.3 million, respectively.

(j) Net unrealized holding gains (losses) Under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, the Company’s investments in securities would be classified as available-for-sale securities and are carried at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings under US GAAP and reported as a net amount in accumulated other comprehensive income (loss), which is a separate component of shareholders’ equity on the balance sheet, until realized. Upon realization, comprehensive income (loss) would be adjusted to reflect the reclassification of the gains or losses into income (loss). As at December 31, 2006 and December 31, 2005, the Company was not holding any investments.

(k) Research and development Under Canadian GAAP, investment tax credits on research and development are deducted from research and development expense. Under US GAAP, Canadian federal investment tax credits are included in the provision for income taxes. The Company ceased recognizing benefits of federal investment tax credits carry forwards in 2003 and as such no reconciling item between Canadian and US GAAP is required for the 2004, 2005 and 2006 periods.

(l) Recent pronouncements In June 2005, the FASB ratified EITF Issue 05-5, Accounting for Early Retirement or Post-employment Programs with Specific Features. The Company does not provide any early retirement or post-employment programs and thus, the adoption of EITF 05-5 is not expected to have a material impact on the Company’s consolidated financial statements.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

In June 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109, Accounting for Income Taxes, to create a single model to address accounting for uncertainty in tax positions taken or expected to be taken in a tax return. Under FIN 48, the tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained, based solely on its technical merits. The Company plans to adopt FIN 48 beginning January 1, 2007. The cumulative effect of adopting FIN 48 will be recorded in retained earnings. The Company is currently evaluating the potential impact, if any, that the adoption of FIN 48 will have on the Company's consolidated financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in US GAAP, and expands disclosures about fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair valuemeasurements; the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The Company plans to adopt this Statement beginning January 1, 2007.  The Company is currently evaluating the potential impact, if any, that the adoption of SFAS 157 will have on the Company's consolidated financial statements.

32.   Subsequent events

a) Term Loan On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing. The term loan has a five-year term and is subject to the same security as the existing loans under the credit facility, but ranking senior to the existing loans. The term loan bears cash interest at a rate equal to the greater of 6.5% or the three-month US dollar LIBOR rate plus 3.85% and additional interest that may be paid in cash or in kind, at the option of the Company, at a rate equal to the greater of 7.5% or the three-month US dollar LIBOR rate plus 4.85%. The cash portion of the interest will be payable in kind until December 2008.  A payout fee of 5% of the term loan will be paid to lenders upon repayment or maturity of the loan. Closing of the transaction occurred on July 3, 2007.

In connection with entering into this new term loan, the syndicate of lenders has agreed to amend certain terms of the initial advances under the credit facility and the convertible term loan. The maturity date has been amended to match the maturity date of this new financing, and the cash portion of the interest will be payable in kind until December 2008

In addition, amendments were also made to the terms of the credit facility and the convertible term loan for the portion of the debt held by two of the lenders. A conversion right was granted to these two lenders whereby their respective portions would be convertible into common shares of the Company. As well, the conversion price of the portion of the convertible term loan held by one of the lenders was amended. 

 

b) Reorganization plan On April 16, 2007, the Company announced a plan to reorganize its internal operations, including the wind-up of legacy product operations and centralization of activities. In conjunction with the implementation of this plan, the Company will be eliminating approximately 75 positions worldwide severance costs are estimated to be $0.8 million.

c)   Sale of property On April 12, 2007, the Company closed the sale of its land and building located in Montréal (Québec), Canada for gross proceeds of $8.6 million 

The land and building had a net book value of $2.0 million and $3.1 million respectively as at December 31, 2006. This property is presented as part of the Wireless Telecommunications Products segment as at December 31, 2006. The land and building did not qualify to be presented as held for sale at year-end given that the Company has leased back a significant portion of the sold property for a term of 10 years at a rate of approximately $0.6 million per year. In accordance with GAAP, the Company will be accounting for the leaseback of the property as an operating lease. The Company realized a gain on sale of property of $3.6 million in the second quarter of 2007, which will be deferred and amortized over the term of the lease. As part of the lease agreement, the Company is to provide a security deposit of three months’ rent to be returned, proportionately, at the end of the third, fourth and fifth year of the lease. In addition, the purchaser has retained three months’ rent from the proceeds as additional security deposit to be returned at the earliest of when the Company completes two consecutive profitable quarters or the end of the lease term.  

d) Debenture conversion On February 14, 2007, the Company announced that it would redeem its outstanding 10% convertible debentures on March 6, 2007 for an amount equal to $1,038.63 per $1,000 of principal amount, representing the principal amount plus $38.63 of accrued but unpaid interest thereon to the redemption date. Up to the redemption date, debenture holders had the option to convert all or a portion of their convertible debentures and accrued but unpaid interest thereon into common shares at an effective rate of $0.15 per common share.

 

Prior to March 6, 2007, $2.0 million convertible debentures, including accrued but unpaid interest thereon were converted into 13,181,651 common shares. The Company will record these conversions as induced early conversions, with the number of shares converted being measured at $0.217 per common share, pursuant to the original terms of the convertible debentures, and additional shares issued to induce the conversion being measured at fair value. The resulting debt settlement gain of $0.1 million will be included in financing expenses and incremental conversion costs of $0.9 million will be included in deficit.

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

48

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

On March 6, 2007, the Company redeemed $0.7 million of convertible debentures and accrued but unpaid interest thereon for $0.8 million. The Company will record this redemption as an early redemption of debt, with the consideration paid on extinguishment being allocated to the debt and equity components of the convertible debentures. The resulting gain of $0.05 million relating to the debt component will included in financing expenses and the resulting loss of $0.04 million relating to the equity component will be included in deficit.

As of March 6, 2007, there were no outstanding 10% convertible redeemable secured debentures.

e)   Sale of CTR On February 1, 2007, the Company announced the closing of the sale of the shares of its Chilean subsidiary, CTR (Telecommunications Service Provider segment) to Chile.com, an integrated telecom service provider, for proceeds of nil. As part of this transaction, the Company was fully released from all of its obligations with respect to CTR, including liabilites in respect of loans to CTR amounting to approximately US$28.0 million for which SR Telecom was guaranteeing up to an amount of US$12.0 million.

The results of operations and the cash flows of the Telecommunications Service Provider segment did not qualify for presentation as discontinued operations as of December 31, 2006 as CTR only became available for sale in its present condition in 2007.

Beginning February 1, 2007, the results of operations and the cash flows of the Telecommunications Service Provider segment will be presented in the financial statements as discontinued operations. 

The following information sets forth the summarized pro forma condensed consolidated balance sheet of the Company as if the sale transaction had occurred on December 31, 2006, and the results of operations and cash flows as if the sale transaction had occurred on January 1, 2006. Certain transaction costs were assumed in arriving at the pro forma information. The sale of CTR resulted in a loss of $0.2 million, recognized in the first quarter of 2007. 

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Condensed Consolidated Balance Sheet

	Pro forma
	as at December 31, 2006
		$
Assets
Current assets		67,507
Property, plant and equipment		14,356
Other assets		33,320
		115,183
Liabilities
Current liabilities		37,278
Long-term credit facility		52,941
Long-term convertible term loan		10,487
Long-term liability		1,749
Long-term debt		270
Convertible redeemable secured debentures		1,785
		104,510
Shareholders' Equity
Capital stock		352,174
Equity components of Convertible Debentures and convertible term loan		10,653
Contributed surplus		1,911
Deficit pre-fresh start accounting		(227,142	)
Deficit		(126,923	)
		10,673
		115,183

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

50

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(all tabular amounts are in thousands of Canadian dollars except where otherwise stated)

Condensed Consolidated Statement of Operations

	Pro forma
	For the year ended
	December 31, 2006
		$
Revenue		68,707
Cost of revenue		69,724
Gross profit		(1,017	)
Operating loss from continuing operations		(99,462	)
Finance charges		11,184
Loss from continuing operations		(110,697	)
Net loss		(109,909	)

Condensed Consolidated Statement of Cash Flows

	Pro forma
	For the year ended
	December 31, 2006
		$
Cash flows used in continuing operating activities		(49,811	)
Cash flows provided by continuing financing activities		67,664
Cash flows used in continuing investing activities		(8,289	)

SR Telecom Inc. 8150 Trans-Canada Hwy. Montréal QC H4S 1M5 T (514) 335.1210 F (514) 334.7783

EX-99.2

SR Telecom

2006

Fourth quarter and year-end report

July 3, 2007

1

CONTENTS

The year at a glance

Management’s Discussion & Analysis

About forward-looking statements

Non-GAAP financial measures

Going concern assumption

Fresh start accounting

Selected consolidated financial information

Segmented analysis

§ Wireless telecommunications products segment

§ Telecommunications service provider segment

Consolidated basic and diluted loss per share

Consolidated balance sheet

Consolidated liquidity and capital resources

Outlook

Assumptions, risks and uncertainties

Disclosure controls and procedures and internal control over financial reporting

Accounting policies

Consolidated financial statements

Notes to Consolidated financial statements

2

THE YEAR AT A GLANCE

2006 was an extremely difficult year for SR Telecom as it struggled to rid itself of the remains of legacy restructuring initiatives, cope with the resulting disruptions to operations, finances and customer service while still carving a niche in the WiMAX market.

Financial results for 2006 may be disappointing, yet the Company remains optimistic about its growth potential for 2007 and beyond, as the WiMAX industry matures and commercial deployments increase. The Company made steady progress, while slower than anticipated, on several fronts:

Strengthened financial footing

§ The Company significantly de-leveraged its balance sheet in Q1 2006 through a private placement and the concurrent conversion of the vast majority of its 10% convertible debentures into common shares. In March 2007, the Company completed the redemption of the remaining $2.7 million balance of convertible debentures, including accrued but unpaid interest, a move that streamlined SR Telecom’s financial structure through the elimination of second ranking creditors and freed up approximately $4.7 million in restricted cash from its balance sheet.

§ In December 2006, the Company sought and obtained $20.0 million in new financing from a syndicate of lenders comprised of shareholders of the Company.

§ In February 2007, the Company announced the sale of its telecommunications service provider subsidiary in Chile, Comunicacion y Telefonia Rural (CTR ). This transaction fully released the Company from all of its obligations with respect to CTR, including liabilities regarding loans amounting to approximately US$28.0 million; it also simplified the Company’s financial structure.

§ On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing.

Defined and implemented a new business plan

§ The Company appointed a new permanent chief executive officer (CEO) and chief financial officer (CFO) in Q2 2006. The new leadership team fully evaluated all aspects of the organization and took decisive action to realign the business to focus on two key ingredients for future success: delivering WiMAX products and creating a contract manufacturing process that is seamless, transparent and efficient.

§ Following the comprehensive evaluation initiated by the new CEO and the new CFO, in April 2007 the Company announced an internal reorganization that centralized activities in its Montréal (Canada) offices and reduced costs. Part of this reorganization included the discontinuation and sale of certain unprofitable legacy product lines; an initiative intended to better align cost structure with revenue potential. The sales process began in earnest in April and is ongoing.

3

Focused on core activities

§ In Q1 2006, the Company outsourced manufacturing activities to increase its cost competitiveness; this transition was completed for the most part in the second quarter. The supply chain was re-established allowing for higher deliveries in the year ended December 31, 2006 compared to the same period in 2005.

§ Nonetheless, contract-manufacturing issues had a strong negative impact on overall results throughout the year. In addition to mitigating transitional issues with existing contract manufacturers, management took action to de-risk manufacturing by broadening its supply source, thereby improving process efficiency with its manufacturing partners:

1 In December 2006, it reached an agreement with a new contract manufacturer to manufacture CPEs

2 In March 2007, it entered into discussions with a tier-1 contract manufacturer for its WiMAX product suite

3 In May 2007, it signed a three-year WIMAX manufacture and supply agreement with Taiwan-based Microelectronics Technology (MTI)

§ The Company received WiMAX Forum certification of its symmetrymx solution, marking a pivotal step towards executing the plan to deploy WiMAX technology.

Renewed customer relationships

§ While product development and delivery delays have put strain on customer relationships, the Company has made efforts to establish open lines of communication to address customer concerns. In addition, the Company’s suite of WiMAX solutions continues to attract new customer enquiries and field trials are currently underway with a number of telecommunications service providers around the world.

4

Management's Discussion and Analysis

This Management Discussions and Analysis of financial position and results of operations comments on SR Telecom’s operations, performance and financial condition for the periods ended December 31, 2006, 2005 and 2004 and should be read in conjunction with the Company’s consolidated financial statements for the periods then ended. The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and are presented in Canadian dollars. The principles of Canadian GAAP used in the preparation of our financial statements for the years ended December 31, 2006, 2005 and 2004 defer in certain material respects with US GAAP, as disclosed in note 31 to the consolidated financial statements for the years ended December 31, 2006, 2005, and 2004.

All tabular amounts in this MD&A are in thousands of Canadian dollars, except where otherwise noted. This MD&A was prepared in accordance with Canadian generally accepted accounting principles (GAAP) and should be read in conjunction with SR Telecom’s annual audited consolidated financial statements. You will find more information about SR Telecom, including SR Telecom Inc.’s annual information form, dated July 3, 2007 on SR Telecom Inc.’s website at www.srtelecom.com and on SEDAR at www.sedar.com .

ABOUT FORWARD LOOKING STATEMENTS

The MD&A may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. The forward-looking statements in this MD&A describe the Company’s expectations on July 3, 2007.

A statement is considered forward-looking when it makes a statement about the future based on what is known and expected today. Forward-looking statements may include words such as anticipate, assumption, believe, could, expect, goal, guidance, intend, may, objective, outlook, plan, seek, should, strive, target and will.

These statements are based on certain assumptions and analyses management makes in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors it believes appropriate in the circumstances. However, whether actual results and developments will confirm management’s expectations and predictions is subject to a number of risks and uncertainties, including among other things, the risk factors discussed in this MD&A.

Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company and its subsidiaries or their businesses or operations. The reader is cautioned not to rely on these forward-looking statements. The Company disclaims any obligation to update these forward-looking statements even if new information becomes available.

5

In the forward-looking statements contained in this MD&A, the Company made a number of assumptions about the market, operations, finances and transactions. Certain factors that could cause results or events to differ materially from our current expectations include, among others, our ability to implement our strategies and plans, the intensity of competitive activity and the ability to deliver our products on time while significantly reducing costs, the proper execution of our contract manufacturing arrangements, timely development of our WiMAX product offerings, the attainment of cost reduction targets, a sustained demand for symmetryone in 2007, the impact of competition on pricing and market share, and the ability to fund the required investment in working capital to sustain revenue growth.

For a more complete discussion of the assumptions and risks underlying our forward-looking statements, please refer to the section entitled “Assumptions, risks and uncertainties”elsewhere in this MD&A and in the Company’s management’s discussion and analysis for the year ended December 31, 2006 and the section entitled “Risk factors” in the Company’s annual report on Form 20-F for the year ended December 31,2006, which can be found under the Company’s name at www.sedar.com and on the Company’s website at www.srtelecom.com.

GOING CONCERN ASSUMPTION

The consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

There is substantial doubt about the appropriateness of the use of the going concern assumption because of the Company’s losses for the current and prior years, negative cash flows, reduced availability of supplier credit and lack of operating credit facilities. As such, the realization of assets and the discharge of liabilities and commitments in the ordinary course of business are subject to significant uncertainty.

For the year ended December 31, 2006, the Company incurred a net loss of $115.6 million ($9.4 million for the month ended December 31, 2005 and $81.8 million for the eleven months ended November 30, 2005) and used cash of $45.2 million ($7.1 million for the month ended December 31, 2005 and $48.0 million for the eleven months ended November 30, 2005) in its continuing operating activities. Going forward, the Company will continue to require substantial funds as it continues the development of its WiMAX product offering.

The Company has taken the following steps to address the going concern uncertainty:

On February 1, 2007, the Company completed the sale of the shares of its Chilean subsidiary, CTR, for proceeds of nil (see note 12). As part of this transaction, the Company has been fully released from all of its obligations with respect to CTR, including liabilities in respect of loans to CTR amounting to approximately US$28.0 million for which SR Telecom was guaranteeing up to US$12.0 million. The divestiture of this non-core asset marked another important step in the Company’s plan to strengthen its financial position by streamlining its balance sheet and focus on its WiMAX strategy.

6

On March 6, 2007, the Company concluded the conversion/redemption of the remaining Convertible Debentures, allowing for the release of $4.7 million of restricted cash.

On April 12, 2007, the Company closed the sale and leaseback of its property located in Montréal (Québec), Canada for gross proceeds of $8.6 million.

On April 16, 2007, the Company announced a plan to reorganize its internal operations, including the wind-up of legacy product operations and centralization of activities. In conjunction with the implementation of this plan, the Company will be eliminating approximately 75 positions worldwide.

On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing.

The Company’s successful execution of its business plan is dependent upon a number of factors that involve risks and uncertainties. In particular, the development and commercialization of both fixed and mobile WiMAX are key elements of the Company’s strategic plan and of its future success and profitability. If either or both of fixed and/or mobile WiMAX prove not to be commercially viable or less commercially viable than is currently anticipated or compared to alternative solutions, or if the Company’s WiMAX products are less commercially viable or competitive than those developed by other companies, the Company will experience significant adverse effects on its liquidity, financial condition and ability to continue as a going concern.

The consolidated financial statements do not reflect any adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, significant adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

FRESH START ACCOUNTING

On November 30, 2005, the Company completed a conversion of $10.0 million in principal amount of the Company’s 10% convertible redeemable secured debentures due October 15, 2011 (convertible debentures) and accrued interest payable in kind into common shares pursuant to the terms of the convertible debentures.  The conversion was completed on a pro-rata basis among all holders of convertible debentures into approximately 47.3 million common shares at the conversion price of approximately $0.217 per common share. Immediately after the conversion, those holders of convertible debentures held approximately 72.9% of the then outstanding common shares. Because of this conversion, there was a substantial realignment of the interests in the Company between creditors and shareholders that, under Canadian Generally Accepted Accounting Principles (GAAP), required the adoption of fresh start accounting. Fresh start accounting required the Company to classify the deficit that arose prior to the conversion to a separate account within shareholders’ equity and re-valued its assets and liabilities to their estimated fair values. The enterprise value was determined based on several traditional valuation methodologies, utilizing projections developed by management including discounted cash flow analysis and comparable company trading analysis. The comprehensive revaluation of assets and liabilities was done based on this enterprise value. The revaluation adjustments were accounted for as a capital transaction and are recorded within the pre-fresh start accounting deficit.

7

Comparative financial statements for periods prior to December 1, 2005 have been presented pursuant to regulatory requirements. In reviewing these comparative financial statements, readers are reminded that they do not reflect the effects of the application of fresh start accounting. The December 31, 2005 financial results we analyze comprise one month of post-fresh start accounting and eleven months of pre-fresh start accounting. The financial results for Q4 2005 comprise one month of post-fresh start accounting and two months of pre-fresh start accounting. The aggregated twelve-month financials and three-month financials represent non-GAAP measures that are used to facilitate the evaluation of the Company’s performance between periods. These non-GAAP measures have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies, and therefore should not be considered in isolation.

8

The following table summarizes the adjustments recorded to implement the fresh start basis of accounting:

	Prior to the adoption of fresh start accounting  November 30, 2005	Fresh start adjustments	Notes	After adjustments  December 1, 2005
Assets
Current assets	86,727	585	(i)	87,312
Property, plant and equipment	77,581	(18,623)	(ii)	58,958
Intangible assets	3,668	38,946	(iii)	42,614
Investment tax credits	4,616	-		4,616
Other assets	2,467	-		2,467
	175,059	20,908		195,967
Liabilities
Current liabilities	75,553	-		75,553
Long-term credit facility	47,551	-		47,551
Long-term liability	1,752	-		1,752
Long-term debt	488	-		488
Convertible redeemable secured debentures	40,261	(274)	(v)	39,987
	165,605	(274)		165,331
Shareholders’ equity
Capital stock	219,653	10,274	(v)	229,927
Warrants	13,029	(13,029)	(iv)	-
Equity component of convertible redeemable secured debentures	37,851	(10,000)	(v)	27,851
Contributed surplus	1,247	(1,247)	(iv)	-
Deficit pre-fresh start accounting	(262,326)	35,184	(vi)	(227,142)
	9,454	21,182		30,636
	175,059	20,908		195,967

(i) The revaluation resulted in an increase in current assets, mainly reflecting work in process and finished goods inventory. The work in process fair value was determined using management’s best estimate of selling price less cost to sell and cost to complete. The finished goods inventory fair value was determined using management’s best estimate of selling price less cost to sell.

(ii) The revaluation resulted in a net decrease in property, plant and equipment. This decrease related primarily to the property, plant and equipment of the Company’s then subsidiary CTR. $26.0 million of the decrease was the result of management’s best estimate of CTR’s fair value as a whole and the allocation of this fair value to its assets and liabilities. The property, plant and equipment in the wireless business segment were valued based on fair market value in continued use of the assets. This valuation resulted in a $7.4 million increase in the value of the assets.

(iii) The revaluation resulted in the Company assigning a value to its technology, using the relief-from-royalties method, calculated using projections management developed. As well, as part of the revaluation, a value was attributed to customer relationships based on the related revenue and cash flows the Company expects these customers to generate; this value was also determined using projections management developed.

(iv) The value of contributed surplus and warrants was determined to be nil at the revaluation date. This value was determined using the Black-Scholes option-pricing model.

(v) Pursuant to the terms of the convertible debentures, $10.0 million principal amount, plus accrued interest, classified in equity at the issuance date, was reclassified to capital stock upon conversion to common shares.

(vi) The adjustment reflects the increase in net assets of the Company as a result of the revaluation.

9

SELECTED CONSOLIDATED FINANCIAL INFORMATION

Consolidated balance sheets	December 31, 2006	December 31, 2005	December 1, 2005
Total assets	150,553	187,551	195,967
Long-term financial liabilities (including current portion)	100,554	129,498	128,647
Total liabilities	139,620	166,203	165,331
Capital stock	352,174	230,086	229,927
Shareholders' equity	10,933	21,348	30,636

Consolidated statements of operations	Year ended December 31, 2006	One month ended December 31, 2005	Eleven months ended November 30, 2005	Year ended December 31, 2005	Year ended December 31, 2004
Revenue	87,455	7,372	69,012	76,384	99,074
Restructuring, asset impairment and other charges	31,515	-	17,200	17,200	7,701
Operating loss from continuing operations	(101,362)	(2,532)	(64,308)	(66,840)	(58,036)
Loss from continuing operations	(116,415)	(5,160)	(77,007)	(82,167)	(76,942)
Earnings (loss) from discontinued operations	788	(4,221)	(4,758)	(8,979)	(9,192)
Net loss	(115,627)	(9,381)	(81,765)	(91,146)	(86,134)
Basic and diluted
Loss per share from continuing operations (in dollars)	(0.17)	(0.08)	(4.34)	(3.77)	(4.62)
Loss per share from discontinued operations (in dollars)	-	(0.06)	(0.27)	(0.41)	(0.55)
Net loss per share (in dollars)	(0.17)	(0.14)	(4.61)	(4.18)	(5.17)
Weighted average number of common shares outstanding (in thousands)	671,478	65,386	17,752	21,797	16,661
Dividends per common share (in dollars)	-	-	-	-	-

Discontinued operations

In 2005, SR Telecom sold substantially all of the assets and operations of its subsidiary in France and its Australian subsidiary to a subsidiary of Duons Systèmes (Duons) in Paris, France. With this transaction, which took effect on December 1, 2005, the Company effectively disposed of its Swing product line and related operations.

The sale price was established on November 30, 2006, determined based on the performance of the sold businesses for the year then ended. Pursuant to the agreement, the sale price was to range between €1 and €4 million. SR Telecom and its French subsidiary agreed to indemnify Duons, up to a maximum of €0.8 million, should the sold businesses realize a loss in the year ended November 30, 2006. As of the third quarter of 2006, management estimated that the sold businesses would generate a loss in excess of  €0.8 million and as a result, recorded a provision of $1.1 million (€ 0.8 million) in Q3 2006. However, following negotiations with Duons, an agreement was reached resulting in no amount being payable. The provision recorded in Q3 2006 was reversed in Q4 2006.

10

As part of the sale transaction, the Company recorded the following charges in the one month ended December 31, 2005 as part of discontinued operations: a write-down of $0.4 million of the remaining fixed assets of its France subsidiary that were deemed to have no future use as well as a write-off of $0.6 million for the remaining Swing-related inventory not taken by Duons, which the Company estimated to be unrecoverable.

Following the disposal of substantially all of the assets and operations of its French subsidiary, the Company redirected the remaining operations of the subsidiary to act as a sales office for other products. The Company entered into negotiations with the landlord of the subsidiary’s premises to terminate the lease and to find premises more suited to its needs; an agreement was reached in March 2006. The Company accrued as part of discontinued operations the settlement of the lease termination as at December 31, 2005 for $1.5 million (€1.1 million) in the one month ended December 31, 2005. The Company vacated the premises in April 2006.

The results of operations and the cash flows of the Swing product line are presented in the consolidated financial statements as discontinued operations. Prior to the sale, Swing product line operations were presented as part of the wireless business segment. Wireless segment results expressed in this MD&A do not include these discontinued operations and are presented on a continuing operations basis.

Results of discontinued operations	Year ended December 31, 2006		One month ended December 31,  2005			Eleven months ended November 30, 2005			Year ended December 31, 2005			Year ended December 31, 2004
Revenue		-		254			13,918			14,172			24,862
Loss on disposal of discontinued operations		-		(1,761	)		-			(1,761	)		-
Pre-tax earnings (loss) from discontinued operations		788		(4,221	)		(4,583	)		(8,804	)		(7,741	)
Earnings (loss) from discontinued operations		788		(4,221	)		(4,758	)		(8,979	)		(9,192	)

In conjunction with the sale of its Swing-related operations in December 2005, the Company signed an agreement with Duons that provides for royalty payments based on revenues earned on specific contracts transferred to Duons. During the year ended December 31, 2006, the Company earned royalties of $0.8 million.

Cash flows from discontinued operations	Year ended December 31, 2006		One month ended December 31,  2005			Eleven months ended November 30, 2005			Year ended December 31, 2005		Year ended December 31, 2004
Cash flows (used in) provided by operating activities		-		(2,115	)		7,791			5,676		841
Cash flows provided by (used in) investing activities		-		762			(8	)		754		(125	)
(Decrease) increase in cash and cash equivalents from discontinued operations		-		(1,353	)		7,783			6,430		716

11

Net Assets of discontinued operations	As at December 31, 2006		As at December 31, 2005			As at December 1, 2006
Accounts receivable, net		-		5,809			5,235
Inventory		-		-			1,019
Other		-		250			880
Current assets		-		6,059			7,134
Property, plant and equipment, net		-		53			1,385
Accounts payable and accrued liabilities		-		(8,365	)		(7,621	)
Customer advances		-		(75	)		(362	)
Current liabilities		-		(8,440	)		(7,983	)
Net (liabilities) assets of discontinued operations		-		(2,328	)		536

SEGMENTED ANALYSIS

As at December 31, 2006, SR Telecom operated in two business segments; as a supplier of wireless telecommunications products and as a telecommunications service provider.

WIRELESS TELECOMMUNICATIONS PRODUCTS SEGMENT

Results analysis for the years ended December 31, 2006, 2005 and 2004

From continuing operations	Year ended December 31, 2006	One month ended December 31, 2005	Eleven months ended November 30, 2005	Year ended December 31, 2005	Year ended December 31, 2004
Revenue	68,267	5,638	51,342	56,980	80,490
Cost of revenue	69,351	4,773	42,639	47,412	55,894
Gross profit (loss)	(1,084)	865	8,703	9,568	24,596
Gross profit (loss) percentage	(2%)	15%	17%	17%	31%
Agent Commissions	903	61	1,660	1,721	4,724
Selling, general and administrative expenses	50,796	2,634	31,791	34,425	39,802
Research and development expenses, net	20,954	990	20,610	21,600	30,319
Restructuring, asset impairment and other charges	24,313	-	16,878	16,878	7,701
Operating loss from continuing operations	(98,050)	(2,820)	(62,236)	(65,056)	(57,950)
Finance charges, net	11,184	2,014	14,230	16,244	5,341
Income tax expense (recovery)	736	23	(109)	(86)	12,610
Loss from continuing operations	(109,285)	(5,146)	(73,190)	(78,336)	(67,933)

Revenue

SR Telecom’s revenue reflects revenue generated from the sale of equipment and services. Equipment revenue rose by 22.8% to reach $62.4 million in 2006 compared to $50.8 million in 2005. This increase resulted from the production ramp-up following financing the Company obtained from a private placement in February 2006. However, long lead times in procurement continued to have a negative impact on results throughout the year. 2006 revenue results also reflect the impact of late delivery penalties totalling $5.7 million, recorded as a reduction of revenue, which were the combined result of three key factors: an implementation ramp-up with one contract manufacturer, capacity constraints at a second contract manufacturer and transitional difficulties with supply chain management. These issues approached resolution late in the year, and the Company progressed with plans for a number of equipment field trials around the world.

12

Service revenue is generated from the sale of a variety of services, including site surveys, repairs, installation and project management. Service revenue in 2006 declined slightly to $5.9 million from $6.2 million recorded in 2005, reflecting the Company’s overall focus on equipment sales.

Comparing 2005 and 2004 results, equipment revenue in 2005 decreased to $50.8 million from $67.6 million in 2004, primarily as a result of longer-than-anticipated delays in finalizing the credit facility; reduced supplier credit and production slow-downs, including timing issues related to the delivery of equipment; and an overall decrease in sales volumes.

The 2005 service revenue decline to $6.2 million from $12.9 million in 2004 can be attributed to service revenue realized on projects in their final stages in 2004, particularly, long-term projects in Asia and Africa which were not replicated in 2005. Also, during the first half of 2005, there were delays in securing purchase orders under large-frame contracts that the Company had in place with long-standing customers.

Revenue by geographic region

Revenue from continuing operations by geographic region, based on the location of the Company’s customers, is as follows for the periods indicated.

	Revenue					Percent of wireless revenue
	Year ended Dec. 31, 2006	One month ended Dec. 31, 2005	Eleven months ended Nov. 30, 2005	Year ended Dec. 31, 2005	Year ended Dec. 31, 2004	Year ended Dec. 31, 2006	One month ended Dec. 31, 2005	Eleven months ended Nov. 30, 2005	Year ended Dec. 31, 2005	Year ended Dec. 31, 2004
Europe, Middle East         and Africa	21,583	240	20,662	20,902	25,094	32%	4%	40%	37%	31%
Asia	9,906	1,144	5,523	6,667	31,521	14%	20%	11%	12%	39%
Latin America	32,923	4,113	18,865	22,978	9,608	48%	73%	37%	40%	12%
Other	3,855	141	6,292	6,433	14,267	6%	3%	12%	11%	18%
	68,267	5,638	51,342	56,980	80,490	100%	100%	100%	100%	100%

Wireless revenue in 2006 saw an overall increase across all of SR Telecom’s main sales regions: Latin America, Asia, Europe, Middle East and Africa. The largest gain, both in dollar terms and as a percentage of wireless revenue, was in Latin America. The continued realization of large projects in Mexico and Argentina resulted in a significant increase in revenue to $32.9 million from $23.0 million in 2005.

13

Revenue in Asia grew to $9.9 million in 2006 compared with 2005, when it realized $6.7 million, primarily due to higher equipment sales in the region and a new service contract in Bangladesh.

Revenue in Europe, Middle East and Africa also increased in dollar terms, increasing from $20.9 million in 2005 to $21.6 million in 2006, but declined as a percentage of wireless revenue from 37% in 2005 to 32% in 2006. The increase in dollar terms is primarily attributable to the continued realization of a large project in Spain.

In 2005, revenue in Latin America in dollar terms increased substantially to $23.0 million from $9.6 million in 2004, primarily due to the realization of the first phase of a project in Mexico and equipment supply contract in Argentina. Revenue in Asia decreased in dollar terms and as a percentage of wireless revenue to $6.7 million in 2005 from $31.5 million in 2004. The decrease in revenue in Asia was largely attributable to higher sales in Thailand in 2004 that were not replicated in 2005. Revenue in Europe, Middle East and Africa decreased to $20.9 million in 2005 from $25.1 million in 2004, largely attributable to lower equipment sales, and was offset by a major project in Spain.

Gross profit

(expressed as a percentage of revenue)	Year ended December 31, 2006	One month ended December 31, 2005	Eleven months ended November 30, 2005	Year ended December 31,  2005	Year ended December 31, 2004
Revenue	100%	100%	100%	100%	100%
Cost of revenue	102%	85%	83%	83%	69%
Gross profit	(2%)	15%	17%	17%	31%

Gross profit is calculated by subtracting the cost of revenue from total revenue. With respect to equipment, cost of revenue consists of manufacturing, material, labour, manufacturing overhead, warranty reserves, inventory impairment charges and other direct product costs. With respect to service, cost of revenue consists of labour, materials, travel, telephone, vehicles and other items that are directly related to the revenue recognized.

The principal drivers of fluctuations in gross margins are revenue levels as well as the product and customer sales mix. Gross profit as a percentage of revenue decreased to negative 2% in 2006 from 17% in 2005 and 31% in 2004. Late delivery penalties of $5.7 million and variations in the sales mix, including the increase in sales of lower margin Customer Premises Equipment (CPE), had a significant impact on gross profits recorded in 2006. Late deliveries also resulted in significant inventory impairment charges arising from customers cancelling current orders for which inventory had already been purchased.

In dollar terms, equipment gross profit decreased to negative $2.2 million in 2006 from $6.4 million in 2005. Results in 2006 reflect the impact of $5.7 million in late delivery penalties, which were the combined result of an implementation ramp-up with one contract manufacturer, capacity constraints at a second contract manufacturer, transition efficiency difficulties with supply chain management, previously discussed $10.1 million write down of inventory due to customer cancellations, and a detailed review of inventory requirements based on the expected sale of legacy product lines. These were partially offset by higher sales volumes.

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Service gross profits decreased to $1.1 million in 2006 from $3.2 million in 2005, primarily due to the shift to project services from repair services; repair services typically generate higher margins.

Gross profit decreased to 17% in 2005 from 31% in 2004. Equipment gross profit in dollar and percentage terms decreased to $6.4 million or 13% in 2005 from $20.4 million or 30% in 2004. The decrease in gross profit in dollar and percentage terms is due in part to a $3.5 million write down of raw material inventory, the revaluation of work-in-process and finished goods inventory upon adoption of fresh-start accounting, low production levels and delays associated with restarting the Company’s supply chain as well as variations in the sales mix with increased lower margin product sales.

Service gross profit as a percentage increased to 52% in 2005 from 33% in 2004, which was largely attributable to higher margins realized on service contracts in general. Higher margins realized on the sale of supply inventory were partially offset by reduced volumes.

Agent commissions

SR Telecom uses a network of third party representatives, or agents, who act on behalf of the Company’s international sales organization in countries where maintaining a permanent presence is not justified or where local customs and practices require the use of local parties. Agent commissions are payments SR Telecom makes to these representatives. The Company complies with the Foreign Corrupt Practices Act of the United States when entering into third party or agent agreements.

Agent commissions as a percentage of revenue decreased to 1%, or $0.9 million, in 2006 from 3%, or $1.7 million, in 2005, and 6%, or $4.7 million in 2004. The decrease in 2006 is due to a change in sales mix and less dependence on local representatives; in 2005, it is commensurate with the decrease in revenue recognized from large turnkey contracts, which traditionally had higher commissions.

Sales, general and administrative expenses

Sales, general and administrative (SG&A) expenses consist primarily of compensation costs, travel and related expenses for marketing, communications, sales, human resources, finance, depreciation and amortization, executive and management and professional service fees and expenses.

SG&A expenses rose by $16.4 million to $50.8 million in 2006 from $34.4 million in 2005. In 2006, SG&A expenses included higher depreciation and amortization expense of $7.2 million, resulting from an increase in the value of technology and customer relationship assets following the adoption of fresh start accounting. In addition, the issuance of 2,769,576 common shares to the Company’s interim president and chief executive officer at the time resulted in an additional $1.8 million in compensation expense, including all applicable taxes in 2006. The remainder of the increase is mostly attributable to an increase in stock-based compensation expense, increases in the Company’s provision for litigation matters as a result of management’s revised estimates of litigation outcomes, increased performance and retention bonuses and increased amounts for professional services relating to business realignment activities.

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SG&A expenses decreased to $34.4 million in 2005 from $40.0 million in 2004, primarily due to the savings associated with the restructuring implemented in 2004 and 2005; and partially offset by a $3.7 million increase in the Company’s provision for doubtful accounts relating to Teleco de Haiti/MCI.

Research and development expenses, net of investment tax credits

Research and development expenses comprise compensation, software development tools, depreciation, consultant fees and prototype expenses related to the design, development and testing of SR Telecom’s products net of refundable provincial government investment tax credits. The Company has focused its research and development activities on a WiMAX-enabled suite of products.

Research and development expenses decreased to $21.0 million in 2006, down $0.6 million from $21.6 million in 2005. In December 2006, the Company determined that there was insufficient evidence of reasonable assurance that investment tax credits in the amounts of $4.6 million for 2006 and $8.5 million for 2005 would be realized within their remaining life. The Company therefore recorded a reduction of these amounts, which resulted in a corresponding charge to the statement of operations. Were we to eliminate the effect of these adjustments, research and development expenses would have been $16.4 million in 2006 and $13.1 million in 2005. As such, the $3.3 million increase in research and development expenses in 2006 over 2005 is mainly attributable to the ramp-up of the Company’s WiMAX research and development plan.

Research and development expenses in 2004 amounted to $30.2 million. The $17.1 million decrease in research and development expenses from 2004 to 2005, when excluding the effect of the 2005 adjustment noted above, was primarily due to the realization of cost reductions from the closure of the research facility in France and the closure of the Redmond, Washington facility in the second and third quarters of 2004.

Restructuring, asset impairment and other charges

In 2006, the Company incurred restructuring charges of $24.3 million compared to $16.9 million in 2005 and $7.7 million in 2004.

The 2006 wireless results include a charge of $13.9 million to adjust inventory to its realizable value, an impairment charge of $5.4 million for intangible assets and an impairment charge of $2.3 million for property, plant and equipment. These charges result from management’s continued restructuring activities, including the realignment of the business on performing products. As a result, inventory, property, plant and equipment and intangible assets directly related to products that the Company is either discontinuing or phasing out over time were written down. Inventory was written down to management’s best estimate of net realizable value. Intangible assets, comprised of customer relationships, were written down to their estimated fair value determined based on the present value of related estimated future cash flows. Property, plant and equipment were written down to their estimated fair value based on the estimated sale price for such assets.

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Restructuring charges in 2006 also include $1.3 million of severance and termination benefits related to the Company’s ongoing efforts to reduce its cost structure. In total, 74 employees were terminated of which 61 were affected by the Company’s decision to outsource manufacturing operations of its non-WiMAX products. Pursuant to this decision, the Company agreed to sell certain manufacturing assets with a carrying value of $1.7 million to its contract manufacturer for $0.4 million. The sale, which was concluded on May 5, 2006, resulted in an impairment charge of $1.3 million that was recorded in Q1 2006.

In addition, in 2006, $0.1 million was accrued for a reduction in expected sublease revenue related to a Montréal (Québec) facility that was vacated in late 2005.

In 2005, restructuring charges of $3.0 million were accrued for severance and termination benefits relating to the termination of 95 employees.  In addition, the Company decided that it would discontinue certain products, no longer support prior versions of certain products and changed its approach to repairs. As a result, the Company wrote down inventory by $16.6 million to its estimated net realizable value, comprised mostly of raw materials and repair stock. The inventory affected was located primarily in Canada and France. The inventory write down related to France in the amount of $2.8 million is included in discontinued operations. Furthermore, in 2005, $0.1 million was accrued for lease charges related to a Montreal manufacturing facility that was vacated in November 2005.

In 2004, restructuring charges of $7.7 million were incurred for severance and termination benefits, write-off of specific inventory and deferred charges, accrued lease charges and operating costs related to the US facilities in Washington as well as losses on the sale of redundant assets. These activities were undertaken by the Company to reduce its cost structure. In total, 45 employees were terminated and management decided that it would no longer pursue the development and sale of its Stride 2400 product line.

Finance charges
Finance charges amounted to $11.2 million in 2006, a decrease of $5.0 million when compared to finance charges of $16.2 million in 2005. This decline is attributable to lower interest expense on outstanding 8.15% senior unsecured debentures and 10% convertible redeemable secured debentures as, with the exchange of the majority of 8.15% debentures to 10% debentures in mid-2005 and with the substantial conversions of 10% convertible debentures in late 2005 and early 2006, debenture debt levels were significantly reduced. In addition, $4.4 million of costs incurred in connection with the exchange in 2005 of the 8.15% debentures into 10% convertible debentures consisting mainly of legal, accounting, broker, dealer and agent fees did not repeat themselves in 2006. These decreases were partially offset by higher interest expense relating to the long-term credit facility, which was fully drawn in the fourth quarter of 2005 thereby generating interest expense for a full year in 2006 as opposed to only a full quarter in 2005.

Finance charges in 2004 amounted to $5.3 million and were primarily related to interest expense on the 8.15% senior unsecured debentures.

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Foreign exchange

The Company incurred a foreign exchange gain of $0.7 million in 2006 compared to a gain of $0.2 million in 2005 and a loss of $0.1 million in 2004. The Company’s trade receivables and payables are primarily denominated in US dollars and Euros. The Company also has other liabilities denominated in US dollars and Euros as well as US-dollar denominated debt. Gains or losses on foreign exchange relate primarily to fluctuations between the US dollar and the Euro compared with the Canadian dollar.

Income taxes

Income tax expense amounted to $0.7 million in 2006 compared to an income tax recovery of $0.1 million in 2005. In the normal course of business, the Company’s tax returns are subject to examination by various domestic and foreign tax authorities. Such examinations may result in future tax and interest assessments. The Company has received notice of assessments from foreign governments for sales taxes and income taxes, has reviewed these assessments and determined the likely amounts to be paid. As such, an income tax accrual of $0.7 million was recorded in 2006. Tax adjustments explain the tax recovery in 2005.

Income tax expense in 2004 amounted to $12.6 million and resulted from management's determination that an increase in the valuation allowance for future income tax assets was appropriate as a result of the continued losses and the significant uncertainties surrounding the future prospects of the Company.

Backlog

Backlog at the end of 2006 stood at $45.4 million, the majority of which is expected to be delivered in the next two quarters. This figure is up from $28.2 million at the end of 2005 and $9.5 million at the end of 2004. The Company’s current backlog is comprised of multiple short-term orders that turn over quickly and includes purchase orders received for committed deliveries.

As of May 31, 2007, backlog stood at $25.8 million, the majority of which is expected to be delivered by the end of the third quarter of 2007.

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WIRELESS TELECOMMUNICATIONS PRODUCTS SEGMENT

Results analysis for the quarters ended December 31, 2006, and 2005

From continuing operations
	2006				2005
	Q4	Q3	Q2	Q1	1 month ended Dec. 31	2 months ended Nov. 30	Q4	Q3	Q2	Q1
Revenue	17,853	16,431	14,818	19,165	5,638	4,677	10,315	27,872	9,580	9,213
Cost of revenue	25,433	13,521	15,345	15,052	4,773	7,736	12,509	18,811	7,829	8,263
Gross profit (loss)	(7,580)	2,910	(527)	4,113	865	(3,059)	(2,194)	9,061	1,751	950
Gross profit (loss)     percentage	(42%)	18%	(4%)	21%	15%	(65%)	(21%)	33%	18%	10%
Operating loss from continuing operations	(27,310)	(41,543)	(17,661)	(11,536)	(2,820)	(21,696)	(24,516)	(6,953)	(22,930)	(10,657)
Loss from  continuing operations	(31,293)	(45,179)	(18,562)	(14,251)	(5,146)	(21,614)	(26,760)	(14,151)	(24,879)	(12,546)

Revenue

The fourth quarter of 2006 saw equipment revenue almost double to $16.5 million from $8.7 million in the fourth quarter of 2005. While the Company faced many issues with contract manufacturing and its supply chain management throughout 2006, outsourcing issues have been coming to a resolution. As such, sales volumes increased, despite late delivery penalties of $2.0 million incurred in the fourth quarter of 2006. Service revenue remained relatively flat at $1.4 million in the fourth quarter of 2006 compared to $1.6 million in the fourth quarter of 2005.

Revenue by geographic region

Three months ended December 31,	Revenue		Percent of wireless revenue
	2006	2005	2006	2005
Europe, Middle East and Africa	7,053	1,784	40%	17%
Asia	2,182	1,900	12%	18%
Latin America	7,475	6,169	42%	60%
Other	1,143	462	6%	5%
	17,853	10,315	100%	100%

Wireless revenue increased across all of SR Telecom’s main sales regions in the fourth quarter of 2006 compared to the fourth quarter of 2005. The largest increase was in Europe, the Middle East and Africa, which benefited from the ongoing realization of a major project in Spain. Latin America remained one of the most active regions both in dollar terms and as a percentage of revenue, due mainly to ongoing projects in Mexico and Argentina.

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Gross profit

(Expressed as a percentage of revenue)	Three months ended December 31,
	2006	2005
Revenue	100%	100%
Cost of revenue	142%	121%
Gross profit	(42%)	(21%)

Gross profit as a percentage of revenue decreased to negative 42% in the fourth quarter of 2006 from negative 21% in the fourth quarter of 2005. In dollar terms, gross profit in the fourth quarter of 2006 was negative $7.6 million compared to negative $2.2 million in the same quarter last year.

Equipment gross margin decreased to negative $8.3 million in the fourth quarter of 2006 from negative $2.7 million in the fourth quarter of 2005 due to the impact of $2.0 million in late delivery penalties, a $10.1 million write down of inventory, and offset by higher sales volumes. The negative gross margin in the fourth quarter of 2005 was a function of a $3.5 million write-down of raw materials, the revaluation of work-in-process and finished goods inventory upon adoption of fresh-start accounting as well as lower sales volume.

Service gross margin increased from $0.5 million in the fourth quarter of 2005 to $0.7 million in the fourth quarter of 2006, also due to higher sales volumes.

Sales, general and administrative expenses

SG&A expenses decreased to $9.4 million in the fourth quarter of 2006 from $9.7 million in the fourth quarter of 2005. The SG&A decrease is primarily the result of a $2.3 million reversal of the bad debt provision in the fourth quarter of 2006, as the Company had reached a settlement with Telecom de Haiti/MCI in March 2007. This was offset by a higher depreciation expense related to an increase in the value of technology and customer relationship assets following the adoption of fresh start accounting as well as an increase in stock-based compensation expense.

Research and development expenses, net of investment tax credits

Research and development expenses increased by $0.2 million to $9.9 million in the fourth quarter of 2006, from $9.7 million in the fourth quarter of 2005. In December 2006, the Company recorded adjustments in the amount of $4.6 million for 2006 and $8.5 million for 2005 for income tax credits receivable that would not be realized within their remaining life. Were we to eliminate the effect of these adjustments, research and development expenses would have been $5.3 million in Q4 2006 and $1.2 million in Q4 2005. As such, this $4.1 million increase is due to the ramp-up of the Company’s WiMAX research and development plan in 2006..

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Finance charges

Finance charges were $3.2 million in the fourth quarter of 2006, a decrease of $1.6 million when compared to $4.8 million in the fourth quarter of 2005. With the substantial conversions of 10% convertible redeemable secured debentures throughout 2006 the interest on these debentures was significantly lower in the fourth quarter of 2006 than in the fourth quarter of 2005.

TELECOMMUNICATIONS SERVICE PROVIDER SEGMENT

Results analysis for the years ended December 31, 2006, 2005 and 2004

Comunicacion y Telefonia Rural (CTR) is a telephone service provider in Chile. CTR provides local telephone services to residential, commercial and institutional customers and operates a network of payphones throughout Chile.

On February 1, 2007, the Company announced the closing of the sale of its Chilean subsidiary, CTR, to Chile.com, an integrated telecommunications service provider. As part of this transaction, the Company has been released from all of its obligations with respect to CTR, including liabilities regarding loans to CTR amounting to approximately US$28.0 million for which SR Telecom was guaranteeing up to US$12.0 million. While this transaction did not produce net cash proceeds, it reduced the Company’s debt levels and is another important step in the Company’s plan to strengthen its financial position and focus on its WiMAX strategy.

The results of operations and cash flows of CTR did not qualify for presentation as discontinued operations in 2006 as CTR only became available for sale in its present condition in 2007. Beginning February 1, 2007, the comparative results of operations and the cash flows of CTR will be presented in the financial statements as discontinued operations.

	Year ended December 31, 2006	One month ended December 31, 2005	Eleven months ended November 30, 2005	Year ended December 31, 2005	Year ended December 31, 2004
Net revenue	19,188	1,734	17,670	19,404	18,584
Operating expenses	15,298	1,446	19,462	20,908	18,670
Operating (loss) income	(3,312)	288	(2,114)	(1,826)	(86)
Loss from continuing operations	(7,130)	(14)	(3,817)	(3,831)	(9,009)

Net revenue

CTR’s net revenue decreased slightly to $19.2 million in 2006 from $19.4 million in 2005. Net revenue in Chilean peso terms remained stable at 9.0 billion pesos in both 2006 and 2005. Net revenue depends in part on the mix of access charges on tariffs paid to other service providers by CTR. Lower traffic in rural areas due to the growth of cellular services and competition was partially offset by lower traffic costs.

Comparing 2005 and 2004 revenue, CTR’s net revenue increased from $18.6 million in 2004 to $19.4 million in 2005. Net revenue in Chilean peso terms amounted to 9.0 billion pesos in 2005 compared to 8.7 billion pesos in 2004. The increase was attributable to new access tariffs approved by the Chilean regulator, Subtel, which took effect March 1, 2004 as well as the expansion of urban telecommunications service to several cities in Chile (urban initiative) in 2005.

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Operating expenses

Operating expenses consist of employee compensation costs, travel and related expenses, as well as wire support and maintenance, professional fees and expenses.

Operating expenses decreased to $15.3 million in 2006 from $20.9 million in 2005. In Chilean peso terms, operating expenses stood at 7.3 billion pesos in 2006 compared to 9.2 billion pesos in 2005. This reflects the positive impact of cost containment initiatives as well as a decrease in depreciation expense resulting from the adoption of fresh start accounting on November 30, 2005, which resulted in a decrease in the book value of telecommunications network equipment, and offset by the expansion of the urban initiative.

Operating expenses increased to $20.9 million or 9.2 billion pesos in 2005 from $18.7 million or 8.1 billion pesos in 2004, due to the expansion of the urban wireless telecommunications service in several cities.

Restructuring, asset impairment and other charges

In 2006, CTR incurred restructuring charges of $7.2 million arising from an impairment charge relating to property, plant and equipment. In the third quarter of 2006, in light of performance below par and non-binding purchase offers received, the Company tested for recoverability of CTR’s net assets. The total estimated future cash flows, on an un-discounted basis, were less than the carrying value of the net assets. An impairment loss of $7.2 million was measured as the difference between the fair value based on discounted estimated future cash flows and the carrying value of net assets.

In 2005, CTR incurred restructuring charges of $0.3 million arising from the write-down of certain satellite-related assets. CTR did not incur any restructuring charges in 2004.

Finance charges

Finance charges rose slightly in 2006 to $3.7 million from $3.1 million in 2005. This increase is mainly attributed to higher interest rates, partially offset by reduced debt levels as well as the effect of a decline in the US dollar compared with the Canadian dollar on the US-dollar-denominated interest payments.

In 2005, finance charges increased to $3.1 million from $2.7 million in 2004. The increase was due to professional and legal fees incurred relating to the renegotiation of the CTR loans.

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Foreign exchange

The foreign exchange loss of $0.1 million in 2006, compared to the foreign exchange gain of $1.1 million in 2005 and the $2.3 million gain in 2004, reflect the impact of fluctuations in the Canadian dollar, US dollar and Chilean peso on the assets and liabilities of CTR, in particular, the US-dollar-denominated debt.

TELECOMMUNICATIONS SERVICE PROVIDER SEGMENT
Results analysis for the quarters ended December 31, 2006 and 2005

	2006				2005
	Q4	Q3	Q2	Q1	1 month ended Dec. 31	2 months ended   Nov. 30	Q4	Q3	Q2	Q1
Net revenue	4,849	4,646	4,570	5,123	1,734	3,041	4,775	4,776	4,719	5,134
Operating expenses	3,757	3,844	3,772	3,925	1,446	3,326	4,772	5,503	5,908	4,725
Operating income (loss)	1,092	(6,400)	798	1,198	288	(385)	(97)	(819)	(1,260)	350
Net (loss) income	(1,115)	(7,347)	1,165	167	(14)	(687)	(701)	(8)	(2,243)	(879)

Net revenue

CTR’s net revenue remained stable at $4.8 million in the fourth quarter of 2006 compared to the fourth quarter of 2005. Net revenue in Chilean peso terms increased slightly to 2.3 billion pesos in the fourth quarter of 2006 from 2.2 billion pesos in the fourth quarter of 2005, a function of changes in the mix of access charges on tariffs paid to other service providers by CTR.

Operating expenses

Operating expenses decreased to $3.8 million in the fourth quarter of 2006 from $4.8 million in the fourth quarter of 2005. In Chilean peso terms, operating expenses amounted to 1.8 billion pesos in the fourth quarter of 2006 compared to 2.1 billion pesos in the fourth quarter of 2005. Cost containment initiatives further contributed to the decrease in operating expenses.  Expansion of the urban wireless telecommunications service in several cities in Chile slightly increased operating expenses, however, these were more than offset by a decrease in depreciation expense as a result of the adoption of fresh start accounting on November 30, 2005, which resulted in a decrease in the book value of the telecommunications network equipment.

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CONSOLIDATED BASIC AND DILUTED LOSS PER SHARE

	2006				2005						2004
Basic and diluted net loss per share	Q4	Q3	Q2	Q1	1 month ended Dec 31	2 months ended Nov 30	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
From continuing operations	(0.04)	(0.07)	(0.02)	(0.03)	(0.08)	(1.21)	(0.90)	(0.80)	(1.54)	(0.76)	(2.28)	(0.26)	(0.86)	(1.19)
From              discontinued operations	-	-	-	-	(0.06)	(0.05)	(0.05)	-	(0.20)	(0.02)	(0.10)	0.03	(0.47)	(0.04)
	(0.04)	(0.07)	(0.02)	(0.03)	(0.14)	(1.26)	(0.95)	(0.80)	(1.74)	(0.78)	(2.38)	(0.23)	(1.33)	(1.23)

CONSOLIDATED BALANCE SHEET

Accounts receivable

The short-term accounts receivable balance decreased to $26.9 million as at December 31, 2006 from $33.0 million as at December 31, 2005. This decrease is mostly attributable to the Company’s collection efforts.

Included in accounts receivable as at December 31, 2006 is a balance of US$4.7 million (US$4.7 million as at December 31, 2005) less an allowance for doubtful accounts of US$2.7 million (US$3.2 million as at December 31, 2005) related to an account receivable from Teleco de Haiti. In December 2001, the Company filed a statement of claim in New York for US$4.9 million against MCI International and Telecommunications d’Haiti, S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause mandating three-party arbitration before the International Court of Arbitration in respect of funds that ceased flowing to the Company under a Tripartite Agreement between Teleco de Haiti, MCI International and the Company. The agreement provided for the financing of a contract between the Company and Teleco de Haiti pursuant to which the Company was to supply and install certain telecommunications equipment to Teleco de Haiti for US$12.9 million. In the eleven month period ended November 30, 2005, following various proceedings and actions throughout 2002 to 2005, the Company determined that the most likely outcome would not result in the full recovery of the receivable and accordingly, recorded a provision for doubtful accounts in the amount of $3.7 million (US$3.2 million). In the fourth quarter of 2005, the Company came to a settlement with MCI and Teleco de Haiti. The settlement was signed by the Company and MCI, but was not signed by Teleco de Haiti. Teleco de Haiti did not agree to execute the settlement agreement, despite the fact that it agreed to the terms of the settlement in December 2005. As a result, the case was returned to litigation and its outcome remained uncertain. Management believed that the most likely outcome would not result in the full recovery of the receivable and accordingly, in the third quarter of 2006, increased its provision for doubtful account for the entire balance outstanding of $5.5 million (US$4.7 million). In March 2007, SR Telecom reached a settlement with MCI and Teleco de Haiti and received payment in the amount of $2.3 million (US$2.0 million). Accordingly, the provision for doubtful accounts as at December 31, 2006 was adjusted to reflect the settled amount.

Inventory

The inventory balance decreased significantly to $12.0 million as at December 31, 2006 from $30.9 million as at December 31, 2005. The main driver behind this decrease was a $13.9 million inventory write down that was recorded in the third quarter of 2006 to adjust inventory to its net realizable value. This charge resulted from management’s continued restructuring activities, which include the realignment of its business to focus only on performing products. As a result, inventory directly related to products that the Company is either discontinuing or phasing out over time were written down to management’s best estimate of net realizable value. In addition, a $10.1 million write down of excess inventory was recorded in the fourth quarter of 2006 due to customer cancellations of current orders for which inventory was already purchased and a detailed review of inventory requirements based on the expected sale of legacy product lines.

Investment tax credits

Investment tax credits are earned based on eligible research and development expenditures. In December 2006, the Company determined that there was insufficient evidence of reasonable assurance that investment tax credits of $4.6 million would be realized within their remaining life. Accordingly, the Company recorded a reduction of this amount, resulting in a corresponding charge to the statement of operations.

Property, plant and equipment

Property, plant and equipment decreased significantly to $47.9 million as at December 31, 2006 from $58.4 million as at December 31, 2005. The Company recorded an impairment charge of $9.5 million in the third quarter of 2006, consisting of $2.3 million in wireless products segment and $7.2 million in the telecommunications service provider (CTR) segment. The $2.3 million impairment charge in wireless products results from management’s continued restructuring activities, which include the realignment of its business to focus only on performing products. The $7.2 million impairment charge at CTR was recorded in light of performance below par and non-binding purchase offers received.

Intangible assets

Intangible assets decreased significantly to $27.8 million as at December 31, 2006 from $41.9 million as at December 31, 2005. An impairment of $5.4 million was recorded in 2006 to adjust intangible assets to their estimated fair value. This impairment results from management’s continued restructuring activities, which include the realignment of its business to focus only on performing products. As a result, intangible assets comprised of customer relationships directly related to products that the Company is either discontinuing or phasing out over time were written down to their estimated fair value based on the present value of the related estimated future cash flows.

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Other assets

Other assets on the balance sheet amounted to $2.8 million as at December 31, 2006 compared to $2.3 million, as at December 31, 2005. These are comprised of costs related to professional fees incurred for the establishment of the credit facility in 2005 and the convertible term loan in 2006.

Accounts payable and accrued liabilities

Trade accounts payable and accrued liabilities increased slightly to $36.0 million as at December 31, 2006 from $35.5 million as at December 31, 2005. The increase is mostly attributable to increased procurement activity in the fourth quarter of 2006, partially offset by the slowing of payments in the fourth quarter of 2005.

Long-term debt and shareholders’ equity

	December 31, 2006	December 31, 2005
	$	$
Lease liability	-	4,197
Credit facility	52,941	47,862
Convertible term loan	10,487	-
Long-term debt (including current and long-term portions)	33,592	35,060
Convertible debentures	1,785	40,630
Other long-term liability	1,749	1,749
Shareholders’ equity	10,933	21,348

Lease liability

The lease liability as at December 31, 2005 primarily related to SR Telecom USA Inc.’s San José, California operating lease, expiring in September 2006, assumed with the acquisition of Netro Corporation on September 4, 2003. As of the second quarter of 2005, the Company stopped making its lease payments and the landlord filed a lawsuit against SR Telecom USA Inc. seeking payment for rent and damages. On January 13, 2006, the Company reached a US$3.6 million settlement including transaction costs for the lease liability claims by the landlord. As at December 31, 2005, the Company recorded a lease liability of $4.2 million (US$3.6 million) reflecting the settlement payable. The Company paid this settlement in the first quarter of 2006.

Credit facility

On May 19, 2005, SR Telecom entered into a US-dollar denominated credit agreement providing for a credit facility of up to US$39.6 million with a syndicate of lenders, comprised of certain previous holders of 8.15% debentures and subsequent shareholders of the Company, and BNY Trust Company of Canada as administrative and collateral agent. The credit facility was revolving until October 1, 2006, followed by a non-revolving term that extends to October 2, 2011. The credit facility is secured by a first priority lien on all of the existing and after-acquired assets of the Company. The credit facility of US$39.6 million was fully drawn as at December 31, 2006 and December 31, 2005 in the amount of $46.2 million and $46.3 million respectively. The interest on the credit facility is comprised of a cash portion, which is the greater of 6.5% or the three-month US-dollar LIBOR rate plus 3.85%, and additional interest payable in kind, which is the greater of 7.5% or the three-month US-dollar LIBOR rate plus 4.85%. The additional interest is accrued and included in the credit facility as at December 31, 2006 and December 31, 2005 in the amount of $6.8 million and $1.7 million respectively. As of February 2007, the Company entered into an agreement with the syndicate of lenders whereby the cash portion of the interest would be payable in kind until December 2007. In addition, the financial terms of the credit facility include the following: a 2% commitment fee based on the facility as it becomes available; and a payout fee at the option of the lenders of either 5% of the US$39.6 million maximum loan or 2% of distributable value, as defined in the credit agreement (which approximates the market capitalization of the Company), at maturity, payable by issuing debt or equity. All 2% commitment fees were paid upon initial drawdown of the credit facility amounts. The 5% payout fee is included in accrued liabilities as at December 31, 2006 in the amount of $0.6 million (US$0.5 million) and as at December 31, 2005 in the amount of $0.2 million (US$0.2 million).

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Convertible term loan

On December 16, 2006, the Company obtained a $20.0 million convertible term loan from a syndicate of lenders, comprised of certain of the Company’s shareholders, following an amendment to its previous credit agreement. The convertible term loan bears cash interest at a rate equal to the greater of 6.5% or the three-month US-dollar LIBOR rate plus 3.85% and additional interest that may be paid in cash or in kind, at the Company’s option, at a rate equal to the greater of 7.5% or the three-month US-dollar LIBOR rate plus 4.85%. As of February 2007, the Company entered into an agreement with the syndicate of lenders whereby the cash portion of the interest would be payable in kind until December 2007. The convertible term loan has a five-year term and is secured by the assets of the Company, subordinated only to the existing credit facility. The holders of the convertible term loan have the right to convert, at any time, the convertible term loan, all “in kind” interest and other accrued but unpaid interest thereon into common shares of the Company at the conversion rate of $0.17 per common share. The financial terms of the convertible term loan include the following: an up-front, 2% commitment fee based on the convertible term loan and a payout fee of 5% of the convertible term loan due at maturity. As at December 31, 2006, the commitment fee of $0.4 million has been paid and $0.02 million has been accrued for the payout fee.

In accordance with Canadian GAAP, the convertible term loan is accounted for on the basis of its substance and is presented in its component parts of debt and equity. The debt component was measured, prior to adjustment, at the issue date as the present value of the cash payments of interest and principal due under the terms of the convertible term loan using a discount rate of 22%, which approximates the estimated interest rate of a similar non-convertible financial instrument with comparable terms and risk. The equity component was measured, prior to adjustment, at the issue date using the Black-Scholes option-pricing model using the following assumptions: dividend yield of 0.0%; volatility of 100.0%; risk-free interest rate of 3.9%; and expected life of 5 years. Both components, individually valued as described above, were then adjusted, on a prorated basis, to arrive at each component of the convertible term loan. The debt component is accreted to its face value through a charge to earnings over its term.

As at December 31, 2006, the debt component is $10.5 million, including $0.04 million of accreted interest and interest payable in kind in the amount of $0.1 million, and the equity component is $9.6 million.

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Issue costs amounting to $1.4 million have been allocated between the debt and equity components of the convertible term loan: $0.7 million was allocated to the debt component and has been included in deferred costs; and $0.7 million was allocated to the equity component and has been included in deficit.

Long-term debt

Long-term debt includes $0.3 million face value of senior unsecured debentures which weren’t exchanged for convertible debentures in August 2005, $0.2 million of obligations under capital leases and $33.1 million of notes payable issued by CTR.

The majority of long-term debt relates to outstanding notes payable by CTR to Export Development Canada (EDC) and the Inter-American Development Bank (IADB). As at December 31, 2006, principal amount of US$28.0 million (US$29.5 million as at December 31, 2005) was outstanding.

During the second quarter of 2005, SR Telecom and CTR lenders re-negotiated and agreed on payment terms and on extending the maturity of the loan to May 17, 2008. The interest rate was at LIBOR plus 4.5%, plus 1% per year, payable in kind at maturity, which is included in long-term debt in the amount of $0.5 million as at December 31, 2006 ($0.1 million as at December 31, 2005).

The EDC note and IADB notes ranked pari passu and were secured by a pledge of all of the assets of CTR and a pledge of the shares of the intermediate holding companies. The Company guaranteed the performance of CTR’s obligations to lenders up to an amount of US$12.0 million. This guarantee was secured against all assets of SR Telecom and ranked pari passu with convertible debentures and subordinate to the security for the credit facility.

The notes were subject to a number of financial performance and financial position covenants, which were in default as at December 31, 2006. However, the lenders did not take any action on these defaults. In accordance with GAAP, the notes were classified as current liabilities. Covenants under the notes fell into two main categories: financial covenants that required the achievement of specific objectives for current ratio, debt service coverage ratio, debt to equity ratio, minimum earnings before income taxes, depreciation and amortization, minimum recurring revenues and receivables turnover; and performance covenants that focused on timely completion of the network and timely achievement of financial independence for the project. While the foregoing is not an exhaustive list of covenants, it includes the majority of non-reporting covenant requirements.

Convertible debentures

In 2005, SR Telecom and its debenture holders entered into an agreement to exchange the then outstanding 8.15% debentures and accrued interest thereon into 10% convertible debentures. At the August 24, 2005 debenture exchange closing, all but face value of $0.3 million of the 8.15% debentures were exchanged for $75.5 million face value of 10% convertible debentures.

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10% convertible debentures were convertible into common shares at a rate of 4,606 common shares per $1,000 in principal amount of new convertible debentures, representing a conversion price of approximately $0.217 per common share. Interest on the convertible debentures was payable in cash or in kind by the issuance of additional convertible debentures.  Convertible debentures were secured by a second lien on all of the assets of SR Telecom, ranking pari passu with the lenders of CTR, and were subordinate to the security of the credit facility.

In conjunction with private placements completed on February 2, 2006 and February 27, 2006, the Company converted approximately $61.8 million and $4.5 million, respectively, of convertible debentures, including accrued interest payable in kind, into 280,881,314 common shares and 20,391,019 common shares, respectively. Other conversions of convertible debentures and accrued interest payable in kind took place throughout the first and second quarters of 2006.

In accordance with Canadian GAAP, the convertible debentures were accounted for in accordance with their substance and were presented in their component parts of debt and equity, measured at their respective fair values. As at December 31, 2006, the debt component is $1.8 million ($40.6 million as at December 31, 2005), including $0.1 million of accreted interest ($0.7 million as at December 31, 2005) and interest payable in kind in the amount of $0.3 million ($2.3 million as at December 31, 2005), and the equity component is $1.0 million ($27.8 million as at December 31, 2005).

In February 2007, the Company announced that it would redeem its outstanding 10% convertible debentures on March 6, 2007 for an amount equal to $1,038.63 per $1,000 of principal amount, representing the principal amount plus $38.63 of accrued but unpaid interest thereon to the redemption date. Up to the redemption date, debenture holders had the option to convert all or a portion of their convertible debentures and accrued but unpaid interest thereon into common shares at an effective amended rate of $0.15 per common share.

Prior to March 6, 2007, $2.0 million convertible debentures, including accrued but unpaid interest thereon were converted into 13,181,651 common shares. The Company accounted for these conversions as induced early conversions, with the number of shares issued from the conversion being measured at $0.217 per common share, as per the original terms of the convertible debentures, and additional shares issued to induce the conversion being measured at fair value. The resulting debt settlement gain of $0.1 million is included in financing expenses and incremental conversion costs of $0.9 million will be included in deficit in the first quarter of 2007.

On March 6, 2007, the Company redeemed $0.7 million of convertible debentures and accrued but unpaid interest thereon for $0.8 million. The Company accounted for this redemption as an early redemption of debt, with the consideration paid on extinguishment being allocated to the debt and equity components of the convertible debentures. The resulting gain of $0.05 million relating to the debt component will be included in financing expenses and the resulting cost of $0.04 million relating to the equity component will be included in deficit in the first quarter of 2007.

As at March 6, 2007, there were no outstanding 10% convertible redeemable secured debentures.

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Other long-term liability

As at December 31, 2006 and December 31, 2005, the Company’s long-term liability was $1.7 million (US$1.5 million), which reflects the fair value of the indemnification provided to the former directors and officers of Netro Corporation, for a period of six years to 2009, as part of the purchase agreement.

The following table outlines the cash payments with respect to SR Telecom’s contractual cash obligations, prior to the sale of CTR and conversion of convertible debentures:

	2007	2008	2009	2010	2011	Thereafter	Total
Contractual obligations
Senior term loan *	-	-	-	-	-	35,000	35,000
Long-term credit facility *	-	-	-	-	-	52,941	52,941
Convertible term loan *	-	-	-	-	-	20,132	20,132
Long-term debt **	2,426	30,896	-	-	270	-	33,592
Convertible redeemable secured debentures***	-	-	-	-	1,785	-	1,785
Operating lease obligations – Wireless telecommunications products	428	168	65	33	1	1	696
Operating lease obligations – Telecommunications service provider **	3,772	3,473	1,557	132	71	80	9,085
	6,626	34,537	1,622	165	75,200	81	118,231

* Interest is payable in cash or in kind at the Company’s option.  The interest component cannot be determined at this time given that the payable in kind component is at the Company’s option.

** With the sale of CTR in February 2007, the Company was fully released from all of its obligations, including liabilities for loans to CTR and lease obligations of CTR.

*** With the conversion and redemption of 10% convertible debentures in March 2007, the Company has no further obligations with regard to these debentures.

Capital stock

Authorized

An unlimited number of common shares

An unlimited number of preferred shares issuable in series

	Issued and outstanding common shares	Capital stock ($ thousands)
Opening balance as at December 31, 2004	17,610,132	219,653
November 30, 2005 mandatory conversion of convertible debentures (a)	47,322,829	10,274
Closing balance as at December 1, 2005	64,932,961	229,927
Conversions of debentures during the fourth quarter of 2005 (a)	734,000	159
Closing balance as at December 31, 2005	65,666,961	230,086
February 2, 2006
Private placement (b)	333,333,333	50,000
Conversion of debentures (b)	280,881,314	61,806
February 27, 2006
Private placement (b)	28,498,302	4,275
Conversion of debentures (b)	20,391,019	4,485
Conversion of debentures during the remainder of the year	1,852,555	414
July 24, 2006 issuance of shares (c)	2,769,576	1,108
Closing balance as at December 31, 2006	733,393,060	351,279

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(a) On November 30, 2005, pursuant to the terms of the convertible debentures, $10.0 million in principal amount of the convertible debentures, and $0.3 million of accrued interest payable in kind thereon were converted into common shares. Other conversions of convertible debentures took place in 2005.

(b) On February 2, 2006, the Company completed a private placement and converted convertible debentures, including accrued interest payable in kind thereon, into common shares. On February 27, 2006, the Company completed a similar private placement and converted convertible debentures, including interest payable in kind thereon, into common shares. Share issue costs amounted to $1.0 million.

(c) On July 24, 2006, the Company issued common shares to its former interim president and chief executive officer as per the terms of an agreement. Compensation expense of $1.1 million, as well as $0.7 million for all applicable taxes, was included in selling, general and administrative expenses in 2006.

In March 2006, the Board of Directors approved a new employee and director stock option plan. The plan was approved by the shareholders of the Company at the Annual General Meeting of the shareholders held on June 8, 2006. Options are granted to directors and employees at the discretion of the Board of Directors. All stock options granted to employees under this plan vest over 4 years and expire 7 years from the grant date. All stock options granted to directors under this plan vest over 1 year and expire 7 years from the grant date. The exercise price of stock options granted under this plan shall be determined by the Board of Directors, but shall not be lower than the greater of the following: (a) the volume weighted average trading price of the common shares on the TSX for the five trading days immediately preceding the date of grant of the option; and (b) the average closing price of the common shares on the TSX for the fifteen trading days immediately preceding the option grant date. During the year, 27,435,835 stock options were granted to employees and directors at a weighted average exercise price of $0.32.

In 2006, $1.9 million of compensation expense for awards granted since January 1, 2002 ($0.7 million for the year ended December 31, 2005) was included under SG&A expenses in the consolidated statement of operations.

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents

Consolidated cash, including restricted cash, increased to $27.1 million as at December 31, 2006 from $10.2 million as at December 31, 2005. The Company had cash collateral for bonding facilities and security for the convertible debentures totalling $7.8 million as at December 31, 2006 ($0.7 million as at December 31, 2005). Amounts outstanding under these facilities amounted to $2.9 million as at December 31, 2006 ($2.0 million as at December 31, 2005).

Consolidated cash, including restricted cash stood at $14.9 million as of May 31, 2007.

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On April 12, 2007, the Company entered into a sale and leaseback agreement regarding its property located in Montréal, Canada for proceeds of approximately $8.6 million.

On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing.

Pursuant to the debenture conversions as well as the financing arrangements the Company has entered into, the Company will have sufficient cash and cash equivalents, short-term investments, and cash from operations going forward to satisfy its working capital requirements and continue operations as a going concern for the next twelve months.

Cash flows

Cash flows used in continuing operations amounted to $45.2 million in 2006 compared with $40.9 million in 2005, mainly attributable to an increased loss from continuing operations, offset by fluctuations in non-cash working capital components and in restructuring, asset impairment and other charges.

Cash flows provided by continuing financing activities amounted to $65.9 million in 2006, derived primarily from the private placements issued in February 2006 and the new convertible term loan obtained in December 2006. This compares to cash flows provided by continuing financing activities of $41.4 million in 2005, primarily arising from the issuance of the credit facility in May 2005.

Cash flows used in continuing investing activities amounted to $10.9 million in 2006 compared with $2.0 million in 2005. This increase is mainly attributable to higher levels of restricted cash in 2006.

Capital expenditures

The Company presently has no material commitments for capital expenditures. Wireless property, plant and equipment additions relate to ongoing capital requirements and were $1.6 million in 2006 compared with $1.4 million in 2005. CTR’s property, plant and equipment additions amounted to $2.8 million in 2006 and $2.7 million in 2005. These expenditures related principally to existing network upgrades and enhancements.

Off-balance sheet and banking arrangements

The Company has provided its customers with product warranties that generally extend for one year, as part of the normal sale of products. The Company also indemnifies its customers against any actions from third parties related to intellectual property claims arising from use of the Company’s products. In the Company’s experience, claims under such indemnifications are rare, and the associated fair value of the liability is not material.

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Pursuant to the acquisition of Netro Corporation, the Company agreed to indemnify and hold harmless, the former directors and officers of Netro, for a period of six years to 2009, and to obtain directors and officers insurance in this regard for a period of three years. An amount of $1.7 million has been recorded in this regard and is presented as a long-term liability.

In connection with the issuance of the convertible redeemable secured debentures and convertible loan (collectively the “convertible debt”), the Company entered into a Registration Rights Agreement (the “Agreement”). Pursuant to the terms of the Agreement, the Company is required to cause the common shares issuable or issued pursuant to the terms of the convertible debt, to be registered under the United States Securities Act of 1933 upon request by the holders thereof. In the event that the Company does not comply with the request and other related conditions within the time limits provided in the Agreement, penalties will be payable by the Company at rates ranging from 0.5% to 2% of the common share amounts.

Litigation

The Company has included in its accounts payable and accrued liabilities or income taxes payable, as at December 31, 2006 and as at December 31, 2005, management’s best estimate of the outcome of several litigations, described as follows:

FUTURE COMMUNICATIONS COMPANY (FCC) LITIGATION

The dispute with FCC relates to the alleged improper drawdown by SR Telecom USA, Inc., a wholly owned subsidiary, of a letter of credit, opened by FCC, with the Bank of Kuwait and the Middle East, and the alleged refusal by SR Telecom USA, Inc. to accept return of inventory provided to FCC. The Kuwait Appeal Court rejected the appeal filed on March 2, 2005 and the Company appealed this decision to the highest of the Kuwait Courts on July 4, 2005. On January 7, 2007, the Kuwait Appeal Court handed down its decision in favour of FCC for an amount of US$1.0 million, plus court fees.

EMPLOYEE-RELATED LITIGATION

As a result of past restructuring efforts, certain employees were terminated and given notices and severances according to local labour laws. Some of these employees are claiming that they did not receive an appropriate amount of severance and/or notice period. The Company intends to vigorously defend itself against these claims with all available defences.

TAX MATTERS

In the normal course of business, the Company’s tax returns are subject to examination by various domestic and foreign taxing authorities. Such examinations may result in future tax and interest assessments on the Company. The Company has received notice of assessments by foreign governments for sales taxes and corporate taxes and by Canadian and provincial governments for research and development tax credits relating to prior years. The Company has reviewed these assessments and determined the likely amounts to be paid. The Company has accrued such amounts in their respective classification on the statement of operations including research and development expenses, income tax expense and selling, general and administration expenses.

GENERAL

From time to time, the Company is involved in various legal proceedings in the ordinary course of business. The Company is not currently involved in any additional litigation that, in management's opinion, would have a material adverse effect on its business, cash flows, operating results or financial condition; however, there can be no assurance that any such proceeding will not escalate or otherwise become material to the Company's business in the future.

Related-party transactions

Most of the credit facility, debentures, Convertible Debentures and convertible term loan interest expense relate to amounts due to current shareholders and the debenture conversions took place with current shareholders. Furthermore, the Company has entered into transactions involving, primarily, professional services with members of its Board of Directors and their affiliated companies. During 2006, the Company entered into a consulting agreement with a former member of its board. The Company continues to pay director fees to its board members. See note 26 to the consolidated financial statements.

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OUTLOOK

Refer to the section entitled “About Forward-Looking Statements” above in this management’s discussion and analysis for a discussion concerning the material assumptions underlying and the material risk factors that could affect our outlook.  In addition, for a more complete discussion of the assumptions and risks underlying our forward-looking statements, please refer to the section entitled “Assumptions, risks and uncertainties”elsewhere in this management’s discussion and analysis for the year ended December 31, 2006 and the section entitled “Risk factors” in the Company’s annual report on Form 20-F for the year ended December 31,2006, which can be found under the Company’s name at www.sedar.com and on the Company’s website at www.srtelecom.com .

The Company believes that WiMAX promises to revolutionize the broadband industry by pulling together many of the technologies that have been developed during the last 15 years. WiMAX innovation will provide performance and cost efficiency similar to that seen with WiFi, but for ubiquitous carrier networks. By leveraging its leading OFDM broadband experience, previous investment in similar products and development platforms, and its existing OFDM customer base, we believe that SR Telecom is well positioned to gain market share in the WiMAX market.

Mobile WiMAX is the long-term goal for many industry segments, but the majority of carriers and enterprises interested in WiMAX today are looking for fixed or nomadic wireless-based solutions as an alternative to wireline deployments or upgrades. Many are now beginning to realize that stable mobile WiMAX solutions are a few years away and are looking to fixed WiMAX to enter the market quickly and capture market share.

By providing a single software-upgradeable platform for both fixed and mobile WiMAX solutions, SR Telecom offers a safe, evolutionary path to “e” that will allow us to gain customers’ interest while mobile WiMAX solutions are still maturing. Over the next eighteen months, the Company’s intention to increase market share is founded on four fundamental drivers of its marketing plan:

1 A diversified CPE product portfolio

2 Value-added pricing

3 Fixed WiMAX  “e” solution

4 Evolutionary and safe WiMAX “e” deployment

We believe that this focus will help create the internal momentum required to realign SR Telecom, as will operational and corporate initiatives to reduce costs and contain expenses.

During the first half of 2007 while the Company sought to re-establish a firm financial footing, a cost reduction plan was implemented to improve production costs and overall price competitiveness. Additional initiatives occurred on the corporate front, including the disposal of legacy product lines and headcount reductions, both of which will contribute to lowering SG&A expenses in 2007 and improve the Company’s profitability and liquidity position. The cost reduction plan will continue throughout 2007.  Management expects that such plan should yield increased gross margins and lower operating expenses in 2008.

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However, cash consumption will continue to occur at a rapid pace for the second half of the year, due primarily to the ramp up of WIMAX solutions as well as the impact of the reversal of a cash conservation effort that occurred as the Company explored additional financing options during the first half of 2007. As SR Telecom completes the operational side of restructuring that began in April, and with new financing confirmed in the form of a $45.0 million term loan, of which $35.0 million was drawn on July 3, 2007, and an additional $10.0 million will be available for drawdown for a period of up to one year from closing, the Company will be investing significantly in working capital during the remainder of the year due to lengthy customer terms and significantly shorter terms with suppliers.

2007 will be a year of transition for SR Telecom, as it realigns the organization to support targeted marketing, development and operational strategies.  SR Telecom anticipates a return to normal operating mode in 2008 as it further monetizes the balance sheet—the result of new contract manufacturer relationships— and benefits from streamlined operations.

In the recent financing round announced July 3, the Company was successful in raising more funds than are expected to be required to fully fund its business plan, while also attracting a new investor.  The Company has used debt-to-equity conversions in the past to de-lever its balance sheet and could consider taking similar actions in the future, though any such actions would each be subject to applicable lender approval.  Nevertheless, the Company’s existing business plan is subject to significant risks and uncertainties, such as: contract manufacturing, timely development of our WiMAX product offerings, the attainment of cost reduction targets, a sustained demand for symmetryone in 2007, the impact of competition on pricing and market share, and the ability to fund the required investment in working capital to sustain revenue growth.  Accordingly, during the next eighteen-month period, the Company will continue to evaluate all strategic options, including the sale of assets or legal entities.

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ASSUMPTIONS, RISKS, AND UNCERTAINTIES

SR Telecom is subject to several risks and uncertainties that could affect its business, financial condition or results of operations. The risks and uncertainties are not the only ones that we may face. Additional risks and uncertainties of which we are unaware, or that we currently deem to be immaterial, may also become important factors that affect us.   For additional disclosure regarding risk factors, please also refer to the section entitled “Risk factors” in the Company’s annual report on Form 20-F for the year ended December 31, 2006, which can be found under the Company’s name at www.sedar.com and on the Company’s website at www.srtelecom.com.

Financial factors

SR Telecom’s operations are by their nature capital-intensive. The Company may therefore require continuing access to financing to fund working capital needs, research and development activities, capital expenditures and other cash requirements, as well as additional development and acquisition opportunities.  There is no guarantee that such continuing access to financing from either existing investors or third parties to fund such working capital needs will be available in the future.

At July 3, 2007, the Company has in excess of $108 million of consolidated debt outstanding comprised principally of the credit facility and the convertible term loan. There is no assurance that the Company will be able to pay interest and principal or to refinance its indebtedness, which will depend upon future performance. Future performance is subject to the success of the business plan, including the Company’s ability to successfully integrate its operations, general economic conditions and financial, competitive, regulatory, labour and other factors, many of which are beyond the Company’s control.  A substantial portion of cash flow from operations would need to be dedicated to repayment of debt, thereby reducing the availability of cash flow to fund our working capital, capital expenditures, research and development efforts, potential acquisition opportunities and other general corporate purposes. This could reduce the Company’s flexibility in planning for, or reacting to, changes in our business, or leave us unable to make strategic acquisitions, introduce new products or exploit new business opportunities, and may cause the Company to seek protection from our creditors under applicable bankruptcy, insolvency or other creditor protection legislation or pursue other restructuring alternatives.

The trust indenture and the credit facility contain provisions that limit the Company’s ability and, in some cases, the ability of the Company’s restricted subsidiaries to: 1) pay dividends or make other restricted payments and investments; 2) incur additional indebtedness and issue preferred stock; 3) create liens on assets; 4) merge, consolidate, or sell all or substantially all of the Company’s assets. Events beyond the Company’s control may affect SR Telecom’s ability to comply with many of these restrictions.

Operating results

The Company has incurred losses from operations in its past fiscal years, and it has failed to execute on its prior business plans developed by prior management.  Failure to return to profitability could have a material adverse effect on business and prospects. The ability to achieve and maintain profitability will depend on, among other things, the ability to secure new business, to develop new products and features on a timely basis, the market’s acceptance of the Company’s products and the ability to reduce product costs and other costs sufficiently.

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External factors

The Company markets and sells telecommunications products and services to customers around the world, with a focus on developing countries. The risk of doing business with customers in such countries, include dealing with the following: 1) trade protection measures and import or export licensing requirements; 2) difficulties in enforcing contracts; 3) difficulties in protecting intellectual property rights; 4) unexpected changes in regulatory requirements; 5) legal uncertainty regarding liability, tax, tariffs and other trade barriers; 6) foreign exchange controls and other currency risks; 7) inflation; 8) government appropriations or subsidies of which the customers are beneficiaries or recipients may be decreased or delayed; 9) challenges to credit and collections; 10) expropriation; 11) government instability, war, riots, insurrections and other political events. The Company attempts to ensure the collection of its revenues through the use of letters of credit and the analysis of the credit worthiness of its customers. However, these measures would likely not cover all losses.

Competition

The inability to develop new products or product features on a timely basis, or if new products or product features fail to achieve market acceptance, the Company’s revenues and revenue growth may be adversely affected. In the past, the Company has experienced design and manufacturing difficulties that delayed the development, introduction or marketing of new products and enhancements, which caused it to incur unexpected expenses. Furthermore, in order to compete in additional markets, the Company will have to develop different versions of its existing products that operate at different frequencies and comply with diverse, new or varying governmental regulations in each market, which could also delay the introduction of new products.

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The market for wireless access telecommunications equipment is rapidly evolving and highly competitive. Increased competition may result in price reductions, shorter product life cycles, longer sales cycles and loss of market share, any of which could adversely affect the Company’s business. If the Company cannot reduce the cost of its products enough to keep pace with the required price reductions, then product sales or gross margins, and consequently results of operations, will suffer.

The Company’s inability to implement cost reductions may also have an impact on its ability to compete in the marketplace. For example, cost for contract manufacturing may be largely impacted by the level and volume of orders, which is driven by customers demand. Also, the Company’s contract manufacturers must correctly implement cost reductions that the Company designs into the products; cost projections are based upon assumptions regarding the ability of contract manufacturers to achieve volume-related cost reductions. Some of the Company’s design cost reductions will depend on the emergence of low-cost components that are likely to be developed by third parties. The Company’s product costs will exceed its internal projections to the extent these third parties are unable or unwilling to cooperate in reducing product cost, or their efforts in this regard are not timely.

In addition, the price for wireless telecommunications equipment is driven by the prevailing price for other connection technologies, such as the cost of obtaining digital subscriber line (DSL) service or leasing a T1 connection from the traditional telecommunications service provider in a given locale. The price of these connections has declined significantly in many countries in the recent past, and could decline significantly in the future. If this trend continues, service providersmight be more likely to use these kinds of connections than to introduce new technology such as our products, which would adversely affect the Company’s revenues and earnings.

Long sales cycles

The Company’s sales cycles are long and unpredictable. OEMs and service providers typically perform numerous tests and extensively evaluate products before incorporating them into networks. As a result, the Company’s revenues may fluctuate from quarter to quarter and it may be unable to adjust its expenses accordingly. This would cause operating results and stock price to fluctuate. In addition, the Company expects that the delays inherent in its sales cycle could raise additional risks of service providers deciding to cancel or change their product plans.

The Company’s sales cycles may cause results to fluctuate from quarter to quarter depending on the timing of purchase orders, the bidding and winning of sales contracts, as well as other factors beyond the Company’s control. The Company markets and sells telecommunications products and services to customers around the world, with a focus on developing countries. Doing business with customers in such countries involves many uncertainties. As such, one quarter’s results are not predictive of a future quarter’s performance and general trend analysis is not an adequate indicator of future performance.

Response to industry’s change of pace

The telecommunications industry is subject to rapid and substantial technological change. The Company may not be able to keep pace with technological developments or developments by other companies that could render its products or technologies non-competitive. Some of these technologies and products could be more effective and less costly than the Company’s, thereby potentially eroding market share.

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Product viability

The development and commercialization of both fixed and mobile WiMAX are key elements of the Company’s business plan, future success and profitability. If fixed and/or mobile WiMAX prove to be less commercially viable than currently anticipated, or if the Company’s WiMAX products are less commercially viable or competitive than those developed by other companies, the Company may experience significant adverse effects on its liquidity, financial condition and ability to continue operating as a going concern.

Product performance

The Company may be subject to significant liability claims if its products do not work properly. The provisions in the agreements with customers that are intended to limit the Company’s exposure to liability claims may not preclude all potential claims. In addition, insurance policies may not adequately limit its exposure with respect to such claims. Liability claims could require the Company to spend significant time and money in litigation or to pay significant damages, and could seriously damage the Company’s reputation and business.

Outsourcing

On March 27, 2006, the Company announced the completion of a multi-year agreement to outsource its manufacturing operations in order to increase competitiveness. The Company also reached an agreement in December 2006 with a new contract manufacturer who began production in early 2007. In Addition, the Company signed a three-year WIMAX manufacture and supply agreement with Taiwan-based Microelectronics Technology (MTI) in May 2007.

As a result, the Company depends on its contract manufacturers to manufacture its products. This reliance on contract manufacturers exposes the Company to significant risks, including risks resulting from: 1) potential lack of manufacturing capacity; 2) limited control over delivery schedules; 3) quality assurance and control; 4) manufacturing production costs; 5) voluntary or involuntary termination of the Company’s relationships with its contract manufacturers; 6) difficulty in, and timeliness of, substituting the Company’s contract manufacturers; and 7) the financial strength of the contract manufacturers. If the operations of the Company’s contract manufacturers are halted, even temporarily, or if they are unable to operate at full capacity for an extended period of time, the Company may experience business interruption, increased costs, loss of goodwill and loss of customers.

The Company’s contract manufacturers rely on the Company’s forecasts of future orders to make purchasing and manufacturing decisions. The Company provides contract manufacturers with forecasts on a regular basis. If a forecast turns out to be inaccurate, it may lead either to excess inventory that would increase the Company’s costs or to a shortage of components that would delay shipment of equipment. In either case, the Company’s business and results may be adversely affected.

Supply chain

Some of the key components to be used in the Company’s products are complex to manufacture and have long lead times. Sole source vendors for which alternative sources are not currently available supply these components. In the event of a reduction or interruption of supply, or degradation in quality, as many as six months could be required before the Company, or its contract manufacturers, could begin receiving adequate supplies from alternative suppliers, if any. As a result, product shipments could be delayed and the Company’s revenues and results of operations could suffer. If the Company, or its contract manufacturers, received a smaller allocation of component parts than is necessary to manufacture products in quantities sufficient to meet customer demand, customers could chose to purchase competing products and the Company could lose market share.

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Outdated inventory

SR Telecom has acquired and may continue to acquire significant inventory in order to support contractual obligations in relation to discontinued product lines and discontinued components in existing products. If sales of such products or components do not materialize, the Company could end up with inventory levels that are significantly in excess of the Company’s needs, which could increase working capital requirements or cause significant losses.

Litigation

The Company is subject to a number of arbitration disputes and litigations that may adversely affect the operating results and liquidity if these disputes are not favourably resolved. Furthermore, SR Telecom has recorded liabilities including those in connection with its arbitration proceedings, and may involve other obligations not yet known. Estimates of these liabilities have been made, but there can be no assurance that the actual settlement of these liabilities will not differ materially from amounts accrued.

Foreign exchange fluctuations

The Company’s functional currency is the Canadian dollar, while the majority of sales contracts are in other currencies. All foreign operations are classified as integrated with those of SR Telecom for consolidation purposes so that any gains or losses on foreign exchange translation are charged to income in the current year. Fluctuations between currencies will affect the reported values of revenues and eventual collections. While the Company could engage in hedging activities from time to time to protect from fluctuations, there can be no assurance that these practices will be adequate to eliminate potential negative effects.

The Company has currency exposures arising from significant operations and contracts in multiple jurisdictions. The Company has limited currency exposure to freely tradable and liquid currencies of first world countries and communities. Foreign currency exposures are evaluated regularly and, where warranted, hedge mechanisms are used to minimize the impact of market fluctuations.

Internal controls

One or more material weakness in the Company’s internal controls over financial reporting could occur or be identified in the future. In addition, because of inherent limitations, the Company’s internal controls over financial reporting may not prevent or detect misstatements, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in condition or that the degree of compliance with the Company’s policies and procedures may deteriorate. If the Company fails to maintain the adequacy of its internal controls, including any failure or difficulty implementing required new or improved controls, the Company’s business and results of operations could be harmed, the Company may not be able to provide reasonable assurance as to its financial results or meet its reporting obligations and there could be a material adverse effect on the price of its shares.

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DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining the Company’s disclosure controls and procedures and internal control over financial reporting for the issuer. They are assisted in this responsibility by the management team. The Company adopted a risk-based approach using the integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to determine its scope. The CEO and CFO, after evaluating the effectiveness of the Company’s disclosure controls and procedures and the design of internal controls at December 31, 2006, have concluded that the Company’s disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company and its subsidiaries would have been known to them.

Through the evaluation of the design of its internal controls, the Company has identified certain internal control weaknesses in the financial reporting process. The principal area of internal control deficiency is a lack of sufficient analysis and review in the year end reconciliation of amounts reported in accordance with Canadian GAAP to US GAAP.

The above deficiency is not uncommon to many small companies. While this deficiency could lead to a material misstatement in the financial statements, no such misstatement has occurred. Management has undertaken a review of the internal controls over financial reporting and is currently developing an action plan to remedy the internal control deficiency in 2007.

ACCOUNTING POLICIES

Critical accounting policies and estimates

SR Telecom’s consolidated financial statements are based on the selection and application of accounting policies that require SR Telecom’s management to make significant estimates and assumptions. These estimates and assumptions are developed based on the best available information and are believed by management to be reasonable under existing circumstances. New events or additional information may result in the revision of these estimates over time.

Going concern assumption

The consolidated financial statements have been prepared on a going-concern basis. The going-concern basis of presentation assumes that the Company will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

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There is substantial doubt about the appropriateness of the use of the going concern assumption because of the Company’s losses for the current and prior years, negative cash flows, reduced availability of supplier credit and lack of operating credit facilities. As such, the realization of assets and the discharge of liabilities and commitments in the ordinary course of business are subject to significant uncertainty.

For the year ended December 31, 2006, the Company incurred a net loss of $115.6 million ($9.4 million for the month ended December 31, 2005 and $81.8 million for the eleven months ended November 30, 2005) and used cash of $45.2 million ($7.1 million for the month ended December 31, 2005 and $48.0 million for the eleven months ended November 30, 2005) in its continuing operating activities. Going forward, the Company will continue to require substantial funds as it continues the development of its WiMAX product offering.

The Company has taken the following steps to address the going concern uncertainty:

On February 1, 2007, the Company completed the sale of the shares of its Chilean subsidiary, CTR, for proceeds of nil (see note 12). As part of this transaction, the Company has been fully released from all of its obligations with respect to CTR, including liabilities in respect of loans to CTR amounting to approximately US$28.0 million for which SR Telecom was guaranteeing up to US$12.0 million. The divestiture of this non-core asset marked another important step in the Company’s plan to strengthen its financial position by streamlining its balance sheet and focus on its WiMAX strategy.

On March 6, 2007, the Company concluded the conversion/redemption of the remaining Convertible Debentures, allowing for the release of $4.7 million of restricted cash.

On April 12, 2007, the Company closed the sale and leaseback of its property located in Montréal (Québec), Canada for gross proceeds of $8.6 million.

On April 16, 2007, the Company announced a plan to reorganize its internal operations, including the wind-up of legacy product operations and centralization of activities. In conjunction with the implementation of this plan, the Company will be eliminating approximately 75 positions worldwide.

On July 3, 2007, the Company entered into an agreement with a syndicate of lenders comprised of shareholders of the Company providing for a term loan of up to $45.0 million, of which $35.0 million will be drawn at closing and an additional $10.0 million will be available for drawdown for a period of up to one year from closing.

The Company’s successful execution of its business plan is dependent upon a number of factors that involve risks and uncertainties. In particular, the development and commercialization of both fixed and mobile WiMAX are key elements of the Company’s strategic plan and of its future success and profitability. If either or both of fixed and/or mobile WiMAX prove not to be commercially viable or less commercially viable than is currently anticipated or compared to alternative solutions, or if the Company’s WiMAX products are less commercially viable or competitive than those developed by other companies, the Company will experience significant adverse effects on its liquidity, financial condition and ability to continue as a going concern.

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The consolidated financial statements do not reflect any adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, significant adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

Revenue recognition

Revenue is recognized when persuasive evidence of an agreement exists, delivery has occurred or the service has been performed, the fee is fixed and determinable and collection of the receivable is reasonably assured.

The principal revenue recognition guidance used by SR Telecom are the US Securities and Exchange Commission’s Staff Accounting Bulletins No. 101 and No.104, Revenue Recognition in Financial Statements (SAB 101 and SAB 104) and the Emerging Issues Committee (EIC) abstracts on revenue recognition: EIC 141 Revenue Recognition and EIC 142 Revenue Arrangements with Multiple Deliverables.

More specifically, revenue for hardware sold on a stand-alone basis is recognized upon delivery, when all significant contractual obligations have been satisfied and collection is reasonably assured. For contracts involving multiple elements, the Company determines if the arrangement can be separated amongst its different elements, using guidance under Canadian and US GAAP. That is, (1) the product or service represents a separate earnings process; (2) objective, reliable and verifiable evidence of fair value exists; and (3) the undelivered elements are not essential to the functionality of the delivered elements. Under this guideline, the Company recognizes revenue for each element based on relative fair values. Telecommunication service revenue is recognized as the services are rendered.

The Company’s products and services are generally sold as part of contracts or purchase orders. Revenue is recognized in the same manner as when the products and services are sold separately. Hardware revenue is recognized upon delivery and service revenue is recognized as the services are performed. In order to determine if there is a loss on services in a contract, estimates of the costs to complete these services are updated on a monthly basis and are based on actual costs to date. These costs are analyzed against the expected remaining service revenue. If the remaining cost exceeds the remaining revenue, a loss is immediately recognized in the financial statements.

The Company is, pursuant to certain arrangements, subject to late delivery penalties on equipment sales. Penalties are accounted for as a reduction of revenue, when revenue is recognized.

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The Company’s customary trade terms include, from time to time, holdbacks on contracts (retainers on contracts) that are due for periods extending beyond one year and are included in long-term accounts receivable. Performance of the Company’s obligations under contracts is independent of the repayment terms. Revenue associated with holdbacks is recorded in the same manner as described above.

The Company ensures collection of its revenue through the use of insurance companies, letters of credit and the analysis of the credit worthiness of its customers.

The Company’s products are not generally sold through resellers and distributors.

Accruals for warranty costs, sales returns and other allowances at the time of shipment are based on contract terms and experience from prior claims.

Warranty obligations

Accruals for warranty costs are established at the time of shipment and are based on contract terms and experience from prior claims. SR Telecom’s usual warranty terms are one year, with two-year warranty periods in certain limited circumstances. SR Telecom evaluates its obligations related to product warranty on an ongoing basis. If warranty costs change substantially, SR Telecom’s warranty accrual could change significantly. SR Telecom tracks historical warranty costs, including labour and replacement parts, and uses this information as the basis for the establishment of its warranty provision. With respect to the introduction of new products, warranty accruals are determined based on SR Telecom’s historical experience with similar products.

Allowance for doubtful accounts

SR Telecom performs ongoing credit evaluations of its customers’ financial condition and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and on-going project risks. Wherever practical, the Company requires the insurance of accounts receivable by an export credit agency or by confirmed irrevocable letters of credit. The Company believes that it has sufficient allowances for doubtful accounts to address the risk associated with its outstanding accounts receivable.

Provision for excess or obsolete inventory

Inventories are valued at the lower of cost and net realizable value or replacement cost, with cost computed at standard, which approximates actual cost computed on a first-in, first-out basis. SR Telecom maintains a reserve for estimated obsolescence based upon assumptions regarding future demand for its products and the conditions of the markets in which its products are sold. This provision to reduce inventory to net realizable value is reflected as a reduction to inventory in the consolidated balance sheets. Management judgments and estimates must be made and used in connection with establishing these reserves. If actual market conditions are less favourable than the Company’s assumptions, additional reserves may be required.

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Assessment of impairment of long-lived assets

Long-lived assets, including property, plant and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management measures recoverability of assets to be held and used on an ongoing basis by comparing the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset and its eventual disposal. If the carrying amount of an assets exceeds its estimated future cash flows, an impairment charge is recognized at the amount by which the carrying amount of the asset exceeds the fair value of the asset in the period incurred. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Foreign currencies

Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Translation gains and losses are reflected in the statement of operations. Revenues and expenses are translated at average exchange rates prevailing during the period.

All of SR Telecom’s subsidiaries are financially and/or operationally dependent on the Company and are accounted for using the temporal method. Under this method, monetary assets and liabilities are translated at exchange rates in effect at the balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period. Translation gains and losses of such subsidiaries’ accounts are reflected in the statement of operations.

Income tax assets

Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantially enacted and the enacted tax rates that will be in effect when the differences are expected to reverse. A valuation allowance is provided for the amount of future income tax assets that are not considered more likely than not to be realized.

Investment tax credits are created from eligible research and development expenditures that can be carried forward to future periods. The Company’s existing credits have a remaining average life of four to 20 years. As of July 1, 2003, the Company ceased the recognition of further federal investment tax credits. The ability to realize the value of investment tax credits is reassessed in light of current and expected results of tax planning strategies. Any reduction in the value of such investment tax credits is recorded in research and development expenses in the statement of operations.

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Adoption of new accounting policies

CONSOLIDATION OF VARIABLE INTEREST ENTITIES

The Canadian Institute of Chartered Accountants (CICA) issued Accounting Guideline 15, Consolidation of Variable Interest Entities. This guideline presents the views of the Accounting Standards Board on the application of consolidation principles to certain entities that are subject to control on a basis other than ownership of voting interests. The guideline provides guidance for determining when an enterprise includes the assets, liabilities and results of activities of such an entity (a variable interest entity) in its consolidated financial statements. This guideline applied to the Company as of January 1, 2005. Adoption of this guideline did not have an impact on the Company’s results of operations or financial position.

FINANCIAL INSTRUMENTS - DISCLOSURE AND PRESENTATION

The CICA issued revisions to section 3860 of the CICA Handbook, Financial Instruments - Disclosure and Presentation. The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equity. These revisions came into effect on January 1, 2005. These recommendations did not have an impact on the Company’s results of operation or financial position at the time of adoption.

STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

The CICA issued Section 3870, Stock-Based Compensation and Other Stock-Based Payments. The Company has adopted the transitional provisions of this section, effective January 1, 2004, where compensation expense is recognized on all issued and outstanding stock options issued to employees after January 1, 2002, in accordance with the fair value method of accounting. The Company applied this provision retroactively, without restatement of prior periods. As a result, opening deficit increased by $0.3 million and contributed surplus was recorded for the same amount at January 1, 2004.

NON-MONETARY TRANSACTIONS

In June 2005, the CICA issued Section 3831, Non-Monetary Transactions, which establishes the standards for the measurement and disclosure of non-monetary transactions. The requirement to measure an asset or liability exchanged or transferred in a non-monetary transaction at fair value has remained unchanged from the former Section 3830. However, an asset or liability exchanged or transferred in a non-monetary transaction is measured at its carrying value when “the transaction lacks commercial substance”, which replaces the “culmination of the earnings process” criterion in former Section 3830. The new requirements are effective for non-monetary transactions initiated in periods beginning on or after January 1, 2006. Earlier adoption was permitted for non-monetary transactions initiated in periods beginning on or after July 1, 2005. The Company has chosen early adoption of these standards. Adoption of this guideline did not have an impact on the Company’s results from operations or financial position.

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New accounting recommendations

FINANCIAL INSTRUMENTS

The CICA issued section 3855 of the CICA Handbook, Financial Instruments – Recognition and Measurement, which describes the standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. This section requires that (1) all financial assets be measured at fair value, with some exceptions such as loans and investments that are classified as held to maturity, (2) all financial liabilities be measured at fair value when they are derivatives or classified as held for trading purposes (other financial liabilities are measured at their carrying value), and (3) all derivative financial instruments be measured at fair value, even when they are part of a hedging relationship. The CICA also reissued section 3860 (as section 3861) of the CICA Handbook, Financial Instruments – Disclosure and Presentation, which establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. These revisions come into effect for years beginning on or after October 1, 2006. The Company will adopt these new sections effective January 1, 2007.

As a result of adopting Section 3855, the Company’s deferred financing costs on the credit facility and convertible term loan, currently presented in other assets on the consolidated balance sheet, will be reclassified against long-term debt as of January 1, 2007. In addition, completion fees on the credit facility and convertible term loan, currently presented in accounts payable and accrued liabilities on the balance sheet, will also be reclassified to long-term debt as of January 1, 2007. As a result of the application of Section 3855, approximately $0.3 million will be recorded in opening deficit as at January 1, 2007 to reflect the difference between the straight-line and the effective interest methods of amortization and accretion.

Furthermore, as a result of adopting Section 3855, the Company’s long-term accounts receivable will be revalued to its discounted present value as at January 1, 2007. Approximately $0.6 million will be recorded in opening deficit as at January 1, 2007 to reflect the difference between the discounted fair value and the carrying value of the long-term accounts receivable.

In accordance with the transitional provisions, prior periods will not be restated as a result of adopting this new accounting standard.

HEDGES

The CICA issued section 3865 of the CICA Handbook, Hedges. The section is effective for years beginning on or after October 1, 2006. It describes when and how hedge accounting may be applied. A company uses hedging to change an exposure to one or more risks by creating an offset between changes in the fair value of a hedged item and a hedging item, changes in the cash flows attributable to a hedged item and a hedging item, or changes resulting from a risk exposure relating to a hedged item and a hedging item. Hedge accounting changes the normal basis for recording gains, losses, revenues and expenses associated with a hedged item or a hedging item in a company’s statement of operations. It ensures that all offsetting gains, losses, revenues and expenses are recorded in the same period. As of January 1, 2007, the adoption of section 3865 did not have a material impact on the Company’s consolidated financial statements.

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COMPREHENSIVE INCOME

The CICA issued section 1530 of the CICA Handbook, Comprehensive Income. The section is effective for years beginning on or after October 1, 2006. It describes how to report and disclose comprehensive income and its components.

Comprehensive income is the change in a company’s net assets that results from transactions, events and circumstances from sources other than just the company’s shareholders. It includes items that would be excluded from net earnings, such as changes in the currency translation adjustment relating to self-sustaining foreign operations, the unrealized gains or losses on available-for-sale investments and the additional minimum liability for pension obligations.

The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section 3251, Equity. The section is also effective for years beginning on or after October 1, 2006. The changes in how to report and disclose equity and changes in equity are consistent with new requirements of section 1530, Comprehensive Income.

Adopting these sections on January 1, 2007 will require the Company to start reporting, to the extent that they are relevant, the following items in the consolidated financial statements:

· Comprehensive income and its components

· Accumulated other comprehensive income and its components

The adoption of this section is not expected to have a material impact on the Company’s consolidated financial statements.

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EX-99.3

EX-99.4