**EXHIBIT 99.5**

 

**MANAGEMENT’S DISCUSSIONAND ANALYSIS**

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion ofour consolidated financial condition and results of operations, as of March 17,2006, has been prepared in accordance with United States generally acceptedaccounting principles (GAAP) and, except where otherwise specificallyindicated, all amounts are expressed in United States dollars.*

 

*Additional informationrelated to Sierra Wireless, Inc., including our Annual Information Form, may befound on SEDAR at www.sedar.com.*

 

**Overview**

 

We provide leading edge wireless wide-area modemsolutions for mobile computing over cellular networks. We develop and market arange of products that include wireless modems for mobile computers, embeddedmodules for original equipment manufacturers, or OEMs, and ruggedvehicle-mounted modems. Our products permit users to access wireless data andvoice communications networks using laptop computers, handheld mobile computingdevices, or vehicle-based systems.

 

Wireless data communications is an expandingmarket positioned at the convergence of wireless communications, mobilecomputing and the Internet, each of which we believe represents a growingmarket. Our products are based on open standards, including the Internetprotocol, and operate on the networks of major wireless operators around theworld.

 

Our products are primarily used by businesses and governmentorganizations to enable their employees to access a wide range of applications,including the Internet, e-mail, corporate intranet, remote databases andcomputer aided dispatch. We sell our products through indirect channels,including wireless operators, resellers and OEMs.

 

During thelatter part of 2003 and throughout 2004, we experienced stronger thanexpected demand for our products, primarily as a result of our strong marketposition in CDMA EV-DO Release 0 PC cards and our CDMA 1X embedded module salesto palmOne. During this period, customer concentration increased in our revenuebase. Following our considerable revenue and earnings growth in 2004, weexperienced a significant reduction in our business in 2005 relative to 2004 asa result of:

 

•                  The reduction in our embedded module business volumes as a result ofthe completion of CDMA 1X module shipments to palmOne for its Treo 600Smartphone at the end of 2004;

•                  Reported channel inventory at some of our channel partners that wasalready sufficient to meet near-term customer demand during the first quarterof 2005; and

•                  The near-term impact of increased competition in CDMA EV-DO and EDGEPC cards, including a loss of market share at Verizon Wireless.

 

During 2005, our revenue decreased 49.3% to $107.1million compared to $211.2 million in 2004. Similarly, we incurred a net loss(including restructuring costs) of $36.5 million, or $1.44 per diluted share,in 2005 compared to net income of $24.9 million, or $0.96 per diluted share, in2004.

 

In order to address this change in our business, weundertook a restructuring of our operations in June of 2005, whichincluded exiting our Voq professional phone initiative. Excluding the impact ofrestructuring and legal provisions, aggregating $19.5 million, our net loss was$17.0 million in 2005, or $0.67 per diluted share. The result of thisrestructuring was a reduction in our cost structure and a greater focus on ourcore PC card and embedded modules business, where we already have wellestablished market positions and believe there are significant growth opportunities.

 

Since the mid-year restructuring, we have focusedintensely on core PC Card and embedded module opportunities for existingproducts, as well as new product development and business development in theseareas. This focus has allowed us to return to sequential quarterly revenuegrowth during the second half of the year, realizing 25% and 37% sequentialgrowth in the third and fourth quarters respectively. Following therestructuring, during the second half of 2005 we were also able to reduce ournet loss and improve cash flow.

 

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Despite consuming cash during 2005, our balance sheetremains strong, with $104.1 million of cash, cash equivalents and short- andlong-term investments, compared to $131.8 million at December 31, 2004. During2005, we used $17.2 million in cash from operations, compared to 2004 when wegenerated $29.1 million in cash from operations. On a quarterly basis, wereduced our cash consumption rate and returned to a positive cash flow positionin the fourth quarter of 2005, generating cash from operations of $3.4 million.

 

We continue to believe that the long-term prospects inthe wireless communications industry remain strong, driven by advances inwireless network technologies such as the deployment of next generation 3Gnetworks by carriers worldwide. We believe the deployment of these networkswill be a catalyst to increasing the demand for wireless communicationsproducts such as those sold by us.

 

Key factors that we expect will affect our revenue inthe near term are the timing of deployment of 3G high speed wireless datanetworks by carriers, the rate of adoption by end users, the timely launch andramp of our new products and our ability to compete effectively. We expect thatcompetition from other wireless communications device manufacturers willcontinue to increase as more companies focus on opportunities in this market.

 

Havingrestructured the company around PC cards and embedded modules, we are veryfocused on executing our product development and business developmentstrategies in these areas. Specific initiatives include:

 

PC Cards:  We have successfully completed thedevelopment of our first UMTS/HSDPA PC card and during the fourth quartercommenced commercial shipments of this product to Cingular in North America, aswell as Manx Telecom and Sunrise in Europe, making us the first company in theworld to launch a fully functional UMTS/HSDPA PC card. We have also commencedthe development of the next generation EV-DO (Rev A) and HSDPA (3.6Mps) PCcards, both of which are expected to be commercially available in the secondhalf of 2006; and

 

EmbeddedModules:  With the announcement byseveral leading laptop manufacturers of their plans to embed high speedwireless wide-area capability inside laptops, we believe that the opportunityfor sales of embedded modules has potentially increased significantly. Webelieve we are well positioned to supply embedded modules to this market as aresult of our extensive experience in the embedded module market; this hasallowed us to establish an early leadership position providing embedded 3Gwireless solutions to major laptop OEMs. Our EV-DO-PCI express mini cardembedded module (“Mini Card”) has been certified for operation on both the Sprintand Verizon networks. We have design wins with Lenovo and HP for our EV-DO MiniCard and commenced commercial shipments to Lenovo in the fourth quarter of2005, representing the first commercial deployment of an embedded 3G wirelessmini card by any laptop manufacturer. Lenovo has subsequently announced theintegration of this Mini Card in two additional business laptops. Early in thefirst quarter of 2006, HP announced the availability of their first laptopincorporating our EV-DO Mini Card. In 2005, we secured designs win for ourHSDPA Mini Cards with Lenovo and Fujitsu-Siemens Computers. We expectcommercial shipments of our HSDPA Mini Card to commence late in the firstquarter of 2006. Also during 2005, we commenced shipment in North America of ourEM5625 EV-DO module to some of our long-time mobile computing OEM customers.One of these OEM customers, Panasonic, has subsequently integrated our EM5625module into three of its laptop platforms. We have also commenced thedevelopment of the next generation EV-DO (Rev A) and HSDPA (3.6Mps) Mini Cards,both of which are expected to be commercially available in the second half of2006.

 

We believethese new product developments provide us with a strong, up-to-date 3G productportfolio in both principal wireless technologies and in both the PC card andembedded module markets.

 

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**Results of Operations**

 

The following table sets forth our operatingresults for the three years ended December 31, 2005, expressed as apercentage of revenue:

 
| **Years ended December 31,** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Revenue                                     |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of goods sold                          |       | 59.5     |       | 60.4     |       | 76.4     |       |
| Gross margin                                |       | 40.5     |       | 39.6     |       | 23.6     |       |
| Expenses                                    |       |     |       |     |       |     |       |
| Sales and marketing                         |       | 11.4     |       | 9.5      |       | 14.5     |       |
| Research and  development, net              |       | 15.7     |       | 11.6     |       | 28.3     |       |
| Administration                              |       | 6.5      |       | 4.3      |       | 10.1     |       |
| Restructuring and  other charges            |       | 1.2      |       | —   |       | 4.9      |       |
| Integration costs                           |       | 1.9      |       | —   |       | —   |       |
| Amortization                                |       | 2.3      |       | 1.2      |       | 2.8      |       |
|                                        |       | 39.0     |       | 26.6     |       | 60.6     |       |
| Earnings (loss)  from operations            |       | 1.5      |       | 13.0     |       | (37.0    | )          |
|                                        |       |     |       |     |       |     |       |
| Other income                                |       | 0.9      |       | 0.9      |       | 2.1      |       |
| Net earnings (loss)  before income taxes    |       | 2.4      |       | 13.9     |       | (34.9    | )          |
|                                        |       |     |       |     |       |     |       |
| Income tax  expense(recovery)               |       | 0.2      |       | 2.1      |       | (0.9     | )          |
| Net earnings (loss)                         |       | 2.2      | %          | 11.8     | %          | (34.0    | )%         |

 

Our revenue by product, bydistribution channel and by geographical region is as follows:

 
| **Years ended December 31,** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Revenue by product                          |       |     |       |     |       |     |       |
| PC card                                     |       | 70       | %          | 59       | %          | 70       | %          |
| Embedded modules                            |       | 21       |       | 33       |       | 13       |       |
| Mobile                                      |       | 6        |       | 5        |       | 13       |       |
| Other                                       |       | 3        |       | 3        |       | 4        |       |
|                                        |       | 100      | %          | 100      | %          | 100      | %          |
|                                        |       |     |       |     |       |     |       |
| Revenue by  distribution channel            |       |     |       |     |       |     |       |
| Wireless carriers                           |       | 46       | %          | 24       | %          | 47       | %          |
| OEM                                         |       | 22       |       | 34       |       | 14       |       |
| Resellers                                   |       | 31       |       | 41       |       | 38       |       |
| Direct and other                            |       | 1        |       | 1        |       | 1        |       |
|                                        |       | 100      | %          | 100      | %          | 100      | %          |
|                                        |       |     |       |     |       |     |       |
| Revenue by  geographical region             |       |     |       |     |       |     |       |
| Americas                                    |       | 73       | %          | 89       | %          | 69       | %          |
| Europe                                      |       | 13       |       | 6        |       | 12       |       |
| Asia-Pacific                                |       | 14       |       | 5        |       | 19       |       |
|                                        |       | 100      | %          | 100      | %          | 100      | %          |

 

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***Restructuring and Other Charges***

 

In June 2005,we announced our decision to exit our Voq professional phone initiative. Wealso decided to shift some Voq resources to our core PC card and embeddedmodules business, where we already had well established market positions andbelieved there were significant growth opportunities. As announced, we incurredrestructuring and other charges associated with the exit of the program. Inaddition to the exit of the Voq initiative, we implemented certain non-Voqrelated reductions to our operating expenses and assets as a result of thereduction in our business in the first half of 2005 and we recorded a provisionfor future legal costs associated with litigation matters.

 

In 2005, werecorded restructuring and other charges of $18.5 million that includedinventory writedowns, severance costs, impairment of fixed, intangible anddeferred tax assets, provisions for facilities restructuring, commitments andother costs related to the restructuring. Restructuring charges related to Voqwere approximately $13.3 million of the total $18.5 million. Approximately $6.3million represented cash disbursements, of which $4.7 million were paid priorto the end of 2005.

 

As part ofthe restructuring, we reduced our workforce by 51 employees, of which 32 were terminatedduring the second quarter of 2005. For the remaining 19 employees who were onworking notice,  $0.4 million wasexpensed as part of our operating expenses during the balance of the year.At the end of 2005 no employees remained on working notice.

 

In the second quarter of 2005, we also recordeda provision for legal costs of $1.0 million. This is related to the class actioncomplaints filed in the U.S. District Court for theSouthern District of New York and the U.S. District Court for the SouthernDistrict of California (which actions, effective December 16, 2005 wereconsolidated in the U.S. District Court for the Southern District of New York) for allegedviolations of federal securities laws.

 

***Results of Operations –Year Ended December 31, 2005 Compared to Year Ended December 31, 2004***

 

*Revenue*

 

Revenue was $107.1millionfor the year ended December 31, 2005, compared to $211.2 million in 2004,a decrease of 49.3%. The decrease in revenue was due primarily to a decrease insales of PC cards and embedded modules. During the first part of 2005, PCcard revenue decreased primarily due to reported channelinventory at some of our channel partners that was sufficient to meet near termcustomer demand and the impact of increased competition in CDMA EV-DO PC cards.The competitive environment in CDMA EV-DO PC cards intensified over the courseof the year, which had a negative impact on our sales of EV-DO PC cards andresulted in a loss of market share at Verizon Wireless. Embedded module revenuedecreased primarily due to the completion of shipments of embedded modules to palmOne forthe Treo 600 at the end of 2004. In the second quarter of 2005 we announced ourplan to exit the Voq professional phone initiative. During 2005, revenue fromthe sale of previously written down Voq product was $1.5 million.

 

Our revenue from customers in the Americas, Europe andthe Asia-Pacific region comprised 69%, 12% and 19%, respectively, of our totalrevenue in 2005 and 89%, 6% and 5%, respectively, in 2004. Our North Americanbusiness has decreased significantly compared to the prior year as a result ofa decline in sales of our PC card and embedded module products to certain NorthAmerican customers. As has been the case in the past several years, ourbusiness continues to be driven predominantly by short lead-time purchaseorders from channels and end customers rather than by long-term, large volumecommitments. In Europe, the deployment of UMTS networks has negatively affectedour GSM/GPRS sales in that region as we did not have a UMTS compatible productuntil the fourth quarter of 2005. This negative impact was partially offset bysales of our EDGE product. Following the fourth quarter launch of ourUMTS/HSDPA PC card and the planned launch of new UMTS/HSDPA products during2006, we expect our sales to improve in Europe in 2006. Our business in theAsia-Pacific region has increased as a result of strong sales of CDMA EV-DO andEDGE PC cards.

 

In 2005, Cingular and Sprint each accounted for morethan 10% of our revenue and, in the aggregate, these two customersrepresented approximately 36% of our revenue. This compared favorably with thesame period last year

 

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in which two customers each accounted for more than10% of our revenue and these two customers represented approximately 51% of ourrevenue.

 

*Gross margin*

 

Gross margin amounted to $25.3 million in 2005. Of thetotal $18.5 million restructuring and other charges that were recorded in theyear, $12.7 million has been deducted in calculating gross margin. Excludingthis amount, gross margin amounted to $38.0 million, or 35.4% of revenue, in2005, compared to $83.6 million, or 39.6% of revenue, in 2004. The decline ingross margin percentage resulted primarily from lower selling prices of our PCcard products and the impact of lower volumes overall, offset slightly by thepositive impact of a favorable product mix between higher margin PC cards andrugged mobiles versus lower margin embedded modules. During 2005, gross marginon the sale of previously written down Voq product was $0.5 million, or 29.7%.

 

We expect our gross marginpercentage to continue to fluctuate from quarter to quarter as a result ofchanges in product mix, volumes, competition, changes in geographical mix andchanges in product cost.

 

*Sales and marketing*

 

Sales and marketing expenseswere $15.6 million in 2005, compared to $20.0 million in 2004, a decrease of22.4%. This decline reflects the impact of our business restructuring andcontinued cost containment. Sales and marketing expenses as a percentage ofrevenue increased to 14.5% in 2005, compared to 9.5% in 2004, due primarily tothe decrease in revenue for fiscal 2005. While managing sales and marketingexpenses in relation to top-line revenue, we will continue to make selectedinvestments in sales and marketing as we market existing products, introducenew products and expand our distribution channels and focus on key customersaround the world.

 

*Research and development,net*

 

Research and development expenses, net ofconditionally repayable government research and development funding, amountedto $30.4 million in 2005, compared to $24.5 million in 2004, an increase of23.8%.

 

Gross research and development expenses, beforeGovernment of Canada’s Technology Partnerships Canada (“TPC”) research anddevelopment funding, were $31.3 million, or 29.2% of revenue in 2005, comparedto $27.2 million, or 12.9% of revenue, in 2004. Repayment of TPC funding of$0.9million was included in our gross research anddevelopment expenses in 2005, compared to $1.9 million in 2004. Gross researchand development expenses increased due to the development of new PC cards andembedded modules. With our decision to exit the Voq professional phoneinitiative, research and development expenditures and TPC funding associatedwith that initiative ceased.

 

During 2004, we signed a second agreement with theGovernment of Canada’s Technology Partnerships Canada (“TPC”) program underwhich we are eligible to receive conditionally repayable research anddevelopment funding up to Cdn. $9.5 million to support the development of theVoq professional phone initiative. The agreement is effective for developmentwork commencing April 2003. In 2005, funding of $0.9 million wasrecognized. Funding of $2.6 million was recognized during 2004, of which $1.1 millionrelates to the period from April 1, 2003 to December 31, 2003. OurTPC funding is based on research and development work completed in each quarter.Unless the second agreement is otherwise renegotiated, with thetermination of the Voq professional phone initiative no further TPC funding isanticipated.

 

*Administration*

 

Administration expenses amounted to $10.8 million,or 10.1% of revenue, in 2005, compared to $9.0 million, or 4.3% of revenue, in2004. The increase of $1.8 million is primarily due tothe provision of $1.0 million for future legal costs related to litigationmatters and an increase in other professional fees. In addition, administrationexpenses in 2004 were net of recoveries from the bankruptcy trustees ofMetricom, a former customer, of $0.5 million, related to a settlementagreement, for which there was no comparable recovery in 2005.

 

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*Restructuring and othercharges*

 

During the secondquarter of 2005, we decided to exit the Voq Professional Phone initiative andto implement certain non-Voq related reductions to ouroperating expenses and assets. During the fourthquarter we recorded additional charges primarilyrelated to a change in estimate of our facilities restructuring originallyannounced in the second quarter of 2005. Asa result, in the year we recorded restructuring and other charges of $18.5million, consisting of inventory writedowns, severance costs, impairment of fixed, intangible and deferred tax assets, provisionsfor facilities restructuring, commitments and other costs related to therestructuring. Of the total amount of $18.5 million, $5.3 million was chargedto restructuring and other charges, $12.7 million to cost of goods sold and$0.5 million to income tax expense.

 

*Other income*

 

Other income increased to $2.3 million in 2005,compared to $1.7 million in 2004. Other income includes interest income,interest expense and foreign exchange gains and losses. This increase is dueprimarily to an increase in interest income from rising interest rates that waspartially offset by a smaller investment balance and foreign exchange losses.

 

*Income tax expense*

 

During2005 we had an income tax recovery of $0.9 million, compared to income taxexpense amounting to $4.4 million in 2004. Income tax recovery, excluding theincrease in our deferred tax asset valuation allowance of $0.5 millionrecognized on the restructuring, was $1.4 million. The income tax recovery is aresult of the utilization of loss carrybacks to recover income taxes previouslypaid in 2004.

 

*Net earnings (loss)*

 

Our net loss amounted to $36.5 million, or lossper share of $1.44, in 2005, compared to net earnings of $24.9 million, ordiluted earnings per share of $0.96, in 2004. Our net loss in 2005, excluding restructuringand other charges of $18.5 million and the provisionfor future legal costs of $1.0 million, was $17.0 million, orloss per share of $0.67.

 

The weighted average diluted number of sharesoutstanding decreased to 25.4 million in 2005 as compared to 26.1 million in2004 because dilutive securities such as stock options are excluded from thetotal when we are in a loss position, as is the case in 2005.

 

***Results of Operations –Three Months Ended December 31, 2005 Compared to Three Months Ended December 31,2004***

 

During the fourth quarter of 2005, our revenuedecreased 36.1% to $37.6 million, compared to $58.8 million in the same periodof 2004, primarilydue to a decrease in sales of PC cards and embedded modules. PC card revenuedecreased primarily due to the impact of increasedcompetition in CDMA EV-DO PC cards, including a loss of market share at VerizonWireless, and lower sales of legacy 2.5G products. Embedded module revenuedecreased primarily due to the completion of shipments of embedded modules to palmOne forthe Treo 600 at the end of 2004. In the fourth quarterof 2005, Cingular and Sprint each accounted for more than 10% of our revenue,and in the aggregate, these two customers represented 42% of our revenue.

 

Gross margin for the three months ended December 31,2005 was 38.6%, compared to 38.8% in the same period of 2004. Gross margins inthe quarter were favorably impacted by approximately $1.2 million, or 3.2% ofrevenue, as a result of completing a royalty agreement with an intellectualproperty holder. This agreement finalized a cumulative royalty obligation thatwas less than we had previously expensed in our cost of goods sold. During thefourth quarter of 2005, revenue from the sale of previously written down Voqproduct was $1.0 million and gross margin was $0.2 million, or 25.7% ofrevenue.

 

Operatingexpenses were $14.6 million in the fourth quarter of 2005, compared to $15.8million in the same period of 2004. This decline reflects the impact of ourbusiness restructuring and continued cost containment. Includedin

 

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our fourthquarter operating expenses were approximately $0.6 million of additionalamortization of patents and licenses related to the writedown of such assets,an additional restructuring charge of $0.3 million primarily related to achange in estimate of our facilities restructuring and a positive recovery ofapproximately $0.7 million from insurance proceeds related to an ongoing legalproceeding.

 

Net earningsfor the fourth quarter decreased to $0.9 million in 2005, or $0.04 per dilutedshare, compared to $7.3 million in 2004, or $0.28 per diluted share. Ourdecline in net earnings was directly attributable to the decline in revenue andthe related decline in gross margin as outlined above.

 

***Results of Operations –Year Ended December 31, 2004 Compared to Year Ended December 31, 2003***

 

*Revenue*

 

Revenue amounted to $211.2million for the year ended December 31, 2004, compared to $101.7 millionin 2003, an increase of 107.7%. The increase in revenue was due primarily to anincrease in sales of PC cards and embedded modules, including sales of productsformerly sold by AirPrime. During the year, wecommenced commercial shipments of our new SmartPhone product, the Voq Professional Phone, as well asthe AirCard 580 for CDMA 1xEV-DO networks, the AirCard 555R for CDMA networksin Asia, the MP555 for CDMA 1X, the MP775 for EDGE networks and the AirCard 775for EDGE networks. We completed shipments of embedded modules to palmOne forthe Treo 600 at the end of 2004. As a result, we expected that embedded modulerevenue as a percentage of revenue would decrease in the near term.

 

Our revenue from customers in the Americas, Europe andthe Asia-Pacific region comprised 89%, 6% and 5%, respectively, of our totalrevenue in 2004 and 73%, 13% and 14%, respectively, in 2003. Our North Americanbusiness increased significantly compared to the prior year as a result ofstrong sales of our PC card and embedded module products to North Americancustomers. Our North American business mix continued to be dominated by nearterm demand from channels rather than by long-term, large volume commitments.In Europe, the deployment of EDGE and UMTS networks gained momentum andnegatively affected our GSM/GPRS sales in that region as we did have EDGEproducts and but did not have a UMTS product. We expected to introduce ourfirst UMTS/HSDPA product in the second half of 2005. In 2004, two customersindividually accounted for more than 10% of our revenue and in aggregate thesetwo customers represented 51% of our revenue.

 

*Gross margin*

 

Gross margin amounted to $83.6 million in 2004,compared to $41.2 million in 2003. Our gross margin percentage was 39.6% ofrevenue in 2004, compared to 40.5% of revenue in 2003. Changes in product mixresulted in a decline in margin for the year. During 2004, we sold $0.2 million of productsthat had a net book value after writedowns of nil.

 

We expected our gross marginto continue to fluctuate from quarter to quarter as a result of changes inproduct mix, competitive pressures, changes in geographical mix and changes inproduct cost due to new product introductions.

 

*Sales and marketing*

 

Sales and marketing expenseswere $20.0 million in 2004, compared to $11.6 million in 2003, an increase of72.9%. The increase was due primarily to an increase in marketing developmentcosts and costs related to new products, such as the Voq professional phone andproducts for EDGE networks. The addition of staff from the AirPrime acquisitionalso contributed to the increase. Sales and marketing expenses as a percentageof revenue decreased to 9.5% in 2004, compared to 11.4% in 2003, due primarilyto the increase in 2004 revenue. We expected to continue to make significantinvestments in sales and marketing as we marketed existing products, introducednew products and continued to expand our distribution channels in the Americas,Europe and the Asia-Pacific region.

 

*Research and development,net*

 

Research and development expenses, net of conditionallyrepayable government research and development funding, amounted to $24.5million in 2004, compared to $16.0 million in 2003, an increase of 53.4%.

 

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Gross research and development expenses, beforegovernment research and development funding, were $27.2 million or 12.9% ofrevenue in 2004, compared to $16.5 million, or 16.2% of revenue, in 2003. Repaymentof TPC funding of $1.9 million was included in our gross research anddevelopment expenses in 2004, compared to nil in 2003. Gross research anddevelopment expenses increased due to the addition of staff and projects fromthe AirPrime acquisition and the development of new products, including EDGEproducts and the Voq professional phone. We expected our gross research anddevelopment expenses to continue to increase as we invest in next generationtechnology and develop new products.

 

During 2004, we signed a second agreement with theGovernment of Canada’s Technology Partnerships Canada (“TPC”) program underwhich we are eligible to receive conditionally repayable research anddevelopment funding up to Cdn. $9.5 million to support the development of arange of third generation wireless technologies. The agreement is effective fordevelopment work commencing April 2003. Funding of $2.6 million wasrecognized during 2004, of which $1.1 million relates to the period from April 1,2003 to December 31, 2003. We expected that our TPC funding would be basedon eligible research and development work completed in each quarter.

 

*Administration*

 

Administration expenses amounted to $9.0 million,or 4.3% of revenue, in 2004, compared to $6.6 million, or 6.5% of revenue, in2003. The increase of $2.4 million was due primarily to an increase inprofessional fees, insurance costs and the addition of staff from the AirPrimeacquisition. Included in administration expenses were recoveries from Metricomof $0.5 million in each of 2004 and 2003 that were related to a settlementagreement.

 

*Restructuring and othercharges*

 

In 2004 we didnot incur any restructuring and other charges. In 2003, we incurredrestructuring and other charges of $1.2 million as a result of our acquisitionof AirPrime. The charges included writedowns of fixed and intangible assets,severance costs for workforce reductions and a facilities restructuring charge.

 

*Integration costs*

 

In 2004 we didnot incur any integration costs. In 2003, we incurred integration costs of $1.9million as a result of our acquisition of AirPrime. The charges included costsof existing staff and contractors retained for the transition period and costsrelated to integration activities. All of these employees and contractorscompleted their integration activities and were terminated by December 31,2003.

 

*Other income*

 

Other income increased to $1.7 million in 2004,compared to $1.0 million in 2003. Other income includes interest income,interest expense and foreign exchange gains and losses. This increase was dueto an increase in interest income from increased cash and investment balancesand an increase in interest rates.

 

*Income tax expense*

 

Income tax expenseamounted to $4.4 million in 2004, compared to $0.2 million in 2003. Income taxexpense increased primarily due to taxes payable in the United States resultingfrom our increased earnings.

 

*Net earnings*

 

Our net earnings amounted to $24.9 million, ordiluted earnings per share of $0.96, in 2004, compared to net earnings of $2.3million, or diluted earnings per share of $0.12, in 2003.

 

The weighted average diluted number of sharesoutstanding increased to 26.1 million in 2004, primarily due to the issuance ofshares in August 2003 related to the AirPrime acquisition and to ourpublic offering in November 2003, as compared to 19.0 million in the sameperiod of 2003.

 

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**Stock-BasedCompensation**

 

In 2005, the Board ofDirectors approved the accelerated vesting of certain “out-of-the-money” stockoptions previously granted under the Company’s stock option plan to participantsother than board members and executive officers of the Company. The acceleratedvesting of these options had the positive effect of rewarding those eligibleparticipants during a challenging year as well as reducing the future expenseassociated with those options as a result of a change in United States GAAP.Effective January 1, 2006 for the Company, United States GAAP requires theexpensing in the Company’s financial statements of thefair value of all stock-based compensation arrangements, including employeestock options. The expensing of the cost of employee stock options in thefinancial statements is in contrast to the practice prior to January, 2006 ofproviding supplemental pro forma disclosure in the footnotes to the financialstatements of our income (loss) after giving effect to the employee stock-basedcompensation charge.

 

In aggregate, the vesting ofstock options to purchase a total of 175,650 common shares with an exerciseprice of US$14.25 (CAD$16.82) per share or higher, being 25% above the tradingprice at the time of the Board of Directors’ approval of this initiative, wasaccelerated and those options became exercisable as of November 2005.These options would otherwise have vested over time periods ranging up to December 2008.The term of these options as well as their respective exercise price and numberof common shares issuable on exercise remain unchanged.

 

By taking this accelerated vesting initiative now, avalue of approximately $2.3 million is recorded as a charge in the calculationof our supplemental footnote disclosure of our pro forma income (loss) in 2005.This will result in a reduction of our otherwise calculated stock-basedcompensation expense of approximately $1.1 million in 2006, $1.1 million in2007 and $0.1 million in 2008.

 

**ContingentLiabilities**

 

SierraWireless America, Inc., as successor to AirPrime, Inc., along withother defendants, has been served with the complaint of Joshua Cohen and DavidBeardsley and others, filed in the U.S. District Court for the Central Districtof California for alleged violations of federal and state securities lawsallegedly occurring prior to the time AirPrime, Inc. was acquired by theCompany. The plaintiffs filed the third amended complaint on July 7, 2005.In November of 2005, the District Court dismissed the third amendedcomplaint, without prejudice, with respect to the Company and most of the otherdefendants. The plaintiffs did not file a fourth amended complaint and soughtan order from the District Court dismissing the federal actions as to alldefendants, with prejudice for the purposes of final judgment, however withoutprejudice to the state claims in the third amended complaint. The DistrictCourt so ordered on February 27, 2006. The plaintiffs filed a notice ofappeal to the U.S. Court of Appeals for the Ninth Circuit on March 8,2006. We expect that it will be several months before they file their appealbrief. In December 2005, we were served with a similar class actioncomplaint of David Beardsley and others, filed in the Superior Court of theState of California, County of San Diego, for alleged violations of statesecurities laws in connection with the same alleged facts. On February 6,2006, we filed a Motion to Stay the state court action pending resolution ofthe nearly identical federal action. We expect the Motion to Stay will be heardby the San Diego Superior Court in late March, 2006. We have given notice toour liability insurance carrier, which has agreed to pay our costs of defensethat exceed the policy’s retention amount, subject to a reservation of rightsin the event it is determined that the carrier has no liability for thislitigation and without conceding any liability for payment of loss. We havealso submitted an escrow claim notice under the escrow agreement dated August 12,2003 relating to the acquisition of AirPrime and the escrow shareholders aredisputing their obligations with respect to this complaint. Although there canbe no assurance that an unfavourable outcome of the dispute would not have amaterial adverse effect on our operating results, liquidity or financialposition, we believe the claims are without merit and will vigorously defendthem. The Company has determined that it is not possible to establish areasonable estimate of the possible loss, or range of possible loss, if any.

 

TheCompany and certain of our current and former officers were named as defendantsin several class action complaints filed in the U.S. District Court forthe Southern District of New York and the U.S. District Court for the SouthernDistrict of California for alleged violations of federal securities laws. Theactions filed in the U.S. District Court for the Southern District ofCalifornia have been transferred to the U.S. District Court for the SouthernDistrict of New York. By order dated December 16, 2005, the U.S. DistrictCourt for the Southern District of New York consolidated all of the actions forpretrial purposes, appointed co-lead plaintiffs in the consolidated action, and

 

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approvedthe selection of co-lead counsel. The plaintiffs filed their consolidatedamended complaint on February 21, 2006 and the defendants have until earlyApril to file their Motion to Dismiss. We have given notice to our liabilityinsurance carrier, which has agreed to pay our costs of defense that exceed thepolicy’s retention amount, subject to a reservation of rights in the event thatit is determined that the carrier has no liability for this litigation. Althoughthere can be no assurance that an unfavourable outcome would not have amaterial adverse effect on our operating results, liquidity or financialposition, we believe the claims are without merit and will vigorously defendthe lawsuits. The Company has determined that it is not possible to establish areasonable estimate of the possible loss, or range of possible loss, if any.However, the Company believes that it is probable that the legal costs relatedto these complaints may exceed our policy retention amount of $1.0 million.Accordingly, we accrued $1.0 million in our results of operations for the yearended December 31, 2005.

 

On February 8, 2005,Sierra Wireless, Inc. was served with the first amended complaint of MLR,LLC filed in the U.S. District Court for the Northern District of IllinoisEastern Division for alleged patent infringement relating to our line ofprofessional phones. We were added as a defendant in existing Civil Action No. 04C 7044 MLR, LLC v. Kyocera Wireless Corporation and Novatel Wireless, Inc.Since that date, we have reached an agreement with MLR under which we receivednon-royalty bearing licenses to use all of MLR’s present and future patents forall of our products and MLR released us from all claims related to their patentportfolio. MLR has dismissed all claims against us in the lawsuit.

 

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

 

**CriticalAccounting Estimates**

 

We prepare our consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States, and we make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses, andthe related disclosure of contingent liabilities. On an on-going basis, weevaluate our estimates and judgments, including those related to revenuerecognition, adequacy of allowance for doubtful accounts, adequacy of inventoryreserve, income taxes and adequacy of warranty reserve. We base our estimateson historical experience and anticipated results and trends and on variousother assumptions that we believe are reasonable under the circumstances. Bytheir nature, estimates are subject to an inherent degree of uncertainty. Actualresults may differ from our estimates. Senior management has discussedwith our audit committee the development, selection, and disclosure ofaccounting estimates used in the preparation of our consolidated financialstatements.

 

During the year ended December 31,2005, we did not adopt any new accounting policies that have a material impacton our consolidated financial statements or make changes to existing accountingpolicies.

 

The following criticalaccounting policies affect our more significant estimates and assumptions usedin preparing our consolidated financial statements:

 

•                  We recognize revenue from sales ofproducts and services upon the later of transfer of title or upon shipment ofthe product to the customer or rendering of the service, so long ascollectability is reasonably assured. Customers include resellers, originalequipment manufacturers, wireless service providers and end-users. We recorddeferred revenue when we receive cash in advance of the revenue recognitioncriteria being met.

 

A significant portion of our revenue is generated from sales to resellers.We recognize revenue on the portion of sales to certain resellers that aresubject to contract provisions allowing various rights of return and stockrotation upon the earlier of when the rights have expired or the products havebeen reported as sold by the resellers.

 

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

 

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and development funding in the period in whichconditions arise that would cause research and development funding to berepayable.

 

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

 

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

 

•                  We maintain an allowance for doubtful accounts for estimated lossesthat may arise if any of our customers are unable to make requiredpayments. We consider the following factors when determining if collection isreasonably assured:  customercredit-worthiness, past transaction history with the customer, current economicindustry trends and changes in customer payment terms. If we have no previousexperience with the customer, we typically obtain reports from creditorganizations to ensure that the customer has a history of paying its creditors.We may also request financial information, including financial statements,to ensure that the customer has the means of making payment. If these factorsindicate collection is not reasonably assured, revenue is deferred untilcollection becomes reasonably assured, which is generally upon receipt of cash.If the financial condition of any of our customers deteriorates, we may increaseour allowance.

 

•                  We value our inventory at the lower of cost, determined on afirst-in-first-out basis, and estimated net realizable value. We assess theneed for an inventory writedown or an accrual for estimated losses on inventorypurchase commitments based on our assessment of estimated market value usingassumptions about future demand and market conditions. Our reserve requirementsgenerally increase as our projected demand requirements decrease, due to marketconditions, technological and product life cycle changes and longer thanpreviously expected usage periods. If market conditions are worse than ourprojections, we may further writedown the value of our inventory orincrease the accrual for estimated losses on inventory purchase commitments.

 

•                  We currently have intangible assets of $10.7 million and goodwill of$19.2 million generated from our acquisition of AirPrime in August 2003. Goodwillis tested for impairment annually, or more often, if an event or circumstanceindicates that an impairment loss has been incurred.

 

The initial goodwill impairment test was completed during the fourthquarter of 2003, which resulted in no impairment loss. We assessed therealizability of goodwill related to our reporting unit during the fourthquarter of each of 2004 and 2005 and determined that the fair value exceededthe carrying amount of the reporting unit by a substantial margin. Therefore,the second step of the impairment test that measures the amount of animpairment loss by comparing the implied fair market value of the reportingunit goodwill with the carrying amount of the goodwill was not required.

 

•                  We evaluate our deferred income tax assets to assess whether theirrealization is more likely than not. If their realization is not consideredmore likely than not, we provide for a valuation allowance. The ultimaterealization of our deferred tax assets is dependent upon the generation offuture taxable income during the periods in which temporary differences becomedeductible. We consider projected future taxable income and tax planningstrategies in making our assessment. If our assessment of our ability torealize our deferred tax assets changes, we may make an adjustment to ourdeferred tax assets that would be charged to income.

 

•                  We accrue product warranty costs inaccrued liabilities to provide for the repair or replacement of defectiveproducts. Our accrual is based on an assessment of historical experience andmanagement’s estimates. If we suffer a decrease in the quality of our products,we may increase our accrual.

 

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•                  Under license agreements, we are committed to royalty payments basedon the sales of products using certain technologies. We recognize royaltyobligations as determinable in accordance with agreement terms. Whereagreements are not finalized, we have recognized our current best estimate ofthe obligation in accrued liabilities. When the agreements are finalized, theestimate will be revised accordingly.

 

•                  We recorded a lease provision during2002 that has been subsequently adjusted in the second and fourth quarters of2005 as a result of our estimate of the net present value of the future cashoutflows over the remaining lease period. The estimate was based on variousassumptions, including the obtainable sublease rates and the time it will taketo find a suitable tenant. These assumptions are influenced by marketconditions and the availability of similar space nearby. If market conditionschange, we will adjust our provision.

 

•                  We are engaged in certain legal actions. We estimate the range ofliability related to pending litigation where the amount and range of loss canbe reasonably estimated. We record our best estimate of a loss when the loss isconsidered probable. As additional information becomes available, we assess thepotential liability relating to our pending litigation and revise ourestimates.

 

**Liquidity and CapitalResources**

 

*Operating Activities*

 

Cashused by operating activities was $17.2 million in 2005, compared to cashprovided by operating activities of $29.1 million in 2004. The use of cash inoperating activities in 2005 primarily resulted from the loss for the year of$36.5 million as adjusted for non-cash items, inventory levels and changes inother operating assets and liabilities of $19.3 million. Our working capitaldecreased from December 31, 2004 as a result of the significant decline inour business and the cash costs of the business restructuring.

 

*Investing Activities*

 

Cash used by investingactivities was $50.0 million in 2005, compared to cash provided by investingactivities of $29.4 million in 2004. The use of cash in investing activitiesduring 2005 was due primarily to the purchase, net of proceeds on maturity, ofshort-term investments of $24.7 million and the purchase of long-terminvestments of $14.9 million. Expenditures on intangible assets were $2.1million and on fixed assets were $8.3 million in 2005, compared to $2.1 millionand $7.1 million, respectively, in 2004. Expenditures on intangible assets wereprimarily for license fees and patents while capital expenditures wereprimarily for research and development equipment, tooling, computer equipmentand software.

 

We do not have anytrading activities that involve any type of commodity contracts that areaccounted for at fair value but for which a lack of market price quotationsnecessitate the use of fair value estimation techniques.

 

*Financing Activities*

 

Cash used by financingactivities was $0.1 million in 2005, compared to cash provided by financingactivities of $3.0 million in 2004. The use of cash by financing activities in2005 was for repayment of long-term liabilities, partially offset by proceedson the exercise of stock options. The source of cash in 2004 was primarily fromthe issuance of common shares upon the exercise of stock options, offsetslightly by repayments of our long-term liabilities.

 

Asof December 31, 2005, we did not have any off-balance sheet finance orspecial purpose entities.

 

*Cash Requirements*

 

Ournear-term cash requirements are primarily related to funding our operations,capital expenditures and other obligations discussed below. In the near term,we expect that our cash flow from operations will be negative. The cash costsof the June 2005 business restructuring totaled approximately $6.3million, of which approximately $4.7 million was paidduring 2005. We believe our cash, cash equivalents and short- andlong-term investments of

 

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$104.1million and cash generated from operations will be sufficient to fund ourexpected working and other capital requirements for at least the next twelvemonths based on current business plans. Our capital expenditures during 2006are expected to be primarily for research and development equipment, tooling,licenses and patents. However, we cannot provide assurance that our actual cashrequirements will not be greater than we currently expect.

 

Thefollowing table quantifies our future contractual obligations as of December 31,2005:

 
| **Payments due in fiscal** | ** ** | **Operating   Leases** | ** ** | **Obligations   under   Capital   Leases** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
|                                      |       |                        |       |                                                      |       |      |       |
| 2006                                      |       | $                           | 2,845      |                                                      | $          | 310       |       | $ | 3,155 |   |
| 2007                                      |       | 2,922                       |       | 7                                                         |       | 2,929     |       |
| 2008                                      |       | 2,907                       |       | —                                                    |       | 2,907     |       |
| 2009                                      |       | 2,228                       |       | —                                                    |       | 2,228     |       |
| 2010                                      |       | 2,219                       |       | —                                                    |       | 2,219     |       |
| Thereafter                                |       | 1,343                       |       | —                                                    |       | 1,343     |       |
| Total                                     |       | $                           | 14,464     |                                                      | $          | 317       |       | $ | 14,781 |   |

 

Wehave entered into purchase commitments totaling approximately $32.8 millionwith certain contract manufacturers under which we have committed to buy aminimum amount of designated products. In certain of these agreements, we may berequired to acquire and pay for such products up to the prescribed minimum orforecasted purchases. The terms of the commitment may require us topurchase approximately $32.8 million of product from certain contractmanufacturers between January 2006 and March 2006.

 

*Sources and Uses of Cash*

 

During 2005, we had an unsecured revolving demand facility for $10.0million that bears interest at prime per annum. Thebalance at December 31, 2005 was nil (2004 — nil).

 

As has been the case in the past several years, ourbusiness continues to be driven predominantly by short lead time purchaseorders from channels and end customers rather than by long-term, large volumecommitments. Ourcustomers are typically under no contractual obligation to purchase ourproducts. If they do not make such purchases, our future operating cash flowwill be negatively impacted. We have a risk of impairment to our liquidityshould there be any significant interruption to our business operations.

 

The source of funds for ourfuture capital expenditures and commitments is cash, short-term investments,long-term investments, accounts receivable, research and development funding,borrowings and cash from operations, as follows:

 

•                  Net cash andshort- and long-term investments amounted to $104.1 million at December 31,2005, compared to $131.8 million at December 31, 2004.

 

•                  Accountsreceivable amounted to $20.5 million at December 31, 2005, compared to$22.5 million at December 31, 2004.

 

•                  We have a $10.0 million unsecured revolving demand facility with aCanadian chartered bank that bears interest at prime. At December 31,2005, there were no borrowings under this facility.

 

**Market Risk Disclosure**

 

During the year ended December 31, 2005, 60%of our revenue was earned from United States-based customers. Our risk fromcurrency fluctuations between the Canadian and U.S. dollar is reduced bypurchasing inventory, other costs of sales and many of our services in U.S.dollars. We are exposed to foreign currency fluctuations because a significantamount of our research and development, marketing, and administration costs areincurred in Canada. We monitor our exposure to fluctuations between theCanadian and U.S. dollars. For the year ended December 31,

 

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2005, we have recorded a foreign exchange loss ofapproximately $1.0 million. As we have available funds and very little debt, wehave not been materially adversely affected by significant interest ratefluctuations.

 

With respect to operations inEurope and the Asia-Pacific region, we transact business in additional foreigncurrencies and the potential for currency fluctuations is increasing. The riskassociated with currency fluctuations between the U.S. dollar and foreigncurrencies in Europe and the Asia-Pacific region has been minimal as suchtransactions have not been material to date. As our business expands in Europe,we expect that we will be increasingly exposed to risks associated with theEuro. To date we have not entered into any futures contracts. To manage ourforeign currency risks, we may enter into such contracts should weconsider it to be advisable to reduce our exposure to future foreign exchangefluctuations.

 

Currently, we do not have any hedging activitiesor derivative instruments.

 

**Related PartyTransactions**

 

During the year ended December 31, 2005,there were no material related party transactions.

 

**QuarterlyResults of Operations**

 

The following tables setforth certain unaudited consolidated statements of operations data for each ofthe eight most recent quarters that, in management’s opinion, have beenprepared on a basis consistent with the audited consolidated financialstatements contained in our fiscal 2005 Annual Report. The unauditedconsolidated statements of operations data presented below reflects alladjustments, consisting primarily of normal recurring adjustments, which are,in the opinion of management, necessary for a fair presentation of results forthe interim periods. These operating results are not necessarily indicative ofresults for any future period. You should not rely on them to predict ourfuture performance.

 
| ** **                                         | ** ** | **Quarter Ended** | ** ** | **Year**         | ** ** |
|----------------------------------------------------|------------|------------------------|------------|------------------|------------|
| **2005**                                           | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **2005** | ** ** |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Revenue                                            |       | $                      | 20,180     |             | $          | 21,930 |   | $ | 27,474 |   | $ | 37,560 |   | $ | 107,144 |   |
| Cost of goods sold                                 |       | 13,055                 |       | 27,852           |       | 17,883 |   | 23,058 |   | 81,848 |   |
| Gross margin                                       |       | 7,125                  |       | (5,922           | )          | 9,591 |   | 14,502 |   | 25,296 |   |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Expenses:                                          |       |                   |       |             |       |   |   |   |   |   |   |
| Sales and marketing                                |       | 4,289                  |       | 4,331            |       | 2,963 |   | 3,968 |   | 15,551 |   |
| Research and  development, net                     |       | 7,261                  |       | 7,399            |       | 7,864 |   | 7,841 |   | 30,365 |   |
| Administration                                     |       | 2,935                  |       | 3,892            |       | 2,435 |   | 1,556 |   | 10,818 |   |
| Restructuring and  other charges                   |       | —                 |       | 4,926            |       | — |   | 329 |   | 5,255 |   |
| Amortization                                       |       | 691                    |       | 679              |       | 728 |   | 899 |   | 2,997 |   |
|                                               |       | 15,176                 |       | 21,227           |       | 13,990 |   | 14,593 |   | 64,986 |   |
| Earnings (loss)  from operations                   |       | (8,051                 | )          | (27,149          | )          | (4,399 | ) | (91 | ) | (39,690 | ) |
| Other income                                       |       | 535                    |       | 220              |       | 659 |   | 863 |   | 2,277 |   |
| Earnings (loss)  before income taxes               |       | (7,516                 | )          | (26,929          | )          | (3,740 | ) | 772 |   | (37,413 | ) |
| Income tax expense  (recovery)                     |       | 78                     |       | (222             | )          | (662 | ) | (139 | ) | (945 | ) |
| Net income (loss)                                  |       | $                      | (7,594     | )                | $          | (26,707 | ) | $ | (3,078 | ) | $ | 911 |   | $ | (36,468 | ) |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Earnings (loss) per  share:                        |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                              |       | $                      | (0.30      | )                | $          | (1.05 | ) | $ | (0.12 | ) | $ | 0.04 |   | $ | (1.44 | ) |
| Diluted                                            |       | $                      | (0.30      | )                | $          | (1.05 | ) | $ | (0.12 | ) | $ | 0.04 |   | $ | (1.44 | ) |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Weighted average  number of shares (in thousands): |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                              |       | 25,358                 |       | 25,364           |       | 25,381 |   | 25,439 |   | 25,385 |   |
| Diluted                                            |       | 25,358                 |       | 25,364           |       | 25,381 |   | 26,111 |   | 25,385 |   |

 

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| ** **                                         | ** ** | **Quarter Ended** | ** ** | **Year**         | ** ** |
|----------------------------------------------------|------------|------------------------|------------|------------------|------------|
| **2004**                                           | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **2004** | ** ** |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Revenue                                            |       | $                      | 41,641     |             | $          | 51,595 |   | $ | 59,149 |   | $ | 58,820 |   | $ | 211,205 |   |
| Cost of goods sold                                 |       | 24,839                 |       | 30,680           |       | 36,107 |   | 35,974 |   | 127,600 |   |
| Gross margin                                       |       | 16,802                 |       | 20,915           |       | 23,042 |   | 22,846 |   | 83,605 |   |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Expenses:                                          |       |                   |       |             |       |   |   |   |   |   |   |
| Sales and marketing                                |       | 4,173                  |       | 4,386            |       | 5,604 |   | 5,866 |   | 20,029 |   |
| Research and  development, net                     |       | 4,739                  |       | 5,991            |       | 6,566 |   | 7,231 |   | 24,527 |   |
| Administration                                     |       | 2,064                  |       | 2,534            |       | 2,354 |   | 2,041 |   | 8,993 |   |
| Amortization                                       |       | 636                    |       | 563              |       | 588 |   | 651 |   | 2,438 |   |
|                                               |       | 11,612                 |       | 13,474           |       | 15,112 |   | 15,789 |   | 55,987 |   |
| Earnings from  operations                          |       | 5,190                  |       | 7,441            |       | 7,930 |   | 7,057 |   | 27,618 |   |
| Other income  (expense)                            |       | 84                     |       | (40              | )          | 405 |   | 1,251 |   | 1,700 |   |
| Earnings before  income taxes                      |       | 5,274                  |       | 7,401            |       | 8,335 |   | 8,308 |   | 29,318 |   |
| Income tax expense                                 |       | 704                    |       | 1,384            |       | 1,268 |   | 1,042 |   | 4,398 |   |
| Net earnings                                       |       | $                      | 4,570      |             | $          | 6,017 |   | $ | 7,067 |   | $ | 7,266 |   | $ | 24,920 |   |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Earnings per share:                                |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                              |       | $                      | 0.18       |             | $          | 0.24 |   | $ | 0.28 |   | $ | 0.29 |   | $ | 0.99 |   |
| Diluted                                            |       | $                      | 0.18       |             | $          | 0.23 |   | $ | 0.27 |   | $ | 0.28 |   | $ | 0.96 |   |
|                                               |       |                   |       |             |       |   |   |   |   |   |   |
| Weighted average  number of shares (in thousands): |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                              |       | 24,986                 |       | 25,221           |       | 25,301 |   | 25,339 |   | 25,212 |   |
| Diluted                                            |       | 26,027                 |       | 26,248           |       | 26,087 |   | 25,891 |   | 26,064 |   |

 

Our quarterlyresults may fluctuate from quarter to quarter because our operatingexpenses are determined based on anticipated sales, are generally fixed and areincurred throughout each fiscal quarter. The impact of significant itemsincurred during the first three interim periods of each fiscal year arediscussed in more detail and disclosed in our quarterly reports on Form 6-K.Items affecting our quarterly results were as follows:

 

•                  Relative to the comparable periods in 2004, revenues decreasedduring the four quarters of 2005 due to a reduction in our embedded modulebusiness volumes as a result of the completion of embedded module shipments topalmOne at the end of 2004, reported channel inventory that was alreadysufficient to meet customer demand in the first part of 2005, and increased competition in CDMA EV-DO and EDGE PC cards, including aloss of market share at Verizon Wireless.

 

•                  Restructuring andother charges of $18.2 million were incurred in the second quarter of 2005. Includedin these charges are inventory writedowns, severancecosts, impairment of fixed, intangible and deferred tax assets, provisions forfacilities restructuring, commitments and other costs related to restructuring.We also recorded a provision of $1.0 million for future legal costs associatedwith litigation matters.

 

•                  Revenues increased during 2004 and 2003 as a result of theintroduction of new products, our strong market position in CDMA EV-DO Release0 PC cards and our CDMA 1X embedded modules sales to palmOne.

 

•                  During thefirst quarter of 2004, we signed a second agreement with the Government ofCanada’s Technology Partnerships Canada (“TPC”) program. The agreement is effectivefor development work commencing April 2003. Funding of $1.4 million wasrecognized as a reduction to research and development expenses in the firstquarter of 2004, of which $1.1 million relates to the period from April 1,2003 to December 31, 2003. Unless the second agreement is otherwiserenegotiated, with the termination of the Voq professional phoneinitiative in the second quarter of 2005, no further TPC funding isanticipated.

 

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**SelectedAnnual Information**

 
| **Years ended December 31,**                                                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                    |       |     |       |     |       |     |       |
| Revenue                                                                                                 |       | $        | 101,709    |     | $          | 211,205  |       | $ | 107,144 |   |
| Net earnings (loss)                                                                                     |       | 2,255    |       | 24,920   |       | (36,468  | )          |
| Diluted earnings  (loss) per share                                                                      |       | 0.12     |       | 0.96     |       | (1.44    | )          |
| Total assets                                                                                            |       | 175,868  |       | 215,594  |       | 173,980  |       |
| Total current and  long-term portions of long term liabilities and obligations under capital lease |       | 3,735    |       | 3,456    |       | 3,128    |       |
|                                                                                                         |            |          |            |          |            |          |            |  |  |  |

 

**Forward-lookingStatements**

 

This reportcontains forward-looking information. These statements are not promises or guaranteesbut are only predictions that relate to future events or our future performanceor state other forward-looking information and are subject to substantial risksand uncertainties that could cause our actual results, performance orachievements to differ materially from those expressed, anticipated or impliedby the forward-looking information. These statements relate to, among otherthings, our revenue, earnings, plans, objectives and timing for theintroduction or enhancement of our services and products, statements concerningstrategies, developments, statements about future market conditions, supplyconditions, channel and end customer demand conditions, projected or futurerevenues, gross margins, operating expenses, profits and other statements ofexpectations, intentions, objectives and plans that are not statements ofhistorical facts. When used in this report, the words “may”, “plan”, “expect”, “believe”,“intends”, “anticipates”, “estimates”, “predicts” and similar expressionsgenerally identify forward-looking information. Forward-looking informationreflects our current expectations. The risk factors and uncertainties that may affectour actual results, performance or achievements are many and include, amongothers, our ability to develop, manufacture, supply and market new productsthat we do not produce today and that may not gain commercial acceptance,our reliance on the deployment of next generation networks by major wirelessoperators, and increased competition. These risk factors and others arediscussed in our Annual Information Form which may be found on SEDARat www.sedar.com and in our other regulatory filings with the Securities andExchange Commission in the United States and the Provincial SecuritiesCommissions in Canada. These factors should be reviewed carefully and youshould not place undue reliance on any forward-looking information. Unlessotherwise required by applicable securities laws, Sierra Wireless disclaims anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Risk Factors**

 

Our business is subject tosignificant risks and past performance is no guarantee of future performance. Someof the risks we face are:

 

**Wehave incurred net losses and if our efforts to restore the business toprofitability are not successful, we may be required to furtherrestructure or take other actions and our share price may decline.**

 

As a result ofthe reduction in our business in 2005, we incurred a loss of $36.5 million inthe year. Our accumulated deficit at December 31, 2005 was $82.9 million. Whilewe had earnings from operations for each of the previous two years ended December 31,2004 and 2003, we incurred a loss from operations in each of the three fiscalyears ended December 31, 2000, 2001 and 2002.

 

Our ability toachieve and maintain profitability in the future will depend on, among otherthings, the success of our restructuring, the continued sales of our currentproducts and the successful development and commercialization of new products.If we do not return to profitability, our total losses will increase and we may berequired to further restructure our operations or raise additional capital.Additional financing may not be available, and even if available, may notbe on acceptable terms. We may seek to raise additional capital through anoffering of common shares, preference shares or debt, which may result indilution, and/or the issuance of securities with rights senior to the rights,of the holders of common shares. As a result, our share price may decline.

 

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**Our revenues and earnings may fluctuatefrom quarter to quarter, which could affect the market price of our commonshares.**

 

Our revenuesand earnings may vary from quarter to quarter as a result of a number offactors, including:

 

•                  The timing of releases of ournew products;

 

•                  The timing of substantialsales orders and OEM and carrier customer sell through;

 

•                  Design win cycles in ourembedded module business;

 

•                  The amount of inventory heldby our channel partners;

 

•                  Competition from other marketparticipants;

 

•                  Possible cyclical fluctuationsrelated to the evolution of wireless technologies;

 

•                  Possible delays in themanufacture or shipment of current or new products;

 

•                  Concentration in our customerbase; and

 

•                  Possible delays or shortagesin component supplies.

 

Because ouroperating expenses are determined based on anticipated sales, are generallyfixed and are incurred throughout each fiscal quarter, any of the factorslisted above could cause significant variations in our revenues and earnings inany given quarter. Therefore, our quarterly results are not necessarilyindicative of our overall business, results of operations and financialcondition. However, quarterly fluctuations in our revenues and earnings may affectthe market price of our common shares.

 

**We are subject to, and may in thefuture be subject to, certain class action lawsuits, which if decidedagainst us, could require us to pay substantial judgments, settlements or otherpenalties.**

 

In addition tobeing subject to litigation in the ordinary course of business, we arecurrently, and may in the future be, subject to class actions andother securities litigation and investigations. We expect that this type oflitigation will be time consuming, expensive and distracting from the conductof our daily business. It is possible that we will be required to paysubstantial judgments, settlements or other penalties and incur expenses thatcould have a material adverse effect on our operating results, liquidity orfinancial position. Expenses incurred in connection with these lawsuits, whichinclude substantial fees of lawyers and other professional advisors and our obligationsto indemnify officers and directors who may be parties to such actions,could materially adversely affect our cash position. We do not know if any ofthis type of litigation and resulting expenses will be covered by insurance. Inaddition, these lawsuits may cause our insurance premiums to increase infuture periods.

 

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**Competition from new or established wirelesscommunication companies or from those with greater resources may preventus from increasing or maintaining our market share and could result in pricereductions and reduced revenues and gross margins.**

 

The wireless industry is intensely competitive and subject to rapidtechnological change. We expect competition to intensify. More established andlarger companies with greater financial, technical and marketing resources sellproducts that compete with ours. We also may introduce new products thatwill put us in direct competition with major new competitors. Existing orfuture competitors may be able to respond more quickly to technologicaldevelopments and changes or may independently develop and patenttechnologies and products that are superior to ours or achieve greateracceptance due to factors such as more favorable pricing or more efficientsales channels. If we are unable to compete effectively with our competitors’pricing strategies, technological advances and other initiatives, our marketshare and revenues may be reduced. As an example, during the first quarterof 2005, one of the factors that caused a significant decline in CDMA EV-DO PCcard revenue was increased competition and loss of market share.

 

**If demand for our current products declines and weare unable to launch successful new products, our revenues will decrease.**

 

If the markets in which we compete fail to grow, or grow more slowly thanwe currently anticipate, or if we are unable to establish markets for our newproducts, it would significantly harm our business, results of operations andfinancial condition. In addition, demand for one or all of our current productscould decline as a result of competition, technological change or otherfactors.

 

**If we are unable to design and develop newproducts that gain sufficient commercial acceptance, we may be unable tomaintain our market share or to recover our research and development expensesand our revenues could decline.**

 

We depend on designing, developing and marketing new products to achievemuch of our future growth. Our ability to design, develop and market newproducts depends on a number of factors, including, but not limited to thefollowing:

 

•            Our ability toattract and retain skilled technical employees;

 

•            The availability ofcritical components from third parties;

 

•            Our ability tosuccessfully complete the development of products in a timely manner; and

 

•            Our ability tomanufacture products at an acceptable price and quality.

 

A failure by us, or our suppliers, in any of these areas, or a failure ofnew products to obtain commercial acceptance, could mean we receive lessrevenue than we anticipate and we are unable to recover our research anddevelopment expenses, and could result in a decrease in the market price forour shares.

 

**The loss of any of our material customers couldadversely affect our revenues and profitability, and therefore shareholdervalue.**

 

We depend on a small number of customers for a significant portion of ourrevenues. In the last three fiscal years, there have been five differentcustomers that individually accounted for more than 10% of our revenues. In theyear ended December 31, 2005, two customers individually accounted formore than 10% of our revenue and in the aggregate these two customers represented 36% of our revenue. If any of these customersreduce their business with us or suffer from business failure, our revenues andprofitability could decline, perhaps materially.

 

**We may not be able to continue todesign products that meet our customer needs and, as a result, our revenue andprofitability may decrease.**

 

We develop products to meet our customers’requirements but, particularly with original equipment manufacturers, currentdesign wins do not guarantee future design wins. If we are unable or choose notto

 

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meet our customers’ future needs, we may notwin their future business and our revenue and profitability may decrease.

 

**We depend on a limited number of third parties tomanufacture our products and supply key components. If they do not manufactureour products properly or cannot meet our needs in a timely manner, we may beunable to fulfill our product delivery obligations and our costs may increase,and our revenue and margins could decrease.**

 

We outsource the manufacture of our products to a limited number of thirdparties and depend heavily on the ability of these manufacturers to meet ourneeds in a timely and satisfactory manner. Some components used by us may onlybe available from a small number of suppliers, in some cases from only onesupplier. We currently rely on two manufacturers, either of which may terminatethe manufacturing contract with us at the end of any contract year. Ourreliance on third party manufacturers and suppliers subjects us to a number ofrisks, including the following:

 

•            The absence ofguaranteed manufacturing capacity;

 

•            Reduced control overdelivery schedules, production yields and costs; and

 

•            Inability to controlthe amount of time and resources devoted to the manufacture of our products.

 

If we are unable to successfully manage any of these risks or to locatealternative or additional manufacturers or suppliers in a timely andcost-effective manner, we may not be able to deliver products in a timelymanner. In addition, our results of operations could be harmed by increasedcosts, reduced revenues and reduced margins.

 

**We do not have fixed-term employmentagreements with our key personnel and the loss of any key personnel may harmour ability to compete effectively.**

 

None of ourexecutive officers or other key employees has entered into a fixed-termemployment agreement. Our success depends in large part on the abilitiesand experience of our executive officers and other key employees. Competitionfor highly skilled management, technical, research and development and otherkey employees is intense in the wireless communications industry. We may notbe able to retain our current executive officers or key employees and may notbe able to hire and transition in a timely manner experienced and highlyqualified additional executive officers and key employees as needed to achieveour business objectives. The loss of executive officers and key employees coulddisrupt our operations and our ability to compete effectively could beadversely affected.

 

**We may have difficulty responding to changingtechnology, industry standards and customer preferences, which could cause usto be unable to recover our research and development expenses and loserevenues.**

 

The wireless industry is characterized by rapid technological change. Oursuccess will depend in part on our ability to develop products that keeppace with the continuing changes in technology, evolving industry standards andchanging customer and end-user preferences and requirements. Our productsembody complex technology that may not meet those standards, changes andpreferences. In addition, wireless communications service providers requirethat wireless data systems deployed on their networks comply with their ownstandards, which may differ from the standards of other providers. We may beunable to successfully address these developments in a timely basis or at all.Our failure to respond quickly and cost-effectively to new developments throughthe development of new products or enhancements to existing products couldcause us to be unable to recover significant research and development expensesand reduce our revenues.

 

**We depend on third parties to offer wireless dataand voice communications services for our products to operate.**

 

Our products can only be used over wireless data and voice networks operatedby third parties. In addition, our future growth depends, in part, on thesuccessful deployment of next generation wireless data and voice networks bythird parties for which we are developing products. If these network operatorscease to offer

 

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effective and reliable service, or fail to market their serviceseffectively, sales of our products will decline and our revenues will decrease.

 

**Acquisitionsof companies or technologies may resultin disruptions to our business or may not achieve the anticipatedbenefits.**

 

As part of our business strategy, we may acquireadditional assets and businesses principally relating to or complementary toour current operations. Any acquisitions and/or mergers by us will beaccompanied by the risks commonly encountered in acquisitions of companies. Theserisks include, among other things:

 

•            Exposure to unknown liabilities ofacquired companies, including unknown litigation related to acts or omissionsof our acquired company and/or its directors and officers prior to theacquisition;

 

•            Higher than anticipated acquisitionand integration costs and expenses;

 

•            Effects of costs and expensesof acquiring and integrating new businesses on our operating results and financialcondition;

 

•            The difficulty and expense ofintegrating the operations and personnel of the companies;

 

•            Disruption of our ongoing business;

 

•            Diversion of management’s timeand attention away from our remaining business during the integration process;

 

•            Failure to maximize ourfinancial and strategic position by the successful incorporation of acquiredtechnology;

 

•            The inability to implement uniform standards, controls,procedures and policies;

 

•            The loss of key employees and customers as a result of changes inmanagement;

 

•                  The incurrence of amortization expenses; and

 

•            Possible dilution to our shareholders if thepurchase price is paid in common shares or securities convertible into commonshares.

 

In addition,geographic distances may make integration of businesses more difficult. Wemay not be successful in overcoming these risks or any other problemsencountered in connection with any acquisitions. If realized, these risks couldreduce shareholder value.

 

**We may infringe the intellectual propertyrights of others.**

 

The industry in which we operate has many participants that own, or claimto own, proprietary intellectual property. In the past we have received, and inthe future may receive, claims from third parties alleging that we, andpossibly our customers, violate their intellectual property rights. Rights tointellectual property can be difficult to verify and litigation may benecessary to establish whether or not we have infringed the intellectualproperty rights of others. In many cases, these third parties are companieswith substantially greater resources than us, and they may be able to, andmay choose to, pursue complex litigation to a greater degree than we could.Regardless of whether these infringement claims have merit or not, we may besubject to the following:

 

•            We may be liablefor potentially substantial damages, liabilities and litigation costs,including attorneys’ fees;

 

•            We may beprohibited from further use of the intellectual property and may berequired to cease selling our products that are subject to the claim;

 

•            We may have tolicense the third party intellectual property, incurring royalty fees that may ormay not be on commercially reasonable terms. In addition, there is noassurance that we will be able to successfully negotiate and obtain such alicense from the third party;

 

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•            We may have to develop anon-infringing alternative, which could be costly and delay or result in theloss of sales. In addition, there is noassurance that we will be able to develop such a non-infringing alternative;

 

•            The diversion ofmanagement’s attention and resources;

 

•            Our relationshipswith customers may be adversely affected; and

 

•            We may berequired to indemnify our customers for certain costs and damages they incur insuch a claim.

 

In the event of an unfavourable outcome in such a claim and our inabilityto either obtain a license from the third party or develop a non-infringingalternative, then our business, operating results and financial condition may bematerially adversely affected and we may have to restructure our business.

 

Absent a specific claim for infringement of intellectual property, fromtime to time we have and expect to continue to license technology, intellectualproperty and software from third parties. There is no assurance that we will beable to maintain our third party licenses or obtain new licenses when requiredand this inability could materially adversely affect our business and operatingresults and the quality and functionality of our products. In addition, thereis no assurance that third party licenses we execute will be on commerciallyreasonable terms.

 

Under purchase orders and contracts for the sale of our products we may provideindemnification to our customers for potential intellectual propertyinfringement claims for which we may have no corresponding recourseagainst our third party licensors. This potential liability, if realized, couldmaterially adversely affect our business, operating results and financialcondition.

 

**Misappropriation of our intellectualproperty could place us at a competitive disadvantage**.

 

Our intellectual property is important to our success. We rely on acombination of patent protection, copyrights, trademarks, trade secrets,licenses, non-disclosure agreements and other contractual agreements to protectour intellectual property. Third parties may attempt to copy aspects ofour products and technology or obtain information we regard as proprietarywithout our authorization. If we are unable to protect our intellectualproperty against unauthorized use by others it could have an adverse effect onour competitive position.

 

Our strategies to deter misappropriation could be inadequate due to thefollowing risks:

 

•            Non-recognition of theproprietary nature or inadequate protection of our methodologies in the UnitedStates, Canada or foreign countries;

 

•            Undetectedmisappropriation of our intellectual property;

 

•            The substantial legaland other costs of protecting and enforcing our rights in our intellectualproperty; and

 

•            Development ofsimilar technologies by our competitors.

 

In addition, we could be required to spend significant funds and ourmanagerial resources could be diverted in order to defend our rights, whichcould disrupt our operations.

 

**As our business expands internationally, we willbe exposed to additional risks relating to international operations.**

 

Our expansioninto international operations exposes us to additional risks unique to suchinternational markets, including the following:

 

•            Increased credit managementrisks and greater difficulties in collecting accounts receivable;

 

•            Unexpected changes inregulatory requirements, wireless communications standards, exchange rates,trading policies, tariffs and other barriers;

 

•            Uncertainties of laws andenforcement relating to the protection of intellectual property;

 

•            Language barriers; and

 

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•            Potential adverse taxconsequences.

 

Furthermore,if we are unable to further develop distribution channels in Europe and theAsia-Pacific region we may not be able to grow our internationaloperations and our ability to increase our revenue will be negatively impacted.

 

**Government regulation could result in increasedcosts and inability to sell our products.**

 

Our products are subject to certain mandatory regulatory approvals in theUnited States, Canada, the European Union and other regions in which weoperate. In the United States, the Federal Communications Commission regulatesmany aspects of communications devices. In Canada, similar regulations areadministered by the Ministry of Industry, through Industry Canada. EuropeanUnion directives provide comparable regulatory guidance in Europe. Although wehave obtained all the necessary Federal Communications Commission, IndustryCanada and other required approvals for the products we currently sell, we may notobtain approvals for future products on a timely basis, or at all. In addition,regulatory requirements may change or we may not be able to obtainregulatory approvals from countries other than the United States and Canada inwhich we may desire to sell products in the future.

 

**Fluctuations in exchange rates between the UnitedStates dollar and other currencies, including the Canadian dollar may affectour operating results.**

 

We are exposed to fluctuations in the exchange rate between the UnitedStates dollar and the Canadian dollar through our operations in Canada. Toreduce our risk because of currency fluctuations, we purchase inventory, othercost of sales items and many of our services in United States dollars. If theCanadian dollar rises relative to the United States dollar, our operatingresults may be negatively impacted. To date, we have not entered into anyforeign currency futures contracts as part of a hedging policy. We expectthat as our business expands in Europe and the Asia-Pacific region, we willalso be exposed to additional foreign currency transactions and to theassociated currency risk. To date, we have not entered into any futurescontracts.

 

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