**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

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**FORM 40-F**

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**o**** REGISTRATION STATEMENT PURSUANT TO SECTION 12 OFTHE SECURITIES EXCHANGE ACT OF 1934**

**OR**

**x**** ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2006**

**Commission File No.:  0-30718**

**SIERRA WIRELESS, INC.**

(Exact name of Registrant as specified in its charter)

**Canada**

(Jurisdiction of incorporation or organization)

**Primary Standard Industrial Classification Doe (ifapplicable): 3663**

**I.R.S. Employer Identification Number (ifapplicable): 94-3338019**

**13811 Wireless Way, Richmond**

**British Columbia, Canada  V6V 3A4**

**(604) 231-1100**

(Address and telephone number of principal executiveoffices)

**Davis Wright Tremaine LLP1300 SW Fifth Avenue, 24****th FloorPortland, OR  97201**

(Agent for service in the United States)

Securities registered or to be registered pursuant toSection 12(b) of the Act:  **None**

Securities registered or to be registered pursuant toSection 12(g) of the Act:

**CommonShares**

(Title of Class)

Name of exchange on which securities are registered:**Toronto Stock Exchange, The Nasdaq Global Market**

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:  **None**

Indicate by check mark the information filed with thisForm:

x  Annual  Information Form    x  AuditedAnnual Financial Statements

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital common stock as of the close of the periodcovered by the annual report:  **25,708,331****Common Shares without parvalue as at December 31, 2006**

Indicate by check mark whether the Registrant, byfiling the information contained in this Form, is also thereby furnishing theinformation to the Commission pursuant to Rule 12g3-2(b) under the SecuritiesExchange Act of 1934, If “yes”, is marked, indicate the filing number assignedto the Registrant in connection with such Rule.  o  Yes       82 -           x  No

Indicate by check mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.    Yes  x       No  o

 

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**INCORPORATIONBY REFERENCE**

The Registrant’sManagement’s Discussion and Analysis of Financial Condition and Results ofOperation and the Registrant’s financial statements for the year ended December31, 2006 are attached hereto as Appendix A and Appendix B, respectively, andare incorporated by reference herein.

**UNDERTAKING**

The Registrant undertakesto make available, in person or by telephone, representatives to respond toinquiries made by the Commission staff, and to furnish promptly, when requestedto do so by the Commission staff, information relating to: the securitiesregistered pursuant to Form 40-F; the securities in relation to which theobligation to file an annual report on Form 40-F arises; or transactions insaid securities.

**SIGNATURES**

Pursuant to therequirements of the *Securities Exchange Act of1934*, as amended, the Registrant certifies that it meets all of therequirements for filing on Form 40-F and has duly caused this annual report tobe signed on its behalf by the undersigned, thereto duly authorized.

 
| ** **           | **SIERRA WIRELESS, INC.**             |
|----------------------|---------------------------------------|
| * *             | *(Registrant)*                        |
| * *             | * *                              |
| * *             | * *                              |
|                 | “David G. McLennan”         |
|                 | David G. McLennan,                    |
|                 | Chief Financial Officer and Secretary |
|                 |                                  |
|                 |                                  |
| Date: March 29, 2007 |                                  |

 

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Annual Information Form****March 21, 2007

**TABLE OF CONTENTS**
| FORWARD-LOOKING STATEMENTS                          |   |   |
|-----------------------------------------------------|--------|--------|
|                                                |   |   |
| CURRENCY                                            |   |   |
|                                                |   |   |
| CORPORATE STRUCTURE                                 |   |   |
|                                                |   |   |
| GENERAL  DEVELOPMENT OF THE BUSINESS                |   |   |
|                                                |   |   |
| **General**                                         |   |   |
| **Three  Year History**                             |   |   |
| **Industry  Background and Future Trends**          |   |   |
| ** **                                          |   |   |
| NARRATIVE  DESCRIPTION OF THE BUSINESS              |   |   |
|                                                |   |   |
| **Our  Solution**                                   |   |   |
| **Our  Products**                                   |   |   |
| **Product  Development**                            |   |   |
| **Distribution**                                    |   |   |
| **Marketing**                                       |   |   |
| **Manufacturing**                                   |   |   |
| **Employees**                                       |   |   |
| **Competition**                                     |   |   |
| **Intellectual Property**                           |   |   |
| **Governmental Regulation**                         |   |   |
| **Additional  Information Concerning Our Business** |   |   |
| ** **                                          |   |   |
| DIVIDENDS                                           |   |   |
|                                                |   |   |
| DESCRIPTION OF  CAPITAL STRUCTURE                   |   |   |
|                                                |   |   |
| MARKET FOR SECURITIES                               |   |   |
|                                                |   |   |
| DIRECTORS  AND EXECUTIVE OFFICERS                   |   |   |
|                                                |   |   |
| **Directors**                                       |   |   |
| **Executive  Officers**                             |   |   |
| ** **                                          |   |   |
| CODE OF  BUSINESS CONDUCT AND ETHICS                |   |   |
|                                                |   |   |
| AUDIT COMMITTEE                                     |   |   |
|                                                |   |   |
| **Mandate of the Audit  Committee**                 |   |   |
| **Composition of the  Audit Committee**             |   |   |
| **Relevant Education  and Experience**              |   |   |
| **Reliance on Certain  Exemptions**                 |   |   |
| **Audit Committee Oversight**                       |   |   |
| **Pre-approval  Policies and Procedures**           |   |   |
| **Auditor Independence**                            |   |   |
| **Auditors’  Fees**                            |   |   |

 

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| EVALUATION OF  DISCLOSURE CONTROLS AND PROCEDURES      |   |   |
|--------------------------------------------------------|--------|--------|
|                                                   |   |   |
| **Disclosure  Controls**                               |   |   |
| **Internal  Control Over Financial Reporting**         |   |   |
| ** **                                             |   |   |
| LEGAL PROCEEDINGS                                      |   |   |
|                                                   |   |   |
| OFF-BALANCE SHEET  ARRANGEMENTS                        |   |   |
|                                                   |   |   |
| CONTRACTUAL OBLIGATIONS                                |   |   |
|                                                   |   |   |
| QUORUM EXEMPTION                                       |   |   |
|                                                   |   |   |
| REGISTRAR AND  TRANSFER AGENT                          |   |   |
|                                                   |   |   |
| MATERIAL CONTRACTS                                     |   |   |
|                                                   |   |   |
| EXPERTS                                                |   |   |
|                                                   |   |   |
| ADDITIONAL  INFORMATION                                |   |   |
|                                                   |   |   |
| APPENDIX A: MANAGEMENT’S DISCUSSION AND  ANALYSIS |   |   |
|                                                   |   |   |
| APPENDIX B: AUDITED ANNUAL FINANCIAL  STATEMENTS       |   |   |

 

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## ***FORWARD-LOOKING STATEMENTS***

Certain statements in this Annual Information Form, orincorporated by reference herein, that are not based on historical facts,constitute forward-looking statements or forward-looking information within themeaning of applicable securities laws (“forward-looking statements”).  These forward-looking statements are notpromises or guarantees of future performance but are only predictions thatrelate to future events, conditions or circumstances or our future results,performance, achievements or developments and are subject to substantial knownand unknown risks, assumptions, uncertainties and other factors that couldcause our actual results, performance, achievements or developments in ourbusiness or in our industry to differ materially from those expressed,anticipated or implied by such forward-looking statements.  Forward-looking statements include alldisclosure regarding possible events, conditions, circumstances or results ofoperations that are based on assumptions about future economic conditions,courses of action and other future events. We caution you not to place undue reliance upon any such forward-lookingstatements, which speak only as of the date they are made.  These forward-looking statements appear in anumber of different places in this Annual Information Form and can beidentified by words such as “may”, “estimates”, “projects”, “expects”, “intends”,“believes”, “plans”, “anticipates”, or their negatives or other comparablewords.  Forward-looking statements includestatements regarding the outlook for our future operations, plans and timingfor the introduction or enhancement of our services and products, statementsconcerning strategies, developments, statements about future market conditions,supply conditions, end customer demand conditions, channel inventory and sellthrough, revenue, gross margin, operating expenses, profits, forecasts offuture costs and expenditures, the outcome of legal proceedings, and otherexpectations, intentions and plans that are not historical fact.  The risk factors and uncertainties that mayaffect our actual results, performance, achievements or developments are manyand include, amongst others, our ability to develop, manufacture, supply andmarket new products that we do not produce today that meet the needs ofcustomers and gain commercial acceptance, our reliance on the deployment ofnext generation networks by major wireless operators, the continuous commitmentof our customers, increased competition and other risks detailed herein underthe heading “*Risk Factors*”.  Many of these factors and uncertainties arebeyond the control of the Company. Consequently, all forward-looking statements in this Annual InformationForm, or the documents incorporated by reference herein, are qualified by thiscautionary statement and there can be no assurance that actual results,performance, achievements or developments anticipated by the Company will berealized.   Forward-looking statementsare based on management’s current plans, estimates, projections, beliefs andopinions and the Company does not undertake any obligation to updateforward-looking statements should the assumptions related to these plans,estimates, projections, beliefs and opinions change.

## ***CURRENCY***

Unless otherwise indicated, all figures are stated inU.S. dollars.

## ***CORPORATE STRUCTURE***

Unless the context otherwise indicates, references to “we”,“our”, “us”, “the Company”, “the Corporation” or “Sierra Wireless” in thisAnnual Information Form means Sierra Wireless, Inc. and its subsidiaries.

Sierra Wireless was incorporated under the *Canada Business Corporations Act* on May 31, 1993.  The Articles of Sierra Wireless were amendedby a Certificate of Amendment issued March 29, 1999 to remove the privatecompany provisions and restrictions on share transfer.  The Articles of the Company were furtheramended by Certificates of Amendment issued May 13, 1999 and May 14, 1999 to:(i) re-designate and change all existing common shares in the capital of theCompany to new common shares in the capital of the Company (the “Common Shares”);(ii) change the rights attached to all preference 

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shares in the capital ofthe Company (the “Preference Shares”) and to remove each existing series ofPreference Shares; and (iii) consolidate the Common Shares on the basis of onepost-consolidation Common Share for 1.5 pre-consolidation Common Shares.

The Company’s registered and records office is locatedat Suite 2600, Three Bentall Centre, 595 Burrard Street, Vancouver, BritishColumbia, Canada, V7X 1L3 and its head office and principal place of businessis located at 13811 Wireless Way, Richmond, British Columbia, Canada, V6V 3A4.

The following table lists subsidiaries of SierraWireless and their jurisdictions of incorporation or organization.  All such entities are 100% owned, directly orindirectly, by Sierra Wireless.
| Name                                    | ** ** | **Jurisdiction of Incorporation or  Organization** |
|-----------------------------------------|------------|----------------------------------------------------|
| Sierra Wireless  America, Inc.          |       | Delaware, U.S.A.                                   |
| SWMS, Inc.                              |       | California, U.S.A.                                 |
| Sierra Wireless  (UK) Limited           |       | United Kingdom                                     |
| Sierra Wireless  (Asia-Pacific) Limited |       | Hong Kong                                          |

 

## ***GENERAL DEVELOPMENT OF THE BUSINESS***

### **General**

We provide leading edge wireless wide-area modemsolutions for mobile computing.  Wedevelop and market a broad range of products that include wireless modems formobile computers, embedded modules for originalequipment manufacturers, or OEMs, and rugged vehicle-mounted modems.  Our products permit users to access wirelessdata and voice communications networks using laptop computers, handheld mobile computing devices, vehicle-based systems or fixed wireless terminals.

Wirelessdata communications is an expanding market positioned at the convergence ofwireless communications, mobile computing and the Internet, each of which webelieve represents a growing market.  Ourproducts are based on widely deployed cellular technologies and operate on thenetworks of major wireless operators around the world.

Our products areprimarily used by business and government organizations to enable their employeesto access a wide range of applications, including the Internet, e-mail,corporate intranet, remote databases and corporate applications.  We sell our products worldwide, withemphasis on the North American, European and Asia-Pacific regions, through indirect channels, including wirelessoperators, resellers and OEMs.

Throughout 2004 we experienced stronger than expecteddemand primarily as a result of our strong market position in CDMA EV-DORelease 0 PC cards and our CDMA 1X embedded module sales to palmOne. Customerconcentration increased our revenue base during 2004. Following ourconsiderable revenue and earnings growth in 2004, we experienced a significantreduction in our business in 2005 relative to 2004 due to, among other things,increased competition for certain of our PC card products, a reduction inembedded module business volumes as a result of the completion of shipments toa key customer at the end of 2004 and some weakness in our product portfolio.

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In order to address this change in our business, werestructured our operations in June 2005, which included exiting our Voqprofessional phone initiative. Since the mid-2005 restructuring, we havere-focused our business on our core PC card and embedded module segments,including the development of new products and the expansion of markets forthese products. Our launch of several new UMTS/HSDPA and CDMA EV-DO Revision Aproducts resulted in strong revenue growth during 2006. We returned tosequential quarterly revenue growth over the last half of 2005 and the firsthalf of 2006.  During the third quarterof 2006, our revenues decreased slightly compared to the second quarter of2006, as we transitioned our two largest customers to next generation products,which resulted in a slight reduction of sales of existing products to thesecustomers ahead of the launch of the next generation products that occurredlate in the quarter.  In the fourthquarter, we reported record revenue as sales of our recently launched nextgeneration products drove strong sequential revenue growth.  In addition to improving revenue growth, wewere profitable in all four quarters of 2006.

We continue to believe that the long-term growthprospects in the wireless wide area modem solutions for mobile computingindustry remain strong, driven by continued deployment of high speed nextgeneration 3G networks by carriers worldwide. We believe the deployment ofthese networks, combined with active promotion by carriers, will be a catalystto increasing demand for high speed 3G wireless communications products, suchas ours. See “Narrative Description of Business - Our Products” fordiscussion of specific product development initiatives.

### **ThreeYear History**

***Fiscal2006***

·                  We began commercial shipments of 8 new products – the AirCard 595 for EV-DO Revision Anetworks, the AirCard 875 for UMTS/HSDPA 3.6 Mbps networks, the MC5725/MC5725VPCI Express Mini Cards embedded modules (“Mini Card”) for EV-DO Revision Anetworks, the MC8755/8765 Mini Cards for UMTS/HSDPA 1.8 Mbps networks, and theMC8775/MC8775V Mini Cards for UMTS/HSDPA 3.6 Mbps networks.

·                  Wecommenced commercial shipments of our next generation EV-DO Revision A AirCard595 to Sprint and Verizon and launched the AirCard 595 with Telecom NewZealand, the first launch of this product outside the United States.

·                  Wecommenced commercial shipments of our UMTS/HSDPA AirCard 875, the firstcommercially available UMTS/HSDPA 3.6 Mbps network card in the world, toCingular during the third quarter.  Wealso began shipping our UMTS/HSDPA AirCard 860 to Rogers Communications inCanada as well.

·                  InEurope, we launched our AirCard 850 and AirCard 875 with a number of operatorsand resellers.  By the end of the year,we were supplying our UMTS/HSDPA AirCards to debitel in Germany, Bouygues Telecomand Orange in France, O2 and Orange in the UK, Swisscom Mobile and sunrise inSwitzerland, Telefonica in Spain and to other operators in the region.  Wealso commenced commercial shipments of our AirCard 875 to Telstra in Australia.

·                  Weannounced new design wins with several PC OEM customers including:  Lenovo and Hewlett-Packard (“HP”) for bothEV-DO and UMTS/HSDPA products, with Panasonic for EV-DO products, and withFujitsu Siemens Computers, ASUSTeK Computers and Dialogue Technology Corp. forUMTS/HSDPA products.  We also securedadditional design wins with other PC OEM customers.

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·                  We secured several design wins withmanufacturers of fixed wireless terminals for both our EV-DO and UMTS/HSDPAembedded module products, including TELES Communication Systems.

·                  We signed anagreement with Tomen Electronics Corp., a leading distributor of semiconductor,storage and communications components in Japan, which designates Tomen as theprimary distributor for all Sierra Wireless products in Japan.  This agreement marks our formal entry intothe Japanese 3G wireless market.

·                  We announcedthat Digi International introduced the industry’s first commercial-grade EV-DORevision A wireless wide area network router, the ConnectPort WAN VPN, thatintegrates the MC5725 EV-DO Revision A embedded module.

·                  We signed anagreement with M2M Connectivity, a specialist wireless module distributor formachine-to-machine products and applications, for the distribution of our 3Gembedded modules in Australia and New Zealand.

·                  We announcedsupport for Intel Corporation’s 3G-enabled Ultra Mobile PC platform.  We collaborated with Intel to incorporate ourWWAN modules into the UMPC platform architecture, which is designed to provideintegrated wireless 3G connections for ultra-mobile devices.

·                  We introduced the latest additions to our ruggedmobile product line for wireless wide area networks, the MP 595 GPS and the MP875 GPS for 3G networks. The MP 595 for EV-DO Revision A networks and the MP875 for UMTS/HSDPA networks are expected to be in carrier certification andcommercially available by the end of the first quarter of 2007.

·                  We introduced our ExpressCard product line, with theupcoming EV-DO Revision A AirCard 597E. Built for notebook computers with ExpressCard expansion slots, theAirCard 597E is expected to be in carrier certification by the end of the firstquarter of 2007. ExpressCards for use on UMTS/HSDPA networks are expected tofollow later in 2007.

·                  We introduced our AirCard USB Wireless Modems forEV-DO Revision A and UMTS/HSDPA networks, the AC595U and AC875U, respectively.Based on our PCI Express Mini Cards, the compact AirCard USB modems can plugdirectly into the USB ports of both notebook and desktop computers or can beconnected through a docking cradle.  Weexpect both products to be in carrier certification late in the first quarterof 2007 and shipping commercially early in the second quarter of 2007.  We have now secured purchase commitments forthese products from major operators.

·                  Atthe Company’s annual general meeting, our Board of Directors appointed CharlesLevine as the Chairman of the Board.  Mr.Levine replaced Mr. Peter Ciceri as Chairman, who wished to step down from thatposition.  Mr. Ciceri continues as amember of the Board of Directors.

***Fiscal2005***

·                  We began commercial shipments of four new products –the UMTS/HSDPA AirCard 860 and AirCard 850 for North America and Europe,respectively; the MC5720 PCI Express Mini Card for CDMA 1xEV-DO networks; andthe EM5625, an embedded module for CDMA 1xEV-DO networks.

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·                  We commenced commercial shipments of the AirCard 860and AirCard 850 to Cingular in North America, as well as Manx Telecom andsunrise in Europe, making us the first company in the world to launch a fullyfunctional UMTS/HSDPA PC card.

·                  We announced OEM design wins with Lenovo and HP forour MC5720 PCI express Mini Card embedded module for EV-DO networks andcommenced commercial shipments of our EV-DO Mini Card to Lenovo in the fourthquarter of 2005.  Our MC5720 is the world’sfirst 3G wireless minicard module for laptop OEMs.  Early in the first quarter of 2006, HPannounced the availability of their first laptop incorporating our MC5720 MiniCard.  Our MC5720 Mini Card has beencertified for operation on both the Sprint and Verizon EV-DO networks.

·                  We launched the EM5625, an embedded module for CDMA1xEV-DO networks, and it was subsequently selected by Panasonic®, @Road,Itronix, MobileAria, a subsidiary of Delphi Corporation, and AirLink for integrationinto their products.

·                  During 2005, the MC8755 and MC8765 PCI Express MiniCard for UMTS/HSDPA networks in North America and Europe, respectively, becameavailable to OEM customers for testing and integration, and commercialshipments of these products commenced late in the first quarter of 2006. In2005, we secured designs win for our UMTS/HSDPA Mini Cards with Lenovo andFujitsu-Siemens Computers.

·                  We commenced the development of the next generationEV-DO Revision A and 3.6 Mbps UMTS/HSDPA PC cards and Mini Cards, all of whichbecame commercially available in the second half of 2006.

·                  We initiated development of two new next generationversions of our MP product, one for EV-DORevision A and one for UMTS/HSDPA, that we expect be in carrier certificationand commercially available by the end of Q1 2007.

·                  We announced the availability of the AirCard 775wireless wide-area network card from Bouygues Telecom in France and fromGuangdong Mobile Communications Corporation in Guangdong province, China. Inaddition, we signed a distribution agreement with Leaf Wireless (Pty) Ltd. todistribute the AirCard 775 in South Africa and surrounding regions.

·                  In October 2005, Jason Cohenour, previously our COO,was named as our President and CEO.  Mr.Cohenour succeeded David Sutcliffe, who had served as the Company’s CEO since1995 and who had announced his intention to retire earlier in the year. Mr.Sutcliffe, at the request of the Board of Directors, continues to serve thecompany in a non-management capacity as a member of the Board.

·                  We restructured our operations in June of 2005, whichincluded exiting our Voq professional phone initiative.  The result of this restructuring was areduction in our cost structure and a greater focus on our core PC card andembedded modules business.

***Fiscal2004***

·                  We began commercial shipments of six new products –the Voq professional phone, the Sierra Wireless AirCard 580 for CDMA 1X EV-DOnetworks, the AirCard 555R for CDMA networks in Asia, the MP555 for CDMA 1X,the MP775 for EDGE networks and the AirCard 775 for EDGE networks.

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·                  We announced distribution agreements for our CDMAembedded modules with Premier Wireless Solutions and for our CDMA PC cards withTirumala Seven Hills Pvt Ltd in India and Beijing Putian Taili Telecom inChina.  We also announced supplyagreements with Audiovox Communications Corporation for additional supply ofour PC5220 EV-DO PC card and with Symbol Technologies and Verifone for ourEM3420 CDMA 1X embedded modules and we completed shipments of this embeddedmodule product to palmOne at the end of the year.

·                  We announced the availability of the PC3300 and the MP555 GPS rugged wireless modem on the Sprint Nationwide PCS Network.

·                  We announced the availability of the Sierra WirelessAirCard 775 and the MP 775 GPS rugged wireless modem on the Cingular WirelessEDGE network.  We also announced theavailability of the Sierra Wireless AirCard 750 for customers in the UnitedKingdom and in India.

·                  We signed a distribution agreement with OndaCommunication Spa for our EDGE/GPRS N775 PC card.

·                  We announced the commercial availability of the Voqprofessional phone in the Netherlands, Belgium, Luxembourg, Turkey, Austria,Germany, Switzerland, the Nordics, the United Kingdom, Italy, France and Spain.

·                  In North America, we announced the commercialavailability of the Voq professional phone from Brightpoint, Cellstar, membersof Intel’s Product Dealer Program, Insight, MobilePlanet, RCS ComputerExperience and USA.NET.

### **IndustryBackground and Future Trends**

***WirelessData Growth***

We provide a broad range of products includingwireless modems for mobile computers and embedded modules for laptop andvertical OEM wireless applications.  Webelieve that our growth potential is tied, in part, to the projected growth ofthe laptop PC market and to the evolution of wireless networks.  Cellular network technologies such as CDMAEV-DO Revision A and Universal Mobile Telecommunications System (UMTS)/HighSpeed Downlink Packet Access (HSDPA) are expected to support much of thisgrowth.

Market segments for wireless data consist ofcorporations, public organizations and individuals seeking to improve customerservice and productivity.  Increasedcellular network coverage and speeds, significant technological improvements towireless data networks, devices and software, and price reductions for datacommunications services have also contributed to growth in the wireless datacommunications industry. The ability to meet the demand for anytime, anyplacecommunications is made possible by the convergence of trends in mobilecomputing, the growth of the Internet, and wireless communications.

*Mobile Computing. *Manybusiness professionals and individuals utilize laptops as their primarycomputing device.  Smaller handheldcomputers or PDAs continue to be popular, as are newer mobile phones that offermore advanced capabilities, such as access to personal information, Internetand email.  Mobile PCs and handhelddevices continue to be the leading devices that are accessing wireless data.

*The Internet. *TheInternet has become an indispensable tool for many business professionals andindividuals, and the volume of Internet traffic continues to grow rapidly.  Wireline telecommunications

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carriers continue to makesignificant investments in Internet protocol-based networks to handle theexpected growth in the volume of data traffic.

*Wireless Communications. *While wireline communications networks werehistorically dominated by voice traffic, data now comprises more than half ofthe traffic on these networks. A similar evolution is now occurring on wirelessnetworks as wireless service providers address the growing demand for datacommunications with additional technical and commercial offerings.

***ExistingDigital Technologies***

Data communications over cellular networks iscurrently supported by various digital technologies.  Newer, high speed technologies include CDMAEV-DO Revision A and GSM based UMTS/HSDPA.

CDMA is a digital technology that significantlyimproves the capacity and quality of both voice and data communications andsupports a broader range of applications, including voice, wireless Internetand multimedia.  We expect the deploymentof CDMA EV-DO Revision A commercial service, the next generation of EV-DO, willcontinue to expand the market for wireless data products and services.  CDMA Revision A offers theoretical downlinkspeeds of 3.1 Mbps, and theoretical uplink speeds of 1.8 Mbps.  In North America, Sprint and Verizon arewidely deploying CDMA EV-DO Revision A.

Leading GSM carriers in North America, Europe and Asiaare deploying third generation (3G) networks to offer advanced services,including high-speed data, to their customers. 3G systems have been developed and launched to replace and/or complementsecond generation and 2.5G digital cellular systems.

In late 2005, the first networks to upgrade to HighSpeed Downlink Packet Access (HSDPA), were Cingular Wireless in North Americaand Manx Telecom in the United Kingdom (an O2 subsidiary) demonstrating speedsbetween 500-700 kbps with maximum speeds up to 1.8 Mbps.  In North America, Cingular has broad coveragewith the latest generation UMTS/HSDPA networks, and continues to offer upgradeinstallation to take advantage of evolving technology standards.

## ***NARRATIVE DESCRIPTION OF THE BUSINESS***

### **Our Solution**

We provide leading edge wireless wide-area modemsolutions for mobile computing over cellular networks.  We develop and market a broad range ofproducts that include wireless modems for mobile computers, embedded modulesfor OEMs and rugged vehicle-mounted modems. Our products permit users to access wireless data and voicecommunications networks using laptop computers, handheld mobile computing devices, or vehicle-based systems.

### **Our Products**

Our current product line of wireless modem solutionsincludes wide-area wireless AirCard products, embedded modules for OEMcomputers and other devices, vehicle-mounted modems and enabling software.  We have a number of new products underdevelopment within these product lines.

Our professional services team provides OEM customerswith wireless product development support to integrate our wireless wide-areaproducts into their products.

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***SierraWireless AirCard Products***

**PCMCIA PC Cards:** The successful launch of our firstUMTS/HSDPA PC cards, the AirCard 850 and 860, during the fourth quarter of 2005helped us to establish a leadership position with this technology in NorthAmerica and to re-establish our market position in Europe. In North America, webelieve we continue to have a strong position with Cingular with the launch ofour UMTS/HSDPA AirCard 875 during 2006. The AirCard 875 was the firstcommercially available UMTS/HSDPA 3.6 Mbps network card in the world.  During 2006, we began shipping our AirCard860 to Rogers Communications in Canada as well. In Europe, we launched our AirCard 850 and AirCard 875 with a number ofoperators and resellers. By the end of the year, we were supplying UMTS/HSDPAAirCards to debitel in Germany, Bouygues Telecom and Orange in France, O2 andOrange in the UK, Swisscom Mobile and sunrise in Switzerland, Telefonica inSpain and to other operators in the region. We also commenced commercial shipments of our AirCard 875 to Telstra inAustralia.

During 2006, we continued shipments of our EV-DORevision 0 AirCard to several carriers in North America and Asia Pacific,including Sprint.  Also during 2006, wecommenced commercial shipments of our next generation EV-DO Revision A AirCard595 to Sprint, Verizon and Telecom New Zealand.

Our AirCard products are now approved on 35 networksaround the world.

**Express Cards**: During 2006, we announced theintroduction of our ExpressCard product line, with the upcoming EV-DO RevisionA AirCard 597E.  Built for notebookcomputers with ExpressCard expansion slots, the AirCard 597E is expected to bein carrier certification by the end of the first quarter of 2007. ExpressCardsfor use on UMTS/HSDPA networks are expected to follow later in 2007.

**USB Wireless Modems:** During 2006, we announced the additionof wireless modems for USB ports to our product line.  This product will plug into the USB ports ofboth notebook and desktop computers.  Weexpect both the AirCard 595U for EV-DO Revision A networks and the AirCard875U, for use on UMTS/HSDPA networks to be in carrier certification late in thefirst quarter of 2007 and shipping commercially early in the second quarter of2007.  We have now secured purchasecommitments for these products from major operators.

***SierraWireless Embedded Module Products***

With the commencement by multiple leading laptopmanufacturers of embedding high-speed wireless wide area capability insidelaptops, we believe that the opportunity for sales of embedded modules hasincreased significantly. Our experience and track record has allowed us toestablish an early leadership position in providing embedded 3G wirelesssolutions to major laptop OEMs.

We were first to market with UMTS/HSDPA 3.6 Mbps withthe HP nc6400 notebook. We have embedded module design wins with eleven PC OEMcustomers, including Lenovo and HP for both EV-DO and UMTS/HSDPA products, withPanasonic for EV-DO products, and with Fujitsu-Siemens Computers, ASUSTeKComputers and Dialogue Technology Corp. for UMTS/HSDPA products. Itronix, aspecialty laptop manufacturer, also embeds a variety of our products across anumber of airlinks. Six of our PC OEM customers currently have commerciallyavailable products featuring our 3G embedded module solutions, representingapproximately 38 distinct platform and airlink combinations.

In addition to our success with PC OEM customers, wehad strong growth and new design wins with our traditional OEM customers.  We also have secured several design wins withmanufacturers of fixed wireless terminals for both our EV-DO and UMTS/HSDPAembedded module products.

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During 2006, we commenced shipments of our nextgeneration embedded modules, the MC5725 for EV-DO Revision A networks and theMC8775 for UMTS/HSDPA 3.6 Mbps networks. We have secured next generation design wins for UMTS/HSUPA with three ofour existing OEM customers.

The following table outlines ourcurrent product offerings for wireless wide-area network PC cards and embeddedmodules: 
| Product  Type              | ** ** | **Product Class**                                                                                | ** ** | **Description**                                                                                                            | ** ** | **Products** | ** ** | **Compatible  Network/Territory**                                                                                                                                                                                                                                                                                                |
|----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                 |       | ** **                                                                                       |       |                                                                                                                       |       |         |       |                                                                                                                                                                                                                                                                                                                             |
|                            |       |                                                                                             |       | Wide-area wireless modems  providing wireless broadband connectivity for computer users on  HSDPA/UMTS/EDGE/GPRS networks. |       | AirCard 875  |       | Type II PC Card  for use on networks supporting UMTS/HSDPA networks in the 850, 1900 and 2100  MHz frequency bands.Theoretical data rates up to 3.6 Mbps downlink on  UMTS/HSDPA networks. Backwards compatible with UMTS/EDGE/GPRS networks supporting the 850, 900, 1800 and 1900 MHz  frequency bands. Distributed worldwide. |
| ** **                 |       |                       |       |                                                                                                                       |       |         |       |                                                                                                                                                                                                                                                                                                                             |
| **Wireless Network Cards** |       | AirCard® 800 Series                                                                    |       |                                                                                                                       |       | AirCard 860  |       | Type II PC card for use on networks supporting UMTS/HSDPA in the 850  and 1900 MHz frequency bands.Theoretical data rates up to 1.8 Mbps  downlink on UMTS/HSDPA networks. Backwards compatible with EDGE/GPRS/GSM  networks supporting the 850,  900, 1800 and 1900 MHz frequency bands. Primary territory is North America.    |
| ** **                 |       |                  |       |                                                                                                                       |       |         |       |                                                                                                                                                                                                                                                                                                                             |
|                            |       |                                                                                             |       |                                                                                                                       |       | AirCard 850  |       | Type II PC card for use on networks supporting UMTS/HSDPA in the 2100  MHz frequency band. Theoretical  data rates up to 1.8 Mbps downlink on UMTS/HSDPA networks. Backwards  compatible with EDGE/GPRS/GSM networks supporting the 850, 900, 1800 and 1900  MHz frequency bands. Primary territories are Europe and Asia.       |

 

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| Product  Type  | ** ** | **Product Class**                 | ** ** | **Description**                                                                                                                                                                                                                    | ** ** | **Products**  | ** ** | **Compatible  Network/Territory**                                                                                                                                                                                                                                                                                                          |
|----------------|------------|-----------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     |       | ** **                        |       |                                                                                                                                                                                                                               |       |          |       |                                                                                                                                                                                                                                                                                                                                       |
|                |       |                              |       | Wide-area wireless modems  providing wireless broadband connectivity for computer users on CDMA EV-DO  Revision A networks.                                                                                                        |       | AirCard 595   |       | Type II PC card for use on networks supporting CDMA  EV-DO Revision A in the 800 and 1900 MHz frequency bands. Theoretical data  rates up to 3.1 Mbps downlink. Primary territory is North America. New Zealand  is the first launch outside of North America.                                                                             |
|                |       | AirCard® 500  Series    |       |                                                                                                                                                                                                                               |       |          |       |                                                                                                                                                                                                                                                                                                                                       |
|                |       |                              |       | Wide-area wireless modems, providing LAN-like connectivity for computer  users on the CDMA 1X and CDMA EV-DO networks.                                                                                                             |       | AirCard 580   |       | Type II PC card for use on networks supporting CDMA 1X EV-DO and 1XRTT  networks in the 800 and  1900 MHz frequency bands. Theoretical data rates up to 2.4 Mbps  downlink. Territories are North  America and Asia.                                                                                                                       |
|           |       |                              |       |                                                                                                                                                                                                                               |       |          |       |                                                                                                                                                                                                                                                                                                                                       |
|                |       | AirCard® USB 800 Series |       | USB wireless modem providing  wireless broadband connectivity for users on HSDPA/UMTS/EDGE/GPRS networks.  The USB wireless modem plugs directly into any USB port on a laptop to  desktop PC, or via the included docking cradle. |       | Air Card 875U |       | USB modem with tri-band UMTS/HSDPA functionality in  the 850, 1900, and 2100 MHz frequency bands. Theoretical data rates up to 3.6  Mbps downlink. Backwards compatible with EDGE/GPRS/GSM networks supporting the 850,  900, 1800 and 1900 MHz frequency bands. Commercial availability is  expected early in the second quarter of 2007. |
| **USB Modems** |       |                              |       |                                                                                                                                                                                                                               |       |          |       |                                                                                                                                                                                                                                                                                                                                       |
|                |       | AirCard® USB 500 Series |       | USB wireless modem providing  wireless broadband connectivity for users on EV-DO Revision A networks. The USB  wireless modem plugs directly into any USB port on a laptop to desktop PC, or  via the included docking cradle.     |       | Air Card 595U |       | USB modem for use on networks supporting CDMA EV-DO  Revision A in the 800 and 1900 MHz frequency bands. Theoretical data rates up  to 3.1 Mbps downlink. Backwards compatible to CDMA EV-DO Rev 0 and CDMA 1X  networks. Commercial availability is expected early in the second quarter of  2007.                                        |

 

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| Product  Type        | ** ** | **Product Class**   | ** ** | **Description**                                                                                                                                                                                                                                                                                   | ** ** | **Products** | ** ** | **Compatible  Network/Territory**                                                                                                                                                                                     |
|----------------------|------------|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           |       | ** **          |       |                                                                                                                                                                                                                                                                                              |       |         |       |                                                                                                                                                                                                                  |
|                      |       |                |       | Proprietary form factor  embedded modules deliver wireless broadband data and voice connectivity that  OEMs integrate into products ranging from handheld computers, PDAs, laptops,  Smartphones and mobile terminals, to fixed terminals including industrial  meters, and monitoring equipment. |       | EM5625       |       | Dual-band CDMA 1X EV-DO in  the 800 and 1900 MHz frequency bands. Theoretical data rates up to 2.4 Mbps  downlink. Backwards compatible with CDMA 1xRTT and IS-95A/B. Territories are North America, Europe and Asia. |
| **Embedded Modules** |       | EM Embedded Modules |       |                                                                                                                                                                                                                                                                                              |       |         |       |                                                                                                                                                                                                                  |
|                      |       |                |       |                                                                                                                                                                                                                                                                                              |       | EM3420       |       | Dual-band CDMA2000 1X in the 800 and 1900 MHz frequency bands. Theoretical data rates  up to 153.6 Kbps downlink.  Backwards compatible with IS-95I/B. Territories are North America and Asia.                        |

 

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| Product  Type                                                                      | ** ** | **Product Class**                     | ** ** | **Description**                                                                                                                                                                                                                        | ** ** | **Products**   | ** ** | **Compatible  Network/Territory**                                                                                                                                                                                                                                                                                                                  |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                         |       | ** **                            |       |                                                                                                                                                                                                                                   |       |           |       |                                                                                                                                                                                                                                                                                                                                               |
|                                                                                    |       |                                  |       | Embedded 3G wireless modules based on the PCI  Express Mini Card form factor and interface specification. The MC87XX series  delivers HSDPA/UMTS/EDGE/GPRS wireless voice and data capability to laptop  OEMs and other manufacturers. |       | MC8775/MC8775V |       | Tri-band PCI Express Mini Card for use on UMTS/HSDPA  networks supporting the 850, 1900 and 2100 MHz frequency bands. Theoretical  data rates up to 3.6 Mbps downlink. Backwards compatible with EDGE/GPRS/GSM  networks supporting the 850, 900, 1800, and 1900 MHz frequency bands. Primary  territories are North America and Europe.           |
| **           **             |       |                                  |       |                                                                                                                                              |       |           |       |                                                                                                                                                                                                                                                                         |
|                                                                                    |       | MC8700 Series PCI Express Mini  Cards |       |                                                                                                                                                                                                                                   |       | MC8765         |       | Dual-band PCI Express Mini Card for use on UMTS/HSDPA networks  supporting the 850 and 1900 MHz frequency bands. Theoretical data rates up to  1.8 Mbps downlink. Backwards compatible with quadband EDGE/GSM/GPRS networks on supporting the  850, 900, 1800 and 1900 MHz frequency bands. Primary territory is North  America.                   |
| **             ** |       |                                  |       |                                                                                                                                                                                                                                   |       |           |       |                                                                                                                                                                                                                                                                                                                                               |
|                                                                                    |       |                                  |       |                                                                                                                                                                                                                                   |       | MC8755         |       | Dual-band PCI Express Mini Card for use on UMTS/HSDPA networks  supporting the 2100 MHz frequency band. Theoretical data rates up to 1.8 Mbps  downlink. Backwards compatible with quadband EDGE/GSM/GPRS networks supporting the 850,  900, 1800 and 1900 MHz frequency bands. Primary territories are Europe, the  Middle East, Africa and Asia. |

 

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| Product  Type | ** ** | **Product Class**                     | ** ** | **Description**                                                                                                                                                                                                                                           | ** ** | **Products**   | ** ** | **Compatible  Network/Territory**                                                                                                                                                                                                                                                                              |
|---------------|------------|---------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **    |       | ** **                            |       |                                                                                                                                                                                                                                                      |       |           |       |                                                                                                                                                                                                                                                                                                           |
|               |       |                                  |       | Embedded 3G wireless modules based on the PCI  Express Mini Card form factor and interface specification. The MC5700 series  delivers CDMA EV-DO Revision A and CDMA 1X EV-DO wireless voice and data  capability to laptop OEMs and other manufacturers. |       | MC5725/MC5725V |       | Dual-band PCI Express Mini Card for use on  CDMA EV-DO Revision A networks supporting the 800 and 1900 frequency  bands. Theoretical data rates up to 3.1 Mbps downlink. Backwards compatible  with CDMA 1X EV-DO Release 0, 1XRTT and IS-95 networks. Territories are primarily North America and  Asia. |
|               |       | MC5700 Series PCI Express Mini  Cards |       |                                                                                                                                                                                                                                                      |       |           |       |                                                                                                                                                                                                                                                                                                           |
|               |       |                                  |       |                                                                                                                                                                                                                                                      |       | MC5720         |       | Dual-band PCI  Express Mini Card for use on CDMA 1X EV-DO networks supporting the 800 and  1900 freqency bands. Theoreticaly data rates up to 2.4 Mbps downlink.  Backwards compatible with 1XRTT and IS-95 networks. Primary territories are North America and Asia.                                          |

 

***Sierra Wireless RuggedMobile Modem Product Line***

TheSierra Wireless rugged mobile product line consists of rugged, intelligent,vehicle-mounted modems that are sold to public safety and field serviceorganizations. Generally, these products are mounted in a vehicle and arephysically connected to a computer or data terminal. The rugged mobile productline is designed to operate in harsh conditions, including extremes oftemperature, humidity, vibration and vehicle ignition noise. Our MP productscome with fully integrated global positioning system, or GPS, capability as astandard feature.  The MP 555 GPSoperates on CDMA 1X networks in North America. We have developedtwo new next generation versions of our MPproduct, the MP 595 for EV-DO Revision A and the MP 875 for UMTS/HSDPA 3.6 Mbpsnetworks, which we expect to be in carrier certification and commerciallyavailable by the end of Q1 2007.  Oncethese products are launched, we expect this part of our business to grow andpositively impact our financial results.

***Enabling Software***

Our line of software allows ourmodems and devices to work with laptop and handheld computers and otherdevices:

·                  *SierraWireless WatcherTM**Software* is agraphical user interface designed for everyday use with our modems. While themodem is in use, the Watcher program provides ongoing information onregistration status and signal strength and allows the user to switch operatingmodes where applicable. Sierra Wireless Watcher supports all major PC andhandheld Windows-based operating systems.

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·                  *Developer’sCentral, including Sierra Wireless Software Development Kits*, provide tools andinformation that support developers in their integration of Sierra Wirelessproducts into applications.  Using thesetools, developers can include important modem status information into their ownuser interface.  This level of integrationsupports easy-to-use, complete bundled solutions.

·                  *MPModem Manager* is a feature-rich, web based diagnostic softwaremanagement tool allowing network administrators access to remote monitoring andconfiguration of a fleet of MP modems.

***Professional Services***

Our professional services team offers a variety ofproduct development and integration support services including the following:

·                  Software and hardware integration

·                  Platform RF testing and optimization

·                  Satimo chambers to provide fast and reliable RF measurements

·                  Regulatory approvals services

·                  Mobile operator certification services

·                  Project management

·                  Sales and technical support training

***Customer Support***

We provide customers, wirelessoperators and other channel partners with product and technical support inseveral languages using telephone, e-mail and our Web site. Online resourcesinclude product documentation, technical specifications, frequently askedquestions, application notes, troubleshooting notes, troubleshooting tools, andsoftware downloads.

***Product Revenue***

Ourrevenue by product for the years ended December 31 for each of 2005 and 2006 isas follows:
|                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| PC  card          |       | 70       | %          | 71       | %          |
| Embedded  modules |       | 13       |       | 24       |       |
| Mobile            |       | 13       |       | 3        |       |
| Other             |       | 4        |       | 2        |       |
|              |       | 100      | %          | 100      | %          |

 

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***Future Products***

We continually evaluate anddevelop new products and technologies that will allow us to take advantage ofthe ever expanding and dynamic wireless market. Emerging wireless standards that are areas of significant new productdevelopment interest for us include:

·                  HSUPA: HSUPA offerstheoretical speeds of up to 7.2 Mbps downlink and increased up link speedsof up to 2 Mbps. Our plan is to introduce new products during 2007 thatincorporate HSUPA technology.  We expectto launch the AirCard 880 and AirCard 881 PC Cards, the AirCard 880E andAirCard 881E ExpressCards, and the MC8780 and MC8781 PCI Express Mini Cardembedded modules during 2007.  Theseproducts offer tri-band UMTS/HSDPA and quad-band GPRS/EDGE network access forroaming on high-speed networks worldwide.

·                  UMTS/HSDPA: Next generation 7.2 MbpsHSDPA offers theoretical down link speeds of up to 7.2 Mbps.  UMTS/HSDPA is an evolutionary path forGSM/GPRS, TDMA, EDGE and UMTS networks. Welaunched our first UMTS/HSDPA AirCard and Mini Card modules in 2005 andlaunched additional products in 2006. Our plan is to continue to introduce newproducts during 2007 that support the UMTS/HSDPA airlink.  These new products include our rugged mobileMP 875 for UMTS/HSDPA networks that we expect to be in carrier certificationand commercially available by the end of the first quarter of 2007.  Our new wireless modem for USB ports, theAirCard 875U, is expected to be shipping commercially early in the second quarterof 2007, and our ExpressCards, for use on UMTS/HSDPA networks, are expected tofollow later in 2007.

·                  EV-DO: As EV-DO deployments continue, newer upgrades are being developed toenhance the capabilities and experience for end-users. CDMA 1X EV-DO Release 0is an evolutionary path for CDMA IA95 and CDMA 1X networks. EV-DO Revision A brings significant uplink anddownlink speed advantages to EV-DO Release 0 networks.  We launched our EV-DO Revision A PC cards andMini Cards in 2006.  In addition, weexpect an EV-DO Revision A versionof our MP product to be in carrier certification and commercially available bythe end of the first quarter of 2007.

### **Product Development**

We have built areputation in the wireless data industry for creating state-of-the-art,high-quality products within aggressive timeframes. Our development team ofapproximately 148 full time employees, located in Richmond, BC and in Carlsbad,CA, are skilled in the areas of radio frequency, hardware, embedded software,windows software and mechanical design. Combined, this team has several hundredperson years of experience in the design of small form factor wireless data andvoice devices. Our product development team combines leaders with extensiveexperience in their fields, with younger graduates from leading universities.

We take a “core team” approachto product development.  Our goal isdevelop a “whole” product and to ensure products are managed closely throughouttheir entire life cycle. As part of this approach, individuals from our productdevelopment group form product-specific teams with staff from other functionalareas, including product management, operations, technical support andquality.  These teams work closely tobring new products through the development phase, while balancing the marketrequirements of performance, time to market and product cost. Concepts andprototypes are validated by working with lead customers, channel partners andindustry consultants.  From time to time,projects are outsourced to third parties, which provides product developmentleverage for our core teams.

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Products that result from thisprocess are designed and tested to cellular industry standards and introducedto our high-volume contract manufacturing partners for production and deliveryto our customers. Included in the development effort is the certification ofour products with industry and regulatory standards bodies and wirelessoperators.

A group of senior engineersdevelops and monitors our development processes. These processes are appliedacross all development projects to ensure uniformity. For example, we haveadopted a core-wireless engine design approach to leverage development effortsacross multiple different products. This is also intended to help our customersto utilize our different products with moderate additional integration efforton their part.

Our product development staffstays current in technology by participating in industry groups such as thePersonal Computer Communications Association (PCCA), the CellularTelecommunications Industry Association (CTIA), the Mobile Advisory Council(MAC), the USB Forum, the PCI Special Interest Group (PCI-SIG), the EuropeanTelecommunications Standards Institute (ETSI), the PCS Type CertificationReview Board (PTCRB), the Third Generation Partnership Project (3GPP), theThird Generation Partnership Project 2 (3GPP2) and the International WirelessPackaging Consortium, and through ongoing technical education.  We maintain close relationships with localuniversities by hiring co-op students, giving lectures, supporting visitingprofessorships and participating in regular informal meetings with facultymembers.

### **Distribution**

Our products are used by avariety of end-users, ranging from sales people and mobile executives, topolice officers and utility workers. We have built a distribution channel thatresponds to the unique purchasing and usage requirements of our customerbase.  Historically, a substantialmajority of our sales have come from North American markets.  As our wireless technology platforms havediversified, we have built sales and distribution teams to focus on developingour business outside of North America. Currently, we have dedicated sales and distribution teams for theEurope, Middle East and Africa (“EMEA”), Asia-Pacific and North Americanregions.  Our approach to distributiontakes advantage of our existing relationships with wireless operators,resellers and OEMs in order to maximize the productivity of our sales team.

***Wireless Operators***

Wireless operators play two keyroles in our distribution strategy. First, wireless operators are often resellers for us, purchasing ourproducts and then reselling them to end-user customers.  Second, the wireless operator sales teamoften works with our sales team to jointly sell wireless solutions and ourequipment to the end-user customers.  Thewireless operator channel provides us with extended customer reach, while theoperators are able to leverage our wireless data expertise to help sell theirproducts and services.  We have investeda great deal of time and resources in cultivating our relationships withwireless operators and view these relationships as a critical success factor.

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***Resellers***

Resellerspurchase our products either directly from us or from a distributor and resellthem to carriers and end-user customers. In order to support resellers who prefer to purchase through adistributor, we have selectively formed distribution relationships.  Distributors ensure that our products areavailable to a large number of resellers that buy products.

Resellers generally combine ourproducts with other elements of an overall solution, such as computer hardware,application software and bundled communication services and deliver a completesolution to the end-user customer. Resellers include computer resellers,wide-area network resellers, application developers and system integrators.

***Original Equipment Manufacturers (OEMs)***

Original equipment manufacturersrepresent companies that integrate our modem technology into devices theymanufacture and sell to end-user customers through their own direct sales forceand indirect distribution channels.  Ourmodems have been integrated into a range of devices, such as laptops,industrial handheld computers, wireless routers, PDAs and Smartphones.

### **Marketing**

Our marketing team isresponsible for providing product management, strategic marketing and marketingcommunications for our products on a global basis.  Members of the product management team playan active role in our core team approach to developing and managing individualproducts through their entire product life cycle.  Emphasis is placed on understanding customerneeds, developing the business case, determining competitive positioning andpricing, and ensuring product completeness, which includes documentation,promotional material and marketing programs.

***Strategic Marketing/Marketing Communications***

We communicate our corporate andproduct positioning to channels and customers in our global markets in severalways, including:

·            Actively seeking editorial coverage andplacing advertisements in industry, business and trade publications;

·            Activelyparticipating in industry associations;

·            By meeting withopinion leaders and industry analysts; and

·            Participating in targeted conferences and trade shows.

Wework with our channel partners to develop programs to encourage end-usercustomer adoption.  Through marketingstrategies including market analysis, branding, design, packaging andpromotions, we  launch products into themarketplace that complement customer launch timelines.

### **Manufacturing**

We outsource most of ourmanufacturing services, including parts procurement, kitting, assembly andrepair. We believe that outsourcing allows us to:

·            Focus on our corecompetencies, including research and development, sales and marketing;

·            Participate incontract manufacturer economies of scale;

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·            Access highquality, lower cost manufacturing resources;

·            Achieve rapidproduction scalability; and

·            Reduce equipment capital costs and equipmentobsolescence risk.

In addition, we perform certainmanufacturing related functions in-house, including key component sourcing,manufacturing engineering, and development of manufacturing test procedures andfixtures.

Our products are currentlymanufactured by Flextronics and Creation Technologies.  We use Flextronics as our primary contractmanufacturer and logistics partner to provide an end-to-end supply chainsolution.  This includes design support,procurement, low cost manufacturing and repair in China and fulfillmentservices from Memphis, Tennessee and Zalaegerszeg, Hungary.  By using its fully integrated supply chainservices, we expect to optimize product costs, improve alignment with ourincreasingly international customer base and achieve increased operatingefficiencies and scalability.  We expectthat Creation Technologies in Canada will continue to assemble our lower unitvolume products.

### **Employees**

As of December 31, 2006 we had atotal of 268 full time employees, 156 of whom are at our head office inRichmond, B.C., with the balance being located across the United States,Canada, Europe and Asia. Of the 268 employees, 148 are involved in productdevelopment, 39 are involved in manufacturing, 30 are sales and supportpersonnel, 15 are marketing personnel, and 36 are in finance andadministration. Employees have access to corporate-funded ongoing training andprofessional development opportunities, both on-the-job and through outsideeducational programs. Cash compensation, our employee stock option plan, ouremployee stock purchase plan and our retirement plan contribution program arecomplemented by internal recognition programs and career advancement opportunities.We believe our relationships with our employees are positive.

We have entered intonon-disclosure agreements and confidentiality agreements with key managementpersonnel and with substantially all of our employees.

### **Competition**

WirelessWide Area Network (WWAN) technology is making its way to the mainstreampopulation.  WWAN advertisements areappearing on television, in magazines, newspapers, train stations and airportsaround the world.  Adoption is reaching alevel that more competitors are entering the market and some of thesecompetitors are large corporations with strong manufacturing scale andfinancial resources at their disposal. The technology is still quickly evolving with faster and more efficientairlink technologies being released by chipset manufacturers.  This evolution creates an opportunity for usto differentiate ourselves by being first to market with qualityimplementations of these new airlinks.

*UMTS/HSDPA:* We have aggressivelyre-entered the UMTS/HSDPA market and have established a technology leadershipposition by being first to market with our UMTS/HSDPA PC cards and embeddedmodules in both North America and Europe. In North America our competitors are Option,  Novatel Wireless and Pantech &Curitel.  In Europe, our competitors includeOption, Novatel Wireless, ZTE and Huawei. In the Asia-Pacific region, our main competitors are Option, ZTE andHuawei.

*CDMA:* We have maintained a strong position in CDMAwith competition coming from Novatel Wireless, Kyocera Wireless Corp. and Pantech& Curitel.  With the release of theAirCard 595 for EV-DO Revision A networks, we believe that we have been able tomaintain a strong position at Sprint, Telecom New Zealand

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and Telus and havealso returned to the Verizon channel. ZTE has also entered the CDMA market in the Canadian and Latin Americanmarkets.

Bymaintaining our first/early to market strategy of delivering high performancequality products and superior service to both operator and OEM customers, webelieve that we will continue to grow our market share and take advantage ofthe increasing overall market size for WWAN products.  In the future we expect to see new airlinks,such as WiMax, that will continue to offer more opportunity for differentiationin the market.

### **Intellectual Property**

We protect our intellectual property through acombination of patent protection, copyright, trademarks, trade secrets,licenses, non-disclosure agreements and contractual provisions. We enter into anon-disclosure and confidentiality agreement with each of our employees,consultants and third parties that have access to our proprietarytechnology.  Pursuant to assignment ofinventions agreements, all of our employees and consultants assign allintellectual property rights in the inventions created during such person’semployment or contract with Sierra Wireless to Sierra Wireless.

We currently hold 51 United States patents and 77international patents. Additional patent applications are pending. When weconsider it to be advantageous, we utilize our intellectual property portfolioand access the intellectual property of third parties by entering intocommercial licenses and cross-licenses.

### **GovernmentalRegulation**

Our products are subject to certain mandatoryregulatory approvals in the United States, Canada, the European Union (EU) andother regions in which we operate. In the United States, the FederalCommunications Commission regulates many aspects of communications devices,including radiation of electromagnetic energy, biological safety and rules fordevices to be connected to the telephone network. In Canada, similarregulations are administered by the Ministry of Industry, through IndustryCanada. European Union directives provide the comparable regulatory guidance inEurope.

Wireless modems must be approved under theseregulations by the relevant government authority prior to these products beingoffered for sale. We have obtained all necessary Federal CommunicationsCommission, Industry Canada, European Union and other required regulatoryapprovals for the products we currently sell.

### **AdditionalInformation Concerning Our Business**

Our operations do not have a significant impact uponthe environment.  We have not made, andare not required to make, any significant capital expenditures to comply withenvironmental regulations.  Working withthe contract manufacturers who build our products and relevant componentsuppliers, we intend to ensure that our products that are sold in the EU complywith the EU directives that restrict the use of certain hazardous substances inelectronic equipment sold in the EU after July 1, 2006.  Sierra Wireless is in compliance with all EUenvironmental directives.

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***RiskFactors***

Ourbusiness is subject to significant risks and past performance is no guaranteeof future performance.  Some of the riskswe face are:

**We haveincurred net losses and if our efforts to restore the business to sustainedprofitability are not successful, we may be required to further restructure ortake other actions and our share price may decline.**

During 2006, our netearnings were $9.8 million.  However, asa result of the reduction in our business in 2005, we incurred a loss of $36.5million in that year. Our accumulated deficit at December 31, 2006 was $73.1million. While we had earnings from operations for each of the two years endedDecember 31, 2004 and 2003, we incurred a loss from operations in each of thethree fiscal years 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.While we have returned to profitability for five sequential quarters, if wecannot sustain 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 not be onacceptable terms. We may seek to raise additional capital through an offeringof common shares, preference shares or debt, which may result in dilution, and/orthe issuance of securities with rights senior to the rights, of the holders ofcommon shares. As a result, our share price may decline.

**Our quarterly financial results are subject tofluctuations that could affect the market price of our common shares.**

Our revenues, gross margin and earnings may vary from quarter toquarter and could be significantly impacted by a number of factors, including:

·      Transition periods associated with the migration ofnew technologies;

·      The development and timing of the introduction of ournew products;

·      The securing of channel slots for new products;

·      The timing of sales orders and OEM and carriercustomer sell through;

·      Design win cycles in our embedded module business;

·      The achievement of milestones related to our professionalservices contracts;

·      The amount of inventory held by our channel partners;

·      Price and product competition from our competitors,which may result in lower selling prices for some of our products;

·      Possible cyclical fluctuations related to the evolutionof wireless technologies;

·      Product mix of our sales.  Our products have different gross margins –for example the embedded module product line has lower gross margins than thehigher margin rugged mobile product line;

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·      Possible delays in the manufacture or shipment ofcurrent or new products;

·      Possible increased inventory levels;

·      Concentration in our customer base;

·      Possible delays or shortages in component supplies;and

·      Possible product quality or factory yield issues thatmay increase our cost of goods sold.

Becauseour operating 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, gross marginand earnings in any given quarter. Therefore, our quarterly results are notnecessarily indicative of our overall business, results of operations andfinancial condition.

Quarterlyvariations in operating results or any of the other factors listed above,changes in financial estimates by securities analysts, or other events orfactors may result in wide fluctuations in the market price of our stock price.In addition, the financial markets have experienced significant price andvolume fluctuations that have particularly affected the market prices of equitysecurities of many technology companies and that often have been unrelated tothe operating performance of these companies or have resulted from the failureof the operating results of such companies to meet market expectations in aparticular quarter. Broad market fluctuations or any failure of the Company’soperating results in a particular quarter to meet market expectations mayadversely affect the market price of our common shares.

**We are subject to, and may in the future be subject to,certain class action lawsuits, which if decided against us, could require us topay substantial judgments, settlements or other penalties.**

Inaddition to being subject to litigation in the ordinary course of business, weare currently, and may in the future be, subject to class actions and othersecurities 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 ourobligations to indemnify officers and directors who may be parties to suchactions, could materially adversely affect our cash position. We do not know ifany of this type of litigation and resulting expenses will be covered byinsurance. In addition, these lawsuits may cause our insurance premiums toincrease in future periods.

**Competition from new orestablished wireless communication companies or from those with greaterresources may prevent us from increasing or maintaining our market share andcould result in price reductions and reduced revenues and gross margins.**

The wireless communications industry is subject to rapidtechnological change, meaning that the wireless technology standardscontinually evolve, and there are frequent product introductions and shortproduct life cycles.  The wirelesscommunications industry is highly competitive and we expect competition to increaseand intensify. More established and larger companies with greater financial, technical and marketing resources sell products that compete with oursand we expect this competition to intensify. We also may introduce new productsthat will put us in direct competition with major new competitors. Existing orfuture competitors may be able to respond more quickly to technologicaldevelopments and changes and introduce new products before we do, or mayindependently develop and patent technologies and products that are superior toours or achieve greater acceptance due to factors such as more favorablepricing or more efficient sales channels. If

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we are unable to compete effectively with ourcompetitors’ pricing strategies, technological advances and other initiatives,we may lose customer orders and market share and we may need to reduce theprice of our products, resulting in reduced revenue and reduced gross margins.

**The loss of any of our material customers could adversely affect ourrevenues and profitability, and therefore shareholder value.**

Wedepend on a small number of customers for a significant portion of our revenuesas the Company sells most of its products through network carriers, resellersand OEMs rather than directly to end user customers. Many of these carriers andresellers also sell products of our competitors.  Accordingly, our business and future successdepends on our ability to build on existing relationships and establish anddevelop new relationships with network carriers and resellers.

Inthe three months ended December 31, 2006, two customers individually accountedfor more than 10% of our revenue and, in the aggregate, these two customersrepresented 37% of our revenue. In the last three fiscal years, there have beenfour different customers that individually accounted for more than 10% of ourrevenues. In the year ended December 31, 2006, two customers individuallyaccounted for more than 10% of our revenue and, in the aggregate, these two  customersrepresented 40% of our revenue. If any of these customers, for any reason,discontinues their relationship with us or reduces or postpones current orexpected purchase orders for products or suffers from business failure, ourrevenues and profitability could decline, perhaps materially.

Inaddition, our current customers purchase our products under stand-alonepurchase orders. Our customers have no contractual obligation to continue topurchase our products following our fulfillment of current purchase orders andif they do not continue to make purchases, our revenue and our profitabilitycould decline, perhaps materially.

**If demand for our current products declines and we are unable to launchsuccessful new products, our revenues will decrease.**

Ifthe markets in which we compete fail to grow, or grow more slowly than we currentlyanticipate, or if we are unable to establish markets for our new products, itwould significantly harm our business, results of operations and financialcondition. In addition, demand for one or all of our current products coulddecline as a result of competition, technological change or other factors.

**We may have difficulty responding to changing technology, industrystandards and customer requirements, which could cause us to be unable torecover our research and development expenses and our revenues could decline.**

Thewireless communications industry is subject to rapid technological change. Ourbusiness and future success will depend, in part, on our ability to accuratelypredict and anticipate evolving wireless technology standards and develop productsthat keep pace with the continuing changes in technology, evolving industrystandards and changing customer and end-user preferences and requirements. Ourproducts embody complex technology that may not meet those standards,preference and requirements. Our ability to design, develop and commerciallylaunch new products depends on a number of factors, including, but not limitedto the following:

·    Our ability to attract andretain skilled technical employees;

·    The availability of criticalcomponents from third parties;

·    Our ability to successfullycomplete the development of products in a timely manner;

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·    The ability of third parties tocomplete and deliver on outsourced product development engagements; and

·    Our ability to manufactureproducts 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 and developmentexpenses, and may result in a decrease in the market price for our shares.

In addition, wireless communications service providers require thatwireless 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 may not be able to continue to design products that meetour customer needs and, as a result, our revenue and profitability maydecrease.**

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 meet our customers’ future needs, we may not win their future business andour revenue and profitability may decrease.

**We depend on a limited number of third parties to manufacture ourproducts and supply key components. If they do not manufacture our productsproperly or cannot meet our needs in a timely manner, we may be unable tofulfill our product delivery obligations and our costs may increase, and ourrevenue and margins could decrease.**

Weoutsource the manufacture of our products to a limited number of third partiesand depend heavily on the ability of these manufacturers to meet our needs in atimely and satisfactory manner. Some components used by us may only beavailable 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 of guaranteedmanufacturing capacity;

·    Reduced control over deliveryschedules, production yields and costs; and

·    Inability to control the amountof 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 employment agreementswith our key personnel and the loss of any key personnel may harm our abilityto compete effectively.**

None of our executiveofficers or other key employees has entered into a fixed-term employmentagreement. Our success depends in large part on the abilities and experience ofour executive

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officers and other keyemployees. Competition for highly skilled management, technical, research anddevelopment and other key employees is intense in the wireless communicationsindustry. We may not be able to retain our current executive officers or keyemployees and may not be able to hire and transition in a timely mannerexperienced and highly qualified additional executive officers and keyemployees as needed to achieve our business objectives. The loss of executiveofficers and key employees could disrupt our operations and our ability tocompete effectively could be adversely affected.

**We depend on wireless network carriers to offer acceptable wirelessdata and voice communications services for our products to operate.**

Ourproducts can only be used over wireless data and voice networks operated bythird parties. Our business and future growth depends, in part, on thesuccessful deployment by network carriers of next generation wireless data andvoice networks and the network carriers’ ability to grow their subscriberbase.  If these network carriers delaythe deployment of next generation networks or fail to offer effective andreliable service, or fail to price and market their services effectively, salesof our products will decline and our revenues will decrease.

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

As part of our business strategy, we have acquiredand may continue to acquire additional assets and businesses principallyrelating to or complementary to our current operations. Any acquisitions and/ormergers by us will be accompanied by the risks commonly encountered in acquisitionsof companies. These risks include, among other things:

·    Exposure to unknown liabilities of acquiredcompanies, including unknown litigation related to acts or omissions of ouracquired company and/or its directors and officers prior to the acquisition;

·    Higher than anticipated acquisition and integration costs and expenses;

·    Effects of costs and expenses of acquiring andintegrating new businesses on our operating results and financial condition;

·    The difficulty and expense of integrating the operations and personnel ofthe companies;

·    Disruption of our ongoing business;

·    Diversion of management’s time and attention away fromour remaining business during the integration process;

·    Failure to maximize our financial and strategicposition by the successful incorporation of acquired technology;

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

·    The loss of key employees and customers as aresult of changes in management;

·    The incurrenceof amortization expenses; and

·    Possible dilutionto our shareholders if the purchase price is paid in common shares orsecurities convertible into common shares.

In addition,geographic distances may make integration of businesses more difficult. We maynot be successful in overcoming these risks or any other problems encounteredin connection with any acquisitions. If realized, these risks could reduceshareholder value.

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**We may infringe the intellectual property rights of others.**

Theindustry in which we operate has many participants that own, or claim to own,proprietary intellectual property. In the past we have received, and in thefuture may receive, claims from third parties alleging that we, and possiblyour customers, violate their intellectual property rights. Activity in thisarea by third parties, particularly those with tenuous claims, is increasing,resulting in the Company taking a more aggressive approach, which may result inincreased litigation.  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, and maychoose 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 liable for potentiallysubstantial damages, liabilities and litigation costs, including attorneys’fees;

·    We may be prohibited fromfurther use of the intellectual property and may be required to cease sellingour products that are subject to the claim;

·    We may have to license the thirdparty intellectual property, incurring royalty fees that may or may not be oncommercially reasonable terms. In addition, there is no assurance that we willbe able to successfully negotiate and obtain such a license from the thirdparty;

·    We may have to develop a non-infringing alternative,which could be costly and delay or result in the loss of sales. In addition, there is no assurance that we willbe able to develop such a non-infringing alternative;

·    The diversion of management’sattention and resources;

·   Our relationships with customersmay be adversely affected; and

·    We may be required to indemnifyour customers for certain costs and damages they incur in such 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 maybe materially 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 mayprovide indemnification to our customers for potential intellectual propertyinfringement claims for which we may have no corresponding recourse against ourthird party licensors. This potential liability, if realized, could materiallyadversely affect our business, operating results and financial condition.

**Misappropriation of our intellectual property could place usat a competitive disadvantage**.

Ourintellectual property is important to our success. We rely on a combination ofpatent protection, copyrights, trademarks, trade secrets, licenses,non-disclosure agreements and other contractual agreements to protect ourintellectual property. Third parties may attempt to copy aspects of our

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productsand technology or obtain information we regard as proprietary without ourauthorization. If we are unable to protect our intellectual property againstunauthorized use by others it could have an adverse effect on our competitiveposition.

Ourstrategies to deter misappropriation could be inadequate due to the followingrisks:

·    Non-recognition of the proprietary natureor inadequate protection of our methodologies in the United States, Canada orforeign countries;

·    Undetectedmisappropriation of our intellectual property;

·    The substantial legal and othercosts of protecting and enforcing our rights in our intellectualproperty; and

·    Development of similartechnologies by our competitors.

Inaddition, we could be required to spend significant funds and our managerialresources could be diverted in order to defend our rights, which could disruptour operations.

**As our business expandsinternationally, we will be exposed to additional risks relating tointernational operations.**

Our expansion intointernational operations exposes us to additional risks unique to suchinternational markets, including the following:

·    Increased credit management risks andgreater difficulties in collecting accounts receivable;

·    Unexpected changes in regulatoryrequirements, wireless communications standards, exchange rates, tradingpolicies, tariffs and other barriers;

·    Uncertainties of laws and enforcementrelating to the protection of intellectual property;

·    Language barriers; and

·    Potential adverse tax consequences.

Furthermore, if we are unableto further develop distribution channels in Europe and the Asia-Pacific regionwe may not be able to grow our international operations and our ability toincrease our revenue will be negatively impacted.

**Government regulation couldresult in increased costs and inability to sell our products.**

Ourproducts are subject to certain mandatory regulatory approvals in the UnitedStates, Canada, the European Union and other regions in which we operate. Inthe United States, the Federal Communications Commission regulates many aspectsof communications devices. In Canada, similar regulations are administered bythe Ministry of Industry, through Industry Canada. European Union directivesprovide comparable regulatory guidance in Europe. Although we have obtained allthe necessary Federal Communications Commission, Industry Canada and otherrequired approvals for the products we currently sell, we may not obtainapprovals for future products on a timely basis, or at all. In addition,regulatory requirements may change or we may not be able to obtain regulatoryapprovals from countries other than the United States and Canada in which wemay desire to sell products in the future.

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**Fluctuations in exchange rates between the United States dollar andother currencies, including the Canadian dollar may affect our operatingresults.**

Weare exposed to fluctuations in the exchange rate between the United Statesdollar and the Canadian dollar through our operations in Canada. To reduce ourrisk because of currency fluctuations, we purchase inventory, other cost ofsales items and many of our services in United States dollars. If the Canadiandollar rises relative to the United States dollar, our operating results may benegatively impacted. To date, we have not entered into any foreign currencyfutures contracts as part of a hedging policy. We expect that as our businessexpands in Europe and the Asia-Pacific region, we will also be exposed toadditional foreign currency transactions and to the associated currency risk.To date, we have not entered into any futures contracts.

## ***DIVIDENDS***

Since incorporation, we have not paid any dividends onour common shares.  Our current intentionis to reinvest earnings to finance the growth of our business.  We do not anticipate that we will pay anydividends on our common shares in the immediate or foreseeable future.

## ***DESCRIPTION OF CAPITAL STRUCTURE***

Our authorized capital consists of an unlimited numberof common shares, of which, at March 21, 2007, 25,731,616 are issued andoutstanding, and an unlimited number of preference shares, issuable in series,of which none are issued and outstanding. Our board of directors is authorized to determine the designation,rights and restrictions to be attached to the preference shares upon issuance.

Holders of common shares are entitled to receivenotice of any meeting of shareholders and to attend and vote at those meetings,except those meetings at which only the holders of shares of another class orof a particular series are entitled to vote. Each common share entitles its holder to one vote.  Subject to the rights of the holders ofpreference shares, the holders of common shares are entitled to receive on aproportionate basis such dividends as our board of directors may declare out offunds legally available therefor.  In theevent of the dissolution, liquidation, winding up or other distribution of ourassets, the holders of the common shares are entitled to receive on aproportionate basis all of our assets remaining after payment of all of our liabilities,subject to the rights of holders of preference shares.

The common shares carry no pre-emptive or conversionrights other than rights granted to holders of common shares under theShareholders Rights Plan implemented and ratified by our shareholders on April27, 2000 and re-adopted by our shareholders on April 28, 2003 and April 25,2006.  The Shareholder Rights Plan isdesigned to encourage the fair treatment of our shareholders in connection withany take-over offer for our outstanding common shares.  The Shareholder Rights Plan provides ourboard of directors and shareholders with 45 days, which is longer than providedby applicable laws, to fully consider any unsolicited take-over bid withoutundue pressure, to allow our board of directors, if appropriate, to considerother alternatives to maximize shareholder value and to allow additional timefor competing bids to emerge.  If a bidis made to all shareholders, is held open for at least 45 days and is acceptedby shareholders holding more than 50% of the outstanding common shares, or isotherwise approved by our board of directors, then the Shareholder Rights Planwill not affect the rights of shareholders. Otherwise, all shareholders, except the parties making a take-over bid,will be able to acquire a number of additional common shares equal to 100% oftheir existing outstanding holdings at half the market price.  Thus, any party making a take-over bid notpermitted by the Shareholder Rights Plan could suffer significant dilution.

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## ***MARKET FOR SECURITIES***

Our common shares have beenlisted on The Toronto Stock Exchange since May 17, 1999, and currently tradeunder the symbol “SW”.  Our common sharesare co-listed on The Nasdaq Global Market under the symbol “SWIR”.

Set out below are the price rangesand volume of common shares of Sierra Wireless, Inc. that traded on the TorontoStock Exchange for the year ended December 31, 2006.
| ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | **Total Monthly** | ** ** |
|------------|------------|----------------|------------|----------------|------------|------------------------|------------|
| **2006**   | ** ** | **Low**        | ** ** | **High**       | ** ** | **Volume**             | ** ** |
| ** ** | ** ** | **Cdn $** | ** ** | **Cdn $** | ** ** | ** **             | ** ** |
| ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **             | ** ** |
| January    |       | 12.32          |       | 16.30          |       | 7,272,300              |       |
| February   |       | 13.50          |       | 15.47          |       | 3,248,400              |       |
| March      |       | 12.60          |       | 14.43          |       | 3,550,400              |       |
| April      |       | 13.53          |       | 21.70          |       | 7,673,900              |       |
| May        |       | 18.42          |       | 23.71          |       | 6,021,700              |       |
| June       |       | 15.39          |       | 20.30          |       | 3,573,900              |       |
| July       |       | 13.01          |       | 20.09          |       | 5,411,000              |       |
| August     |       | 12.31          |       | 14.34          |       | 5,016,200              |       |
| September  |       | 11.73          |       | 14.25          |       | 6,029,700              |       |
| October    |       | 12.50          |       | 15.56          |       | 5,588,700              |       |
| November   |       | 13.29          |       | 15.16          |       | 2,488,800              |       |
| December   |       | 13.67          |       | 16.65          |       | 2,933,500              |       |

 

## ***DIRECTORS AND EXECUTIVE OFFICERS***

The tables set forth below listthe directors and executive officers of the Company as at March 21, 2007,indicating their name, municipalities of residence, their respective positionsand offices held with the Company, the length of service and their principaloccupations within the five preceding years.

Each director is elected at ourannual meeting of shareholders to serve until the next annual meeting or untila successor is elected or appointed, unless such director resigns or is removedearlier.  To the knowledge of SierraWireless, the directors and executive officers as a group, beneficially own,directly or indirectly, or exercise control or discretion over, 251,981 commonshares, (not including common shares issuable upon the exercise of stockoptions), representing as of March 21,2007 approximately 1.0%****of the issued and outstanding common shares.

### **Directors**

| **Name,  Position and  Residence**                                    | ** ** | **Principal Occupation or Employment**(1)                                                                                                                                                                                                     | ** ** | **Director  Since** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| **Jason  W. Cohenour**President, CEO and Director  Washington, U.S.A. |       | President and Chief Executive Officer of the Company  from October 2005 to present; Chief Operating Officer of the Company from  August 2004 to October 2005; Senior Vice President, Worldwide Sales of the  Company from 2000 to August 2004 |       | October 2005        |

 

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| **Gregory  D. Aasen (3)**Director  British Columbia, Canada             |   | Chief Strategy Officer of PMC-Sierra, Inc. (a  broadband communications company) from September 2005 to present;  Vice-President and General Manager, Communication Products Division of  PMC-Sierra, Inc. from 2004 to September 2005; Chief Operating Officer of  PMC-Sierra, Inc. from 1997 to 2004 and Chief Technology Officer of  PMC-Sierra, Inc. from 2003 to 2004                                                                                                                                                                             |   | December 1997 |
|-------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
| ** **                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |          |
| **Paul G.  Cataford (2) (4)**Director  Alberta, Canada                  |   | President and Chief Executive Officer of University  Technologies International Inc. (a technology transfer and commercialization  company) from 2004 to present; Managing Partner of HorizonOne Asset  Management from December 2002 to 2004; Consultant from March 2002 to December  2002; Executive Managing Director of BMO Nesbitt Burns Equity Partners Inc.  from 2001 to 2002                                                                                                                                                                  |   | July 1998     |
| ** **                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |          |
| **Peter  Ciceri (2) (3)**Director  British Columbia, Canada             |   | President of Custom House Global Foreign Exchange  from January 2007 to present; Corporate Director and principal of Peter  Ciceri & Associates Executive Coaching and Business Counselling Services  from 2001 to present                                                                                                                                                                                                                                                                                                                         |   | February 2000 |
| ** **                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |          |
| **Charles  E. Levine (3) (4)**Chairman and Director  California, U.S.A. |   | Independent Outside Director; President and Chief  Operating Officer of Sprint PCS from 2000 to 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | May 2003      |
| ** **                                                              |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |          |
| **S. Jane  Rowe (2)**Director  Ontario, Canada                          |   | Executive Vice-President, Domestic Personal Lending  and Insurance of Scotiabank and President and CEO of Scotia Mortgage  Corporation and Vice Chairman of Maple Trust Company from May 2006 to  present; Vice Chairman of Travelers Leasing Corporation from February 2007 to  present; President and Chief Executive Officer of Roynat Capital from 2004 to  2006; Senior Vice President, Global Risk Management Division of Scotiabank  from 2002 to 2004; Managing Director and Co-Head of Scotia Merchant  Capital Corporation from 1997 to 2002 |   | March 1998    |
| ** **                                                              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |          |
| **David  B. Sutcliffe****(4)**Director  British Columbia, Canada        |   | Corporate Director from October 2005 to present;  Chief Executive Officer of the Company from May 1995 through October 2005                                                                                                                                                                                                                                                                                                                                                                                                                            |   | June 1995     |

 

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| **Kent  Thexton****(3)******Director  British Columbia, Canada |   | Executive Chairman of SEVEN Networks, Inc. (a  software company) from November 2006 to present; President and Chief  Executive Officer of SEVEN Networks, Inc. from April 2004 to October 2006;  Chief Data and Marketing Officer of O2 and President of O2 Online from 2001  to 2004 |   | March 2005 |
|----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|

 

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Notes:

(1)   The information as to “principaloccupation” has been furnished by the respective directors

(2)   Member of the Audit Committee

(3)   Member of the Human ResourcesCommittee

(4)   Member of the Governance andNominating Committee

### **ExecutiveOfficers**

| **Name,  Position and  Province or State and  Country of Residence**                  | ** ** | **Principal Occupation in the Preceding  Five Years**(1)                                                                                                                                                                                                                                                                                    | ** ** | **Length of Service** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                  | ** ** | ** **            | ** ** |
| **Jason  W. Cohenour**President and Chief Executive Officer  Washington, U.S.A.       |       | President and Chief Executive Officer of the Company  since October 2005; Chief Operating Officer of the Company from August 2004  to October 2005; Senior Vice President, Worldwide Sales of the Company from  2000 to August 2004                                                                                                         |       | 11 years              |       |
| ** **                                                                            |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |       |
| **David  G. McLennan**Chief Financial Officer and Secretary  British Columbia, Canada |       | Chief Financial Officer of the Company from March  2004 to present; Consultant to BCE Emergis from September 2002 to January  2003; Chief Financial Officer  of Bell Canada from June 2002 to September 2002; President and Chief  Operating Officer of Bell ExpressVu from November 1999 to June 2002                                      |       | 3 years               |       |
| ** **                                                                            |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |       |
| **James  B. Kirkpatrick**Chief Technical Officer  California, U.S.A.                  |       | Chief Technical Officer of the Company from  September 2004 to present; Senior Vice-President, Engineering of the Company  from August 2003 to August 2004; President and Chief Executive Officer of  AirPrime, Inc. from July 2002 to August 2003; Senior Vice-President,  Engineering of AirPrime, Inc. from September 2000 to March 2003 |       | 4 years               |       |

 

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| **Name,  Position and  Province or State and  Country of Residence**                                      | ** ** | **Principal Occupation in the Preceding  Five Years**(1)                                                                                                                                                                                                                                                                                                                | ** ** | **Length of Service** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                              | ** ** | ** **            | ** ** |
| **Trent  H. Punnett**Senior Vice President, Marketing and Corporate Development  British Columbia, Canada |       | Senior Vice-President, Marketing and Corporate  Development from February 2006 to present; Vice-President, Marketing of the  Company from January 2005 to January 2006; Vice-President, Marketing and  Product Line Management of Motorola from July 2003 to December 2004; Senior  Director, Marketing and Product Line Management of Motorola from 2000 to June  2003 |       | 2 years               |       |
|                                                                                                           |            |                                                                                                                                                                                                                                                                                                                                                                         |            |                       |            |  |  |

 

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Notes:

(1)   Theinformation as to “principal occupation” has been furnished by the respectiveexecutive officers.

## ***CODE OF BUSINESS CONDUCT AND ETHICS***

In 2003, the Board of Directors adopted a Code ofBusiness Conduct and Ethics applying to all directors, officers and employeesof the Company to ensure that the Company conducts its business in accordancewith the highest standards of business conduct and ethics.  The Board of Directors approved an updatedversion of the Code of Business Conduct and Ethics in December 2005.  There have been no waivers granted from theCode of Business Conduct and Ethics since its adoption.  The Code of Business Conduct and Ethics isavailable on the Company’s website at www.sierrawireless.com.

## ***AUDIT COMMITTEE***

### **Mandate ofthe Audit Committee**

The full text of the Mandate of the Audit Committee isset out below.

**“1.**** ****Purpose and Scope**

The audit committee **(the “AC”)** was established by the Board of Directors **(“Board”)** of Sierra Wireless Inc. **(“Company”)**to assist the Board in all issues relating to the oversight of the following:

·      the Company’s systems of internal and disclosure controls regardingfinance, accounting and legal compliance;

·      the Company’s auditing, accounting and financial reporting processes,including adherence to US generally accepted accounting principles;

·      the Company’s financial statements and other financial informationprovided by the Company to its shareholders, the public and others;

·      the Company’s compliance with legal and regulatory requirements;

·      the appointment, compensation, independence, oversight, communicationwith, performance and change of the Company’s external and independent auditors(the “Auditors”);

·      the Company’s whistleblower process; and

·      the fulfillment of the other responsibilities set forth in thisMandate.

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**2.**              Organization,Membership and Meetings

·                  Committee members shall meet the requirementsof the Toronto Stock Exchange, the NASDAQ Exchange, the Securities and ExchangeCommission, the securities commissions of each of the Provinces of Canada inwhich the Company is a reporting issuer and any other regulatory agency thatmay have jurisdiction over the operations of the Company from time to time.

·                  The Committee shall consist of three or moredirectors who are “independent” as defined by applicable law, regulations,guidelines and policies, and as determined by the Governance and NominatingCommittee (“GNC”) of the Board.

·                  All members of the Committee shall be “financiallyliterate”, and at least one member of the Committee shall be a “financialexpert”.  “Financially literate” and “financialexpert” will have the respective meanings set out in applicable law,regulations, guidelines and policies.

·                  Members of the Committee shall be appointedannually by the Board on the recommendation of the GNC.  Members may be replaced by the Board at anytime, but shall otherwise serve until a successor has been named.

·                  No director shall serve on the compensationcommittee of another company that employs such directors.

·                  No member shall be affiliated with theCompany or any subsidiary.

·                  The Committee shall meet from time to time,as it deems necessary, but at least four times per year.

·                  The Committee may include management at itsmeetings, but shall also hold an executive session at each meeting at whichonly independent directors are present.

·                  The Committee shall maintain written minutesof its meetings, which minutes will be filed in the corporate minute book.

**3.**              Authorityand Responsibilities

**3.1.**         Withrespect to the Auditors:

·                  Be directly responsible for recommending tothe Board the appointment and compensation of the Auditor.  Oversee the work of the Auditors (includingresolution of disagreements between Management and the Auditors regardingfinancial reporting) for the purpose of preparing or issuing an audit report orperforming other audit, review or attest services for the Company.

·                  Have the sole authority to review in advanceand pre-approve all non-audit services to be provided to the Company or itssubsidiaries by the Auditors, as permitted by applicable governance rules andin particular Section 10A of the Securities Exchange Act of 1934 and, inconnection therewith, to approve all fees and other terms of engagement. TheCommittee shall also review and pre-approve all disclosures required to beincluded in any public filings with respect to non-audit services.  The Committee may delegate to one or moremembers the authority to pre-approve non-audit services, provided a report ismade to the Committee at its next scheduled meeting.  The Committee may consult with Management butshall not delegate these responsibilities to Management.

·                  Have the authority to communicate directlywith the Auditors.

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·                  Review the performance of the Auditors on atleast an annual basis.

·                  On an annual basis, review and discuss withthe Auditors all relationships the Auditors have with the Company in order toevaluate the Auditors’ continued independence. The Committee: (i) shall ensurethat the Auditors submit to the Committee on an annual basis a writtenstatement delineating all relationships and services that may impact theobjectivity and independence of the Auditors; (ii) shall discuss with theAuditors any disclosed relationship or services that may impact the objectivityand independence of the Auditors; and (iii) shall satisfy itself as to theAuditors’ independence.

·                  At least annually, obtain and review anannual report from the Auditors describing (i) the Auditors’ internal qualitycontrol procedures and (ii) any material issues raised by the most recentinternal quality control review, or peer review, of the Auditors, or by anyinquiry or investigation by governmental or professional authorities, withinthe preceding five years, respecting one or more independent audits carried outby the Auditors, and any steps taken to deal with any such issues.

·                  Confirm that the rotation of the lead auditpartner, or the lead audit partner responsible for reviewing the audit, for theCompany’s Auditors complies with the requirements of the Canadian and USregulatory authorities.

·                  Review all reports required to be submittedby the Auditors to the Committee particularly including those required bySection 10A of the Securities Exchange Act of 1934.

·                  Review, based upon the recommendation of theAuditors and Management, the scope and plan of the work to be done by theAuditors for each fiscal year.

**3.2.**         Withrespect to financial statements:

·                  Review and discuss with Management and theAuditors the Company’s quarterly financial statements (including disclosuresmade in Management’s Discussion and Analysis, as defined in MultilateralInstrument 51-102, and interim earnings press releases) prior to submission toshareholders, any governmental body, any stock exchange or disclosure to thepublic.  Subject to delegation from theBoard, approve the interim financial statements and footnotes, MD&A andinterim earnings press release.

·                  Review and discuss with Management and theAuditors the Company’s annual audited financial statements (includingdisclosures made in Management’s Discussion and Analysis and annual earningspress releases) prior to submission to shareholders, any governmental body, anystock exchange or disclosure to the public. Recommend to the Board approval of the annual audited financial statementsand footnotes, MD&A and annual earnings press release.

·                  Recommend to the Board, if appropriate, thatthe Company’s annual audited financial statements be included in the Company’sannual report for filing with appropriate securities regulatory agencies.

·                  Prepare any reports required to be includedin the Company’s annual meeting materials and any other Committee reportsrequired by applicable securities laws or stock exchange listing requirementsor rules.

**3.3.**         Withrespect to periodic and annual reviews:

·                  Periodically review separately with each ofManagement and the Auditors (i) any significant disagreement between Managementand the Auditors in connection with the preparation of the

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financialstatements, (ii) any difficulties encountered during the course of the audit orreview (including any restrictions on the scope of work or access to requiredinformation), and (iii) Management’s response to each.

·                  Periodically discuss with the Auditors,without Management being present (i) their judgments about the quality,appropriateness, and acceptability of the Company’s accounting principles andfinancial disclosure practices, as applied in its financial reporting, and (ii)the completeness and accuracy of the Company’s financial statements.

·                  Consider and approve, if appropriate,significant changes to the Company’s accounting principles and financialdisclosure practices as suggested by the Auditors or Management.  Review with the Auditors and Management, atappropriate intervals, the extent to which any changes or improvements inaccounting or financial practices, as approved by the Committee, have beenimplemented.

·                  Review with Management, the Auditors and theCompany’s counsel, as appropriate, any legal, regulatory or compliance mattersthat could have a significant impact on the Company’s financial statements,including significant changes in accounting standards or rules as promulgatedby the Canadian Institute of Chartered Accountants, the securities regulatorshaving jurisdiction over the Company or other regulatory authorities with relevantjurisdiction.

·                  Obtain and review an annual report fromManagement relating to the accounting principles used in preparation of theCompany’s financial statements (including those policies for which Managementis required to exercise discretion or judgments regarding the implementationthereof).

**3.4.**         Discussionswith Management:

·                  Review and discuss with Management theCompany’s annual and interim earnings press releases (including the use of “proforma” or “adjusted” non-GAAP information), financial information and earningsguidance provided to analysts and rating agencies as well as all other materialpublic disclosure documents such as the Company’s AIF, management informationcircular and any prospectuses.

·                  Review and discuss with Management allmaterial off-balance sheet transactions, arrangements, obligations (includingcontingent obligations) and other relationships of the Company withunconsolidated entities or other persons, that may have a material current orfuture effect on financial condition, changes in financial condition, resultsof operations, liquidity, capital resources, capital reserves or significantcomponents of revenues or expenses.

·                  Inquire about the application of the Company’saccounting policies and its consistency from period to period, and thecompatibility of these accounting policies with generally accepted accountingprinciples, and (where appropriate) the Company’s provisions for futureoccurrences that may have a material impact on the financial statements of theCompany.

·                  Review and discuss with Management theCompany’s major financial risk exposures and the steps Management has taken tomonitor and control such exposures (including Management’s risk assessment andrisk management policies).

·                  Review and discuss with Management alldisclosures made by the Company concerning any material changes in thefinancial condition or operations of the Company.

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·                  The Committee will meet periodically andseparately with the Company’s counsel to review material legal affairs of theCompany and the Company’s compliance with applicable law and listing standards.

·                  Obtain explanations from Management forunusual variances in the Company’s annual financial statements from year toyear, and review annually the Auditors’ letter of the recommendations toManagement and Management’s response.

**3.5.**         Withrespect to internal controls and disclosure:

·                  In consultation with the Auditors andManagement: (a) review the adequacy of the Company’s internal control structureand system, and the procedures designed to ensure compliance with laws andregulations, (b) discuss the responsibilities, budget and staffing needs of theCompany’s internal accounting department, and (c) review and consider whetherthere is any need for the Company to establish an internal audit department.

·                  Establish whistleblowing procedures for (i)the receipt, retention and treatment of complaints received by the Companyregarding accounting, internal accounting controls or auditing matters, (ii)the confidential, anonymous submission by employees of the Company of concernsregarding questionable accounting or auditing matters, and (iii) referring anywhistleblower matters that fall outside of the scope of the Committee to theChair of the appropriate Committee or to the Chair of the Board.

·                  Be satisfied that adequate procedures are inplace for the review of the Company’s public disclosure of financialinformation extracted or derived from the Company’s financial statements andperiodically assess the adequacy of those procedures.

**3.6.**         Withrespect to reporting obligations:

·                  Ensure that all reporting obligations relatedto the AIF (Form 40-F for US purposes) and management information circularunder Part 5 of Multilateral Instrument 52-110 are fully complied with.

**3.7.**         Other:

·                  Review and approve all related-partytransactions.

·                  Review and approve the Company’s hiringpolicies regarding partners, employees, and former partners and employees ofthe present and former external auditor of the Company.

·                  Review any Management decision to seek asecond opinion from Auditors other than the Company’s regular Auditors withrespect to any significant accounting issue.

·                  Review with Management and the Auditors thesufficiency and quality of the financial and accounting personnel of theCompany.

·                  Monitor and ensure compliance with legal andregulatory requirements and corporate policy relating to audit, internalcontrols, financial matters and any other matters within the scope of thismandate.

·                  Review and reassess the adequacy of thisMandate not less than annually, and recommend any proposed changes to the Boardfor approval.  The Committee will alsoreview its own

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performance,at least annually, for purposes of self-evaluation and to encourage thecontinuing improvement of the Committee in the execution of itsresponsibilities.

·                  The Committee may delegate its authoritywhere permitted and appropriate.

·                  As necessary to carry out its duties, toretain and release independent legal, accounting or other advisors to advisethe Committee and set and cause the Company to pay the compensation for anysuch advisors employed by the Committee.

·                  Perform any other activities consistent withthis Mandate, the Company’s By-laws and governing law as the Committee or theBoard deems necessary or appropriate.

·                  The Committee will have full access to allbooks, records, facilities and personnel of the Company.

·                  To honour the spirit and intent of applicablelaw as it evolves, authority to make minor technical amendments to thisMandate, on request of the Chair of the Committee , is delegated to the Chairof the Governance and Nominating Committee, who will report any amendments tothe Board at its next meeting.

**4.**              Externaland Internal Linkages

·                  The Board

·                  The CEO and Senior Management

·                  Outside Consultants and Advisors

·                  The Corporate Governance and NominatingCommittee”

### **Compositionof the Audit Committee**

S. Jane Rowe (Chair), Paul G. Cataford and PeterCiceri are the current members of the Audit Committee.  Each of them is an Independent Director andis financially literate.  The Board ofDirectors has determined that Ms. S. Jane Rowe is the Audit Committee’sfinancial expert.

### **RelevantEducation and Experience**

S. Jane Rowe is the Executive Vice-President, DomesticPersonal Lending and Insurance, and President and CEO of Scotia MortgageCorporation, the mortgage subsidiary of Scotiabank.  Ms. Rowe is also Vice Chairman of Maple TrustCompany and Travelers Leasing Corporation, both of which are wholly-ownedsubsidiaries of Scotiabank.  Prior to hermost recent appointment in May 2006, Ms. Rowe was the President and ChiefExecutive Officer of Roynat Capital.  Ms.Rowe has an extensive background in the financial services and banking industrywith over 19 years of experience with the Scotiabank Group.  Ms. Rowe holds a Bachelor of Commerce degreewith honours from Memorial University of Newfoundland and an MBA from YorkUniversity.

Paul G. Catafordis the President and Chief Executive Officer of University Technologies Inc., awholly-owned subsidiary of the University of Calgary that is responsible forthe university’s technology commercialization. Mr. Cataford’s other experience includes consulting, Managing Directorof BMO Nesbitt Burns Equity Partners Inc. from 2001 to 2002 and ManagingDirector and President of BCE Capital Inc. from 1997 to 2001.  Mr. Cataford has extensive knowledge ofventure capital investing and

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technology.  Mr. Cataford completed a MechanicalEngineering Degree at Queen’s University and an MBA at York University.

Peter Ciceri is the President of Custom House GlobalForeign Exchange, the largest non-bank foreign exchange company in NorthAmerica.  He is also the principal ofPeter Ciceri & Associates Executive Coaching and Business CounsellingService offering mentoring and counselling services to senior executives.  Mr. Ciceri’s other experience includes CEO ofCompaq Canada Inc., and he has held other senior positions with Tandem AsiaPacific Ltd., Hewlett Packard Asia Pacific Ltd., and Japan Unisys.  Mr. Ciceri is an authority in internationalbusiness (emphasis on Asia Pacific) and in 1999 he was named one of Canada’stop 10 “IT Influencers” and one of the country’s top 100 businessexecutives.  Mr. Ciceri holds anEconomics Degree at University of Victoria, and a MA in counselling psychologyfrom the University of British Columbia.

### **Relianceon Certain Exemptions**

At no time since thecommencement of the Company’s most recently completed financial year has theCompany relied upon any exemption from MI 52-110 provided therein.

### **AuditCommittee Oversight**

At no time since thecommencement of the Company’s most recently completed financial year was arecommendation of the Committee to nominate or compensate an external auditornot adopted by the board of directors of the Company.

### **Pre-approvalPolicies and Procedures**

The Committee has the sole authority to review inadvance and pre-approve all non-audit services to be provided to the Company orits subsidiaries by the Auditor, as well as all fees and other terms of engagement.  The Committee may delegate to one or moremembers the authority to pre-approve non-audit services, provided a report ismade to the Committee at its next scheduled meeting.  All of the audit-related, tax and all otherfees below were pre-approved by the Committee.

### **AuditorIndependence**

Sierra Wireless’s AuditCommittee has concluded that the Auditors are independent under applicablerules and guidelines and, in particular, that the Auditors are free fromconflicts of interest that could impair their objectivity in conducting theaudit of the Company’s financial statements. The Audit Committee is required to approve all non-audit relatedservices performed by our Auditors, and our Auditors are not permitted toperform services for us prohibited for an independent auditor under applicableCanadian and United States regulations, including the Sarbanes-Oxley Act.

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### **Auditors’Fees**

In the 2006 and 2005 fiscalyears, the fees paid to the Auditors were as follows:
|                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | $        | 357,000    |     | $          | 297,000 |   |
| Audit-Related Fees |       | 51,000   |       | 23,000   |       |
| Tax Fees           |       | 203,000  |       | 212,000  |       |
| All Other Fees     |       | Nil      |       | Nil      |       |
|                    |            |          |            |          |            |  |  |

 

***Audit Fees***

Audit fees for 2006 and 2005 include fees related to theaudit of our year-end financial statements and the review of our quarterlyfinancial statements.

***Audit-RelatedFees***

Audit-related fees for 2006 and2005 are for fees related to our Sarbanes-Oxley 404 documentation.

***Tax Fees***

Tax fees for 2006 and 2005 areprimarily for the preparation of our Canadian and U.S. tax returns, assistancewith tax planning and completion of transfer pricing studies.

## ***EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES***

### **Disclosure Controls**

The Company’s management isresponsible for establishing and maintaining adequate disclosure controls andprocedures for the Company.  Ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed in our reports filed with securities regulatoryauthorities is recorded, processed, summarized and reported within prescribedtime periods and is accumulated and communicated to our management, includingour Chief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

An evaluation was carried out under the supervision of,and with the participation of, our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as of December 31, 2006.  Based on that evaluation, our Chief ExecutiveOfficer and our Chief Financial Officer have concluded that our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by the Company in the reports it files or submits under applicablesecurities laws and regulations is recorded, processed, summarized, andreported within the time periods specified thereby.

The Company does not expect that its disclosure controls and procedureswill prevent all error and all fraud, if any. A control procedure, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met. Because of theinherent limitations in all control procedures, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of

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thecontrol. The Company considered these limitations during the development of itdisclosure controls and procedures and will continually re-evaluate them toensure they provide reasonable assurance that such controls and procedures areeffective.

### **Internal Control Over Financial Reporting**

***Management’sAnnual Report on Internal Control Over Financial Reporting***

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Actof 1934.

Our internal control over financialreporting includes those policies and procedures that: (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Under the supervision and with the participation of ourChief Executive Officer and our Chief Financial Officer, management conductedan evaluation of the effectiveness of our internal control over financialreporting, as of December 31, 2006, based on the framework set forth inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on its evaluation underthis framework, management concluded that our internal control over financialreporting was effective as of that date.

This annual report does not include an attestationreport of the Company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the Company to provide only management’sreport in this annual report.

***Changes in Internal Controls OverFinancial Reporting***

As 2006 is the first year that management is reportingon our internal controls over financial reporting, as set out above, we have nochanges to report.  On a going forwardbasis, under this heading, we will describe significant changes to our internalcontrols.

The design of any system of controls and procedures isbased in part upon certain assumptions about the likelihood of certain events.There can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions, regardless of how remote.

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## ***LEGAL PROCEEDINGS***

Sierra Wireless America, Inc., as successor toAirPrime, Inc., is named as a defendant in a class action complaint for allegedviolations of federal and state securities laws allegedly occurring prior tothe time AirPrime, Inc. was acquired by the Company. The settlement of thislitigation was approved by the Superior Court of the State of California forthe County of San Diego in February 2007. The settlement, which will be recorded once the appeal period has ended,will have no net effect on our income statement.  If the judgment of the Court does not becomefinal due to a successful appeal, the litigation will continue and although therecan be no assurance that an unfavourable outcome of the dispute would not havea material adverse effect on our operating results, liquidity or financialposition, we believe the claims are without merit and will vigorously defendthem.

The Company and certainof our current and former officers are named as defendants in several classaction complaints for alleged violations of federal securities laws, which areconsolidated for pre-trial purposes in the U.S. District Court for the SouthernDistrict of New York. The plaintiffs filed their consolidated amended complainton February 21, 2006 and the Company and the other defendants filed a motion todismiss on April 7, 2006. To date, the Court has not considered the motion todismiss. We have given notice to our liability insurance carrier, which hasagreed to pay our costs of defence that exceed the policy’s retention amount,subject to a reservation of rights in the event that it is determined that thecarrier has no liability for this litigation. Although there can be noassurance that an unfavourable outcome would not have a material adverse effecton our operating results, liquidity or financial position, we believe theclaims are without merit and will vigorously defend the lawsuits. The Companyhas determined that it is not possible to establish a reasonable estimate ofthe possible loss, or range of possible loss, if any.

We are engaged in certain legal actions in theordinary course of business and believe that the ultimate outcome of theseactions will not have a material adverse effect on our operating results,liquidity or financial position.

## ***OFF-BALANCE SHEET ARRANGEMENTS***

During 2006, we obtained a letter of credit to ensurethe performance of a third party in accordance with specified terms and conditions.At December 31, 2006, we had $3.2 million outstanding under the letter ofcredit, which approximates its fair value.

As of December 31, 2006, we did not have anyoff-balance sheet finance or special purpose entities.

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## ***CONTRACTUAL OBLIGATIONS***

The following tablespecifies our known contractual obligations as of December 31, 2006:
| ** **                                               | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                                               | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **than 5** | ** ** |
| **Contractual Obligations**                         | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **years** | ** ** |
| ***(in thousands of U.S. dollars)*** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital lease obligations                                |       | $                                         | 6          |   | $ | 6 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating lease obligations                              |       | 11,675                                    |       | 3,006 |   | 5,120 |   | 3,453 |   | 96 |   |
| Purchase commitments(1)                                  |       | 77,479                                    |       | 77,479 |   | — |   | — |   | — |   |
| Long-term liabilities(2)                                 |       | 1,986                                     |       | 841 |   | 664 |   | 481 |   | — |   |
| Total                                                    |       | $                                         | 91,146     |   | $ | 81,332 |   | $ | 5,784 |   | $ | 3,934 |   | $ | 96 |   |

 

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Notes

(1)          Purchase commitments represent obligations withcertain contract manufacturers to buy a minimum amount of designated productsbetween January 2007 and March 2007.  Incertain of these arrangements, we may be required to acquire and pay for suchproducts up to the prescribed minimum or forecasted purchases.

(2)          Long-term liabilities relate torestructurings from prior years.

## ***QUORUM EXEMPTION***

The rules and regulations of theNasdaq Global Market applicable to the Company require each listed issuer toprovide that a quorum for its shareholders’ meetings be at least 33 1/3 percentof the issuer’s outstanding shares.  TheCompany has been granted an exemption from this requirement because it iscontrary to generally accepted business practices in Canada, the Company’scountry of domicile.  The Company has hadthe benefit of this exemption in the current and prior year.

In determining whether arequirement is contrary to generally accepted business practices, the Nasdaqrules generally look to the requirements of the primary market in the issuer’scountry of domicile.  The rules andpolicies of the Toronto Stock Exchange, the primary market in Canada, do notcontain quorum requirements, and the *Canada BusinessCorporations Act*, the Corporation’s governing statute, defers to thequorum requirements contained in an issuer’s By-laws.  Under the Company’s By-laws, a quorum for ameeting of the Company’s shareholders is two persons present in person, eachbeing a shareholder entitled to vote thereat or a duly appointed proxyholder orrepresentative for a shareholder so entitled.

## ***REGISTRAR AND TRANSFER AGENT***

The Registrar and Transfer Agentfor the common shares in Canada is Computershare Investor Services Inc., 510 BurrardStreet, Vancouver, British Columbia, and in the United States is ComputershareTrust Company, N.A., 350 Indiana Street, Suite 800, Golden, Colorado.  These offices and the principal offices ofComputershare Investor Services Inc. in the City of Toronto maintain theregister of common shares and can effect transfers and make deliveries ofcertificates for common shares.

## ***MATERIAL CONTRACTS***

On March 6, 2007, we announced a definitive agreement to acquire 100percent of the outstanding securities of AirLink Communications, Inc. (“AirLink”),a privately held supplier of high value fixed, portable and mobile wirelessdata solutions for industrial and public safety applications located inHayward, California. Under the terms of the definitive agreement, SierraWireless will pay $10.0 million of cash consideration, subject to customaryclosing adjustments, and will issue approximately 1.3 million

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sharesof Sierra Wireless to the shareholders of AirLink. The completion of thecombination is expected by the end of June 2007.

There are no other materialcontracts entered into outside of the Company’s ordinary course of business.

## ***EXPERTS***

KPMG LLP, independent charteredaccountants, have audited our consolidated financial statements as at December31, 2006 and 2005, and for each of the years in the three year period endedDecember 31, 2006 as set forth in their reports.  KPMG LLP has advised the Company that theyare independent with respect to the Company within the meaning of the Rules ofProfessional Conduct of the Institute of Chartered Accountants of BritishColumbia.  

## ***ADDITIONAL INFORMATION***

Additional information relating to the Company:

(a)                                  may be found on SEDAR on www.sedar.com;

(b)                                 including directors’ and officers’remuneration and indebtedness, principal holders of the Company’s securitiesand securities authorized for issuance under equity compensation plans, iscontained in the Company’s Information Circular for its most recent annualmeeting of shareholders; and

(c)                                  is provided in the Company’s financialstatements and MD&A for the financial year ended December 31, 2006.

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**APPENDIX A**

## ***MANAGEMENT’SDISCUSSION AND ANALYSIS***

***OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS***

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

*The following discussion of ourconsolidated financial condition and results of operations, as of March 21,2007, has been prepared in accordance with United States generally acceptedaccounting principles (GAAP) and, except where otherwise specifically indicated,all amounts are expressed in United States dollars.*

*Additional information related toSierra Wireless, Inc., including our Annual Information Form, may be found onSEDAR at www.sedar.com.*

**Overview**

We provide leading edge wireless wide area modem solutions for mobilecomputing. We develop and market a range of products that include wirelessmodems for mobile computers, embedded modules for original equipmentmanufacturers, or OEMs, and rugged vehicle-mounted modems. Our products permitusers to access wireless data and voice communications networks using laptopcomputers, handheld mobile computing devices, vehicle-based systems or fixedwireless terminals.

Wireless data communications is an expanding market positioned at theconvergence of wireless communications, mobile computing and the Internet, eachof which we believe represents a growing market. Our products are based onwidely deployed cellular technologies and operate on the networks of majorwireless operators around the world.

Our products are primarily used by business and government organizationsto enable their employees to access a wide range of applications, including theInternet, e-mail, corporate intranet, remote databases and corporateapplications. We sell our products through indirect channels, includingwireless operators, resellers and OEMs.

Throughout 2004 weexperienced stronger than expected demand primarily as a result of our strongmarket position in CDMA EV-DO Release 0 PC cards and our CDMA 1X embeddedmodule sales to palmOne. Customer concentration increased in our revenue baseduring 2004. Following our considerable revenue and earnings growth in 2004, weexperienced a significant reduction in our business in 2005 relative to 2004due to, among other things, increased competition for certain of our PC cardproducts, a reduction in embedded module business volumes as a result of thecompletion of shipments to a key customer at the end of 2004 and some weaknessin our product portfolio.

In order toaddress this change in our business, we restructured our operations in June2005, which included exiting our Voq professional phone initiative. Since themid-2005 restructuring, we have re-focused our business on our core PC card andembedded module segments, including the development of new products and theexpansion of markets for these products. Our launch of several new UMTS/HSDPAand CDMA EV-DO Rev A products resulted in strong revenue growth during 2006. Wereturned to sequential quarterly revenue growth over the last half of 2005 andthe first half of 2006.  During the thirdquarter of 2006, our revenues decreased slightly compared to the second quarterof 2006, as we transitioned our two largest customers to next generationproducts, which resulted in a slight reduction in sales of existing products tothese customers ahead of the launch of the next generation products thatoccurred late in the quarter.  In thefourth quarter, we reported record revenue as sales of our recently launched nextgeneration products drove strong sequential revenue growth.  In addition to improving revenue growth, wewere profitable in all four quarters of 2006.

In  2006, our revenue increased 107% to $221.3million, compared to $107.1 million in 2005. Gross margin in 2006 was 31.3%,compared to 23.6% in the same period of 2005. Net earnings were $9.8 million,or diluted earnings per share of $0.38 in 2006, compared to a net loss of $36.5million, or loss per share of $1.44, in 2005. Our net earnings for 2006 include$3.8 million of stock-based compensation expense, compared to nil in 2005.

Our balance sheetremains strong, with $87.0 million of cash, cash equivalents and short andlong-term investments, compared to $104.4 million at December 31, 2005. During2006, cash of $8.1 million was used in operations, compared to cash used inoperations of $17.3 million in 2005.

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We continue tobelieve that the long-term growth prospects in the wireless wide area modemsolutions for mobile computing industry remain strong, driven by continueddeployment of high speed next generation 3G networks by carriers worldwide. Webelieve the deployment of these networks, combined with active promotion bycarriers, will be a catalyst to increasing demand for high speed 3G wirelesscommunications products, such as ours.

Key factors thatwe expect will affect our revenue in the near term are the timing of deploymentof 3G high speed wireless data networks by carriers, technology transitions inboth CDMA EV-DO and UMTS/HSDPA, the rate of adoption by end-users, the timelylaunch and ramp up of sales of our new products currently under development,the level of success PC OEMs achieve with sales of embedded solutions and ourability to compete effectively. We expect that competition from other wirelesscommunications device manufacturers will continue to intensify. As morecompanies focus on opportunities in this market, we expect continued pressureon selling prices.

During the year,we launched eight new products, including our UMTS/HSDPA AirCardÒ875, UMTS/HSDPA MC8775 embedded module, EV-DO Revision A AirCard 595 and EV-DORevision A MC5725 embedded module, and anticipate an acceleration in newproduct launches in 2007.  We expandedour global channels, adding important operator channels like Verizon, Orange,O2 and Telefonica, while solidifying our position with key existing customerssuch as Cingular, Sprint and Telstra.  Wealso expanded our OEM channels and now have design wins with eleven PC OEMcustomers across multiple airlinks.  Ourrejuvenated product line, expanded roster of channels and strong market growthunderpin our expectation of strong revenue growth and continued profitabilityin 2007.

Specific productdevelopment and business development initiatives include:

**AirCardProducts**:

**PCMCIAPC Cards**: The successful launch of our first UMTS/HSDPA PCcards, the AirCard 850 and 860, during the fourth quarter of 2005 helped us toestablish a leadership position with this technology in North America and tore-establish our market position in Europe. In North America, we believe wecontinue to have a strong position with Cingular (now AT&T) with the launchof our UMTS/HSDPA AirCard 875 during 2006. The AirCard 875 was the firstcommercially available HSDPA 3.6 Mbps network card in the world.  During 2006, we began shipping our AirCard860 to Rogers Communications in Canada as well. In Europe, we launched our AirCard 850 and AirCard 875 with a number ofoperators and resellers. By the end of the year, we were supplying UMTS/HSDPAAirCards to debitel in Germany, Bouygues Telecom and Orange in France, O2 andOrange in the UK, Swisscom Mobile and sunrise in Switzerland, Telefonica inSpain and to other operators in the region.  We also commenced commercialshipments of our AirCard 875 to Telstra in Australia.

During 2006, we continued shipments of our EV-DO Revision 0 AirCard toseveral carriers in North America and Asia Pacific, including Sprint.  We commenced commercial shipments of ournext generation EV-DO Revision A AirCard 595 to Sprint and Verizon and launchedthe AirCard 595 with Telecom New Zealand, the first launch of this productoutside the United States.

Our AirCard products are now approved on 35 networks around the world.

**ExpressCards**: During 2006, we announced the introduction of ourExpressCard product line, with the upcoming EV-DO Revision A AirCard 597E.  Built for notebook computers with ExpressCardexpansion slots, the AirCard 597E is expected to be in carrier certification bythe end of the first quarter of 2007. ExpressCards for use on HSDPA networksare expected to follow later in 2007.

**USBWireless Modems**: During 2006, we announced the addition ofwireless modems for USB ports to our product line.  This product will plug into the USB ports ofboth notebook and desktop computers.  Weexpect the AirCard 595U, for EV-DO Revision A networks and the AirCard 875U,for  HSDPA networks, to be in carriercertification late in the first quarter of 2007 and shipping commercially earlyin the second quarter of 2007.  We havenow secured purchase commitments for these products from major operators.

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**EmbeddedModules**:

With thecommencement by multiple leading laptop manufacturers of embedding high-speedwireless wide area capability inside laptops, we believe that the opportunityfor sales of embedded modules has increased significantly. Our experience andtrack record in embedded wireless for mobile computing has allowed us toestablish an early leadership position in providing embedded 3G wirelesssolutions to major PC OEMs.

We were first tomarket with HSDPA 3.6 Mbps capability with the HP nc6400 notebook. We haveembedded module design wins with eleven PC OEM customers, including Lenovo andHP for both EV-DO and UMTS/HSDPA products, with Panasonic for EV-DO products,and with Fujitsu-Siemens Computers, ASUSTeK Computers and Dialogue TechnologyCorp. for UMTS/HSDPA products. Itronix, a specialty laptop manufacturer, alsoembeds a variety of our products across a number of airlinks. Six of our PC OEMcustomers currently have commercially available products featuring our 3G embeddedmodule solutions, representing approximately 38 distinct platform and airlinkcombinations.

In addition to our success with PC OEM customers, we had strong growthand new design wins with our traditional OEM customers in 2006.  We have also secured several design wins with manufacturers of fixedwireless terminals, including Ericsson, for our EV-DO and/or UMTS/HSDPAembedded module products.

During 2006, we commenced shipments of our next generation embeddedmodules, the MC5725 for EV-DO Revision A networks and the MC8775 for UMTS/HSDPA3.6 Mbps networks.  We havesecured next generation design wins for UMTS/HSUPA with three of our existingOEM customers.

**RuggedMobile Products:**

Our rugged mobileproducts are sold to public safety and field service organizations and are ourhighest gross margin products.  Weexperienced a decline in sales of products in this segment in 2006 as a resultof not having 3G products to offer to our customers.  Development of 3G rugged mobile products isunderway and we expect that both EV-DO Revision A and UMTS/HSDPA 3.6 Mbpsversions of these products will enter carrier certification and be commerciallyavailable by the end of Q1 2007.  Oncethese products are launched, we expect this part of our business to grow andpositively impact our financial results.

We believe our newproduct developments will provide us with a solid, leading edge 3G productportfolio in both principal wireless technologies and across the AirCard,embedded module and rugged mobile markets. With this stronger productportfolio, we expect to continue to be able to expand our channels in thesemarkets.

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**Results ofOperations**

The following table sets forthour operating results for the three years ended December 31, 2006, expressed asa percentage of revenue:
| **Years ended December 31,** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Revenue                                     |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost  of goods sold                         |       | 60.4     |       | 76.4     |       | 68.7     |       |
| Gross  margin                               |       | 39.6     |       | 23.6     |       | 31.3     |       |
| Expenses                                    |       |     |       |     |       |     |       |
| Sales and marketing                         |       | 9.5      |       | 14.5     |       | 6.2      |       |
| Research and development, net               |       | 11.6     |       | 28.3     |       | 15.4     |       |
| Administration                              |       | 4.3      |       | 10.1     |       | 5.8      |       |
| Restructuring and other charges             |       | —   |       | 4.9      |       | —   |       |
| Amortization                                |       | 1.2      |       | 2.8      |       | 1.4      |       |
|                                        |       | 26.6     |       | 60.6     |       | 28.8     |       |
| Earnings  (loss) from operations            |       | 13.0     |       | (37.0    | )          | 2.5      |       |
|                                        |       |     |       |     |       |     |       |
| Other  income                               |       | 0.9      |       | 2.1      |       | 2.4      |       |
| Net  earnings (loss) before income taxes    |       | 13.9     |       | (34.9    | )          | 4.9      |       |
|                                        |       |     |       |     |       |     |       |
| Income  tax expense (recovery)              |       | 2.1      |       | (0.9     | )          | 0.5      |       |
| Net earnings (loss)                         |       | 11.8     | %          | (34.0    | )%         | 4.4      | %          |

 

Ourrevenue by product, by distribution channel and by geographical region is asfollows:
| **Years ended December 31,**        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |     |       |
| Revenue  by product                                |       |     |       |     |       |     |       |
| PC card                                            |       | 59       | %          | 70       | %          | 71       | %          |
| Embedded modules                                   |       | 33       |       | 13       |       | 24       |       |
| Mobile                                             |       | 5        |       | 13       |       | 3        |       |
| Other                                              |       | 3        |       | 4        |       | 2        |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |
|                                               |       |     |       |     |       |     |       |
| Revenue by distribution channel                    |       |     |       |     |       |     |       |
| Wireless carriers                                  |       | 24       | %          | 47       | %          | 49       | %          |
| PC OEM                                             |       | 1        |       | 6        |       | 13       |       |
| Other OEM                                          |       | 33       |       | 8        |       | 12       |       |
| Resellers                                          |       | 41       |       | 38       |       | 25       |       |
| Direct and other                                   |       | 1        |       | 1        |       | 1        |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |
|                                               |       |     |       |     |       |     |       |
| Revenue by geographical region                     |       |     |       |     |       |     |       |
| Americas                                           |       | 89       | %          | 69       | %          | 64       | %          |
| Europe, Middle East and Africa  (“EMEA”) |       | 6        |       | 12       |       | 17       |       |
| Asia-Pacific                                       |       | 5        |       | 19       |       | 19       |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |

 

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***Results of Operations – Year Ended December 31, 2006 Compared to YearEnded December 31, 2005***

*Revenue*

Revenue was $221.3millionfor the year ended December 31, 2006, compared to $107.1 million in 2005, anincrease of 107%.  The increase inrevenue was due primarily to increased sales of our UMTS/HSDPA and EV-DO PCCards through expanded channels, as well as an increase in sales of our CDMAEV-DO and recently launched UMTS/HSDPA embedded modules to both our PC OEM andtraditional OEM customers.

Our revenue fromcustomers in the Americas, EMEA and the Asia-Pacific region comprised 64%, 17%and 19%, respectively, of our total revenue in 2006 and 69%, 12% and 19%,respectively, in 2005.  Our NorthAmerican business has increased by 91% compared to the prior year as a resultof sales of our UMTS/HSDPA PC cards, the AirCard 860 and the AirCard 875, andsales of our CDMA EV-DO Rev A AirCard 595. In Europe, revenue increased by 209%, compared to 2005, as a result ofsales of our UMTS/HSDPA PC cards and embedded modules. In Europe, we launched ourAirCard 850 and AirCard 875 with a number of operators and resellers. By theend of the year, we were supplying UMTS/HSDPA AirCards to debitel in Germany,Bouygues Telecom and Orange in France, O2 and Orange in the UK, Swisscom Mobileand sunrise in Switzerland, Telefonica in Spain and to other operators in theregion.  Our business in the Asia-Pacificregion has increased 100% in 2006, compared to 2005, due primarily to anincrease in sales to PC OEM customers, as well as AirCard sales to Telstra inAustralia.

In 2006, Cingularand Sprint each accounted for more than 10% of our revenue and, in theaggregate, these two customersrepresented approximately 40% of our revenue. In 2005, these same two customers each accounted for more than 10% ofour revenue and, in the aggregate, these two customers representedapproximately 36% of our revenue.

A growing market,combined with rapid channel expansion, recent new product launches of ourUMTS/HSDPA AirCard 875, UMTS/HSDPA MC8775 embedded module, EV-DO Revision AAirCard 595 and EV-DO Revision A MC5725 embedded module and an anticipatedacceleration in new product launches, underpin our expectation of strongrevenue growth in 2007.

*Grossmargin*

Gross margin amounted to$69.2 million, or 31.3% of revenue in 2006, compared to $25.3 million, or 23.6%of revenue in 2005.  Included in grossmargin for 2005 was $12.7 million in restructuring charges.  Excluding this amount, gross margin for 2005amounted to $38.0 million, or 35.4% of revenue. The decline in gross margin percentage resulted primarily from increasedproduct costs of our newer, lower gross margin AirCard products, increasedsales of lower margin embedded module products and a reduction in sales ofhigher margin rugged mobile and legacy AirCard products.  Included in gross margin for 2006 is $0.4million of stock-based compensation expense, compared to nil in 2005.  During 2006, the gross margin on the sale ofpreviously written down Voq product was nil, compared to $0.5 million in 2005.

In2007, we expect that continued pressure on selling prices in our AirCard andembedded module products, due to intensified competition, combined withdecreased sales of higher margin legacy AirCard products, will put pressure onour gross margins.  We expect this willbe partially offset by increased sales of higher margin rugged mobile productsand lower cost of goods sold as a result of expected increased unit volume.

*Sales andmarketing*

Salesand marketing expenses were $13.7 million in 2006, compared to $15.6 million in2005, a decrease of 11.8%.  Sales and marketingexpenses declined despite the inclusion of $0.5 million of stock-basedcompensation expense in 2006 as compared to nil in 2005. Sales and marketingexpenses as a percentage of revenue decreased to 6.2% in 2006, compared to14.5% in 2005, due primarily to the increase in revenue for fiscal 2006,combined with reduced costs resulting from the 2005 restructuring and continuedcost containment.  While managing salesand marketing expenses relative to revenue, we expect to continue to makeselected investments in sales and marketing as we introduce new products,market existing products, expand our distribution channels and focus on keycustomers around the world.

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*Researchand development, net*

Research and developmentexpenses, net of conditionally repayable government research and developmentfunding, amounted to $34.1 million in 2006, compared to $30.4 million in 2005,an increase of 12.3%.  The increase isdue to the significant investment in new products being developed in both CDMAEV-DO and UMTS/HSDPA technologies.  In2006, eight new products were launched compared to four in 2005.  In addition, there was an increase inrepayments of repayable government research and development funding and theinclusion of $0.7 million of stock-based compensation expense in 2006, comparedto nil in 2005.

Gross research and developmentexpenses, excluding the government research and development funding andrepayments, were $32.1 million or 14.5% of revenue in 2006, compared to $30.4million, or 28.4% of revenue, in the same period of 2005. With the terminationof the Voq professional phone initiative in June 2005, no further governmentresearch and development funding is anticipated in the near future.

We expect gross research anddevelopment expenses to grow during 2007 as we continue investing in newproducts for new technologies.

*Administration*

Administrationexpenses amounted to $12.9 million, or 5.8% of revenue, in 2006, compared to$10.8 million, or 10.1% of revenue, in 2005. The increase of $2.1 million is primarily due to the inclusion of$2.2 million of stock-based compensation expense in 2006, compared to nil in2005. In 2005, administration expenses included the provision of $1.0 millionfor future legal costs related to litigation matters.

*Restructuring and other charges*

Restructuring and othercharges were nil during 2006, compared to $5.3 million in 2005. During thesecond quarter of 2005, we exited the Voq professional phone initiative andimplemented certain non-Voq related reductions to our operating expensesand assets.  In 2005, werecorded restructuring and other charges of $18.5 million, consisting ofinventory writedowns, severance costs, impairment of fixed, intangibleand deferred tax assets, provisions for facilities restructuring, commitments andother costs related to the restructuring.  Of the total amount of $18.5 million,$5.3 million was charged to restructuring and other charges, $12.7 million tocost of goods sold and $0.5 million to income tax expense.

*Otherincome*

Other income increased to $5.3million in 2006, compared to $2.3 million in 2005.  Other income includes interest income,interest expense and foreign exchange gains and losses.  This increase is due to an increase ininterest income from rising interest rates that was partially offset by asmaller investment balance and an increase in foreign exchange gains.  Our foreign exchange gain in 2006 was $0.9million, compared to a foreign exchange loss of $1.0 million in 2005.

*Income taxexpense (recovery)*

Income tax expense was $1.0 million during2006, compared to an income tax recovery of $0.9 million in 2005.  The 2005 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 expense in 2006 is due to anincrease in taxable income in 2006, whereas the income tax recovery in 2005 isa result of the utilization of loss carrybacks to recover income taxespreviously paid.

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*Net earnings (loss)*

Our net earnings amounted to $9.8million, or diluted earnings per share of $0.38, in 2006, compared to a netloss of $36.5 million, or loss per share of $1.44, in 2005.  Our net loss in 2005 includes restructuringand other charges of $18.5 million and a provision for future legal costsof $1.0 million.  Net earnings for 2006 include$3.8 million of stock-based compensation expense, compared to nil in 2005.

The weighted average dilutednumber of shares outstanding increased to 25.9 million in 2006, compared to25.4 million in 2005 because dilutive securities, such as stock options, areincluded in the total when we are in a profitable position, as is the case in2006, but are not included when we are in a loss position, as was the case in2005.

***Results of Operations – Three Months Ended December 31, 2006 Comparedto Three Months Ended December 31, 2005***

During the fourth quarterof 2006, our revenue increased 82% to $68.3 million, compared to $37.6 millionin the same period of 2005.  PC cardsales grew significantly, driven primarily by the recent launch of ourUMTS/HSDPA 3.6 Mbps and EV-DO Revision A products and the expansion of saleschannels in Europe and North America. Embedded module sales also grew considerably, driven primarily by anincrease in sales to our PC OEM customers. In the fourth quarter of 2006, Cingularand Verizon each accounted for more than 10% of our revenue, and in theaggregate, these two customers represented 37% of our revenue.

Gross margin for thethree months ended December 31, 2006 was 26.0%, compared to 38.6% in the sameperiod of 2005.  Gross margin in thefourth quarter of 2005 included the favourable impact of approximately $1.2million from the completion of a royalty agreement with an intellectualproperty holder. This agreement finalized a cumulative royalty obligation thatwas less than what had been previously expensed in cost of goods sold.  The decline in gross margin percentage in thefourth quarter of 2006 resulted primarily from increased product costs of ournewer, lower gross margin AirCard products, increased sales of lower marginembedded modules products and a reduction in sales of higher margin ruggedmobile and legacy AirCard products. Included in gross margin for 2006 is $0.1 million of stock-based compensationexpense, compared to nil in 2005.

Operating expenses were$16.4 million in the fourth quarter of 2006, compared to $14.6 million in thesame period of 2005.  This increase reflects the significantresearch and development investment being made to develop new products as wellas $0.9 million of stock-based compensation expense included in the fourthquarter of 2006, compared to nil in the same period of 2005.  Operating expenses in 2005 include the recoveryof approximately $0.7 million from insurance proceeds related to an ongoing legalproceeding, offset by a $0.6 million writedown of patents and licenses and $0.3million of restructuring charges associated with our facilities.

Net earnings for the fourth quarter increased to $2.4million in 2006, or $0.09 per diluted share, compared to $0.9 million in 2005,or $0.04 per diluted share.

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

*Revenue*

Revenue was $107.1millionfor the year ended December 31, 2005, compared to $211.2 million in 2004, adecrease of 49.3%.  The decrease inrevenue was due primarily to a decrease in sales of PC cards and embeddedmodules.  During the first part of 2005,PC card revenue decreased primarily due to reported channel inventory atsome of our channel partners that was sufficient to meet near term customerdemand and the impact of increased competition in CDMA EV-DO PC cards.   The competitive environment in CDMA EV-DO PCcards intensified over the year, which had a negative impact on our sales ofCDMA EV-DO PC cards and resulted in a loss of market share at VerizonWireless.  Embedded module revenuedecreased primarily due to the completion of shipments of embedded modules to palmOne for the Treo 600 at the end of2004.   In the second quarter of 2005 weannounced our plan to exit the Voq professional phone initiative.  During2005, revenue from the sale of previously written down Voq product was $1.5million.

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Our revenue fromcustomers in the Americas, Europe and the Asia-Pacific region comprised 69%,12% and 19%, respectively, of our total revenue in 2005 and 89%, 6% and 5%,respectively, in 2004.  Our NorthAmerican business decreased significantly compared to the prior year as aresult of a decline in sales of our PC card and embedded module products tocertain North American customers. Consistent with the past several years, our business continues to bedriven predominantly by short lead-time purchase orders from channels and endcustomers rather than by long-term, large volume commitments.  In Europe, the deployment of UMTS networksnegatively affected our GSM/GPRS sales in that region as we did not have a UMTScompatible product until the fourth quarter of 2005. This negative impact waspartially offset by sales of our EDGE product. Our business in the Asia-Pacific region increased as a result of strongsales of CDMA EV-DO and EDGE PC cards.

In 2005, Cingularand Sprint each accounted for more than 10% of our revenue and, in theaggregate, these two customersrepresented approximately 36% of our revenue. This compared favorably with the same period in 2004 in which twocustomers each accounted for more than 10% of our revenue and, in theaggregate, these two customers represented approximately 51% of our revenue.

*Grossmargin*

Gross margin amounted to$25.3 million in 2005.  Of the total$18.5 million restructuring and other charges that were recorded in 2005, $12.7million was charged to gross margin. Excluding this amount, gross margin amounted to $38.0 million, or 35.4%of revenue, in 2005, compared to $83.6 million, or 39.6% of revenue, in2004.  The decline in gross marginpercentage resulted primarily from lower selling prices of our PC card productsand lower volumes overall, offset slightly by a favorable product mix betweenhigher margin PC cards and rugged mobiles versus lower margin embeddedmodules.  During 2005, gross margin onthe sale of previously written down Voq product was $0.5 million.

*Sales andmarketing*

Salesand marketing expenses were $15.6 million in 2005, compared to $20.0 million in2004, a decrease of 22.4%.  This declinereflected the impact of our business restructuring and continued costcontainment.  Sales and marketingexpenses as a percentage of revenue increased to 14.5% in 2005, compared to9.5% in 2004, due primarily to the decrease in revenue for 2005.

*Researchand development, net*

Research and developmentexpenses, net of conditionally repayable government research and developmentfunding, amounted to $30.4 million in 2005, compared to $24.5 million in 2004,an increase of 23.8%.

Gross research and developmentexpenses, before Government of Canada’s Technology Partnerships Canada (“TPC”)research and development funding, were $31.3 million, or 29.2% of revenue in2005, compared to $27.2 million, or 12.9% of revenue, in 2004.  Repayment of TPC funding of $0.9million was included inour gross research and development expenses in 2005, compared to $1.9 millionin 2004.  Gross research and developmentexpenses increased due to the development of new PC cards and embedded modules.  With our decision to exit the Voqprofessional phone initiative, research and development expenditures and TPCfunding associated with that initiative ceased.

During 2004, we signed a secondagreement with the Government of Canada’s TPC program under which we wereeligible to receive conditionally repayable research and development funding upto Cdn. $9.5 million to support the development of the Voq professional phoneinitiative.  The agreement was effectivefor development work commencing April 2003. In 2005, funding of $0.9 million was recognized.  Funding of $2.6 million was recognized during2004, of which $1.1 million related to the period from April 1, 2003 toDecember 31, 2003.  Our TPC funding wasbased on research and development work completed in each quarter.  With the termination of the Voq professional phoneinitiative no further TPC funding is anticipated.

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*Administration*

Administrationexpenses amounted to $10.8 million, or 10.1% of revenue, in 2005, compared to$9.0 million, or 4.3% of revenue, in 2004. The increase of $1.8 million was primarily due to the provisionof $1.0 million for future legal costs related to litigation matters and anincrease in other professional fees.  Inaddition, administration expenses in 2004 were net of recoveries of $0.5million from Metricom, a former customer, related to a settlement agreement forwhich there was no comparable recovery in 2005.

*Restructuring and other charges*

During the second quarter of2005, we exited the Voq professional phone initiative and implementedcertain non-Voq related reductions to our operating expenses and assets.  During the fourth quarter we recordedadditional charges primarily related to a change in estimate of ourfacilities restructuring originally announced in the second quarter of2005.  As a result, in 2005 werecorded restructuring and other charges of $18.5 million, consisting ofinventory writedowns, severance costs, impairment of fixed, intangibleand deferred tax assets, provisions for facilities restructuring, commitmentsand other costs related to the restructuring.  Of the total amount of $18.5 million,$5.3 million was charged to restructuring and other charges, $12.7 million tocost of goods sold and $0.5 million to income tax expense.

*Otherincome*

Other income increased to $2.3million in 2005, compared to $1.7 million in 2004.  Other income included interest income,interest expense and foreign exchange gains and losses.  This increase was due primarily to anincrease in interest income from rising interest rates that was partiallyoffset by a smaller investment balance and foreign exchange losses.

*Income taxexpense (recovery)*

During 2005, our income tax recovery was $0.9million, compared to income tax expense of $4.4 million in 2004.  Income tax recovery, excluding the increasein our deferred tax asset valuation allowance of $0.5 million recognized on therestructuring, was $1.4 million.  Theincome tax recovery was a result of the utilization of loss carrybacks to recoverincome taxes previously paid in 2004.

*Net earnings (loss)*

Our net loss amounted to $36.5million, or loss per share of $1.44, in 2005, compared to net earnings of $24.9million, or diluted earnings per share of $0.96, in 2004.  Our net loss in 2005, excluding restructuringand other charges of $18.5 million and the provision for future legalcosts of $1.0 million, was $17.0 million, or loss per share of $0.67.

The weighted average dilutednumber of shares outstanding decreased to 25.4 million in 2005 compared to 26.1million in 2004 because dilutive securities such as stock options are excludedfrom the total when we are in a loss position, as was the case in 2005.

**Stock-BasedCompensation**

In 2005, the Board ofDirectors approved the accelerated vesting of certain “out-of-the-money” stockoptions previously granted under the our 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, we are required to expense the fair value ofall stock-based compensation arrangements, including employee stock options, inour financial statements. Prior to January 1, 2006, we were only required toprovide pro forma disclosure in the notes to the financial statements of ournet income (loss) after the effect of employee stock-based compensation expense.

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In aggregate, the vesting ofstock options to purchase 175,650 common shares, with an exercise price ofUS$14.25 per share or greater, were accelerated.  The exercise price of the options was 25%higher than the market price at the time the Board of Directors approved theaccelerated vesting.  The options becameexercisable as of November 2005, but would otherwise have vested over time upto December 2008.  The term, exercise priceand number of common shares issuable upon exercise remained unchanged.

Accelerating the vesting of these stock optionsresulted in expensing approximately $2.3 million in our pro forma notedisclosure in 2005. The impact was a reduction of our otherwise calculatedstock-based compensation expense of approximately $1.1 million in 2006 andexpected reductions of approximately $1.1 million in 2007 and $0.1 million in2008.

**ContingentLiabilities**

Sierra Wireless America,Inc., as successor to AirPrime, Inc., is named as a defendant in a class actioncomplaint for alleged violations of federal and state securities laws allegedlyoccurring prior to the time AirPrime, Inc. was acquired by the Company. Thesettlement of this litigation was approved by the Superior Court of the State of California for the County of SanDiego in February 2007.  The settlement,which will be recorded once the appeal period has ended, will have no neteffect on our income statement.  If thejudgment of the Court does not become final due to a successful appeal, thelitigation will continue and although there can be no assurance that anunfavourable outcome of the dispute would not have a material adverse effect onour operating results, liquidity or financial position, we believe the claimsare without merit and will vigorously defend them.

TheCompany and certain of our current and former officers are named as defendantsin several class action complaints for alleged violations of federal securitieslaws, which are consolidated for pre-trial purposes in the U.S. District Courtfor the Southern District of New York. The plaintiffs filed their consolidatedamended complaint on February 21, 2006 and the Company and the other defendantsfiled a motion to dismiss on April 7, 2006. To date, the Court has notconsidered the motion to dismiss. We have given notice to our liabilityinsurance carrier, which has agreed to pay our costs of defence that exceed thepolicy’s retention amount, subject to a reservation of rights in the event thatit is determined that the carrier has no liability for this litigation.Although there can be no assurance that an unfavourable outcome would not havea material 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.

We are engaged in otherlegal actions in the ordinary course of business and believe that the ultimateoutcome of these actions will not have a material adverse effect on ouroperating results, liquidity or financial position.

**SubsequentEvent**

OnMarch 6, 2007, we announced a definitive agreement to acquire 100 percent ofthe outstanding securities of AirLink Communications, Inc. (“AirLink”), aprivately held supplier of high value fixed and mobile wireless data solutionsfor industrial and public safety applications located in Hayward,California.  Under the terms of thedefinitive agreement, Sierra Wireless will pay $10.0 million of cashconsideration, subject to customary closing adjustments, and will issueapproximately 1.3 million shares of Sierra Wireless to the shareholders ofAirLink.  The completion of thecombination is expected by the end of June 2007.

The combination joins AirLink, a leadingprovider of fixed, portable and mobile wireless connectivity devices, embeddedsoftware and remote device management software, with Sierra Wireless, a leadingprovider of wide area wireless solutions for mobile computing.  The combined entity is expected to be aleader in mobile computing as well as rugged, intelligent mobile and M2Mconnectivity solutions.  The acquisitionis consistent with our strategy of renewing and strengthening our emphasis onhigher gross margin products and solutions.

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**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, expenses and therelated disclosure of contingent liabilities. On an ongoing basis, we evaluateour estimates and judgments, including those related to revenue recognition,adequacy of allowance for doubtful accounts, adequacy of inventory reserve,adequacy of warranty reserve, royalty obligations and income taxes.  We base our estimates on historicalexperience, anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances. By their nature,estimates are subject to an inherent degree of uncertainty.  Actual results may differ from ourestimates.  Senior management hasdiscussed with our audit committee the development, selection and disclosure ofaccounting estimates used in the preparation of our consolidated financialstatements.

Other than the change inaccounting for stock-based compensation disclosed earlier, during the yearended December 31, 2006, we did not adopt any new accounting policies or makechanges to existing accounting policies that had a material impact on ourconsolidated financial statements.

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

·                  We recognize revenue from sales of products andservices upon the later of transfer of title or upon shipment of the product tothe customer or rendering of the service, so long as collectibility isreasonably assured. Customers include resellers, original equipmentmanufacturers, wireless operators and end-users. We record deferred revenuewhen we receive cash in advance of the revenue recognition criteria being met.

A significant portion of our revenue is generated fromsales to resellers.  We recognize revenueon the portion of sales to certain resellers, that are subject to contractprovisions allowing various rights of return and stock rotation, upon theearlier of when the rights have expired or the products have been reported assold by the resellers.

Revenuesfrom contracts with multiple-element arrangements, such as those includingtechnical support services, are recognized as each element is earned based onthe relative fair value of each element and only when there are no undeliveredelements that are essential to the functionality of the delivered elements.

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

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

·                  We maintain anallowance for doubtful accounts for estimated losses that may arise if any ofour customers are unable to make required payments.  We consider the following factors whendetermining whether collection is reasonably assured:  customer credit-worthiness, past transactionhistory with the customer, insured amounts, if any, current economic industrytrends and changes in customer payment terms. If we have no previous experience with the customer, we typically obtainreports from credit organizations to ensure that the customer has a history ofpaying its creditors.  We may alsorequest financial information, including financial statements, to ensure thatthe customer has the means of making payment. If these factors indicate collection is not reasonably assured, revenueis deferred until collection becomes

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reasonablyassured, which is generally upon receipt of cash.  If the financial condition of any of ourcustomers deteriorates, we may increase our allowance.

·                  We value our inventory at the lower of cost,determined on a first-in-first-out basis, and estimated net realizable value.We assess the need for an inventory writedown or an accrual for estimatedlosses on inventory purchase commitments based on our assessment of estimatedmarket value using assumptions about future demand and market conditions. Ourreserve requirements generally increase as our projected demand requirementsdecrease, due to market conditions, technological and product life cyclechanges and longer than previously expected usage periods.  If market conditions are worse than ourprojections, we may further writedown the value of our inventory or increasethe accrual for estimated losses on inventory purchase commitments.

·                  We currently have intangible assets of $9.9million and goodwill of $18.4 million generated from our acquisition ofAirPrime in August 2003.  Goodwill istested for impairment annually, or more often, if an event or circumstanceindicates that an impairment loss has been incurred.

We assessed the realizability of goodwill related toour reporting unit during the fourth quarter of each of 2004, 2005 and 2006 anddetermined that the fair value exceeded the carrying amount of the reportingunit 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 toassess whether their realization is more likely than not. If their realizationis not considered more likely than not, we provide for a valuation allowance.The ultimate realization of our deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which temporarydifferences become deductible. We consider projected future taxable income andtax planning strategies in making our assessment. If our assessment of ourability to realize our deferred tax assets changes, we may make an adjustmentto our deferred tax assets that would be charged to income.

·                  We accrue product warranty costs in accruedliabilities to provide for the repair or replacement of defectiveproducts.  Our accrual is based on anassessment of historical experience and management’s estimates.  If there is a change in the quality of ourproducts, we will adjust our accrual accordingly.

·                  Under licenseagreements, we are committed to royalty payments based on the sales of productsusing certain technologies.  We recognizeroyalty obligations as determinable in accordance with agreement terms.  Where agreements are not finalized, we haverecognized our current best estimate of the obligation in accruedliabilities.  When the agreements arefinalized, the estimate will be revised accordingly.

·                  We recorded a lease provision during 2002 thathas been subsequently adjusted as a result of changes in our assumptions usedto estimate the net present value of the future cash outflows over theremaining lease period.  The estimate wasbased on various assumptions, including the obtainable sublease rates and thetime it will take to find a suitable tenant. These assumptions are influenced by market conditions and theavailability of similar space nearby.  Asmarket conditions change, we will adjust our provision accordingly.

·                  We are engagedin certain legal actions. We estimate the range of liability related to pendinglitigation where the amount and range of loss can be reasonably estimated.  We record our best estimate of a loss whenthe loss is considered probable.  Asadditional information becomes available, we assess the potential liabilityrelating to our pending litigation and revise our estimates.

·                  EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of FAS 123R,using the modified prospective transition method and therefore have notrestated results for prior periods. Under this transition method, we recognizecompensation expense for all stock options granted prior to, but not yet vestedas of January 1, 2006, based on the grant date fair value estimated inaccordance with the original

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provision of FAS 123. Stock-based compensation expensefor all stock-based compensation awards granted after January 1, 2006 is basedon the grant date fair value estimated in accordance with the provisions of FAS123R. Under the fair value recognition provisions of FAS 123R, we recognizestock-based compensation expense for those shares expected to vest on astraight-line basis over the requisite service period of the award.

Determiningthe appropriate fair value model and calculating the fair value of share-basedpayment awards requires the input of subjective assumptions. The assumptionsused in calculating the fair value of share-based payment awards representmanagement’s best estimates, but these estimates involve inherent uncertaintiesand the application of management judgment. As a result, if factors change andwe use different assumptions, our stock-based compensation expense could bematerially different in the future.

**Liquidityand Capital Resources**

*Operating Activities*

Cash used by operating activities was $8.1million in 2006, compared to cash used by operating activities of $17.3 millionin 2005.  The use of cash in operatingactivities in 2006 primarily resulted from net earnings for the year of $9.8million adjusted for non-cash items and changes in other operating assets andliabilities of $17.9 million.

*Investing Activities*

Cash used by investing activities was $10.3 millionin 2006, compared to cash used by investing activities of $50.0 million in2005.  The use of cash in investingactivities during 2006 was due primarily to the expenditures on intangibleassets of $1.6 million and on fixed assets of $9.1 million, compared to $2.1million and $8.3 million, respectively, in 2005.  Expenditures for intangible assets wereprimarily for license fees and patents while fixed asset expenditures wereprimarily for research and development equipment, tooling, computer equipmentand software.

We do not have any trading activities that involveany type of commodity contracts that are accounted for at fair value but forwhich a lack of market price quotations necessitate the use of fair valueestimation techniques.

*Financing Activities*

Cashprovided by financing activities was $0.2 million in 2006, compared to nil in2005.  Cash provided by financingactivities in 2006 was from the proceeds on the exercise of stock options, partiallyoffset by the repayment of long-term liabilities.

As of December 31, 2006, we did not have anyoff-balance sheet finance or special purpose entities.

*Cash Requirements*

Our near-term cash requirements are primarilyrelated to funding our operations, capital expenditures and other obligationsdiscussed below.  In the near term, weexpect that our cash flow from operating activities will be positive.    We believe our cash, cash equivalents and short andlong-term investments of $87.0 million and cash generated from operations willbe sufficient to fund our expected working and other capital requirements forat least the next twelve months based on current business plans.  Our capital expenditures during 2007 are expectedto be primarily for research and development equipment, tooling, licenses andpatents.  However, we cannot provideassurance that our actual cash requirements will not be greater than wecurrently expect.

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The following table quantifies our futurecontractual obligations as of December 31, 2006:
| ** **                                | ** ** | ** **    | ** ** | **Obligations** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                                | ** ** | ** **    | ** ** | **under**       | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Operating** | ** ** | **Capital**     | ** ** | ** ** | ** ** |
| **Payments due in fiscal** | ** ** | **Leases**    | ** ** | **Leases**      | ** ** | **Total**  | ** ** |
|                                      |       |          |       |            |       |       |       |
| 2007                                      |       | $             | 3,006      |            | $          | 6          |       | $ | 3,012 |   |
| 2008                                      |       | 2,900         |       | —          |       | 2,900      |       |
| 2009                                      |       | 2,220         |       | —          |       | 2,220      |       |
| 2010                                      |       | 2,211         |       | —          |       | 2,211      |       |
| 2011                                      |       | 1,242         |       | —          |       | 1,242      |       |
| Thereafter                                |       | 96            |       | —          |       | 96         |       |
| Total                                     |       | $             | 11,675     |            | $          | 6          |       | $ | 11,681 |   |

 

We have entered into purchase commitmentstotalling approximately $77.5 million with certain contract manufacturers underwhich we have committed to buy a minimum 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 thecommitment may require us to purchase approximately $77.5 million of productfrom certain contract manufacturers between January 2007 and March 2007.

*Sources and Uses of Cash*

During 2006, we had an unsecured revolving demand facility for $10.0million that bears interest at prime per annum. The balance at December 31, 2006 was nil (2005 — nil).

During2006, we obtained a letter of credit to ensure the performance of a third partyin accordance with specified terms and conditions. At December 31, 2006, we had$3.2 million outstanding under the letter of credit, which approximates thefair value.

Our business continues tobe driven predominantly by short lead time purchase orders from channels andend customers rather than by long-term, large volume commitments.   Our customers are typically underno contractual obligation to purchase our products.  If they do not make such purchases, ourfuture operating cash flow will 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, borrowings and cash fromoperations, as follows:

·                  Net cash and short andlong-term investments amounted to $87.0 million at December 31, 2006, comparedto $104.4 million at December 31, 2005.

·                  Accounts receivableamounted to $57.4 million at December 31, 2006, compared to $20.3 million atDecember 31, 2005.

·                  We have a $10.0 million unsecured revolvingdemand facility with a Canadian chartered bank that bears interest atprime.  At December 31, 2006, there wereno borrowings under this facility.

**Market RiskDisclosure**

Our risk from currencyfluctuations between the Canadian and U.S. dollar is reduced by purchasinginventory, other costs of sales and many of our services in U.S. dollars.  We are exposed to foreign currencyfluctuations because a significant amount of our research and development,marketing, and administration costs are incurred in Canada. We monitor our exposureto fluctuations between the Canadian and U.S. dollars. For the year endedDecember 31, 2006, we have recorded a foreign exchange gain of approximately$0.9 million.  As we have available fundsand very little debt, we have not been materially adversely affected bysignificant interest rate fluctuations.

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Withrespect to operations in Europe and the Asia-Pacific region, we transactbusiness in additional foreign currencies and the potential for currencyfluctuations is increasing.  As ourbusiness expands in Europe, we expect that we will be increasingly exposed torisks associated with the Euro. To date we have not entered into any futurescontracts. To manage our foreign currency risks, we may enter into suchcontracts should we consider it to be advisable to reduce our exposure to futureforeign exchange fluctuations.

Currently, we do not have anyhedging activities or derivative instruments.

**Related PartyTransactions**

During the year ended December31, 2006, there were no material related party transactions.

**DisclosureControls**

The Company’s management isresponsible for establishing and maintaining adequate disclosure controls andprocedures for the Company.  Ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed in our reports filed with securities regulatoryauthorities is recorded, processed, summarized and reported within prescribedtime periods and is accumulated and communicated to our management, includingour Chief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

An evaluation was carried out under the supervision of, and with theparticipation of, our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of our disclosure controls andprocedures as of December 31, 2006. Based on that evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective to ensure that information required to be disclosed bythe Company in the reports it files or submits under applicable securities lawsand regulations is recorded, processed, summarized, and reported within thetime periods specified thereby.

The Company doesnot expect that its disclosure controls and procedures will prevent all errorand all fraud, if any. A control procedure, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control procedure are met. Because of the inherentlimitations in all control procedures, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The Company consideredthese limitations during the development of it disclosure controls andprocedures and will continually re-evaluate them to ensure they providereasonable assurance that such controls and procedures are effective.

**InternalControl Over Financial Reporting**

**Management’s Annual Report on Internal Control Over FinancialReporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)under the U.S. Securities Exchange Act of 1934.

Our internalcontrol over financial reporting includes those policies and procedures that:(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of our assets;(2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures arebeing made only in accordance with authorizations of our management anddirectors; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on the financial statements.

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Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Under thesupervision and with the participation of our Chief Executive Officer and ourChief Financial Officer, management conducted an evaluation of theeffectiveness of our internal control over financial reporting, as of December31, 2006, based on the framework set forth in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on its evaluation underthis framework, management concluded that our internal control over financialreporting was effective as of that date.

**Changesin Internal Controls Over Financial Reporting**

As 2006 is thefirst year that management is reporting on our internal controls over financialreporting, as set out above, we have no changes to report.  On a going forward basis, under this heading,we will describe significant changes to our internal controls.

The design of anysystem of controls and procedures is based in part upon certain assumptionsabout the likelihood of certain events. There can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

**QuarterlyResults of Operations**

Thefollowing tables set forth certain unaudited consolidated statements ofoperations data for each of the eight most recent quarters that, in management’sopinion, have been prepared on a basis consistent with the audited consolidatedfinancial statements contained in our fiscal 2006 Annual Report.  The unaudited consolidated statements ofoperations data presented below reflects all adjustments, consisting primarilyof normal recurring adjustments, which are, in the opinion of management,necessary for a fair presentation of results for the interim periods.  These operating results are not necessarilyindicative of results for any future period. You should not rely on them to predict our future performance.

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| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Year**         | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------|------------|
| **2006**                                          | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **2006** | ** ** |
|                                              |       |                   |       |             |       |   |   |   |   |   |   |
| Revenue                                           |       | $                      | 45,224     |             | $          | 55,223 |   | $ | 52,535 |   | $ | 68,303 |   | $ | 221,285 |   |
| Cost of goods sold                                |       | 28,567                 |       | 36,366           |       | 36,651 |   | 50,524 |   | 152,108 |   |
| Gross margin                                      |       | 16,657                 |       | 18,857           |       | 15,884 |   | 17,779 |   | 69,177 |   |
|                                              |       |                   |       |             |       |   |   |   |   |   |   |
| Expenses:                                         |       |                   |       |             |       |   |   |   |   |   |   |
| Sales and marketing                               |       | 3,750                  |       | 3,726            |       | 2,820 |   | 3,418 |   | 13,714 |   |
| Research and development, net                     |       | 7,528                  |       | 8,905            |       | 8,830 |   | 8,824 |   | 34,087 |   |
| Administration                                    |       | 2,747                  |       | 3,301            |       | 3,427 |   | 3,404 |   | 12,879 |   |
| Amortization                                      |       | 759                    |       | 748              |       | 697 |   | 705 |   | 2,909 |   |
|                                              |       | 14,784                 |       | 16,680           |       | 15,774 |   | 16,351 |   | 63,589 |   |
| Earnings from operations                          |       | 1,873                  |       | 2,177            |       | 110 |   | 1,428 |   | 5,588 |   |
| Other income                                      |       | 1,175                  |       | 1,306            |       | 1,146 |   | 1,627 |   | 5,254 |   |
| Earnings before income taxes                      |       | 3,048                  |       | 3,483            |       | 1,256 |   | 3,055 |   | 10,842 |   |
| Income tax expense (recovery)                     |       | 461                    |       | (287             | )          | 188 |   | 684 |   | 1,046 |   |
| Net income                                        |       | $                      | 2,587      |             | $          | 3,770 |   | $ | 1,068 |   | $ | 2,371 |   | $ | 9,796 |   |
|                                              |       |                   |       |             |       |   |   |   |   |   |   |
| Earnings per share:                               |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | $                      | 0.10       |             | $          | 0.15 |   | $ | 0.04 |   | $ | 0.09 |   | $ | 0.38 |   |
| Diluted                                           |       | $                      | 0.10       |             | $          | 0.15 |   | $ | 0.04 |   | $ | 0.09 |   | $ | 0.38 |   |
|                                              |       |                   |       |             |       |   |   |   |   |   |   |
| Weighted average number of shares (in thousands): |       |                   |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | 25,492                 |       | 25,602           |       | 25,660 |   | 25,681 |   | 25,609 |   |
| Diluted                                           |       | 25,736                 |       | 25,959           |       | 25,874 |   | 25,856 |   | 25,857 |   |

 
| ** **                                        | ** ** | **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 |   |
| 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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Ourquarterly results 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 items incurred during the first three interimperiods of each fiscal year are discussed in more detail and disclosed in ourquarterly reports on Form 6-K.  Itemsaffecting our quarterly results were as follows:

·                  Revenue in 2006 increasedsignificantly compared to 2005 as a result of several new AirCard and embeddedmodule product introductions and the expansion of our sales channels.  During 2006, gross margin declined as aresult of increased product cost for our newer AirCard products, higher salesof lower margin embedded module products and lower sales of higher marginrugged mobile products.

·                  Relative to thecomparable periods in 2004, revenues decreased during the four quarters of 2005due to a reduction in our embedded module business volumes as a result of thecompletion of embedded module shipments to palmOne at the end of 2004, reportedchannel inventory that was already sufficient to meet customer demand in thefirst quarter of 2005, and increased competition in CDMA EV-DO and EDGE PC cards, including a lossof market share at Verizon Wireless.

·                  Restructuring and othercharges of $18.2 million were incurred in the second quarter of 2005.  Included in these charges are inventorywritedowns, severance costs, impairment of fixed, intangible and deferred taxassets, provisions for facilities restructuring, commitments and other costsrelated to restructuring. We also recorded a provision of $1.0 million forfuture legal costs associated with litigation matters.

·                  Revenuesincreased during 2004 as a result of the introduction of new products, ourstrong market position in CDMA EV-DO Release 0 PC cards and our CDMA 1Xembedded modules sales to palmOne.

·                  During the first quarterof 2004, we signed a second agreement with the Government of Canada’sTechnology Partnerships Canada (“TPC”) program. The agreement was effective for development work commencing April2003.  Funding of $1.4 million wasrecognized as a reduction to research and development expenses in the firstquarter of 2004, of which $1.1 million related to the period from April 1, 2003to December 31, 2003.  With the termination ofthe Voq professional phone initiative in the second quarter of 2005, no furtherTPC funding is anticipated.

**SelectedAnnual Information**
| **Years ended December 31,**                                                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                |       |     |       |     |       |     |       |
| Revenue                                                                                             |       | $        | 211,205    |     | $          | 107,144  |       | $ | 221,285 |   |
| Net earnings (loss)                                                                                 |       | 24,920   |       | (36,468  | )          | 9,796    |       |
| Diluted earnings (loss) per share                                                                   |       | 0.96     |       | (1.44    | )          | 0.38     |       |
| Total assets                                                                                        |       | 215,594  |       | 173,980  |       | 211,608  |       |
| Total  current and long-term portions of long-term liabilities  and obligations under capital lease |       | 3,456    |       | 3,128    |       | 1,992    |       |
|                                                                                                     |            |          |            |          |            |          |            |  |  |  |

 

**Forward-lookingStatements**

Certainstatements in this report that are not based on historical facts constituteforward-looking statements or forward-looking information within the meaning ofapplicable securities laws (‘forward-looking statements”). These forward-lookingstatements are not promises or guarantees of future performance but are onlypredictions that relate to future events, conditions or circumstances or ourfuture results, performance, achievements or developments and are subject tosubstantial known and unknown risks, assumptions, uncertainties and otherfactors that could cause our actual results, performance, achievements ordevelopments in our business or in our industry to differ materially from thoseexpressed, anticipated or implied by such forward-looking statements.Forward-looking statements include disclosure regarding possible events,conditions circumstances or results of operations that are based on assumptionsabout future economic conditions, courses of action and other future events.  We caution you not to

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placeundue reliance upon any such forward-looking statements, which speak only as ofthe date they are made.  Theseforward-looking statements appear in a number of different places in thisreport and can be identified by words such as “may”, “estimates”, “projects”, “expects”,“intends”, “believes”, “plans”, “anticipates”, or their negatives or othercomparable words.  Forward-lookingstatements include statements regarding the outlook for our future operations,plans and timing for the introduction or enhancement of our services andproducts, statements concerning strategies or developments, statements aboutfuture market conditions, supply conditions, end customer demand conditions,channel inventory and sell through, revenue, gross margin, operating expenses,profits, forecasts of future costs and expenditures, the outcome of legalproceedings, and other expectations, intentions and plans that are nothistorical fact. The risk factors and uncertainties that may affect our actualresults, performance, achievements or developments are many and include,amongst others, our ability to develop, manufacture, supply and market newproducts that we do not produce today and that meet the needs of customers andgain commercial acceptance, our reliance on the deployment of next generationnetworks by major wireless operators, the continuous commitment of ourcustomers and increased competition. These risk factors and others are discussed in our Annual InformationForm which may be found on SEDAR at www.sedar.com and in our other regulatoryfilings with the Securities and Exchange Commission in the United States andthe Provincial Securities Commissions in Canada.  Many of these factors are beyond the controlof the Company.  Consequently, allforward-looking statements in this report are qualified by this cautionarystatement and there can be no assurance that actual results, performance,achievements or developments anticipated by the Company will be realized.  Forward-looking statements are based onmanagement’s current plans, estimates, projections, beliefs and opinions andthe Company does not undertake any obligation to update forward-lookingstatements should the assumptions related to these plans, estimates,projections, beliefs and opinions change.

**Risk Factors**

Our business is subject to significant risksand past performance is no guarantee of future performance. Some of the riskswe face are:

**We haveincurred net losses and if our efforts to restore the business to sustainedprofitability are not successful, we may be required to further restructure ortake other actions and our share price may decline.**

During 2006, our netearnings were $9.8 million.  However, asa result of the reduction in our business in 2005, we incurred a loss of $36.5million in that year. Our accumulated deficit at December 31, 2006 was $73.1million. While we had earnings from operations for each of the two years endedDecember 31, 2004 and 2003, we incurred a loss from operations in each of thethree fiscal years 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.While we have returned to profitability for five sequential quarters, if wecannot sustain 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 not be onacceptable terms. We may seek to raise additional capital through an offeringof common shares, preference shares or debt, which may result in dilution,and/or the issuance of securities with rights senior to the rights, of theholders of common shares. As a result, our share price may decline.

**Our quarterly financial results are subject tofluctuations that could affect the market price of our common shares.**

Our revenues, gross margin and earnings may vary from quarter toquarter and could be significantly impacted by a number of factors, including:

·                  Transition periods associated with the migration ofnew technologies;

·                  The development and timing of the introduction of ournew products;

·                  The securing of channel slots for new products;

·                  The timing of sales orders and OEM and carriercustomer sell through;

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·                  Design win cycles in our embedded module business;

·                  The achievement of milestones related to ourprofessional services contracts;

·                  The amount of inventory held by our channel partners;

·                  Price and product competition from our competitors,which may result in lower selling prices for some of our products;

·                  Possible cyclical fluctuations related to theevolution of wireless technologies;

·                  Product mix of our sales.  Our products have different gross margins –for example the embedded module product line has lower gross margins than thehigher margin rugged mobile product line;

·                  Possible delays in the manufacture or shipment ofcurrent or new products;

·                  Possible increased inventory levels;

·                  Concentration in our customer base;

·                  Possible delays or shortages in component supplies;and

·                  Possible product quality or factory yield issues thatmay increase our cost of goods sold.

Becauseour operating 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, gross marginand earnings in any given quarter. Therefore, our quarterly results are notnecessarily indicative of our overall business, results of operations andfinancial condition.

Quarterlyvariations in operating results or any of the other factors listed above,changes in financial estimates by securities analysts, or other events orfactors may result in wide fluctuations in the market price of our stock price.In addition, the financial markets have experienced significant price andvolume fluctuations that have particularly affected the market prices of equitysecurities of many technology companies and that often have been unrelated tothe operating performance of these companies or have resulted from the failureof the operating results of such companies to meet market expectations in a particularquarter. Broad market fluctuations or any failure of the Company’s operatingresults in a particular quarter to meet market expectations may adverselyaffect the market price of our common shares.

**We are subject to, and may in the future be subject to,certain class action lawsuits, which if decided against us, could require us topay substantial judgments, settlements or other penalties.**

In addition tobeing subject to litigation in the ordinary course of business, we arecurrently, and may in the future be, subject to class actions and othersecurities 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 ourobligations to indemnify officers and directors who may be parties to suchactions, could materially adversely affect our cash position. We do not know ifany of this type of litigation and resulting expenses will be covered byinsurance. In addition, these lawsuits may cause our insurance premiums toincrease in future periods.

**Competition from new orestablished wireless communication companies or from those with greaterresources may prevent us from increasing or maintaining our market share andcould result in price reductions and reduced revenues and gross margins.**

The wireless communications industry is subject to rapidtechnological change, meaning that the wireless technology standards continuallyevolve, and there are frequent product introductions and short product lifecycles.  The wireless communicationsindustry is highly competitive and we expect competition to increase andintensify. More established and larger companies with greater financial,technical and marketing resources sell products that compete with ours and weexpect this competition to intensify. We also may introduce new

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products that will put us in direct competition withmajor new competitors. Existing or future competitors may be able to respondmore quickly to technological developments and changes and introduce newproducts before we do, or may independently develop and patent technologies andproducts that are superior to ours or achieve greater acceptance due to factorssuch as more favorable pricing or more efficient sales channels. If we areunable to compete effectively with our competitors’ pricing strategies,technological advances and other initiatives, we may lose customer orders andmarket share and we may need to reduce the price of our products, resulting inreduced revenue and reduced gross margins.

**The loss of any of our material customers could adversely affect ourrevenues and profitability, and therefore shareholder value.**

Wedepend on a small number of customers for a significant portion of our revenuesas the Company sells most of its products through network carriers, resellersand OEMs rather than directly to end user customers. Many of these carriers andresellers also sell products of our competitors.  Accordingly, our business and future successdepends on our ability to build on existing relationships and establish anddevelop new relationships with network carriers and resellers.

Inthe three months ended December 31, 2006, two customers individually accountedfor more than 10% of our revenue and, in the aggregate, these two customersrepresented 37% of our revenue. In the last three fiscal years, there have beenfour different customers that individually accounted for more than 10% of ourrevenues. In the year ended December 31, 2006, two customers individuallyaccounted for more than 10% of our revenue and, in the aggregate, these two  customersrepresented 40% of our revenue. If any of these customers, for any reason,discontinues their relationship with us or reduces or postpones current orexpected purchase orders for products or suffers from business failure, ourrevenues and profitability could decline, perhaps materially.

Inaddition, our current customers purchase our products under stand-alonepurchase orders. Our customers have no contractual obligation to continue topurchase our products following our fulfillment of current purchase orders andif they do not continue to make purchases, our revenue and our profitabilitycould decline, perhaps materially.

**If demand for our current products declines and we are unable to launchsuccessful new products, our revenues will decrease.**

Ifthe markets in which we compete fail to grow, or grow more slowly than wecurrently 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.

**We may have difficulty responding to changing technology, industrystandards and customer requirements, which could cause us to be unable torecover our research and development expenses and our revenues could decline.**

Thewireless communications industry is subject to rapid technological change. Ourbusiness and future success will depend, in part, on our ability to accuratelypredict and anticipate evolving wireless technology standards and developproducts that keep pace with the continuing changes in technology, evolvingindustry standards and changing customer and end-user preferences andrequirements. Our products embody complex technology that may not meet thosestandards, preference and requirements. Our ability to design, develop andcommercially launch new products depends on a number of factors, including, butnot limited to the following:

·    Our ability to attract and retain skilledtechnical employees;

·    The availability of critical components fromthird parties;

·    Our ability to successfully complete thedevelopment of products in a timely manner;

·    The ability of third parties to complete anddeliver on outsourced product development engagements; and

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·    Our ability to manufacture products at anacceptable 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 may result in a decrease in the market price for ourshares.

In addition, wireless communications service providers require thatwireless 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 may not be able to continue to design products that meetour customer needs and, as a result, our revenue and profitability maydecrease.**

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 meet our customers’ future needs, we may not win their future business andour revenue and profitability may decrease.

**We depend on a limited number of third parties to manufacture ourproducts and supply key components. If they do not manufacture our productsproperly or cannot meet our needs in a timely manner, we may be unable tofulfill our product delivery obligations and our costs may increase, and ourrevenue and margins could decrease.**

Weoutsource the manufacture of our products to a limited number of third partiesand depend heavily on the ability of these manufacturers to meet our needs in atimely and satisfactory manner. Some components used by us may only beavailable 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 of guaranteed manufacturingcapacity;

·    Reduced control over delivery schedules,production yields and costs; and

·    Inability to control the amount of time andresources 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 employment agreementswith our key personnel and the loss of any key personnel may harm our abilityto compete effectively.**

None of our executiveofficers or other key employees has entered into a fixed-term employmentagreement. Our success depends in large part on the abilities and experience ofour executive officers and other key employees. Competition for highly skilledmanagement, technical, research and development and other key employees isintense in the wireless communications industry. We may not be able to retainour current executive officers or key employees and may not be able to hire andtransition in a timely manner experienced and highly qualified additionalexecutive officers and key employees as needed to achieve our businessobjectives. The loss of executive officers and key employees could disrupt ouroperations and our ability to compete effectively could be adversely affected.

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**We depend on wireless network carriers to offer acceptable wirelessdata and voice communications services for our products to operate.**

Ourproducts can only be used over wireless data and voice networks operated bythird parties. Our business and future growth depends, in part, on thesuccessful deployment by network carriers of next generation wireless data andvoice networks and the network carriers’ ability to grow their subscriberbase.  If these network carriers delaythe deployment of next generation networks or fail to offer effective andreliable service, or fail to price and market their services effectively, salesof our products will decline and our revenues will decrease.

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

As part of our business strategy, we have acquiredand may continue to acquire additional assets and businesses principallyrelating to or complementary to our current operations. Any acquisitions and/ormergers by us will be accompanied by the risks commonly encountered inacquisitions of companies. These risks include, among other things:

·            Exposure to unknown liabilities of acquiredcompanies, including unknown litigation related to acts or omissions of ouracquired company and/or its directors and officers prior to the acquisition;

·    Higher than anticipated acquisition andintegration costs and expenses;

·            Effects of costs and expenses of acquiring andintegrating new businesses on our operating results and financial condition;

·    The difficulty and expense of integratingthe operations and personnel of the companies;

·    Disruption of our ongoing business;

·            Diversion of management’s time and attention away fromour remaining business during the integration process;

·            Failure to maximize our financial and strategicposition by the successful incorporation of acquired technology;

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

·    The loss of key employees and customers as aresult of changes in management;

·                  The incurrenceof amortization expenses; and

·            Possible dilutionto our shareholders if the purchase price is paid in common shares orsecurities convertible into common shares.

In addition,geographic distances may make integration of businesses more difficult. We maynot be successful in overcoming these risks or any other problems encounteredin connection with any acquisitions. If realized, these risks could reduceshareholder value.

**We may infringe the intellectual property rights of others.**

Theindustry in which we operate has many participants that own, or claim to own,proprietary intellectual property. In the past we have received, and in thefuture may receive, claims from third parties alleging that we, and possiblyour customers, violate their intellectual property rights. Activity in thisarea by third parties, particularly those with tenuous claims, is increasing,resulting in the Company taking a more aggressive approach, which may result inincreased litigation.  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, and maychoose 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:

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

·            We may be prohibitedfrom further use of the intellectual property and may be required to ceaseselling our products that are subject to the claim;

·            We may have tolicense the third party intellectual property, incurring royalty fees that mayor may 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;

·            We may have to develop a non-infringingalternative, which could be costly and delay or result in the loss of sales. In addition, there is no assurance that we willbe able to develop such a non-infringing alternative;

·    The diversion of management’s attention andresources;

·    Our relationships with customers may beadversely affected; and

·    We may be required to indemnify ourcustomers for certain costs and damages they incur in such 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 maybe materially 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 mayprovide indemnification to our customers for potential intellectual propertyinfringement claims for which we may have no corresponding recourse against ourthird party licensors. This potential liability, if realized, could materiallyadversely affect our business, operating results and financial condition.

**Misappropriation of our intellectual property could place usat a competitive disadvantage**.

Ourintellectual property is important to our success. We rely on a combination ofpatent protection, copyrights, trademarks, trade secrets, licenses,non-disclosure agreements and other contractual agreements to protect ourintellectual property. Third parties may attempt to copy aspects of ourproducts and technology or obtain information we regard as proprietary withoutour authorization. If we are unable to protect our intellectual propertyagainst unauthorized use by others it could have an adverse effect on ourcompetitive position.

Ourstrategies to deter misappropriation could be inadequate due to the followingrisks:

·            Non-recognition of the proprietary natureor inadequate protection of our methodologies in the United States, Canada orforeign countries;

·    Undetectedmisappropriation of our intellectual property;

·    The substantial legal and other costs ofprotecting and enforcing our rights in our intellectual property; and

·    Development of similar technologies by ourcompetitors.

Inaddition, we could be required to spend significant funds and our managerialresources could be diverted in order to defend our rights, which could disruptour operations.

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**As our business expandsinternationally, we will be exposed to additional risks relating tointernational operations.**

Our expansion intointernational operations exposes us to additional risks unique to suchinternational markets, including the following:

·    Increased credit management risks andgreater difficulties in collecting accounts receivable;

·            Unexpected changes in regulatoryrequirements, wireless communications standards, exchange rates, tradingpolicies, tariffs and other barriers;

·    Uncertainties of laws and enforcementrelating to the protection of intellectual property;

·    Language barriers; and

·    Potential adverse tax consequences.

Furthermore, if we areunable to further develop distribution channels in Europe and the Asia-Pacificregion we may not be able to grow our international operations and our abilityto increase our revenue will be negatively impacted.

**Government regulation couldresult in increased costs and inability to sell our products.**

Ourproducts are subject to certain mandatory regulatory approvals in the UnitedStates, Canada, the European Union and other regions in which we operate. Inthe United States, the Federal Communications Commission regulates many aspectsof communications devices. In Canada, similar regulations are administered bythe Ministry of Industry, through Industry Canada. European Union directivesprovide comparable regulatory guidance in Europe. Although we have obtained allthe necessary Federal Communications Commission, Industry Canada and otherrequired approvals for the products we currently sell, we may not obtainapprovals for future products on a timely basis, or at all. In addition,regulatory requirements may change or we may not be able to obtain regulatoryapprovals from countries other than the United States and Canada in which wemay desire to sell products in the future.

**Fluctuations in exchange rates between the United States dollar andother currencies, including the Canadian dollar may affect our operatingresults.**

Weare exposed to fluctuations in the exchange rate between the United Statesdollar and the Canadian dollar through our operations in Canada. To reduce ourrisk because of currency fluctuations, we purchase inventory, other cost ofsales items and many of our services in United States dollars. If the Canadiandollar rises relative to the United States dollar, our operating results may benegatively impacted. To date, we have not entered into any foreign currencyfutures contracts as part of a hedging policy. We expect that as our businessexpands in Europe and the Asia-Pacific region, we will also be exposed toadditional foreign currency transactions and to the associated currency risk.To date, we have not entered into any futures contracts.

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**APPENDIX B**

## ***AUDITED ANNUALFINANCIAL STATEMENTS***

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**MANAGEMENT’S STATEMENT OF RESPONSIBILITIES**

Theaccompanying consolidated financial statements have been prepared by managementand approved by the Board of Directors of Sierra Wireless, Inc. Theconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States and, where appropriate,reflect management’s best estimates and judgments. Where alternative accountingmethods exist, management has chosen those methods deemed most appropriate inthe circumstances. Management is responsible for the accuracy, integrity andobjectivity of the consolidated financial statements within reasonable limitsof materiality, and for the consistency of financial data included in the textof the Annual Report with that contained in the consolidated financialstatements.

To assistmanagement in the discharge of these responsibilities, the Company maintains asystem of internal controls over financial reporting as described in “Management’sAnnual Report on Internal Control Over Financial Reporting” on page 14 ofManagement’s Discussion and Analysis.

The Company’sAudit Committee is appointed by the Board of Directors annually and iscomprised exclusively of outside, independent directors. The Audit Committeemeets with management as well as with the independent auditors to satisfyitself that management is properly discharging its financial reportingresponsibilities and to review the consolidated financial statements and theindependent auditors’ report. The Audit Committee reports its findings to theBoard of Directors for consideration in approving the consolidated financialstatements for presentation to the shareholders. The Audit Committee considers,for review by the Board of Directors and approval by the shareholders, theengagement or reappointment of the independent auditors. KPMG LLP have directaccess to the Audit Committee of the Board of Directors.

Theconsolidated financial statements have been independently audited by KPMG LLP,Chartered Accountants, on behalf of the shareholders, in accordance with thestandards of the Public Company Accounting Oversight Board (United States) withrespect to the consolidated financial statements for the year ended December31, 2006. Their report outlines the nature of their audit and expresses theiropinion on the consolidated financial statements of the Company.
| /s/ Jason W. Cohenour                 |   | /s/ David G. McLennan   |   |
|---------------------------------------|--------|-------------------------|--------|
| Jason W. Cohenour                     |   | David G. McLennan       |
| President and Chief Executive Officer |   | Chief Financial Officer |
| January 31, 2007                      |   |                    |
|                                       |        |                         |        |  |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS**

We have audited the accompanying consolidated balancesheets of Sierra Wireless, Inc. as at December 31, 2006 and 2005 and therelated consolidated statements of operations, shareholders’ equity and cashflows for each of the years in the three-year period ended December 31, 2006.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our auditsin accordance with the standards established by the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free from material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company as at December 31, 2006 and 2005 and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2006 in accordance with U.S. generally accepted accountingprinciples.

As discussed in Note 2 to the consolidated financialstatements, the Company changed its method of computing stock-basedcompensation in 2006.

 
| /s/ KPMG LLP                                                                         |   |
|--------------------------------------------------------------------------------------|--------|
|                                                                                 |
| Chartered Accountants                                                                |
| Vancouver, Canada                                                                    |
| January 31, 2007, except as to Notes 15(d)(i) and 19, which are as of  March 6, 2007 |

 

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**SIERRA WIRELESS, INC.**

**Consolidated Statements ofOperations**

(Expressed in thousands of United States dollars, except per shareamounts)

(Prepared in accordance withUnited States generally accepted accounting principles (GAAP))
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenue                                  |       | $                                           | 211,205    |   | $ | 107,144 |   | $ | 221,285 |   |
| Cost  of goods sold                      |       | 127,600                                     |       | 81,848 |   | 152,108 |   |
| Gross  margin                            |       | 83,605                                      |       | 25,296 |   | 69,177 |   |
|                                     |       |                                        |       |   |   |   |   |
| Expenses:                                |       |                                        |       |   |   |   |   |
| Sales and marketing                      |       | 20,029                                      |       | 15,551 |   | 13,714 |   |
| Research and development, net (note 13)  |       | 24,527                                      |       | 30,365 |   | 34,087 |   |
| Administration                           |       | 8,993                                       |       | 10,818 |   | 12,879 |   |
| Restructuring and other charges (note 3) |       | —                                      |       | 5,255 |   | — |   |
| Amortization                             |       | 2,438                                       |       | 2,997 |   | 2,909 |   |
|                                     |       | 55,987                                      |       | 64,986 |   | 63,589 |   |
| Earnings  (loss) from operations         |       | 27,618                                      |       | (39,690 | ) | 5,588 |   |
| Other  income                            |       | 1,700                                       |       | 2,277 |   | 5,254 |   |
| Earnings  (loss) before income taxes     |       | 29,318                                      |       | (37,413 | ) | 10,842 |   |
| Income  tax expense (recovery) (note 12) |       | 4,398                                       |       | (945 | ) | 1,046 |   |
| Net  earnings (loss)                     |       | $                                           | 24,920     |   | $ | (36,468 | ) | $ | 9,796 |   |
|                                     |       |                                        |       |   |   |   |   |
| Earnings  (loss) per share (note 14):    |       |                                        |       |   |   |   |   |
| Basic                                    |       | $                                           | 0.99       |   | $ | (1.44 | ) | $ | 0.38 |   |
| Diluted                                  |       | $                                           | 0.96       |   | $ | (1.44 | ) | $ | 0.38 |   |

 

See accompanying notes to consolidated financial statements.

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**SIERRA WIRELESS, INC.**

**Consolidated Balance Sheets**

(Expressed in thousands of United States dollars, except number ofshares)

(Prepared in accordance withUnited States GAAP)
| ** **                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **Assets**                                                                                    |       |                  |       |   |   |
| Current assets:                                                                               |       |                  |       |   |   |
| Cash and cash equivalents                                                                     |       | $                     | 64,611     |   | $ | 46,438 |   |
| Short-term investments (note  4)                                                              |       | 24,907                |       | 40,554 |   |
| Accounts receivable, net of allowance  for doubtful  accounts of $1,867  (2005 – $1,561) |       | 20,252                |       | 57,441 |   |
| Inventories (note 5)                                                                          |       | 3,316                 |       | 18,889 |   |
| Deferred income taxes (note  12)                                                              |       | —                |       | 118 |   |
| Prepaid expenses                                                                              |       | 3,974                 |       | 6,032 |   |
|                                                                                          |       | 117,060               |       | 169,472 |   |
|                                                                                          |       |                  |       |   |   |
| Long-term investments (note 4)                                                                |       | 14,867                |       | — |   |
| Fixed assets (note 6)                                                                         |       | 11,647                |       | 13,400 |   |
| Intangible assets (note 7)                                                                    |       | 10,693                |       | 9,892 |   |
| Goodwill (note 7)                                                                             |       | 19,227                |       | 18,409 |   |
| Other assets                                                                                  |       | 486                   |       | 435 |   |
|                                                                                          |       | $                     | 173,980    |   | $ | 211,608 |   |
| ** **                                                                                    |       |                  |       |   |   |
| **Liabilities and Shareholders’ Equity**                                                 |       |                  |       |   |   |
| Current liabilities:                                                                          |       |                  |       |   |   |
| Accounts payable                                                                              |       | $                     | 3,971      |   | $ | 16,608 |   |
| Accrued liabilities                                                                           |       | 28,644                |       | 39,543 |   |
| Deferred revenue and credits                                                                  |       | 422                   |       | 633 |   |
| Current portion of long-term  liabilities (note 8)                                            |       | 894                   |       | 841 |   |
| Current portion of obligations  under capital lease                                           |       | 304                   |       | 6 |   |
|                                                                                          |       | 34,235                |       | 57,631 |   |
|                                                                                          |       |                  |       |   |   |
| Long-term liabilities (note 8)                                                                |       | 1,926                 |       | 1,145 |   |
| Obligations under capital lease                                                               |       | 4                     |       | — |   |
|                                                                                          |       |                  |       |   |   |
| Shareholders’ equity:                                                                    |       |                  |       |   |   |
| Share capital (note 9)                                                                        |       |                  |       |   |   |
| Authorized                                                                                    |       |                  |       |   |   |
| Unlimited number of common and  preference shares with no par value                           |       |                  |       |   |   |
| Common shares, 25,708,331  (2005 – 25,476,447) issued and outstanding                    |       | 219,398               |       | 221,861 |   |
| Additional paid-in capital                                                                    |       | 556                   |       | 3,240 |   |
| Warrants                                                                                      |       | 1,538                 |       | 1,538 |   |
| Deficit                                                                                       |       | (82,857               | )          | (73,061 | ) |
| Accumulated other  comprehensive loss                                                         |       | (820                  | )          | (746 | ) |
|                                                                                          |       | 137,815               |       | 152,832 |   |
|                                                                                          |       | $                     | 173,980    |   | $ | 211,608 |   |

Commitmentsand contingencies (note 15)

Subsequentevents (notes 15(d)(i) and 19)

See accompanying notes to consolidated financial statements.
| /s/ Jason W. Cohenour |   | /s/ S. Jane Rowe |   |
|-----------------------|--------|------------------|--------|
| JASON W. COHENOUR     |   | S. JANE ROWE     |
| Director              |   | Director         |

 

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**SIERRA WIRELESS, INC.**

**Consolidated Statements ofShareholders’ Equity**

(Expressed in thousands of United States dollars, except number ofshares)

(Prepared in accordance withUnited States GAAP)

 
| ** **                                                     | ** ** | ** **             | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-------------|------------|----------------|------------|------------|------------|------------|------------|-------------|------------|-------------------|------------|------------|------------|
| ** **                                                     | ** ** | ** **             | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **             | ** ** | ** **  | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Common Shares** | ** ** | **Paid-in** | ** ** | **Warrants**   | ** ** | ** ** | ** ** | **Income** | ** ** | ** **  | ** ** |
| ** **                                                     | ** ** | **Number**             | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Number** | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **(Loss)**        | ** ** | **Total**  | ** ** |
|                                                           |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       |       |       |
| Balance December 31, 2003                                      |       | 24,822,071             |       | $           | 214,047    |           | $          | —     |       | 138,696    |       | $           | 1,538      |              | $          | (71,309    | )          | $ | (729 | ) | $ | 143,547 |   |
| Net and comprehensive  earnings                                |       | —                 |       | —      |       | —         |       | —     |       | —     |       | 24,920      |       | —            |       | 24,920     |       |
| Stock option tax benefit                                       |       | —                 |       | —      |       | 440            |       | —     |       | —     |       | —      |       | —            |       | 440        |       |
| Stock option exercises                                         |       | 535,160                |       | 4,758       |       | —         |       | —     |       | —     |       | —      |       | —            |       | 4,758      |       |
|                                                           |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       |       |       |
| Balance December 31, 2004                                      |       | 25,357,231             |       | 218,805     |       | 440            |       | 138,696    |       | 1,538      |       | (46,389     | )          | (729              | )          | 173,665    |       |
| Net loss                                                       |       | —                 |       | —      |       | —         |       | —     |       | —     |       | (36,468     | )          | —            |       | (36,468    | )          |
| Unrealized loss on short  and  long-term investments           |       | —                 |       | —      |       | —         |       | —     |       | —     |       | —      |       | (91               | )          | (91        | )          |
| Comprehensive loss                                             |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       | (36,559    | )          |
| Stock option tax benefit                                       |       | —                 |       | —      |       | 116            |       | —     |       | —     |       | —      |       | —            |       | 116        |       |
| Stock option exercises                                         |       | 119,216                |       | 593         |       | —         |       | —     |       | —     |       | —      |       | —            |       | 593        |       |
|                                                           |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       |       |       |
| Balance December 31, 2005                                      |       | 25,476,447             |       | 219,398     |       | 556            |       | 138,696    |       | 1,538      |       | (82,857     | )          | (820              | )          | 137,815    |       |
| Net income                                                     |       | —                 |       | —      |       | —         |       | —     |       | —     |       | 9,796       |       | —            |       | 9,796      |       |
| Net unrealized gain on  short-term  investments                |       | —                 |       | —      |       | —         |       | —     |       | —     |       | —      |       | 6                 |       | 6          |       |
| Reclassification adjustment for realized losses on investments |       | —                 |       | —      |       | —         |       | —     |       | —     |       | —      |       | 68                |       | 68         |       |
| Comprehensive income                                           |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       | 9,870      |       |
| Stock option exercises                                         |       | 231,884                |       | 2,463       |       | (1,112         | )          | —     |       | —     |       | —      |       | —            |       | 1,351      |       |
| Stock-based compensation                                       |       | —                 |       | —      |       | 3,796          |       | —     |       | —     |       | —      |       | —            |       | 3,796      |       |
|                                                           |       |                   |       |        |       |           |       |       |       |       |       |        |       |              |       |       |       |
| Balance  December 31, 2006                                     |       | 25,708,331             |       | $           | 221,861    |           | $          | 3,240      |       | 138,696    |       | $           | 1,538      |              | $          | (73,061    | )          | $ | (746 | ) | $ | 152,832 |   |

 

See accompanying notes to consolidated financial statements.

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**SIERRA WIRELESS, INC.**

**Consolidated Statements of Cash Flows**

(Expressed in thousands of United States dollars)

(Prepared in accordance withUnited States GAAP)
| ** **                                                                                             | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                                  |       |                                        |       |   |   |   |   |
| Net earnings (loss)                                                                                    |       | $                                           | 24,920     |   | $ | (36,468 | ) | $ | 9,796 |   |
| Adjustments to reconcile net  earnings (loss) to  net cash  provided by (used in) operating activities |       |                                        |       |   |   |   |   |
| Amortization                                                                                           |       | 6,915                                       |       | 9,012 |   | 9,665 |   |
| Stock-based compensation                                                                               |       | —                                      |       | — |   | 3,796 |   |
| Utilization of pre-acquisition  tax losses                                                             |       | —                                      |       | — |   | 818 |   |
| Deferred income tax                                                                                    |       | —                                      |       | — |   | (118 | ) |
| Non-cash restructuring and  other charges                                                              |       | —                                      |       | 12,329 |   | — |   |
| Gain on disposal                                                                                       |       | (66                                         | )          | (41 | ) | (35 | ) |
| Changes in operating assets  and liabilities                                                           |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                                    |       | (1,384                                      | )          | 1,967 |   | (38,196 | ) |
| Inventories                                                                                            |       | (9,579                                      | )          | 219 |   | (15,573 | ) |
| Prepaid expenses and other  assets                                                                     |       | (3,950                                      | )          | 891 |   | (2,007 | ) |
| Accounts payable                                                                                       |       | (1,844                                      | )          | (151 | ) | 12,637 |   |
| Accrued liabilities                                                                                    |       | 12,437                                      |       | (5,149 | ) | 10,899 |   |
| Deferred revenue and credits                                                                           |       | 62                                          |       | 75 |   | 211 |   |
| Net cash provided by (used in) operating activities                                                    |       | 27,511                                      |       | (17,316 | ) | (8,107 | ) |
|                                                                                                   |       |                                        |       |   |   |   |   |
| Cash flows from investing activities:                                                                  |       |                                        |       |   |   |   |   |
| Proceeds on disposal                                                                                   |       | 69                                          |       | 48 |   | 92 |   |
| Purchase of fixed assets                                                                               |       | (7,120                                      | )          | (8,292 | ) | (9,102 | ) |
| Increase in intangible assets                                                                          |       | (2,123                                      | )          | (2,138 | ) | (1,646 | ) |
| Purchase of long-term  investments                                                                     |       | (21,369                                     | )          | (14,851 | ) | — |   |
| Proceeds on disposal of  long-term investments                                                         |       | 46,186                                      |       | — |   | — |   |
| Purchase of short-term  investments                                                                    |       | (21,305                                     | )          | (88,320 | ) | (71,943 | ) |
| Proceeds on maturity of  short-term investments                                                        |       | 36,247                                      |       | 63,593 |   | 72,318 |   |
| Net cash provided by (used in) investing activities                                                    |       | 30,585                                      |       | (49,960 | ) | (10,281 | ) |
|                                                                                                   |       |                                        |       |   |   |   |   |
| Cash flows from financing activities:                                                                  |       |                                        |       |   |   |   |   |
| Issue of common shares, net of  share issue costs                                                      |       | 4,758                                       |       | 592 |   | 1,351 |   |
| Tax benefit related to stock  option deduction                                                         |       | 440                                         |       | 116 |   | — |   |
| Repayment of long-term  liabilities                                                                    |       | (1,806                                      | )          | (667 | ) | (1,136 | ) |
| Net cash provided by financing activities                                                              |       | 3,392                                       |       | 41 |   | 215 |   |
|                                                                                                   |       |                                        |       |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                   |       | 61,488                                      |       | (67,235 | ) | (18,173 | ) |
| Cash and cash equivalents, beginning of year                                                           |       | 70,358                                      |       | 131,846 |   | 64,611 |   |
| Cash  and cash equivalents, end of year                                                                |       | $                                           | 131,846    |   | $ | 64,611 |   | $ | 46,438 |   |

 

See supplementary cash flow information (note 16)

See accompanying notes to consolidated financial statements.

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**SIERRA WIRELESS, INC.**

**Notes to ConsolidatedFinancial Statements**

Years ended December 31, 2004,2005 and 2006

(Expressed in thousands of United States dollars, except per shareamounts and number of shares)

(Prepared in accordance withUnited States GAAP)

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

We were incorporatedunder the Canada Business Corporations Act on May 31, 1993. We provide leading edgewireless wide area modem solutions for mobile computing. We develop and marketa range of products that include wireless modems for mobile computers, embeddedmodules for original equipment manufacturers and rugged vehicle-mounted modems.Our products permit users to access wireless data and voice communicationsnetworks using laptop computers, handheld mobile computing devices, vehicle-basedsystems or fixed wireless terminals.

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

Managementhas prepared these consolidated financial statements in accordance withaccounting principles generally accepted in the United States.

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

Our consolidatedfinancial statements include the accounts of Sierra Wireless, Inc. and itswholly-owned subsidiaries Sierra Wireless America, Inc. (formerly AirPrime,Inc. and Sierra Wireless Data, Inc.), Sierra Wireless (UK) Limited, SierraWireless (Asia Pacific) Limited, Sierra Wireless SRL and Sierra Wireless ULCfrom their respective dates of formation or acquisition. We have eliminated allsignificant intercompany balances and transactions.

*(b)**       **Foreign currency translation***

Our functional or primaryoperating currency is the United States (U.S.) dollar. We translatetransactions in currencies other than the U.S. dollar at the exchange rate ineffect on the transaction date. Monetary assets and liabilities denominated ina currency other than the U.S. dollar are translated at the exchange rates ineffect at the balance sheet date. The resulting exchange rate gains and lossesare recognized in earnings.

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

Inpreparing the financial statements in conformity with United States generallyaccepted accounting principles (“U.S. GAAP”), management makes estimates andassumptions that affect the reported amounts of assets, particularly therecoverability of accounts receivable, inventory, fixed assets, intangibleassets, goodwill and deferred income taxes, royalty and warranty accruals,other liabilities, stock-based compensation, and disclosures of contingentliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom the estimates.

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

Cashequivalents include short-term deposits, which are all highly liquid securitieshaving a term to maturity of three months or less when acquired. We value ourshort-term deposits at amortized cost.

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

Short-terminvestments, all of which we categorize as available-for-sale, are carried atquoted market value. We reflect unrealized holding gains (losses) related toavailable-for-sale investments, after deducting amounts allocable to incometaxes, as part of accumulated other comprehensive income (loss), a separatecomponent of shareholders’

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equity.These gains (losses) are removed from comprehensive income (loss) when theinvestments mature or are sold on an item-by-item basis.

Weregularly evaluate the realizable value of short-term investments, and ifcircumstances indicate that a decline in value is other-than-temporary, werecognize an impairment charge. To determine whether to recognize an impairmentcharge, we consider various factors, such as the significance of the decline invalue, how long the investment has been below market value, changes that wouldimpact the financial condition of the investee, and the likelihood that theinvestment will recover its value before it matures or is disposed of.

*(f)    **Inventories***

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

*(g)  **Research anddevelopment***

Weexpense research and development costs as they are incurred. To date we havehad no significant software development costs that would be required to becapitalized pursuant to Financial Accounting Standards (“FAS”) No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”.

Wefollow the cost reduction method of accounting for government research anddevelopment funding, whereby the benefit of the funding is recognized as areduction in the cost of the related expenditure when certain criteriastipulated under the terms of those funding agreements have been met, and thereis reasonable assurance the research and development funding will be received.Certain research and development funding is repayable only on the occurrence ofspecified future events. If such events do not occur, no repayment is required.We recognize the liability to repay research and development funding in theperiod in which conditions arise that will cause research and development fundingto be repayable.

*(h)  **Long-terminvestments***

Long-terminvestments are categorized as available-for-sale and are carried at quotedmarket value. We reflect unrealized holding gains (losses) related toavailable-for-sale investments, after deducting amounts allocable to incometaxes, as part of accumulated other comprehensive income (loss), a separatecomponent of shareholders’ equity. These gains (losses) are removed fromcomprehensive income (loss) when the investments mature or are sold on anitem-by-item basis.

Weregularly evaluate the realizable value of long-term investments, and ifcircumstances indicate that a decline in value is other-than-temporary, werecognize an impairment charge, as described in note 2(e) above.

*(i)   **Fixed assets***

Weinitially record fixed assets at cost. We subsequently provide amortization ona straight-line basis over the following periods:
| Furniture and fixtures             |   | 5 years   |
|------------------------------------|--------|-----------|
| Research and development equipment |   | 3 years   |
| Tooling                            |   | 3 years   |
| Software                           |   | 3-5 years |
| Office equipment                   |   | 5 years   |

 

Weamortize leasehold improvements on a straight-line basis over the shorter ofthe initial lease term or their useful lives.

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*(j)    **Intangibleassets***

*Patents andtrademarks*

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

*Licensefees*

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

*Intellectualproperty, customer relationships and databases*

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

*(k)  **Goodwill***

Goodwillrepresents the excess of the purchase price of an acquired enterprise over thefair value assigned to assets acquired and liabilities assumed in a businesscombination. Goodwill is allocated as of the date of the business combinationto the reporting units that are expected to benefit from the synergies of thebusiness combination.

Goodwillhas an indefinite life, is not amortized and at least annually is subject to atwo-step impairment test. The first step compares the fair value of thereporting unit to its carrying amount, which includes the goodwill. When thefair value of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not to be impaired and the second step of theimpairment test is unnecessary. If the carrying amount exceeds the fair value,the second part of the test is performed to measure the amount of theimpairment loss. The second step compares the implied fair value of thereporting unit goodwill with the carrying amount of the goodwill. If thecarrying amount exceeds the fair value of the goodwill, an impairment loss isrecognized equal to that excess.

*(l)   **Impairmentof long-lived assets***

Wemonitor the recoverability of long-lived assets, which includes fixed assetsand intangible assets, other than goodwill, based on factors such as futureasset utilization and the future undiscounted cash flows expected to resultfrom the use of the related assets. Our policy is to record an impairment lossin the period when we determine that the carrying amount of the asset will notbe recoverable. At that time the carrying amount is written down to fair value.

*(m)  **Income taxes***

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

Uponthe adoption of FAS No. 123(R), “Share-Based Payments”, on January 1, 2006, werecognize the tax benefits associated with the exercise of stock options byU.S. employees to additional paid-in capital (“APIC”) when realized. This taxbenefit is not recognized until the deduction reduces U.S. taxes payable andall U.S. loss carryforwards have been utilized.

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*(n)  **Stock-basedcompensation***

EffectiveJanuary 1, 2006, we adopted the Financial Accounting Standards Board (“FASB”)revised Statement of Financial Accounting Standards No. 123R, “Share-BasedPayments” (“FAS No. 123R”). Accordingly, we measure share-based compensation atthe grant date based on the estimated fair value of the award using theBlack-Scholes valuation model, and recognize this cost over the employee’srequisite service period. We adopted the provisions of FAS No. 123R using themodified prospective transition method, under which prior periods are notrestated. The valuation provisions of FAS No. 123R apply to new awards and toawards that are outstanding on the date of adoption that are subsequentlymodified or cancelled. Compensation expense for unvested stock options and awardsthat were outstanding on January 1, 2006 will be recognized over the remainingservice period based on the grant date fair value of those options and awardsas previously calculated under the pro-forma disclosures of FASB Statement No.123, “Accounting for Stock-Based Compensation” (“FAS No. 123”).

**Priorto the adoption of FAS No. 123R, we used the intrinsic value method underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), and related Interpretations and provided thedisclosure-only provisions of FAS No. 123. Under the intrinsic value method, nostock-based compensation had been recognized in our Consolidated Statements ofOperations prior to January 1, 2006 because the exercise price of our stockoptions granted to employees and directors was equal to the market value of theunderlying common shares at the date of grant.**

**Seenote 10 for further details regarding our stock-based compensation.**

*(o)  **Revenuerecognition***

Werecognize revenue from sales of products and services upon the later oftransfer of title or upon shipment of the product to the customer or renderingof the service, so long as persuasive evidence of an arrangement exists,delivery has occurred, the fee is fixed or determinable, and collectibility isreasonably assured. Customers include resellers, original equipmentmanufacturers, wireless service providers and end-users. We record deferredrevenue when we receive cash in advance of the revenue recognition criteriabeing met.

Werecognize revenue on the portion of sales to certain resellers that are subjectto contract provisions allowing various rights of return and stock rotationwhen the rights have expired or the products have been reported as sold by theresellers.

Revenuesfrom contracts with multiple-element arrangements, such as those includingtechnical support services, are recognized as each element is earned based onthe relative fair value of each element and only when there are no undeliveredelements that are essential to the functionality of the delivered elements.

Revenuefrom licensed software is recognized at the inception of the license term andin accordance with Statement of Position 97-2, “Software Revenue Recognition”.Revenue from software maintenance, unspecified upgrades and technical supportcontracts is recognized over the period such items are delivered or servicesare provided. Technical support contracts extending beyond the current periodare recorded as deferred revenue.

Fundingfrom research and development agreements, other than government research anddevelopment arrangements, is recognized as revenue when certain criteriastipulated under the terms of those funding agreements have been met, and whenthere is reasonable assurance the funding will be received. Certain researchand development funding will be repayable only on the occurrence of specifiedfuture events. If such events do not occur, no repayment would be required. Wewill recognize the liability to repay research and development funding in theperiod in which conditions arise that would cause research and developmentfunding to be repayable.

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*(p)  **Warrantycosts***

Weaccrue warranty costs upon the recognition of related revenue, based on ourbest estimates, with reference to past and expected future experience.  If there is a change in these estimates, weadjust our accrual accordingly.

*(q)  **Marketdevelopment costs***

Weaccrue for co-op advertising costs upon the later of the recognition date ofthe related revenue or date at which the co-op advertising is available. Marketdevelopment costs are recorded as marketing expense in accordance with thecriteria in Emerging Issues Task Force 01-9, “Accounting for ConsiderationGiven by a Vendor to a Customer (Including a Reseller of Vendor’s Products)”.

*(r)   **Share issuecosts***

Wereduce the value of consideration assigned to shares issued by the directcosts, net of income tax recoveries, of issuing the shares.

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

Wecalculate basic earnings (loss) per share based on the weighted-average numberof common shares outstanding for the year. If, in a reporting period, we havehad in-the-money outstanding dilutive stock options and warrants, we calculatediluted earnings (loss) per share using the treasury stock method. Under thetreasury stock method, the number of dilutive shares, if any, are determined bythe proceeds from the exercise price of the options, the amount of unrecognizedstock-based compensation, the estimated tax benefit that would be recognizedwhen the options by U.S. employees are exercised, and the average market priceof the shares for the period, that could be used to repurchase stock during thereporting period.

*(t)   **Comprehensiveincome (loss)***

UnderFAS No. 130, “Reporting Comprehensive Income”, we are required to reportcomprehensive income (loss), which includes our net earnings (loss) as well aschanges in equity from other non-owner sources. In our case, the other changesin equity included in comprehensive income (loss) are comprised of the foreigncurrency cumulative translation adjustments and unrealized gains or losses onavailable-for-sale investments. Comprehensive income (loss) is presented in theconsolidated statements of shareholders’ equity.

*(u)  **Investmenttax credits***

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

*(v)   **Comparativefigures***

Wehave reclassified certain of the figures presented for comparative purposes toconform to the financial statement presentation we adopted for the currentyear.

*(w)  **Recentaccounting pronouncements***

In September 2006, FASB issued SFAS No. 157 entitled “FairValue Measurements” (“FAS No. 157”). This statement clarifies the definition offair value to provide greater consistency and clarity on existing accountingpronouncements that require fair value measurements, provides a framework forusing fair value to measure assets and liabilities and expands disclosuresabout fair value measurements. FAS No. 157 is required to be applied for fiscalyears beginning after November 15, 2007 and interim periods within that year.The impact that FAS No. 157 will have on our consolidated financial statementsis not yet determinable.

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InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin No. 108 (“SAB No. 108”) regarding the process of quantifying financialstatement misstatements.  Effective forfiscal years ending after November 15, 2006, material misstatements in thecurrent year may result in the need to correct prior year financial statements,even if the misstatement in the prior year(s) is considered immaterial.  There is no impact from SAB No. 108 on ourconsolidated financial statements.

InJune 2006, FASB issued FASB Interpretation No. 48, entitled “Accounting forUncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN48”). This interpretation prescribes a recognition threshold and measurementmethod for the recognition of a tax position taken or expected to be taken in atax return. FIN 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. We will adopt FIN 48 as of January 1, 2007. The impact thatFIN 48 will have on our consolidated financial statements, if any, is not yetdeterminable.

**3.****             Restructuring and other charges**

In thesecond quarter of 2005, we announced our decision to exit our Voq professionalphone initiative. In addition to the exit of the Voq initiative, we madecertain non-Voq related reductions to our operating expenses and assets. During2005, we recorded restructuring and other charges of $18,485 as follows:

| Inventory writedown                    |   | $     | 8,556  |   |
|----------------------------------------|--------|-------|--------|--------|
| Provision for royalty commitments      |   | 2,749 |   |
| Intangible assets writedown            |   | 2,435 |   |
| Workforce reduction                    |   | 1,507 |   |
| Fixed assets writedown                 |   | 913   |   |
| Facilities restructuring               |   | 1,135 |   |
| Deferred tax asset writedown           |   | 500   |   |
| Other                                  |   | 690   |   |
| Total  restructuring and other charges |   | $     | 18,485 |   |

 

Of the restructuring and other charges of $18,485, $12,686 was includedin cost of goods sold, $5,255 in restructuring and other expenses, $500 inincome tax expense and $44 in other expense in 2005.

Theinventory writedown of $8,556 was related to the writedown of Voq componentsand finished goods.

The provision for royalty commitments of $2,749 wasrelated to a writedown of prepaid royalties in the amount of $937 and a furtherprovision of $1,812 was for contractual royalty commitments.

Fixed and intangible assets impairment charges of$913 and $2,435, respectively, consisted of writedowns primarily for researchand development equipment, test equipment and research and developmentlicenses. The fixed assets and intangible assets, which were no longerrequired, were written down to nil.

Workforce reduction charges of $1,507 were relatedto the cost of severance and benefits associated with the 32 employeesterminated during the second quarter of 2005. As a result of the workforcereduction, a facilities restructuring provision of $1,135 was recorded toreflect the costs related to the leased facilities that exceeded ourrequirements.

We increased our deferred tax asset valuationallowance by $500, thereby reducing our deferred tax asset to nil, to reflectthe reduction in our deferred tax assets that we did not believe to be morelikely than not to be realized.

Other charges of $690 included provisions fortooling purchase commitments that were no longer useable and professional feesincurred in connection with the restructuring activities.

By December 31, 2005, wehad substantially completed the implementation of our restructuring program.

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The following tablesummarizes the changes in the provision for prior period restructuring andother charges at December 31, 2006 and December 31, 2005:
|                                | ** ** | ** ** | ** ** | ** **          | ** ** | **Facilities**     | ** ** |
|--------------------------------|------------|------------|------------|---------------------|------------|--------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Cost of**    | ** ** | **Restructuring**  | ** ** |
| ** **                     | ** ** | **Total**  | ** ** | **Goods Sold** | ** ** | **and Other** | ** ** |
| Balance at December 31, 2004   |       | $          | 2,505      |                | $          | —             |       | $ | 2,505 |   |
| 2005 restructuring             |       | 5,890      |       | 3,475               |       | 2,415              |       |
| Increase in facilities accrual |       | 530        |       | —              |       | 530                |       |
| Cash payments                  |       | (5,478     | )          | (2,848              | )          | (2,630             | )          |
| Balance at December 31, 2005   |       | 3,447      |       | 627                 |       | 2,820              |       |
| Cash payments                  |       | (1,062     | )          | —              |       | (1,062             | )          |
| Increase in facilities accrual |       | 228        |       | —              |       | 228                |       |
| Other adjustments              |       | (361       | )          | (361                | )          | —             |       |
| Balance  at December 31, 2006  |       | $          | 2,252      |                | $          | 266                |       | $ | 1,986 |   |

 

**4.****            ****Investments**

Investments,all of which are classified as available-for-sale, were comprised as follows:
|                                          | ** ** | **Short-term** | ** ** | **Long-term** | ** ** |
|------------------------------------------|------------|----------------|------------|---------------|------------|
| ** **                               | ** ** | **2005**       | ** ** | **2006**      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Government treasury bills and securities |       | $              | 13,664     |          | $          | 19,995 |   | $ | — |   | $ | — |   |
| Government bonds                         |       | —         |       | 2,522         |       | 14,867 |   | — |   |
| Commercial paper                         |       | 11,243         |       | 18,037        |       | — |   | — |   |
|                                     |       | $              | 24,907     |          | $          | 40,554 |   | $ | 14,867 |   | $ | — |   |

 

Our short-term investments of $40,554 (2005 –$24,907) have contractual maturities ranging from three to twelve months fromthe date of purchase. Our long-term investments of nil (2005 – $14,867) havecontractual maturities of over one year.

The following table shows the gross unrealizedlosses and fair values of our investments that have been in an unrealized lossposition deemed to be temporary for less than and more than 12 months atDecember 31, 2006:
|                                          | ** ** | **Less than 12 Months** | ** ** | **More than 12 Months** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | ** **                             | ** ** | **Unrealized**                         | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **Fair Value**                    | ** ** | **Losses**                             | ** ** | **Fair Value** | ** ** | **Losses** | ** ** |
| Government treasury bills and securities |       | $                                      | 5,041      |                                   | $          | 2 |   | $ | — |   | $ | — |   |
| Government bonds                         |       | —                                 |       | —                                 |       | 2,522 |   | 19 |   |
|                                     |       | $                                      | 5,041      |                                   | $          | 2 |   | $ | 2,522 |   | $ | 19 |   |

 

We have government-backed investments withunrealized losses. However, the duration and severity of the losses are notsignificant and we have the ability and intent to hold these investments untilthe market values recover, which may be when they mature, therefore we do notconsider these investments to be other-than-temporarily impaired at December31, 2006.

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**5.****             Inventories**
|                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Electronic components |       | $        | 1,675      |     | $          | 7,511 |   |
| Finished goods        |       | 1,641    |       | 11,378   |       |
|                  |       | $        | 3,316      |     | $          | 18,889 |   |

 

**6.****             Fixed assets**
|                                    | ** ** | **2006**   | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Book** | ** ** |
| ** **                         | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Furniture and fixtures             |       | $          | 2,982      |   | $ | 2,482 |   | $ | 500 |   |
| Research and development equipment |       | 14,820     |       | 9,440 |   | 5,380 |   |
| Tooling                            |       | 13,742     |       | 7,933 |   | 5,809 |   |
| Software                           |       | 4,373      |       | 3,392 |   | 981 |   |
| Leasehold improvements             |       | 2,537      |       | 2,114 |   | 423 |   |
| Office equipment                   |       | 735        |       | 428 |   | 307 |   |
|                               |       | $          | 39,189     |   | $ | 25,789 |   | $ | 13,400 |   |

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

 

**7.****             Goodwill and intangible assets**

Goodwill of $18,409 relates to the August 2003acquisition of AirPrime, Inc. (“AirPrime”), a privately held supplier ofhigh-speed CDMA wireless products. During 2006, goodwill decreased by $818 (2005 – nil) due to the utilization of previouslyunrecognized pre-acquisition tax losses. An annual impairment test has beenperformed, which resulted in no impairment loss.

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Thecomponents of intangible assets at December 31, 2006 and 2005 are as follows:
|                        | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **             | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Book** | ** ** |
| ** **             | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
|                   |       |       |       |   |   |   |   |
| Patents and trademarks |       | $          | 4,737      |   | $ | 1,149 |   | $ | 3,588 |   |
| Licenses               |       | 13,840     |       | 9,118 |   | 4,722 |   |
| Intellectual property  |       | 4,214      |       | 2,986 |   | 1,228 |   |
| Customer relationships |       | 940        |       | 635 |   | 305 |   |
| Databases              |       | 150        |       | 101 |   | 49 |   |
|                   |       | $          | 23,881     |   | $ | 13,989 |   | $ | 9,892 |   |

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

 

Theestimated aggregate amortization expense for each of the next five years isexpected to be $2,770 per year.

**8.****             Long-term liabilities**
|                      | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Facilities (note 3)  |       | $        | 2,820      |     | $          | 1,986 |   |
| Less current portion |       | 894      |       | 841      |       |
|                 |       | $        | 1,926      |     | $          | 1,145 |   |

 

Of the balance outstanding as at December 31, 2006,$648 (2005 – $920) is from the 2005 restructuring and $1,338 (2005 – $1,900)arises from prior restructurings.

**9.****              Share capital**

***Stockoption plan***

Underthe terms of our employee Stock Option Plan (the “Plan”), our Board ofDirectors may grant options to employees, officers and directors. InApril 2005, shareholders approved an amendment to the Plan whereby the maximumnumber of shares available for issue under the Plan is a rolling number equalto 10% of the number of issued and outstanding common shares from time to time,provided that after April 2005 no more than 1,600,000 common shares will beadded to the number of common shares currently available for issue under thePlan without the Company first obtaining shareholder approval. Prior to thisamendment, the number of shares available for issuance was a specified, fixedamount. Based on the number of shares outstanding as at December 31, 2006,stock options exercisable into 599,061 common shares are available for futureallocation under the Plan. Since the amendment to the Plan, 381,863 commonshares have been added to the number of common shares currently available forissue under the Plan, which are to be applied against the limit of 1,600,000common shares.

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The Plan provides for granting of options at the fairmarket value of our stock at the grant date. Options generally vest over fouryears, with the first 25% vesting at the first anniversary date of the grantand the balance vesting in equal amounts at the end of each month thereafter.We determine the term of each option at the time it is granted, with optionshaving a five-year or a ten-year term. Since February 1999, options have beengranted with a five-year term.

Stock option activity since December 31, 2003 ispresented below:
| ** **                      | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Shares**         | ** ** | **Exercise Price**   | ** ** |
| ** **                      | ** ** | ** **         | ** ** | **Cdn.$**                 | ** ** | **U.S.$** | ** ** |
|                            |       |               |       |                      |       |   |   |
| Outstanding, December 31, 2003  |       | 1,726,360          |       | 11.58                     |       | 8.98 |   |
| Granted                         |       | 566,813            |       | 30.77                     |       | 25.43 |   |
| Exercised                       |       | (535,160           | )          | 11.74                     |       | 9.70 |   |
| Forfeited                       |       | (52,442            | )          | 25.98                     |       | 21.47 |   |
| Outstanding, December 31, 2004  |       | 1,705,571          |       | 20.71                     |       | 17.12 |   |
| Granted                         |       | 575,422            |       | 10.70                     |       | 9.18 |   |
| Exercised                       |       | (119,216           | )          | 5.34                      |       | 4.58 |   |
| Forfeited                       |       | (362,344           | )          | 31.71                     |       | 27.21 |   |
| Outstanding, December 31, 2005  |       | 1,799,433          |       | 18.48                     |       | 15.86 |   |
| Granted                         |       | 567,750            |       | 14.59                     |       | 12.95 |   |
| Exercised                       |       | (231,884           | )          | 6.57                      |       | 5.84 |   |
| Forfeited                       |       | (163,527           | )          | 18.85                     |       | 16.73 |   |
| Outstanding,  December 31, 2006 |       | 1,971,772          |       | 16.64                     |       | 14.22 |   |

 
|                       | ** ** | **Exercisable,**          | ** ** |
|-----------------------|------------|---------------------------|------------|
| **December 31,** | ** ** | **end of year** | ** ** |
|                  |       |                      |       |
| 2004                  |       | 545,382                   |       |
| 2005                  |       | 959,717                   |       |
| 2006                  |       | 1,023,246                 |       |

 

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The following table summarizes the stock optionsoutstanding at December 31, 2006:
| ** **                                      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                   | ** ** | **Average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Number**                   | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of**                                    | ** ** | **of**                       | ** ** | **Contractual**              | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices**                             | ** ** | **Options**                  | ** ** | **Life**                     | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| ** **                                      | ** ** | ** **                   | ** ** | **In years**            | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** | ** ** | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|                                            |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| $1.28 - $2.99  (Cdn.$1.50 –  Cdn.$3.50)    |       | 139,625                      |       | 0.7                          |       | $ | 3.14 |   | $ | 2.68 |   | 139,625 |   | $ | 3.14 |   | $ | 2.68 |   |
| $3.00 - $10.26 (Cdn.$3.51 –  Cdn.$12.00)   |       | 544,266                      |       | 2.8                          |       | 10.15 |   | 8.68 |   | 284,207 |   | 9.88 |   | 8.44 |   |
| $10.27 - $17.09 (Cdn.$12.01 –  Cdn.$20.00) |       | 670,361                      |       | 3.9                          |       | 14.67 |   | 12.54 |   | 100,148 |   | 15.48 |   | 13.23 |   |
| $17.10 - $25.64  (Cdn.$20.01  - Cdn.$30.00)     |       | 414,720                      |       | 2.0                          |       | 24.02 |   | 20.53 |   | 338,320 |   | 23.93 |   | 20.45 |   |
| $25.65 - $39.87  (Cdn.$30.01  - Cdn.$46.65)     |       | 202,800                      |       | 2.2                          |       | 34.80 |   | 29.74 |   | 160,946 |   | 34.70 |   | 29.66 |   |
|                                            |       | 1,971,772                    |       | 2.8                          |       | 16.64 |   | 14.22 |   | 1,023,246 |   | 18.06 |   | 15.43 |   |
|                                                 |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options outstanding atDecember 31, 2006 expire between January 24, 2007 and December 8, 2011.

The aggregate intrinsic value ofstock options outstanding and exercisable at December 31, 2006 was $5,581 and$3,320, respectively. The intrinsic value of outstanding and exercisable stockoptions is calculated as the quoted market price of the stock at the balancesheet date less the exercise price of the option. The aggregate intrinsic valueof options exercised in the year ended December 31, 2006 was $2,465 (2005 – $777; 2004 – $8,814).

***Employeestock purchase plan***

During2005 we established employee stock purchase plans for U.S. and Canadian andother non-U.S employees (together, the “ESPP Plans”) to enable eligible employeesand directors to acquire common shares over the facilities of the Toronto StockExchange and Nasdaq. The ESPP Plans do not allow the issuance of common shares fromtreasury. Eligibleemployees and directors may contribute up to 10% of base compensation topurchase common shares on the public markets. Under the U.S. plan, thepurchase price to be paid by an eligible employee is 85% of the fair marketvalue of the common shares, with us contributing the other 15%, plus anyapplicable commissions or transactional costs. The maximum number of commonshares that can be purchased under the U.S. plan is 50,000 Common Shares. Under the non-U.S.plan we contribute an amount equal to 20% of the employee’s contribution,plus any applicable commissions or transactional costs. The ESPP Plans purchaseshares at certain plan-defined dates. In 2006 participants purchased at totalof 15,639 (2005 – 17,832) Common Shares at a weighted-average price ofU.S.$13.36 (2005 – U.S.$9.25) per share.

***Warrants***

There are outstanding warrants to purchase 138,696 ofour common shares at Cdn. $20.49 per share. The warrants are exercisable for aterm of five years from December 30, 2003. The warrants were issued under our agreement with the Government of Canada’sTechnology Partnerships Canada (“TPC”) program (see note 15(b)(iv)).

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**10.****       Stock-based compensation**

The following table summarizes the classification ofthe stock-based compensation expense recognized in the year ended December 31, 2006:
|                                   | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|
| Cost of goods sold                |       | $        | 377        |   |
| Sales and marketing               |       | 493      |       |
| Research and development, net     |       | 746      |       |
| Administration                    |       | 2,180    |       |
| Stock-based  compensation expense |       | $        | 3,796      |   |

 

As of December 31, 2006,there was $6,587 of unrecognized compensation cost related to non-vestedstock-based compensation, which is to be recognized over a weighted averageperiod of 1.3 years.

We calculate the fair value of stock options grantedunder the provisions of FAS No. 123R using the Black-Scholes valuation model.Under this method, the weighted average fair value of stock options granted in2006 was $7.98 using the following assumptions:
|                                 | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|
| Expected dividend yield         |       | 0        |       |
| Expected stock price volatility |       | 75       | %          |
| Risk-free interest rate         |       | 4.19     | %          |
| Expected  life of options       |       | 4 years  |       |

 

There is no dividendyield because we do not pay, and do not plan to pay, cash dividends on ourcommon shares. The expected stock price volatility is based on the historicalvolatility of our average monthly stock closing prices over a period equal tothe expected life of each option grant. The risk-free interest rate is based onyields from Canadian Government Bond yields with a term equal to the expectedterm of the options being valued. The expected life of options represents theperiod of time that the options are expected to be outstanding based onhistorical data of option holder exercise and termination behaviour.

Under FAS No.123R stock-based compensation isrecognized based on awards expected to vest, and is reduced for estimatedforfeitures. We estimate forfeitures at the time of grant, and if necessary,revise that estimate if actual forfeitures differ. Prior to 2006, forfeitureswere accounted for as they occurred.

The following table summarizes the pro-forma effect ofstock-based compensation for fiscal 2005 and 2004 as if the fair value methodof accounting for stock compensation had been applied. Due to the adoption ofFAS No. 123R on January 1, 2006, such pro-forma disclosure is not required for2006.
| ** **                                                                                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net  earnings (loss):                                                                                           |       |     |       |     |       |
| As reported                                                                                                     |       | $        | 24,920     |     | $          | (36,468 | ) |
| Less: Total stock-based employee compensation expense  determined under fair value based method for  all awards |       | (5,591   | )          | (7,615   | )          |
| Pro-forma                                                                                                       |       | $        | 19,329     |     | $          | (44,083 | ) |
|                                                                                                            |       |     |       |     |       |
| Basic  earnings (loss) per share:                                                                               |       |     |       |     |       |
| As reported                                                                                                     |       | $        | 0.99       |     | $          | (1.44 | ) |
| Pro-forma                                                                                                       |       | 0.77     |       | (1.74    | )          |
|                                                                                                            |       |     |       |     |       |
| Diluted  earnings (loss) per share:                                                                             |       |     |       |     |       |
| As reported                                                                                                     |       | $        | 0.96       |     | $          | (1.44 | ) |
| Pro-forma                                                                                                       |       | 0.75     |       | (1.74    | )          |

 

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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 toparticipants other than board members and executive officers of the Company. Inaggregate, the vesting of stock options to purchase a total of 175,650 commonshares with an exercise price of US$14.25 (Cdn.$16.82) per share or higher,being 25% above the trading price at the time of the Board of Directors’approved this initiative, was accelerated and these became fully exercisable inNovember 2005. These options would otherwise have vested over time periodsranging up to December 2008. Accelerating the vesting of certain stockoptions resulted in the inclusion of approximately $2,300 in the pro-formastock-based compensation expense.

The weighted average fair value of stock options grantedduring the years ended December 31, 2005 and 2004 was $5.94 and $16.71,respectively, using the Black-Scholes option-pricing model with the followingassumptions:
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                    | ** ** | **2005** | ** ** |
| Expected  dividend yield         |       | 0                                           |       | 0 |   |
| Expected  stock price volatility |       | 93                                          | %          | 85 | % |
| Risk-free  interest rate         |       | 3.76                                        | %          | 3.43 | % |
| Expected life of options         |       | 4 years                                     |       | 4 years |   |

 

**11.****       Financial instruments**

***Fair value of financial instruments***

The carrying amounts of certain of our financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable, accrued liabilities and current portions of long-term liabilities,approximate their fair value due to their short maturities. Short and long-terminvestments are carried at fair market value; their book values for December31, 2006 were $40,571 (2005 – $24,909) and nil (2005 – $14,956), respectively.Based on borrowing rates currently available to us for loans with similarterms, the carrying value of our obligations under capital lease and long-termliabilities approximates their fair value.

***Concentrations of business risk***

We depend on a small number of customers for asignificant portion of our revenue. In 2006, two customers accountedindividually for more than 10% of our revenue and, in aggregate, thesecustomers represented 40% of our revenue. In the years ended 2005 and 2004, twodifferent customers individually accounted for more than 10% of our revenue.

We maintain substantially all of our cash and cashequivalents with major financial institutions or government instruments.Corporate paper is uninsured. Our deposits with banks may exceed the amount ofinsurance provided on such deposits.

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

Financial instruments that potentially subject us toconcentrations of credit risk are primarily accounts receivable.****We perform on-going credit evaluations ofour customer’s financial condition and require letters of credit or otherguarantees whenever deemed appropriate.

Although substantially all of our revenues are receivedin U.S. dollars, we incur operating costs and have obligations under capital leasesthat are denominated in Cdn. dollars. Fluctuations in the exchange ratesbetween these currencies could have a material effect on our business,financial condition and results of operations. We mitigate this risk bydenominating many of our payment obligations in U.S. dollars.

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***Letter of credit***

During2006, we obtained a letter of credit to ensure the performance of a third partyin accordance with specified terms and conditions. At December 31, 2006, we had$3,237 outstanding under the letter of credit, which approximates the fairvalue.

***Line of credit***

During 2006, we had an unsecured revolving demand facility for$10,000, which bears interest at prime per annum. The balance atDecember 31, 2006 and 2005 was nil and this facility was not utilized duringeither fiscal 2006 or fiscal 2005.

**12.****       Income taxes**

The composition of our deferred tax assets at December31 is as follows:
| ** **                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred  tax assets                         |       |     |       |     |       |
| Fixed assets                                 |       | $        | 933        |     | $          | 1,063 |   |
| Loss carryforwards                           |       | 19,601   |       | 15,044   |       |
| Capital loss carryforwards                   |       | —   |       | 4,618    |       |
| Scientific research and development expenses |       | 13,715   |       | 15,134   |       |
| Share issue costs                            |       | 737      |       | 332      |       |
| Reserves and other                           |       | 3,287    |       | 2,611    |       |
| Total  gross deferred tax assets             |       | 38,273   |       | 38,802   |       |
| Less  valuation allowance                    |       | 38,273   |       | 38,684   |       |
| Net deferred tax assets                      |       | $        | —     |     | $          | 118 |   |

 

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

At December 31, 2006, wehad approximately $19,654 of non-capital loss carryforwards for Canadian taxpurposes that, if unutilized, will expire at various dates beginning in fiscal2010 and ending in fiscal 2015. Also, we have approximately $14,898 of capitalloss carryforwards for Canadian tax purposes that are available, indefinitely,to be deducted against future Canadian taxable capital gains. As well, we haveapproximately $39,812 of scientific research and development expendituresavailable to be deducted against future Canadian taxable income that may becarried forward indefinitely and investment tax credits of approximately$22,633 available to offset future Canadian federal and provincial income taxespayable. The investment tax credits expire commencing in 2010 until 2016.

In addition, at December 31, 2006, netoperating loss carryforwards for our foreign subsidiaries were $25,785 for United Statesincome tax purposes and $654 for U.K. income tax purposes. These carryforwardsexpire in various amounts commencing in 2019 through 2025. Our foreign subsidiaries may be limited intheir ability to use foreign net operating losses in any single year dependingon their ability to generate significant taxable income.  We also have approximately $1,660 of researchand development credits available to be deducted against future United Statestaxable income.  The research and developmentcredits expire commencing in 2023 until 2025.

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***Effective tax rate***

Our income tax expense for the year ended December 31differs from that calculated by applying statutory rates for the followingreasons:
| ** **                                                                                                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Combined  Canadian federal and provincial income taxes at  expected rate of 34.1%  (2005 – 34.85%, 2004 – 35.6%) |       | $        | 10,437     |     | $          | (13,038  | )          | $ | 3,699 |   |
| Permanent  and other differences                                                                                           |       | (126     | )          | 468      |       | 1,028    |       |
| Unrecognized  tax assets                                                                                                   |       | (5,780   | )          | 10,965   |       | (3,387   | )          |
| (Income)  loss subject to tax at rates lower than statutory rate                                                           |       | (133     | )          | 160      |       | (176     | )          |
| Writedown  (recognition) of deferred tax asset                                                                             |       | —   |       | 500      |       | (118     | )          |
|                                                                                                                       |       | $        | 4,398      |     | $          | (945     | )          | $ | 1,046 |   |

 

Our provisions for income taxes consist of the following:

 
| ** **                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                        |       |     |       |     |       |     |       |
| Canadian                       |       | $        | 357        |     | $          | (42      | )          | $ | (91 | ) |
| Foreign                        |       | 4,041    |       | (1,403   | )          | 1,255    |       |
| Total  current                 |       | 4,398    |       | (1,445   | )          | 1,164    |       |
| Deferred                       |       |     |       |     |       |     |       |
| Canadian                       |       | (500     | )          | 500      |       | —   |       |
| Foreign                        |       | 500      |       | —   |       | (118     | )          |
| Total  deferred                |       | —   |       | 500      |       | (118     | )          |
| Income  tax expense (recovery) |       | $        | 4,398      |     | $          | (945     | )          | $ | 1,046 |   |

 

**13.****       Research and development**
| ** **                                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross  research and development                 |       | $        | 25,200     |     | $          | 30,390   |       | $ | 32,094 |   |
| Government  research and development funding    |       | (2,643   | )          | (893     | )          | —   |       |
| Government  research and development repayments |       | 1,970    |       | 868      |       | 1,993    |       |
|                                            |       | $        | 24,527     |     | $          | 30,365   |       | $ | 34,087 |   |

 

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

The weighted-average numbers of shares outstanding (inthousands) used in the computation of earnings (loss) per share are as follows:
| ** **                                                                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted-average  shares used in computation of basic earnings (loss) per share   |       | 25,212   |       | 25,385   |       | 25,609   |       |
| Weighted-average  shares from assumed conversion of dilutive options              |       | 852      |       | —   |       | 248      |       |
| Weighted-average shares used in computation of  diluted earnings (loss) per share |       | 26,064   |       | 25,385   |       | 25,857   |       |

 

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**15.****       Commitments and contingencies**

***(a)  Operating leases***

We lease equipment and premises with minimum futurelease payments denominated in Cdn. dollars at December 31, 2006 as follows:
| ** ** | ** ** | **Cdn.$** | ** ** | **U.S.$** | ** ** |
|------------|------------|-----------|------------|-----------|------------|
| 2007       |       | $         | 3,524      |      | $          | 3,012 |   |
| 2008       |       | 3,393     |       | 2,900     |       |
| 2009       |       | 2,597     |       | 2,220     |       |
| 2010       |       | 2,587     |       | 2,211     |       |
| 2011       |       | 1,453     |       | 1,242     |       |
| Thereafter |       | 112       |       | 96        |       |
|       |       | $         | 13,666     |      | $          | 11,681 |   |

 

***(b)  Contingent liability on saleof products***

(i)                  Under licenseagreements, we are committed to make royalty payments based on the sales ofproducts using certain technologies. We recognize royalty obligations asdeterminable in accordance with agreement terms. Where agreements are notfinalized, we have recognized our current best estimate of the obligation. Whenthe agreements are finalized, the estimate will be revised accordingly.

(ii)               We are a party to avariety of agreements in the ordinary course of business under which we may beobligated to indemnify a third party with respect to certain matters.Typically, these obligations arise as a result of contracts for sale of ourproducts to customers where we provide indemnification against losses arisingfrom matters such as potential intellectual property infringements and productliabilities. The impact on our future financial results is not subject toreasonable estimation because considerable uncertainty exists as to whetherclaims will be made and the final outcome of potential claims. To date, we havenot incurred material costs related to these types of indemnifications.

(iii)            Under certain researchand development funding agreements, we are contingently liable to repay up to$3,168. Repayment under these agreements is contingent upon reaching certainrevenue levels for specified products.

(iv)           Under an agreement withthe Government of Canada’s Technology Partnerships Canada (“TPC”) program, we have received Cdn. $9,999 to support the developmentof a range of third generation wireless technologies. Under the terms of theagreement, an amount up to a maximum of Cdn. $13,000 is to be repaid based onannual sales, in excess of certain minimum amounts, of specified productscommencing in 2004. As all funds available under this program were earned priorto 2004, during the years ended December 31, 2006, 2005 and 2004, we claimednil. During the year ended December 31, 2006, we recorded, in research anddevelopment expense, the accrued repayment of $1,977 (2005 – $850; 2004 – $1,904). In addition, we issued warrants toTPC to purchase 138,696 common shares on December 30, 2003, valued at Cdn.$2,000 based on the Black-Scholes option pricing model. The warrants areexercisable at Cdn. $20.49 per share for a term of five years from December 30,2003. As of December 31, 2006, no warrants have been exercised.

In March 2004, we entered into a second agreementwith TPC under which we are eligible to receive conditionally repayableresearch and development funding up to Cdn. $9,540 to support the developmentof a range of third generation wireless technologies. The agreement iseffective April 2003. During the year ended December 31, 2006, we claimed nil(2005 – $893; 2004 – $2,643), which has been recorded as a reduction ofresearch and development expense. With the termination of the Voq professionalphone initiative in the second quarter of 2005 no further TPC funding isanticipated. During the year endedDecember 31, 2006, we recorded, in research and development expense, theaccrued repayment of $16 (2005 – $18; 2004 – nil). Under the terms ofthe agreement, repayment based on a percentage of annual sales, in excess ofcertain minimum amounts, will be made over the period from April 2003 toDecember 2011. The funding is repayable upon the occurrence of certain eventsof default, which include material change or insolvency events. If the payments

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during this period are less than Cdn. $16,455,payments will continue subsequent to December 2011 until the earlier of whenthe amount is reached or December 2014. No cash repayments were made in 2006 or2005.

(v)              We accrue productwarranty costs, when we sell the related products, to provide for the repair orreplacement of defective products. Our accrual is based on an assessment ofhistorical experience and on management’s estimates. An analysis of changes inthe liability for product warranties follows:
| Balance, December 31, 2003  |   | $      | 2,341  |   |
|-----------------------------|--------|--------|--------|--------|
| Provisions                  |   | 2,785  |   |
| Expenditures                |   | (2,185 | )      |
| Balance, December 31, 2004  |   | 2,941  |   |
| Provisions                  |   | 1,898  |   |
| Expenditures                |   | (2,206 | )      |
| Balance, December 31, 2005  |   | 2,633  |   |
| Provisions                  |   | 3,522  |   |
| Expenditures                |   | (3,550 | )      |
| Balance,  December 31, 2006 |   | $      | 2,605  |   |

 

***(c) Other commitments***

We have entered into purchase commitments totallingapproximately $77,479 with certain contract manufacturers under which we havecommitted to buy a minimum amount of designated products between January 2007and March 2007. In certain of these agreements, we may be required to acquire andpay for such products up to the prescribed minimum or forecasted purchases.

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

(i)                  Sierra Wireless America, Inc., as successorto AirPrime, Inc., is named as a defendant in a class action complaint foralleged violations of federal and state securities laws allegedly occurringprior to the time AirPrime, Inc. was acquired by the Company. The settlement ofthis litigation was approved by the Superior Court of the State of Californiafor the County of San Diego in February 2007. The settlement, which will be recorded once the appeal period has ended,will have no net effect on our income statement. If the judgment of the Courtdoes not become final due to a successful appeal, the litigation will continue and althoughthere can be no assurance that an unfavourable outcome of the dispute would nota have a material adverse effect on our operating results, liquidity orfinancial position, we believe the claims are without merit and will vigorouslydefend them.

(ii)               The Company and certain of our current andformer officers are named as defendants in several class action complaints foralleged violations of federal securities laws, which are consolidated forpretrial purposes in the U.S. District Court for the Southern District of NewYork. The plaintiffs filed their consolidated amended complaint on February 21,2006 and the Company and the other defendants filed a motion to dismiss onApril 7, 2006. To date, the Court has not considered the motion to dismiss. Wehave given notice to our liability insurance carrier, which has agreed to payour costs of defense that exceed the policy’s retention amount, subject to areservation of rights in the event that it is determined that the carrier hasno liability for this litigation. Although there can be no assurance that anunfavourable outcome would not have a material adverse effect on our operatingresults, liquidity or financial position, we believe the claims are withoutmerit and will vigorously defend the lawsuits. The Company has determined that itis not possible to establish a reasonable estimate of the possible loss, orrange of possible loss, if any. However, the Company believes that it isprobable that the legal costs related to these complaints may exceed our policyretention amount of $1,000. Accordingly, we accrued $1,000 in the year endedDecember 31, 2005.

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

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financial position.

**16.****       Supplementary information**
| ** **                                                          | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ***(a) Cash flow information:***                                    |       |     |       |     |       |     |       |
| Cash  received                                                      |       |     |       |     |       |     |       |
| Interest                                                            |       | $        | 1,660      |     | $          | 2,792    |       | $ | 4,204 |   |
| Income taxes                                                        |       | 4        |       | 1,590    |       | 717      |       |
| Cash  paid for                                                      |       |     |       |     |       |     |       |
| Interest                                                            |       | 32       |       | 59       |       | 19       |       |
| Income taxes                                                        |       | 2,649    |       | 470      |       | 247      |       |
| Non-cash  financing activities                                      |       |     |       |     |       |     |       |
| Purchase of fixed assets funded by obligations under  capital lease |       | 1,238    |       | 24       |       | —   |       |
|                                                                |       |     |       |     |       |     |       |
| ***(b) Allowance for doubtful accounts:***                          |       |     |       |     |       |     |       |
| Opening  balance                                                    |       | $        | 2,230      |     | $          | 2,468    |       | $ | 1,561 |   |
| Bad  debt expense                                                   |       | 366      |       | (36      | )          | 315      |       |
| Write  offs and settlements                                         |       | (128     | )          | (871     | )          | (9       | )          |
| Closing  balance                                                    |       | $        | 2,468      |     | $          | 1,561    |       | $ | 1,867 |   |
|                                                                |       |     |       |     |       |     |       |
| ***(c) Other:***                                                    |       |     |       |     |       |     |       |
| Rent  expense                                                       |       | $        | 2,004      |     | $          | 2,168    |       | $ | 2,334 |   |
| Foreign exchange gain (loss)                                        |       | 333      |       | (951     | )          | 911      |       |

 

**17.****       Segmented information**

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

Revenues by product were as follows:
| ** **                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| PC  card                          |       | $        | 125,604    |     | $          | 74,495   |       | $ | 156,512 |   |
| Embedded  modules                 |       | 70,044   |       | 13,419   |       | 51,888   |       |
| Mobile                            |       | 10,451   |       | 14,154   |       | 7,082    |       |
| Other                             |       | 3,718    |       | 5,076    |       | 5,803    |       |
| Research  and development funding |       | 1,388    |       | —   |       | —   |       |
|                              |       | $        | 211,205    |     | $          | 107,144  |       | $ | 221,285 |   |

 

As at December 31, 2006, 34%(2005 – 43%) of our fixed assets are in Canada. In the year ended December 31,2006, product sales in the Americas were 64% (2005 – 69%; 2004 – 89%).

We sell certain products through resellers, original equipmentmanufacturers, and wireless service providers who sell these products toend-users. The approximate sales to the significant channels are as follows:
| ** **  | ** ** | **2004**      | ** ** | **2005**       | ** **    | **2006**       | ** **    |
|-------------|------------|---------------|------------|----------------|---------------|----------------|---------------|
| Customer  A |       | less than 10% |       | $              | 17,545        |           | $             | 25,502 |   |
| Customer  B |       | less than 10% |       | 20,585         |          | 62,747         |          |
| Customer  C |       | $             | 55,718     |           | less than 10% |           | less than 10% |   |
| Customer D  |       | 52,755        |       | less  than 10% |          | less  than 10% |          |
|             |            |               |            |                |               |                |               |  |  |  |

 

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**18.****       Differences between United States and CanadianGAAP**

New Canadian securitiesregulations provide that financial statements filed by an SEC issuer may beprepared in accordance with United States GAAP provided that, if the SEC issuerpreviously filed or included in a prospectus financial statements prepared inaccordance with Canadian GAAP, the issuer complies with certain disclosurerequirements. Those requirements include explaining and quantifying thedifferences between Canadian and U.S. GAAP for the current and comparativeperiods presented.

The consolidatedfinancial statements have been prepared in accordance with U.S. GAAP, whichdiffer in certain material respects from those principles that would have beenfollowed had our consolidated financial statements been prepared in accordancewith Canadian GAAP. The following is a reconciliation of the net earnings(loss) between U.S. GAAP and Canadian GAAP for the years ended December 31,2006, 2005, and 2004:
| ** **                                                                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                       |       |                                        |       |   |   |   |   |
| Net earnings (loss)  under U.S. GAAP                                       |       | $                                           | 24,920     |   | $ | (36,468 | ) | $ | 9,796 |   |
| Stock-based  compensation expense (a)                                      |       | (5,591                                      | )          | (7,615 | ) | — |   |
| Realization of  previously recognized losses on short-term investments (d) |       | —                                      |       | — |   | 68 |   |
| Unrealized loss  on short and long-term investments (d)                    |       | —                                      |       | (91 | ) | (20 | ) |
| Stock option tax  benefit difference (h)                                   |       | 51                                          |       | 75 |   | — |   |
| Net earnings (loss)  under Canadian GAAP                                   |       | $                                           | 19,380     |   | $ | (44,099 | ) | $ | 9,844 |   |
|                                                                       |       |                                        |       |   |   |   |   |
| Earnings  (loss) per share under Canadian GAAP                             |       |                                        |       |   |   |   |   |
| Basic                                                                      |       | $                                           | 0.77       |   | $ | (1.74 | ) | $ | 0.38 |   |
| Diluted                                                                    |       | $                                           | 0.75       |   | $ | (1.74 | ) | $ | 0.38 |   |

 

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The most significant balance sheet differences betweenU.S. GAAP and Canadian GAAP are as follows:
| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2005**              | ** ** | **2006** | ** ** |
|                                                    |       |                  |       |   |   |
| Share capital under  U.S. GAAP                          |       | $                     | 219,398    |   | $ | 221,861 |   |
| Stock-based  compensation expense (a)                   |       | 4,250                 |       | 4,250 |   |
| Foreign currency  translation (g)                       |       | (1,223                | )          | (1,223 | ) |
| Share capital under  Canadian GAAP                      |       | $                     | 222,425    |   | $ | 224,888 |   |
|                                                    |       |                  |       |   |   |
| Additional paid-in  capital under U.S. GAAP             |       | $                     | 556        |   | $ | 3,240 |   |
| Stock-based  compensation expense (a)                   |       | 47,960                |       | 47,960 |   |
| Stock option tax  benefit difference (h)                |       | (126                  | )          | (126 | ) |
| Contributed surplus  under Canadian GAAP                |       | $                     | 48,390     |   | $ | 51,074 |   |
|                                                    |       |                  |       |   |   |
| Deficit under U.S. GAAP                                 |       | $                     | (82,857    | ) | $ | (73,061 | ) |
| Foreign currency  translation (g)                       |       | 978                   |       | 978 |   |
| Stock-based  compensation expense (a)                   |       | (52,210               | )          | (52,210 | ) |
| Unrealized loss  on short and long-term investments (d) |       | (91                   | )          | (43 | ) |
| Stock option tax  benefit difference (h)                |       | 126                   |       | 126 |   |
| Deficit under Canadian  GAAP                            |       | $                     | (134,054   | ) | $ | (124,210 | ) |
|                                                    |       |                  |       |   |   |
| Cumulative translation  adjustments under U.S. GAAP     |       | $                     | (820       | ) | $ | (746 | ) |
| Foreign currency  translation (g)                       |       | 245                   |       | 245 |   |
| Loss on short  and long-term investments (d)            |       | 91                    |       | 17 |   |
| Cumulative translation adjustments under Canadian GAAP  |       | $                     | (484       | ) | $ | (484 | ) |

 

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

(i)                   EffectiveJanuary 1, 2006, we adopted FAS No. 123R, under which we measure stock-basedcompensation at the grant date based on the estimated fair value of the awardusing the Black-Scholes valuation model, and recognize this cost over theemployee’s requisite service period. Accordingly, there is no Canadian GAAP difference in 2006. Prior to2006, under U.S. GAAP, we elected under FAS No. 123 to account for employeestock options using the intrinsic value method. This method is described in APB25 and related interpretations. As we grant all stock options with an exerciseprice equal to the market value of the underlying common shares on the date ofthe grant, no compensation expense was required to be recognized under APB 25.

(ii)                EffectiveJanuary 1, 2004, under Canadian GAAP, we adopted the fair value recognitionprovisions of the amended Canadian Institute of Chartered Accountants Handbook (“HB”)3870, “Stock-based Compensation and Other Stock-based Payments” (“HB 3870”),which requires recognition of an estimate of the fair value of stock-basedawards in earnings. We have retroactively applied HB 3870, with restatement ofprior periods to record the compensation cost that would have been recognizedhad the fair value recognition provisions of HB 3870 been applied to all awardsgranted to employees since the inception of the stock option plan.

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

Under U.S. GAAP, we expense research anddevelopment costs as they are incurred. Under Canadian GAAP, we expenseresearch costs as they are incurred. Development costs are expensed unless they meet certain specifiedcriteria for deferral and amortization. No development costs have been deferredduring the years ended December 31, 2006, 2005 and 2004, as the criteria fordeferral were not met.

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

Under U.S. GAAP, we report comprehensive income(loss) in accordance with the provisions of Statement of Financial AccountingStandards No. 130 entitled “Reporting Comprehensive Income”. Under CanadianGAAP, we are not required to report comprehensive income (loss).

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

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

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

Under U.S. GAAP, tax rates applied in thecalculation of future income taxes are those rates that are passed intolaw.  Under Canadian GAAP, substantivelyenacted tax rates are used. There has been no impact to any of the numbers inthe years ended December 31, 2006, 2005 and 2004.

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

Under U.S. GAAP, investment tax credits areaccounted for using the flow through method whereby such credits are accountedfor as a reduction of income tax expense in the period in which the credit arises.Under Canadian GAAP, investment tax credits are accounted for using the costreduction method whereby such credits are deducted from the expenses or assetsto which they relate in the period in which their recoverability is reasonablyassured. During the years ended December 31, 2006, 2005 and 2004, no investmenttax credits were recorded.

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

During the year ended December 31, 1999, theCompany changed its reporting and functional currency from Canadian dollars toU.S. dollars. Under U.S. GAAP, the shareholders’ equity accounts weretranslated into U.S. dollars at the rate in effect at the original transactiondate, while under Canadian GAAP, all amounts were translated into U.S. dollarsat the rate in effect on December 31, 1999.

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

The tax benefit related to the stock optiondeduction is calculated as the difference between the cumulative accountingdeduction and the tax deduction. Because the accounting deduction is calculateddifferently under U.S. and Canadian GAAP prior to the adoption of FAS No. 123R,the tax benefit recorded for accounting purposes is also different under eachGAAP prior to 2006.

**19.****       Subsequent event**

On March 6, 2007,we announced a definitive agreement to acquire 100 percent of the outstandingsecurities of AirLink Communications, Inc. (“AirLink”), a privately heldsupplier of high value fixed and mobile wireless data solutions for industrialand public safety applications located in Hayward, California.  Under the terms of the definitive agreement,Sierra Wireless will pay $10.0 million of cash consideration, subject tocustomary closing adjustments, and will issue approximately 1.3 million sharesof Sierra Wireless to the shareholders of AirLink.  The completion of the combination is expectedby the end of June 2007.

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