**Exhibit 99.5**

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

*The following discussion of our consolidatedfinancial condition and results of operations, as of March 4, 2005, hasbeen prepared in accordance with United States generally accepted accountingprinciples (GAAP) and, except where otherwise specifically indicated, allamounts are expressed in United States dollars.*

 

*Additional information related to Sierra Wireless, Inc.,including our Annual Information Form, may be found on SEDAR at www.sedar.com.*

 

**Overview**

 

We provide highly differentiated wireless solutions worldwide.  We develop and market a broad range ofproducts that include wireless data modems for portable computers, embeddedmodules for original equipment manufacturers, or OEMs, rugged vehicle-mountedmodems and mobile phones.  Our productspermit users to access wireless data and voice networks using notebookcomputers, personal digital assistants, or PDAs, vehicle-based systems andmobile phones.

 

Wireless data communications is an expanding market positioned at theconvergence of wireless communications, portable computing and the Internet,each of which we believe represents a growing market.  Our products are based on open standards,including the Internet protocol, and operate on the networks of major wirelesscommunications service providers.

 

Our products are primarily used by businesses and governmentorganizations to enable their employees access to a wide range of wireless dataapplications, including Internet access, e-mail, messaging, corporate intranetaccess, remote database inquiry and computer aided dispatch.  We sell our products through indirectchannels, including wireless operators, resellers and OEMs.

 

Beginning in fiscal 2001, there was a slowdown inenterprise spending and an overall economic slowdown that adversely impactedour business.  The trend intensifiedduring fiscal 2002 and continued into fiscal 2003.  Reasons for the market deterioration includeda general economic slowdown, customer bankruptcies, network build-out delaysand limited availability of capital. During the latter part of 2003 and throughout 2004, we experiencedstronger than expected demand.

 

During 2004, we achieved a number of importantobjectives, including strong growth in revenue and earnings and significantgeneration of free cash flow.  Ourrevenue increased 107.7% to $211.2 million in 2004, compared to $101.7 millionin 2003, primarily as a result of strong revenue from our PC card and OEMproducts, including products formerly sold by AirPrime, Inc. (“AirPrime”)which we acquired on August 12, 2003. Net earnings increased to $24.9 million in 2004, or $0.96 per dilutedshare, compared to $2.3 million in 2003, or $0.12 per diluted share.  Our improvement in net earnings wasattributable to a number of factors, including our acquisition of AirPrime in2003, an increase in PC Card and embedded modules revenue, operating costcontrol and a reduction in restructuring and integration costs that were relatedto the acquisition of AirPrime.

 

Our balance sheet remains strong, with $131.8 millionof cash and cash equivalents, compared to $109.7 million of cash, cashequivalents, short and long-term investments at December 31, 2003.  During 2004, we generated $29.1 million incash from operations, compared to $14.3 million in 2003.

 

We believe prospects in the wireless communicationsindustry remain strong, driven by advances in wireless network technologiessuch as the deployment of next generation 3G networks by carriersworldwide.  We believe the deployment ofthese networks will be a catalyst to increasing the demand for wirelesscommunications products such as those sold by us.

 

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Following our considerable revenue and earnings growthin 2004, we expect a significant reduction in our business in early 2005.  During the first quarter, we expect that ourbusiness will be negatively affected by:

 

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

•                  Channel inventory at some of our channel partners that is alreadysufficient to meet near term customer demand; and

•                  The near term impact of increased competition in EVDO and EDGE PCcards, including an expected loss of near term market share at VerizonWireless.

 

During 2005 we expect to increase our research anddevelopment efforts to ensure we are well positioned with new products thatwill take advantage of market opportunities associated with the deployment of3G networks. Specific product development initiatives include:

 

•                  HSDPA PC cards: We have accelerated the development of UMTS HSDPA PCcards, which we expect to launch in the second half of 2005.

 

•                  CDMA EVDO Release A PC Cards: Release A brings significant uplinkand downlink speed advantages to EVDO. We have established a strong market position in EVDO PC Release 0 cardsover the past 18 months.  We intend tointroduce EVDO Release A PC cards that we expect to be available during thefirst half of 2006.

 

•                  Embedded modules for laptop manufacturers and other OEMs:  We intend to capitalize on our embeddedmodules experience and meet the potential demand from laptop and othermanufacturers for embedded 3G capability. We intend to develop products and services specifically for thiscategory.

 

•                  Voq professional phone product line: We are continuing to seed the corporate enterprise market and areengaged in a number of trial deployments with our current Voq professionalphone.  We are developing the nextgeneration Voq platform to take advantage of 3G high speed networks, such asHSDPA.  Our next generation Voq phones willbring significant airlink, feature and ID enhancements to the product line.  We expect the first of these products to beavailable during the first half of 2006.

 

**Results of Operations**

 

The following table sets forth our operating results for the three yearsended December 31, 2004, expressed as a percentage of revenue:

 

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| **Years  ended December 31,**       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |     |       |
| Revenue                                  |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of goods sold                       |       | 89.6     |       | 59.5     |       | 60.4     |       |
| Gross margin                             |       | 10.4     |       | 40.5     |       | 39.6     |       |
| Expenses                                 |       |     |       |     |       |     |       |
| Sales and marketing                      |       | 15.0     |       | 11.4     |       | 9.5      |       |
| Research and  development, net           |       | 19.3     |       | 15.7     |       | 11.6     |       |
| Administration                           |       | 6.2      |       | 6.5      |       | 4.3      |       |
| Restructuring and  other charges         |       | 16.6     |       | 1.2      |       | 0.1      |       |
| Integration costs                        |       | —   |       | 1.9      |       | —   |       |
| Amortization                             |       | 3.0      |       | 2.3      |       | 1.1      |       |
|                                     |       | 60.1     |       | 39.0     |       | 26.6     |       |
| Earnings (loss)  from operations         |       | (49.7    | )          | 1.5      |       | 13.0     |       |
|                                     |       |     |       |     |       |     |       |
| Other income                             |       | 0.3      |       | 0.9      |       | 0.9      |       |
| Net earnings (loss)  before income taxes |       | (49.4    | )          | 2.4      |       | 13.9     |       |
|                                     |       |     |       |     |       |     |       |
| Income tax expense                       |       | 4.5      |       | 0.2      |       | 2.1      |       |
| Net earnings (loss)                      |       | (53.9    | )%         | 2.2      | %          | 11.8     | %          |

 

Our revenue by product, by distribution channel and bygeographical region is as follows:

 
| **Years  ended December 31,** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Revenue by product                 |       |     |       |     |       |     |       |
| PC card                            |       | 58       | %          | 70       | %          | 59       | %          |
| Embedded modules                   |       | 25       |       | 21       |       | 33       |       |
| Mobile                             |       | 10       |       | 6        |       | 5        |       |
| Voq                                |       | —   |       | —   |       | 1        |       |
| Other                              |       | 7        |       | 3        |       | 2        |       |
|                               |       | 100      | %          | 100      | %          | 100      | %          |
|                               |       |     |       |     |       |     |       |
| Revenue by  distribution channel   |       |     |       |     |       |     |       |
| Wireless carriers                  |       | 43       | %          | 46       | %          | 24       | %          |
| OEM                                |       | 25       |       | 22       |       | 34       |       |
| Resellers                          |       | 25       |       | 31       |       | 41       |       |
| Direct and other                   |       | 7        |       | 1        |       | 1        |       |
|                               |       | 100      | %          | 100      | %          | 100      | %          |
|                               |       |     |       |     |       |     |       |
| Revenue by  geographical region    |       |     |       |     |       |     |       |
| Americas                           |       | 87       | %          | 73       | %          | 89       | %          |
| Europe                             |       | 7        |       | 13       |       | 6        |       |
| Asia-Pacific                       |       | 6        |       | 14       |       | 5        |       |
|                               |       | 100      | %          | 100      | %          | 100      | %          |

 

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

 

*Revenue*

 

Revenue amounted to $211.2 million for the year ended December 31,2004, compared to $101.7 million in 2003, an increase of 107.7%.  The increase in revenue was due primarily toan increase in sales of PC cards and embedded modules, including sales ofproducts formerly sold by AirPrime. During the year, we commenced commercial shipments of our new SmartPhoneproduct, the Voq Professional Phone, as well as the AirCard 580 for CDMA 1xEV-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.  We completed shipments of embedded modules topalmOne for the Treo 600 at the end of 2004. As a result, we expect that embedded module revenue as a percentage ofrevenue will decrease in the near term.

 

Our revenue from customers in the Americas, Europe andthe Asia-Pacific region comprised 89%, 6% and 5%, respectively, of our totalrevenue in 2004 and 73%, 13% and 14%, respectively, in 2003.  Our North American business has increasedsignificantly compared to the prior year as a result of strong sales of our PCcard and embedded module products to North American customers.  Our North American business mix continues tobe dominated by near term demand from channels rather than by long-term, largevolume commitments. In Europe, the deployment of EDGE and UMTS networks havebeen gaining momentum and have negatively affected our GSM/GPRS sales in thatregion.  We do have EDGE products and donot currently have a UMTS product. We expect to introduce our first UMTS/HSDPAproduct in the second half of 2005.  In2004, two customers individually accounted for more than 10% of our revenue andin aggregate these two customers represented 51% of our revenue.

 

*Gross margin*

 

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

 

We expect our gross margin to continue to fluctuatefrom quarter to quarter as a result of changes in product mix, competitivepressures, changes in geographical mix and changes in product cost due to newproduct introductions.

 

*Sales and marketing*

 

Sales and marketing expenses were $20.0 million in2004, compared to $11.6 million in 2003, an increase of 72.9%.  The increase is due primarily to an increasein marketing development costs and costs related to new products, such as theVoq professional phone and products for EDGE networks.  The addition of staff from the AirPrimeacquisition also contributed to the increase. Sales and marketing expenses as a percentage of revenue decreased to9.5% in 2004, compared to 11.4% in 2003, due primarily to the increase in 2004revenue.  We expect to continue to makesignificant investments in sales and marketing as we market existing products,introduce new products and continue to expand our distribution channels in theAmericas, Europe and the Asia-Pacific region.

 

*Research and development, net*

 

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

 

Gross research and development expenses, before government research anddevelopment funding, were $27.2 million or 12.9% of revenue in 2004, comparedto $16.5 million, or 16.2% of revenue, in 2003. Repayment of TPC funding of $1.9 million was included in our grossresearch and development expenses in 2004, compared to nil in 2003.  Gross research and development expensesincreased due to the addition of staff and projects from the AirPrimeacquisition and the development of new products, including EDGE products andthe Voq professional phone.  We expectour gross research and development expenses to continue to increase as weinvest in next generation technology and develop new products.

 

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During 2004, we signed a second agreement with the Government of Canada’sTechnology Partnerships Canada (“TPC”) program under which we are eligible toreceive conditionally repayable research and development funding up to Cdn.$9.5 million to support the development of a range of third generation wirelesstechnologies.  The agreement is effectivefor development work commencing April 2003.  Funding of $2.6 million was recognized during2004, of which $1.1 million relates to the period from April 1, 2003 to December 31,2003.  We expect that our TPC fundingwill be based on research and development work completed in each quarter.

 

*Administration*

 

Administration expenses amounted to $9.0 million, or 4.3% of revenue, in2004, compared to $6.6 million, or 6.5% of revenue, in 2003.  The increase of $2.4 million is due primarilyto an increase in professional fees, insurance costs and the addition of stafffrom the AirPrime acquisition.   Includedin administration expenses were recoveries from Metricom of $0.5 million ineach of 2004 and 2003 that were related to the settlement agreement that isfurther described under the heading “Contingent Liabilities”.

 

*Restructuring and other charges*

 

In 2004, weincurred restructuring and other charges of $0.3 million as a result of achange in estimate of the facilities restructuring charge that was originallyannounced in 2002.  The change inestimate reflects the impact of changes in estimated operating costs of thefacilities and foreign exchange rates.

 

In 2003, weincurred restructuring and other charges of $1.2 million as a result of ouracquisition of AirPrime.  The chargesincluded writedowns of fixed and intangible assets, severance costs for workforcereductions and an additional facilities restructuring charge.

 

*Integration costs*

 

In 2004 we didnot incur any integration costs.  In2003, we incurred integration costs of $1.9 million as a result of ouracquisition of AirPrime.  The chargesinclude costs of existing staff and contractors retained for the transitionperiod and costs related to integration activities.   All of these employees and contractorscompleted their integration activities and were terminated by December 31,2003.

 

*Other income*

 

Other income increased to $2.0 million in 2004, compared to $1.0 millionin 2003.  Other income includes interestincome, interest expense and foreign exchange gains and losses.  This increase is due to an increase ininterest income from increased cash and investment balances and an increase ininterest rates.

 

*Income tax expense*

 

Income tax expense amounted to $4.4 million in 2004, compared to $0.2million in 2003.  Income tax expense hasincreased primarily due to taxes payable in the United States resulting fromour increased earnings.

 

*Net earnings*

 

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

 

The weighted average diluted number of shares outstanding increased to26.1 million in 2004, primarily due to the issuance of shares in August 2003related to the AirPrime acquisition and to our public offering in November 2003,as compared to 19.0 million in the same period of 2003.

 

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

 

During thefourth quarter of 2004, our revenue increased 70.1% to $58.8 million in 2004,compared to $34.6 million in the same period of 2003, due primarily to strongrevenue from our PC card and embedded module products.  In the fourth quarter of 2004, threecustomers individually accounted for more than 10% of our revenue, and in theaggregate, these three customers represented 62% of our revenue.  Gross margin for the three months ended December 31,2004 was 38.8%, compared to 41.1% in the same period of 2003.  The decrease in gross margin is due primarilyto changes in product mix.

 

Operatingexpenses were $15.8 million in the fourth quarter of 2004, compared to $13.0million in the same period of 2003. Operating expenses increased primarily due to additional costs incurredin generating increased revenue and costs related to the development andmarketing of new products, including products for EDGE networks and the VoqProfessional Phone.

 

Net earningsincreased to $7.3 million in 2004, or $0.28 per diluted share, compared to $1.9million in 2003, or $0.08 per diluted share. Our improvement in net earnings was attributable to a number of factors,including an increase in PC card and embedded modules revenue and operatingcost control.

 

***Results of Operations – Year Ended December 31,2003 Compared to Year Ended December 31, 2002***

 

*Follow-OnOffering*

 

On November 14, 2003, we completed a new issueand secondary public offering of 4.6 million common shares in the United Statesand Canada at a price of $16.25 per common share. The offering generated netproceeds of approximately $67.4 million.  Of the 4.6 million common shares, 4.4 millioncommon shares were sold by the Company and 0.2 million common shares were soldby retiring officers of the Company.

 

*Acquisitionof AirPrime, Inc.*

 

On August 12,2003, we acquired 100 percent of the outstanding securities of AirPrime, aprivately-held supplier of high-speed CDMA wireless products located inCarlsbad, California.  We subsequentlychanged the name of AirPrime to Sierra Wireless America, Inc.  The results of AirPrime’s operations havebeen included in our consolidated financial statements since that date.  As a result of the acquisition, we believethe combined entity to be a well-positioned market leader with a broad productline, innovative engineering, blue chip customers, global distribution channelsand a strong balance sheet.

 

The aggregatepurchase price was $23.8 million including common shares valued at $22.4million with costs related to the acquisition of $1.4 million.  The value of the 3,708,521 common sharesissued was determined based on the average market price of our common sharesover the two-day period before and after June 16, 2003, which was the datethe terms of the acquisition were agreed to and announced.  Under the terms of the escrow agreement datedAugust 12, 2003, 927,129 common shares were deposited into escrow.  Of that number, 309,064 common shares havebeen released and the balance continue to be held in escrow.

 

*2003 Restructuring and Integration Costs*

 

In the third quarter of 2003, we incurredrestructuring and other charges as a result of our acquisition ofAirPrime.  During the year ended December 31,2003, we recorded restructuring and other charges of $1.2 million as follows:

 

| Fixed and  intangible asset writedowns |   | $   | 0.6    |   |
|----------------------------------------|--------|-----|--------|--------|
| Workforce  reductions                  |   | 0.3 |   |
| Facilities restructuring               |   | 0.3 |   |
| Total restructuring  and other charges |   | $   | 1.2    |   |

 

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The writedowns of fixed and intangibleassets of $0.6 million were primarily for research and development equipment,test equipment and research and development licenses that are no longerrequired.  These assets were written downto nil.  Workforce reduction charges of$0.3 million were related to the cost of severance and benefits associated with11 employees notified of termination.  Ofthe 11 employees, seven were in product development and four were inmanufacturing.  As of September 30,2003, there were no restructuring amounts remaining to be paid out related toworkforce reductions.  We also recordedan additional facilities restructuring charge of $0.3 million as we made littleprogress in 2003 on the facilities restructuring that was originally announcedin 2002.

 

During 2003, we also incurred integration costs of $1.9 million relatedto travel, facilities and costs related to eight existing employees retainedfor the transition period.  All of theseemployees completed their integration activities and were terminated as of December 31,2003.

 

*Revenue*

 

Revenue amounted to $101.7 million in 2003, comparedto $77.3 million in 2002, an increase of 31.6%. Included in our revenue wasresearch and development funding of $0.7 million and freight revenue of $0.3million in 2003, compared to $3.7 million and $0.1 million, respectively, in2002. The increase in revenue was a result of sales of our 2.5G products aswell as increasing sales to new channels in Europe and the Asia-Pacificregion.  During 2003, we commencedcommercial shipment of the AirCard 575, MP 555 and MP 750 as well as theproducts formerly sold by AirPrime.

 

*Gross margin*

 

Gross margin amounted to $41.2 million in 2003,compared to $8.0 million in 2002. Included in our gross margin was research anddevelopment funding of $0.7 million and freight revenue of $0.3 million in2003, compared to $3.7 million and $0.1 million, respectively, in 2002.  During 2002, our gross margin was negativelyaffected by restructuring and other charges of $20.8 million.  Our gross margin percentage was 40.5% ofrevenue in 2003, compared to 10.4% of revenue in 2002.  Our gross margin, excluding restructuring andother charges, amounted to $41.2 million, or 40.5% of revenue in 2003, comparedto $28.8 million, or 37.3% of revenue in 2002. The increase in gross margin was a result of a greater mix of 2.5GAirCard products, which yield a higher margin than OEM products, as well asproduct cost reductions.  During 2003, wesold $1.4 million of products that had a book value after writedowns of nil.

 

*Sales and marketing*

 

Sales and marketing expenses were $11.6 million in2003, unchanged from 2002.  Sales andmarketing expenses as a percentage of revenue decreased to 11.4% in 2003,compared to 15.0% in 2002.  This decreasewas due primarily to an increase in revenue without a corresponding increase inoperating expenses.

 

*Research and development, net*

 

Research and development expenses, net of conditionally repayablegovernment research and development funding and investment tax credits,amounted to $16.0 million in 2003, compared to $14.9 million in 2002, anincrease of 7.4%.  Gross research anddevelopment expenses, before government research and development funding andinvestment tax credits, were $16.5 million or 16.2% of revenue in 2003,compared to $16.8 million or 21.7% of revenue in 2002. Gross research anddevelopment expenses in 2003 decreased due to cost reductions under ourrestructuring plan implemented in the second quarter of 2002 and a reduction ofcosts related to the development of products based on CDMA and GPRS standards.These reductions were partially offset by the addition of staff and projectsfrom the AirPrime acquisition and the development costs of the Voq professionalphone.

 

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*Administration*

 

Administration expenses amounted to $6.6 million in 2003, compared to$4.8 million in 2002.  Included inadministration expenses were recoveries from Metricom of $0.5 million in 2003and $1.8 million in 2002.  Excluding theMetricom recoveries, administration expenses were $7.1 million in 2003,compared to $6.6 million in 2002.  Thisincrease of 7.8% is due primarily to an increase in insurance costs that waspartially offset by cost reductions under our restructuring plan.  Administration expenses, excluding theMetricom recoveries, as a percentage of revenue amounted to 7.0% in 2003,compared to 8.5% in 2002.

 

*Other income*

 

Other income increased to $1.0 million in 2003, compared to $0.2 millionin 2002.  Other income includes interestincome, interest expense and foreign exchange gains and losses.  This increase is due to an increase ininterest income from increased cash and investment balances from our secondarypublic offering, as well as net foreign exchange gains on our Canadiandenominated currency.

 

*Income tax expense (recovery)*

 

Income tax expense amounted to $0.2 million in 2003, compared to $3.5million in 2002.  Our 2002 income taxrecovery, excluding restructuring and other costs of $4.0 million, was $0.6million.  The income tax recoveryrecorded in 2002 is a recovery of taxes paid in prior periods.

 

*Net earnings (loss)*

 

Our net earnings amounted to $2.3 million in 2003, compared to a net lossof $41.7 million in 2002.  Our netearnings amounted to $4.9 million in 2003, excluding restructuring andintegration costs of $3.2 million and the Metricom recovery of $0.5 million,compared to a net loss of $5.8 million in 2002, excluding restructuring andother costs of $37.7 million and the Metricom recovery of $1.8 million.  Our diluted earnings per share amounted to$0.12 in 2003, compared to a loss per share of $2.56 in 2002.  Our diluted earnings per share, excluding theitems referred to above, was $0.26 in 2003, compared to a loss per share of$0.35 in 2002.  The weighted averagenumber of shares outstanding increased to 19.0 million in 2003 due to the issuanceof shares related to the AirPrime acquisition and to our public offering, ascompared to 16.3 million in 2002.

 

**Contingent Liabilities**

 

Sierra Wireless America, Inc., as successor toAirPrime, Inc., along with other defendants, has been served with thefirst amended complaint filed September 13, 2004 and second amendedcomplaint filed January 3, 2005 (collectively the “Complaint”) of JoshuaCohen and David Beardsley on behalf of themselves and others similarlysituated, which was filed in the U.S. District Court for the Central District ofCalifornia for alleged violations of federal and state securities lawsallegedly occurring prior to the time AirPrime, Inc. was acquired by theCompany.   On March 4, 2005, thedefendants filed motions to dismiss the Complaint.  The hearing is expected to occur in May 2005.  We have given notice to our liabilityinsurance carriers and submitted an escrow claim notice under the escrowagreement dated August 12, 2003 relating to the acquisition ofAirPrime.  Both the insurance carrier andthe escrow shareholders are disputing their obligations with respect to thisComplaint.  Although there can be noassurance that an unfavourable outcome of the dispute would not have a materialadverse effect on our operating results, liquidity or financial position, we believethe claims are without merit and will vigorously defend them.

 

During 2002, we executed a settlement agreement withMetricom, one of our U.S. customers, in a Chapter 11 reorganization under U.S.bankruptcy laws, under which all claims and counterclaims were settled.  We received the amount of $1.8 million thathas been included in our net loss for 2002. We also received additional recoveries of $0.5 million in each of 2003 and2004 that have been included in our results for each of 2003 and 2004.

 

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.  When the agreements are finalized, theestimate will be revised accordingly.

 

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We are engagedin other legal actions in the ordinary course of business and believe that theultimate outcome of these actions will not have a material adverse effect onour operating results, liquidity or financial position.

 

**Subsequent Events**

 

Subsequent to December 31, 2004, we became awareof certain alleged securities class action lawsuits filed against the Companyand certain of our officers in the U.S. District Court Southern District of NewYork and the U.S. District Court Southern District of California.  On February 22, 2005, we were servedwith one of the complaints filed in the Southern District of California.  We are assessing the complaints and have notyet been required to file our response. Although there can be no assurance that an unfavourable outcome wouldnot have a material adverse effect on our operating results, liquidity orfinancial position, we believe the claims are without merit and will vigorouslydefend the lawsuits.  The Company hasdetermined that it is not possible to establish a reasonable estimate of the possibleloss, or range of possible loss, if any.

 

On February 8, 2005, Sierra Wireless, Inc.was served with the first amended complaint of MLR, LLC filed in the U.S.District Court for the Northern District of Illinois Eastern Division foralleged patent infringement relating to our line of professional phones.  We have been added as a defendant in existingcivil action no. 04 C 7044 MLR, LLC v. Kyocera Wireless Corporation and NovatelWireless, Inc.  We are assessing thecomplaint and have not yet been required to file our response.  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 the action. The Company hasdetermined that it is not possible to establish a reasonable estimate of thepossible loss, or range of possible loss, if any.

 

**Critical Accounting Estimates**

 

We prepare our consolidated financial statements inaccordance with accounting principles generally accepted in the United States,and we make estimates and assumptions that affect the reported amounts ofassets, liabilities, revenue and expenses, and the related disclosure ofcontingent liabilities. On an on-going basis, we evaluate our estimates andjudgments, including those related to revenue recognition, adequacy ofallowance for doubtful accounts, adequacy of inventory reserve, income taxesand adequacy of warranty reserve.  Webase our estimates on historical experience and anticipated results and trendsand on various other assumptions that we believe are reasonable under thecircumstances. By their nature, estimates are subject to an inherent degree ofuncertainty.  Actual results may differfrom our estimates.  Senior managementhas discussed with our audit committee the development, selection, anddisclosure of accounting estimates used in the preparation of our consolidatedfinancial statements.

 

During the year ended December 31, 2004, we didnot adopt any new accounting policies that have a material impact on ourconsolidated financial statements or make changes to existing accountingpolicies.

 

The following critical accounting policies affect ourmore significant estimates and assumptions used in preparing our consolidatedfinancial statements:

 

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

 

A significant portion of our revenue is generated from sales to resellers.  We recognize revenue on the portion of salesto certain resellers that are subject to provisions allowing various rights ofreturn and stock rotation when the rights have expired or the products havebeen reported as sold by the resellers.

 

Funding from research and development agreements,other than government research and development arrangements, is recognized asrevenue when certain criteria stipulated under the terms of those funding agreementshave been met, and when

 

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there is reasonable assurance the funding will bereceived. Certain research and development funding will be repayable only onthe occurrence of specified future events. If such events do not occur, no repayment would be required.  We will recognize the liability to repayresearch and development funding in the period in which conditions arise thatwould cause research and development funding to be repayable.

 

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

 

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

 

•                  We maintain an allowance for doubtful accounts for estimated lossesthat may arise if any of our customers are unable to make requiredpayments.   We consider the followingfactors when determining if collection is reasonably assured:  customer credit-worthiness, past transactionhistory with the customer, current economic industry trends and changes incustomer payment terms.  If we have noprevious experience with the customer, we typically obtain reports from creditorganizations to ensure that the customer has a history of paying its creditors.  We may also request financial information,including financial statements, to ensure that the customer has the means ofmaking payment.  If these factorsindicate collection is not reasonably assured, revenue is deferred untilcollection becomes reasonably assured, which is generally upon receipt ofcash.  If the financial condition of anyof our customers deteriorates, we may increase our allowance.

 

•                  We value ourinventory at the lower of cost, determined on a first-in-first-out basis, andestimated net realizable value. We assess the need for an inventory writedownor an accrual for estimated losses on inventory purchase commitments based onour assessment of estimated market value using assumptions about future demandand market conditions. Our reserve requirements generally increase as ourprojected demand requirements decrease, due to market conditions, technologicaland product life cycle changes and longer than previously expected usageperiods.  If market conditions are worsethan our projections, we may further writedown the value of our inventory orincrease the accrual for estimated losses on inventory purchase commitments.

 

•                  We currently haveintangible assets of $14.2 million and goodwill of $19.2 million generated fromour acquisition of AirPrime in August 2003.  Goodwill is tested for impairment annually,or more often, if an event or circumstance indicates that an impairment losshas been incurred.

 

The initialgoodwill impairment test was completed during the fourth quarter of 2003, whichresulted in no impairment loss.  We assessedthe realizability of goodwill related to our reporting unit during the fourthquarter of 2004 and determined that the fair value amount exceeded the carryingamount of the reporting unit by a substantial margin.  Therefore, the second step of the impairmenttest that measures an impairment loss by comparing the implied fair marketvalue of the reporting unit goodwill with the carrying amount of the goodwillis not required.

 

•                  We evaluate ourdeferred income tax assets to assess whether their realization is more likelythan not. If their realization is not considered more likely than not, weprovide for a valuation allowance. The ultimate realization of our deferred taxassets is dependent upon the generation of future taxable income during theperiods in which temporary differences become deductible. We consider projectedfuture taxable income and tax planning strategies in making our assessment. Ifour assessment of our ability to realize our deferred tax assets changes, wemay make an adjustment to our deferred tax assets that would be charged toincome.

 

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

 

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

 

•                  We recorded a lease provision during2002 as a result of our restructuring program by estimating the net presentvalue of the future cash outflows over the remaining lease period.  The estimate was based on various assumptionsincluding the obtainable sublease rates and the time it will take to find asuitable tenant.  These assumptions areinfluenced by market conditions and the availability of similar space nearby.  If market conditions change, we will adjustour provision.

 

•                  We are engaged in certain legal actions and believe that theultimate outcome of these actions will not have a material adverse effect onour operating results, liquidity or financial position.  We estimate the range of liability related topending litigation where the amount and range of loss can be reasonablyestimated.  We record our best estimateof a loss when the loss is considered probable. As additional information becomes available, we assess the potentialliability relating to our pending litigation and revise our estimates.

 

**Liquidity and Capital Resources**

 

*Operating Activities*

 

Cash provided by operating activities amounted to$29.1 million in 2004, compared to cash provided by operating activities of$14.3 million in 2003, an improvement of $14.8 million.  The source of cash in 2004 primarily resultedfrom earnings from operations of $24.9 million adjusted for non-cash items,inventory levels and changes in other operating assets and liabilities of $4.2million.  Our working capital hasincreased significantly from December 31, 2003 as a result of thesignificant growth in our business.

 

*Investing Activities*

 

Cash provided by investing activities was $29.4 million for 2004,compared to cash used by investing activities of $45.3 million in 2003.  The source of cash during 2004 was dueprimarily to the disposal of long-term investments that were re-invested ininvestments with maturities less than 90 days. Expenditures on intangible assets were $2.1 million in 2004, compared to$4.1 million in 2003, and were primarily for license fees and patents.  Capital expenditures were $7.1 million in2004, compared to $2.0 million in 2003, and were primarily for tooling,research and development equipment, computer equipment and software.

 

We do not have any trading activities that involve any type of commoditycontracts that are accounted for at fair value but for which a lack of marketprice quotations necessitate the use of fair value estimation techniques.

 

*Financing Activities*

 

Cash provided by financing activities was $3.0 millionin 2004, compared to $66.5 million during the same period in 2003.  The source of cash in 2004 was primarily fromthe issuance of common shares upon the exercise of stock options, offsetslightly by repayments of our long-term obligations.  The source of cash in 2003 was due to thecompletion of a public offering in the United States and Canada.

 

As of December 31, 2004, we did not have anyoff-balance sheet finance or special purpose entities.

 

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*CashRequirements*

 

Our near-term cash requirements are primarily related to funding ouroperations, capital expenditures and other obligations discussed below.  In the near term, we expect that our cashflow from operations will be negative. We believe our cash and cash equivalents of $131.8 million and cashgenerated from operations will be sufficient to fund our expected working andother capital requirements for the next twelve months based on current businessplans.  Our capital expenditures during2005 are expected to be primarily for research and development equipment,tooling, licenses and patents.  However,we cannot provide assurance that our actual cash requirements will not begreater than we currently expect.

 

The following table quantifies our future contractual obligations as ofDecember 31, 2004:

 
| **Payments due in fiscal** | ** ** | **Operating  Leases** | ** ** | **Obligations  under  Capital  Leases** | ** ** | **Total** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------------|------------|-----------|------------|
|                       |       |                  |       |                                    |       |      |       |
| 2005                       |       | $                     | 2,844      |                                    | $          | 664       |       | $ | 3,508 |   |
| 2006                       |       | 2,728                 |       | 287                                     |       | 3,015     |       |
| 2007                       |       | 2,802                 |       | —                                  |       | 2,802     |       |
| 2008                       |       | 2,816                 |       | —                                  |       | 2,816     |       |
| 2009                       |       | 2,146                 |       | —                                  |       | 2,146     |       |
| Thereafter                 |       | 3,432                 |       | —                                  |       | 3,432     |       |
| Total                      |       | $                     | 16,768     |                                    | $          | 951       |       | $ | 17,719 |   |

 

We have entered into purchase commitments totaling approximately $12.6million with certain contract manufacturers under which we have committed tobuy a minimum amount of designated products. In certain of these agreements, we may be required to acquire and payfor such products up to the prescribed minimum or forecasted purchases.  The terms of the commitment may require us topurchase approximately $12.6 million of product from certain contractmanufacturers between January 2005 and March 2005.

 

*Sourcesand Uses of Cash*

 

During 2004, we had an operating line of credit of $10.0 million, whichbore interest at prime plus 1.25% per annum. This line of credit was secured bya general security agreement providing a first charge against all assets.  On December 31, 2004, we renegotiatedour line of credit and now have an unsecured revolving demand facility for$10.0 million that bears interest at prime per annum.  The balance at December 31, 2004 was nil(2003 — nil).

 

In November 2003, we completed a public offering in the UnitedStates and Canada.  Our net proceedsafter selling commissions and expenses of the offering amounted toapproximately $67.4 million.  The netproceeds from the offering are to be used for product development, workingcapital and general corporate purposes, including acquisitions.

 

In the past, our revenue was dependent on us fulfilling our commitmentsin accordance with agreements with major customers. We have completed volumeshipments on those contracts.  We are nowrelying on purchase orders with these customers and these customers, like ourother customers, will be under no contractual obligation to purchase ourproducts.  If they do not make suchpurchases, our future operating cash flow will be negatively impacted.  We have a risk of impairment to our liquidityshould there be any interruption to our business operations.

 

The source of funds for our future capital expenditures and commitmentsis cash, short-term investments, accounts receivable, research and developmentfunding, borrowings and cash from operations, as follows:

 

•                  Net cash and short-term investmentsamounted to $131.8 million at December 31, 2004, compared to $85.1 millionat December 31, 2003.

•                  Long-term investments amounted to nilat December 31, 2004, compared to $24.6 million at December 31, 2003.

 

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•                  Accounts receivable amounted to $22.5million at December 31, 2004, compared to $21.6 million at December 31,2003.

•                  We have a $10.0 million unsecured revolving demand facility with aCanadian chartered bank that bears interest at prime.  At December 31, 2004, there were noborrowings under this facility.

 

**MarketRisk Disclosure**

 

During the year ended December 31, 2004, 86% of our revenue wasearned from United States-based customers. Our risk from currency fluctuationsbetween the Canadian and U.S. dollar is reduced by purchasing inventory, othercosts 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 exposure tofluctuations between the Canadian and U.S. dollars. For the three and twelvemonths ended December 31, 2004, we have recorded a foreign exchange gainof approximately $0.7 million and $0.3 million, respectively.  As we have available funds and very littledebt, we have not been adversely affected by significant interest ratefluctuations.

 

With our international operations in Europe and the Asia-Pacificregion, we are transacting business in additional foreign currencies and thepotential for currency fluctuations is increasing.  The risk associated with currencyfluctuations between the U.S. dollar and foreign currencies in Europe and theAsia-Pacific region has been minimal as such transactions have not been materialto date.  As our business expands inEurope, we expect that we will also continue to be exposed to Eurotransactions. To date we have not entered into any futures contracts. To manageour foreign currency risks, we may enter into such contracts should we considerit to be advisable to reduce our exposure to future foreign exchangefluctuations.

 

Currently, we do not have any hedging activities or derivativeinstruments.

 

**RelatedParty Transactions**

 

During the year ended December 31, 2004, there were no materialrelated party transactions.

 

**QuarterlyResults of Operations**

 

The following tables set forth certain unaudited consolidatedstatements of operations data for each of the eight most recent quarters that,in management’s opinion, have been prepared on a basis consistent with theaudited consolidated financial statements contained in our fiscal 2004 AnnualReport.  The unaudited consolidatedstatements of operations data presented below reflects all adjustments,consisting primarily of normal recurring adjustments, which are, in the opinionof management, necessary for a fair presentation of results for the interimperiods.  These operating results are notnecessarily indicative of results for any future period.  You should not rely on them to predict ourfuture performance.

 

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| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Year**         | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------------|------------|
| **2004**                                          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **2004** | ** ** |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Revenue                                           |       | $                 | 41,641     |             | $          | 51,595 |   | $ | 59,149 |   | $ | 58,820 |   | $ | 211,205 |   |
| Cost of goods sold                                |       | 24,839            |       | 30,680           |       | 36,107 |   | 35,974 |   | 127,600 |   |
| Gross margin                                      |       | 16,802            |       | 20,915           |       | 23,042 |   | 22,846 |   | 83,605 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Expenses:                                         |       |              |       |             |       |   |   |   |   |   |   |
| Sales and marketing                               |       | 4,173             |       | 4,386            |       | 5,604 |   | 5,866 |   | 20,029 |   |
| Research and development, net                     |       | 4,739             |       | 5,991            |       | 6,566 |   | 7,231 |   | 24,527 |   |
| Administration                                    |       | 2,064             |       | 2,534            |       | 2,354 |   | 2,041 |   | 8,993 |   |
| Restructuring and other charges                   |       | —            |       | —           |       | 289 |   | — |   | 289 |   |
| Amortization                                      |       | 636               |       | 563              |       | 588 |   | 651 |   | 2,438 |   |
|                                              |       | 11,612            |       | 13,474           |       | 15,401 |   | 15,789 |   | 56,276 |   |
| Earnings from operations                          |       | 5,190             |       | 7,441            |       | 7,641 |   | 7,057 |   | 27,329 |   |
| Other income (expense)                            |       | 84                |       | (40              | )          | 694 |   | 1,251 |   | 1,989 |   |
| Earnings before income taxes                      |       | 5,274             |       | 7,401            |       | 8,335 |   | 8,308 |   | 29,318 |   |
| Income tax expense                                |       | 704               |       | 1,384            |       | 1,268 |   | 1,042 |   | 4,398 |   |
| Net earnings                                      |       | $                 | 4,570      |             | $          | 6,017 |   | $ | 7,067 |   | $ | 7,266 |   | $ | 24,920 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Earnings per share:                               |       |              |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | $                 | 0.18       |             | $          | 0.24 |   | $ | 0.28 |   | $ | 0.29 |   | $ | 0.99 |   |
| Diluted                                           |       | $                 | 0.18       |             | $          | 0.23 |   | $ | 0.27 |   | $ | 0.28 |   | $ | 0.96 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Weighted average number of shares (in thousands): |       |              |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | 24,986            |       | 25,221           |       | 25,301 |   | 25,339 |   | 25,212 |   |
| Diluted                                           |       | 26,027            |       | 26,248           |       | 26,087 |   | 25,891 |   | 26,064 |   |

 

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| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Year**         | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------------|------------|
| **2003**                                          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **2003** | ** ** |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Revenue                                           |       | $                 | 20,150     |             | $          | 20,736 |   | $ | 26,250 |   | $ | 34,573 |   | $ | 101,709 |   |
| Cost of goods sold                                |       | 12,210            |       | 12,405           |       | 15,566 |   | 20,370 |   | 60,551 |   |
| Gross margin                                      |       | 7,940             |       | 8,331            |       | 10,684 |   | 14,203 |   | 41,158 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Expenses:                                         |       |              |       |             |       |   |   |   |   |   |   |
| Sales and marketing                               |       | 2,729             |       | 2,590            |       | 2,653 |   | 3,613 |   | 11,585 |   |
| Research and development, net                     |       | 2,749             |       | 2,947            |       | 4,677 |   | 5,621 |   | 15,994 |   |
| Administration                                    |       | 1,617             |       | 1,451            |       | 1,331 |   | 2,198 |   | 6,597 |   |
| Restructuring and other charges                   |       | —            |       | —           |       | 1,220 |   | — |   | 1,220 |   |
| Integration costs                                 |       | —            |       | —           |       | 1,026 |   | 921 |   | 1,947 |   |
| Amortization                                      |       | 553               |       | 546              |       | 590 |   | 638 |   | 2,327 |   |
|                                              |       | 7,648             |       | 7,534            |       | 11,497 |   | 12,991 |   | 39,670 |   |
| Earnings (loss) from operations                   |       | 292               |       | 797              |       | (813 | ) | 1,212 |   | 1,488 |   |
| Other income (expense)                            |       | 104               |       | 167              |       | (74 | ) | 768 |   | 965 |   |
| Earnings (loss) before income taxes               |       | 396               |       | 964              |       | (887 | ) | 1,980 |   | 2,453 |   |
| Income tax expense                                |       | 35                |       | 54               |       | 54 |   | 55 |   | 198 |   |
| Net earnings (loss)                               |       | $                 | 361        |             | $          | 910 |   | $ | (941 | ) | $ | 1,925 |   | $ | 2,255 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Earnings (loss) per share:                        |       |              |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | $                 | 0.02       |             | $          | 0.06 |   | $ | (0.05 | ) | $ | 0.09 |   | $ | 0.12 |   |
| Diluted                                           |       | $                 | 0.02       |             | $          | 0.05 |   | $ | (0.05 | ) | $ | 0.08 |   | $ | 0.12 |   |
|                                              |       |              |       |             |       |   |   |   |   |   |   |
| Weighted average number of shares (in thousands): |       |              |       |             |       |   |   |   |   |   |   |
| Basic                                             |       | 16,355            |       | 16,375           |       | 18,409 |   | 22,563 |   | 18,442 |   |
| Diluted                                           |       | 16,718            |       | 16,754           |       | 18,409 |   | 23,383 |   | 18,989 |   |

 

Our quarterlyresults may fluctuate from quarter to quarter because our operating expensesare determined based on anticipated sales, are generally fixed and are incurredthroughout each fiscal quarter.  Theimpact of significant items incurred during the first three interim periods ofeach fiscal year are discussed in more detail and disclosed in our quarterlyreports on Form 6-K.  Itemsaffecting our quarterly results were as follows:

 

•                  Revenues increased in each of the last eight quarters as a result ofthe introduction of new products and strong sales of PC card and OEM products.

 

•                  During the third quarter of 2003, weacquired AirPrime, a supplier of high-speed CDMA wireless products located inCarlsbad, California.  The results ofAirPrime’s operations have been included in our consolidated financialstatements since August 2003.  Inconnection with the acquisition, we incurred restructuring and other charges inthe amount of $1.2 million related to fixed and intangible asset writedowns,workforce reductions and facilities restructuring.  We also incurred integration costs of $1.9million related to the acquisition and these costs included travel, facilitiesand costs related to retaining existing employees for the transition period.

 

•                  During the first quarter of 2004, wesigned a second agreement with the Government of Canada’s TechnologyPartnerships Canada (“TPC”) program.  Theagreement is effective for development work commencing April 2003.  Funding of $1.4 million was recognized in thefirst quarter of 2004, of which $1.1 million relates to the period from April 1,2003 to December 31, 2003.

 

•                  During the third quarter of 2004, weincurred restructuring and other charges of $0.3 million as a result of achange in estimate of the facilities restructuring charge that was originallyannounced in 2002.  The change inestimate reflects the impact of changes in estimated operating costs of the facilitiesand foreign exchange rates.

 

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**SelectedAnnual Information**

 
| **Years  ended December 31,**                                                                      | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                    |       |     |       |     |       |     |       |
| Revenue                                                                                                 |       | $        | 77,259     |     | $          | 101,709  |       | $ | 211,205 |   |
| Net earnings (loss)                                                                                     |       | (41,663  | )          | 2,255    |       | 24,920   |       |
| Diluted earnings (loss) per share                                                                       |       | (2.56    | )          | 0.12     |       | 0.96     |       |
| Total assets                                                                                            |       | 71,089   |       | 175,868  |       | 215,594  |       |
| Total current and long-term portions of long term liabilities and obligations under capital  lease |       | 6,590    |       | 3,735    |       | 3,456    |       |
|                                                                                                         |            |          |            |          |            |          |            |  |  |  |

 

**Forward-lookingStatements**

 

This report contains forward-looking statements that involve risks anduncertainties. These forward-looking statements relate to, among other things,plans and timing for the introduction or enhancement of our services andproducts, statements about future market conditions, supply and demandconditions, channel inventory and sell through, revenue, gross margin,operating expenses, profits, and other expectations, intentions and planscontained in this report that are not historical fact. Our expectationsregarding future revenues and earnings depend in part upon our ability todevelop, manufacture, supply and market products that we do not produce todayand that meet defined specifications. When used in this report, the words “plan”, “expect”, “believe”, andsimilar expressions generally identify forward-looking statements. Thesestatements reflect our current expectations. They are subject to a number ofrisks and uncertainties, including but not limited to, changes in technologyand changes in the wireless communications market. In light of the many risksand uncertainties surrounding the wireless communications market, you shouldunderstand that we cannot assure you that the forward-looking statementscontained in this report will be realized.

 

**RiskFactors**

 

Our business is subject to significant risks and past performance is noguarantee of future performance.  Some ofthe risks we face are:

 

**We have incurred netlosses in the past and may not sustain profitability.**

 

While we had earnings from operations foreach of the last two years ended December 31, 2004, we have incurred aloss from operations in each of the three fiscal years ended December 31,2002.  As of December 31, 2004, ouraccumulated deficit was $46.4 million. While we had net earnings of $24.9million for the year ended December 31, 2004, our ability to achieve andmaintain profitability will depend on, among other things, the continued salesof our current products and the successful development and commercialization ofnew products.

 

We expect losses in Q1 2005.  If we do not return to profitability, we mayneed to raise additional capital in the future. Additional financing may not beavailable, and even if available, may not be on acceptable terms. We may seekto raise additional capital through an offering of common shares, preferenceshares or debt, which may result in dilution, and/or the issuance of securitieswith rights senior to the rights, of the holders of common shares.  As a result, our share price may decline.

 

**Ourrevenues and earnings may fluctuate from quarter to quarter, which could affectthe market price of our common shares.**

 

Our revenues and earnings may vary fromquarter to quarter as a result of a number of factors, including:

 

•                  The timing of releases of our new products;

 

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•                  The timing of substantial sales orders;

 

•                  Design win cycles in our embedded module business;

 

•                  The amount of inventory held by our channel partners;

 

•                  Competition from other market participants;

 

•                  Possible seasonal fluctuations in demand;

 

•                  Possible cyclical fluctuations related to theevolution of wireless technologies;

 

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

 

•                  Concentration in our customer base; and

 

•                  Possible delays or shortages in component supplies.

 

Because our operating expenses aredetermined based on anticipated sales, are generally fixed and are incurredthroughout each fiscal quarter, any of the factors listed above could causesignificant variations in our revenues and earnings in any given quarter.  Therefore, our quarterly results are notnecessarily indicative of our overall business, results of operations andfinancial condition.  However, quarterlyfluctuations in our revenues and earnings may affect the market price of ourcommon shares.

 

**Ifdemand for our current products declines and we are unable to launch successfulnew products, our revenues will decrease.**

 

If the markets inwhich 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 oneor all of our current products could decline as a result of competition,technological change or other factors.

 

**Ifwe are unable to design and develop new products that gain sufficientcommercial acceptance, we may be unable to maintain our market share or torecover our research and development expenses and our revenues could decline.**

 

We depend ondesigning, developing and marketing new products to achieve much of our futuregrowth. Our ability to design, develop and market new products depends on anumber of factors, including, but not limited to the following:

 

•            Ourability to attract and retain skilled technical employees;

 

•            Theavailability of critical components from third parties;

 

•            Ourability to successfully complete the development of products in a timelymanner; and

 

•            Ourability to manufacture products at an acceptable price and quality.

 

A failure by us, orour suppliers, in any of these areas, or a failure of new products, such as theVoq professional phone, to obtain commercial acceptance, could mean we receiveless revenue than we anticipate and we are unable to recover our research anddevelopment expenses, and could result in a decrease in the market price forour shares.

 

**Theloss of any of our material customers could adversely affect our revenue andprofitability, and therefore shareholder value.**

 

We depend on a smallnumber of customers for a significant portion of our revenues.  In the last three fiscal years, there havebeen four different customers that individually accounted for more than 10% ofour revenues.  In the twelve months endedDecember 31, 2004, two customers individually accounted for more than 10%of our revenue and in the aggregate these two customers represented 51% of ourrevenue.  If any of these customersreduce their business with us or suffer from business failure, our revenues andprofitability could decline, perhaps materially.  Shipments of our CDMA embedded modules topalmOne were completed in the fourth quarter of 2004 and we have no visibilityon future revenue from this customer.  Asa 

 

18

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result of channelinventory and increased competition, our business with Verizon Wireless isexpected to be significantly lower than the previous quarter.

 

**Wemay not be able to continue to design products that meet our customer needsand, as a result, our revenue and profitability may decrease.**

 

We develop productsto meet our customers’ requirements but, particularly with original equipmentmanufacturers, current design wins do not guarantee future design wins.  If we are unable or choose not to meet ourcustomers’ future needs, we may not win their future business and our revenueand profitability may decrease.

 

**Wedepend on a few third parties to manufacture our products and supply keycomponents. If they do not manufacture our products properly or cannot meet ourneeds in a timely manner, we may be unable to fulfill our product deliveryobligations and our costs may increase, and our revenue and margins coulddecrease.**

 

We outsource asubstantial part of the manufacture of our products to third parties and dependheavily on the ability of these manufacturers to meet our needs in a timely andsatisfactory manner. Some components used by us may only be available from asmall number of suppliers, in some cases from only one supplier.  We currently rely on two manufacturers,either of which may terminate the manufacturing contract with us at the end ofany contract year. Our reliance on third party manufacturers and supplierssubjects us to a number of risks, including the following:

 

•            Theabsence of guaranteed manufacturing capacity;

 

•            Reducedcontrol over delivery schedules, production yields and costs; and

 

•            Inabilityto control the amount of time and resources devoted to the manufacture of ourproducts.

 

If we are unable tosuccessfully manage any of these risks or to locate alternative or additionalmanufacturers or suppliers in a timely and cost-effective manner, we may not beable to deliver products in a timely manner. In addition, our results ofoperations could be harmed by increased costs, reduced revenues and reducedmargins.

 

**Wedo not have fixed-term employment agreements with our key personnel and theloss of any key personnel may harm our ability to compete effectively.**

 

None of our officers or other key employeeshas entered into a fixed-term employment agreement.  Our success depends in large part on theabilities and experience of our executive officers and other keyemployees.  Competition for highlyskilled management, technical, research and development and other key employeesis intense in the wireless communications industry.  We may not be able to retain our current keyemployees or attract and retain additional key employees as needed.  The loss of key employees could disrupt ouroperations and impair our ability to compete effectively.

 

**Wemay have difficulty responding to changing technology, industry standards andcustomer preferences, which could cause us to be unable to recover our researchand development expenses and lose revenues.**

 

The wireless industryis characterized by rapid technological change. Our success will depend in part on our ability to develop products thatkeep 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, changesand preferences. In addition, wireless communications service providers requirethat wireless data systems deployed on their networks comply with their ownstandards, which may differ from the standards of other providers. We may beunable to successfully address these developments in a timely basis or at all.Our failure to respond quickly and cost-effectively to new developments throughthe development of new products or enhancements to existing products couldcause us to be unable to recover significant research and development expensesand reduce our revenues.

 

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**Competitionfrom new or established wireless communication companies or from those withgreater resources may prevent us from increasing or maintaining our marketshare and could result in price reductions and reduced revenues.**

 

The wireless industryis intensely competitive and subject to rapid technological change. We expect competitionto intensify. More established and larger companies with greater financial,technical and marketing resources sell products that compete with ours.  We also may introduce new products that willput us in direct competition with major new competitors.  Existing or future competitors may be able torespond more quickly to technological developments and changes 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 we are unable to competeeffectively with our competitors’ pricing strategies, technological advancesand other initiatives, our market share and revenues may be reduced.

 

**Wedepend on third parties to offer wireless data and voice communicationsservices for our products to operate.**

 

Our products can onlybe used over wireless data and voice networks operated by third parties.  In addition, our future growth depends, inpart, on the successful deployment of next generation wireless data and voicenetworks by third parties for which we are developing products.  If these network operators cease to offereffective and reliable service, or fail to market their services effectively,sales of our products will decline and our revenues will decrease.

 

**Acquisitions of companies or technologies may result indisruptions to our business or may not achieve the anticipated benefits.**

 

As part ofour business strategy, we may acquire additional assets and businessesprincipally relating to or complementary to our current operations.  Any acquisitions and/or mergers by us will beaccompanied by the risks commonly encountered in acquisitions of companies.  These risks include, among other things:

 

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

 

•            Higher than anticipated acquisitioncosts and expenses;

 

•            Effects of costs and expenses of acquiringand integrating new businesses on our operating results and financialcondition;

 

•            The difficulty and expense of integrating theoperations 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 inabilityto implement uniform standards, controls, procedures and policies;

 

•            The loss ofkey employees and customers as a result of changes in management;

 

•                  The incurrenceof amortization expenses; and

 

•                  Possible dilutionto our shareholders.

 

In addition, geographic distances may makeintegration of businesses more difficult. We may not be successful in overcoming these risks or any other problemsencountered in connection with any acquisitions.  If realized, these risks could reduceshareholder value.

 

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**Otherscould claim that we infringe on their intellectual property rights, which mayresult in substantial costs, diversion of resources and management attentionand harm to our reputation.**

 

It is possible thatother parties may claim that we have violated their intellectual propertyrights. Rights to intellectual property can be difficult to verify. Competitorscould assert, for example, that former employees of theirs whom we have hiredhave misappropriated their proprietary information for our benefit. Asuccessful infringement claim against us could damage us in the following ways:

 

•            We maybe liable for damages and litigation costs, including attorneys’ fees;

 

•            We maybe prohibited from further use of the intellectual property;

 

•            We mayhave to license the intellectual property, incurring licensing fees; and

 

•            We may have to develop anon-infringing alternative, which could be costly and delay or result in theloss of sales.

 

Regardless of theoutcome, an infringement claim could result in substantial costs, diversion ofresources and management attention and harm to our reputation.

 

**Weare subject to certain alleged class action lawsuits, which if decided againstus, could require us to pay substantial judgments, settlements or otherpenalties.**

 

In addition to being subject to litigationin the ordinary course of business, we are currently, and may in the future be,subject to class actions and other securities litigation andinvestigations.  Subsequent to our January 26,2005 announcement of our forward looking financial guidance for Q1 2005,numerous class action complaints have been filed against the Company andcertain officers of the Company.  Weexpect that this litigation will be time consuming, expensive and distractingfrom the conduct of our daily business. We are unable at this time to estimate what our ultimate liability inthese matters may be, if any, however, it is possible that we will be requiredto pay substantial judgments, settlements or other penalties and incur expensesthat could have a material adverse effect on our operating results, liquidityor financial position.  Expenses incurredin connection with these lawsuits, which include substantial fees of lawyers andother professional advisors and our obligations to indemnify officers anddirectors who may be parties to such actions, could adversely affect our cashposition.

 

**Ifwe are successful in the design and development of our new products, and thereis commercial acceptance of our existing or new products, others may claim thatwe infringe on their intellectual property rights, which may result insubstantial costs, diversion of resources and management attention and harm ourreputation.**

 

**Misappropriationof our intellectual property could place us at a competitive disadvantage.**

 

Our intellectualproperty is important to our success. We rely on a combination of patentprotection, copyrights, trademarks, trade secrets, licenses, non-disclosureagreements and other contractual agreements to protect our intellectualproperty. Third parties may attempt to copy aspects of our products andtechnology 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.

 

Our strategies todeter misappropriation could be inadequate due to the following risks:

 

•            Non-recognition of the proprietary nature orinadequate protection of our methodologies in the United States, Canada orforeign countries;

 

•            Undetected misappropriation ofour intellectual property;

 

•            Thesubstantial legal and other costs of protecting and enforcing our rights in ourintellectual property; and

 

•            Developmentof similar technologies by our competitors.

 

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In addition, we couldbe required to spend significant funds and our managerial resources could bediverted in order to defend our rights, which could disrupt our operations.

 

**Asour business expands internationally, we will be exposed to additional risksrelating to international operations.**

 

Our expansion into international operationsexposes us to additional risks unique to such international markets, includingthe following:

 

•            Increased credit management risks and greaterdifficulties in collecting accounts receivable;

 

•            Unexpected changes in regulatory requirements,wireless communications standards, exchange rates, trading policies, tariffsand other barriers;

 

•            Uncertainties of laws and enforcement relating to theprotection of intellectual property;

 

•            Language barriers; and

 

•            Potential adverse tax consequences.

 

Furthermore, if we are unable to furtherdevelop distribution channels in Europe and the Asia-Pacific region we may notbe able to grow our international operations and our ability to increase ourrevenue will be negatively impacted.

 

**Governmentregulation could result in increased costs and inability to sell our products.**

 

Our products aresubject to certain mandatory regulatory approvals in the United States, Canadaand other countries in which we operate. In the United States, the FederalCommunications Commission regulates many aspects of communications devices. InCanada, similar regulations are administered by the Ministry of Industry,through Industry Canada. Although we have obtained all the necessary FederalCommunications Commission, Industry Canada and other required approvals for theproducts we currently sell, we may not obtain approvals for future products ona timely basis, or at all. In addition, regulatory requirements may change orwe may not be able to obtain regulatory approvals from countries other than theUnited States and Canada in which we may desire to sell products in the future.

 

**Fluctuationsin exchange rates between the United States dollar and other currencies,including the Canadian dollar may affect our operating results.**

 

We are exposed tofluctuations in the exchange rate between the United States dollar and theCanadian dollar through our operations in Canada. To reduce our risk because ofcurrency fluctuations, we purchase inventory, other cost of sales items and manyof our services in United States dollars. If the Canadian dollar rises relativeto the United States dollar, our operating results may be negatively impacted.To date, we have not entered into any foreign currency futures contracts aspart of a hedging policy.  We haveentered into distribution agreements in Europe and the Asia-Pacific region thatare denominated primarily in U.S. dollars. We expect that as our business expands in Europe and the Asia-Pacificregion, we will also be exposed to additional foreign currency transactions andto the associated currency risk.  Todate, we have not entered into any futures contracts.

 

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