**EXHIBIT 1.3**

 

### ***MANAGEMENT’S DISCUSSION AND ANALYSIS OF***

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)provides information for the year ended December 31, 2009, and up to andincluding March 24, 2010.  ThisMD&A should be read together with our audited consolidated financialstatements and the accompanying notes for the year ended December 31, 2009(the “consolidated financial statements”). The consolidated financial statements have been prepared in accordancewith generally accepted accounting principles in the United States (“U.S. GAAP”).  Except where otherwise specificallyindicated, all amounts in this MD&A are expressed in United States dollars.*

 

*We have prepared this MD&Awith reference to National Instrument 51-102 “Continuous Disclosure Obligations”of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, we arepermitted to prepare this MD&A in accordance with the disclosurerequirements of Canada, which requirements are different than those of theUnited States.*

 

*Certain statements in thisMD&A constitute forward-looking statements or forward-looking informationwithin the meaning of applicable securities laws.  You should carefully read the cautionary notein this MD&A regarding forward-looking statements and should not placeundue reliance on any such forward-looking statements.  See “Cautionary Note RegardingForward-Looking Statements”.*

 

*Additional information related to Sierra Wireless, Inc., includingour consolidated financial statements and our Annual Information Form, may befound on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.*

 

**Overview**

 

We provide leading edgewireless solutions for the mobile computing and machine-to-machine (“M2M”)markets. We develop and market a range of products that include wireless modemsfor mobile computers, embedded modules and software for original equipmentmanufacturers (“OEMs”), intelligent wireless gateway solutions for industrial,commercial and public safety applications and an innovative platform fordelivering device management and end-to-end application services. We also offerprofessional services to OEM customers during their product development andlaunch process, leveraging our expertise in wireless design, software,integration and certification to provide built-in wireless connectivity formobile computing devices and M2M solutions. Our products, services andsolutions connect people, their mobile computers and machines to wireless voiceand mobile broadband networks around the world.

 

Our acquisition ofWavecom S.A. (“Wavecom”) on February 27, 2009 enhances our product andservice offering in the global M2M market by adding highly sophisticated wireless module platforms andsolutionswhichintegrate all of the necessary software and hardware on embedded devices thatcan be used for a wide variety of applications. The acquisition of Wavecom alsoenhances our capabilities in key markets as they provide us with provendevelopment tools and an innovative services platform for delivering devicemanagement and application services.  Ourconsolidated results include Wavecom’s results for the period from February 27,2009 to December 31, 2009.

 

Webelieve that the markets for mobile broadband connectivity and wireless M2Msolutions have strong growth prospects. We believe that the key growth enablers for these markets include thecontinued deployment of mobile broadband networks around the world, aggressivepromotion of mobile broadband services by wireless operators, growing strategicfocus on mobile broadband and M2M services by wireless operators and expandingend customer awareness of the availability of such services and their benefits.

 

Ourmobile computing products are used by businesses, consumers and governmentorganizations to enable mobile broadband access to a wide range ofapplications, including the Internet, e-mail, corporate intranet, remotedatabases and corporate and consumer applications.

 

Ourexpanded line-up of embedded wireless solutions is used by a wide range of OEMsto wirelessly enable their products and solutions.  Our OEM customers cover a broad range ofindustries including mobile computing,

 

1

----

 

networkingequipment, automotive, energy, security, transaction processing, industrialcontrol and monitoring and fleet management.

 

Ourrugged mobile and M2M gateway solutions are used primarily in the publicsafety, energy, industrial, fleet management and transaction processingmarkets.  We believe the mobile and M2Mgateway markets we serve offer attractive opportunities for long termprofitable growth.

 

Wesell our products primarily through indirect channels including wireless operators,OEMs, distributors and value added resellers.

 

On December 2, 2008,we announced an all-cash offer to purchase all of the ordinary shares andOCEANE convertible bonds (“OCEANEs”) of Wavecom, a global leader in wirelessM2M solutions headquartered in Issy-les-Moulineaux, France.  The total value of the transaction wasapproximately €218.0 million.  We made acash offer of €8.50 per share of Wavecom and €31.93 per OCEANE.  The transaction was implemented by way ofconcurrent but separate public tender offers in both France and the UnitedStates for all Wavecom shares, all American Depository Shares (“ADSs”)representing Wavecom shares and all OCEANEs issued by Wavecom.  On February 27, 2009, we completed ouracquisition of 84.32% of the outstanding shares and 99.97% of the outstandingOCEANEs of Wavecom, representing 90.57% of the voting rights of Wavecom.  Following a statutory re-opening of thetender offer and our purchase of Wavecom shares on the market, we increased ourownership of the voting rights of Wavecom from 90.57% to 95.4% and, on April 29,2009, completed our acquisition of all of the remaining Wavecom shares, exceptfor certain shares held by employees that are subject to a hold period, andOCEANEs by way of a squeeze-out.  TheWavecom shares and OCEANEs have been delisted from the Euronext and the ADSshave been delisted from the NASDAQ Global Market (“Nasdaq”).

 

We expect the combinationof Sierra Wireless and Wavecom will create a global leader that will beuniquely positioned to benefit from the anticipated growth in the wirelessmobile computing and M2M markets.  Weexpect the acquisition to significantly expand and diversify our position inthe global M2M market, broaden our product offerings and increase our scale andcapabilities in Europe and Asia.

 

Prior to our acquisitionof Wavecom, Wavecom announced a cost savings program and a proposedreorganization.  The first portion ofthis plan, related to its operations in the United States, began in late 2008.  In the second quarter of 2009, the staffreduction program in France related to this reorganization wasimplemented.  A total of 77 positions inFrance were impacted, with 10 of these positions remaining to be phased out inthe first quarter of 2010 and 2 positions to be phased out in the secondquarter of 2010.

 

On January 29,2009, also prior to the acquisition of Wavecom, Sierra Wireless implemented an expense reduction programthat was completed during the first quarter of 2009 and included theelimination of approximately 56 positions, representing 10% of ourworkforce.  In the first quarter of 2009,we incurred a pre-tax charge of approximately $1.6 million related to theprogram, which includes $0.5 million of stock-based compensation expense.

 

On May 15, 2009, we announced further cost reduction initiativesrelated to the integration of Wavecom and Sierra Wireless that includedcombining the R&D and product operations of both organizations.  As a result, the Wavecom location in ResearchTriangle Park, North Carolina, was closed in the fourth quarter of 2009.  R&D activities from this location havebeen transitioned primarily to the Sierra Wireless location in Carlsbad,California.  The cost reductioninitiatives in the U.S. and France are expected to be substantially completed bythe first quarter of 2010.  Forthe year ended December 31, 2009, restructuring costs related to theclosure of the Research Triangle Park location and additional cost reductioninitiatives implemented during the second half of 2009 were $19.0million.  Included in restructuring costs is $0.4 million of stock-basedcompensation expense.

 

Duringthe second quarter of 2008, we received regulatory approval allowing us topurchase up to 1,567,378 of our common shares (approximately 5% of our commonshares outstanding as of May 21, 2008) by way of a normal course issuerbid (“the Bid”) on the Toronto Stock Exchange (“TSX”) and the Nasdaq.  On May 25, 2009, we had purchased andcancelled 407,700 shares under the Bid. On May 25, 2009, the Bid terminated.

 

Key factors that weexpect will affect our revenue in the near term are general economic conditionsin the markets we serve, our ability to successfully complete the integrationof the Wavecom acquisition, the relative competitive position our products havewithin the wireless operators’ sales channels in any given period, theavailability of

 

2

----

 

components from keysuppliers, timing of deployment of mobile broadband networks by wirelessoperators, wireless technology transitions, the rate of adoption by end-users,the timely launch and ramp up of sales of our new products currently underdevelopment, the level of success our OEM customers achieve with sales ofembedded solutions to end users and our ability to secure future design winswith both existing and new OEM customers. We expect that product and pricecompetition from other wireless communications device manufacturers willcontinue to be intense.  As a result ofthese factors, we may experience volatility in our results on a quarter toquarter basis.

 

With the acquisition ofWavecom, we have a significantly expanded product line and global roster ofsales channels.  However, the state ofthe global economy causes us to continue to be cautious regarding revenuetrends in the near term.  We expect thatQ1 2010 revenue will increase moderately relative to Q4 2009.  Specific product and business developmentinitiatives include:

 

**AirCard®Mobile Broadband Devices**

 

Our AirCard productfamily includes our AirCard branded PC cards and USB modems.  In 2009, sales of our AirCard productsdecreased 28% to $295.0 million, compared to $408.8 million in 2008 dueprimarily to timing of product transitions in our key channels, lower sellingprices and reduced sell through.

 

Our AirCards plug intothe PC card, ExpressCard or USB ports of notebook and desktop computers, aswell as other products such as network routers. Our AirCard products support EV-DO and HSPA technologies and are sold towireless operators around the world.  During 2009, we continued to have a strongposition with shipments of our HSPA AirCards to AT&T and Telstra and withshipments of our EV-DO Rev A AirCards to Sprint.

 

During 2009, we beganshipping several new HSPA USB modems including our Compass 889 HSPA USB modemto CSL Limited, our AirCard USB 306/307 to Telstra and CSL Limited, the world’sfirst mobile broadband modems for HSPA+ networks, our AirCard USB 308/309modems to Telstra, our second generation products for the HSPA+ networks, andour AirCard USB 301/302 modems for HSPA networks that combine a new design andstreamlined feature set for the value-driven consumer market.  In the fourth quarter of 2009, we begancommercially shipping the AT&T USB Connect Lightning, also known as theSierra Wireless USB 305 for HSPA networks, to AT&T.  The USB Connect Lightning, with downloadspeeds of up to 7.2 Mbps, has an innovative lighted design with a swivel hingefor flexible use in horizontally or vertically oriented USB ports.

 

Our AirCard USB 598 modemfor EV-DO Rev A networks was launched with Telus during 2009, which is thefirst CDMA operator using our TRU-Update feature, a managed service providingautomatic firmware, driver and application updates.

 

We also began shippingtwo new ExpressCards, including our AirCard 402 for EV-DO Rev A networks, a2-in-1 mobile broadband card designed to fit both PC card and ExpressCard slotsand our AirCard 503, the world’s first 2-in-1 ExpressCard with PC Card adapterfor HSPA+ networks.

 

In addition, our AirCard402, Compass 885 and USB598 modems passed Microsoft Corp. certification testsfor compatibility and reliability with Windows 7 mobile broadband and have beenofficially designated as “Compatible with Windows 7”.

 

We also made strongprogress on the development of Overdrive, a highly differentiated device in themobile hotspot segment.  Overdrive is thefirst mobile hotspot product to combine 3G (EV-DO RevA) with 4G (WiMax) andWi-Fi technologies.  Overdrive waslaunched with Sprint in January 2010.

 

Notwithstanding our lowerAirCard revenue for 2009 compared to 2008, we believe that the market for ourAirCard products continues to offer opportunities.  Competition in this market continues to beintense and our future success in this market will depend in part on ourability to continue to differentiate and to develop products that meet ourcustomers’ evolving technology, design, schedule and price requirements.

 

3

----

 

**AirPrimeTMIntelligent Embedded Modules**

 

Our expanded line-up ofAirPrime Intelligent Embedded Modules is used by a wide range of OEMs towirelessly enable their products and solutions. Our OEM customers cover a broad range of industries including mobile computing,networking equipment, automotive, security, transaction processing, fleetmanagement and energy.

 

In 2009, sales of ourembedded module products increased 51% to $181.4 million, compared to $120.2million in 2008, primarily as a result of our acquisition of Wavecomproducts.  Of the $181.4 million,approximately $174.0 million was from sales to M2M OEMs and $7.4 million wasfrom sales to PC OEMs.

 

With the acquisition ofWavecom, we have significantly expanded our global position in wireless embeddedsolutions for M2M.  In 2009, we continuedto secure design wins in key segments, including consumer electronics, payment,security and mobile computing.  One ofour modules is embedded inside the recently introduced Barnes & Noble “nook”ebook reader.  In the fourth quarter of2009, Vodacom, a South African cellular network, along with Tracker, a SouthAfrican vehicle tracking company, introduced a next generation SIM card forvehicle tracking, based on our inSIM technology.  The inSIM component embeds the SIM functioninto our wireless CPU at the component level, eliminating the use of thetraditional plastic SIM card.  We arecollaborating with MobiPower in the development of stolen-vehicle recovery andasset protection solutions based on our wireless microprocessor platform.  In addition, two of our OEM partners, OutpostCentral and Radiocrafts AS, introduced new smart metering solutions based onour Fastrack Supreme platform.  In thesecond quarter of 2009, we announced that our Q26 Elite Wireless CPU passed allFCC and CDG 1 & 2 testing and is Safe for Network on the VerizonWireless, Sprint and Aeris networks.  TheQ26 Elite is ruggedized for extreme environmental conditions and supports GPS,which makes it suitable for fleet management and tracking applications.  We are also collaborating with Meta SystemSpa to provide a platform for automotive telematics, with a focus on emergencycalls, stolen vehicle tracking, remote diagnostics and fleet management.  In addition, with Meta System Spa, we are alsodeveloping an optimized telematics on-board unit for the insurance market.  During the second quarter of 2009, wecommenced commercial volume shipments of a customized wireless communicationmodule to Denso, a leading supplier of automotive electronics to Japanese andglobal auto manufacturers.  We believethe long-term growth and profitability prospects in the embedded M2M marketsare strong.  We plan to continue toinvest to expand our leadership position in this market.

 

Competition in the PC OEMmarket intensified during 2008 with the entry of both the Ericsson and Qualcommsolutions for PC OEMs.  Both Ericsson and Qualcomm have secured PC OEMdesign wins, including PC OEMs with whom we have had previous design wins.  As expected, this increased competitioncontinued to put pressure on our revenue from PC OEMs during 2009.  However, during the first quarter of 2009, wewere awarded our first GOBI design wins with two of our existing PC OEMcustomers.  Since then, we have beenawarded additional GOBI design wins with notebook and netbookmanufacturers.  We believe that these newdesign wins will enable us to grow our revenue from PC OEM customers insubsequent quarters.  Our ability tosecure additional design wins in the PC OEM market will depend on beingsuccessful in developing products and offering services that meet our customers’technology, design, schedule and price requirements.

 

During the fourth quarterof 2009, we began shipping our MC8795V embedded module for HSPA networks, whichoffers quad band frequency support, enabling customers to expand their productoffering into new geographical markets as well as data speeds with up to 7.2Mbps on the downlink and 5.76 Mbps on the uplink. In the second quarter of2009, we introduced our new MC5728V embedded module for EV-DO Rev A networks,that provides added flexibility to OEMs integrating mobile broadbandconnectivity into a variety of devices, including networking equipment andindustrial handheld devices.  The MC5728Vis the first EV-DO product with our TRU-Flow data traffic management technologythat optimizes overall upload and download modem performance, even with a VPN.

 

**AirLinkTMIntelligent Gateways and Routers**

 

Our AirLink IntelligentGateways and Routers are sold to public safety, transportation, field service,energy, industrial and financial organizations and are among our highest grossmargin products.  We believe that thereare strong profitable growth prospects for our AirLink intelligent gateway solutionsand intend to capture these opportunities through segment, product line andgeographical expansion.

 

In 2009, revenue fromAirLink intelligent gateway solutions increased to $41.0 million from $30.8million in 2008 primarily as a result of our acquisition of Wavecom products.

 

4

----

 

During the fourth quarterof 2009, our Helix RT 3G router was approved to run on the Verizon Wirelessnetwork through their open development program, which provides customers withthe option to use wireless devices that Verizon does not offer directly.  During the third quarter of 2009, we signed aMemorandum of Understanding (“MOU”) with T-Mobile to deliver joint solutionofferings for the M2M market.  The areasof co-operation identified by the MOU are product development, marketing, salesand deployment of M2M solutions and related services.  The co-operation initiatives target theEuropean market, with an initial focus on Germany.  We also signed an agreement with Netcomm todistribute our AirLink range of in-vehicle and M2M devices in Australia and NewZealand.  We introduced ACEnet Services,the latest enhancement in our suite of ACEware web-based device managementplatforms.  Using a software-as-a-service(“SaaS”) model, ACEnet Services offers customers a secure hosted platform tocomprehensively configure, control and manage their entire deployment ofAirLink devices using a standard web browser. In the near future, we expect that ACEnet will be integrated with ourAirVantage services platform and will become part of our comprehensive suite ofhosted services and solutions for M2M. During the third quarter of 2009, we received technical approvals forour Raven XE Gateway on Sprint, our MP 890 in-vehicle Gateway on AT&T andshipped the first commercial units of our Helix RT 3G Router.  During the second quarter of 2009, weannounced that our ALEOS embedded software platform will be available on our MPline of rugged in-vehicle mobile routers. The addition of ALEOS to our MP product line simplifies device managementand support.

 

**AirVantageTMServices Platform and Solutions**

 

Inthe third quarter, we reorganized and integrated Anyware Technologies, thesoftware and services company that Wavecom acquired in 2008.  These changes included selling Anyware’s OpenSource consulting business to a group of employees, integrating the remainingteam members into Sierra Wireless and forming our AirVantage solutions andservices business unit. We believe these changes will help us focus ondelivering end to end solutions for the M2M market and to drive collaborationwith our other lines of business.

 

Ournew business unit provides solutions and services that allow systemintegrators, key accounts and telecom operators to roll out complete M2Msolutions for managing remote equipment and assets.  The solutions are based on tools thatfacilitate the development and delivery of applications that are hosted on ourAirVantage services platform.  Ourservices platform is scalable, secure and compatible with the majority ofwireless equipment available on the market.

 

Duringthe third quarter of 2009, we signed a contract with PSA Peugeot Citroen Group,a leader in advanced automotive technology, who will use our AirVantageservices platform for the remote monitoring and software upgrade of futuregenerations of cars equipped with our telematics technology.  During the fourth quarter of 2009 we enteredinto an agreement with ORBCOMM Inc. to integrate the innovative capabilities ofour AirVantage services platform within ORBCOMM’s web services portal to enablecustomers to control their M2M services, devices and communications.  We announced our collaboration with Atos Worldline,which brings Atos Origin’s core expertise in hi-tech transactional services, toprovide a comprehensive, expandable and secure M2M services platform, alongwith significant processing and hosting capacity, to simplify and acceleratethe large scale deployment of end-to-end solutions in Europe. We also announceda new major release of M2M Studio, a fully integrated environment for the developmentof embedded M2M software, enabling developers to create, develop, compile,download, debug and test their applications.

 

5

----

 

**Selected Annual Information**

 
| **Years ended December 31,** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Revenue                           |       | $        | 439,903    |     | $          | 567,308  |       | $ | 526,384 |   |
| Net earnings (loss)               |       | 32,459   |       | 62,583   |       | (39,899  | )          |
| Basic earnings (loss) per share   |       | 1.17     |       | 2.00     |       | (1.29    | )          |
| Diluted earnings (loss) per share |       | 1.16     |       | 2.00     |       | (1.29    | )          |
| Total assets                      |       | 385,021  |       | 462,386  |       | 484,519  |       |
| Total long term liabilities       |       | 6,919    |       | 15,105   |       | 36,105   |       |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

Seediscussion under “Results of Operations” for factors that have caused period toperiod variations.

 

**Results of Operations**

 

The following table sets forth our operating results forthe three years ended December 31, 2009, expressed as a percentage ofrevenue:

 
| **Years ended December 31,**                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |     |       |
| Revenue                                              |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of goods sold                                   |       | 72.0     |       | 72.4     |       | 67.2     |       |
| Gross margin                                         |       | 28.0     |       | 27.6     |       | 32.8     |       |
| Expenses                                             |       |     |       |     |       |     |       |
| Sales and marketing                                  |       | 5.0      |       | 5.8      |       | 10.0     |       |
| Research and development                             |       | 9.8      |       | 9.5      |       | 15.4     |       |
| Administration                                       |       | 3.5      |       | 3.6      |       | 6.3      |       |
| Acquisition costs                                    |       | —   |       | —   |       | 1.5      |       |
| Restructuring costs                                  |       | —   |       | —   |       | 3.9      |       |
| Integration costs                                    |       | —   |       | —   |       | 0.7      |       |
| Amortization                                         |       | 0.9      |       | 0.8      |       | 2.2      |       |
|                                                 |       | 19.2     |       | 19.7     |       | 40.0     |       |
| Earnings (loss) from  operations                     |       | 8.8      |       | 7.9      |       | (7.2     | )          |
|                                                 |       |     |       |     |       |     |       |
| Foreign exchange gain (loss)                         |       | (0.1     | )          | 1.0      |       | 0.2      |       |
| Other income (expense)                               |       | 1.2      |       | 3.6      |       | (0.8     | )          |
| Earnings (loss) before income  taxes                 |       | 9.9      |       | 12.5     |       | (7.8     | )          |
|                                                 |       |     |       |     |       |     |       |
| Income tax expense                                   |       | 2.5      |       | 1.5      |       | —   |       |
| Net earnings (loss) before  non-controlling interest |       | 7.4      |       | 11.0     |       | (7.8     | )          |
| Less: Non-controlling  interest                      |       | —   |       | —   |       | (0.2     | )          |
| Net earnings (loss)                                  |       | 7.4      | %          | 11.0     | %          | (7.6     | )%         |

 

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

 
| **Years ended December 31,**                  | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |     |       |
| Revenue by product                                 |       |     |       |     |       |     |       |
| AirCard Mobile Broadband  Devices                  |       | 71       | %          | 73       | %          | 56       | %          |
| AirPrime Intelligent Embedded  Modules             |       | 21       |       | 21       |       | 34       |       |
| AirLink Intelligent Gateways  and Routers          |       | 6        |       | 5        |       | 8        |       |
| Other                                              |       | 2        |       | 1        |       | 2        |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |
|                                               |       |     |       |     |       |     |       |
| Revenue by distribution  channel                   |       |     |       |     |       |     |       |
| Wireless carriers                                  |       | 60       | %          | 61       | %          | 46       | %          |
| Resellers                                          |       | 20       |       | 19       |       | 29       |       |
| M2M OEM                                            |       | 8        |       | 8        |       | 23       |       |
| PC OEM                                             |       | 12       |       | 12       |       | 1        |       |
| Direct and other                                   |       | —   |       | —   |       | 1        |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |
|                                               |       |     |       |     |       |     |       |
| Revenue by geographical  region                    |       |     |       |     |       |     |       |
| Americas                                           |       | 69       | %          | 70       | %          | 59       | %          |
| Europe, Middle East and  Africa (“EMEA”) |       | 12       |       | 9        |       | 17       |       |
| Asia-Pacific                                       |       | 19       |       | 21       |       | 24       |       |
|                                               |       | 100      | %          | 100      | %          | 100      | %          |

 

6

----

 

***Non-GAAP Financial Measures***

 

Our consolidated financial statements are prepared in accordance withU.S. GAAP on a basis consistent for all periods presented.  In addition to results reported in accordancewith U.S. GAAP, we use non-GAAP financial measures as supplemental indicatorsof our operating performance.  The term “non-GAAPfinancial measure” is used to refer to a numerical measure of a company’shistorical or future financial performance, financial position or cash flowsthat: (i) excludes amounts, or is subject to adjustments that have theeffect of excluding amounts, that are included in the most directly comparablemeasure calculated and presented in accordance with U.S. GAAP in a company’sstatement of income, balance sheet or statement of cash flows; or (ii) includesamounts, or is subject to adjustments that have the effect of includingamounts, that are excluded from the most directly comparable measure socalculated and presented.  We refer togross margin, earnings (loss) from operations, net earnings (loss) and dilutedearnings (loss) per share adjusted for specific items that affect comparabilityas non-GAAP gross margin, non-GAAP earnings (loss) from operations, non-GAAPnet earnings (loss) and non-GAAP diluted earnings (loss) per share,respectively.  We disclose non-GAAPamounts as we believe that these measures provide better information on actualoperating results and assist in comparisons from one period to another.

 

Readers are cautioned that non-GAAP financial measures do not have anystandardized meaning prescribed by U.S. GAAP and therefore may not becomparable to similar measures presented by other companies.

 

The following table provides a reconciliation of thenon-GAAP financial measures for the years ended December 31, 2009 and 2008to our U.S. GAAP results:

 

7

----

 
| ** **                                                                                                         | ** ** | **2009**             | ** ** | **2008**              | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| **(in  millions of U.S. dollars)**                                                                                 | ** ** | **Sierra  Non-GAAP** | ** ** | **Wavecom  Non-GAAP** | ** ** | **Consolidated  Non-GAAP** | ** ** | **Consolidated  Non-GAAP** | ** ** |
|                                                                                                               |       |                 |       |                  |       |   |   |   |   |
| Revenue  — GAAP and Non-GAAP                                                                                  |       | $                    | 406.8      |                  | $          | 119.6 |   | $ | 526.4 |   | $ | 567.3 |   |
|                                                                                                               |       |                 |       |                  |       |   |   |   |   |
| Gross  margin — GAAP                                                                                          |       | $                    | 125.9      |                  | $          | 46.5 |   | $ | 172.4 |   | $ | 156.7 |   |
| Stock-based  compensation                                                                                          |       | 0.6                  |       | —                |       | 0.6 |   | 0.5 |   |
| Gross  margin — Non-GAAP                                                                                      |       | $                    | 126.5      |                  | $          | 46.5 |   | $ | 173.0 |   | $ | 157.2 |   |
|                                                                                                               |       |                 |       |                  |       |   |   |   |   |
| Earnings  (loss) from operations — GAAP                                                                       |       | $                    | 7.7        |                  | $          | (45.4 | ) | $ | (37.7 | ) | $ | 44.6 |   |
| Stock-based  compensation                                                                                          |       | 7.3                  |       | 0.8                   |       | 8.1 |   | 6.4 |   |
| Transaction  costs                                                                                                 |       | 7.8                  |       | —                |       | 7.8 |   | 0.7 |   |
| Restructuring  and other costs                                                                                     |       | 1.6                  |       | 18.4                  |       | 20.0 |   | — |   |
| Integration  costs                                                                                                 |       | 3.2                  |       | 0.6                   |       | 3.8 |   | — |   |
| Acquisition  related amortization                                                                                  |       | 2.3                  |       | 9.5                   |       | 11.8 |   | 3.2 |   |
| Earnings  (loss) from operations — Non-GAAP                                                                   |       | $                    | 29.9       |                  | $          | (16.1 | ) | $ | 13.8 |   | $ | 54.9 |   |
|                                                                                                               |       |                 |       |                  |       |   |   |   |   |
| Net  earnings (loss) — GAAP                                                                                   |       |                 |       |                  |       | $ | (39.9 | ) | $ | 62.6 |   |
| Stock-based  compensation, transaction, restructuring, integration and acquisition  amortization costs, net of tax |       |                 |       |                  |       | 50.3 |   | 7.2 |   |
| Unrealized  foreign exchange gain                                                                                  |       |                 |       |                  |       | (2.6 | ) | (18.4 | ) |
| Interest  expense                                                                                                  |       |                 |       |                  |       | 4.4 |   | — |   |
| Non-controlling  interest                                                                                          |       |                 |       |                  |       | (0.9 | ) | — |   |
| Tax  impact related to net change in tax assets                                                                    |       |                 |       |                  |       | 0.5 |   | (6.5 | ) |
| Net  earnings — Non-GAAP                                                                                      |       |                 |       |                  |       | $ | 11.8 |   | $ | 44.9 |   |
|                                                                                                               |       |                 |       |                  |       |   |   |   |   |
| Diluted  earnings (loss) per share — GAAP                                                                     |       |                 |       |                  |       | $ | (1.29 | ) | $ | 2.00 |   |
| Diluted  earnings per share — Non-GAAP                                                                        |       |                 |       |                  |       | $ | 0.38 |   | $ | 1.43 |   |

 

***Results of Operations —Year Ended December 31, 2009 Compared to Year Ended December 31, 2008***

 

*Revenue*

 

Revenue amounted to$526.4 million for the year ended December 31, 2009, compared to $567.3million in the same period of 2008, a decrease of 7%.  The decrease in revenue was primarily aresult of a decrease in sales of our AirCards and sales of embedded modules toPC OEM customers, partially offset by an increase in revenue from the Wavecom acquisition.  Our revenue for the year ended December 31,2009 included Wavecom revenue of $119.6 million for the period from February 27,2009 until December 31, 2009.

 

Our revenue fromcustomers in the Americas, EMEA and the Asia-Pacific region comprised 59%, 17%and 24%, respectively, of our total revenue in 2009, compared to 70%, 9% and21%, respectively, of our total revenue in 2008.  Our business in North America decreased by21% compared to 2008 due primarily to a decrease in sales of our AirCards andembedded modules.  Our business in EMEAincreased by 72% compared to 2008 due primarily to the increase in revenue fromthe Wavecom acquisition, partially offset by a decrease in sales of ourAirCards and embedded modules.  Ourbusiness in the Asia-Pacific region increased 6% compared to 2008 due primarilyto the increase in revenue from the Wavecom acquisition, partially offset by adecrease in sales of embedded modules to PC OEM customers and AirCards.

 

In 2009, AT&Tand Sprint each accounted for more than 10% of our revenue and, in theaggregate, these two customers represented approximately 40% of ourrevenue.  In 2008, these same twocustomers each accounted for more than 10% of our revenue and, in theaggregate, these two customers represented approximately 53% of our revenue.

 

With the acquisition ofWavecom, we have a significantly expanded product line and global roster ofsales channels.  However, the state ofthe global economy causes us to continue to be cautious regarding revenue trendsin the near term.  We expect that Q1 2010revenue will increase moderately compared to Q4 2009.

 

8

----

 

*Gross margin*

 

Gross margin amounted to$172.5 million for the year ended December 31, 2009, or 32.8% of revenue, comparedto $156.7 million, or 27.6% of revenue, in the same period of 2008.  The increase in gross margin percentageresulted primarily from product cost reductions, early synergies from theWavecom acquisition, as well as the addition of higher margin products from theWavecom acquisition.  Gross marginincluded $0.6 million of stock-based compensation expense in 2009, compared to$0.5 million in 2008.

 

During the first quarterof 2010, we expect that our gross margin percentage will remain above 30%, butmay fluctuate from quarter to quarter depending on product mix, competitiveselling prices and our ability to reduce product costs.

 

*Sales and marketing*

 

Sales and marketingexpenses were $52.8 million for the year ended December 31, 2009, comparedto $32.7 million in the same period of 2008, an increase of 62%.  The increase in sales and marketing costs isdue primarily to the addition of staff and costs from the Wavecom acquisition,partially offset by a reduction in expenses due to an increased focus on costmanagement, including the impact of restructuring programs.  Sales and marketing expenses included $1.6million of stock-based compensation expense in 2009, compared to $1.5 millionin 2008.  Sales and marketing expenses asa percentage of revenue increased to 10.0% in the year ended December 31,2009, compared to 5.8% in the same period of 2008, primarily due to theaddition of costs from the Wavecom acquisition as well as the decrease inrevenue.

 

*Research and development*

 

Research and developmentexpenses amounted to $80.8 million for the year ended December 31, 2009,compared to $54.1 million in the same period of 2008, an increase of 50%.  The increase is due primarily to the additionof staff and costs from the Wavecom acquisition, partially offset by areduction in accruals for government research and development fundingrepayments.

 

During 2009, we finalizedour obligations with respect to our conditionally repayable research anddevelopment funding agreement with the Government of Canada’s TechnologyPartnerships Canada (“TPC”).  Under theterms of the original agreement, royalty repayments, based on a percentage ofannual sales in excess of certain minimum amounts, would be calculated over theperiod from April 2003 to December 2011.  If royalty repayments were less than Cdn$16.5 million by December 2011, repayments would have continued subsequentto December 2011 until the earlier of when this amount was reached or December 2014.  In March 2009, we signed an amendedagreement under which we will pay a total of Cdn $2.5 million, with paymentsdue on March 1 for each of the next five years beginning March 1,2009, in full and final satisfaction of all amounts owing, or to be owed, toTPC under this agreement.  We hadpreviously accrued payments under the original agreement and as a result of theamended agreement we have reversed accruals recorded in research anddevelopment expense totaling $0.8 million during 2009.

 

Included in research anddevelopment expenses was $1.4 million of stock-based compensation expense in2009, compared to $1.2 million in 2008.

 

Research and development expenses, excluding governmentresearch and development funding repayments and reversal of accruals, were $82.9million, or 15.7% of revenue for the year ended December 31, 2009, compared to $48.3 million, or 8.5% of revenuein the same period of 2008.

 

*Administration*

 

Administration expensesamounted to $33.0 million, or 6.3% of revenue, for the year ended December 31,2009, compared to $20.6 million, or 3.6% ofrevenue, in the same period of 2008.  Theincrease in administration costs is primarily due to the addition of staff andcosts from the Wavecom acquisition as well as increased legal fees (seedisclosure under “Legal proceedings”). Included in administration expenses was $3.6 million of stock-basedcompensation expense in 2009, compared to $3.1 million in 2008.

 

9

----

 

*Acquisitioncosts*

 

Acquisitioncosts were $7.8 million for the year ended December 31, 2009, compared tonil in the same period of 2008.  Theacquisition costs were related to the acquisition of Wavecom.

 

*Restructuring costs*

 

During the second quarterof 2009, as part of the Wavecom cost reduction initiatives announced prior toour acquisition of Wavecom, the staff reduction program in France wasimplemented.  A total of 77 positionswere impacted, with 10 of these positions remaining to be phased out in thefirst quarter of 2010 and 2 positions to be phased out in the second quarter of2010.  On May 15, 2009, we announcedfurther cost reduction initiatives related to the integration of Wavecom andSierra Wireless that included combining the R&D and productoperations.  As a result, the Wavecomlocation in Research Triangle Park, North Carolina, was closed during thefourth quarter of 2009. For the year ended December 31, 2009,restructuring costs related to the closure of the Research Triangle Parklocation and additional cost reduction initiatives were $19.0 million. Included in this restructuring cost is $0.4 million of stock-based compensationexpense.

 

In the first quarter of 2009,we completed anexpense reduction program that included the elimination of approximately 56positions.  As a result, restructuringcosts, comprised primarily of severance costs and stock-based compensationexpense, amounted to $1.6 million and included $0.5million of stock-based compensation expense.

 

For the year ended December 31,2009, restructuring costs related to these two programs were $20.6 million,compared to nil in the same period of 2008.

 

*Integration costs*

 

In 2009, integrationcosts related to the acquisition of Wavecom were $3.9 million, compared to nilin 2008.  Integration costs included thecost of employees retained for integration activities, related travel expensesand consulting fees.

 

*Foreign exchange gain (loss)*

 

Our foreign exchange gain was$1.3 million in the year ended December 31, 2009, compared to a foreignexchange gain of $20.6 million in 2008. Our foreign exchange gain for 2009includes a net foreign exchange gain of $19.5 million on an intercompanybalance that the parent company has with its self-sustaining foreign operationsthat arose as a result of the Wavecom acquisition, partially offset by arealized foreign exchange loss of $15.7 million on Euros that had been held forthe Wavecom transaction.  Our foreignexchange gain for 2008 includes an unrealized foreign exchange gain of $18.4million on Euros held for the Wavecom transaction.

 

*Other income (expense)*

 

Other expense, which includesinterest expense and interest income, was $4.4million in the yearended December 31, 2009, compared toother income of $5.6 million in the same period of 2008.  Other expense in 2009 includes $4.1 millionof financing costs and $0.9 million of interest expense, of which $0.7 millionrelated to the credit facilities that were set up in connection with theWavecom acquisition, compared to nil for 2008. Interest income decreased to $0.6 million in 2009, from $5.6 million in2008 due to a decrease in our cash and short-term investment balances that wereused to fund the Wavecom acquisition, as well as a decline in interest rates.

 

*Income tax expense*

 

Income tax expense was $0.3millionfor the year ended December 31, 2009, compared to $8.2 million in the same period of 2008 due primarily to areduction in taxable income.

 

*Non-controlling interest*

 

The non-controlling interest in the year ended December 31,2009 was $1.3 million, compared to nil in the same period of 2008.  The non-controlling interest represents thenon-controlling interest in Wavecom’s loss that results from the shares held byWavecom employees under their long-term incentive plan.  The shares have vested, but are

 

10

----

 

subject to a hold period for tax purposes.  We have entered into a put/call agreementwith these employees to purchase back the shares at €8.50 per share upon expiryof the tax hold period.  Until that time,the shares are considered the non-controlling interest.

 

*Net earnings (loss)*

 

Our net loss amounted to $39.9million,or loss per share of $1.29, for the year ended December 31, 2009, compared to net earnings of $62.6 million, or diluted earnings pershare of $2.00, in the same period of 2008. Included in net earnings (loss) was $8.1 million of stock-basedcompensation expense in 2009, compared to $6.4 million in the same period of2008.

 

The weighted average diluted number of sharesoutstanding decreased to 31.0 million for the year ended December 31,2009, compared to 31.3 million in 2008because some securities, such as stock options, that are dilutive are not includedin the total when we are in a loss position. In addition, under the Bid, we purchased and cancelled shares during thethird quarter of 2008 which reduced the weighted average diluted number ofshares outstanding.  The number of sharesoutstanding at December 31, 2009 and December 31, 2008 was 31.0million.

 

***Results of Operations —Three Months Ended December 31, 2009 Compared to Three Months Ended December 31,2008***

 

*Revenue*

 

Revenue amounted to$144.0 million for the three months ended December 31, 2009, compared to$132.9 million in the same period of 2008. The increase in revenue was primarily a result of the inclusion ofrevenue from the Wavecom acquisition, partially offset by a decrease in salesof AirCard products and sales of embedded modules to PC OEM customers.  Our fourth quarter revenue included Wavecomrevenue of $42.1 million.

 

Our revenue fromcustomers in the Americas, EMEA and the Asia-Pacific region comprised 52%, 15%and 33%, respectively, of our total revenue in the fourth quarter of 2009,compared to 75%, 8% and 17%, respectively, in the same period of 2008.  Our business in North America decreased by24% compared to the fourth quarter of 2008 due primarily to a decrease in salesof our AirCards.  Our business in EMEAincreased by 104% compared to the fourth quarter of 2008 due primarily to theincrease in revenue from the Wavecom acquisition, partially offset by adecrease in sales of our AirCards.  Ourbusiness in the Asia-Pacific region increased 106% compared to the fourthquarter of 2008 due primarily to an increase in revenue from the Wavecomacquisition and sales of our embedded modules.

 

In the fourthquarter of 2009, AT&T and Sprint each accounted for more than 10% of ourrevenue and, in the aggregate, these two customers represented approximately28% of our revenue.  In the fourthquarter of 2008, these same two customers each accounted for more than 10% ofour revenue and, in the aggregate, these two customers representedapproximately 57% of our revenue.

 

*Gross margin*

 

Gross margin amounted to$47.4 million for the three months ended December 31, 2009, or 32.9% ofrevenue, compared to $36.4 million, or 27.4% of revenue, in the same period of2008.  The increase in gross marginpercentage resulted primarily from product cost reductions, early synergiesfrom the Wavecom acquisition, as well as the addition of higher margin productsfrom the Wavecom acquisition.  Grossmargin included $0.1 million of stock-based compensation expense in each of thefourth quarters of 2009 and 2008.

 

During the first quarterof 2010, we expect that our gross margin percentage will remain above 30%, butmay fluctuate from quarter to quarter depending on product mix, competitiveselling prices and our ability to reduce product costs.

 

*Operating expenses*

 

Operating expenses were$48.5 million in the fourth quarter of 2009, compared to $27.4 million in thesame period of 2008.  This increasereflects the addition of staff and costs from the Wavecom acquisition, significantresearch and development investment being made to develop new products and thesales and marketing costs associated with

 

11

----

 

the launch of theseproducts and expansion of sales channels. $1.5 million of stock-based compensation expense was included the fourthquarter of 2009, compared to $1.4 million in the same period of 2008.

 

Operating expenses forthe fourth quarter of 2009 included the reversal of purchase price amortizationof $3.7 million, resulting from the adjustment of our estimate of the purchaseprice allocation to the actual allocation based on the third party valuation,compared to $0.6 million in 2008.  Inaddition, our fourth quarter of 2009 results also include acquisition costs of$0.1 million, restructuring costs of $4.7 million and integration costs of $1.3million, compared to nil in the same period of 2008.  All of these costs were related to theacquisition of Wavecom which was completed on February 27, 2009.

 

*Net earnings (loss)*

 

Our net loss was $2.7million in the fourth quarter of 2009, or loss per share of $0.09, compared tonet earnings of $34.7 million, or diluted earnings per share of $1.12 in2008.  Our net loss for the fourthquarter of 2009 included an unrealized foreign exchange gain of $0.8 million on intercompany balances that the parent company has with itsself-sustaining foreign operations and a reduction in our valuation allowanceof $0.5 million that reduced our income tax expense.  Net earnings for the fourth quarter of 2008included an after-tax unrealized foreign exchange gain of $18.4 million onEuros held for the Wavecom transaction, an after-tax gain of $0.4 million onsale of bonds that were liquidated for the Wavecom transaction and a reductionin our valuation allowance of $6.5 million that reduced our income tax expense.Included in net earnings (loss) was $1.7 million of stock-based compensationexpense in the fourth quarter of 2009, compared to $1.5 million in the sameperiod of 2008.

 

***Results of Operations —Year Ended December 31, 2008 Compared to Year Ended December 31, 2007***

 

*Revenue*

 

Revenue amounted to arecord $567.3 million for the year ended December 31, 2008, compared to$439.9 million in the same period of 2007, an increase of 29%.  The increase in revenue was primarily aresult of an increase in sales of our HSPA and EV-DO Rev A USB modems andembedded modules, as well as a full year of revenue contribution from ourAirLink acquisition.

 

Our revenue fromcustomers in the Americas, EMEA and the Asia-Pacific region comprised 70%, 9% and21%, respectively, of our total revenue in 2008, compared to 69%, 12% and 19%,respectively, in 2007.  Our NorthAmerican business increased by 31% compared to 2007 primarily as a result of anincrease in sales of our HSPA and EV-DO Rev A USB modems and embeddedmodules.  In EMEA, revenue decreased by5% compared to 2007, primarily as a result of decreased sales of our HSPA USBmodems.  Our business in the Asia-Pacificregion increased 42% compared to 2007 due primarily to an increase in sales ofour HSPA PC adapters and embedded modules.

 

In 2008, AT&Tand Sprint each accounted for more than 10% of our revenue and, in theaggregate, these two customers represented approximately 53% of ourrevenue.  In 2007, these same twocustomers each accounted for more than 10% of our revenue and, in theaggregate, these two customers represented approximately 44% of our revenue.

 

*Gross margin*

 

Gross margin amounted to$156.7 million for the year ended December 31, 2008, or 27.6% of revenue,compared to $123.1 million, or 28.0% of revenue, in the same period of2007.  The decrease in gross marginpercentage resulted primarily from a higher proportion of sales of our PCadapter products that yield a lower margin than our embedded module and M2Mproducts, partially offset by improved margins in all of our productlines.  Gross margin included $0.6million of stock-based compensation expense in 2008, compared to $0.5 millionin 2007.

 

*Sales and marketing*

 

Sales and marketingexpenses were $32.7 million for the year ended December 31, 2008, comparedto $22.2 million in the same period of 2007, an increase of 47%.  The increase in sales and marketing costs wasdue primarily to the costs associated with new product launches and investmentsin channel expansion.  Sales and marketingexpense

 

12

----

 

included $1.5 million ofstock-based compensation expense in 2008, compared to $0.9 million in2007.  Sales and marketing expenses as apercentage of revenue increased to 5.8% in the year ended December 31,2008, compared to 5.0% in the same period of 2007.

 

*Research and development*

 

Research and developmentexpenses amounted to $54.1 million for the year ended December 31, 2008,compared to $43.0 million in the same period of 2007, an increase of 26%.  The increase was due to the significantinvestment in new products being developed and launched in both EV-DO and HSPAtechnologies.  Included in research anddevelopment expense was $1.2 million of stock-based compensation expense in2008, compared to $0.9 million in 2007.

 

Research and development expenses, excluding governmentresearch and development funding repayments, were $48.3 million, or 8.5% ofrevenue for the year ended December 31, 2008, compared to $38.9 million, or 8.8% of revenue in the same period of2007.

 

*Administration*

 

Administration expensesamounted to $20.6 million, or 3.6% of revenue, for the year ended December 31, 2008, compared to $15.4 million, or 3.5% of revenue,in the same period of 2007.  The increasein administration costs was primarily due to an increase in costs to supportour corporate growth.  Included inadministration expense was $3.1 million of stock-based compensation expense in2008, compared to $2.9 million in 2007.

 

*Other income*

 

Other income was $26.2millionfor the year ended December 31, 2008, compared to $4.8 million in the same period of 2007.  Other income included interest income,interest expense and foreign exchange gains and losses.  Other income included a foreign exchange gainof $20.0 million in 2008, which included an unrealized foreign exchange gain of$18.4 million on Euros held for the Wavecom transaction, compared to a foreignexchange loss of $0.4 million in 2007. Also included in other income was a $0.6 million gain on the sale ofbonds that were liquidated for the Wavecom transaction.

 

*Income tax expense*

 

Income tax expense was $8.2millionfor the year ended December 31, 2008, compared to $10.9 million in the same period of 2007.  Excluding the reduction in valuationallowance of $6.5 million in 2008, income tax expense increased as a result ofan increase in taxable income.

 

*Net earnings*

 

Net earnings amounted to $62.6 million,or diluted earnings per share of $2.00, for the yearended December 31, 2008, compared tonet earnings of $32.5 million, or diluted earnings per share of $1.16, in thesame period of 2007.  Net earnings for2008 included an after-tax unrealized foreign exchange gain of $18.4 million onEuros held for the Wavecom transaction, an after-tax gain of $0.4 million onsale of bonds that were liquidated for the Wavecom transaction and a reductionin our valuation allowance of $6.5 million that reduced our income taxexpense.  Included in net earnings was$6.4 million of stock-based compensation in 2008, compared to $5.2 million in2007.

 

The weighted average diluted number of sharesoutstanding increased to 31.3 million for the year ended December 31,2008, compared to 28.0 million in2007.  The increase was primarily due tothe issuance of 3.8 million shares in connection with our October 2, 2007public offering.  During 2008, wepurchased and cancelled 407,700 of our common shares under the Bid. The numberof shares outstanding at December 31, 2008 was 31.0 million and at December 31,2007 was 31.3 million.

 

**Acquisition of Wavecom S.A.**

 

On December 2, 2008,we announced an all-cash offer to purchase all of the ordinary shares andOCEANEs of Wavecom, a global leader in wireless M2M solutions headquartered inIssy-les-Moulineaux, France.  The totalvalue of the transaction was approximately €218.0 million.  We made a cash offer of €8.50 per share ofWavecom and

 

13

----

 

€31.93 per OCEANE.  The transaction was implemented by way ofconcurrent but separate public tender offers in both France and the UnitedStates for all Wavecom shares, all ADSs representing Wavecom’s shares and allOCEANEs issued by Wavecom.

 

On February 27,2009, we completed our acquisition of 84.32% of the outstanding shares and99.97% of the outstanding OCEANEs of Wavecom, representing 90.57% of the votingrights of Wavecom.  Following a statutoryre-opening of the tender offer and our purchase of Wavecom shares on themarket, we increased our ownership of the voting rights of Wavecom from 90.57%to 95.4% and, on April 29, 2009, completed our acquisition of all of theremaining Wavecom shares, except for certain shares held by employees that aresubject to a hold period, and OCEANEs by way of a squeeze-out.  The Wavecom shares and OCEANEs have beendelisted from the Euronext and the ADSs have been delisted from the Nasdaq.

 

We expect the combinationof Sierra Wireless and Wavecom will create a global leader that will beuniquely positioned to benefit from the anticipated growth in the wirelessmobile computing and M2M markets.  Weexpect the acquisition to significantly expand our position in the global M2Mmarket, broaden our product offerings and increase our scale and capabilitiesin Europe and Asia.

 

**International Financial Reporting Standards (“IFRS”)**

 

The Securities and Exchange Commission (“SEC”) proposeda roadmap for phasing in mandatory IFRS filings by U.S. public companiesbeginning for years ending on or after December 15, 2014.  The proposed roadmap addresses the basis forconsidering the mandatory use of IFRS by U.S. issuers.  It then sets forth seven milestones, which,if achieved, could lead to the use of IFRS by U.S. issuers in their filingswith the SEC.  In 2011, the SEC willdetermine whether to proceed with rulemaking to require that U.S. issuers useIFRS beginning in 2014 if it is in the public interest and for the protectionof investors to do so.  We will continueto monitor the timing of adoption of IFRS.

 

**Legal Proceedings**

 

In July 2009, apatent holding company, SPH America, LLC, filed a patent litigation lawsuit inthe United States District Court for the Eastern District of Virginia assertingpatent infringement by a number of device manufacturers, including us, andcomputer manufacturers, including Hewlett-Packard Co. (“HP”), Panasonic Corporation(“Panasonic”), General Dynamics Itronix Corporation (“GD”) and Fujitsu Americaand Fujitsu Japan (“Fujitsu”).  Thelitigation, which has been transferred to the United States District Court,Southern District of California, makes certain allegations concerning thewireless modules sold to the computer manufacturers by us, our competitors, andsome of our customers with whom we have supply agreements.  We are assessing our obligations and ourliability, if any, in respect of 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 lawsuit.

 

In July 2009, a patentholding company, WIAV Networks, LLC, filed a patent litigation lawsuit in theUnited States District Court for the Eastern District of Texas asserting patentinfringement by a number of parties, including wireless device manufacturers,including us.  We are currently assessingour potential liability, if any, in respect of this litigation. Although therecan be no assurance that an unfavourable outcome would not have a materialadverse effect on our operating results, liquidity or financial position, webelieve the claims are without merit and will vigorously defend the lawsuit.

 

In July, 2009, a patentholding company, Celltrace, LLC, filed a patent litigation lawsuit in theUnited States District Court for the Eastern District of Texas asserting patentinfringement by a number of telecommunication carrier companies includingSprint Spectrum, LP and AT&T Mobility LLC. The litigation makes certain allegations concerning the wireless modemssold to the carriers by us and our competitors. We are currently assessing our obligations and our liability, if any, inrespect of 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 lawsuit.

 

In June 2009, apatent holding company, Saxon Innovations, LLC (“Saxon”), filed a patentlitigation lawsuit in the United States District Court for the Eastern Districtof Texas asserting patent infringement by a number of wireless

 

14

----

 

device manufacturers,including us.  The litigation makescertain allegations concerning the products sold by those manufacturers.  We are currently assessing our liability, ifany, in respect of 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 lawsuit.

 

InJanuary 2009, a patent holding company, DNT LLC, filed a patent litigationlawsuit in the United States District Court for the Eastern District ofVirginia asserting patent infringement by a number of telecommunication carriercompanies including Sprint Spectrum, LP and Nextel, Verizon Wireless andT-Mobile USA, Inc.  The litigationmade certain allegations concerning the wireless modems sold to the carriers byus and our competitors. Following a trial in December 2009, the Courtentered a verdict of patent non-infringement and invalidity. In February, 2010,DNT LLC filed a motion for a new trial or in the alternative for an amendedjudgment.  While we believe that thismotion will be unsuccessful, we intend to vigorously defend the motion.  DNT LLC has indicated its intention to filean appeal from the Court’s verdict. While we believe that the appeal, if any, will be unsuccessful, weintend to vigorously defend against the appeal.

 

In July 2008, Saxonalso filed a patent litigation lawsuit in the United States District Court forthe Eastern District of Texas asserting patent infringement by a number ofcomputer manufacturers, including HP.  Wehave entered into a supply agreement with HP and, pursuant to that agreement,have been notified of the litigation.  Weare currently assessing our obligations and our liability, if any, in respectof 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 lawsuit.

 

On February 6, 2008,Wavecom filed a civil proceeding in the Supreme Court of the State of New York(USA) against Siemens AG and two of its U.S. subsidiaries.  In thatproceeding, Wavecom alleged that the defendants improperly took Wavecom’sconfidential internal product information, distributed it internally and tocustomers of Wavecom, and utilized it to unfairly compete with Wavecom. The lawsuit claimed torts of conversion, unfair competition andmisappropriation of trade secrets, and sought damages in an amount to be provedat trial and a court order requiring the defendants to return the information. On August 24, 2009, the parties reached a mutually agreeable settlement ofthe lawsuit and the case was subsequently dismissed by stipulation of theparties.

 

Sinceearly December 2008, Wavecom and its subsidiary Wavecom, Inc. havebeen involved in litigation with a contracting counterparty, Temic Automotiveof North America (Continental Group) which has unjustly withheld payment ofapproximately $2.0 million for products sold by Wavecom, Inc.  This amount has been provided for in ourallowance for doubtful accounts.  Wavecomand Wavecom, Inc. filed suit against Continental Group in the SupremeCourt of the State of New York (USA) to recover the unpaid receivables.  Continental Group filed a separate suit instate court in North Carolina against Wavecom, asserting eight claims forrelief, alleging breach of both tort and contracts law.  Continental Group has requested damages underthe main claim of $1.5 million to be determined at trial.  On the other claims, Continental hasrequested damages in excess of $10,000 each and has also requested treble andpunitive damages.  As a result of amerger with Sierra Wireless America, Inc. (“SWA”), Wavecom, Inc. nolonger exists and the liabilities of Wavecom, Inc. are the liabilities ofSWA.  Although there can be no assurance thatan unfavourable outcome would not have a material adverse effect on ouroperating results, liquidity or financial position, we believe the claims madeby Continental Group are without merit and will vigorously defend the lawsuit.

 

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

 

**Critical Accounting Estimates**

 

We prepare our consolidatedfinancial statements in accordance with U.S. GAAP and we make estimates andassumptions that affect the reported amounts of assets, liabilities, revenue,expenses and the related disclosure of contingent liabilities. On an ongoingbasis, we evaluate our estimates and judgments, including those related torevenue recognition, adequacy of allowance for doubtful accounts, adequacy ofinventory reserve, valuation of goodwill and intangible assets, income taxes,adequacy of warranty reserve, royalty obligations, lease provision,contingencies and stock-based compensation. We base our estimates on historical experience, anticipated results andtrends and on various other assumptions that we believe are reasonable underthe circumstances. By their nature, estimates are subject to an inherent degreeof uncertainty.  Actual results maydiffer from our estimates.  Senior

 

15

----

 

management has discussed withour audit committee the development, selection and disclosure of accountingestimates used in the preparation of our consolidated financial statements.

 

Effective January 1,2009, we adopted a new policy to account for assets acquired and liabilitiesassumed in a business combination.  Underthis policy, the acquisition method is used to record all identifiable assets,liabilities, non-controlling interests and goodwill acquired at fair value. Wehave applied this policy to our acquisition of Wavecom.  The adoption of this policy resulted in theexpensing of Wavecom acquisition costs of $7.8 million in 2009, of which $2.8million was deferred at December 31, 2008. We did not adopt any other new accounting policies or make changes toexisting accounting policies that had a material impact on our consolidatedfinancial 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 ourrevenue is generated from sales to resellers. We recognize revenue on the portion of sales to certain resellers thatare subject to contract provisions allowing various rights of return and stockrotation, upon the earlier of when the rights have expired or the products havebeen reported as sold by the resellers.

 

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 at theinception of the license term.  Revenuefrom software maintenance, unspecified upgrades and technical support contractsis recognized over the period such items are delivered or services areprovided.  Technical support contractsextending beyond the current period are recorded as deferred revenue.

 

Funding from research and development agreements, otherthan government research and development arrangements, is recognized as revenuewhen certain criteria stipulated under the terms of those funding agreementshave been met and when 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 recognize the liability to repay researchand development funding in the period in which conditions arise that wouldcause research and development funding to be repayable. Government research anddevelopment arrangements are recognized as a reduction of the related expensewhen the criteria stipulated under the terms of the agreements have been metand when there is reasonable assurance the funding will be received.

 

·                  We maintain an allowance for doubtful accounts forestimated losses that may arise if any of our customers are unable to makerequired payments.  We consider thefollowing factors when determining whether collection is reasonablyassured:  customer credit-worthiness,past transaction history with the customer, insured amounts, if any, currenteconomic industry trends and changes in customer payment terms.  If we have no previous experience with thecustomer, we typically obtain reports from credit organizations to ensure thatthe 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 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 and/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

 

16

----

 

demandrequirements decrease, due to market conditions, technological and product lifecycle changes 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 currentlyhave intangible assets of $86.7 million and goodwill of $95.1 million generatedprimarily from our acquisitions of Wavecom in February 2009, AirLink in May 2007and AirPrime in August 2003. Goodwill and intangible assets are assessed for impairment annually, ormore often, if an event or circumstance indicates that an impairment loss mayhave been incurred.

 

We determined that we had tworeporting units as of December 31, 2009. We assessed the realizability of goodwill related to each of thereporting units during the fourth quarter of 2009 and determined that the fairvalue exceeded the carrying amount for each reporting unit by a substantialmargin.  Therefore, the second step ofthe impairment test that measures the amount of an impairment loss by comparingthe implied fair market value for each reporting unit with the carrying amountof the goodwill for each reporting unit was not required.  There was no impairment of goodwill duringthe years ended December 31, 2009 or 2008.

 

·                  We recognize andmeasure each tax position related to income tax positions taken or expected tobe taken in a tax return.  We havereviewed our tax positions to determine which should be recognized and measuredaccording to the more likely than not threshold requirement.  The tax benefits recognized in the financialstatements are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon ultimate resolution.

 

If the realization of a taxposition is not considered more likely than not, we provide for a valuationallowance. The ultimate realization of our deferred tax assets is dependentupon the generation of future taxable income during the periods in whichtemporary differences become deductible. We consider projected future taxableincome and tax planning strategies in making our assessment. If our assessmentof our ability to realize our deferred tax assets changes, we may make anadjustment to our deferred tax assets that would be charged to income (loss).

 

·                  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 license agreements, we are committed to royalty payments based onthe 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 accrued liabilitiesand other long-term liabilities.  Whenthe agreements are finalized, the estimate will be revised accordingly.

 

·                  If we are engaged in legal actions, we estimate the range of liabilityrelated to pending litigation where the amount and range of loss can bereasonably estimated.  We record our bestestimate of a loss when the loss is considered probable.  As additional information becomes available,we assess the potential liability relating to our pending litigation and reviseour estimates.

 

·                  We recognize stock-based compensationexpense for all stock-based compensation awards based on the fair value atgrant date. We recognize stock-based compensation expense for those sharesexpected to vest on a straight-line basis over the requisite service period ofthe 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’s judgment. As a result, if factors changeand we use different assumptions, our stock-based compensation expense could bematerially different in the future.

 

17

----

 

**Liquidity and Capital Resources**

 

*OperatingActivities*

 

Cash provided by operating activities was $47.7 millionfor the year ended December 31, 2009, compared to $86.1 million in thesame period of 2008.  The source of cashin operating activities in 2009 primarily resulted from our net loss of $41.2million adjusted for net non-cash items of $64.1 million as well as changes inother operating assets and liabilities of $24.8 million.

 

*Investing Activities*

 

Cash provided byinvesting activities was $16.1 million in 2009, compared to cash used by investingactivities of $99.7 million in 2008. Cash provided by investing activities was due primarily to a reductionin restricted cash of $175.8 million, offset by cash used for the acquisitionof OCEANEs of $104.8 million, the acquisition of Wavecom net assets of $146.7million, which included cash acquired of $139.8 million, and the acquisition ofthe remaining non-controlling interest of $19.6 million. In 2008, cash used byinvesting activities was due primarily to the increase in restricted cash of$173.1 million for the Wavecom acquisition. We also used cash for expenditures on fixed and intangible assets of$13.3 million and $6.5 million, respectively, for the year ended December 31,2009, compared to $19.7 million and $3.0 million, respectively, in the sameperiod of 2008.  Capital expenditureswere primarily for production and tooling equipment, research and developmentequipment, computer equipment and software, while intangible assets wereprimarily for patents and software licenses. In 2009, we used cash of $8.8 million to fund purchases of short-terminvestments, net of proceeds on maturity of short-term investments, compared tonet proceeds of $96.1 million from short and long-term investments in 2008.

 

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

 

*FinancingActivities*

 

Cash used by financingactivities was $9.6 million in the year ended December 31, 2009, comparedto $6.8 million in the same period of 2008. During 2009, we received proceeds from the term loan of $102.7 millionwhich was used to purchase the Wavecom OCEANEs and subsequently repaid the termloan with cash acquired from the acquisition of Wavecom.  In 2009, we also used cash of $4.0 millionfor financing costs related to the credit facilities that were set up tofinance the Wavecom acquisition, compared to nil in 2008.  In addition, in 2009, we used $6.4 million tofund our restricted share unit program and $2.2 million to repay long termobligations, compared to $2.5 million and nil, respectively, in 2008.  During 2009, we received proceeds from theexercise of Wavecom options of $4.1 million, compared to nil in 2008.

 

As of December 31, 2009, we did not have any off-balance sheetfinance or special purpose entities.

 

*CashRequirements*

 

Our near-term cash requirements are primarily related to funding ouroperations, capital expenditures, completion of the purchase of Wavecom andother obligations discussed below.  Webelieve our cash, cash equivalents and short-term investments of $134.4 million and cash generated from operations will be sufficient to fund ourexpected working capital requirements for at least the next twelve months basedon current business plans.  Our capitalexpenditures during the first quarter of 2010 are expected to be primarily forresearch and development equipment, tooling, leasehold improvements, softwarelicenses and patents.  However, we cannotassure you that our actual cash requirements will not be greater than wecurrently expect.

 

18

----

 

The following table quantifies our future contractual obligations relatedto operating leases as of December 31, 2009:

 

Payments due in fiscal

 
| 2010       |   | $     | 10,933 |   |
|------------|--------|-------|--------|--------|
| 2011       |   | 6,513 |   |
| 2012       |   | 1,568 |   |
| 2013       |   | 1,485 |   |
| 2014       |   | 1,457 |   |
| Thereafter |   | 578   |   |
| Total      |   | $     | 22,534 |   |

 

As of December 31, 2009, we had taxobligations for uncertain tax positions of $7.8 million.

 

We have entered into purchase commitmentstotaling approximately $109.4million withcertain contract manufacturers under which we have committed to buy a minimumamount of designated products between January 2010 and March 2010.  In certain of these agreements, we may berequired to acquire and pay for such products up to the prescribed minimum orforecasted purchases.

 

*NormalCourse Issuer Bid*

 

On May 21,2008, we received regulatory approval to purchase up to 1,567,378 of our commonshares by way of the Bid on the TSX and the Nasdaq,representing approximately 5% of the common shares outstanding as of May 21,2008.  The Bid commenced on May 26,2008 and terminated on May 25, 2009. As of May 25, 2009, 407,700 common shares had been purchased at open market prices, for an aggregatepurchase price of $5.0 million, and subsequently cancelled.  The amount paid to acquire the shares inexcess of the average carrying value was charged to retained earnings in 2009.

 

*Sourcesand Uses of Cash*

 

The source of funds forour future capital expenditures and commitments includes cash and short-terminvestments, accounts receivable, borrowings and cash from operations, asfollows:

 

·                  Net cash and short-term investments amounted to $134.4 million at December 31,2009, compared to $81.3 million at December 31, 2008, excluding restrictedcash of $191.5 million.

·                  Accounts receivable amounted to $86.5 million at December 31, 2009,compared to $67.1 million at December 31, 2008.

·                  We have a credit facility with twoCanadian chartered banks as described below. At December 31, 2009, there were no borrowings under this creditfacility.  At December 31, 2008, wehad drawn a letter of credit in the amount of €218.0 million issued under the€218.0 million secured term facility.

 

*Credit Facilities*

 

Until December 2008,we had an unsecured revolving demand facility with a Canadian chartered bankfor $10.0 million that bore interest at prime per annum.  No amount was drawn down under that facility andit was terminated on December 1, 2008.

 

In connection with ouracquisition of Wavecom, we signed a credit agreement on December 1, 2008,with The Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, aslenders, that provided for a one-year revolving term credit facility (“RevolvingFacility”) and a one-year non-revolving term credit facility (“Term Facility”).

 

The Term Facility, not toexceed €218.0 million, was to be used to complete the acquisition of Wavecomordinary shares and OCEANEs.  The TermFacility was secured by cash of €136.8 million and a pledge against all of ourassets.  On December 1, 2008, asrequired by French regulations, we drew a letter of credit in the amount of€218.0 

 

19

----

 

million issued under theTerm Facility.  On February 26,2009, we borrowed €80.473 million under the Term Facility to facilitate thepurchase, on February 27, 2009, of 99.97% of the outstanding OCEANEs.  On February 27, 2009, we completed thepurchase of 84.32% of the outstanding Wavecom shares with €115.3 million of ourcash that secured the Term Facility and the letter of credit was reduced from€218.0 million to €22.2 million.   TheOCEANEs were subsequently redeemed by Wavecom and on March 13, 2009 the loanof €80.473 million under the Term Facility was repaid with those proceeds.  On completion of the squeeze-out on April 29,2009, the letter of credit was reduced to nil and the Term Facility was nolonger available.

 

The Revolving Facility,not to exceed $55.0 million, is to be used for working capital requirements andis secured by a pledge against all of our assets.  On January 29, 2010, we signed anamended and restated credit agreement which renewed our Revolving Facility to January 28,2011, and amended the maximum amount from $55.0 million to $10.0 million.  Since December 1, 2008, we have notdrawn any amount under the Revolving Facility.

 

During2007, we obtained letters of credit to ensure the performance of a third partyin accordance with specified terms and conditions.  Our obligations under these financialinstruments expired in February 2008 and were replaced by a standbyirrevocable letter of credit, which was terminated during November 2008.

 

**Market Risk Disclosure**

 

We are exposed to currencyfluctuations and exchange rate risk on all operations conducted in currenciesother than the United States dollar.  Wecannot accurately predict the future effects of foreign currency fluctuationson our financial condition or results of operations.

 

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 currency fluctuationsbecause a significant amount of our research and development, marketing, andadministration costs are incurred in Canada. We monitor our exposure tofluctuations between the Canadian and U.S. dollars.

 

With respect tooperations in EMEA and the Asia-Pacific region, we transact business in additionalforeign currencies and the potential for currency fluctuations isincreasing.  Our risk associated withcurrency fluctuations associated with the Euro has increased as a result of ouracquisition of Wavecom and cash balances that we hold in Euros.  Wavecom, whose functional currency is Euros,uses derivatives such as foreign currency forward and options contracts toreduce our foreign exchange risk on cash flows from firm and highly probablecommitments denominated in U.S. dollars. All derivatives that were outstanding at December 31, 2009 hadmaturity dates of less than 12 months. We believe that the counterparty risk on the foreign currency financialinstruments being used is acceptable because we deal with major banks andfinancial institutions.

 

**Related Party Transactions**

 

During the year ended December 31, 2009, there wereno material related party transactions.

 

**Disclosure Controls**

 

Our management is responsible for establishing andmaintaining adequate disclosure controls and procedures for the Company.  Our disclosure controls and procedures aredesigned to ensure that information required to be disclosed in our reportsfiled with securities regulatory authorities is recorded, processed, summarizedand reported within prescribed time periods and is accumulated and communicatedto our management, including our Chief Executive Officer and our ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Anevaluation was carried out under the supervision of, and with the participationof, our management, including our Chief Executive Officer and our ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of December 31, 2009. Based on that evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective toensure that information required to be disclosed by us in the reports we fileor submit under applicable securities laws and regulations is recorded,processed, summarized, and reported within the time periods specified thereby.

 

20

----

 

We do not expect that ourdisclosure controls and procedures will prevent all error and all fraud, ifany. A control procedure, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol procedure are met. Because of the inherent limitations in all controlprocedures, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within our company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the control. We considered these limitations during the developmentof our disclosure controls and procedures and will periodically re-evaluatethem to ensure they provide reasonable assurance that such controls andprocedures are effective.

 

**Internal Control Over FinancialReporting**

 

**Management’s Annual Report on Internal Control OverFinancial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the U.S.*SecuritiesExchange Act of 1934*.

 

Our internal control overfinancial reporting includes those policies and procedures that: (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with GAAP, and that ourreceipts and expenditures are being made only in accordance with authorizationsof our management and directors; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture 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.

 

We acquired Wavecom S.A.during 2009 and excluded from our assessment of the effectiveness of ourinternal control over financial reporting, Wavecom’s internal control overfinancial reporting associated with total assets of $106.2 million and totalrevenue of $119.6 million included in our consolidated financial statements asof and for the year ended December 31, 2009.

 

Under the supervision andwith the participation of our Chief Executive Officer and our Chief FinancialOfficer, management conducted an evaluation of the effectiveness of ourinternal control over financial reporting, as of December 31, 2009, basedon 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.

 

KPMGLLP (“KPMG”), an independent registered public accounting firm, who audited andreported on our consolidated financial statements, has issued an attestationreport on the effectiveness of our internal control over financial reporting asof December 31, 2009.  Theattestation report is included in our consolidated financial statements.

 

**Changes in Internal Control Over Financial Reporting**

 

Prior to our acquisitionof Wavecom, Wavecom maintained effective internal control over financialreporting based on criteria established in Internal Control IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. We are evaluating Wavecom’s internal control over financialreporting but are not aware of any changes since the date of acquisition thathave materially affected, or are reasonably likely to materially affect,Wavecom’s internal controls over financial reporting.

 

There have been nochanges in Sierra Wireless’ internal control over financial reporting duringthe year ended December 31, 2009 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.   The design of any system ofcontrols and procedures is based in part upon certain

 

21

----

 

assumptions about thelikelihood of certain events. There can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote.

 

**Quarterly Results of Operations**

 

The following tables setforth certain unaudited consolidated statements of operations data for each ofthe eight most recent quarters that, in management’s opinion, have beenprepared on a basis consistent with the audited consolidated financialstatements for the year ended December 31, 2009.  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.

 

Amounts are expressed inthousands of United States dollars except per share amounts and number ofshares.

 

**2009**

 
| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Year**   | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------|------------|
| ** **                                        | ** ** | **Mar 31**        | ** ** | **Jun 30** | ** ** | **Sep 30** | ** ** | **Dec 31** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                           |       | $                 | 111,407    |       | $          | 135,348 |   | $ | 135,677 |   | $ | 143,952 |   | $ | 526,384 |   |
| Cost of goods sold                                |       | 80,697            |       | 88,222     |       | 88,436 |   | 96,576 |   | 353,931 |   |
| Gross margin                                      |       | 30,710            |       | 47,126     |       | 47,241 |   | 47,376 |   | 172,453 |   |
|                                              |       |              |       |       |       |   |   |   |   |   |   |
| Expenses:                                         |       |              |       |       |       |   |   |   |   |   |   |
| Sales and marketing                               |       | 8,974             |       | 15,035     |       | 14,244 |   | 14,551 |   | 52,804 |   |
| Research and development                          |       | 15,014            |       | 22,923     |       | 22,705 |   | 20,179 |   | 80,821 |   |
| Administration                                    |       | 6,074             |       | 9,769      |       | 8,530 |   | 8,617 |   | 32,990 |   |
| Acquisition costs                                 |       | 6,522             |       | 804        |       | 364 |   | 95 |   | 7,785 |   |
| Restructuring costs                               |       | 1,726             |       | 8,869      |       | 5,332 |   | 4,678 |   | 20,605 |   |
| Integration costs                                 |       | 254               |       | 936        |       | 1,332 |   | 1,337 |   | 3,859 |   |
| Amortization                                      |       | 2,420             |       | 5,001      |       | 4,889 |   | (997 | ) | 11,313 |   |
|                                              |       | 40,984            |       | 63,337     |       | 57,396 |   | 48,460 |   | 210,177 |   |
| Loss from operations                              |       | (10,274           | )          | (16,211    | )          | (10,155 | ) | (1,084 | ) | (37,724 | ) |
| Foreign exchange gain (loss)                      |       | (9,923            | )          | 10,957     |       | 1,981 |   | (1,754 | ) | 1,261 |   |
| Other expense                                     |       | (4,022            | )          | (10        | )          | (88 | ) | (279 | ) | (4,399 | ) |
| Loss before income taxes                          |       | (24,219           | )          | (5,264     | )          | (8,262 | ) | (3,117 | ) | (40,862 | ) |
| Income tax expense (recovery)                     |       | (267              | )          | 1,229      |       | (634 | ) | 12 |   | 340 |   |
| Net loss before non-controlling interest          |       | (23,952           | )          | (6,493     | )          | (7,628 | ) | (3,129 | ) | (41,202 | ) |
| Net loss attributable to non-controlling interest |       | (287              | )          | (622       | )          | — |   | (394 | ) | (1,303 | ) |
| Net loss                                          |       | $                 | (23,665    | )          | $          | (5,871 | ) | $ | (7,628 | ) | $ | (2,735 | ) | $ | (39,899 | ) |
|                                              |       |              |       |       |       |   |   |   |   |   |   |
| Loss per share:                                   |       |              |       |       |       |   |   |   |   |   |   |
| Basic                                             |       | $                 | (0.76      | )          | $          | (0.19 | ) | $ | (0.25 | ) | $ | (0.09 | ) | $ | (1.29 | ) |
| Diluted                                           |       | $                 | (0.76      | )          | $          | (0.19 | ) | $ | (0.25 | ) | $ | (0.09 | ) | $ | (1.29 | ) |
|                                              |       |              |       |       |       |   |   |   |   |   |   |
| Weighted average number of shares (in thousands): |       |              |       |       |       |   |   |   |   |   |   |
| Basic                                             |       | 31,032            |       | 31,032     |       | 31,032 |   | 31,042 |   | 31,035 |   |
| Diluted                                           |       | 31,032            |       | 31,032     |       | 31,032 |   | 31,042 |   | 31,035 |   |

 

22

----

 

**2008**

 
| ** **                                         | ** ** | **Quarter Ended** | ** ** | **Year**   | ** ** |
|----------------------------------------------------|------------|-------------------|------------|------------|------------|
| ** **                                         | ** ** | **Mar 31**        | ** ** | **Jun 30** | ** ** | **Sep 30** | ** ** | **Dec 31** | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                            |       | $                 | 141,949    |       | $          | 155,698 |   | $ | 136,794 |   | $ | 132,867 |   | $ | 567,308 |   |
| Cost of goods sold                                 |       | 102,614           |       | 112,490    |       | 99,025 |   | 96,482 |   | 410,611 |   |
| Gross margin                                       |       | 39,335            |       | 43,208     |       | 37,769 |   | 36,385 |   | 156,697 |   |
|                                               |       |              |       |       |       |   |   |   |   |   |   |
| Expenses:                                          |       |              |       |       |       |   |   |   |   |   |   |
| Sales and marketing                                |       | 7,835             |       | 7,928      |       | 8,717 |   | 8,204 |   | 32,684 |   |
| Research and development                           |       | 13,769            |       | 14,063     |       | 13,062 |   | 13,166 |   | 54,060 |   |
| Administration                                     |       | 5,084             |       | 5,601      |       | 5,011 |   | 4,871 |   | 20,567 |   |
| Amortization                                       |       | 1,281             |       | 1,212      |       | 1,135 |   | 1,186 |   | 4,814 |   |
|                                               |       | 27,969            |       | 28,804     |       | 27,925 |   | 27,427 |   | 112,125 |   |
| Earnings from operations                           |       | 11,366            |       | 14,404     |       | 9,844 |   | 8,958 |   | 44,572 |   |
| Other income                                       |       | 2,459             |       | 1,269      |       | 522 |   | 21,912 |   | 26,162 |   |
| Earnings before income taxes                       |       | 13,825            |       | 15,673     |       | 10,366 |   | 30,870 |   | 70,734 |   |
| Income tax expense (recovery)                      |       | 4,148             |       | 4,702      |       | 3,110 |   | (3,809 | ) | 8,151 |   |
| Net earnings                                       |       | $                 | 9,677      |       | $          | 10,971 |   | $ | 7,256 |   | $ | 34,679 |   | $ | 62,583 |   |
|                                               |       |              |       |       |       |   |   |   |   |   |   |
| Earnings per share:                                |       |              |       |       |       |   |   |   |   |   |   |
| Basic                                              |       | $                 | 0.31       |       | $          | 0.35 |   | $ | 0.23 |   | $ | 1.12 |   | $ | 2.00 |   |
| Diluted                                            |       | $                 | 0.31       |       | $          | 0.35 |   | $ | 0.23 |   | $ | 1.12 |   | $ | 2.00 |   |
|                                               |       |              |       |       |       |   |   |   |   |   |   |
| Weighted average number of  shares (in thousands): |       |              |       |       |       |   |   |   |   |   |   |
| Basic                                              |       | 31,341            |       | 31,371     |       | 31,273 |   | 31,032 |   | 31,254 |   |
| Diluted                                            |       | 31,427            |       | 31,512     |       | 31,324 |   | 31,032 |   | 31,323 |   |

 

Our quarterly results mayfluctuate from quarter to quarter because our operating expenses are determinedbased on anticipated sales, are generally fixed and are incurred throughouteach fiscal quarter.  The impact ofsignificant items incurred during the first three interim periods of eachfiscal year are discussed in more detail and disclosed in our quarterly reportsand MD&A.  Items affecting ourresults were as follows:

 

·                  The decrease in revenue and net earnings in the third quarter of 2008compared to the second quarter of 2008 was primarily a result of missing an expectedproduct launch with a large wireless operator.

 

·                  The increase in net earnings in the fourth quarter of 2008 compared tothe third quarter of 2008 was primarily a result of an unrealized foreignexchange gain of $18.4 million on Euros held in connection with the Wavecomacquisition and a reduction in income tax expense of $6.5 million as a resultof reducing our valuation allowance on our current tax assets.

 

·                  The decrease in net earnings in the first quarter of 2009 compared tothe fourth quarter of 2008 was a result of a decrease in revenue due tomacro-economic headwinds in key markets and continued intense competition.  In addition, our net loss included Wavecom’snet loss of $3.0 million for the month of March, an unrealized foreign exchangeloss of $15.7 million on Euros held in connection with the Wavecom acquisition,Wavecom transaction costs of $10.4 million,restructuring costs of $1.6 million, stock-based compensation of $2.0 million,acquisition related amortization of $2.2 million and integration costs of $0.3million.

 

·                  The decrease in our netloss in the second quarter of 2009 compared to the first quarter of 2009 was aresult of an increase in gross margin that resulted from product cost reductions and the additionof higher margin products from the acquisition of Wavecom, as well as adecrease in acquisition and financing costs and a foreign exchange gain.  These decreases to our net loss werepartially offset by an increase in operating expenses due to the acquisition ofWavecom, restructuring costs and income tax expense.

 

·                  In the third quarter of2009, our loss from operations decreased to $10.2 million from $16.2 million inthe

 

23

----

 

secondquarter of 2009, primarily as a result of a decrease in restructuring andacquisitions costs.  Our operatingexpenses also decreased due partly to the impact of the restructurings thatoccurred in May 2009.  Our net lossincreased to $7.6 million in the third quarter of 2009, compared to a net lossof $5.9 million in the second quarter of 2009 as a result of a decrease inforeign exchange gain, partially offset by a decrease in income tax expense.

 

·                  In the fourth quarterof 2009, our loss from operations and net loss decreased to $1.1 million and$2.7 million, respectively, compared to $10.2 million and $7.6 million,respectively, in the third quarter of 2009, primarily as a result of thereversal of purchase price amortization. During the fourth quarter we received a third party valuation report andrevised our estimates of the fair value of the identifiable assets acquired andliabilities assumed which resulted in the adjustment of our purchase priceamortization of intangible assets.

 

**Cautionary Note RegardingForward-looking Statements**

 

Certain statements inthis report that are not based on historical facts constitute forward-lookingstatements or forward-looking information within the meaning of the U.S.Private Securities Litigation Reform Act of 1995 and applicable Canadiansecurities 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 futureevents.  We caution you not to 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”, “continue”, “growing”  “expanding” 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 and products,statements concerning strategies or developments, statements about futuremarket conditions, supply conditions, end customer demand conditions, channelinventory and sell through, revenue, gross margin, operating expenses, profits,forecasts of future costs and expenditures, the outcome of legal proceedings,and other expectations, intentions and plans that are not historical fact. Therisk factors, uncertainties and assumptions that may affect our actual results,performance, achievements or developments are many and include, amongst others,our ability to develop, manufacture, supply and market new products that we donot produce today and that meet the needs of customers and gain commercialacceptance, our reliance on the deployment of next generation networks by majorwireless operators, the continuous commitment of our customers and increasedcompetition.  These risk factors andothers are discussed below under “Risk Factors” 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 ourcontrol.  Consequently, allforward-looking statements in this report are qualified by this cautionarystatement and we cannot assure you that the actual results, performance,achievements or developments that we anticipate will be realized.  Forward-looking statements are based onmanagement’s current plans, estimates, projections, beliefs and opinions and wedo not undertake any obligation to update forward-looking statements should theassumptions related to these plans, estimates, projections, beliefs andopinions change, except as required by law.

 

**Risk Factors**

 

Our business is subject to significant risks anduncertainties and past performance is no guarantee of future performance. Therisks and uncertainties described below are those which we currently believe tobe material, and do not represent all of the risks that we face.  Other risks and uncertainties may becomematerial in the future or ones we currently believe to be immaterial may becomematerial in the future.  If any of thefollowing risks actually occurs, our business, financial condition and resultsof operation could be materially adversely affected as well as the market priceof our common shares.

 

24

----

 

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

 

Our revenue, gross margin, operatingearnings and net earnings may vary from quarter to quarter and could besignificantly impacted by a number of factors, including:

 

·                  Possible delays or shortages in componentsupplies;

 

·                  The ability to accurately forecast demandin order to properly align the purchase of components and the appropriate levelof manufacturing capability;

 

·                  Price and product competition, which mayresult in lower selling prices for some of our products or lost market share;

 

·                  Price and demand pressure on our productsfrom our customers as they experience pressure in their businesses;

 

·                  Potential commoditization and saturation incertain markets;

 

·                  Transition periods associated with themigration of new technologies;

 

·                  The development and timing of theintroduction of our new products;

 

·                  The securing of channel slots for newproducts and the timing of sales orders and OEM and carrier customer sellthrough;

 

·                  Design win cycles in our embedded modulebusiness;

 

·                  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;

 

·                  The amount of inventory held by our channelpartners;

 

·                  Possible cyclical fluctuations related tothe evolution of wireless technologies;

 

·                  Possible delays in the manufacture orshipment of current or new products;

 

·                  Possible product quality or factory yieldissues that may increase our cost of goods sold;

 

·                  Possible increased inventory levels;

 

·                  Possible fluctuations in certain foreigncurrencies relative to the US dollar;

 

·                  Concentration in our customer base; and

 

·                  The achievement of milestones related toour professional services contracts.

 

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, gross margin and earnings in any givenquarter. Therefore, our quarterly results are not necessarily indicative of ouroverall business, results of operations and financial condition.

 

Quarterly variations in operating resultsor any of the other factors listed above, changes in financial estimates bysecurities analysts, or other events or factors may result in wide fluctuationsin the market price of our stock price. In addition, the financial markets haveexperienced significant price and volume fluctuations that have particularlyaffected the market prices of equity securities of many technology companiesand that often have been unrelated to the operating performance of thesecompanies or have resulted from the failure of the operating results of suchcompanies to meet market expectations in a particular quarter. Broad marketfluctuations or any failure of the Company’s operating results in a particularquarter to meet market expectations may adversely affect the market price ofour common shares.

 

25

----

 

**Competition from new orestablished wireless communication companies or from those with greater resourcesmay prevent us from increasing or maintaining our market share and could resultin price reductions and/or loss of business with resulting reduced revenues andgross margins.**

 

The wirelesscommunications industry is highly competitive and we expect competition toincrease and intensify. More established and larger companies with differentbusiness models, strong brands and greater financial, technical and marketingresources sell products that compete with ours and we expect this competitionto intensify. We also may introduce new products that will put us in directcompetition with major new competitors. Existing or future competitors may beable to respond more quickly to technological developments and changes andintroduce new products before we do, or may independently develop and patenttechnologies and products that are superior to ours or achieve greateracceptance due to factors such as more favorable pricing, more desired orbetter quality features or more efficient sales channels. If we are unable tocompete effectively with our competitors’ pricing strategies, technologicaladvances and other initiatives, we may lose customer orders and market shareand we may need to reduce the price of our products, resulting in reducedrevenue and reduced gross margins.

 

**The loss of any of oursignificant customers could adversely affect our revenue and profitability, andtherefore shareholder value.**

 

We sell our productsthrough network carriers, resellers and OEMs and we are dependent on a limitednumber of customers for a significant portion of our revenues.  Most of these network carriers, resellers andOEMs also sell products of our competitors. Accordingly, our business and future success depends on our ability tomaintain and build on existing relationships and develop new relationships withnetwork carriers, resellers and OEMs.  If any of these customers, for anyreason, discontinues their relationship with us or reduces or postpones currentor expected purchase orders for products, or suffers from business failure, ourrevenues and profitability could decline, perhaps materially.  We expect that a limited number of customerswill account for a significant portion of our revenues for the foreseeablefuture.

 

In the year ended December 31,2009, two customers individually accounted for more than 10% of our revenue,and in the aggregate, these two customers represented approximately 40% of ourrevenue.  In the year ended December 31,2008, these same two customers individually accounted for more than 10% of ourrevenue and, in the aggregate, these two customers represented approximately53% of our revenue.  In the last threefiscal years, there have been two different customers that individuallyaccounted for more than 10% of our revenues.

 

In addition, ourcurrent customers purchase our products under purchase orders. Our customershave no contractual obligation to continue to purchase our products followingour fulfillment of current purchase orders and if they do not continue to makepurchases, our revenue and our profitability could decline, perhaps materially.

 

**We may infringe on theintellectual property rights of others.**

 

The industry in whichwe operate has many participants that own, or claim to own, proprietaryintellectual property. In the past we have received, and in the future mayreceive assertions or claims from third parties alleging that our productsviolate or infringe their intellectual property rights.  We may be subject to these claims directly orthrough indemnities against these claims which we have provided to certaincustomers.  Activity in this area bythird parties, particularly those with tenuous claims, is increasing, resultingin us taking a more aggressive defensive 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 potentially substantial damages, liabilities andlitigation costs, including attorneys’ fees;

 

·            We may be prohibited from further use of the intellectual property andmay be required to cease selling our products that are subject to the claim;

 

26

----

 

·            We may have to license the third party intellectual property, incurringroyalty fees that may or may not be on commercially reasonable terms. Inaddition, there is no assurance that we will be able to successfully negotiateand obtain such a license from the third party;

 

·            We may have todevelop a non-infringing alternative, which could be costly and delay or resultin the loss of sales. In addition, there isno assurance that we will be 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.

 

We license technology, intellectual property and software from thirdparties for use in our products and from time to time may be required tolicense additional intellectual property. In some cases, these licenses provide us with certain pass-throughrights for the use of other third party intellectual property. There is noassurance that we will be able to maintain our third party licenses or obtainnew licenses when required and this inability could materially adversely affectour business and operating results and the quality and functionality of ourproducts. In addition, there is no assurance that third party licenses weexecute will be on commercially reasonable 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.

 

**We depend on single sourcesuppliers for some components used in our products and if these suppliers areunable to meet our demand the availability of our products may be materiallyadversely affected.**

 

Our products arecomprised of components some of which are procured from single sourcesuppliers, including where we have licensed certain software embedded in acomponent.  From time to time, certaincomponents used in our products have been, and may be, in short supplyworldwide and shortages in allocation of components may result in delay infilling orders from our customers, which may adversely affect our business.  In addition, our single source suppliers mayexperience damage or interruption in their operations, become insolvent orbankrupt, or experience claims of infringement, all of which could delay orstop their shipment of components to us, which may adversely affect our business.  Alternate sources of components may not beavailable.  If there is a shortage of anysuch components and we cannot obtain an appropriate substitute, we may not beable to deliver sufficient quantities of our products, we may lose business orcustomers and our revenue may be materially adversely affected.

 

**We depend on a limitednumber of third parties to purchase certain components and manufacture ourproducts. 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 thepurchase of certain components and the manufacturing of our products to alimited number of third parties and depend heavily on the ability of thesemanufacturers to meet our needs in a timely and satisfactory manner at areasonable cost. We currently rely on two manufacturers, either of whom mayterminate the manufacturing contract with us at the end of any contract year.Our reliance on third party manufacturers subjects us to a number of risks,including the following:

 

·    The absence of guaranteed or adequatemanufacturing capacity;

 

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

 

·    Their inability to secure adequate volumesof components in a timely manner at a reasonable cost; and

 

·    Unexpected increases in manufacturing costs.

 

27

----

 

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.

 

Under ourmanufacturing agreements, in many cases we are required to place bindingpurchase orders with our manufacturers well in advance of our receipt ofbinding purchase orders from our customers. In this situation, we consider our customers’ good faith, non-bindingforecasts of demand for our products.  Asa result, if the number of actual products ordered by our customers ismaterially different from the number of products we have instructed ourmanufacturer to build (and purchase components in respect of), then, if toomany components have been purchased by our manufacturer, we may be required topurchase such excess component inventory, or, if an insufficient number ofcomponents have been purchased by our manufacturer, we may not be in a positionto meet all of our customers’ requirements. If we are unable to successfully manage our inventory levels and respondto our customers’ purchase orders based on their forecasted quantities, ourbusiness could be adversely affected.

 

**We may have difficultyresponding to changing technology, industry standards and customerrequirements, which could cause us to be unable to recover our research anddevelopment expenses and our revenue could decline.**

 

The wirelesscommunications industry is subject to rapid technological change. Our businessand future success will depend, in part, on our ability to accurately predictand anticipate evolving wireless technology standards and 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,preferences 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 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

 

·    Our ability to design and manufactureproducts at an acceptable cost 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.

 

We develop productsto meet our customers’ requirements. Original equipment manufacturer customers award design wins for theintegration of wide area wireless embedded modules on a platform by platformbasis.  Current design wins do notguarantee 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.

 

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.

 

**Fluctuations in exchangerates between the United States dollar and other currencies, including theCanadian dollar, Euro and Australian 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, the Euro primarily throughour recent acquisition of Wavecom in Europe and the Australian dollar throughsales to certain customers. To reduce our risk because of currency

 

28

----

 

fluctuations, wepurchase inventory, other cost of sales items and many of our services inUnited States dollars, however, some of our operating costs are still incurredin Canadian dollars, primarily those relating to marketing, administration anda portion of our research and development. Given the fluctuations in theCanadian dollar relative to the United States dollar, our operating results maybe negatively impacted. Wavecom has significant revenue and costs denominatedin Euro and certain of our product sales are denominated in Australian dollars,resulting in increased exposure to currency fluctuations.

 

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

 

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

 

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

 

·            Unexpectedchanges in regulatory requirements, wireless communications standards, exchangerates, trading policies, 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 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.

 

**We do not have fixed-termemployment agreements with our key personnel and the loss of any key personnelmay harm our ability to compete effectively.**

 

None of our executive officers or other keyemployees has entered into a fixed-term employment agreement. Our successdepends in large part on the abilities and experience of our executive officersand other key employees. Competition for highly skilled management, technical,research and development and other key employees is intense in the wirelesscommunications industry. We may not be able to retain our current executive officersor key employees 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 rely on certain internal processes, networksand systems to efficiently operate and report on our business**

 

Failure of these internal processes, networksor systems could negatively impact our ability to operate or accurately reporton our business.

 

**Acquisitions of companies or technologies, including our acquisition of Wavecom,may result in disruptions to our business or may not achieve the anticipatedbenefits.**

 

As part ofour business strategy, we have acquired and may continue to acquire additionalassets and businesses principally relating to or complementary to our currentoperations.  On February 27, 2009,we completed our acquisition of Wavecom. Any acquisitions and/or mergers by us will be accompanied by the riskscommonly encountered in acquisitions of companies. These risks include, amongother 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 costsand expenses;

 

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

 

29

----

 

·            Thedifficulty and expense of integrating the operations and personnel of thecompanies;

 

·            Possible use of cash tosupport the operations of an acquired business;

 

·            Possible increase in foreignexchange translation risk depending on the denomination of the revenue andexpenses of the acquired business;

 

·            Disruption ofour ongoing business;

 

·            Diversion of management’stime and attention away from our remaining business during the integrationprocess;

 

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

 

·            The inability to implement uniform standards, controls, procedures andpolicies;

 

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

 

·            The incurrence of amortization expenses;

 

·            As a result of the growth ofour company, we may seek to raise additional capital through an offering ofcommon shares, preference shares or debt, which may result in dilution and/orthe issuance of securities.  As a result,our share price may decline; and

 

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

 

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

 

**Continueddifficult market conditions could adversely affect our revenue and profitability.**

 

A significant portion of our business is in the U.S. and we areparticularly exposed to the downturns in the U.S. economy.  With our acquisition of Wavecom, we have alarger portion of our business based in Europe and will have increased exposureto the market conditions in Europe.  Themarket turmoil and tightening of credit have led to an increased level ofcommercial and consumer delinquencies, lack of consumer confidence, increasedmarket volatility and widespread reduction of business activity generally.  If the resulting economic pressure on ourcustomers causes them to end their relationship with us,reduce or postpone current or expected purchase orders for our products, orsuffer from business failure, our revenues and profitability could decline,perhaps materially.

 

**Misappropriation of our intellectual property couldplace 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-recognitionof the proprietary nature or inadequate protection of our methodologies in theUnited States, Canada or foreign countries;

 

·            Undetected misappropriation of our intellectual property;

 

·            The substantial legal and other costs of protecting and enforcing ourrights in our intellectual property; and

 

·            Development of similar technologies by our competitors.

 

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.

 

30

----

 

**We have been subject to, and may in the future besubject to, certain class action lawsuits, which if decided against us, couldrequire us to pay substantial judgments, settlements or other penalties.**

 

In addition tobeing subject to litigation in the ordinary course of business, in the future,we may be subject to class actions and other securities litigation andinvestigations. We expect that this type of litigation will be time consuming,expensive and distracting from the conduct of our daily business. It ispossible that we will be required to pay substantial judgments, settlements orother penalties and incur expenses that could have a material adverse effect onour operating results, liquidity or financial position. Expenses incurred inconnection 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 materially adversely affectour cash position. We do not know if any of this type of litigation andresulting expenses will be covered by insurance. In addition, these lawsuitsmay cause our insurance premiums to increase in future periods.

 

**We depend on wirelessnetwork carriers to offer acceptable 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. Ourbusiness and future growth depends, in part, on the successful deployment bynetwork carriers of next generation wireless data and voice networks and the networkcarriers’ ability to grow their subscriber base.  If these network carriers delay thedeployment or expansion of next generation networks or fail to offer effectiveand reliable service, or fail to price and market their services effectively,sales of our products will decline and our revenues will decrease.

 

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

 

Our products are subject to certain mandatoryregulatory approvals in the United States, Canada, the European Union and otherregions in which we operate. In the United States, the Federal CommunicationsCommission regulates many aspects of communications devices. In Canada, similarregulations are administered by the Ministry of Industry, through Industry Canada.European Union directives provide comparable regulatory guidance in Europe.Although we have obtained all the necessary Federal Communications Commission,Industry Canada and other required approvals for the products we currentlysell, we may not obtain approvals for future products on a timely basis, or atall. In addition, regulatory requirements may change or we may not be able toobtain regulatory approvals from countries other than the United States andCanada in which we may desire to sell products in the future.

 

31

----