**Exhibit 99.5**

 

**MANAGEMENT’S DISCUSSIONAND ANALYSIS**

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

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

 

**Overview**

 

We provide leading edge wireless wide-area modemsolutions for mobile computing over cellular networks.  We develop and market a range of productsthat include wireless modems for mobile computers, embedded modules fororiginal equipment manufacturers, or OEMs, and rugged vehicle-mountedmodems.  Our products permit users toaccess wireless data and voice communications networks using laptop computers,handheld mobile computing devices, or vehicle-based systems.

 

Wireless data communications is an expanding marketpositioned at the convergence of wireless communications, mobile computing andthe Internet, each of which we believe represents a growing market.  Our products are based on open standards,including the Internet protocol, and operate on the networks of major wirelessoperators around the world.

 

Our products are primarily used by businessesand government organizations to enable their employees to access a wide rangeof applications, including the Internet, e-mail, corporate intranet, remotedatabases and computer aided dispatch. We sell our products through indirect channels, including wirelessoperators, resellers and OEMs.

 

During the latter part of 2003 and throughout 2004, we experiencedstronger than expected demand for our products, primarily as a result of ourstrong market position in CDMA EV-DO Release 0 PC cards and our CDMA 1Xembedded module sales to palmOne.  Duringthis period, customer concentration increased in our revenue base.  Following our considerable revenue andearnings growth in 2004, we experienced a significant reduction in our businessin 2005 relative to 2004 as a result of:

 

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

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

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

 

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

 

In order to address this change in our business, weundertook a restructuring of our operations in June of 2005, whichincluded exiting our Voq professional phone initiative.  Excluding the impact of restructuring andlegal provisions, aggregating $19.5 million, our net loss was $17.0 million in2005, or $0.67 per diluted share.  Theresult of this restructuring was a reduction in our cost structure and agreater focus on our core PC card and embedded modules business, where wealready have well established market positions and believe there aresignificant growth opportunities.

 

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

 

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Despite consuming cash during 2005, our balance sheetremains strong, with $104.1 million of cash, cash equivalents and short- andlong-term investments, compared to $131.8 million at December 31,2004.  During 2005, we used $17.2 millionin cash from operations, compared to 2004 when we generated $29.1 million incash from operations.  On a quarterlybasis, we reduced our cash consumption rate and returned to a positive cashflow position in the fourth quarter of 2005, generating cash from operations of$3.4 million.

 

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

 

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

 

Having restructured the company around PC cards and embedded modules,we are very focused on executing our product development and businessdevelopment strategies in these areas. Specific initiatives include:

 

PC Cards:  We have successfullycompleted the development of our first UMTS/HSDPA PC card and during the fourthquarter commenced commercial shipments of this product to Cingular in NorthAmerica, as well as Manx Telecom and Sunrise in Europe, making us the firstcompany in the world to launch a fully functional UMTS/HSDPA PC card.  We have also commenced the development of thenext generation EV-DO (Rev A) and HSDPA (3.6Mps) PC cards, both of which areexpected to be commercially available in the second half of 2006; and

 

Embedded Modules:  With theannouncement by several leading laptop manufacturers of their plans to embedhigh speed wireless wide-area capability inside laptops, we believe that theopportunity for sales of embedded modules has potentially increasedsignificantly.   We believe we are wellpositioned to supply embedded modules to this market as a result of ourextensive experience in the embedded module market; this has allowed us toestablish an early leadership position providing embedded 3G wireless solutionsto major laptop OEMs.  Our EV-DO-PCI express mini card embedded module (“MiniCard”) has been certified for operation on both the Sprint and Verizonnetworks.  We have design wins withLenovo and HP for our EV-DO Mini Card and commenced commercial shipments toLenovo in the fourth quarter of 2005, representing the first commercialdeployment of an embedded 3G wireless mini card by any laptopmanufacturer.  Lenovo has subsequentlyannounced the integration of this Mini Card in two additional businesslaptops.  Early in the first quarter of2006, HP announced the availability of their first laptop incorporating our EV-DOMini Card.  In 2005, we secured designswin for our HSDPA Mini Cards with Lenovo and Fujitsu-Siemens Computers.  We expect commercial shipments of our HSDPAMini Card to commence late in the first quarter of 2006.  Also during 2005, we commenced shipment inNorth America of our EM5625 EV-DO module to some of our long-time mobilecomputing OEM customers. One of these OEM customers, Panasonic, hassubsequently integrated our EM5625 module into three of its laptop platforms.  We have also commenced the development of thenext generation EV-DO (Rev A) and HSDPA (3.6Mps) Mini Cards, both of which areexpected to be commercially available in the second half of 2006.

 

We believe these new product developments provide us with a strong,up-to-date 3G product portfolio in both principal wireless technologies and inboth the PC card and embedded module markets.

 

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**Results of Operations**

 

The following table sets forth our operating results forthe three years ended December 31, 2005, expressed as a percentage ofrevenue:

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

 

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

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

 

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***Restructuringand Other Charges***

 

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

 

In 2005, we recorded restructuring and other charges of $18.5 millionthat included inventory writedowns, severance costs, impairment of fixed,intangible and deferred tax assets, provisions for facilities restructuring,commitments and other costs related to the restructuring.  Restructuring charges related to Voq wereapproximately $13.3 million of the total $18.5 million.  Approximately $6.3 million represented cashdisbursements, of which $4.7 million were paid prior to the end of 2005.

 

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

 

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

 

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

 

*Revenue*

 

Revenue was $107.1millionfor the year ended December 31, 2005, compared to $211.2 million in 2004,a decrease of 49.3%.  The decrease inrevenue was due primarily to a decrease in sales of PC cards and embeddedmodules.  During the first part of 2005,PC card revenue decreased primarily due to reported channelinventory at some of our channel partners that was sufficient to meet near termcustomer demand and the impact of increased competition in CDMA EV-DO PCcards.   The competitive environment inCDMA EV-DO PC cards intensified over the course of the year, which had anegative impact on our sales of EV-DO PC cards and resulted in a loss of marketshare at Verizon Wireless.  Embeddedmodule revenue decreased primarily due to the completion of shipments of embedded modules topalmOne for the Treo 600 at the end of 2004.  In the second quarter of 2005 we announced our plan to exit the Voqprofessional phone initiative.  During 2005, revenue from the sale of previously written down Voq productwas $1.5 million.

 

Our revenue from customers in the Americas, Europe andthe Asia-Pacific region comprised 69%, 12% and 19%, respectively, of our totalrevenue in 2005 and 89%, 6% and 5%, respectively, in 2004.  Our North American business has decreasedsignificantly compared to the prior year as a result of a decline in sales ofour PC card and embedded module products to certain North Americancustomers.  As has been the case in thepast several years, our business continues to be driven predominantly by shortlead-time purchase orders from channels and end customers rather than bylong-term, large volume commitments.  InEurope, the deployment of UMTS networks has negatively affected our GSM/GPRSsales in that region as we did not have a UMTS compatible product until thefourth quarter of 2005. This negative impact was partially offset by sales ofour EDGE product.  Following the fourthquarter launch of our UMTS/HSDPA PC card and the planned launch of new UMTS/HSDPAproducts during 2006, we expect our sales to improve in Europe in 2006.  Our business in the Asia-Pacific region hasincreased as a result of strong sales of CDMA EV-DO and EDGE PC cards.

 

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

 

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

 

*Gross margin*

 

Gross margin amounted to $25.3 million in 2005.  Of the total $18.5 million restructuring andother charges that were recorded in the year, $12.7 million has been deductedin calculating gross margin.  Excludingthis amount, gross margin amounted to $38.0 million, or 35.4% of revenue, in2005, compared to $83.6 million, or 39.6% of revenue, in 2004.  The decline in gross margin percentageresulted primarily from lower selling prices of our PC card products and theimpact of lower volumes overall, offset slightly by the positive impact of afavorable product mix between higher margin PC cards and rugged mobiles versuslower margin embedded modules.  During2005, gross margin on the sale of previously written down Voq product was $0.5million, or 29.7%.

 

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

 

*Sales and marketing*

 

Sales and marketing expenseswere $15.6 million in 2005, compared to $20.0 million in 2004, a decrease of22.4%.  This decline reflects the impactof our business restructuring and continued cost containment.  Sales and marketing expenses as a percentageof revenue increased to 14.5% in 2005, compared to 9.5% in 2004, due primarilyto the decrease in revenue for fiscal 2005. While managing sales and marketing expenses in relation to top-linerevenue, we will continue to make selected investments in sales and marketingas we market existing products, introduce new products and expand ourdistribution channels and focus on key customers around the world.

 

*Research and development, net*

 

Research and development expenses, net of conditionallyrepayable government research and development funding, amounted to $30.4million in 2005, compared to $24.5 million in 2004, an increase of 23.8%.

 

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

 

During 2004, we signed a second agreement with theGovernment of Canada’s Technology Partnerships Canada (“TPC”) program underwhich we are eligible to receive conditionally repayable research anddevelopment funding up to Cdn. $9.5 million to support the development of theVoq professional phone initiative.  Theagreement is effective for development work commencing April 2003.  In 2005, funding of $0.9 million wasrecognized.  Funding of $2.6 million wasrecognized during 2004, of which $1.1 million relates to the period from April 1,2003 to December 31, 2003.  Our TPCfunding is based on research and development work completed in eachquarter.  Unless the second agreement is otherwiserenegotiated, with the termination of the Voq professional phone initiative no furtherTPC funding is anticipated.

 

*Administration*

 

Administration expenses amounted to $10.8 million, or10.1% of revenue, in 2005, compared to $9.0 million, or 4.3% of revenue, in2004.  The increase of $1.8million is primarily due to the provision of $1.0 million for future legalcosts related to litigation matters and an increase in other professionalfees.  In addition, administrationexpenses in 2004 were net of recoveries from the bankruptcy trustees of Metricom, aformer customer, of $0.5 million, related to a settlement agreement, for whichthere was no comparable recovery in 2005.

 

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*Restructuring and other charges*

 

During the second quarter of2005, we decided to exit the Voq Professional Phone initiative and toimplement certain non-Voq related reductions to our operating expenses andassets.  During thefourth quarter we recorded additional charges primarily related to achange in estimate of our facilities restructuring originally announced in thesecond quarter of 2005.  Asa result, in the year we recorded restructuring and other charges of $18.5million, consisting of inventory writedowns, severance costs, impairmentof fixed, intangible and deferred tax assets, provisions for facilitiesrestructuring, commitments and other costs related to the restructuring.  Of the total amount of $18.5 million,$5.3 million was charged to restructuring and other charges, $12.7 million tocost of goods sold and $0.5 million to income tax expense.

 

*Other income*

 

Other income increased to $2.3 million in 2005, comparedto $1.7 million in 2004.  Other incomeincludes interest income, interest expense and foreign exchange gains and losses.  This increase is due primarily to an increasein interest income from rising interest rates that was partially offset by asmaller investment balance and foreign exchange losses.

 

*Income tax expense*

 

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

 

*Net earnings (loss)*

 

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

 

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

 

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

 

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

 

Gross margin for the three months ended December 31,2005 was 38.6%, compared to 38.8% in the same period of 2004.  Gross margins in the quarter were favorablyimpacted by approximately $1.2 million, or 3.2% of revenue, as a result ofcompleting a royalty agreement with an intellectual property holder. Thisagreement finalized a cumulative royalty obligation that was less than we hadpreviously expensed in our cost of goods sold. During the fourth quarter of 2005, revenue from the sale of previouslywritten down Voq product was $1.0 million and gross margin was $0.2 million, or25.7% of revenue.

 

Operating expenses were $14.6 million in the fourth quarter of 2005,compared to $15.8 million in the same period of 2004.  This decline reflects the impact of our business restructuring andcontinued cost containment.  Includedin 

 

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our fourth quarter operating expenses were approximately $0.6 millionof additional amortization of patents and licenses related to the writedown ofsuch assets, an additional restructuring charge of $0.3 million primarilyrelated to a change in estimate of our facilities restructuring and a positiverecovery of approximately $0.7 million from insurance proceeds related to anongoing legal proceeding.

 

Net earnings for the fourth quarter decreased to $0.9 million in 2005,or $0.04 per diluted share, compared to $7.3 million in 2004, or $0.28 perdiluted share.  Our decline in netearnings was directly attributable to the decline in revenue and the relateddecline in gross margin as outlined above.

 

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

 

*Revenue*

 

Revenue amounted to $211.2million for the year ended December 31, 2004, compared to $101.7 millionin 2003, an increase of 107.7%.  Theincrease in revenue was due primarily to an increase in sales of PC cards andembedded modules, including sales of products formerly sold by AirPrime.  During the year, wecommenced commercial shipments of our new SmartPhone product, the Voq Professional Phone, as well asthe AirCard 580 for CDMA 1xEV-DO networks, the AirCard 555R for CDMA networksin Asia, the MP555 for CDMA 1X, the MP775 for EDGE networks and the AirCard 775for EDGE networks.  We completedshipments of embedded modules to palmOne for the Treo 600 at the end of2004.  As a result, we expected thatembedded module revenue as a percentage of revenue would decrease in the nearterm.

 

Our revenue from customers in the Americas, Europe andthe Asia-Pacific region comprised 89%, 6% and 5%, respectively, of our totalrevenue in 2004 and 73%, 13% and 14%, respectively, in 2003.  Our North American business increased significantlycompared to the prior year as a result of strong sales of our PC card andembedded module products to North American customers.  Our North American business mix continued tobe dominated by near term demand from channels rather than by long-term, largevolume commitments. In Europe, the deployment of EDGE and UMTS networks gainedmomentum and negatively affected our GSM/GPRS sales in that region as we didhave EDGE products and but did not have a UMTS product. We expected tointroduce our first UMTS/HSDPA product in the second half of 2005.  In 2004, two customers individually accountedfor more than 10% of our revenue and in aggregate these two customersrepresented 51% of our revenue.

 

*Gross margin*

 

Gross margin amounted to $83.6 million in 2004,compared to $41.2 million in 2003.  Ourgross margin percentage was 39.6% of revenue in 2004, compared to 40.5% ofrevenue in 2003.  Changes in product mixresulted in a decline in margin for the year. During2004, we sold $0.2 million of products that had a net book value afterwritedowns of nil.

 

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

 

*Sales and marketing*

 

Sales and marketing expenseswere $20.0 million in 2004, compared to $11.6 million in 2003, an increase of72.9%.  The increase was due primarily toan increase in marketing development costs and costs related to new products,such as the Voq professional phone and products for EDGE networks.  The addition of staff from the AirPrimeacquisition also contributed to the increase. Sales and marketing expenses as a percentage of revenue decreased to9.5% in 2004, compared to 11.4% in 2003, due primarily to the increase in 2004revenue.  We expected to continue to makesignificant investments in sales and marketing as we marketed existingproducts, introduced new products and continued to expand our distribution channelsin the Americas, Europe and the Asia-Pacific region.

 

*Research and development, net*

 

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

 

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

 

During 2004, we signed a second agreement with theGovernment of Canada’s Technology Partnerships Canada (“TPC”) program underwhich we are eligible to receive conditionally repayable research anddevelopment funding up to Cdn. $9.5 million to support the development of a rangeof third generation wireless technologies. The agreement is effective for development work commencing April 2003.  Funding of $2.6 million was recognized during2004, of which $1.1 million relates to the period from April 1, 2003 to December 31,2003.  We expected that our TPC fundingwould be based on eligible research and development work completed in eachquarter.

 

*Administration*

 

Administration expenses amounted to $9.0 million, or4.3% of revenue, in 2004, compared to $6.6 million, or 6.5% of revenue, in2003.  The increase of $2.4 million wasdue primarily to an increase in professional fees, insurance costs and theaddition of staff from the AirPrime acquisition.   Included in administration expenses wererecoveries from Metricom of $0.5 million in each of 2004 and 2003 that wererelated to a settlement agreement.

 

*Restructuring and other charges*

 

In 2004 we did not incur any restructuring and other charges.  In 2003, we incurred restructuring and othercharges of $1.2 million as a result of our acquisition of AirPrime.  The charges included writedowns of fixed andintangible assets, severance costs for workforce reductions and a facilitiesrestructuring charge.

 

*Integration costs*

 

In 2004 we did not incur any integration costs.  In 2003, we incurred integration costs of$1.9 million as a result of our acquisition of AirPrime.  The charges included costs of existing staffand contractors retained for the transition period and costs related tointegration activities.  All of theseemployees and contractors completed their integration activities and wereterminated by December 31, 2003.

 

*Other income*

 

Other income increased to $1.7 million in 2004, comparedto $1.0 million in 2003.  Other incomeincludes interest income, interest expense and foreign exchange gains andlosses.  This increase was due to anincrease in interest income from increased cash and investment balances and anincrease in interest rates.

 

*Income tax expense*

 

Income tax expense amountedto $4.4 million in 2004, compared to $0.2 million in 2003.  Income tax expense increased primarily due totaxes payable in the United States resulting from our increased earnings.

 

*Net earnings*

 

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

 

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

 

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**Stock-BasedCompensation**

 

In 2005, the Board ofDirectors approved the accelerated vesting of certain “out-of-the-money” stockoptions previously granted under the Company’s stock option plan toparticipants other than board members and executive officers of the Company.The accelerated vesting of these options had the positive effect of rewardingthose eligible participants during a challenging year as well as reducing thefuture expense associated with those options as a result of a change in UnitedStates GAAP. Effective January 1, 2006 for the Company, United States GAAPrequires the expensing in the Company’s financial statements of the fair value of all stock-basedcompensation arrangements, including employee stock options. The expensing ofthe cost of employee stock options in the financial statements is in contrastto the practice prior to January, 2006 of providing supplemental pro formadisclosure in the footnotes to the financial statements of our income (loss)after giving effect to the employee stock-based compensation charge.

 

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

 

By taking thisaccelerated vesting initiative now, a value of approximately $2.3 million isrecorded as a charge in the calculation of our supplemental footnote disclosureof our pro forma income (loss) in 2005. This will result in a reduction of ourotherwise calculated stock-based compensation expense of approximately $1.1million in 2006, $1.1 million in 2007 and $0.1 million in 2008.

 

**ContingentLiabilities**

 

SierraWireless America, Inc., as successor to AirPrime, Inc., along withother defendants, has been served with the complaint of Joshua Cohen and DavidBeardsley and others, filed in the U.S. District Court for the Central Districtof California for alleged violations of federal and state securities lawsallegedly occurring prior to the time AirPrime, Inc. was acquired by theCompany.  The plaintiffs filed the thirdamended complaint on July 7, 2005. In November of 2005, the District Court dismissed the third amendedcomplaint, without prejudice, with respect to the Company and most of the otherdefendants.  The plaintiffs did not filea fourth amended complaint and sought an order from the District Courtdismissing the federal actions as to all defendants, with prejudice for thepurposes of final judgment, however without prejudice to the state claims inthe third amended complaint.  TheDistrict Court so ordered on February 27, 2006.  The plaintiffs filed a notice of appeal tothe U.S. Court of Appeals for the Ninth Circuit on March 8, 2006. Weexpect that it will be several months before they file their appeal brief.  In December 2005, we were served with asimilar class action complaint of David Beardsley and others, filed in theSuperior Court of the State of California, County of San Diego, for allegedviolations of state securities laws in connection with the same allegedfacts.  On February 6, 2006, wefiled a Motion to Stay the state court action pending resolution of the nearlyidentical federal action. We expect the Motion to Stay will be heard by the SanDiego Superior Court in late March, 2006. We have given notice to our liability insurance carrier, which hasagreed to pay our costs of defense that exceed the policy’s retention amount,subject to a reservation of rights in the event it is determined that thecarrier has no liability for this litigation and without conceding anyliability for payment of loss.  We havealso submitted an escrow claim notice under the escrow agreement dated August 12,2003 relating to the acquisition of AirPrime and the escrow shareholders aredisputing their obligations with respect to this complaint.  Although there can be no assurance that anunfavourable outcome of the dispute would not have a material adverse effect onour operating results, liquidity or financial position, we believe the claimsare without merit and will vigorously defend them.  The Company has determined that it is notpossible to establish a reasonable estimate of the possible loss, or range ofpossible loss, if any.

 

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

 

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approvedthe selection of co-lead counsel.  Theplaintiffs filed their consolidated amended complaint on February 21, 2006and the defendants have until early April to file their Motion toDismiss.  We have given notice to ourliability insurance carrier, which has agreed to pay our costs of defense thatexceed the policy’s retention amount, subject to a reservation of rights in theevent that it is determined that the carrier has no liability for thislitigation.  Although there can be noassurance that an unfavourable outcome would not have a material adverse effecton our operating results, liquidity or financial position, we believe theclaims are without merit and will vigorously defend the lawsuits.  The Company has determined that it is notpossible to establish a reasonable estimate of the possible loss, or range ofpossible loss, if any. However, the Company believes that it is probable thatthe legal costs related to these complaints may exceed our policy retentionamount of $1.0 million.  Accordingly, weaccrued $1.0 million in our results of operations for the year ended December 31,2005.

 

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

 

Weare engaged in other legal actions in the ordinary course of business andbelieve that the ultimate outcome of these actions will not have a materialadverse effect on our operating results, liquidity or financial position.

 

**CriticalAccounting Estimates**

 

We prepare our consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States, and we make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses, andthe related disclosure of contingent liabilities. On an on-going basis, weevaluate our estimates and judgments, including those related to revenuerecognition, adequacy of allowance for doubtful accounts, adequacy of inventoryreserve, income taxes and adequacy of warranty reserve.  We base our estimates on historical experienceand anticipated results and trends and on various other assumptions that webelieve are reasonable under the circumstances. By their nature, estimates aresubject to an inherent degree of uncertainty. Actual results may differ from our estimates.  Senior management has discussed with ouraudit committee the development, selection, and disclosure of accountingestimates used in the preparation of our consolidated financial statements.

 

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

 

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

 

•                  We recognize revenue from sales 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 collectability isreasonably assured. Customers include resellers, original equipmentmanufacturers, wireless service providers and end-users. We record deferredrevenue when we receive cash in advance of the revenue recognition criteriabeing met.

 

A significant portion of our revenue isgenerated from sales to resellers.  Werecognize revenue on the portion of sales to certain resellers that are subjectto contract provisions allowing various rights of return and stock rotationupon the earlier of when the rights have expired or the products have beenreported as sold by the resellers.

 

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

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and developmentfunding in the period in which conditions arise that would cause research anddevelopment funding to be repayable.

 

Revenues fromcontracts with multiple-element arrangements, such as those including technicalsupport services, are recognized as each element is earned based on therelative fair value of each element and only when there are no undeliveredelements that are essential to the functionality of the delivered elements.

 

Revenue fromlicensed software is recognized at the inception of the license term and inaccordance with Statement of Position 97-2, “Software Revenue Recognition”.  Revenue from software maintenance, unspecifiedupgrades and technical support contracts is recognized over the period suchitems are delivered or services are provided. Technical support contracts extending beyond the current period arerecorded as deferred revenue.

 

•                  We maintain an allowance for doubtful accounts for estimated lossesthat may arise if any of our customers are unable to make requiredpayments.  We consider the followingfactors when determining if collection is reasonably assured:  customer credit-worthiness, past transactionhistory with the customer, current economic industry trends and changes incustomer payment terms.  If we have noprevious experience with the customer, we typically obtain reports from creditorganizations to ensure that the customer has a history of paying itscreditors.  We may also request financialinformation, including financial statements, to ensure that the customer hasthe means of making payment.  If thesefactors indicate collection is not reasonably assured, revenue is deferreduntil collection 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 or an accrual for estimatedlosses on inventory purchase commitments based on our assessment of estimatedmarket value using assumptions about future demand and market conditions. Ourreserve requirements generally increase as our projected demand requirementsdecrease, due to market conditions, technological and product life cyclechanges and longer than previously expected usage periods.  If market conditions are worse than our projections,we may further writedown the value of our inventory or increase the accrual forestimated losses on inventory purchase commitments.

 

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

 

Theinitial goodwill impairment test was completed during the fourth quarter of 2003,which resulted in no impairment loss.  Weassessed the realizability of goodwill related to our reporting unit during thefourth quarter of each of 2004 and 2005 and determined that the fair valueexceeded the carrying amount of the 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 of the reporting unit goodwill with the carryingamount of the goodwill was not required.

 

•                  We evaluate our deferred income tax assets toassess whether their realization is more likely than not. If their realizationis not considered more likely than not, we provide for a valuation allowance.The ultimate realization of our deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which temporarydifferences become deductible. We consider projected future taxable income andtax planning strategies in making our assessment. If our assessment of ourability to realize our deferred tax assets changes, we may make an adjustmentto our deferred tax assets that would be charged to income.

 

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

 

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•                  Underlicense agreements, we are committed to royalty payments based on the sales ofproducts using certain technologies.  Werecognize royalty obligations as determinable in accordance with agreementterms.  Where agreements are notfinalized, we have recognized our current best estimate of the obligation inaccrued liabilities.  When the agreementsare finalized, the estimate will be revised accordingly.

 

•                  We recorded a lease provision during 2002 thathas been subsequently adjusted in the second and fourth quarters of 2005 as aresult of our estimate of the net present value of the future cash outflowsover the remaining lease period.  Theestimate was based on various assumptions, including the obtainable subleaserates and the time it will take to find a suitable tenant.  These assumptions are influenced by marketconditions and the availability of similar space nearby.  If market conditions change, we will adjustour provision.

 

•                  Weare engaged in certain 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.

 

**Liquidity and Capital Resources**

 

*OperatingActivities*

 

Cashused by operating activities was $17.2 million in 2005, compared to cashprovided by operating activities of $29.1 million in 2004.  The use of cash in operating activities in2005 primarily resulted from the loss for the year of $36.5 million as adjustedfor non-cash items, inventory levels and changes in other operating assets andliabilities of $19.3 million.  Our workingcapital decreased from December 31, 2004 as a result of the significantdecline in our business and the cash costs of the business restructuring.

 

*InvestingActivities*

 

Cash used by investingactivities was $50.0 million in 2005, compared to cash provided by investingactivities of $29.4 million in 2004.  Theuse of cash in investing activities during 2005 was due primarily to thepurchase, net of proceeds on maturity, of short-term investments of $24.7million and the purchase of long-term investments of $14.9 million.  Expenditures on intangible assets were $2.1million and on fixed assets were $8.3 million in 2005, compared to $2.1 millionand $7.1 million, respectively, in 2004. Expenditures on intangible assets were primarily for license fees andpatents while capital expenditures were primarily for research and developmentequipment, tooling, computer equipment and software.

 

We do not have any tradingactivities that involve any type of commodity contracts that are accounted forat fair value but for which a lack of market price quotations necessitate theuse of fair value estimation techniques.

 

*FinancingActivities*

 

Cash used by financingactivities was $0.1 million in 2005, compared to cash provided by financingactivities of $3.0 million in 2004.  Theuse of cash by financing activities in 2005 was for repayment of long-termliabilities, partially offset by proceeds on the exercise of stockoptions.  The source of cash in 2004 wasprimarily from the issuance of common shares upon the exercise of stockoptions, offset slightly by repayments of our long-term liabilities.

 

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

 

*CashRequirements*

 

Ournear-term cash requirements are primarily related to funding our operations,capital expenditures and other obligations discussed below.  In the near term, we expect that our cashflow from operations will be negative. The cash costs of the June 2005 business restructuring totaledapproximately $6.3 million, of which approximately $4.7million was paid during 2005.  Webelieve our cash, cash equivalents and short- and long-term investments of 

 

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

 

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

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

 

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

 

*Sourcesand Uses of Cash*

 

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

 

As has been the case in the past several years, ourbusiness continues to be driven predominantly by short lead time purchaseorders from channels and end customers rather than by long-term, large volumecommitments.   Our customers are typically under nocontractual obligation to purchase our products.  If they do not make such purchases, ourfuture operating cash flow will be negatively impacted.  We have a risk of impairment to our liquidityshould there be any significant interruption to our business operations.

 

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

 

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

•                  Accounts receivableamounted to $20.5 million at December 31, 2005, compared to $22.5 millionat  December 31, 2004.

•                  We have a $10.0 million unsecured revolving demand facility with aCanadian chartered bank that bears interest at prime.  At December 31, 2005, there were noborrowings under this facility.

 

**Market Risk Disclosure**

 

During the year ended December 31, 2005, 60% of ourrevenue was earned from United States-based customers. Our risk from currencyfluctuations between the Canadian and U.S. dollar is reduced by purchasinginventory, other costs of sales and many of our services in U.S. dollars.  We are exposed to foreign currencyfluctuations because a significant amount of our research and development,marketing, and administration costs are incurred in Canada. We monitor ourexposure to fluctuations between the Canadian and U.S. dollars. For the yearended December 31, 

 

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2005, we have recorded a foreign exchange loss ofapproximately $1.0 million.  As we haveavailable funds and very little debt, we have not been materially adverselyaffected by significant interest rate fluctuations.

 

With respect to operations inEurope and the Asia-Pacific region, we transact business in additional foreigncurrencies and the potential for currency fluctuations is increasing.  The risk associated with currencyfluctuations between the U.S. dollar and foreign currencies in Europe and theAsia-Pacific region has been minimal as such transactions have not beenmaterial to date.  As our businessexpands in Europe, we expect that we will be increasingly exposed to risksassociated with the Euro. To date we have not entered into any futurescontracts. To manage our foreign currency risks, we may enter into suchcontracts should we consider it to be advisable to reduce our exposure tofuture foreign exchange fluctuations.

 

Currently, we do not have any hedging activities orderivative instruments.

 

**Related Party Transactions**

 

During the year ended December 31, 2005, there wereno material related party transactions.

 

**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 contained in our fiscal 2005 Annual Report.  The unaudited consolidated statements ofoperations data presented below reflects all adjustments, consisting primarilyof normal recurring adjustments, which are, in the opinion of management,necessary for a fair presentation of results for the interim periods.  These operating results are not necessarilyindicative of results for any future period. You should not rely on them to predict our future performance.

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

 

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

 

Our quarterly results may fluctuate from quarter to quarter because ouroperating expenses are determined based on anticipated sales, are generallyfixed and are incurred throughout each fiscal quarter.  The impact of significant items incurredduring the first three interim periods of each fiscal year are discussed inmore detail and disclosed in our quarterly reports on Form 6-K.  Items affecting our quarterly results were asfollows:

 

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

 

•                  Restructuring andother charges of $18.2 million were incurred in the second quarter of2005.  Included in these charges are inventory writedowns, severance costs, impairment of fixed,intangible and deferred tax assets, provisions for facilities restructuring,commitments and other costs related to restructuring. We also recorded aprovision of $1.0 million for future legal costs associated with litigationmatters.

 

•                  Revenuesincreased during 2004 and 2003 as a result of the introduction of new products,our strong market position in CDMA EV-DO Release 0 PC cards and our CDMA 1Xembedded modules sales to palmOne.

 

•                  During the first quarterof 2004, we signed a second agreement with the Government of Canada’sTechnology Partnerships Canada (“TPC”) program. The agreement is effective for development work commencing April 2003.  Funding of $1.4 million was recognized as areduction to research and development expenses in the first quarter of 2004, ofwhich $1.1 million relates to the period from April 1, 2003 to December 31,2003.  Unless the second agreement is otherwise renegotiated,with thetermination of the Voq professional phone initiative in the second quarter of2005, no further TPC funding is anticipated.

 

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**Selected Annual Information**

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

 

 

**Forward-looking Statements**

 

This report contains forward-looking information. These statements arenot promises or guarantees but are only predictions that relate to futureevents or our future performance or state other forward-looking information andare subject to substantial risks and uncertainties that could cause our actualresults, performance or achievements to differ materially from those expressed,anticipated or implied by the forward-looking information.  These statements relate to, among otherthings, our revenue, earnings, plans, objectives and timing for theintroduction or enhancement of our services and products, statements concerningstrategies, developments, statements about future market conditions, supplyconditions, channel and end customer demand conditions, projected or futurerevenues, gross margins, operating expenses, profits and other statements ofexpectations, intentions, objectives and plans that are not statements ofhistorical facts.  When used in thisreport, the words “may”, “plan”, “expect”, “believe”, “intends”, “anticipates”,“estimates”, “predicts” and similar expressions generally identifyforward-looking information.  Forward-lookinginformation reflects our current expectations. The risk factors and uncertainties that may affect our actual results,performance or achievements are many and include, among others, our ability todevelop, manufacture, supply and market new products that we do not producetoday and that may not gain commercial acceptance, our reliance on thedeployment of next generation networks by major wireless operators, andincreased competition.  These riskfactors and others are discussed in our Annual Information Form which maybe found on SEDAR at www.sedar.com and in our other regulatory filings with theSecurities and Exchange Commission in the United States and the ProvincialSecurities Commissions in Canada.  Thesefactors should be reviewed carefully and you should not place undue reliance onany forward-looking information.  Unlessotherwise required by applicable securities laws, Sierra Wireless disclaims anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Risk Factors**

 

Our business is subject tosignificant risks and past performance is no guarantee of futureperformance.  Some of the risks we faceare:

 

**We have incurred net losses and if ourefforts to restore the business to profitability are not successful, we may berequired to further restructure or take other actions and our share price maydecline.**

 

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

 

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

 

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

 

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

 

•                  The timing of releases of ournew products;

 

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

 

•                  Design win cycles in ourembedded module business;

 

•                  The amount of inventory heldby our channel partners;

 

•                  Competition from other marketparticipants;

 

•                  Possible cyclical fluctuationsrelated to the evolution of wireless technologies;

 

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

 

•                  Concentration in our customerbase; and

 

•                  Possible delays or shortagesin component supplies.

 

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

 

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

 

In addition tobeing subject to litigation in the ordinary course of business, we arecurrently, and may in the future be, subject to class actions and othersecurities litigation and investigations. We expect that this type of litigation will be time consuming, expensiveand distracting from the conduct of our daily business.   It is possible that we will be required topay substantial judgments, settlements or other penalties and incur expensesthat could have a material adverse effect on our operating results, liquidityor financial position.  Expenses incurredin connection with these lawsuits, which include substantial fees of lawyersand other 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 lawsuits may cause ourinsurance premiums to increase in future periods.

 

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

 

The wireless industry is intensely competitive and subject to rapidtechnological change. We expect competition to intensify. More established andlarger companies with greater financial, technical and marketing resources sellproducts that compete with ours.  We alsomay introduce new products that will put us in direct competition with majornew competitors.  Existing or futurecompetitors may be able to respond more quickly to technological developmentsand changes or may independently develop and patent technologies and productsthat are superior to ours or achieve greater acceptance due to factors such asmore favorable pricing or more efficient sales channels. If we are unable tocompete effectively with our competitors’ pricing strategies, technologicaladvances and other initiatives, our market share and revenues may bereduced.  As an example, during the firstquarter of 2005, one of the factors that caused a significant decline in CDMAEV-DO PC card revenue was increased competition and loss of market share.

 

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

 

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

 

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

 

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

 

•    Ourability to attract and retain skilled technical employees;

 

•    Theavailability of critical components from third parties;

 

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

 

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

 

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

 

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

 

We depend on a small number of customers for a significant portion of ourrevenues.  In the last three fiscalyears, there have been five different customers that individually accounted formore than 10% of our revenues.  In theyear ended December 31, 2005, two customers individually accounted formore than 10% of our revenue and in the aggregate these two customers represented 36% of our revenue. If any of these customers reduce their business with us or suffer frombusiness failure, our revenues and profitability could decline, perhapsmaterially.

 

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

 

We develop products to meet our customers’ requirementsbut, particularly with original equipment manufacturers, current design wins donot guarantee future design wins.  If weare unable or choose not to 

 

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

 

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

 

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

 

•    Theabsence of guaranteed manufacturing capacity;

 

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

 

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

 

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

 

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

 

None of ourexecutive officers or other key employees has entered into a fixed-termemployment agreement.  Our successdepends in large part on the abilities and experience of our executive officersand other key employees.  Competition forhighly skilled management, technical, research and development and other keyemployees is intense in the wireless communications industry.  We may not be able to retain our currentexecutive officers or key employees and may not be able to hire and transitionin a timely manner experienced and highly qualified additional executiveofficers and key employees as needed to achieve our business objectives.  The loss of executive officers and keyemployees could disrupt our operations and our ability to compete effectivelycould be adversely affected.

 

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

 

The wireless industry is characterized by rapid technologicalchange.  Our success will depend in parton our ability to develop products that keep pace with the continuing changesin technology, evolving industry standards and changing customer and end-userpreferences and requirements. Our products embody complex technology that maynot meet those standards, changes and preferences. In addition, wirelesscommunications service providers require that wireless data systems deployed ontheir networks comply with their own standards, which may differ from thestandards of other providers. We may be unable to successfully address thesedevelopments in a timely basis or at all. Our failure to respond quickly andcost-effectively to new developments through the development of new products orenhancements to existing products could cause us to be unable to recoversignificant research and development expenses and reduce our revenues.

 

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

 

Our products can only be used over wireless data and voice networksoperated by third parties.  In addition,our future growth depends, in part, on the successful deployment of nextgeneration wireless data and voice networks by third parties for which we aredeveloping products.  If these networkoperators cease to offer 

 

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

 

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

 

As part of our business strategy, we may acquireadditional assets and businesses principally relating to or complementary toour current operations.  Any acquisitionsand/or mergers by us will be accompanied by the risks commonly encountered inacquisitions of companies.  These risksinclude, among other things:

 

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

 

•    Higherthan anticipated acquisition and integration costs and expenses;

 

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

 

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

 

•    Disruptionof our ongoing business;

 

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

 

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

 

•    The inabilityto implement uniform standards, controls, procedures and policies;

 

•    The lossof key employees and customers as a result of changes in management;

 

•                  The incurrence of amortization expenses; and

 

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

 

In addition,geographic distances may make integration of businesses more difficult.  We may not be successful in overcoming theserisks or any other problems encountered in connection with anyacquisitions.  If realized, these riskscould reduce shareholder value.

 

**We may infringe the intellectual property rightsof others.**

 

The industry in which we operate has many participants that own, or claimto own, proprietary intellectual property. In the past we have received, and in the future may receive, claims fromthird parties alleging that we, and possibly our customers, violate theirintellectual property rights. Rights to intellectual property can be difficultto verify and litigation may be necessary to establish whether or not we haveinfringed the intellectual property rights of others.  In many cases, these third parties arecompanies with substantially greater resources than us, and they may be ableto, and may choose to, pursue complex litigation to a greater degree than wecould.  Regardless of whether these infringementclaims have merit or not, we may be subject to the following:

 

•    Wemay be liable for potentially substantial damages, liabilities and litigationcosts, including attorneys’ fees;

 

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

 

•    Wemay have to license the third party intellectual property, incurring royaltyfees that may or may not be on commercially reasonable terms.  In addition, there is no assurance that wewill be able to successfully negotiate and obtain such a license from the thirdparty;

 

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•    We may have to develop anon-infringing alternative, which could be costly and delay or result in theloss of sales.  In addition, there is no assurance that we will be able to develop such anon-infringing alternative;

 

•    Thediversion of management’s attention and resources;

 

•    Ourrelationships with customers may be adversely affected; and

 

•    Wemay be required to indemnify our customers for certain costs and damages theyincur in such a claim.

 

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

 

Absent a specific claim for infringement of intellectual property, fromtime to time we have and expect to continue to license technology, intellectualproperty and software from third parties. There is no assurance that we will be able to maintain our third partylicenses or obtain new licenses when required and this inability couldmaterially adversely affect our business and operating results and the qualityand functionality of our products.  Inaddition, there is no assurance that third party licenses we execute will be oncommercially 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.

 

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

 

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

 

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

 

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

 

•    Undetectedmisappropriation of our intellectual property;

 

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

 

•    Developmentof similar technologies by our competitors.

 

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

 

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

 

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

 

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

 

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

 

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

 

•    Language barriers; and

 

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•    Potential adverse tax consequences.

 

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

 

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

 

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

 

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

 

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

 

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