20-20 Technologies Inc.
TSX : TWT

20-20 Technologies Inc.

January 26, 2007 06:00 ET

20-20 Technologies Inc. Reports Record Fourth Quarter and Full-Year Results for Fiscal 2006

LAVAL, QUEBEC--(CCNMatthews - Jan. 26, 2007) - 20-20 Technologies Inc. (TSX:TWT), the world leader in 3D interior design and furniture manufacturing software, today announced quarterly and fiscal year-end results for the period ending October 31, 2006. All amounts are in U.S. dollars unless otherwise indicated.

Fiscal 2006 Highlights

- Revenues increased 49.4% to $60.5 million

- Operating income advanced 6.0% to $6.3 million

- Net earnings gained 37.7% to $5.9 million

- EPS rose to $0.31 from $0.24 in 2005

- Net cash position $34.7 million at fiscal year end

In 2006, 20-20 undertook to accomplish well defined objectives of consolidating its North American market and further expanding its business in Europe and emerging markets. Jean Mignault, CEO of 20-20, noted that "beyond our growth by acquisition, we continued to deliver organic growth, 13.0% in 2006, during which we extended and reinforced our position worldwide as the software provider of choice to every link in the chain of the interior design industry."

Jean-Francois Grou, President and COO of 20-20 added that "We continue to integrate the companies and technologies we acquired over the last 18 months and are harmonizing our product portfolio to enhance the seamless application of our unique end-to-end solution."

20-20 now commands a unique selling proposition that should ensure our continued dominance in the North American marketplace, cement our position as the largest international provider of interior design software accelerating global acceptance of our technology as the clear industry standard.

20-20's potential on the manufacturing side of the interior design industry has hardly been tapped. Following the acquisition of three companies, MBI, VSI and PSI, all leading providers of manufacturing solutions, there is significant potential for the Company on the factory floor in the context of its end-to-end solution. 20-20 can now leverage its entrenched market position to connect the manufacturers to compatible 20-20 point of sales software.

Revenues

Revenues for the 12 months ended October 31, 2006 totalled $60.5 million, a 49.4% increase from fiscal 2005. On an organic basis, excluding revenues from acquisitions, revenues grew by 13.0% during fiscal 2006.

License revenue for fiscal 2006 increased 32.6% to $24.3 million. Maintenance and other recurring revenues grew by 53.6% to $24.2 million, while professional services increased 87.1% to $11.9 million.

For the fourth quarter of fiscal 2006, revenues advanced 60.6% over the same period in fiscal 2005 to $17.4 million. On an organic basis, excluding revenues from acquisitions, revenues grew by 26.7% during the quarter.

License revenue for the fourth quarter gained 52.8% to $7.3 million, while maintenance and other recurring revenues grew by 56.2% to $6.5 million and revenue from professional services increased by 90.0% to $3.6 million for the three months ended October 31, 2006.

Operating Income

Operating income for fiscal 2006 increased 6.0% to $6.3 million. The total represented 10.4% of revenues, versus 14.7% in fiscal 2005. For the fourth quarter, operating income increased 195.1% to $3.1 million. The quarterly total represented 17.9% of revenues, compared to 9.7% in the same period last year.

Net earnings

Net earnings for fiscal 2006 totalled $5.9 million, an increase of 37.7% over last year. On a per-share basis, net earnings were $0.31 per share, up from $0.24 per share in fiscal 2005, on a fully diluted basis for both periods. For the fourth quarter, the total increased 159.4% to $2.7 million. That equated to $0.14 per share in the fourth quarter of fiscal 2006, versus $0.05 per share in the same period last year, also on a fully diluted basis for both periods.

Conference Call Information

20-20 will host a conference call to discuss results today, January 26, 2007 at 10 a.m. (ET). The call will be available by telephone at 514-940-2795 and 1-866-250-4910. An audio recording will be archived until midnight on Monday, March 26, 2007, and can be accessed by dialing 416-640-1917 or 1-877-289-0825 and entering pass code 21216942#.

About 20-20 Technologies Inc.

20-20 Technologies is the world's leading provider of computer-aided design, sales software and manufacturing solutions tailored for the interior design and furniture industry. 20-20 offers a proprietary end-to-end solution, integrating the entire sales, supply chain and manufacturing processes. The Company offers dealers and retailers state-of-the-art design, specification, photo-realistic 3D rendering and management software for configurable and standalone products in the residential and commercial interior design markets. 20-20's manufacturing solutions include enterprise resource planning systems, as well as computer-aided engineering, manufacturing and shop floor automation software. 20-20's software is available in more than 20 languages and is sold in more than 100 countries worldwide. 20-20 is a publicly traded company (TWT) on the Toronto Stock Exchange (TSX). For more information, visit www.2020technologies.com.

Forward-Looking Statements

Certain statements contained in this news release constitute forward-looking information within the meaning of securities laws.

Implicit in this information, particularly in respect of future operating results and economic performance of the Company are assumptions regarding projected revenue and expenses. These assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company are subject to a number of risks and uncertainties, including general economic, market and business conditions and could differ materially from what is currently expected.

For more exhaustive information on these risks and uncertainties you should refer to our most recently filed annual information form which is available at www.sedar.com. Forward-looking information contained in this report is based on management's current estimates, expectations and projections, which management believes are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time unless required by applicable securities law.

The selected consolidated financial information set out below for the years ended October 31, 2006 and 2005 has been derived from our audited consolidated financial statements. The following information should be read in conjunction with our audited financial statements and notes related thereto available on www.sedar.com.



Consolidated Statement of Earnings Data:
(In thousands of U.S. dollars, except share and per-share data)
---------------------------------------------------------------------------
Three months ended Year ended
October 31, October 31,
---------------------------------------------------------------------------
2006 2005(1) 2006 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited) (Unaudited)
$ $ $ $

Revenues
License sales 7,335 4,799 24,310 18,334
Maintenance and other
recurring revenues 6,522 4,175 24,224 15,767
Professional services 3,564 1,876 11,927 6,374
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17,421 10,850 60,461 40,475
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Cost of revenues
License sales 903 373 2,365 1,183
Maintenance and services 3,571 1,869 12,330 6,809
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4,474 2,242 14,695 7,992
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Gross margin 12,947 8,608 45,766 32,483
Gross margin % 74.3% 79.3% 75.7% 80.3%
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Operating expenses
Sales and marketing 4,379 3,662 18,686 13,480
Research and development 2,270 1,218 7,378 4,796
General and administrative 3,058 2,566 12,991 7,936
Stock-based compensation
expense 125 107 416 334
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9,832 7,553 39,471 26,546
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Operating income 3,115 1,055 6,295 5,937
Operating margin % 17.9% 9.7% 10.4% 14.7%

Financial income 368 115 1,160 140
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Earnings before income taxes 3,483 1,170 7,455 6,077
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Income taxes
Current 411 (126) 579 943
Future 400 266 1,007 872
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811 140 1,586 1,815
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Net earnings 2,672 1,030 5,869 4,262

Earnings per share
Basic 0.14 0.05 0.31 0.24
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Diluted 0.14 0.05 0.31 0.24
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(1) During the fourth quarter of the year ended October 31, 2005, an amount
of new product development was capitalized relating to work performed
over the twelve months then ended that met Canadian GAAP capitalization
criteria, but for which no capitalization had been recorded in the
first nine months of fiscal 2005 amounting to approximately $590,000,
net of amortization expense of $81,000 respectively. The figures for
the fourth quarter ended October 31, 2005 have been adjusted for this
amount resulting in a decrease in net earnings of $385,000 to
$1,030,000, including the related adjustment to income taxes of
$204,000.



CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
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October 31, October 31,
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
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$ $

ASSETS
Current assets
Cash and cash equivalents 5,337 5,534
Short term investments 29,937 35,967
Accounts receivable 13,908 8,134
Contracts in progress 556 350
Prepaid expenses 1,229 773
Future income taxes 873 1,640
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51,840 52,398
Property and equipment 3,731 2,924
Intangibles 3,384 878
Development costs 11,599 6,217
Other 1,454 1,237
Goodwill 24,157 15,256
Future income taxes 414 54
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96,579 78,964
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LIABILITIES
Current liabilities
Accounts payable 8,625 6,731
Income taxes payable 1,853 1,014
Deferred revenue 12,672 8,945
Deferred credit 1,037 1,902
Long-term debt 53 238
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24,240 18,830
Long-term debt 568 1,166
Leasehold inducements 308 239
Future income taxes 3,375 -
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28,491 20,235
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SHAREHOLDERS' EQUITY
Capital stock 57,886 57,608
Common stock options 1,847 1,763
Contributed surplus 966 920
Retained earnings (deficit) 896 (4,973)
Cumulative translation adjustment 6,493 3,411
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68,088 58,729
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96,579 78,964
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CONSOLIDATED CASH FLOWS
(Amounts in thousands of U.S. dollars)
---------------------------------------------------------------------------
Three months ended Year ended
---------------------------------------------------------------------------
October 31 October 31
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited) (Unaudited)
$ $ $ $

OPERATING ACTIVITIES
Net earnings 2,672 1,030 5,869 4,262
Non-cash items
Amortization 1,623 1,066 5,537 3,437
Capitalized interest on
convertible debentures - - - 125
Leasehold inducements 8 66 57 95
Stock-based compensation 125 107 416 334
Gain on long-term debt
forgiveness - (102) - (314)
Future income taxes 400 266 1,007 872
Changes in working
capital items (2,452) 924 (2,697) (396)
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Cash flows from
operating activities 2,376 3,357 10,189 8,415
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INVESTING ACTIVITIES
Business acquisitions - (501) (9,294) (663)
Short term investments (20,242) (14,735) 7,821 (31,179)
Property and equipment (301) (253) (1,639) (1,390)
Development costs - acquired (34) (898) (473) (1,473)
Development costs - internal (1,233) (745) (5,875) (3,176)
Other assets (52) (396) (402) (528)
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Cash flows from investing
activities (21,862) (17,528) (9,862) (38,409)
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FINANCING ACTIVITIES
Bank indebtedness - - (59) -
Long-term debt - - 10 32
Repayment of long-term debt (68) (679) (603) (859)
Share issue costs - 62 - (2,681)
Options exercised 2 12 72 199
Share issue - - - 35,503
Redemption of Class "D"
preferred shares - - - (904)
Dividends of Class "D"
preferred shares - - - (17)
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Cash flows from financing
activities (66) (605) (580) 31,273
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Effect of changes in
exchange rate on cash held
in foreign currencies (140) 411 56 386
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Net increase ( decrease)
in cash and cash
equivalents (19,692) (14,365) (197) 1,665
Cash and cash equivalents,
beginning of period 25,029 19,899 5,534 3,869
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Cash and cash equivalents,
end of period 5,337 5,534 5,337 5,534
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MANAGEMENT'S DISCUSSION AND ANALYSIS

(For the year ended October 31, 2006)

The following report, dated January 16, 2007, is a discussion relating to the financial results and condition of 20-20 Technologies Inc. ("20-20" or the "Company") for the years ended October 31, 2006 and 2005. The discussion should be read in conjunction with the selected consolidated financial information shown in this report and with our audited consolidated financial statements and the accompanying notes thereto. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) and are presented in U.S. dollars as a significant proportion of the Company's revenues are recorded in U.S. dollars. The Company's financial statements result from having been translated from the currency of measurement, the Canadian dollar, to the U.S. dollar using the current rate method. Additional information relating to 20-20, including the Company's Annual Information Form, Annual Report and, interim financial statements and related management reports for the year ended October 31, 2006, can be obtained on SEDAR at www.sedar.com as well as on the Company's web site at www.2020technologies.com in the Investor Relations section. Information contained in this report is qualified by reference to the discussion concerning forward-looking statements detailed below.

Unless otherwise noted or the context otherwise indicates, "20-20", the "Company", "we", "us" and "our" refers to 20-20 Technologies Inc. and its direct and indirect subsidiaries. Unless otherwise indicated, all dollar amounts in this report are expressed in U.S. dollars. References to "$" or "U.S." are to U.S. dollars and references to "C$" are to Canadian dollars. Disclosure of information in this report has been limited to that which management has determined to be "material", on the basis that omitting or misstating such information would influence or change a reasonable investor's decision to purchase, hold or dispose of securities in the Company.

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The Consolidated Financial Statements and Management discussion and analysis ("MD&A") of 20-20 Technologies Inc. (the "Company") and all other information in this Annual Report are the responsibility of Management and have been reviewed and approved by its Board of Directors.

The Consolidated Financial Statements have been prepared by Management in accordance with Canadian generally accepted accounting principles. The MD&A has been prepared in accordance with the requirements of securities regulators. The financial statements and MD&A include items that are based on best estimates and judgments of the expected effects of current events and transactions. Management has determined such items on a reasonable basis in order to ensure that the financial statements and MD&A are presented fairly in all material respects. Financial information presented elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements.

The Company's Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures, or have caused them to be designed under their supervision, to provide reasonable assurance that material information related to the Corporation has been made known to them and has been properly disclosed in the Consolidated Financial Statements and MD&A. The Company's Chief Executive Officer and Chief Financial Officer have also evaluated the effectiveness of such disclosure controls and procedures as of the end of fiscal year 2006. As at year end, Management believes that the disclosure controls and procedures effectively provide reasonable assurance that material information related to the Corporation has been disclosed in the Consolidated Financial Statements and MD&A. In compliance with Multilateral Instrument 52-109, the Company's Chief Executive Officer and Chief Financial Officer have provided to the Canadian Securities Administrators a certification related to the Company's annual disclosure documents, including the Consolidated Financial Statements and MD&A.

The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the Consolidated Financial Statements and MD&A. The Board of Directors carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board of Directors and is comprised entirely of independent and financially literate directors. The Audit Committee meets periodically with Management, as well as with the external auditors, to review the Consolidated Financial Statements, the MD&A, auditing matters and financial reporting issues, to discuss internal controls over the financial reporting process, and to satisfy it that each party is properly discharging its responsibilities. In addition, the Audit Committee has the duty to review the appropriateness of the accounting policies and significant estimates and judgments underlying the Consolidated Financial Statements as presented by Management, and to review and make recommendations to the Board of Directors with respect to the fees of the external auditors. The Audit Committee reports its findings to the Board of Directors for its consideration when it approves the Consolidated Financial Statements and MD&A for issuance to shareholders.

Raymond Chabot Grant Thornton LLP, external auditors designated by the shareholders, meets regularly with the Audit Committee to discuss audit activities, financial reporting matters and other related subjects.

This report and our audited consolidated financial statements were reviewed by the Company's Audit Committee on January 16, 2007 and approved by 20-20's Board of Directors on January 25, 2007.

Forward-looking Statements

Certain statements contained in this report constitute forward-looking information within the meaning of securities laws.

Implicit in this information, particularly in respect of future operating results and economic performance of the Company are assumptions regarding projected revenues and expenses. These assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company are subject to a number of risks and uncertainties, including general economic, market and business conditions and could differ materially from what is currently expected.

For more exhaustive information on these risks and uncertainties you should refer to our most recently filed Annual Information Form which is available at www.sedar.com. Forward-looking information contained in this report is based on management's current estimates, expectations and projections, which Management believes are reasonable as of the current date. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While the Company may elect to, it is under no obligation and does not undertake to update this information at any particular time, unless required by applicable securities law. In addition to presenting an analysis of results for the fiscal years ended October 31, 2006 and 2005, this report also discusses certain important elements that occurred between such date and January 16, 2007.

1. Business Summary

Founded in 1987, 20-20 is the world's leading provider of computer-aided design, sales and manufacturing software tailored for the interior design industry, offering dealers and retailers state-of-the-art design, specification, photo-realistic 3-D rendering and management software for configurable and standalone products in the residential, commercial and recreational interior design markets. The Company's proprietary end-to-end solution integrates the entire design, sales, supply chain and manufacturing processes of the industry, including an integration platform between sales and manufacturing, and computer-aided engineering and shop floor automation software tailored to the kitchen, bath and furniture industry's manufacturers. Moreover, we create, maintain, publish and update electronic catalogs with detailed 3-D graphics, product specifications and finishes, pricing information and product reference numbers for configurable products on behalf of our manufacturing customers. 20-20 has over 1,500 electronic catalogs in its catalog library.

20-20 solutions are available across both desktop and web environments. Its products and services are marketed and sold worldwide through a corporate sales and marketing team complemented by a network of consultants in North America and distributors located in the rest of the world. 20-20 is the largest international provider of software focused exclusively on the interior design industry with a direct presence in the fast-growing Asia-Pacific and Latin American markets. The Company's position in the interior design markets is built on a stable worldwide customer base with licenses sold in more than 100 countries.

20-20 derives revenue and growth from three sources. Revenues from License sales are predominantly derived from licensing of the Company's desktop and client-server enterprise software as described above. Each software license, for which users pay a one-time fee, is typically perpetual in nature. Each license is typically intended for use by a single user and is non-transferable. In fiscal 2006, revenues of this type amounted to $24.3 million, or 40.2% of total revenues. Our revenues from maintenance and other recurring revenues are derived from providing customer support, software and electronic catalog updates, web services, and from annual software usage fees. Typical maintenance and other recurring service agreements have a twelve-month term and are renewable at the option of the customer. In fiscal 2006, revenues of recurring nature amounted to $24.2 million, or 40.1% of total revenues. Finally, our revenues from professional services include revenues derived from training, electronic catalog creation and maintenance, and integration services, such as consulting and application customization, as well as a small portion related to hardware resale. These revenues amounted to $11.9 million, or 19.7% of total revenues during the past fiscal year.

The Company's operating income is derived after considering both cost of revenues and operating expenses, explained as follows:

Cost of revenues from license sales primarily consists of: (i) the costs of the actual software product media including duplication, manuals and inserts, and packaging; (ii) the cost of resale of third-party software; and (iii) royalties payable on certain license sales to third parties whose technology is embedded into 20-20 software. Cost of revenues from maintenance and professional services primarily consists of costs relating to personnel and other related costs incurred in providing customer support, software updates (other than research and development expenses), electronic catalog creation, updates and maintenance, web services, training, integration and hardware.

Operating expenses include: (i) Sales and marketing expenses, which primarily consist of costs relating to personnel and to sales and marketing activities, including the salaries and commissions paid to our sales force and fees paid to our industry consultants, shipping, advertising, telemarketing, trade shows and other promotional activities and materials; (ii) Research and development expenses (including the amortization of capitalized research and development expenses) primarily consist of costs relating to personnel for the development of new products, the enhancement of existing products, quality assurance activities and software development tools and equipment. Research and development expenses are shown net of applicable tax credits; (iii) General and administrative expenses primarily consist of costs relating to administrative, information technology and finance functions, legal and professional fees, insurance and other corporate and overhead expenses, and; (iv) Stock-based compensation expense consists of the cost of stock-based awards to employees expensed on a straight-line basis over the options' vesting period and the cost associated with the deferred share units issued quarterly to the Company's Directors.

2. Year in Review

Management is focused on deriving synergies at all levels of the organization, following the integration of the businesses acquired over the last twelve months. Fiscal 2006 has proven to be a pivotal year in the alignment of the Company in terms of its market positioning, product and services offering and, its resulting growth potential. Celebrating its first anniversary as a public company in December 2005, 20-20 has over the course of this past fiscal year, continued to deliver on a number of key strategic initiatives and objectives set out in the intended use of proceeds from its IPO.

Fiscal 2006 saw the Company's revenues grow by 49.4% through a combination of both solid organic growth and acquisition, reaching $60.5 million for the twelve-month period ended October 31, 2006 and net earnings that amounted to $5.9 million, or 9.7% of total revenues for the period. This compares to $40.5 million in revenues and $4.3 million in net earnings, or 10.5% of total revenues for the comparable twelve month period in 2005. The performance recorded in fiscal 2006 is principally attributable to revenues contributed by our acquisitions totaling $14.7 million in fiscal 2006 compared to $0.5 million in 2005. The increase was also fueled by the continued strength in sales volumes to customers in both the residential and commercial markets of the industry.

Sales of the Company's 20-20 Design software to dealers and retailers in the residential market continued to grow during fiscal 2006 on the back of continued strength of the retail renovation market in North America. License sales to customers in the commercial (office) market also showed growth over 2005. We continue to deploy business development and marketing efforts to demonstrate the value and merits of our systems to office furniture dealers and are investing in integrating all our software solutions and catalog tools for the commercial market to further leverage our catalog library, which was recently enhanced by the acquisition of Data One and its catalog creation tool.

The number of housing-starts has little effect on 20-20's business. The largest part of our sales volume relates to bath, kitchen and other in-home renovation projects, transacted by individual home owners through retail centers and other dealers. We have found that when housing starts go down, the number of home renovation projects actually goes up.

The improvement in overall license sales activity during fiscal 2006, reaching $24.3 million, contributed in turn to an increase in professional services revenue and, together with the $18.3 million of revenues from license sales recorded in fiscal 2005, contributed to maintenance and other recurring revenues climbing to $24.2 million for the twelve months ended October 31, 2006.

The Company has and continues to complete strategic acquisitions of both highly complementary businesses and technologies. During the twelve months ended October 31, 2006, the Company completed key acquisitions representing a total of approximately $9.5 million in acquisition considerations. Transaction rationales for these key acquisitions and considerations in relation to such (including net debt assumed and capitalized transaction costs but excluding conditional future considerations and royalties) can be summarized as follows:

Data One, Inc.:

($1,249,000 - before acquisition costs)

Based in Indianapolis, Data One is a software developer of layout, specification, and catalog creation software for office furniture and case goods dealers and manufacturers (1,500 active customers) with minimal overlap to the Company's existing business. The acquisition consolidates the Company's market position within design centers and office manufacturers and will be instrumental in allowing 20-20 to further sales automation for the office furniture market - effective December 1, 2005.

MBI Software Company GmbH:

($3,167,000 - before acquisition costs)

Acquisition of all the assets, business and software solutions of the leading Germany-based software company involved in the development, sale and implementation of large-scale ERP solutions, supplemented by workflow management and business intelligence applications, specifically tailored for manufacturers of case goods and kitchen cabinets as well as office and other residential furniture. MBI has a large installed base of top-tier manufacturers in Europe and North America and has offices in Osnabrueck (Germany), Toronto (Canada) and Vienna (Austria). Complementing 20-20's own solution offering to manufacturers, the MBI transaction allows the Company to gain access to product data for the furniture industry in Germany and complements 20-20's offering of an end-to-end solution for the various manufacturing segments in relation to the residential and commercial interior design market worldwide, while gaining a significant presence in Germany and Eastern Europe - completed December 1, 2005.

Virtual Systems International, Inc.:

($5,125,000 - before acquisition costs)

Virtual Systems is a North Carolina-based software company involved in the development, sale and integration of manufacturing solutions for medium to large North American woodworking manufacturing operations which can be seamlessly integrated with various horizontal ERP platforms. Virtual Systems offers further potential for operational synergies once combined with that of MBI and 20-20. This transaction represents a further step in establishing the Company as the world leading vertically -integrated ERP, engineering and manufacturing solutions provider in its addressable markets --completed on February 9, 2006.

Shanghai Rena and DesignTec Co. Ltd.

The Company entered into an agreement to purchase all of the assets of Shanghai Rena (China) and DesignTec Co. Ltd. (Taiwan), in December 2005. The transactions have yet to close as the Company is currently in the process of completing the legal requirements in order to comply with Chinese legislation, thereby permitting a wholly foreign-owned Chinese entity ("WOFE") to conduct business in China. During the process, the Company amended its approach to move toward creating a WOFE that would permit the Company to conduct "manufacturing" activities such as catalog creation and integration services. This amendment resulted in additional delays in the process.

Since October 31, 2006, the Company has also completed the following acquisition:

Pattern Systems International, Inc.

($ 775,000 - before acquisition costs)

On January 8, 2007, the Company acquired the assets and business of Pattern Systems International, Inc. of Mount Arlington, New Jersey ("PSI") for a total consideration of $775,000 (before acquisition fees), paid in cash. PSI has also been mandated to develop additional software components for the Company which, if completed and accepted by the Company, will result in additional consideration paid in cash to PSI, not to exceed $225,000. PSI develops computer software products for distribution through dealers and sales representatives, with some direct sales, mainly for the cabinetmaker, architectural millwork and woodworking industry. The Company also offers customer support, maintenance on its products and provides training and catalog development.

These acquisitions are further explained in section 5 of this report and in Notes 8 and 23 to the audited consolidated financial statements.

Amortization of Acquired Intangibles

The Company's recent acquisitions have resulted in the addition of intangible assets to the Consolidated Balance Sheet that is being amortized over periods ranging from 3 to 15 years. These intangible assets consist of acquired development costs (software), client lists, trade names and a non-compete agreement. The amortization related to these intangible assets amounted to $1,214,000 for fiscal 2006 compared to $185,000 for fiscal 2005.

Recent acquisitions mentioned in section 2 above have contributed 24.3% of revenues for the 2006 fiscal year. The revenue mix for these acquisitions, largely due to MBI and to a lesser extent, VSI, is different from that of 20-20 excluding acquisitions. This difference has had a significant impact on the consolidated gross margin of the group from 80.3% in 2005 to 75.7% in 2006. For year ended October 31, 2006, revenues were as follows:



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Excluding
Acquisitions Acquisitions Total
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% % %
Revenues
License sales 23.5 45.6 40.2
Maintenance and other recurring
revenues 39.2 40.3 40.1
Professional services 37.3 14.1 19.7
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100.0 100.0 100.0

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Gross margin (%) 61.6 80.2 75.7
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If we exclude the effect of the recent acquisitions, gross margins remained essentially unchanged at 80.2% in fiscal 2006 from 80.3% in fiscal 2005.

However, as a percentage of revenues, operating expenses incurred by acquisitions, including the related amortization of intangible assets and development costs resulting from the purchase accounting of these acquisitions, are lower than those of 20-20 excluding acquisitions. For fiscal 2006, acquisition operating expenses amounted to 62.1% of revenue while expenses excluding acquisitions totalled 66.3%.

MBI revenues recorded during fiscal 2006 were significantly weighted to maintenance and integration services revenue, with a smaller contribution from higher-margin license sales revenues. This situation was anticipated following the acquisition, as 20-20 repositioned the business of MBI following its financial difficulties in mid-2005, by first securing follow-on services revenues from existing MBI customers which had temporarily postponed their investments, waiting for a definitive resolution to MBI's financial difficulties. Since the acquisition date, license sales have begun to increase as clients gain confidence in the future prospects of MBI. As these higher margin license sales increase, we should begin to see the related improvement in gross margin from this acquisition.

Following the launch of new products this year and our software integration and localization efforts accomplished to date, our focus in product management and marketing is on introducing these products in other geographical markets where we are already active and also expand our activities into adjacent markets in order to increase our licenses sales. This will not only contribute to our organic growth but also progressively improve our gross margins over the coming quarters.

Research and Development

We continue to focus in the coming quarters on integrating solutions acquired over the past fifteen months in order to deliver an industry-specific and fully-integrated solutions offering for all participants in the interior design market - from sales, design, and product configuration software, to ERP and manufacturing execution systems. In essence, 20-20 will continue to reinforce its position as the world leading provider of an end-to-end solution that effectively integrates all of the interior design industry's critical business processes. This will namely be done by maintaining and leveraging a unique comprehensive foundation of industry data that will be used seamlessly across all of 20-20's tools and solutions. Management believes this strategy will allow the Company to increasingly offer its customers the ability to produce and deliver customized products on an industrial scale, which is rapidly becoming vital for those participants wishing to remain competitive and profitable in today's operating environment. As a result of these efforts, the Company continues to maintain additional resources on research and development work, advancing the integration of Company-wide products and data.

It is expected that the first half of fiscal 2006 represented the peak in terms of percentage of revenue for gross R&D expenditure for the Company. As projects approach completion, the amount invested in capitalized development costs will decline as a proportion of the total expenditure while the amortization of development costs will be increasing in the near term.



R&D Expenses and Development Costs
(Amounts in thousands of U.S. dollars)
-----------------------------------------------------------------
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Years ended October 31,
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2006 2005
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$ $

Research and Development
Gross Expenditure 11,144 6,852
Less: tax credits (1) (253) (512)
--------------
10,891 6,340
--------------
--------------
Capitalized cost 7,145 4,072
Development costs acquired 473 1,473
Tax credits (1,270) (896)
--------------
Per cash flow statement 6,348 4,649
--------------
--------------

Gross Expenditure 11,144 6,852
Less: Expenses capitalized 7,145 4,072
--------------
As per note 4 to the Financial Statements 3,999 2,780

Less: Tax Credits (253) (512)
Amortization - Development costs internal 2,757 2,308
Amortization - Development costs acquired 875 220
--------------
Per earnings statement 7,378 4,796
--------------
--------------
Investment tax credits
Credited to Earnings (1) 253 512
Reducing Capitalization 1270 896
--------------
1,523 1,408
-----------------------------------------------------------------
-----------------------------------------------------------------
(1) The Company's investment tax credit claims previously submitted
for the fiscal years ended October 31, 2001 and 2002 were reviewed
by the tax authorities resulting in the Company recording an amount
of $388,000 in credits, previously unclaimed for such years, in its
statement of earnings for the year ended October 31, 2005 and $110,000
for the year ended October 31, 2006.


Currency Exchange Risk

The Company's currency of measure is the Canadian dollar. However, financial statements are presented in U.S. dollars. With the recent decline in value of the U.S. dollar versus most major currencies, the company's operating results have been affected, particularly in cases where the expenditure is in a currency other than the U.S. dollar. The most significant impact is due to expenses incurred in Canadian dollars, given that most North American sales are in U.S. dollars. With respect to other currencies such as the Euro and the British Pound, however, we have a natural hedge since revenues and expenses are incurred in the same currency.

The Company incurred cost in Canadian dollars of approximately C$23.5 million for the year. In fiscal 2006, the average Canadian dollar exchange rate was $0.8853 compared to $0.8212 in fiscal 2005. This 7.8% increase in value resulted in an increase of $1.3 million in expenses and a corresponding decrease in operating income simply due to the exchange rate variation.

The Company enters into forward exchange contracts as described in Note 20 to our 2006 Consolidated Audited Annual Financial Statements in order to improve predictability in the short term with respect to the impact of the variations in exchange rates between the Canadian and U.S. dollars. Losses resulting from these contracts amounting to $304,000 for the year ended October 31, 2006 compared to $279,000 in 2005, are recorded in the "Financial Income" line of our Consolidated Earnings Statement.

3. Performance Overview

Revenues for fiscal 2006 amounted to $60.5 million, representing a $20 million, or 49.4% increase over what had been recorded in the same period in the preceding fiscal year. The increase in revenues is attributable to revenues amounting to $14.7 million generated by businesses recently acquired including that of CMS (effective September 1, 2005), MBI (effective December 1, 2005), Data One (effective December 1, 2005) and VSI (effective February 1, 2006).

On an organic basis, excluding revenues from acquisitions over the last 12 months, revenues grew by 13.0% for the year ended October 31, 2006 over the comparable period in 2005, largely due to continued license sales growth in North America.

The Company's gross margin improved by $13.3 million, or 40.9% to $45.8 million for the year ended October 31, 2006 compared with $32.5 million for the comparable period in 2005, representing 75.7% and 80.3% of total revenues, respectively. As mentioned earlier, the decline in the overall gross margin (as a percentage of revenues) is namely attributable to MBI revenues recorded during the interim period which were heavily weighted to maintenance and professional services revenue, with negligible contribution from higher-margin license sales revenues as well as VSI revenues whose mix includes a greater proportion of integration services. With respect to MBI, this was anticipated following the acquisition as 20-20 repositions the business of MBI following its financial difficulties in mid-2005, namely by first securing follow-on services revenues from existing MBI customers which had temporarily postponed their investments in waiting for a definitive resolution of MBI's financial difficulties.

The operating income for the year ended October 31, 2006, increased by 6.0% to $6.3 million in fiscal 2006 compared to fiscal 2005, representing 10.4% and 14.7% of total revenues for each respective period. The decline in operating income as a percentage of revenues is namely attributable to: (i) onetime benefits recorded as a reduction of expenses amounting to $713,000 in fiscal 2005; (ii) additional investments in sales and marketing; (iii) the addition of resources to sustain the Company's growth and compliance requirements (iv) the negative effect on operating expenses of the appreciation of the Canadian dollar against the U.S. dollar amounting to approximately $1.3 million and, (v) the incremental amortization of intangible assets created upon accounting for the business acquisitions completed subsequently to the end of the third quarter of fiscal 2005 amounting to $1.0 million, including acquired development costs (accounted for in the research and development operating expense line), client lists and trade names and a non-compete agreement (all accounted for in the general and administrative operating expense line).

Net earnings for the period increased to $5.9 million for fiscal 2006 compared with $4.3 million for the comparable period in 2005. The consolidated income tax expense for 2006 stood at $1.6 million or 21.3% of pre-tax earnings compared to $1.82 million or 29.9% for 2005. The decrease in effective tax rate from 2005 is largely attributable to the reduction in the deferred credit account amounting to $865,000 (2005 -$ nil) which arose with the acquisition of MindAvenue Inc., with respect to unused tax losses carried forward.

4. Selected Consolidated Financial Information

The selected consolidated financial information set out below for the three years ended October 31, 2006, 2005 and 2004 has been derived from our audited consolidated financial statements. The following information should be read in conjunction with our audited financial statements and notes related thereto.



Consolidated Statement of Earnings Data:
(In thousands of U.S. dollars, except share and per-share data)

------------------------------------------------------------------------
------------------------------------------------------------------------

Years ended October 31, 2006 2005 2004(i)
------------------------------------------------------------------------

Revenues
License sales $ 24,310 $ 18,334 $ 16,903
Maintenance and other recurring
revenues 24,224 15,767 13,973
Professional services 11,927 6,374 5,778
-----------------------------------------------------------------------
60,461 40,475 36,654
Cost of revenues
License sales 2,365 1,183 1,609

Maintenance and services 12,330 6,809 5,889
------------------------------------------------------------------------
14,695 7,992 7,498
------------------------------------------------------------------------
Gross margin 45,766 32,483 29,156

Gross margin (%) 75.7% 80.3% 79.5%
------------------------------------------------------------------------

Operating expenses
Sales and marketing 18,686 13,480 10,377
Research and development 7,378 4,796 5,131
General and administrative 12,991 7,936 8,117
Stock-based compensation
expense (1) 416 334 -
-----------------------------------------------------------------------
39,471 26,546 23,625
------------------------------------------------------------------------

Operating income 6,295 5,937 5,531
Operating margin (%) 10.4% 14.7% 15.1%

Financial expenses (income) (1,160) (140) 2,811
------------------------------------------------------------------------

Earnings before income taxes
and non-controlling interest 7,455 6,077 2,720
Income taxes
Current 579 943 545
Future 1,007 872 569
-----------------------------------------------------------------------
1,586 1,815 1,114
------------------------------------------------------------------------

Earnings before non-controlling
interest 5,869 4,262 1,606
Non-controlling interest - - (66)
------------------------------------------------------------------------
Net earnings $ 5,869 $ 4,262 $ 1,672
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings per share (2)
Net earnings available to
common shareholders $ 5,869 $ 4,245 $ 1,536

Basic weighted average number
of common shares outstanding 18,785,855 17,580,899 8,535,140

Basic earnings per share $ 0.31 $ 0.24 $ 0.18

Diluted weighted average number
of common shares outstanding 19,068,537 17,996,569 9,054,640

Diluted earnings per share $ 0.31 $ 0.24 $ 0.17
------------------------------------------------------------------------
------------------------------------------------------------------------


(i) Restated: the 2004 consolidated financial statements have been restated to reflect the retroactive adoption effective November 1, 2004 of the Canadian Institute of Chartered Accountants' ("CICA") Handbook Section -- 3860, "Financial Instruments, Disclosure and Presentation" which requires that the principal equity component and associated cumulative translation adjustment of the convertible debentures be reclassified from the shareholders' equity to liabilities and as a result also reclassify for applicable periods, the increase of the equity component of convertible debentures to the consolidated earnings as a financial expense (refer to Note 2 to the audited consolidated financial statements for further details relating to the change in accounting policy). The change in standard has no impact on earnings per share for these periods as the adjustments on the consolidated earnings were already considered in each period's earnings per share calculations. On December 8, 2004, all outstanding convertible debentures were converted into common shares.

(1) Effective January 1, 2004, CICA Handbook Section - 3870, "Stock-based Compensation and Other Stock-based Payments", was amended to require expense treatment for all stock-based compensation, eliminating the alternative of disclosing pro forma information instead of a charge to earnings, as was done for the 2005 fiscal year. On November 1, 2004, the Company adopted the amended standard retroactively without restatement of prior periods. Furthermore, since the Company became public on December 8, 2004; the minimum value method (e.g. using no volatility) can no longer be used to establish the stock-based compensation expense. The impact of adopting the new recommendation was an increase to deficit and to common stock options of $296,000 on November 1, 2004, representing the expense for the 2004 fiscal year.

(2) Please refer to Note 6 to the audited consolidated financial statements for further details relating to the calculation of basic and diluted earnings per share.

5. Comparison of Twelve Months Ended October 31, 2006 and 2005 and Fiscal 2007 Outlook

Acquisitions

The following information in regard to major acquisitions completed during the twelve months ended October 31, 2006 and 2005 should be read in conjunction with Notes 8, 15 and 23 to the audited consolidated financial statements for further details relating to basic considerations paid, future performance-based additional considerations, values attributed to the assets acquired (including intangible assets and goodwill) and assumed liabilities as of the date of the transactions, if applicable.

Virtual Systems International, Inc.

On December 12, 2005, the Company entered into an agreement to acquire 100% of the shares of Virtual Systems International, Inc. ("VSI"), based in Raleigh, North Carolina for a total consideration of $5,233,690 paid in cash, with net cash acquired of $388,000. The transaction was completed on February 9, 2006. VSI develops, sells and integrates advanced manufacturing software solutions for the cabinet, furniture and woodworking industries. The purchase method of accounting for the transaction resulted in the creation of $2,242,000 in intangible assets (i.e. acquired development costs, a non-compete agreement and client lists) and goodwill of $3,611,000.

Data One, Inc.

Effective December 1, 2005, the Company acquired 100% of the shares of Data One for a total consideration of $1,303,000 paid in cash, with $62,000 in net cash assumed as at the effective date of acquisition. Data One develops services and sells layout, specification and catalog creation software for dealers, manufacturers and facilities managers of office furniture and case goods. The acquisition of Data One consolidates the Company's market position within design centers and allows for further enhancement of office furniture manufacturer data. The purchase method of accounting for the transaction resulted in the creation of $775,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $1,017,000.

MBI Software Company GmbH

Effective on December 1, 2005, the Company acquired all of the assets of Germany-based MBI, for a total consideration of 2,804,764 Euros ($3,332,000) paid in cash with $125,000 in net cash assumed as of the effective date of the acquisition. MBI develops markets and implements software solutions for the furniture manufacturing industry. The purchase method of accounting for the transaction resulted in the creation of $2,293,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $3,405,000.

CMS Informatique SA

Effective September 1, 2005, we concluded the acquisition of CMS Informatique SA, a software company based in Cannes, France that also has customers in Belgium and Spain. Our 20-20 Design, 20-20 CAD and 20-20 ProdManager will namely be used to complete CMS's product offering, thereby addressing a broader spectrum of size of woodworking shops. The cash consideration paid for 100% of the shares in CMS amounted to 619,000 Euros, or $775,000 (including $77,000 in transaction costs), with 288,000 Euros, or $360,000 in net debt assumed as at the effective date of acquisition. Under the terms of the agreement, an additional cash amount of 90,000 Euros is payable to the selling shareholder, and was paid subsequent to year end, since certain performance thresholds for the 2006 fiscal year were met. The purchase method of accounting for the transaction resulted in the creation of $588,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $613,000.

Build-Rite

On September 1, 2005, the Company completed the acquisition of the Build-Rite software for a total cash consideration of $1,300,000, of which $500,000 remains due as a balance of purchase price, without interest, payable in installments of $500 per copy of Build-Rite software sold by the Company. Any remaining unpaid balance is due on July 27, 2010. In addition, the Company has agreed to pay a royalty on license sales commencing, at the earlier of when the $500,000 above is paid in full or July 27, 2010, up to a maximum of $250,000, also payable in cash. There were no direct revenues recorded in relation to the Build-Rite software as work continues to integrate the application to 20-20 Design for Manufacturing Professional (DFM-PRO) to automate manufacturing directly from 20-20 Design files.

SmartFusion

On July 5, 2005, the Company completed the purchase of certain computer software, SmartFusion, and related business activities. The cash purchase price was entirely attributed to development costs for an amount of $350,000.

MindAvenue Inc.

On June 30, 2005, we completed the acquisition of MindAvenue. The tool's capabilities have generated vivid interest from interior design retailers and manufacturers who have seen its applications. The cash consideration paid for 100% of the shares in MindAvenue amounted to $73,000 (including $24,000 in transaction costs), with $10,000 in net cash assumed as at the effective date of acquisition. MindAvenue Inc. had, as at June 30, 2005, operating tax losses and expenses not deducted for tax purposes in Canada. 20-20 believes that it is more likely than not that the benefits for tax purposes attached to these losses and expenses will continue to be realized by 20-20 in the near future. During the 2006 fiscal year, 20-20 benefited from the reduction of the deferred credit associated with these losses to the tune of $1.0 million. As such, we continue to record a future tax benefit reflecting the estimated benefits on the consolidated balance sheet whose balance is also $1.0 million as at October 31, 2006.

In accordance with the Emerging Issues Committee Abstract No. 110 (EIC-110), "Accounting for Acquired Future Tax Benefits in Certain Purchase Transactions that are not Business Combinations", any excess of the amounts assigned to the acquired assets over the consideration paid, should be allocated pro rata to reduce the values assigned to non-monetary assets acquired. As the allocation reduced the non-monetary assets to zero, the excess was accounted as a deferred credit.

Revenues

Our total revenues increased 49.4%, or $20.0 million, to $60.5 million for the twelve months ended October 31, 2006 compared with $40.5 million for the twelve months ended October 31, 2005. On an organic basis, excluding the effect of acquisitions, total revenues in fiscal 2006 grew by 13.0% over fiscal 2005.



Revenues - by Geography
Revenue Mix by Customer Location
(In thousands of U.S. dollars)
-------------------------------------------------------------------
-------------------------------------------------------------------
Year ended Year ended
October 31, 2006 October 31, 2005
$ % $ %
-------------------------------------------------------------------
By Geography
North America 41,547 68.7 32,434 80.1
Europe 17,769 29.4 6,771 16.7
International 1,145 1.9 1,270 3.2
-------------------------------------------------------------------
Total 60,461 100.0 40,475 100.0
-------------------------------------------------------------------
-------------------------------------------------------------------


However, in fiscal 2006, revenues generated in European countries increased by 162.4% to represent 29.4% of the total for fiscal 2006 compared to 16.7% in 2005 principally due to the MBI acquisition as well as the full year revenues from the CMS acquisition in 2005, such incremental revenues being more heavily weighted towards maintenance and professional services revenues as opposed to license sales. European growth accounted for $11.0 million in dollar revenue growth. Organic growth in revenue for the year in Europe amounted to 2.5% compared to 8.7% in 2005, largely due to a decline in license sales of 13.2% in the year.

Revenues continued to be generated mainly in North America, representing 68.7% of total revenues for fiscal 2006. The dollar increase in revenues year-over-year attributable to our North American market segment amounted to $9.1 million, or 28.1%, to $41.5 million for the year ended October 31, 2006. The increase is principally attributable to:

(i) revenue from VSI and Data One;

(ii) an increase in maintenance and recurring revenue resulting from the expansion of our installed customer base, which in turn resulted from strong license sales recorded in North America in the last three fiscal years, as well as the addition of both Data One and VSI to the installed base.

(iii) Several new catalog creation projects in North America.

On an organic basis, revenues grew by 16.1% for fiscal 2006 compared to 8.4% in 2005.

Revenues generated in the rest of the world declined by 9.8% to $1,1 million for the 2006 fiscal year, largely due to the fact that revenues in 2005 included sales to Shanghai Rena and DesignTec Co. Ltd., our distributors for China and Taiwan. Revenues this year from these distributors have been recorded as deferred revenues, as we are in the process of acquiring their operations. If we adjust for these, revenues would have increased by 8.0%.

In addition, the Company is working on adapting its office products to the market where we are present to generate growth in the coming years.



Revenues - by Type
Revenue Mix
(In thousands of U.S. dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year ended Year ended
October 31, 2006 October 31, 2005
$ % $ %
-------------------------------------------------------------------------
By Revenue type
License sales 24,310 40.2 18,334 45.3
Maintenance and other
recurring revenues 24,224 40.1 15,767 39.0
Professional services 11,927 19.7 6,374 15.7
-------------------------------------------------------------------------
Total 60,461 100.0 40,475 100.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------


As explained in previous shareholder communications, certain recent acquisitions' principal business is to market and sell manufacturing solutions (e.g. enterprise resource planning systems -- "ERP") to their customers, which typically comprise a significantly higher services-to-software revenue ratio compared to that of our desktop products such as 20-20 Design, Giza, CAP and other solutions currently offered by 20-20. As such, the acquisitions of MBI and VSI, which are involved in the marketing and sale of manufacturing and enterprise solutions, have resulted in the Company's overall percentage of total revenues represented by professional services to increase.

Revenues from license sales increased 32.6%, or $6.0 million, to $24.3 million for the year ended October 31, 2006. License sales revenues recorded by CMS, MBI, VSI and Data One in the 2006 fiscal year amounting to $3.5 million contributed significantly to the increase over 2005.

The growth in license revenues resulted from an increase in the number of customers and from additional sales to existing customers, which were fuelled by both product improvements and additional sales and marketing efforts. The increase in license revenues is principally attributable to improved sales of our 20-20 Design product, including large home centers.

On an organic basis, license sales increased by 13.7% over 2005. This growth, amounting to $2.5 million, was recorded mainly in North America, particularly in the residential sector with a 16.2% growth. The appreciation of the Canadian dollar against the U.S. dollar during such period had little effect on revenues derived from license sales realized in North America as the majority of those sales are recorded in U.S. dollars.

On the other hand, license sales declined by 13.2% in Europe on an organic basis, despite the fact that for the twelve months ended October 31, 2006 compared with the same period in 2005, our revenues from license sales realized in Europe benefited from the appreciation of the European currencies to which we are exposed (Euro, British Pound and Danish Krone) against the U.S. dollar.

Lastly, other international markets reported a decrease of 11.7% in license sales for the year, also on an organic basis, for the reasons indicated above with respect to our Chinese and Taiwanese distributors.

Revenues from maintenance and other recurring revenues increased 53.6%, or $8.5 million, to $24.2 million for the year ended October 31, 2006. Maintenance and recurring revenues recorded by CMS, MBI, VSI and Data One in the year ended October 31, 2006 amount to $5.8 million. The increase in revenues is attributable to additional recurring support and maintenance service revenues generated from a growing licensee base, following record license sales revenues generated in fiscal 2006 and 2005, in the residential market. The increase was also principally attributable to the appreciation of the Canadian dollar against the U.S. dollar for the twelve months ended October 31, 2006 compared with the same period in 2005. Canadian and U.S. dollar revenues under service contracts are subject to accounting translation adjustments. These adjustments result in such revenues being affected by changes in the exchange rate as if they had originally been realized in Canadian dollars (and thus benefiting from the appreciation of the Canadian dollar). Finally, the increase was partially attributable to those revenues from maintenance and other recurring revenues realized in Europe that benefited from the appreciation of the European Currencies against the U.S. dollar during such period.

On an organic basis, these revenues grew by $2.7 million or 17.0%, over fiscal 2005.

Revenues from professional services increased 87.1%, or $5.6 million, to $11.9 million for the year ended October 31, 2006. Professional services revenues recorded by CMS, MBI, VSI and Data One in the year ended October 31, 2006 amounted to $5.5 million. Growth in commercial revenues on an organic basis was offset by a decline in both the North American residential sector and the UK, where contracts completed in 2005 were not replaced.

Revenues - 2007 Outlook

Given the various acquisitions that have been completed as of the date of this report, we expect the Company's geographical revenue mix weighting in fiscal 2007 to remain relatively unchanged.

Revenues from license sales, maintenance and other recurring revenues, and professional services are expected to increase across all our geographical market segments in future periods as we intend to continue to add new customers and to introduce and sell new products to our existing customer base and as a result of consolidating revenues from recently completed acquisitions in fiscal 2006 (as described in previous sections). In North America, this will translate in selling our newer solutions as well as ERP systems for the residential and office furniture markets and automating the office furniture sales processes with 20-20 Office Sales. In Europe, we will gradually introduce our North American product portfolio. More specifically, we will continue in Northern Europe, to leverage our strengths in the U.K. residential market, and also enter the residential and office furniture segment and develop the market for our web applications, including in Scandinavian countries. In Southern Europe, we will build upon our electronic catalogs and ERP solutions for the kitchen and closet sectors, along with our solutions for residential furniture manufacturers. As for Central and Eastern Europe, we will take advantage of the expansion opportunities offered by the acquisition of MBI, which delivers to office and residential furniture manufacturers mission-critical ERP solutions, a position that gives us an exceptional entry into this new geographical market. Concurrently, we will seize further growth opportunities in emerging markets, namely in the Asia-Pacific region, especially in China, as well as in Brazil and other Latin American countries; and we will continue to selectively introduce our sales and design software for office furniture given the great interest shown in 2006, and also deploy our European electronic catalogs. We will leverage our position as the only large and fully integrated provider of software for the interior design industry, with a direct presence in all these fast-growing markets.

Cost of Revenues

Cost of revenues from license sales increased by $1.2 million to $2.4 million in fiscal 2006 compared to $1.2 million in fiscal 2005. Over the periods, the cost increased from 6.5% of license sales revenues in 2005 to 9.7% in 2006. The increase is principally attributable to having a greater proportion of license reselling in 2006 compared to 2005. In addition, the CMS, MBI, VSI and Data One acquisitions contributed $0.7 million to the overall dollar amount increase. The cost of licenses for these acquisitions stood at 22.6% of license revenues, as a greater proportion of license revenues consist of reselling third party software.

Although it should continue to increase in dollar amount, the cost of license revenues as a percentage of revenues from licenses is expected to improve in fiscal 2007, favored by the considerably higher selling price of licenses of ERP solutions (such as in the case of MBI) without the proportionally higher direct product cost (media, packaging, etc).

The cost of revenues from maintenance and other recurring revenues increased by 81.1% or $5.5 million to $12.3 million, compared to $6.8 million for fiscal 2005. This increase is attributable to: (i) cost of revenues from maintenance and recurring revenues recorded by CMS, MBI, VSI and Data One in fiscal 2006 amounting to $4.9 million; (ii) the appreciation of the Canadian dollar against the U.S. dollar in the same period amounting to $299,000, compared with the same period in the previous year; (iii) the reallocation of some staff in North America from research and development functions to maintenance and services and the hiring of new employees, in order to allocate more resources to service the growing installed base, and; (iv) the sub-contracting of certain specific professional services from third parties. The effect of these factors in turn were partially offset by higher tax credits receivable under a tax credit program in fiscal 2006 compared to that of 2005. We expect an increase in the cost of revenues from maintenance and services in dollar amount in fiscal 2007 as a result of the inclusion of recently acquired businesses to the Company's operations and results for a full year, some of which are involved in the selling and integration of manufacturing and ERP solutions which typically comprise a high services-to-software revenue ratio.

Gross Margin

The gross margin increased 40.9%, or $13.3 million, to $45.8 million for the twelve months ended October 31, 2006 compared with $32.5 million for the same period in 2005, representing 75.7% and 80.3% of total revenues for each period, respectively.

The decline in the overall gross margin as a percentage of revenues is namely attributable to MBI and to a lesser extent, VSI revenues recorded during the year which were weighted to maintenance and integration services revenue with a lesser contribution from higher-margin license sales revenues. This situation was anticipated following the acquisitions, particularly with MBI as 20-20 repositions its business following its financial difficulties in mid-2005, namely by first securing follow-on services revenues from existing MBI customers which had temporarily postponed their investments in waiting for a definitive resolution of MBI's financial difficulties.

If we exclude the effect of the recent acquisitions, gross margins remained essentially unchanged at 80.2% in fiscal 2006 from 80.3% in fiscal 2005.

Operating Expenses

Human resources

As at October 31, 2006, the Company employed 504 people on a full time and
part time basis in the following geographies:



2006 2005
--------------------------------------------------------
Canada 229 45.5% 222 56.8%
U.S.A 97 19.2% 69 17.7%
Germany 55 10.9% 15 3.8%
Rest of Europe 98 19.4% 68 17.4%
Rest of the World 25 5.0% 17 4.3%
--------------------------------------------------------
504 100% 391 100%
--------------------------------------------------------


Sales and marketing expenses

During fiscal 2006, sales and marketing expenses increased 38.6%, or $5.2 million, to $18.7 million compared with $13.5 million for the comparable period in 2005, representing 30.9% and 33.3% of total revenues for each period, respectively. The increase in dollars is namely attributable to: (i) sales and marketing expenses incurred by CMS, MBI, Data One and VSI in fiscal 2006 amounting to $3.2 million; (ii) the reallocation and addition of certain staff and consultants to sales and marketing (including those employees now forming the Company's product management team); (iii) higher sales commissions and bonuses paid out to our sales force commensurate with the greater level of license revenues, and; (iv) the appreciation of the Canadian dollar against the U.S. dollar in 2006 amounting to $349,000, compared with the same period in the previous year.

It is expected that selling and marketing expenses will increase in future periods as: (i) we include selling and marketing costs of acquired businesses to the Company's results for a full year; (ii) amounts paid out to our sales force and to industry consultants increase commensurate with the growth in our sales; (iii) overall marketing activities and efforts increase, and; (iv) we continue to invest in marketing activities to maximize the value of product launches, visibility and awareness and to extend our sales reach in new geographies.

Research and development expenses

For the year ended October 31, 2006, gross research and development expenses increased by 62.6%, or $4.3 million, to $11.1 million, representing 18.4% of total revenues for the period, which compares to $6.9 million for the same period in 2005, or 16.9% of total revenues for the period. Research and development expenditures increased between the periods namely as a result of: (i) research and development expenses incurred by MBI, CMS, Data One and VSI for the period totalling $2.8 million; (ii) the appreciation of the Canadian dollar against the U.S. dollar in fiscal 2006 compared with the same period in fiscal 2005 resulting in an increase in gross expenditure of $629,000 (i.e. as an important portion of research and development expenses are incurred in Canadian dollars), and; (iii) the addition of employees to research and development functions.

The above mentioned increase in gross expenditures was partially offset by an increase in the amount of expenditures capitalized amounting to $2.7 million, net of tax credits, between the two periods as the company now covers a wider spectrum with its end-to-end solution and its additional efforts made towards the integration of company-wide products and data.

Net research and development expenses increased by 53.8%, or $2.6 million, to $7.4 million for fiscal 2006, representing 12.2% of total revenues for the period compared to $4.8 million for the same period in 2005, or 11.8% of total revenues for the period. Research and development expenditures increased between the periods as a result of: (i) research and development expenses incurred by MBI, CMS, Data One and VSI between the effective acquisition dates and the 2006 year-end; (ii) the increase in amortization expenses amounting to $576,000 due to the increase in amortization of intangible assets (i.e. acquired development cost) created upon accounting for the various acquisitions completed in fiscal 2005 and in fiscal 2006 -- namely CMS, MBI, Data One and VSI, and; (iii) the appreciation of the Canadian dollar against the U.S. dollar in fiscal 2006 compared with the same period in 2005 (i.e. the majority of research and development expenses are incurred in Canadian dollars).

General and administrative expenses

General and administrative expenses increased 63.7%, or $5.1 million, to $13.0 million for the year ended October 31, 2006, compared with $7.9 million in the same period in 2005, representing 21.5% and 19.6% of total revenues for each respective period. The increase is attributable to: (i) general and administrative expenses incurred by MBI, CMS, Data One and VSI for the year totalling $3.1 million; (ii) one-time benefits recorded as a reduction of expenses in 2005 totalling $713,000 with respect to a release received for a government loan and the favourable judgement received in a dispute where cost provisions had been taken; (iii) an increase in office rental expenses as we increased the occupied space by our staff, in fiscal 2005, in the building where our head office is located as well as in 2006 in Southern Europe; (iv) the appreciation of the Canadian dollar in the year compared with the same period in 2005, as a majority of general and administrative expenses are incurred in Canadian dollars, namely at our head office in Laval, Quebec for $456,000, and; (v) increase in professional fees and fees related to the Company's public listing and ongoing costs associated with compliance requirements. If we exclude acquisitions, the effect of exchange rates on Canadian dollar expenses and the one-time benefit realized in 2005, general and administrative expenses increased by 8.0% in 2006 over 2005.

Amortization expenses included in general and administrative expenditures increased by $838,000 of which $453,000 was due to the amortization of intangible assets (i.e. client lists, trade names and a non-compete agreement) created upon accounting for the various acquisitions completed subsequently to the end of the third quarter of fiscal 2005, as mentioned above. The total expense related to the acquisitions represents 0.9% of revenues for 2006 while it represented 0.2% of revenues in 2005. These acquisitions also contributed $385,000 in amortization expense, not related to intangible assets, for fiscal 2006.

Stock-based compensation expenses

Stock-based compensation expenses amounted to $416,000 for the year ended October 31, 2006, which compares to $334,000 for the same period in the previous year. The increase is principally attributable to options granted in 2006. The obligation recorded by the company for deferred share units granted to certain members of the Board of Directors was also reduced during the year, in line with the value of these units based on the Company's common share market value. Refer to Note 18 of the audited consolidated financial statements for further details relating to the stock-based compensation expense.

Operating Income

As a result of the above, the Company's operating income increased by 6.0% or $6.3 million for the year, representing 10.4% of total revenues compared to $5.9 million or 14.7% of total revenues for the same period in 2005. These results were achieved despite the net negative effect on operating expenses of the appreciation of the Canadian and European Currencies against the U.S. dollar between the comparative periods and the incremental cost related to the amortization of intangibles and development costs related to the acquisitions recently concluded. These two items account for approximately $2.6 million or 4.2% of total revenues.



Operating Income
(Amounts in percentages)
-------------------------------------------------------------
-------------------------------------------------------------
Years ended October 31,
2006 2005
-------------------------------------------------------------
% %
-------------------------------------------------------------
Revenue 100.0 100.0
Cost of Sales 24.3 19.7
-------------------------------------------------------------
Gross Margin 75.7 80.3
Sales & marketing 30.9 33.3
Research & development 12.2 11.9
General and administrative 21.5 19.6
Stock based compensation 0.7 0.8
-------------------------------------------------------------
Operating Income 10.4 14.7
-------------------------------------------------------------
-------------------------------------------------------------


Adjusted Operating Income

As the Company has made several acquisitions over the last several months we felt that it was important to provide a measure that enhances an overall understanding of our operational results and trends, on a comparable basis with the prior periods. Adjusted operating income is a non-GAAP measure related to operating income and is defined for these purposes as operating income excluding stock-based compensation and amortization of business acquisition-related intangibles and development costs. Adjusted operating income is a supplemental measure and should not be construed as an alternative to operating income as defined under Canadian generally accepted accounting principles (Canadian GAAP) as a measure of profitability. Our method of measuring adjusted operating income is unlikely to be comparable to similar measures provided by other companies.

In fiscal 2006, adjusted operating income increased to $7.9 million, or 13.1% of revenues, from $6.5 million, or 16.0% of revenues in 2005.



Adjusted Operating Income
(Amounts in thousands of U.S. dollars)
----------------------------------------------------------------------
----------------------------------------------------------------------
Years ended October 31,
----------------------------------------------------------------------
2006 2005
$ $
----------------------------------------------------------------------
Operating Income (GAAP) 6,295 5,937

Stock based compensation 416 334
Amortization of acquired intangibles 547 95
Amortization of acquired development costs 667 91
----------------------------------------------------------------------
Adjusted Operating Income 7,925 6,457
----------------------------------------------------------------------
----------------------------------------------------------------------


Other Expenses

Financial income increased from $140,000 for the year ended October 31, 2005, to an income of $1.2 million for fiscal 2006. The increase of approximately $1.0 million is principally attributable to: (i) $220,000 in interest revenue during the period related to interest earned on refundable income taxes; (ii) lower interest charges on long-term debt and debentures, amounting to $296,000. The debentures were entirely converted into common shares upon closing of the Company's IPO on December 8, 2004; (iii) $358,000 in additional interest revenue during the period generated from our investing a portion of available cash in short term investments at higher rates, compared to interest revenue for 2005; (iv) an exchange gain of $191,000 compared to an exchange loss of $47,000 for the same period in 2005, and; (v) higher interest and bank charges largely attributable to recent acquisitions.

6. Liquidity

Cash from Operations

For the year ended October 31, 2006 and 2005, cash flow from operating activities before changes in working capital items were $12.9 million and $ 8.8 million for each period, respectively. During fiscal 2006 and 2005, $2.7 million and $0.4 million in cash were used in working capital items (excluding those working capital items from acquisitions as at the effective date of transactions, which are included in the Business acquisitions item shown in investing activities in the cash flow statement). The use of working capital principally resulted from the increase in accounts receivable, deferred revenue and contracts in progress, offset by increases in accounts payable and income taxes.

In the twelve months ended October 31, 2006, the $2.7 million in cash used in working capital (excluding changes in working capital items included at the time of the purchase of the acquisitions) was related to the following:



Significant changes in working capital
(In thousands of U.S. dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 Fiscal year $ principally attributable to
---------------------------------------------------------------------------
Increase - Accounts receivable 1,839 Increase in overall sales and
invoicing volume
Increase - Contracts in progress 140 Increase in and timing of contract-
based work volume
Increase - Prepaid expenses 330 Increase in overall business
activity
Increase - Accounts payable (317) Variances in payment cycle timing
Increase - Income taxes payable (765) Reduction in deferred credit
related to tax losses
Decrease - Deferred revenue 1,470 Earned revenue from MBI acquisition
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Investing activities

Our principal investing activities consist of development costs (internal capitalized costs and those resulting from acquisitions), business acquisitions and the purchase of property and equipment.

For the year ended October 31, 2006, cash was used as follows with respect to acquisitions (net of cash on the acquired companies' balance sheets): (i) VSI for $4.8 million; (ii) Data One - $1.2 million, and; (iii) MBI - $3.2 million. Please refer to Note 8 to the audited consolidated financial statements for further details relating to the allocation of purchase prices and other specifics of these acquisitions.

In the years ended October 31, 2006 and 2005, the Company capitalized internal development costs in the amounts of $5.9 million and $3.2 million, respectively (net of applicable credits). Capitalized internal development costs amounted to $11.6 million in 2006 compared to $6.2 million in 2005. The increase is attributable to executing development work on a growing product base, which results from the Company's various business combinations and acquisitions over past periods and to product and data integration efforts currently underway as further described in introduction and section 3 of this report. These increases do not include those that were acquired through the business acquisitions of MBI, VSI and Data One but they do include capitalized expenditures by these companies post acquisition.

The Company also acquired $473,000 in technology to support its end-to-end solution ($1.5 million in 2005).

In the years ended October 31, 2006 and 2005, the Company expended $1.6 million and $1.4 million respectively, towards the purchase of property and equipment, principally comprising computers, software and leasehold improvements. No major projects have been undertaken during these periods and expenditures are essentially sustaining in nature. These additions do not include those that were acquired through the business acquisitions of MBI, VSI and Data One but they do include expenditures incurred by these companies post acquisition. Please refer to Note 8 to the audited consolidated financial statements for further details relating to the allocation of purchase prices and other specifies of these acquisitions.

Since the beginning of the fiscal year, the Company has increased available cash on hand by reducing short term investments totaling $7.8 million in commercial paper and bonds. We will continue in the future to invest a portion of available cash on hand in short term investments in order to maintain financing availability and flexibility while ensuring a minimum return on such amounts.

Financing activities

For the year ended October 31, 2006, $0.6 million in long term debt was repaid by the Company, which included repayment in full of a loan on leasehold improvements which carried an interest rate of 10% for $631,000 trough a combination of cash for $365,000 and the relinquishing of a security deposit of $266,000. In addition $59,000 in bank indebtedness was repaid by the Company, which amount had been assumed upon closing of the MBI acquisition on December 1, 2005. During fiscal 2005, the Company successfully completed (December 8, 2004) an initial public offering (IPO) and listing of its common shares on the TSX for net proceeds of $30.8 million. Share issue costs in fiscal 2005 associated to the IPO amounted to $2.7 million, which were charged to deficit. In 2005, $0.9 million was also used to redeem all outstanding Class "D" preferred shares as part of the share capital reorganization that was completed concurrently with the closing of the IPO. Prior to their redemption, the Company paid $17,000 in dividends on preferred shares during the first quarter of fiscal 2005. In year ended October 31, 2006 and 2005, $72,000 and $199,000 in cash were provided by the exercise of common stock options, respectively.



Use of Proceeds - Initial Public Offering
(Amounts in millions of U.S. Dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Investment Area Investment range Investment as at January
indicated at IPO 16, 2007
---------------------------------------------------------------------------
Sales and Marketing $3.1 to $4.6 $3.5
10% - 15%

Research and Development $9.2 to $10.8 $4.9
30% - 35%

Acquisitions $15.4 to $16.9 $11.0
50% - 55%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Consistent with what had been explained at the time of the IPO, the net proceeds from the offering have been, and continue to be, deployed and invested in: (i) augmenting our sales and marketing teams and initiatives, and; (ii) furthering our research and development efforts; (iii) completing strategic acquisitions and for general corporate purposes. We do not see any significant deviation from this deployment plan in the near future. Please refer to the Company's final prospectus dated December 8, 2004, which can be obtained on SEDAR at www.sedar.com, as well as in the Investor Relations section on the Company's web site at www.2020technologies.com for further details pertaining to the IPO.

Sales and Marketing:

In support of the launch and sale of new products and in an effort to capitalize on cross-selling opportunities resulting from recently acquired businesses, the Company has augmented its sales and marketing teams and initiatives. Sales and marketing efforts have namely included 20-20's attending of all major industry tradeshows whilst leveraging the events to introduce new products and to generate and secure new sales leads with key international market participants. Seasoned professionals have also been added to our business development teams with specific roles in successfully integrating and extracting value from our various acquisitions. Finally, in order to help stay on track with the Company's overall product strategy and to make best use of our development resources, we have put in place a formal product management team. The group is dedicated to ensuring that product development efforts are aligned with our marketing and sales efforts and feedback we receive from our customers. In addition, the team will be keeping abreast of new developments in the industry which will impact customer requirements in the future, so that 20-20 can effectively meet those needs.

Research & Development:

In addition to completing key strategic acquisitions since the closing of its IPO in December 2004, the Company has also furthered its internal development efforts, leading to the successful launch of software products and modules and to the extension of its electronic catalog products library. In most instances, the Company's major product launches were leveraged by coinciding them with two of the industry's premier trade shows, KBIS (May 2005) in the case of Virtual Showroom and AWFS (July 2005) for the launch of 20-20 CAD and 20-20 DFM-SE. Key product developments and launches of the past fiscal year include:

Countertop module:

The Company has developed a specialized software module for handling complex and specific countertop and solid surfaces product sale, design and configuration activities. This initial implementation at a U.S.-based customer is valued at over $1.0 million in addition to related annual recurring revenues. The module is developed to work seamlessly with our 20-20 Design software already in use in the chain's stores. This product will become part of a complete solution offering for manufacturers, dealers and cutting stations involved in the countertop and solid surfaces product category.

20-20 Virtual Showroom:

Virtual Showroom is a tool that allows for dealer and retailer showrooms to be extended into the virtual world and for consumers to rapidly and easily browse room design ideas using manufacturer-specific products. Virtual Showroom represents various revenue opportunities as it can be sold to both manufacturers to showcase selected product sets and to retailers to promote a given set of products they carry in their points-of-sale. Furthermore, Virtual Showroom can be sold on a stand-alone basis to new customers, or as a follow-on sale to existing customers of 20-20 Design. Virtual Showroom is sold at a lower price point than that of 20-20 Design.

The Company's R&D team recently succeeded adding customer appeal to the product by bringing it on the same technology base as the virtual planner technology acquired in the MindAvenue transaction and combining them in a new offering known as Virtual Studio. This technology consolidation will also facilitate the ability to provide future maintenance and enhancements for the Company.

20-20 CAD:

20-20 CAD is computer-aided engineering software specifically tailored to meet the needs of wood and furniture manufacturers that allows engineers and manufacturers to create new or special products with greater accuracy and time efficiency and with the ability to directly generate all information required to produce the said item including cut-lists, bills of material and costing. Furthermore, any new product designed in 20-20 CAD can be seamlessly incorporated into 20-20 Design for "in-context" visualization, in addition to then becoming a standard item that can be published to a manufacturer's electronic catalog and be available to any 20-20 Design user.

20-20 DFM-SE:

20-20 Design for Manufacturing Standard Edition ("DFM-SE") builds on 20-20 Design's platform to offer smaller manufacturers with custom casework manufacturing solutions. At the heart of the DFM product is an enhanced set of shapes with superior graphical details, which shapes can be easily modified to create custom product designs. These newly created custom designs can then form the basis of a custom catalog, delivering for a given manufacturer both sales tool capabilities as well as manufacturing assistance by its capacity to produce cut-lists and shop drawings, effectively allowing for engineering at the point-of-sale.

Acquisitions:

Since the completion of the IPO, the Company has completed 7 business acquisitions for a total of $11.0 million in cash (net of cash acquired with each acquisition). These acquisitions are described in sections 2 and 5 of this report.

General Corporate Purposes:

The Company's finance and accounting teams have also been progressively complemented by the hiring of additional experienced professionals to ensure that proper governance and internal control procedures are enforced throughout our operations including that of newly acquired businesses.



7. Capital Resources

Consolidated Balance Sheet Data:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(In thousands of U.S. dollars) October 31, 2006 October 31, 2005
--------------------------------------------------------------------------
$ $

Cash and cash equivalents 5,337 5,534
Short term investments 29,937 35,967
Working capital (considering Deferred
revenue) 27,600 33,568
Total assets 96,579 78,964
Deferred revenue 12,672 8,715
Long-term debt (including current
portion) 621 1,404
Total shareholders' equity 68,088 58,729
--------------------------------------------------------------------------
--------------------------------------------------------------------------


As at October 31, 2006, our working capital stood at $27.6 million compared to $33.6 million at the same date in 2005. The main items that contributed to the decrease in our working capital position in the twelve months ended October 31, 2006 are: (i) an increase in deferred revenue of $4.0 million, mainly due to the acquisitions concluded in 2006 for $2.9 million, and; (ii) an increase in accounts payable of $1.9 million, mainly due to the said acquisitions for $1.3 million. The increase in accounts receivable and other current assets were offset by the use of cash deployed for the said acquisitions.

We believe that our cash, investments and anticipated cash flow from operations will be sufficient to meet our working capital, contractual obligations, capital expenditure and corporate development program requirements for the foreseeable future. Furthermore, the Company has at its disposal, authorized but unused bank credit facilities of C$5.0 million for our ongoing operational needs. In addition to this amount, two wholly-owned subsidiaries of the Company have at their disposal, authorized but unused credit facilities available for their ongoing operational needs amounting to approximately 340,000 Euros.

8. Balance Sheet and Financial Situation

The variations in balance sheet items as at October 31, 2006 compared with the year ended on October 31, 2005, resulted principally from the completion of the MBI, VSI and Data One acquisitions, whereby the Company acquired various working capital items and allocated a portion of the considerations paid to intangible assets in the consolidated balance sheet (including acquired development costs, client lists --shown under Other Assets and Goodwill). The reader should refer to Note 8 to the audited consolidated financial statements for further details relating to the accounting of business acquisitions completed fiscal 2006.

In addition to having increased as a result of the acquisitions, development costs are also higher due to the capitalization of research and development expenditures as explained in section 5 of this report.

Variations in the balance sheet are also attributable to the completion of the three acquisitions completed in 2006, whereby we acquired various working capital items and allocated a portion of the consideration paid to intangible assets in our consolidated balance sheet (including acquired development costs, client lists and goodwill). Variations are also related to technology and asset purchases resulting in increasing development costs, goodwill and other intangibles compared to the previous period, namely as a result of accounting for the three transactions. Please refer to Note 8 to the audited consolidated financial statements for further details relating to the accounting of all business acquisitions for fiscal 2006.

Finally, balance sheet items varied due to exchange rates fluctuations between periods. The conversion rate used to translate balance sheet items from the currency of measurement, the Canadian dollar, to the currency of presentation, the U.S. dollar, stood at C$1.1227 as at October 31, 2006, compared to C$1.1801 at the same date in 2005.

Contractual Obligations

Our contractual obligations consist of commitments to repay certain long-term indebtedness as well as certain operating leases, namely for the rental of office space worldwide. The Company has entered into various leases expiring on different dates until July 31, 2015, which call for aggregate lease payments of $12.4 million for the rental of buildings and other operating leases. Note 17 to our audited consolidated financial statements further describes the instruments underlying the obligations related to our long term debt while Note 21 to the statements discusses those related to leases. Minimum obligations under these commitments in the following years are as follows:



--------------------------------------------------------------
--------------------------------------------------------------
Long-Term Operating
(In thousands of U.S. dollars) Debt Leases Total
--------------------------------------------------------------
$ $ $
2007 53 2,447 2,500
2008 47 2,075 2,122
2009 21 1,647 1,668
2010 500 1,524 2,024
2011 - 1,346 1,346
Subsequent years - 3,381 3,381
--------------------------------------------------------------
Total 621 12,420 13,041
--------------------------------------------------------------
--------------------------------------------------------------


Share Capital Reorganization

On December 8, 2004, we completed an IPO and listing of our common shares on the TSX. The offering consisted in the sale of 6,687,560 common shares at a price of C$6.50 per share, including 923,100 common shares from the exercise of the over-allotment option by the IPO's underwriters. Please refer to our final prospectus dated December 8, 2004, which can be obtained on SEDAR at www.sedar.com, as well as in the Investor Relations section on the Company's web site at www.2020technologies.com for further details pertaining to the IPO.

Immediately prior to the closing of our IPO, we reorganized the Company's share capital by redeeming all of the outstanding Class "D" preferred shares, for an aggregate consideration of $904,500, removing the authorized but unissued Class "A", Class "B", Class "C" and Class "D" preferred shares and all rights, privileges, restrictions and conditions attached thereto. In addition, concurrently with the closing of the initial public offering, all outstanding convertible debentures were converted into an aggregate of 3,136,560 common shares pursuant to the terms of the convertible debentures.

Share Capital Structure

We are authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. The common shares are voting and participating. The preferred shares may be issued in one or more series with specific terms, privileges and restrictions to be determined for each class created by the Board of Directors of the Company at the time such class is created.



-------------------------------------------------------------------------
-------------------------------------------------------------------------
Issued as at Issued as at
Authorized October 31, 2006 January 16, 2007
-------------------------------------------------------------------------

Common shares Unlimited 18,805,037 18,805,037
Preferred shares Unlimited None None
Stock options - currently
issued and outstanding 809,605 809,605
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Dividends

We do not currently intend to pay any cash dividends on our common shares in the foreseeable future. Our current policy is to retain earnings to finance expansion and to develop, license and acquire new software products and to reinvest in the Company. The Board of Directors of the Company will determine if and when dividends should be declared and paid in the future based on all relevant circumstances, including the desirability of financing our further growth and our financial position at the relevant time.

Off-balance Sheet Arrangements

We have certain off-balance sheet arrangements, namely for the rental of office space worldwide, which are recorded as operating leases (refer to the Contractual Obligations section above for further details). And, although we do not use derivative financial instruments to speculative ends, we will periodically enter into forward foreign currency contracts to manage some of the risk inherent to future exchange rate fluctuations. As at October 31, 2006, the total amount of committed currency sales was $6.0 million. The Company does not account for these forward contracts using hedge accounting and therefore forward exchange contracts are recorded at estimated fair value. Gains or losses resulting from changes in fair values are reflected in earnings. The fair value of these foreign exchange contracts is determined based on prices obtained from the Company's financial institution for identical or similar financial instruments. The estimated fair value of the contracts amounted to a loss of three thousand dollars as at October 31, 2006. This amount was accounted for as a foreign exchange loss and presented in accounts payable as at that date. Note 20 to the audited consolidated financial statements, further describes these financial instruments.

9. Controls and Policies

Disclosure Controls

The CEO and CFO are responsible for establishing and maintaining disclosure control and procedures for the Company. The disclosure controls and procedures have been conducted under the CEO's and CFO's supervision to provide reasonable assurance that the material information relating to the Company is known to management in the period in which the annual filings are made. As at the end of the 2006 fiscal year the Company's CEO and CFO were satisfied with the effectiveness of the Company's disclosure controls and procedures to ensure that material information relating to the Company and its subsidiaries would have been known to them.

Internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The President and Chief Executive Officer and the Vice President and Chief Financial Officer have evaluated whether there were changes to internal control over financial reporting during the year ended October 31, 2006 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. No such changes were identified through their evaluation.

10. Fourth Quarter of Fiscal 2006

Revenues for the fourth quarter 2006 amounted to $17.4 million, which represents an increase of 60.6% or $6.6 million increase over the $10.9 million recorded in the same period in 2005. On an organic basis, revenues for the fourth quarter grew by 26.7% over those of the comparative period last year. Organic growth was strongest in North America at 33.4%, followed by Europe at 7.7% .

The Company's operating income increased by 195.1% or $2.0 million to $3.1 million for the three months ended October 31, 2006, compared to $1.1 million for the comparable period in 2005. The increase is namely attributable to: (i) an increase in gross margin of $4.3 million relating to the increased revenue. On an organic basis the gross margin increased by $2.5 million or 29.2%, and; (ii) operating expenses grew by 30.2% over the fourth quarter of 2005. However, on an organic basis, operating expenses grew by only 3.3%, thereby leveraging our infrastructure and increasing profitability. These benefits were partially offset by the negative impact amounting to $284,000, of an increase in the value of the Canadian dollar compared to the fourth quarter of 2005 as significant proportion of those expenses are incurred in Canadian dollars.

The following quarterly information has been presented on the same basis as the audited consolidated financial statements, and all necessary adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the notes thereto. The operating results for any quarter should not be relied upon as any indication of results for any future period.




Selected Quarterly Unaudited Financial Information
(In thousands of U.S. dollars, except per-share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 Fiscal Year Quarters 2005 Fiscal Year Quarters
First Second Third Fourth First Second Third Fourth
$ $ $ $ $ $ $ $
---------------------------------------------------------------------------
As reported
Revenues 12,036 16,140 14,864 17,421 8,828 10,098 10,699 10,850
Net earnings 773 1,747 677 2,672 238 1,217 1,392 1,415
Basic earnings
per share 0.04 0.09 0.04 0.14 0.02 0.07 0.07 0.08
Diluted earnings
per share 0.04 0.09 0.04 0.14 0.02 0.06 0.07 0.07

Adjusted for
year-end items
Revenues n/a n/a n/a n/a 8,828 10,098 10,699 10,850
Net earnings n/a n/a n/a n/a 327 1,366 1,539 1,030
Basic earnings
per share n/a n/a n/a n/a 0.02 0.07 0.08 0.05
Diluted earnings
per share n/a n/a n/a n/a 0.02 0.07 0.08 0.05

---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Risks and Uncertainties

Please refer to our 2006 Annual Information Form for the complete text and description of the risks and uncertainties which the Company faces.

Failure to manage our growth successfully may adversely impact our operating results.

The growth of our business places a strain on managerial, financial and human resources. Our ability to manage future growth will depend in large part upon a number of factors, including the ability to rapidly:

- build and train sales and marketing staff;

- attract and retain qualified technical personnel;

- develop customer support capacity as sales increase;

- expand our internal management and financial controls commensurate with internal growth and growth by acquisition; and

- expand our marketing and distribution channels.

Our inability to achieve any of these objectives could harm our business and operating results.

We cannot assure you that we will sustain our profitability. If we fail to do so, our share price may decline.

We expect to increase our expenses in the near term in order to expand our business. These increased operating expenses may adversely affect our operating results and may result in or contribute to net losses in future periods. Our business strategies may not be successful. If we are not able to sustain profitability, our share price may decline and we may require additional financing, which may not be available.

If we do not derive revenues from new software, our results could be materially affected.

There may be little demand for our new solutions, and it may not be widely accepted by the market. If we do not derive revenues as a result of our efforts to market our new solutions, our results could be materially affected.

Our success depends on our ability to enhance our existing products and develop new products.

If we are unable to successfully develop new products or enhance and improve our existing software platform or if we fail to position and/or price our products to meet market demand, our business and operating results will be adversely affected. Accelerating product introductions and shortening product life cycles require high levels of expenditures for research and development that could adversely affect our operating results. Furthermore, any new products we develop could require long development and testing periods and may not be introduced in a timely manner or may not achieve the broad market acceptance necessary to generate significant revenue and as such, may result in the write-down of amounts capitalized as development costs.

Currency fluctuations may adversely affect us.

A substantial portion of our revenue is earned in U.S. dollars, but a substantial portion of our operating expenses is incurred in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and other currencies, such as the Canadian dollar, may have a material adverse effect on our business, financial condition and operating results. Our policy is to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, we do not hedge entirely the exposure related to any one foreign currency. In addition, the use of forward contracts to hedge our foreign currency exposure carries risk and could limit our gains or result in a loss.

We may be unable to identify and complete strategic acquisitions that will contribute to future growth.

There is a risk that we will not be able to: (i) identify suitable acquisition candidates available for sale at reasonable prices; (ii) properly evaluate the fair value of the businesses being acquired, or; (iii) complete any acquisition in a given timeframe. In addition, if we proceed with acquisitions, available cash may be used to complete such transactions, diminishing our liquidity and capital resources, or shares may be issued which could cause significant dilution to existing shareholders. Furthermore, identifying acquisitions and the completion of acquisitions per se, could divert management's attention and financial resources which may negatively affect our operating results.

Failure in attaining expected results from integrating acquisitions may materially impact our operating results.

If we do not successfully address risks or potential problems encountered in connection with acquisitions (whether of a product or a business), these acquisitions could have a material adverse effect on our business, results of operations and financial condition, including the possibility of having to write down the carrying values of intangible assets recorded at the time of acquisition. The Company intends to grow both organically and through acquisitions. Based on the acquisitions completed as of the date of this report, it can be expected that a significant portion of revenue growth in fiscal 2006 will stem from results related to those acquired businesses. The ability to successfully integrate them into the Company's operations and realize expected profit and returns from them are inherent risks related to these acquisitions.

The future results from, and the integration of, the business of MBI Software Company GmbH ("MBI") poses specific risk in that its business, prior to our acquiring the company, was facing financial difficulties and was forced to undertake a financial restructuring under the management of a reorganization trustee.

Following a significant growth period from 1994 through 2001, MBI made significant investments in both Italy and North America, at a time when the German market was experiencing a downturn affecting MBI's sales and creating financial problems for many of its clients. The funds required to support its expansion and the downturn in its main market resulted in financial difficulties, forcing MBI to undertake a financial restructuring in mid-2005, in accordance with German law, under the management of a reorganization trustee. Pursuant to the terms of the acquisition, 20-20 purchased certain assets and intellectual property of MBI including its ongoing business conducted principally in Germany as well as the assets of its North American subsidiary and the shares of its Austrian subsidiary. MBI retained approximately half of its employee base compared to what it had been prior to the company experiencing financial difficulties. There exists risk that the restructuring of the MBI business, the uncertainty related to the extent and strength of the ongoing recovery of the German market and the impact the financial difficulties may have had on MBI's customers' perception of the company could materially impact the returns and operating results expected from the MBI acquisition.

Our ability to recruit and retain key management and other qualified personnel from our acquired businesses is crucial to our ability to realize expected profit and returns from them.

The product, industry, customer and market knowledge of key technical and management personnel of acquired businesses are instrumental to realizing expected profit and returns from said acquisitions in the short to medium term. The loss of said key technical and management personnel could have a material adverse effect on our business, results of operations and financial condition. Our inability to retain the necessary management, technical, sales and marketing personnel in those acquired businesses may adversely affect our future growth and profitability.

Acquisitions may lengthen overall sales cycle of the Company which could impair our ability to forecast revenues and increase fluctuations or revenues and results from quarter to quarter.

Certain recent acquisitions' principal business is to market and sell manufacturing solutions (i.e. enterprise resource planning systems -- "ERP") to their customers. Due namely to their considerably higher selling price, inherent complexity and general impact on a customer's business operations, ERP systems typically present a significantly longer sales cycle than that of our desktop products such as 20-20 Design, Giza and CAP. The ensuing lengthening and variability of our product sales cycles resulting from these and future acquisitions could impair our ability to forecast and predict revenues and increase fluctuations of revenues and profitability from a given quarter to another. Furthermore, anticipated revenue and operating results from these businesses will be more subject to the discretionary nature of their customers' purchase and budget cycles and changes in their budgets for, and timing of, software, implementation services and related purchases.

Recent acquisitions may increase the Company's overall percentage of total revenues represented by maintenance and services and thereby possibly reduce overall gross margins.

Certain recent acquisitions' principal business is to market and sell manufacturing and ERP solutions to their customers, which typically comprise a significantly higher services-to-software revenue ratio compared to that of our desktop products such as 20-20 Design, Giza, CAP and other solutions currently offered by 20-20. As such, completed and future acquisitions of businesses involved in the marketing and sale of manufacturing and enterprise solutions may increase the Company's overall percentage of total revenues represented by maintenance and services and thereby possibly reduce 20-20's overall gross margins. Future mergers and acquisitions activity may further increase the percentage of total revenues represented by maintenance and services which would adversely affect our overall gross margins.

As our software solutions expand, potential competitors may have significantly greater resources than we do, and therefore, we may be at a disadvantage in competing with them.

As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can. Any of these factors could materially impair our ability to compete and have a material adverse effect on our operating performance and financial condition.

Errors in our products could result in significant costs to us and could impair our ability to sell our products.

Our products are complex and, accordingly, they may contain errors, or "bugs", that could be detected at any point in their product life cycle. Errors in our products could materially and adversely affect our reputation, result in significant costs to us, delay planned release dates and impair our ability to sell our products in the future.

If a successful product liability claim were made against us, our business could be seriously harmed.

While we carry product liability insurance, a successful product liability claim could result in monetary liability in excess of our insurance coverage or may not be covered by our insurance and could seriously disrupt our business.

Economic uncertainty and downturns in the overall software market may lead to decreases in our revenue and margins.

Downturns in the economy may cause businesses to delay or cancel software projects, reduce their overall information technology budgets or reduce or cancel orders for our products. This, in turn, may lead to longer sales cycles, delays or failures in payment and collection, and price pressures, causing us to realize lower revenue and margins.

Our international operations pose risks for our business and financial condition.

We currently conduct operations in Canada, United States, Europe, Latin America and in Asia. We intend to continue to expand our international operations and to increase the proportion of our revenue from outside North America. These operations require significant management attention and financial resources and additionally subject us to risks inherent in doing business internationally. Our failure to properly comply or address any of the above factors could adversely affect the success of our international operations and could have a material adverse effect on our operating performance and financial condition.

If our intellectual property is not adequately protected, we may lose our competitive advantage.

We rely on various intellectual property protections, including contractual provisions, copyright, trademark and trade secret laws, to preserve our intellectual property rights. To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of our management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and results of operations.

We cannot determine with certainty whether any existing third-party trademarks or patents or the issuance of any third-party trademarks or patents would require us to alter our names or our technology, obtain licenses or cease certain activities. We may become subject to claims by third parties that we infringe their property rights due to the growth of software products in our target markets, the overlap in functionality of these products and the prevalence of software products. Litigation may be necessary to determine the scope, enforceability and validity of such third-party proprietary rights or to establish our proprietary rights. Regardless of their merit, any such claims could result in substantial expenses, divert the attention of our management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and results of operation.

Our ability to recruit and retain management and other qualified personnel is crucial to our ability to develop, market and support our products and services.

We depend on the services of our key technical and management personnel. The loss of such services could have a material adverse effect on our business, results of operations and financial condition. Our inability to attract and retain the necessary management, technical, sales and marketing personnel may adversely affect our future growth and profitability. It may be necessary for us to increase the level of compensation paid to existing or new employees to a degree that our operating expenses could be materially increased.

We may lose sales, or sales may be delayed, due to the lengthening sales and implementation cycles for certain of our new enterprise solutions.

Typically, the larger the potential sale, the more time, money and other resources will be invested. As a result, it may take an extended period of time after our first contact with a customer before a sale can actually be completed. We may invest significant sales and other resources in a potential customer that may not generate revenue for a substantial period of time, if at all. During these lengthening sales and implementation cycles, events may occur that affect the size or timing of the order or even cause it to be cancelled. If these events were to occur, sales of certain of our new enterprise solutions or services may be adversely affected, which would reduce our revenue.

The loss of our rights to use software currently licensed to us by third parties could increase our operating expenses by forcing us to seek alternative technology and adversely affect our ability to compete.

We license certain technologies used in our products from third parties, generally on a non-exclusive basis. The termination of any of these licenses, or the failure of the licensors to adequately maintain or update their products, could delay our ability to ship our products while we seek to implement alternative technology offered by other sources and require significant unplanned investments on our part. In addition, alternative technology may not be available on commercially reasonable terms.

We may be subject to transfer pricing challenges by taxation authorities which may adversely affect our income tax expense.

We conduct business operations through subsidiaries in various jurisdictions. Certain of these subsidiaries provide products and services to, and may from time to time undertake certain significant transactions with, other of our subsidiaries in different jurisdictions. Our future earnings and cash may be adversely affected if any of the taxation authorities in these various jurisdictions were successful in challenging our documentation and transfer pricing policies.

Our operating results could be adversely affected if the CNE tax credits were to cease or be significantly reduced.

The program of Carrefour de la nouvelle economie ("CNE") offers tax incentives to companies that conduct their business activities in CNE-designated buildings in Quebec. As a result of the June 12, 2003 Quebec budget, the credit would be eliminated in the event of an acquisition of control of the Company. There can be no guarantee that we will continue to meet the eligibility criteria or that the CNE program will not be amended or cancelled in the future.

Our operating results could be adversely affected as a result of certain other tax matters.

Although we are of the view that all expenses and tax credits claimed by the Company, including research and development ("R&D") expenses and tax credits, are reasonable and deductible and have been correctly determined, there can be no assurance that the Canadian taxation authorities will agree. If the Canadian taxation authorities successfully challenge such expenses or the correctness of such income tax credits claimed, our operating results could be adversely affected. We may directly or indirectly, through our subsidiaries, be subject to taxes with respect to our operations in foreign jurisdictions. Although we are of the view that the liability with respect to such foreign taxes has been provided for in our books and financial statements, the taxation authorities of these foreign jurisdictions could however challenge our liabilities for such foreign taxes, which could adversely affect our operating results.

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