20-20 Technologies Inc.
TSX : TWT

20-20 Technologies Inc.

June 12, 2007 08:34 ET

20-20 Technologies Inc. Reports Second Quarter Results for Fiscal 2007

LAVAL, QUEBEC--(Marketwire - June 12, 2007) - 20-20 Technologies Inc. (TSX:TWT), the world leader in 3D interior design and furniture manufacturing software, today announced quarterly results for the period ending April 30, 2007. All amounts are in U.S. dollars unless otherwise indicated.
Second Quarter Highlights:

- Revenues increased 8.6% to $17.5 million

- Operating income increased 31.5% to $2.5 million

- EBITDA increased 33.5% to $4.3 million

- European revenue increased 20.1%, representing approximately one-third of total revenue

- EPS stable at $0.09 per share despite negative effect of sharp decline of U.S. dollar compared to Canadian dollar

"The record revenues and robust operating income 20-20 achieved in the second quarter of fiscal 2007 were driven through essentially organic growth," said Jean Mignault, Co-Chairman of the Board and CEO. "Our successful financial performance reinforces our commitment to capture further growth opportunities in new and emerging markets and to optimize our operations."

"Our product offering and geographic mix are more diversified following our recent acquisitions in the manufacturing sector," said, Jean-Francois Grou, President and COO of the Company. "We expect to add new customers and roll out existing and new products as we continue to establish our presence in these new markets. For example, in Europe, where we see an increasing amount of our revenues derived, we will gradually introduce some products of our North American portfolio."

Revenues

Revenues grew by 8.6%, reaching $17.5 million for the quarter ended April 30, 2007. The increase is attributable to revenues totaling $1.1 million in organic growth as well as $0.3 million contributed by acquisitions in the quarter. It is important to note that in 2006, second quarter revenues included sales made at the K/BIS show, the premier trade show in North America for the kitchen and bath industry, while it took place in the third quarter in 2007. On an organic basis, excluding revenues from acquisitions in the quarter and the effect of the K/BIS show, revenues grew by 10.1% over the comparable period in 2006.

Revenues from license sales remained stable at $6.7 million. License sales for the quarter increased by 5.6% over the same period in 2006 on an organic basis, adjusting for K/BIS. Revenues from maintenance and other recurring revenues increased 13.4% to $6.9 million. On an organic basis, these revenues grew by 10.8% compared to the same period last year. Revenues from professional services increased 18.6% to $3.9 million for the quarter ended April 30, 2007. On an organic basis, these revenues grew by 17.3% versus 2006.

Revenues continue to be generated mainly in North America, representing 66.5% of total revenues for the second quarter and 67.0% for the six months ended April 30, 2007. Revenues generated in European countries increased by 20.1% in the second quarter of fiscal 2007, representing 31.2% of the total for the quarter. The growth is attributed partly to the strengthening European currencies.

For the six months ended April 30, 2007, revenues increased by 17.5% to $33.1 million from $28.2 million last year. Organic growth for the same period amounted to 11.6% once adjusted for acquisitions and the K/BIS show.

Operating Income

"Our operating expenses declined slightly to $10.4 million during the second quarter of fiscal 2007," said Steve Perrone, Chief Financial Officer. "We expect that in the near term our operating expenses will remain relatively consistent sequentially on a quarter-overquarter basis. This predictability will enable us to grow our net income in conjunction with our revenues."

Operating income increased by 31.5% to $2.5 million for the second quarter of 2007, representing 14.0% of total revenues compared to $1.9 million or 11.6% of total revenues for the same period in 2006.

For the six months, operating income increased by 28.3% to $3.1 million, representing 9.4% of revenues compared to $2.4 million or 8.6% of revenues for the same period last year.

Net earnings

Due to the decline in value of the U.S. dollar compared to the Canadian dollar, and the relative decrease in value of the Canadian dollar against the Euro and the Pound Sterling, 20-20 recorded an unrealized exchange loss of approximately $0.5 million relating to the Company's net monetary holdings in each of the three currencies and in particular the U.S. dollar.

As a result, net earnings for the period remained essentially the same at $1.7 million or 9.7% of total revenues for the quarter compared to $1.7 million or 10.8% of total revenues for the comparable period in 2006. Earnings per share for the quarter amounted to $0.09 compared to $0.09 per share last year, on a fully diluted basis for both periods.

For the six months, net income was $2.5 million, unchanged from the comparable period in 2006. Earnings per share for the six months were also unchanged compared to last year at $0.13 per share, on a fully diluted basis.

EBITDA(i) increased 33.5% to $4.3 million for the second quarter of fiscal 2007, compared to $3.2 million during the same period in 2006. EBITDA(i) for the six months ended April 30, 2007 increased 39.7% to $6.7 million compared to $4.8 million last year.

"The Company is exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar," said Steve Perrone. "We are reviewing our foreign exchange policy which consists of hedging transactional exposure as our geographic diversification will add new currencies to our risk profile. We will be evaluating whether we should also begin hedging financial statement translation exposure as our holdings in monetary assets and liabilities denominated in foreign currencies increase."

Conference Call Information

20-20 will host a conference call to discuss results today, June 12, 2007 at 5 p.m. (ET). The call will be available by telephone at 514-807-8791 and 1-800-731-5319. The call will be web cast at www.2020technologies.com. An audio recording will be archived until midnight on August, 14, 2007, and can be accessed by dialing 416-640-1917 and entering pass code 21235043#.

About 20-20 Technologies Inc.

20-20 Technologies is the world's leading provider of computer-aided design, business and manufacturing software solutions tailored for the interior design and furniture industries. Dealers and retailers use its desktop and Web-based products and solutions for the residential and commercial markets. 20-20 also offers a unique proprietary end to end solution, integrating the entire breadth of functions in interior design through one platform. It provides a bridge between data communication from a point-of-sale to manufacturing and world-leading enterprise resource planning (ERP) systems, including computer-aided engineering and plant floor automation software. Operating in 13 countries with more than 500 employees, 20-20 is a publicly traded company (TWT) on the Toronto Stock Exchange (TSX) and celebrates this year, its 20th anniversary. For more information, visit www.2020Technologies.com.

(i)Non-GAAP Measures

References in this press release to the term "EBITDA" are related to cash earnings and is defined for these purposes as Operating Income plus amortization and depreciation expenses. EBITDA is not a recognized measure under GAAP in Canada and may not be comparable to similar measures used by other companies.

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 three and six months ended April 30, 2007 and 2006 has been derived from our interim unaudited consolidated financial statements. The following information should be read in conjunction with our interim unaudited consolidated financial statements and notes related thereto.

 

CONSOLIDATED EARNINGS

(Amounts in thousands of U.S. dollars, except
earnings-per-share, unaudited)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Six months ended
April 30 April 30
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
$ $ $ $
Revenues
License sales 6,729 6,769 12,094 11,301
Maintenance and
other recurring revenues 6,895 6,081 13,482 11,260
Professional services 3,901 3,290 7,527 5,615
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17,525 16,140 33,103 28,176
---------------------------------------------------------------------------
Cost of revenues
License sales 672 733 1,391 1,082
Maintenance and services 4,006 2,800 7,781 5,324
---------------------------------------------------------------------------
4,678 3,533 9,172 6,406
---------------------------------------------------------------------------
Gross margin 12,847 12,607 23,931 21,770
---------------------------------------------------------------------------
Operating expenses
Sales and marketing 4,898 5,151 9,629 9,493
Research and development 2,433 2,011 4,930 3,105
General and administrative 3,008 3,518 6,086 6,532
Stock-based compensation
expense 51 59 165 208
---------------------------------------------------------------------------
10,390 10,739 20,810 19,338
---------------------------------------------------------------------------
Operating income 2,457 1,868 3,121 2,432
Financial expenses (income) 336 (401) (1) (601)
---------------------------------------------------------------------------
Earnings before income taxes 2,121 2,269 3,122 3,033
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Income taxes
Current 298 275 555 89
Future 129 247 93 424
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427 522 648 513
---------------------------------------------------------------------------
Net earnings 1,694 1,747 2,474 2,520
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Average Number of Shares
outstanding:
Basic 18,825,515 18,789,327 18,815,106 18,769,627
Diluted 19,085,869 19,080,385 19,065,049 19,093,167
Earnings per share
Basic 0.09 0.09 0.13 0.13
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Diluted 0.09 0.09 0.13 0.13

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CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)

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

April 30, October 31,
-----------------------------------------------------------------
2007 2006
-----------------------------------------------------------------
-----------------------------------------------------------------
(Unaudited)
$ $
ASSETS
Current assets
Cash and cash equivalents 7,820 5,337
Short-term investments 27,473 29,937
Accounts receivable 16,591 13,908
Contracts in progress 613 556
Prepaid expenses 1,571 1,229
Future income taxes 245 873
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54,313 51,840
Property and equipment 3,567 3,731
Intangibles 3,382 3,384
Development costs 12,677 11,599
Other assets 1,795 1,454
Goodwill 25,088 24,157
Future income taxes 257 414
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101,079 96,579
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LIABILITIES
Current liabilities
Accounts payable 8,910 8,625
Income taxes payable 792 1,853
Deferred revenue 15,485 12,672
Deferred credit 116 1,037
Long-term debt 64 53
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25,367 24,240
Long-term debt 457 568
Leasehold inducements 325 308
Future income taxes 3,623 3,375
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-----------------------------------------------------------------
29,772 28,491
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SHAREHOLDERS' EQUITY
Capital stock 57,989 57,886
Common stock options 1,836 1,847
Contributed surplus 966 966
Retained earnings 3,431 896
Accumulated other comprehensive income 7,085 6,493
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71,307 68,088
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101,079 96,579
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CONSOLIDATED CASH FLOWS
(Amounts in thousands of U.S. dollars, unaudited)

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Three months ended Six months ended
-------------------------------------------------------------------
April 30 April 30
-------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------
-------------------------------------------------------------------
$ $ $ $
OPERATING ACTIVITIES
Net earnings 1,694 1,747 2,474 2,520
Non-cash items
Amortization 1,826 1,342 3,541 2,338
Leasehold inducements 6 41 14 53
Stock-based compensation 51 59 165 208
Capitalized interest on long
term debt 12 - 12 -
Future income taxes 129 247 93 424
Unrealized gain on forward
exchange contracts (549) (62) (248) (88)
Changes in working capital
items (1,104) (726) (1,383) (2,142)
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Cash flows from operating
activities 2,065 2,648 4,668 3,313
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INVESTING ACTIVITIES
Business acquisitions - (3,787) (800) (8,194)
Short-term investments 688 3,496 2,544 24,758
Property and equipment (344) (353) (586) (551)
Development costs - internal (1,598) (1,532) (3,186) (3,121)
Other assets (147) 149 (319) 105
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Cash flows from investing
activities (1,401) (2,027) (2,347) 12,997
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FINANCING ACTIVITIES
Bank indebtedness - - - (59)
Repayment of long-term debt (19) (700) (27) (767)
Options exercised 17 34 17 70
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Cash flows from financing
activities (2) (666) (10) (756)
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Effect of changes in exchange
rate on cash held in foreign
currencies 425 346 172 876
-------------------------------------------------------------------
Net increase in cash and
cash equivalents 1,087 301 2,483 16,430
Cash and cash equivalents,
beginning of period 6,733 21,663 5,337 5,534
-------------------------------------------------------------------
Cash and cash equivalents,
end of period 7,820 21,964 7,820 21,964
-------------------------------------------------------------------

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MANAGEMENT'S DISCUSSION AND ANALYSIS

(For the Second Quarter ended April 30, 2007)

The following report, dated June 7, 2007, is a discussion relating to the financial results and condition of 20-20 Technologies Inc. ("20-20" or the "Company") for the Second Quarters ended April 30, 2007 and 2006. The discussion should be read in conjunction with the selected consolidated financial information shown in this report and with our interim unaudited 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 the interim unaudited consolidated financial statements and related management reports for the three months and six months ended April 30, 2007, 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.

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 second quarters ended April 30, 2007 and 2006, this report also discusses certain important elements that occurred between such date and June 7, 2007.

1. Changes in Accounting Policies

On November 1, 2006, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants Handbook (CICA Handbook) Section 1530, Comprehensive Income; Section 3855, Financial Instruments -Recognition and Measurement; Section 3861, Financial Instruments -Disclosure and Presentation; Section 3865, Hedges; and Section 3251, Equity. These sections apply to fiscal years beginning on or after October 1, 2006 and provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities and non-financial derivatives, and describe when and how hedge accounting may be applied. Section 1530 provides standards for the reporting and presentation of comprehensive income, which represents the change in equity, from transactions and other events and circumstances from non-owner sources. Other comprehensive incomes are defined by revenues, expenses, gains and losses that are recognized in comprehensive income, but excluded from net income, in conformity with the generally accepted accounting principles.

Under the new standards, all financial assets are classified as held for trading, held-to-maturity investments, loans and receivables or available-for-sale categories. Also, all financial liabilities must be classified as held for trading or other financial liabilities. All financial instruments are recorded on the consolidated balance sheet at fair value. After initial recognition, the financial instruments should be measured at their fair values, except for held-to-maturity investments, loans and receivables and other financial liabilities, which should be measured at amortized cost. The effective interest related to the financial liabilities and the gain or loss arising from a change in the fair value of a financial asset or financial liability classified as held for trading is included in net income for the period in which it arises. If a financial asset is classified as available-for-sale, the gain or loss should be recognized in other comprehensive income until the financial asset is derecognized and all cumulative gain or loss is then recognized in net income.

The Company has classified its cash and cash equivalents and short-term investments as held for trading. The accounts receivable, rental deposits and balance of sale receivable were classified as loans and receivables, and the accounts payable and the long-term debt were classified as other financial liabilities. The initial measurement resulted in a gain of $86,615 for the long term debt, at an interest rate of 4.5%, and in a loss of $25,558 for the short-term investments at their fair value. This net gain of $61,057 is presented in the opening retained earnings. The Cumulative translation adjustment of $6,493,000 as of October 31, 2006, presented in the consolidated balance sheet has been reclassified to Accumulated other comprehensive income.

The Company enters into forward exchange contracts to sell amounts of currency in the future at predetermined exchange rates. The net fair value of outstanding forward exchange contracts has been accounted for as a foreign exchange loss in the net income since the Company does not use hedge accounting rules. The accrued gain of $253,733 (accrued loss of $3,248 as of October 31, 2006) is included in accounts receivable. Transactions costs, related to financial assets and liabilities, are accounted for in the financial expenses.

An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. If certain conditions are met, an embedded derivative is separate from the host contract and accounted for as a derivative in the balance sheet, at its fair value. The Company has decided to recognize embedded derivatives in its consolidated balance sheet, if applicable. This rule has no impact in the financial statements of the Company.

2. 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 stateof-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, 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 solutions are available across both desktop and web environments. Its products and services are marketed and sold worldwide through a sales and marketing team in various locations 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 Asia-Pacific and Latin American markets.

Revenues

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. Revenues of this type amounted to $6.7 million, or 38.4% of total revenues in second quarter of fiscal 2007, and $12.1 million, or 36.5% for the six months ended April 30, 2007. 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. Revenues of recurring nature amounted to $6.9 million, or 39.3% of total revenues in second quarter of fiscal 2007, and $13.5 million, or 40.7% for the six months ended April 30, 2007. 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 hardware resale. These revenues amounted to $3.9 million, or 22.3% of total revenues during the quarter, and $7.5 million, or 22.7% for the six months ended April 30, 2007.

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

Cost of Revenues

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 used with 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

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.

3. Second Quarter in Review

Celebrating its twentieth anniversary in 2007, 20-20 continues to deliver on key strategic initiatives and objectives during the second quarter, set out in the intended use of proceeds from its IPO. Management continues to focus on deriving synergies at all levels of the organization in order to improve profitability and enhance shareholder value.

The Company's revenues in the quarter grew by 8.6% essentially through solid organic growth and along with acquisition, reaching $17.5 million for the quarter ended April 30, 2007. Net earnings amounted to $1.7 million, or 9.7% of total revenues for the period. This compares to $16.1 million in revenues and $1.7 million in net earnings, or 10.8% of total revenues for the comparable period in 2006. The performance recorded in the second quarter of fiscal 2007 is attributable to revenues contributed by acquisitions totaling $313,000 in fiscal 2007 as well as $1.1 million in organic growth. It is important to note that in 2006, revenues included sales made at the K/BIS show, the premier trade show in North America for the kitchen and bath industry sponsored by the National Kitchen and Bath Association ("NKBA"). This show took place in the third quarter in 2007. The 10.1% organic increase, adjusted for the effect of the K/BIS show, was fueled by the continued strength in sales volumes to customers in commercial markets as well at the manufacturing sectors of the industry.

The second quarter also saw some significant movement in currency exchange rates. With respect to European currencies, the variations contributed to revenue growth for the quarter contributing 3.3 percentage points to the organic growth above.

License sales to customers in the commercial (office) market showed strong growth over 2006. We continue to deploy business development and marketing and are investing in integrating all our software solutions and catalog tools for the commercial market to further leverage our catalog library.

Our manufacturing solutions also contributed to this growth with an increase of 14.9% in the quarter, excluding currency exchange rate contributions. However, these gains were partially offset by a decline in license sales of the Company's software to dealers and retailers in the residential market compared to 2006.

4. Performance Overview

Revenues for the second quarter ended April 30, 2007 amounted to $17.5 million, representing a $1.4 million, or 8.6% 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 $313,000 generated by the acquisition of PSI (effective January 1, 2007,); to additional recurring support and maintenance service revenues generated from a growing licensee base and to the increase in catalog and hardware sales. Revenues for the first six months of fiscal 2007 amounted to $33.1 million, representing a $4.9 million, or 17.5% increase over revenues recorded in the same period in fiscal 2006. The increase in revenues is attributable to revenues amounting $2.2 million generated by businesses recently acquired including that of MBI (effective December 1, 2005), Data One (effective December 1, 2005), VSI (effective February 1, 2006) and PSI (effective January 1, 2007).

On an organic basis, excluding revenues from acquisitions in the quarter and the effect of K/BIS show sales, revenues grew by 10.1% over the comparable period in 2006. The growth for the six months ended April 30, 2007 on the same basis is 11.6% over the comparable period in 2006.

The Company's gross margin improved by $240,000 or 1.9% to $12.8 million for the quarter ended April 30, 2007 compared with $12.6 million for the comparable period in 2006, representing 73.3% and 78.1% of total revenues respectively. The decline in the overall gross margin (as a percentage of revenues) is namely attributable to the change in revenue mix in the second quarter of 2007 versus 2006 and is further explained in section 6 of this report.

For the six months ended April 30, 2007, gross margins improved by $2.2 million or 9.9% to $23.9 million compared to $21.8 million for the same period last year, representing 72.3% and 77.3% of total revenues respectively. This decline in gross margin (as a percentage of revenues) is due to essentially the same factors as those described above for the second quarter of fiscal 2006.

The operating income for the quarter ended April 30, 2007, increased by 31.5% to $2.5 million compared to the same period last year, representing 14.0% and 11.6% of total revenues for each respective period. The increase in operating income is namely attributable to: (i) the increase in gross margin dollars namely attributable to sales volumes in the second quarter of 2007 versus 2006; (ii) decrease in commissions on licenses and sales and marketing costs attributable to K/BIS and other shows included in 2006 but not in the current quarter; and (iii) decrease in professional fees and fees related to the Company's public listing and ongoing costs associated with compliance requirement. These benefits were partially offset by the increase in research and development expenses due to increased amortization related to capitalized costs of prior periods.

Net earnings for the period remained essentially the same at $1.7 million for the quarter ended April 30, 2007 compared with the same period in 2006. The consolidated income tax expense for the second quarter of fiscal 2007 stood at $427,000 or 20.1% of pre-tax earnings compared to $522,000 or 23.0% for 2006.

5. Selected Consolidated Financial Information

The selected consolidated financial information set out below for the three and six months ended April 30, 2007 and 2006 has been derived from our unaudited consolidated financial statements. The following information should be read in conjunction with our unaudited financial statements and notes related thereto.



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

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Three months Six months
ended April 30, ended April 30,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
Revenue
License sales 6,729 6,769 12,094 11,301
Maintenance and other
recurring revenues 6,895 6,081 13,482 11,260
Professional services 3,901 3,290 7,527 5,615
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17,525 16,140 33,103 28,176
---------------------------------------------------------------------------
Cost of revenues
License sales 672 733 1,391 1,082
Maintenance and services 4,006 2,800 7,781 5,324
---------------------------------------------------------------------------
4,678 3,533 9,172 6,406
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Gross margin 12,847 12,607 23,931 21,770
Gross margin (%) 73.3% 78.1% 72.3% 77.3%
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Operating expenses
Sales and marketing 4,898 5,151 9,629 9,493
Research and development 2,433 2,011 4,930 3,105
General and administrative 3,008 3,518 6,086 6,532
Stock-based compensation
expense 51 59 165 208
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10,390 10,739 20,810 19,338
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Operating income 2,457 1,868 3,121 2,432
Operating income (%) 14.0% 11.6% 9.4% 8.6%

Financial expenses (income) 336 (401) (1) (601)
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Earnings before income
taxes 2,121 2,269 3,122 3,033
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Income taxes
Current 298 275 555 89
Future 129 247 93 424
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Net earnings 1,694 1,747 2,474 2,520
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Earnings per share (1)

Net earnings available
to common shareholders 1,694 1,747 2,474 2,520
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Basic weighted average
number of common shares 18,825,515 18,789,327 18,815,106 18,769,627
Basic earnings per share $0.09 $0.09 $0.13 $0.13
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Diluted weighted average
number of common shares 19,085,869 19,080,385 19,065,049 19,093,167
Diluted earnings per share $0.09 $0.09 $0.13 $0.13
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(1) Please refer to Note 5 to the interim unaudited consolidated
financial statements for further details relating to the calculation
of basic and diluted earnings per share.


6. Comparison of the Three Months Ended April 30, 2007 and 2006

Acquisitions

Amortization of Acquired Intangibles

The Company's acquisitions since the initial public offering have resulted in the addition of intangible assets to the unaudited consolidated balance sheet that are 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 $326,000 for second quarter of fiscal 2007 and $625,000 for the six months ended April 30, 2007, compared to $295,000 and $443.000 respectively for the same periods in 2006.

The following information with respect to acquisitions completed following the end of the second quarter of fiscal 2006 should be read in conjunction with Note 6 to the interim unaudited 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.

Pattern Systems International, Inc.

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

On January 8, 2007, a wholly-owned subsidiary of the Company acquired substantially all of the assets of Pattern Systems International, Inc. ("PSI"), based in Mount Arlington, New Jersey for a total consideration of $1,000,000 (before acquisition fees), of which $150,000 remains as a balance of purchase price payable. This balance of purchase price payable will be paid in cash as the seller completes development of additional software components for the company. The unallocated balance of the purchase price was allocated to goodwill. The preliminary allocation of the purchase price is subject to change as the Company completes its evaluation of the assets. 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.

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 completing the legal requirements in order to comply with Chinese legislation, thereby permitting a wholly foreign-owned Chinese entity to conduct business in China.

Revenues

Our total revenues increased by 8.6% compared to the same period in 2006. On an organic basis, excluding the effect of acquisitions and the K/BIS trade show, total revenues in second quarter of fiscal 2007 grew by 10.1% compared to 11.0% organic growth for the second quarter of fiscal 2006. For the six months ended April 30, 2007, revenues grew organically by 11.6% compared to 9.6% for the first six months of fiscal 2006.

 

Revenues - by Geography
Revenue Mix by Customer Location
(In thousands of U.S. dollars)

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---------------------------------------------------------------------------
Three months ended Six months ended
April 30, April 30,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ % $ % $ % $ %
Revenues by
geographic
location
North America 11,646 66.5 11,376 70.5 22,156 67.0 19,434 69.0
Europe 5,470 31.2 4,555 28.2 10,303 31.1 8,236 29.2
Rest of the
World 409 2,3 209 1.3 644 1.9 506 1.8
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17,525 16,140 33,103 28,176
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---------------------------------------------------------------------------


Revenues continued to be generated mainly in North America, representing 66.5% of total revenues for the second quarter and 67.0% of total revenues for the six months ended April 30, 2007. The dollar increase in revenues year-over-year attributable to our North American market segment amounted to $270,000 or 2.4%, to $11.6 million for the second quarter ended April 30, 2007. For the first six months of fiscal 2007, revenues of this market grew by $2.7 million or 14.0%, to $22.2 million. Comparison between periods is affected however by the fact that the K/BIS show took place in the second quarter and in the first half in 2006 while it occurred in the third quarter and the second half of fiscal 2007. The increase is principally attributable to:



(i) for the quarter, the addition of PSI;

(ii) for the six months, revenues from a full half for VSI, MBI
and Data One as well as revenues from PSI for the four months
ended April 2007;

(iii) 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 two fiscal years;

(iv) several new integration projects in North America.


On an organic basis, adjusted for K/BIS, revenues in North America grew by 4.2% for the quarter and by 8.3% for the six months ended April 30, 2007.

Revenues generated in European countries in the second quarter of fiscal 2007 increased by 20.1% (all organic) to represent 31.2% of the total for the quarter increasing slightly from the same period last year. European growth accounted for $915,000 in dollar revenue growth. For the six months ended April 30, 2007, European revenues increased by $2.1 million or 25.1% (18.4% organically) compared to the same period in 2006. The growth is attributable in part to the strengthening European currencies. If we exclude the effect of currency gains, revenues grew organically by 8.8% for the quarter and 7.3% for the six months ended April 30, 2007 compared to the previous year.

Revenues generated in the rest of the world increased by 95.7% to $409,000 for the second quarter, which was all organic.



Revenues - by Type
Revenue Mix
(In thousands of U.S. dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Six months ended
April 30, April 30,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ % $ % $ % $ %
Revenues by Type
License sales 6,729 38.4 6,769 41.9 12,094 36.6 11,301 40.1
Maintenance and other
recurring revenues 6,895 39.3 6,081 37.7 13,482 40.7 11,260 40.0
Professional services 3,901 22.3 3,290 20.4 7,527 22.7 5,615 19.9
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17,525 16,140 100.0 33,103 28,176 100.0
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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 decreased by 0.6%, or $40,000 to $6.7 million for the quarter ended April 30, 2007. License sales revenues recorded by PSI in the second quarter of 2007 for which there were no revenues in the comparable period last year amounted to $111,000. For the six month period, revenues from licenses increased by 7.0% or $793,000. PSI contributed $136,000 to this growth.

The decrease in license revenues is largely due to license sales generated at the K/BIS show which took place in the second quarter in 2006 but in third quarter in 2007. If we exclude these revenues, the organic growth in license sales was 5.6% and 4.9% for the three and six months ended April 30, 2007 respectively compared to the same periods in 2006. This organic increase is explained by sales to new 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 commercial and manufacturing products. MBI license sales also grew significantly over the second quarter of 2006.

On an organic basis, adjusting for the effect of the K/BIS show, license sales for the quarter increased by 5.6% over the same period in 2006. This growth was recorded in Europe, particularly in the manufacturing sector with a 20.1% growth. The 55.0% increase in the commercial sector (35.1% for proprietary licenses) was partially offset by a decrease of 10.6% in the residential sector, adjusted for the K/BIS show. The manufacturing sector contributed 15.4% growth in licenses in North America. 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.

In Europe, license sales increased by 21.3% on an organic basis, largely due to the contribution made by manufacturing. Revenues from license sales realized in the quarter ended April 30, 2007 compared with the same period in 2006, benefited from the appreciation of the European Currencies to which we are exposed (Euro, British Pound and Danish Krone) (collectively, the "European Currencies") against the U.S. dollar.

With respect to the six months ended April 30, 2007, also adjusting for K/BIS, license sales grew by 4.9% over the same period in 2006. Europe recorded a 27.9% organic growth in licenses while North America reported 6.9% organic growth, representing a combination of 59.7% growth in the commercial sector (35.8% for proprietary licenses) offset by declines in license sales for the six months in the residential sector amounting to 13.1% and in the manufacturing sector by 22.6%.

Revenues from maintenance and other recurring revenues increased by 13.4%, or $814,000, to $6.9 million for the quarter ended April 30, 2007 and 19.7% or $2.2 million for the six months then ended. On an organic basis, these revenues grew by $656,000 or 10.8% in the quarter and $1.4 million or 12.4% for the six months ended April 30, 2007, compared to the same periods last year. The acquisition of PSI contributed for $158,000 of these revenues for the quarter. 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 the last two fiscal years in the residential market and more recently in the commercial market. Revenues attributable to MBI, Data One, VSI and PSI in 2007 amounted to $822,000 for the first half of 2007. 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.

The improvement in overall license sales activity during fiscal 2006, reaching $24.3 million, together with the $12.1 million of revenues from license sales recorded in the first half of fiscal 2007, contributed to maintenance and other recurring revenues climbing to $6.9 million for the quarter ended April 30, 2007.

Revenues from professional services increased by 18.6%, or $611,000, to $3.9 million for the quarter ended April 30, 2007. On an organic basis, these revenues grew by $567,000 or 17.3% in the quarter, compared to the same period last year. This growth was largely in Europe (25.7%) in both the residential and commercial sectors with North America adding the remaining dollar increase.

For the six months ended April 30, 2007, revenues from professional services increased by 34.1%, or $1.9 million, to $7.5 million. On an organic basis, these revenues grew by $1.3 million or 22.9% compared to the same period last year. This growth came from North America (29.9%) and Europe (16.5%).

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 expect to continue to add new customers and to introduce and sell new products to our existing customer base. 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. 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 office furniture segment and develop the market for our web applications. 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 geographical market, especially in eastern European countries. 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; by continuing to selectively introduce our sales and design software for office furniture given the great interest shown in 2006.

Cost of Revenues

Cost of revenues from license sales remained stable at 10.0% of licenses sales for the second quarter in fiscal 2007 compared to 10.8% in fiscal 2006. For the six months ended April 30, 2007, cost of revenues from license sales increased by $0.3 million, to $1.4 million, compared to $1.1 million, in the first six months of fiscal 2006. Over the periods, the cost increased to 11.5% of license sales revenues in the six months ended April 30, 2007 from 9.6% in the same period in the 2006 fiscal year. The increase is principally attributable to having a greater proportion of license reselling in 2007 as compared to 2006. The MBI, Data One, VSI, and PSI acquisitions contributed $79,000 to the overall dollar amount increase compared to the same period last year where they were not included for the full six month period.

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), as well as a lower proportion of 3rd party license sales.

The cost of revenues from maintenance, other recurring revenues and professional services increased by 43.1%, or $1.2 million, to $4.0 million, compared to $2.8 million for fiscal 2006, representing 37.1% and 29.9% of revenues from maintenance and services, respectively. This increase is attributable to: (i) cost of revenues from maintenance and recurring revenues recorded by PSI in fiscal 2007 for which no revenues were recorded in comparable periods last year, amounting to $90,000; (ii) increase of 173,000$ related to the cost of hardware sold to customers; (iii) the reallocation of some staff in Europe from research and development functions to maintenance and services in order to allocate more resources to service the growing installed base, amounting to $257,000; (iv) increased cost of third party software included in ERP solutions in Europe amounting to $99,000, and (v) generally, due to the increased volume of professional services year over year.

Cost of revenues from maintenance, other recurring revenues and professional services increased by 46.2%, or $2.5 million, to $7.8 million for the six months ended April 30, 2007 compared with $5.3 million for the same period in 2006, representing 37.0% and 31.5% of revenues from maintenance and services, respectively. In addition to the factors indicated above, the increase is attributable to the cost of revenues amounting to $1.2 million from maintenance and services incurred by MBI, VSI, Data One and PSI in the six month period.

Gross Margin

The revenue mix in the second quarter of fiscal 2007 changed significantly from the comparable period last year, mainly due to the K/BIS show. Licenses that generated a gross margin of 90.0% in 2007, accounted for 38.4% of revenue, while they represented 41.9% of revenue in the second quarter of 2006. For the six months ended April 30, 2007, licenses generated 36.6% of revenues with a gross margin of 88.5% compared with 40.1% of revenues and 90.4% of gross margin for the same period last year.

Given the relative importance of both the volume and the margin percentage associated with licenses, variations in the revenue composition in both license types and overall revenue mix directly affect the gross margin percentage.

With respect to maintenance and recurring revenues and professional services, overall gross margins are negatively affected both by the fact that these revenues accounted for 61.6% of total revenues compared to 58.1% in 2006 and the gross margin was 63.0% in 2007 versus 70.1% in 2006. For the six months ended April 30, 2007, these revenues accounted for 63.4% of total revenues, generating a gross margin of 63.0% compared with 59.9% of total revenues with a gross margin of 68.5% for the first six months of 2006.

Acquisitions for which there were no revenues in the comparable period last year, have contributed 1.8% of revenues for the second quarter of the 2007 fiscal year and 6.7% of revenues for the six months ended April 30, 2007. For the second quarter ended April 30, 2007, revenues were as follows:



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For 3 months ended For 6 months ended
April 30, 2007 April 30, 2007

Acquisitions Organic Total Acquisitions Organic Total
---------------------------------------------------------------------------
% % % % % %
Revenues
Licenses sales 35.3 38.4 38.4 34.6 36.7 36.6
Maintenance and other
recurring revenues 50.7 39.1 39.3 37.2 41.0 40.7
Professional services 14.0 22.4 22.3 28.2 22.3 22.7
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100.0 100.0 100.0 100.0 100.0 100.0
Gross margin (%) 48.0 73.8 73.3 59.1 73.2 72.3
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MBI revenues recorded during the second quarter of fiscal 2007 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 and now represent 12.8% of total revenues from MBI for the quarter and 11.7% for the six month period 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 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.

As a result, although gross margins increased by $240,000 or 1.9%, the gross margin percentage decreased from 78.1% in the second quarter of 2006 to 73.3% in second quarter of 2007. The same result is obtained for the six months ended April 30, 2007 with an increase of $2.2 million or 9.9% . The gross margin percentage also decreased from 77.3% in 2006 to 72.3% for the first six months of 2007. In both cases however, the 2007 gross margin does not benefit from higher margin license sales related to the K/BIS show.



Gross Margin Mix
(Amounts in thousands except percentages)
----------------------------------------------------------------------
----------------------------------------------------------------------
For the three months ended April 30,
----------------------------------------------------------------------
----------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------
----------------------------------------------------------------------
Revenue Margin % Revenue Margin %

Licenses 6,729 6,057 90.0% 6,769 6,036 89.2%

Maintenance, recurring and
professional services 10,796 6,790 62.9% 9,371 6,571 70.1%
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17,525 12,847 73.3% 16,140 12,607 78.1%
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For the six months ended April 30,
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---------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue Margin % Revenue Margin %

Licenses 12,094 10,703 88.5% 11,301 10,219 90.4%

Maintenance, recurring and
professional services 21,009 13,228 63.0% 16,875 11,551 68.5%
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33,103 23,931 72.3% 28,176 21,770 77.3%
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The overall change in mix can be explained by a greater proportion of total revenues being derived from manufacturing and ERP solutions in 2007 versus 2006.

Operating Expenses

Human resources

As at April 30, 2007, the Company employed 530 people on a full time and part time basis in the following geographies:



--------------------------------------------
--------------------------------------------
As at April 30, 2007 2006
--------------------------------------------
Canada 241 45.5% 239 47.4%
U.S.A 109 20.6% 99 19.6%
Germany 62 11.7% 59 11.7%
Rest of Europe 92 17.4% 86 17.1%
Rest of the World 26 4.9% 21 4.2%
--------------------------------------------
530 100% 504 100%
--------------------------------------------
--------------------------------------------


Sales and marketing expenses

During the second quarter of fiscal 2007, sales and marketing expenses decreased 4.9%, or $253,000, to $4.9 million compared with $5.2 million for the comparable period in 2006, representing 27.9% and 32.0% of total revenues for each period, respectively. This decrease is attributable to several factors: (i) the second quarter of 2006 included trade shows such as K/BIS which did not take place in the second quarter of 2007. Expenses associated with these shows 2006 amounted to approximately $300,000; (ii) lower sales commissions compared to the prior year for $265,000; and (iii) a net reduction of various other expense items totaling $62,000. These decreases were partially offset by the PSI acquisition which added $141,000 to the quarter, the increased cost of travel, salaries and bad debt expenses all of which amounted to $262,000.

For the six months, sales and marketing expenses increased 1.4%, or $136,000, to $9.6 million compared with $9.5 million for the comparable period in 2006, representing 29.1% and 33.7% of total revenues for each period, respectively. In addition to the items listed above, the increase in dollars is namely attributable to: (i) sales and marketing expenses incurred by MBI, Data One, VSI and PSI in the six month period for which there were no expenses incurred in the comparative period last year amounting to $470,000; and (ii) an additional $190,000 related to trade show and other events which took place in the first half of 2006 but not in the first half of 2007.

It is expected that selling and marketing expenses will increase in dollars in future periods as amounts paid out to our sales force and to industry consultants increase commensurate with the growth in our sales. It is not expected, however, that as a percentage of sales, sales and marketing costs will vary significantly in the near future.

Research and development expenses

We continue to focus in the coming quarters on integrating solutions recently acquired 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 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 follow-on versions as well as data for maintaining, improving and localizing our new or recently introduced products in order to further enhance their marketability and expand their target markets.



R&D Expenses and Development Costs
(Amounts in thousands of U.S. dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------
Three months Six months
ended April 30, ended April 30,
2007 2006 2007 2006
------------------------------------------------------------------------
Research and Development $ $ $ $
Gross Expenditure 3,049 3,041 6,257 5,381
Less: tax credits (32) (32) (65) (78)
-----------------------------------
3,017 3,009 6,192 5,303
-----------------------------------
-----------------------------------
Capitalized cost 1,873 1,871 3,743 3,704
Development costs acquired - 1,430 260 2,254
Tax credits (275) (339) (557) (583)
-----------------------------------
Net capitalized costs 1,598 2,962 3,446 5,375
-----------------------------------
-----------------------------------

Gross Expenditure 3,049 3,041 6,257 5,381
Less: Expenses capitalized 1,873 1,871 3,743 3,704
-----------------------------------
As per note 4 to the Financial
Statements 1,176 1,170 2,514 1,677

Less: Tax Credits (32) (32) (65) (78)
Amortization - Development costs
internal 1,033 614 1,972 1,136
Amortization - Development costs
acquired 256 259 509 370
-----------------------------------
Per earnings statement 2,433 2,011 4,930 3,105
-----------------------------------
-----------------------------------

Investment tax credits
----------------------
Credited to Earnings 32 32 65 78
Reducing Capitalization 275 339 557 583
-----------------------------------
307 371 622 661
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For the three months ended April 30, 2007, gross research and development expenses remained stable at $3.0 million, representing 17.4% of total revenues for the period compared to 18.8% for the same period in 2006. Of course, as stated earlier, the 2007 revenues do not include K/BIS sales while the 2006 revenues do.

Net research and development expenses increased by $422,000 or 21.0%, to $2.4 million for the second quarter of fiscal 2007, representing 13.9% of total revenues for the period compared to $2.0 million for the same period in 2006, or 12.5% of total revenues for the period. Research and development expenditures increased between the periods as a result of an increase of $416,000 related to an amortization expense with respect to internally generated development costs.

For the six months ended April 30, 2007, gross research and development expenses increased by 16.3%, or $876,000, to $6.3 million, representing 18.9% of total revenues for the period, which compares to $5.4 million in 2006, or 19.1% of total revenues for the period. Research and development expenditures increased between the periods namely as a result of research and development expenses incurred by MBI, Data One, VSI and PSI in the six months where no expense was incurred last year totaling $681,000 and the addition of employees to research and development functions.

Net research and development expenses increased by 58.8%, or $1.8 million, to $4.9 million for the first six months of fiscal 2007, representing 14.9% of total revenues for the period. This compared to $3.1 million for the same period in 2006, or 11.0% of total revenues. Net research and development expenditures increased between the periods as a result of: (i) research and development expenses incurred by MBI, Data One, VSI and PSI for the period totaling $487,000 which included amortization expenses amounting to $123,000 due to acquired development costs related to the said acquisitions which did not have a corresponding charge in fiscal 2006; (ii) an increase of $836,000 related to the amortization expense with respect to internally generated development costs; (iii) increase in organic gross expenditure related to additional time spent in R&D activities in the period amounting to $212,000; and (iv) a decrease in organic capitalized costs amounting to $302,000 offset by an increase in capitalized cost from acquisitions amounting to $344,000.

General and administrative expenses

General and administrative expenses decreased by 14.5%, or $510,000, to $3.0 million for the second quarter ended April 30, 2007, compared with $3.5 million in the same period in 2006, representing 17.2% and 21.7% of total revenues for each respective period. The decrease is attributable to: (i) a reduction of professional fees related to accounting and tax and other consulting services provided by outside services amounting to $434,000; (ii) lower costs related to the company's stock trading activity amounting to $67,000; (iii) a net reduction of various other expense items totaling $56,000; and (iv) these decreases were partially offset by general and administrative expenses incurred by PSI amounting to $47,000.

General and administrative expenses decreased by 6.8%, or $446,000, to $6.1 million for the first six months of 2007, compared with $6.5 million in the same period in 2006, representing 18.4% and 23.2% of total revenues for each respective period. In addition to the items described above, the decrease is attributable to a further decrease of $132,000 with respect to outside professional services and the reallocation of certain expenses related to information systems to other line items. These decreases were partially offset by the increase in amortization expenses included in general and administrative expenditures of $159,000 of which $67,000 due to amortization expense related to intangible assets as well as general and administrative expenses incurred by MBI, Data One, VSI and PSI for the quarter totaling $331,000.

On an organic basis, general and administrative expenses decreased by 4.7% for the second quarter and decreased by 16.0% for the first six months of 2007 compared to the same period last year.

Stock-based compensation expenses

Stock-based compensation expenses remained stable for the second quarter of 2007 and the comparable period in the previous year. Stock-based compensation expenses amounted to $165,000 for the six months of fiscal 2007 compared to $208,000 for the same period in the previous year. Refer to Note 10 of the interim unaudited 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 31.5% to $2.5 million for the second quarter of 2007, representing 14.0% of total revenues compared to $1.9 million or 11.6% of total revenues for the same period in 2006. For the six months ended April 30, 2006, operating income stood at $3.1 million compared to the $2.4 million recorded for the same period in 2006.



Operating Income
(Amounts in percentages)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
April 30, April 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
% % % %

Revenue 100.0 100.0 100.0 100.0
Cost of Sales 26.7 21.9 27.7 22.7
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Gross Margin 73.3 78.1 72.3 77.3
Sales & marketing 27.9 31.9 29.1 33.7
Research & development 13.9 12.5 14.9 11.0
General and administrative 17.2 21.7 18.4 23.2
Stock based compensation 0.3 0.4 0.5 0.8
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Operating Income 14.0 11.6 9.4 8.6
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Other Expenses

As a result of the sharp drop in value of the US dollar compared to the Canadian dollar and in turn the relative decrease in value of the Canadian dollar against the Euro and the Pound Sterling in the last few days of the second quarter, the Company recorded a largely unrealized exchange loss of $542,000 (2006 - gain of $62,000) relating principally to its net monetary asset holdings in each of the three currencies and in particular the US Dollar. This loss was partially offset by financial income in the quarter of $206,000 (2006 - $339,000) for a net other expense of $336,000 compared to a net other income of $401,000 in the second quarter of 2006.

For the six months ended April 30, 2007 other income totals $1,000, representing the net result of exchange losses of $432,000 offset by financial income of $433,000.

Non GAAP Measures

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 the second quarter of fiscal 2007, adjusted operating income increased to $2.9 million, or 16.6% of revenues compared to $2.3 million, or 14.3% of revenues, for the same period in fiscal 2006.



Adjusted Operating Income
(Amounts in percentages)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Six months ended
April 30, April 30,
2007 2006 2007 2006
---------------------------------------------------------------------------
$ $ $ $
Operating Income (GAAP) 2,457 1,868 3,121 2,432
Stock based compensation 51 59 165 208
Amortization of acquired
intangibles 137 125 267 200
Amortization of acquired
development costs 256 259 509 370
---------------------------------------------------------------------------
Adjusted Operating Income 2,901 2,311 4,062 3,210
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16.6% 14.3% 12.2% 11.4%
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EBITDA

EBITDA is a non-GAAP measure related to cash earnings and is defined for these purposes as Operating Income plus amortization and depreciation expenses. The following table provides the details for the quarters and six months period ended April 30, 2007 and 2006:



(Amounts in thousands of U.S. dollars)
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Three months ended Six months ended
April 30, April 30,
2007 2006 2007 2006
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$ $ $ $
Operating Income (GAAP) 2,457 1,868 3,121 2,432
Amortization of property and
equipment 349 296 696 535
Amortization of intangibles 188 173 364 297
Amortization of internal
development costs 1,033 614 1,972 1,136
Amortization of acquired
development costs 256 259 509 370
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EBITDA 4,283 3,210 6,662 4,770
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Margin % 24.4% 19.9% 20.1% 16.9%
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7. Liquidity

Cash from Operations

For the quarter ended April 30, 2007, cash flow from operating activities before changes in working capital items amounted to $3.2 million. During the quarter, $1.1 million in cash was used in working capital items compared to $726,000 for the same period last year (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).

For the six months ended April 30, 2007, cash flow from operating activities before changes in working capital items amounted to $6.1 million compared to $5.5 million for the same period of last fiscal year. During the six months, $1.4 million in cash was used in working capital items compared to $2.1 million for the same period last year (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 an increase in accounts receivable, contracts in progress, prepaid expenses and a decrease in income taxes payable and accounts payable, partially offset by an increase in deferred revenues.

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 quarter ended April 30, 2007, the Company capitalized internal development costs in the amounts of $1.6 million, net of applicable credits (2006 - $1.5 million) and expended $344,000 (2006 -- $353,000) 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.

For the six months ended April 30, 2007, $800,000 in cash was used to acquire PSI. Please refer to Note 6 to the interim unaudited consolidated financial statements for further details relating to the allocation of purchase prices and other specifics of this acquisition. Cash used for acquisitions in the same period last year amounted to $8.2 million. The company also expended $586,000 (2006 -$551,000) to purchase property and equipment as described above. These additions do not include those that were acquired through the business acquisition of PSI.

Since the beginning of the fiscal year, the Company has increased available cash on hand by reducing short term investments by $2.5 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

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. 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.



Use of Proceeds - Initial Public Offering

(Amounts in millions of US Dollars)
----------------------------------------------------------
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Investment range Investment as at
Investment Area indicated at IPO April 30, 2007
----------------------------------------------------------

Sales and Marketing $3.1 to $4.6 $3.8
10% - 15%

Research and Development $9.2 to $10.8 $8.1
30% - 35%

Acquisitions $15.4 to $16.9 $11.1
50% - 55%
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8. Capital Resources

Consolidated Balance Sheet Data:
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(In thousands of U.S. dollars) April 30, October 31,
2007 2006
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Cash and cash equivalents 7,820 5,337
Short term investments 27,473 29,937
Working capital (considering deferred revenue) 28,946 27,600
Total assets 101,079 96,579
Deferred revenue 15,485 12,672
Long-term debt (including current portion) 521 621
Total shareholders'equity 71,307 68,088
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As at April 30, 2007, our working capital stood at $28.9 million compared to $27.6 million at the end of our 2006 fiscal year. The main items that contributed to the increase in our working capital position in the six months ended April 30, 2007 are an increase in accounts receivable of $2.7 million due to annual billings for support and enhancements to major home centers in the quarter and a decrease in income taxes payable of $1.1 million. These were partially offset by an increase in deferred revenue of $2.8 million related to the unearned portion of support and enhancement billings in the quarter to major home centers.

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, a wholly-owned subsidiary of the Company has at its disposal, authorized but unused credit facilities available for its ongoing operational needs amounting to approximately 160,000 Euros.

9. Balance Sheet and Financial Situation

The variations in balance sheet items as at April 30, 2007 compared with the year ended on October 31, 2006, resulted principally from the completion of the PSI acquisition and working capital variations. The reader should refer to Note 6 to the interim unaudited consolidated financial statements for further details relating to the accounting of the business acquisition completed in fiscal 2007.

Development costs are also higher due to the capitalization of research and development expenditures as explained in section 6 of this report.

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$1.1153 as at April 30, 2007, compared to C$1.1227 as at October 31, 2006.

Share Capital Information

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.



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Issued as at Issued as at
Authorized April 30, 2007 May 31, 2007
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Common shares Unlimited 18,827,637 18,801,237
Preferred shares Unlimited None None
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Stock options - currently
issued and outstanding 787,005 787,005
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On April 26, 2007, the Company announced its intention to purchase for cancellation purposes, by way of a normal course issuer bid (the "Bid"), some of its common shares, beginning on May 2, 2007.

Under the Bid, the Company may repurchase for cancellation up to 940,200 common shares. The consideration to be paid by the Company for any common shares it will repurchase under the Bid will be at the market price of such common shares at the time of acquisition. The Company did not repurchase any of its shares within the previous twelve months.

From May 2 to June 7, 2007, the Company repurchased 26,400 common shares for a total cash consideration of $144,027.

10. Responsibilities, Controls and Policies

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 Interim 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 this Interim Report is consistent with that in the Interim Unaudited 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 Interim Unaudited 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 interim disclosure documents, including the Interim Unaudited 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 Interim Unaudited 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 Interim Unaudited 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. However, the interim unaudited consolidated financial statements for the quarter ended April 30, 2007 have not been reviewed by the Company's auditors. In addition, the Audit Committee has the duty to review the appropriateness of the accounting policies and significant estimates and judgments underlying the Interim Unaudited 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 Interim Unaudited Consolidated Financial Statements were reviewed by the Company's Audit Committee on June 7, 2007 and approved by 20-20's Board of Directors on June 12, 2007.

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 interim filings are made.

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 CEO and CFO have evaluated whether there were changes to internal control over financial reporting during the interim period ended April 30, 2007 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.

11. Quarterly Financial Data

The amount of R&D capitalization recorded in the fourth quarter of fiscal 2005 that relates to adjustments for prior periods amounts to approximately $670,000. Net of associated amortization expense, the adjustments represent a reduction of $590,000 in the fourth quarter research and development expense. The $590,000 amount breaks out into $137,000, $225,000 and $228,000 for the first to the third quarter of fiscal 2005, respectively. The following table illustrates the impact of allocating the above-mentioned capitalization to respective quarters of fiscal 2005 -- please refer to the Adjusted for Year-end Items section of the Selected Quarterly Unaudited Financial Information table shown hereafter.

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)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2007 2006 2006 2006 2006 2005 2005
Second First Fourth Third Second First Fourth Third
As reported
Revenues 17,525 15,578 17,421 14,864 16,140 12,036 10,850 10,699
Net earnings 1,694 780 2,672 677 1,747 773 1,415 1,392
Basic earnings
per share 0.09 0.04 0.14 0.04 0.09 0.04 0.08 0.07
Diluted earnings
per share 0.09 0.04 0.14 0.04 0.09 0.04 0.07 0.07
Adjusted for
year-end items
Revenues n/a n/a n/a n/a n/a n/a 10,850 10,699
Net earnings n/a n/a n/a n/a n/a n/a 1,030 1,539
Basic earnings
per share n/a n/a n/a n/a n/a n/a 0.05 0.08
Diluted earnings
per share n/a n/a n/a n/a n/a n/a 0.05 0.08
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12. Other Disclosure

The reader should refer to the Company's 2006 Audited Consolidated Financial Statements, notes related thereto, and accompanying Management's Discussion and Analysis for the fiscal year ended October 31, 2006 for additional information pertaining to our off-balance sheet arrangements, contractual obligations, accounting policies, use of accounting estimates, future changes in accounting policies and risks and uncertainties as there have not been notable changes in these elements since the Company reported its 2006 results.

Currency Exchange Risk

The Company's currency of measure is the Canadian dollar. However, financial statements are presented in U.S. dollars. With the decline in value of the U.S. dollar versus most major currencies in the last two fiscal years, the company's operating results had been affected, particularly in cases where the expenditure is in a currency other than the U.S. dollar. The most significant impact was 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 had a natural hedge since most revenues and expenses are incurred in the same currency.

During the first half of fiscal 2007 however, the impact of this variation was not as significant as it has been in the last several quarters as the average Canadian dollar exchange rate was $0.865 compared to $0.862 for the same period in fiscal 2006. The Company incurred cost in Canadian dollars of approximately C$13 million for the six months ended April 30, 2007.

The Company enters into forward exchange contracts 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. Gains resulting from these contracts amounting to $414,000 for the quarter ended April 30, 2007 compared to a gain of $140,000 for the corresponding period in 2006 are recorded in the "Financial Income" line of our Consolidated Earnings Statement.

Contact Information

  • 20-20 Technologies Inc.
    Jean Mignault
    Co-Chairman of the Board and Chief Executive Officer
    Laval: (514) 332-4110
    or
    20-20 Technologies Inc.
    Steve Perrone
    Chief Financial Officer
    Laval: (514) 332-4110
    Website: www.2020technologies.com