20-20 Technologies Inc.
TSX : TWT

20-20 Technologies Inc.

September 12, 2007 09:20 ET

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

LAVAL, QUEBEC--(Marketwire - Sept. 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 July 31, 2007. All amounts are in U.S. dollars unless otherwise indicated.

Third Quarter Highlights:

- Revenues increased 14.0% to $16.9 million

- Operating income increased 14.6% to $857,000

- EBITDA increased 23.1% to $2.9 million

- EPS stood at $0.03, impacted by a largely unrealized exchange loss due to significant movement in currency exchange rates

"Despite softer than expected license revenues, 20-20 achieved growth in revenues and operating income exceeding 14.0% in the third quarter of fiscal 2007, driven mainly by organic growth," said Jean Mignault, Co-Chairman of the Board and CEO. "However, significant exchange rate fluctuations did not allow our sound operational performance to be reflected on our bottom line results."

"Our internationally diversified product offering contributed to our performance as we registered continued strength in revenues from the commercial and residential markets, offset by a decline in revenues from the manufacturing sector," said, Jean-Francois Grou, President and COO. "This was notably the case in the United-States where we experienced a slowdown in the sales of our manufacturing software despite the fact that we actually have very little competition in this segment. We believe this is a result of manufacturers only delaying the purchase of our products. We are confident that the continuous launch of new products either developed internally or by companies we have acquired, will continue to strengthen our international market presence and contribute to 20-20 s overall growth."

Revenues

Revenues grew by 14.0%, reaching $16.9 million for the quarter ended July 31, 2007. The increase is attributable to revenues totaling $1.2 million in organic growth as well as $0.3 million contributed by acquisitions. On an organic basis, excluding revenues from acquisitions in the quarter and the effect of the K/BIS trade show, which this year took place in the third quarter, revenues grew by 8.1% over the comparable period in 2006.

Revenues from license sales increased 10.4% to $6.3 million over the same period in 2006. Revenues from maintenance and other recurring revenues increased 11.3% to $7.2 million for the quarter. Revenues from professional services increased 27.7% to $3.5 million for the quarter ended July 31, 2007. Revenues continued to be generated mainly in North America, representing 68.8% of total revenues for the third quarter and 67.5% for the nine months ended July 31, 2007.

For the nine months ended July 31, 2007, revenues increased by 16.3% to $50.0 million from $43.0 million last year. Organic growth for the same period amounted to 10.4%, once adjusted for acquisitions.

Operating Income

"Our operating expenses increased to $11.5 million during the third quarter of fiscal 2007 essentially due to the higher Canadian dollar and to the cost of the K/BIS trade show that took place this quarter but occurred in the second quarter last year," said Steve Perrone, Chief Financial Officer. "We expect that in the near term our operating expenses will remain relatively consistent sequentially, on a quarter-over-quarter basis, excluding any impact due to exchange rate variations. This predictability should enable us to grow our net income in conjunction with our revenues."

"The Company is exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar," added M. Perrone. "We will continue to hedge a portion of our transactional exposure and will continue to monitor our financial statement translation exposure to evaluate when and how much of this exposure should be hedged."

Operating income increased by 14.6% to $857,000 for the third quarter of 2007, representing 5.1% of total revenues compared to $748,000 or 5.0% of total revenues for the same period in 2006. This was achieved despite the stronger Canadian dollar compared to the same period last year, which resulted in effectively increasing our CA$ expenses when represented in U.S. dollars, by approximately $600,000. For the nine months, operating income increased by 25.1% to $4.0 million, representing 7.9% of revenues compared to $3.2 million or 7.4% of revenues for the same period last year.

Net earnings

As a result of the sharp drop in value of the U.S. 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 third quarter, the Company recorded a largely unrealized exchange loss of approximately $524,000, compared to a gain of $79,000 in the corresponding quarter of 2006, relating principally to its net monetary asset holdings in each of the three currencies and in particular the U.S. Dollar. This loss was partially offset by financial income in the quarter of $261,000 (2006 - $207,000) for a net other expense of $54,000 compared to a net other income of $191,000 in the third quarter of 2006. For the nine months, other expenses total $53,000, representing the net result of exchange losses of $748,000 offset by financial income of $695,000.

As a result, net earnings declined to $549,000 or 3.2% of total revenues for the quarter compared to $677,000 or 4.6% of total revenues in the year-ago third quarter. Earnings per share for the quarter amounted to $0.03 compared to $0.04 per share in the previous year third quarter, on a fully diluted basis for both periods. For the nine months, net income was $3.0 million, compared to $3.2 million in the comparable period in 2006. Earnings per share on a fully diluted basis were $0.16 compared to $0.17 per share for the corresponding periods.

EBITDA(i) increased 23.1% to $2.9 million for the third quarter of fiscal 2007, compared to $2.3 million during the same period in 2006. EBITDA(i) for the nine months ended July 31, 2007 increased by 34.2% to $9.5 million compared to $7.1 million last year.

The Company's cash and investments are essentially held in AAA and R1 rated instruments issued by major Canadian chartered banks and governments. The Company has no exposure to asset-backed instruments.

Conference Call Information

20-20 will host a conference call to discuss results today, September 12, 2007 at 5 p.m. (ET). The call will be available by telephone at 514-807-8791 and 1-800-732-0232. The call will be web cast at www.2020technologies.com. An audio replay of the conference call will be available until midnight on Monday, November 12, 2007 and can be accessed by dialing 416-640-1917 or 1-877-289-8525 and entering pass code 21245675#.

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.



20-20 Technologies Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)

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July 31, October 31,
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2007 2006
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(Unaudited)
$ $
ASSETS
Current assets
Cash and cash equivalents 16,102 5,337
Short-term investments 23,029 29,937
Accounts receivable 15,371 13,908
Contracts in progress 688 556
Prepaid expenses 1,338 1,229
Future income taxes 240 873
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56,768 51,840
Property and equipment 3,529 3,731
Intangibles 3,337 3,384
Development costs 13,599 11,599
Other assets 2,013 1,454
Goodwill 26,112 24,157
Future income taxes 356 414
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105,714 96,579
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LIABILITIES
Current liabilities
Accounts payable 9,472 8,625
Income taxes payable 1,011 1,853
Deferred revenue 15,391 12,672
Deferred credit - 1,037
Long-term debt 73 53
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25,947 24,240
Long-term debt 454 568
Leasehold inducements 353 308
Future income taxes 3,899 3,375
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30,653 28,491
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SHAREHOLDERS EQUITY
Capital stock 57,912 57,886
Common stock options 1,866 1,847
Contributed surplus 965 966
Retained earnings 3,904 896
Accumulated other comprehensive income 10,414 6,493
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75,061 68,088
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105,714 96,579
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20-20 Technologies Inc.
CONSOLIDATED EARNINGS
(Amounts in thousands of U.S. dollars, except earnings-per-share,
unaudited)

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Three months ended Nine months ended
July 31 July 31
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
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$ $ $ $
Revenues
License sales 6,264 5,674 18,358 16,975
Maintenance and other recurring
revenues 7,168 6,442 20,650 17,702
Professional services 3,509 2,748 11,036 8,363
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16,941 14,864 50,044 43,040
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Cost of revenues
License sales 725 380 2,116 1,462
Maintenance and services 3,851 3,564 11,632 8,888
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4,576 3,944 13,748 10,350
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Gross margin 12,365 10,920 36,296 32,690
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Operating expenses
Sales and marketing 5,780 4,899 15,409 14,392
Research and development 2,410 2,066 7,340 5,171
General and administrative 3,212 3,124 9,298 9,656
Stock-based compensation
expense 106 83 271 291
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11,508 10,172 32,318 29,510
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Operating income 857 748 3,978 3,180
Financial expenses (income) 54 (191) 53 (792)
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Earnings before income taxes 803 939 3,925 3,972
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Income taxes
Current 325 79 880 168
Future (71) 183 22 607
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254 262 902 775
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Net earnings 549 677 3,023 3,197
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Earnings per share
Basic 0.03 0.04 0.16 0.17
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Diluted 0.03 0.04 0.16 0.17

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20-20 Technologies Inc.
CONSOLIDATED CASH FLOWS
(Amounts in thousands of U.S. dollars, unaudited)

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Three months ended Nine months ended
---------------------------------------------------------------------------
July 31 July 31
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
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$ $ $ $
OPERATING ACTIVITIES
Net earnings 549 677 3,023 3,197
Non-cash items
Amortization 2,004 1,576 5,545 3,914
Leasehold inducements 13 (4) 27 49
Stock-based compensation 98 83 263 291
Capitalized interest on long term
debt 6 - 18 -
Future income taxes (71) 183 22 607
Unrealized gain on forward
exchange contracts 57 (21) (191) (109)
Changes in working capital items 1,755 2,006 372 (136)
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Cash flows from operating activities 4,411 4,500 9,079 7,813
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INVESTING ACTIVITIES
Business acquisitions (95) (1,100) (895) (9,294)
Short-term investments 5,469 3,305 8,013 28,063
Property and equipment (178) (787) (764) (1,338)
Development costs - acquired - (439) - (439)
Development costs - internal (1,794) (1,521) (4,980) (4,642)
Other assets (135) (189) (454) (84)
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Cash flows from investing activities 3,267 (731) 920 12,266
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FINANCING ACTIVITIES
Bank indebtedness - - - (59)
Long term debt - 10 - 10
Repayment of long-term debt (3) (34) (30) (801)
Options exercised 3 - 20 70
Common shares buyback (164) - (164) -
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Cash flows from financing activities (164) (24) (174) (780)
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Effect of changes in exchange rate on
cash held in foreign currencies 768 (680) 940 196
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Net increase in cash and
cash equivalents 8,282 3,065 10,765 19,495
Cash and cash equivalents,
beginning of period 7,820 21,964 5,337 5,534
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Cash and cash equivalents,
end of period 16,102 25,029 16,102 25,029
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MANAGEMENT'S DISCUSSION AND ANALYSIS

(For the Third Quarter ended July 31, 2007)

The following report, dated September 6, 2007, is a discussion relating to the financial results and condition of 20-20 Technologies Inc. ("20-20" or the "Company") for the Third Quarters ended July 31, 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 nine months ended July 31, 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 third quarters ended July 31, 2007 and 2006, this report also discusses certain important elements that occurred between such date and September 6, 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 $198,574 as of July 31, 2007 is included in accounts receivable. The accrued loss of $3,248 as of October 31, 2006 is included in accounts payable.

Transaction 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 his fair value. The Company has decided to recognize embedded derivative in its consolidated balance sheet, if applicable. This rule has no impact in the financial statements of the Company.

Effective July 1, 2007, the Company adopted the new CICA Handbook Section 1506, Accounting Changes, providing standards for accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The section also specifies that a change in accounting policy, if not required by a primary source of Canadian GAAP, should be made only if it results in a more reliable and relevant information. Section 1506 includes disclosures rules regarding the description and the impact on the Company financial results of future accounting standards not yet applied. The adoption of the new section did not have an effect on the Company financial results.

Future Accounting Standards

In December 2006, the CICA issued the following new recommendations which apply to fiscal years beginning on or after October 1, 2007. During the next quarters, the Company will evaluate the impact of the adoption of these new sections on its consolidated financial statements.

Financial Instruments - Disclosures, Section 3862, describes the required disclosures related to the significance of financial instruments on the entity s financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. This section complements the principles of recognition, measurement and presentation of financial instruments of Section 3855,
Financial Instruments - Recognition and Measurement.

Financial Instruments - Presentation, Section 3863, establishes standards for presentation of financial instruments and non-financial derivatives. It complements standards of Section 3861, Financial Instruments - Disclosure and Presentation.

Capital Disclosures, Section 1535, establishes standards for disclosing information about the entity s capital and how it is managed to enable users of financial statements to evaluate the entity s objectives, policies and procedures for managing capital

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 and furniture industries, offering dealers and retailers state-of-the-art design, specification, photo-realistic 3-D rendering and management software for configurable and standalone products in the residential, commercial and recreational interior design markets. The Company's proprietary end-to-end solution integrates the entire design, sales, supply chain and manufacturing processes of the industry, including an integration platform between sales and manufacturing, computer-aided engineering, shop floor automation and machining 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 and distributors. 20-20 has operations throughout North America and Europe as well as a direct presence in both 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 $6.3 million, or 37.0% of total revenues in third quarter of fiscal 2007, and $18.4 million, or 36.7% for the nine months ended July 31, 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 a recurring nature amounted to $7.2 million, or 42.3% of total revenues in third quarter of fiscal 2007, and $20.7 million, or 41.3% for the nine months ended July 31, 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 $3.5 million, or 20.7% of total revenues during the quarter, and $11.0 million, or 22.0% for the nine months ended July 31, 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 services 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 as well as product management, 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 and documentation 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, the Company portion of the employee share purchases under the Employee Share Purchase Plan and the cost associated with the deferred share units issued quarterly to the Company's Directors.

3. Third Quarter in Review

The Company's revenues in the quarter grew by 14.0%, essentially through organic growth along with an acquisition, reaching $16.9 million for the quarter ended July 31, 2007. Net earnings amounted to $549,000 or 3.2% of total revenues for the period. This compares to $14.9 million in revenues and $677,000 in net earnings, or 4.6% of total revenues for the comparable period in 2006. The performance recorded in the third quarter of fiscal 2007 is attributable to $1.2 million in organic growth as well as revenues contributed by acquisitions totaling $328,000 in fiscal 2007. It is important to note that in 2007, revenues included sales made at the K/BIS show, the premier trade show in North America for the kitchen and bath industry that took place in the second quarter in 2006. The 8.1% organic increase, adjusted for the effect of the K/BIS show, was fueled by the continued strength in revenues from the commercial and residential markets, offset by a decline in revenues from the manufacturing sector.

License sales to customers in the commercial (office) market showed strong growth at 83.8% over 2006, contributing to overall organic growth of 32.5% in the commercial sector. Although license sales in the residential sector remained essentially unchanged from the third quarter in 2006 once we adjust for the timing of the K/BIS show, total revenues from the residential sector recorded a growth of 17.8%, largely due to growth in recurring revenues derived from our installed base and from professional services.

Revenues from our manufacturing solutions however saw a decline in the quarter of 19.5% on an organic basis excluding currency exchange rate contributions as sales cycles increase due to the uncertainty in the homebuilding sector and the tight credit conditions in the United States.

4. Performance Overview

Revenues for the third quarter ended July 31, 2007 amounted to $16.9 million, representing a $2.1 million or 14.0% increase over what had been recorded in the same period in the preceding fiscal year. The increase in revenues is attributable to additional recurring support and maintenance service revenues generated from a growing licensee base and to the increase in catalog sales revenues as well as $328,000 generated by the acquisition of PSI (effective January 1, 2007).

Revenues for the first nine months of fiscal 2007 amounted to $50.0 million, representing a $7.0 million, or 16.3% increase over revenues recorded in the same period in fiscal 2006. The increase in revenues is partly attributable to revenues amounting $2.5 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 8.1% over the comparable period in 2006. The growth for the nine months ended July 31, 2007 on the same basis is 10.4% over the comparable period in 2006.

The Company's gross margin increased by $1.4 million or 13.2% to $12.4 million for the quarter ended July 31, 2007 compared with $10.9 million for the comparable period in 2006, representing 73.0% and 73.5% of total revenues respectively. The overall gross margin (as a percentage of revenues) remained essentially unchanged versus 2006.

For the nine months ended July 31, 2007, gross margins increased by $3.6 million or 11.0% to $36.3 million compared to $32.7 million for the same period last year, representing 72.5% and 76.0% of total revenues respectively. This decline in gross margin (as a percentage of revenues) is essentially attributable to the change in revenue mix in 2007 versus 2006 and is further discussed in section 6 of this report.

The operating income for the quarter ended July 31, 2007, increased by 14.6% to $857,000 compared to the same period last year, representing 5.1% and 5.0% of total revenues for each respective period. The increase in operating income is namely attributable to: (i) the increase in gross margin dollars due to sales volumes; (ii) increase in sales and marketing costs related to trade shows and sales volume; and (iii) increase in research and development expenses due to increased amortization related to capitalized costs of prior periods.

The strength of the Canadian dollar versus the U.S. dollar also had a significant impact on operating and financial expenses, as further discussed in section 6 of this report.

Net earnings for the period declined slightly to $549,000 for the quarter ended July 31, 2007, compared with the same period in 2006. The consolidated income tax expense for the third quarter of fiscal 2007 stood at $254,000 or 31.6% of pre-tax earnings compared to $262,000 or 27.9% for 2006.

5. Selected Consolidated Financial Information

The selected consolidated financial information set out below for the three and nine months ended July 31, 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 Nine months
ended July 31, ended July 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
Revenues
License sales 6,264 5,674 18,358 16,975
Maintenance and other
recurring revenues 7,168 6,442 20,650 17,702
Professional services 3,509 2,748 11,036 8,363
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16,941 14,864 50,044 43,040
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Cost of revenues
License sales 725 380 2,116 1,462
Maintenance and services 3,851 3,564 11,632 8,888
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4,576 3,944 13,748 10,350
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Gross margin 12,365 10,920 36,296 32,690
Gross margin (%) 73.0% 73.5% 72.5% 76.0%
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Operating expenses
Sales and marketing 5,780 4,899 15,409 14,392
Research and development 2,410 2,066 7,340 5,171
General and administrative 3,212 3,124 9,298 9,656
Stock-based compensation
expense 106 83 271 291
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11,508 10,172 32,318 29,510
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Operating income 857 748 3,978 3,180
Operating income (%) 5.1% 5.0% 7.9% 7.4%

Financial expenses
(income) 54 (191) 53 (792)
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Earnings before income
taxes 803 939 3,925 3,972
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Income taxes
Current 325 79 880 168
Future (71) 183 22 607
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Net earnings 549 677 3,023 3,197
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings per share (1)

Net earnings available to
common shareholders 549 677 3,023 3,197
---------------------------------------------------------------------------

Basic weighted average
number of common shares 18,804,172 18,800,837 18,811,421 18,780,145
Basic earnings per share $0.03 $0.04 $0.16 $0.17
---------------------------------------------------------------------------
Diluted weighted average
number of common shares 19,064,008 19,051,356 19,065,404 19,078,870
Diluted earnings per
share $0.03 $0.04 $0.16 $0.17
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


(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 and Nine Months Ended July 31, 2007 and 2006

Acquisitions

The following information with respect to acquisitions completed following the end of the third 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.

On January 8, 2007, the Company acquired substantially all of the assets of Pattern Systems International, Inc. ("PSI"), based in Mount Arlington, New Jersey. At that time, the transaction was established at a total consideration of $1,025,000, of which $225,000 was remaining as a balance of purchase price payable, as the seller completes development of additional software components for the Company. On July 17, 2007, the Company concluded an agreement with "PSI" whereby the balance of purchase price was settled at $95,000, representing a full and final payment for development completed as of that date, with no further obligation to either party. As of July 31, 2007, the total consideration of $895,000 was paid in full. 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 internal sales representatives, with some direct sales, mainly for the cabinetmaker, architectural millwork and woodworking industry.

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

Total revenues increased by 14.0% 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 third quarter of fiscal 2007 grew by 8.1%. For the nine months ended July 31, 2007, revenues grew organically by 10.4%.



Revenues by Geography
Revenue Mix by Customer Location
(In thousands of U.S. dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended July 31, Nine months ended July 31,
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ % $ % $ % $ %
Revenues
by
geographic
location
North
America 11,655 68.8 9,917 66.7 33,811 67.5 29,351 68.2
Europe 4,890 28.9 4,648 31.3 15,193 30.4 12,884 29.9
Rest of
the
World 396 2.3 299 2.0 1,040 2.1 805 1.9
--------------------------------------------------------------------------
16,941 14,864 50,044 43,040
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Revenues continued to be generated mainly in North America, representing 68.8% of total revenues for the third quarter and 67.5% of total revenues for the nine months ended July 31, 2007.

The dollar increase in revenues year-over-year attributable to our North American market segment amounted to $1.7 million representing growth of 17.5% over last year, to $11.7 million for the third quarter ended July 31, 2007. 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. On an organic basis, adjusted for K/BIS for the quarter, revenues in North America grew by 8.7% and by 8.4% for the nine months ended July 31, 2007.

For the first nine months of fiscal 2007, revenues of this market grew by $4.5 million or 15.2%, to $33.8 million. The increase is principally attributable to:

(i) for the nine months, revenues from a full three quarters for VSI, MBI and Data One as well as revenues from PSI for the seven months ended July 2007;

(ii) an increase in maintenance and recurring revenue resulting from the expansion of our installed customer base, which in turn resulted from strong license sales recorded in North America in the last two fiscal years;

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

(iv) several catalog projects in North America.

Revenues generated in European countries accounted for 28.9% of revenues in the third quarter of fiscal 2007 increasing by 5.2% (all organic) over last year. European growth accounted for $242,000 in dollar revenue growth. For the nine months ended July 31, 2007, European revenues increased by $2.3 million or 17.9% (13.6% 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 decreased organically by 1.4% for the quarter and increased organically by 4.4% for the nine months ended July 31, 2007 compared to the previous year.

Revenues generated in the rest of the world increased by 32.5% to $396,000 for the third quarter. The increase is mainly due to an adjustment of $132,000 recorded during the third quarter of fiscal 2006 to exclude sales to Shanghai Rena and DesignTec Co. Ltd, our distributors for China and Taiwan and record these sales as deferred revenue, as we are in the process of acquiring their operations.



Revenues - by Type
Revenue Mix
(In thousands of U.S. dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine months ended
July 31, July 31,
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ % $ % $ % $ %
Revenues by Type
License sales 6,264 37.0 5,674 38.2 18,358 36.7 16,975 39.5
Maintenance and
other recurring
revenues 7,168 42.3 6,442 43.3 20,650 41.3 17,702 41.1
Professional
services 3,509 20.7 2,748 18.5 11,036 22.0 8,363 19.4
---------------------------------------------------------------------------
16,941 14,864 50,044 43,040
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Revenues from license sales increased by 10.4%, or $590,000 to $6.3 million for the quarter ended July 31, 2007. License sales revenues recorded by PSI in the third quarter of 2007 for which there were no revenues in the comparable period last year amounted to $131,000. For the nine month period, revenues from licenses increased by 8.1% or $1.4 million. PSI contributed $267,000 to this growth.

The increase in license revenues is largely due to license sales generated at the K/BIS show which took place in the third quarter in 2007 but in second quarter in 2006. If we adjust for these revenues, the organic decline in license sales was 0.7% for the three months ended July 31, 2007. This organic decrease is explained by the unchanged license sales in the residential sector and a decline in manufacturing license sales due to economic conditions in the United States partly offset by a marked increase in license sales in the commercial sector.

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 7.5% on an organic basis, largely due to the appreciation of European Currencies.

With respect to the nine months ended July 31, 2007, license sales grew by 2.9% on an organic basis over the same period in 2006. Europe recorded a 10.7% organic growth in licenses while North America reported an organic decrease of 3.0%, representing a combination of 67.8% growth in the commercial sector (35.8% for proprietary licenses), a 13.8% decline in the residential sector and a decline of 41.8% in the manufacturing sector.

On a global basis, residential licenses decreased by 8.3 % and manufacturing licenses increased by 3.6%, both on an organic basis.

Revenues from maintenance and other recurring revenues increased by 11.3%, or $726,000, to $7.2 million for the quarter ended July 31, 2007 and 16.7% or $2.9 million for the nine months then ended. On an organic basis, these revenues grew by $578,000 or 9.0% in the quarter and $2.0 million or 11.2% for the nine months ended July 31, 2007, compared to the same periods last year. The acquisition of PSI contributed for $149,000 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 $971,000 for the first nine months of 2007.

The improvement in overall license sales activity during fiscal 2006, reaching $24.3 million, together with the $18.4 million of revenues from license sales recorded in the first nine months of fiscal 2007, contributed to maintenance and other recurring revenues climbing to $7.2 million for the quarter ended July 31, 2007.

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 professional services increased by 27.7%, or $761,000, to $3.5 million for the quarter ended July 31, 2007. On an organic basis, these revenues grew by $712,000 or 26.0% in the quarter, compared to the same period last year. This growth was largely in North America (42.5%) in both the residential and commercial sectors with Europe adding the remaining dollar increase.

For the nine months ended July 31, 2007, revenues from professional services increased by 32.0%, or $2.7 million, to $11.0 million. On an organic basis, these revenues grew by $2.0 million or 23.9% compared to the same period last year. This growth came from North America (32.1%) and Europe (14.6%).

Revenues Outlook

We expect the Company's geographical revenue mix weighting in fiscal 2007 to remain relatively unchanged and changing in the near term as licenses are expected to account for a greater proportion of total revenues.

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 office furniture markets and automating the office furniture sales processes. The residential market is not expected to generate significant growth in license sales given the current economic environment in the United States partly compensated by increasing sales of our new products.

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 we expect to be fully functional in Shanghai buy the end of the fourth quarter. In Brazil and other Latin American countries we will continue to selectively introduce our sales and design software for office furniture.

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.

Cost of Revenues

Cost of revenues from license sales increased at 11.6% of licenses sales for the third quarter in fiscal 2007 compared to 6.7% in fiscal 2006. For the nine months ended July 31, 2007, cost of revenues from license sales increased by $700,000, to $2.1 million, compared to $1.5 million, in the first nine months of fiscal 2006. Over the periods, the cost increased to 11.5% of license sales in the nine months ended July 31, 2007 from 8.6% 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 $81,000 to the overall dollar amount increase compared to the same period last year where they were not included for the full nine month period.

Despite the results in the third quarter attributable to softer than expected license revenues, we expect that 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 third party license sales.

The cost of revenues from maintenance, other recurring revenues and professional services increased by 8.1% or $287,000, to $3.9 million, compared to $3.6 million for fiscal 2006, representing 36.1% and 38.8% of revenues from maintenance and services, respectively. This increase is attributable to: (i) the reallocation of some staff from research and development functions to maintenance and services in order to allocate more resources to service the growing installed base, amounting to $93,000; (ii) increase of $116,000 related to a reclassification of sub-contractor expenses to selling & marketing in fiscal 2006; (iii) 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 $87,000; and (iv) an increase of $122,000 related to the strengthening of the Canadian dollar versus the US dollar in the quarter compared to the same period last year. These increases were offset by a decrease in cost of hardware amounting to $141,000.

Cost of revenues from maintenance, other recurring revenues and professional services increased by 30.9% or $2.7 million, to $11.6 million for the nine months ended July 31, 2007, compared with $8.9 million for the same period in 2006, representing 36.7% and 34.1% of revenues from maintenance and services, respectively. In addition to the factors indicated above, the increase is attributable to: (i) further reallocation of some staff from research and development functions to maintenance and services in order to service the growing installed base; (ii) increase in cost of hardware; (iii) reclassification of some expenses between the line of expenses; and (iv) the cost of revenues amounting to $846,000 from maintenance and services incurred by MBI, VSI, Data One and PSI in the nine month period and the increase in business volumes.

Gross Margin

In the third quarter of fiscal 2007 the margin remained relatively stable as a result of the unchanged revenue mix. For the nine months ended July 31, 2007, the revenue mix changed significantly from the comparable period last year. In particular, licenses generated 36.7% of revenues with a gross margin of 88.5% compared with 39.5% of revenues and 91.4% 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 for the quarter, overall gross margins are negatively affected because of their relative proportion of the revenue mix despite the fact that these revenues accounted for 63.0% of total revenues compared to 61.8% in 2006 and the gross margin is 63.9% in 2007 versus 61.2% in 2006. For the nine months ended July 31, 2007, these revenues accounted for 63.3% of total revenues, generating a gross margin of 63.3% compared with 60.5% of total revenues with a gross margin of 65.9% for the first nine months of 2006.

Acquisitions for which there were no revenues in the comparable period last year, have contributed 1.9% of revenues for the third quarter of the 2007 fiscal year and 5.1% of revenues for the nine months ended July 31, 2007. For the third quarter ended July 31, 2007, revenues were as follows:



---------------------------------------------------------------------------
---------------------------------------------------------------------------
For 3 months ended July 31, For 9 months ended July 31,
2007 2007
Acquisitions Organic Total Acquisitions Organic Total
---------------------------------------------------------------------------
% % % % % %
Revenues
Licenses sales 40.0 36.9 37.0 35.3 36.8 36.6
Maintenance and
other recurring
revenues 45.3 42.3 42.3 38.2 41.4 41.3
Professional
services 14.7 20.8 20.7 26.5 21.8 22.1
---------------------------------------------------------------------------
100.0 100.0 100.0 100.0 100.0 100.0
Gross margin (%) 53.9 73.4 73.0 58.5 73.3 72.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------


MBI revenues recorded during the third 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 had begun to increase. In the third quarter however, license sales declined by 23.5% to represent 13.8% of total revenues from MBI for the quarter. Given the relatively low license sales volume and the high average transaction value the quarterly license revenues are and will remain variable for some periods to come, we anticipate that these higher margin license sales will resume their growth in coming periods thereby generating the expected increase in gross margin from this acquisition.

As a result, although gross margins increased by $1.4 million or 13.2%, the gross margin percentage decreased slightly from 73.5% in the third quarter of 2006 to 73.0% in third quarter of 2007. The quarter benefited from license sales at the K/BIS show however this was offset by the decline in license sales in the manufacturing sector as well as an increase in third party license resale.

The impact on the gross margin percentage is more significant for the nine months ended July 31, 2007. Despite an increase of $3.6 million or 11.0% in dollars, the gross margin percentage decreased from 76.0% in 2006 to 72.5% for the first nine months of 2007.



Gross Margin Mix
(Amounts in thousands except percentages)
-------------------------------------------------------------------------
For the three months ended July 31,
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue Margin % Revenue Margin %

Licenses 6,264 5,539 88.4% 5,674 5,294 93.3%

Maintenance,
recurring and
professional
services 10,677 6,826 63.9% 9,190 5,626 61.2%
-------------------------------------------------------------------------
16,941 12,365 73.0% 14,864 10,920 73.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended July 31,
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue Margin % Revenue Margin %

Licenses 18,358 16,242 88.5% 16,975 15,513 91.4%

Maintenance,
recurring and
professional
services 31,686 20,054 63.3% 26,065 17,177 65.9%
-------------------------------------------------------------------------
50,044 36,296 72.5% 43,040 32,690 76.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Operating Expenses

Human resources

As at July 31, 2007, the Company employed 544 people on a full time and part time basis in the following geographies:



----------------------------------------------------------
----------------------------------------------------------
As at July 31, 2007 2006
----------------------------------------------------------
Canada 243 44.6% 231 45.4%
U.S.A 114 21.0% 97 19.1%
Germany 62 11.4% 62 12.2%
Rest of Europe 98 18.0% 96 18.9%
Rest of the World 27 5.0% 22 4.4%
----------------------------------------------------------
544 100% 508 100%
----------------------------------------------------------
----------------------------------------------------------


Sales and marketing expenses

During the third quarter of fiscal 2007, sales and marketing expenses increased by 18.0% or $881,000, to $5.8 million compared with $4.9 million for the comparable period in 2006, representing 34.1% and 33.0% of total revenues for each period, respectively. This increase is attributable to several factors: (i) the third quarter of 2007 included the K/BIS show which did not take place in the third quarter of 2006. Expenses associated with this show 2006 amounted to approximately $500,000; (ii) higher sales commissions compared to the prior year; (iii) an increase in salaries and rent; and (iv) $151,000 related to a stronger Canadian dollar versus the US dollar compared to last year. PSI acquisition contributed for $154,000 of the increase to the quarter. These increases were partially offset by a reclassification of expenses from the cost of revenues in 2006 and marketing funding received in the context of a partnership program which was applied in reduction of selling and marketing expenses.

For the nine months, sales and marketing expenses increased by 7.1%, or $1.0 million, to $15.4 million compared with $14.4 million for the comparable period in 2006, representing 30.8% and 33.4% of total revenues for each period, respectively. In addition to the items listed above, the increase in dollars is namely attributable to sales and marketing expenses incurred by MBI, Data One, VSI and PSI in the nine month period for which there were no expenses incurred in the comparative period last year amounting to $470,000 and a reduction in spending on certain trade shows and events compared to the 2006 year.

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 and localizing 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 ended Nine months ended
July 31, July 31,
2007 2006 2007 2006
---------------------------------------------------------------------------
Research and Development $ $ $ $

Gross Expenditure 3,142 2,847 9,399 8,229
Less: tax credits (48) (33) (113) (111)
--------------------------------------
3,094 2,814 9,286 8,118
--------------------------------------
--------------------------------------

Capitalized cost 2,128 1,772 5,871 5,477
Development costs acquired - 439 260 2,693
Tax credits (334) (251) (891) (835)
--------------------------------------
Net capitalized costs 1,794 1,960 5,240 7,335
--------------------------------------
--------------------------------------

Gross Expenditure 3,142 2,847 9,399 8,229

Less: Expenses capitalized 2,128 1,772 5,871 5,477
As per note 4 to the Financial
Statements 1,014 1,075 3,528 2,752
Less: Tax Credits (48) (33) (113) (111)
Amortization - Development costs
internal 1,175 773 3,147 1,909
Amortization - Development costs
acquired 269 251 778 621
--------------------------------------
Per earnings statement 2,410 2,066 7,340 5,171
--------------------------------------
--------------------------------------

Investment tax credits
----------------------

Credited to Earnings 48 33 113 111
Reducing Capitalization 334 251 891 835
--------------------------------------
382 284 1,004 946
--------------------------------------
--------------------------------------


For the three months ended July 31, 2007, gross research and development expenses increased by $295,000 to $3.1 million, representing 18.5% of total revenues for the period compared to 19.2% for the same period in 2006. Of course, as stated earlier, the 2006 revenues do not include K/BIS sales while the 2007 revenues do. A portion of the increase amounting to $184,000 is related to the stronger Canadian dollar compared to the U.S. dollar for the quarter compared to 2006.

Net research and development expenses increased by $344,000 or 16.7%, to $2.4 million for the third quarter of fiscal 2007, representing 14.2% of total revenues for the period compared to $2.1 million for the same period in 2006, or 13.9% of total revenues for the period. Research and development expenditures increased between the periods as a result of an increase of $402,000 related to an amortization expense with respect to internally generated development costs.

For the nine months ended July 31, 2007, gross research and development expenses increased by 14.2%, or $1.2 million, to $9.4 million, representing 18.8% of total revenues for the period, which compares to $8.2 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 nine months where no expense was incurred last year totaling $820,000 and the addition of employees to research and development functions.

Net research and development expenses increased by 41.9%, or $2.2 million, to $7.3 million for the first nine months of fiscal 2007, representing 14.7% of total revenues for the period. This compared to $5.2 million for the same period in 2006, or 12.0% 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 $675,000 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 $1.2 million related to the amortization expense with respect to internally generated development costs; and (iii) the whole offset by an increase in capitalized cost from acquisitions amounting to $489,000.

General and administrative expenses

General and administrative expenses increased by 2.8% or $88,000 to $3.2 million for the third quarter ended July 31, 2007, compared with the same period in 2006, representing 19.0% and 21.0% of total revenues for each respective period. The increase is attributable to: (i) higher professional fees related to accounting and tax and other consulting services provided by outside services amounting to $133,000; (ii) general and administrative expenses incurred by PSI amounting to $65,000; (iii) accrual reversals in the third quarter of fiscal 2006 amounting to $117,000 for provisions that were no longer required; and $139,000 related to the stronger Canadian dollar compared to the U.S. dollar for the quarter. These increases were partially offset by a reallocation of certain expenses in 2007 related to information systems to other line items.

General and administrative expenses decreased by 3.7% or $358,000, to $9.3 million for the first nine months of 2007, compared with $9.7 million in the same period in 2006, representing 18.6% and 22.5% of total revenues for each respective period. In addition to the items described above, the decrease is attributable to a decrease of $566,000 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 $462,000.

On an organic basis, general and administrative expenses decreased by 2.3% for the third quarter and decreased by 9.1% for the first nine months of 2007 compared to the same period last year.

Stock-based compensation expenses

Stock-based compensation expenses amounted to $106,000 for the third quarter of 2007 compared to $83,000 for the comparable period in the previous year. Stock-based compensation expenses amounted to $271,000 for the nine months of fiscal 2007 compared to $291,000 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 14.6% to $857,000 for the third quarter of 2007, representing 5.1% of total revenues compared to $748,000 or 5.0% of total revenues for the same period in 2006. For the nine months ended July 31, 2007, operating income stood at $4.0 million compared to the $3.2 million recorded for the same period in 2006.



Operating Income
(Amounts in percentages)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended Nine months ended
July 31, July 31,
2007 2006 2007 2006
---------------------------------------------------------------------------
% % % %

Revenue 100.0 100.0 100.0 100.0
Cost of Sales 27.0 26.5 27.5 24.0
---------------------------------------------------------------------------
Gross Margin 73.0 73.5 72.5 76.0
Sales & marketing 34.1 33.0 30.8 33.4
Research & development 14.2 13.9 14.7 12.0
General and administrative 19.0 21.0 18.6 22.5
Stock based compensation 0.6 0.6 0.5 0.7
---------------------------------------------------------------------------
Operating Income 5.1 5.0 7.9 7.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Other Expenses

As a result of the sharp drop in value of the U.S. 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 third quarter, the Company recorded a largely unrealized exchange loss of approximately $524,000 (2006 - gain of $79,000) 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 $261,000 (2006 - $207,000) for a net other expense of $54,000 compared to a net other income of $191,000 in the third quarter of 2006.

For the nine months ended July 31, 2007 other expenses total $53,000, representing the net result of exchange losses of $748,000 offset by financial income of $695,000.

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 third quarter of fiscal 2007, adjusted operating income remained stable in percentage with an increase of $169,000 from $1.2 million in the third quarter of fiscal 2006 to $1.4 million.



Adjusted Operating Income
(Amounts in percentages)
---------------------------------------------------------------------------
Three months ended Nine months ended
July 31, July 31,
2007 2006 2007 2006
---------------------------------------------------------------------------
$ $ $ $
Operating Income (GAAP) 857 748 3,978 3,180
Stock based compensation 106 83 271 291
Amortization of acquired intangibles 148 129 415 329
Amortization of acquired development
costs 269 251 778 621
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Adjusted Operating Income 1,380 1,211 5,442 4,421
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8.1% 8.1% 10.9% 10.3%
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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.



(Amounts in thousands of U.S. dollars)
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Three months ended Nine months ended
July 31, July 31,
2007 2006 2007 2006
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$ $ $ $
Operating Income (GAAP) 857 748 3,978 3,180
Amortization of property and
equipment 367 372 1,063 907
Amortization of intangibles 193 180 557 477
Amortization of internal development
costs 1,175 773 3,147 1,909
Amortization of acquired development
costs 269 251 778 621
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EBITDA 2,861 2,324 9,523 7,094
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Margin % 16.9% 15.6% 19.0% 16.5%
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7. Liquidity

Cash from Operations

For the quarter ended July 31, 2007, cash flow from operating activities before changes in working capital items amounted to $2.7 million. During the quarter, $1.8 million in cash was used in working capital items compared to $2.0 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).

For the nine months ended July 31, 2007, cash flow from operating activities before changes in working capital items amounted to $8.7 million compared to $7.9 million for the same period of last fiscal year. During the nine months, $372,000 in cash was used in working capital items compared to cash generated from operations amounting to $136,000 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). The use of working capital principally resulted from an increase in accounts receivable, contracts in progress, prepaid expenses and decrease in income taxes payable partially offset by an increase in accounts payable and 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 July 31, 2007, the Company capitalized internal development costs in the amounts of $1.8 million, net of applicable credits (2006 - $1.5 million) and expended $178,000 (2006 - $787,000) 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 nine months ended July 31, 2007, $895,000 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 $9.3 million. The company also expended $764,000 (2006 - $1.3 million) 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 $8.0 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 July 31, 2007
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Sales and Marketing $3.1 to $4.6 $4.7
10% - 15%

Research and Development $9.2 to $10.8 $8.8
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) July 31, October 31,
2007 2006
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Cash and cash equivalents 16,102 5,337
Short term investments 23,029 29,937
Working capital (considering deferred
revenue) 30,821 27,600
Total assets 105,417 96,579
Deferred revenue 15,391 12,672
Long-term debt (including current portion) 527 621
Total shareholders' equity 75,061 68,088
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As at July 31, 2007, our working capital stood at $30.8 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 nine months ended July 31, 2007 are an increase in accounts receivable of $1.5 million due to an increase in tax credit receivable and a decrease in income taxes payable of $0.8 million. These were partially offset by an increase in deferred revenue of $2.7 million related to the unearned portion of support and an increase in accounts payable of $0.8 million.

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 July 31, 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 an excess of $1.0 million of capitalized costs versus the amortization and the decline in value of the U.S. dollar versus most major currencies for $696,000.

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$1.0657 as at July 31, 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 July 31, 2007 August 31, 2007
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Common shares Unlimited 18,801,237 18,797,137
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 twelve months prior to the Bid.

During the three and nine months ended July 31, 2007, 28,400 common shares were repurchased and cancelled, for a total cash consideration of $164,200 attributed as follow: $87,472 to the common shares book value, $1,208 to the contributed surplus and $75,580 to retained earnings.

Following the end of the quarter until September 6, 2007, the Company repurchased 4,100 common shares for a total cash consideration of $27,078.

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 July 31, 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 September 6, 2007 and approved by 20-20 s Board of Directors on September 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 July 31, 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 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.

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.



Selected Quarterly Unaudited Financial Information
(In thousands of U.S. dollars, except per-share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2007 2007 2006 2006 2006 2006 2005
Third Second First Fourth Third Second First Fourth
As reported
Revenues 16,941 17,525 15,578 17,421 14,864 16,140 12,036 10,850
Net earnings 549 1,694 780 2,672 677 1,747 773 1,415
Basic earnings
per share 0.03 0.09 0.04 0.14 0.04 0.09 0.04 0.08
Diluted earnings
per share 0.03 0.09 0.04 0.14 0.04 0.09 0.04 0.07
Adjusted for
year-end items
Revenues n/a n/a n/a n/a n/a n/a n/a 10,850
Net earnings n/a n/a n/a n/a n/a n/a n/a 1,030
Basic earnings
per share n/a n/a n/a n/a n/a n/a n/a 0.05
Diluted earnings
per share n/a n/a n/a n/a n/a n/a n/a 0.05
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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 six months of fiscal 2007 however, the impact of this variation was not as significant as it has been in the last several quarters. However in the third quarter the total impact on operating expenses and cost of sales incurred in Canadian dollars amounted to $595,000 as the average Canadian dollar exchange rate was $0.933 compared to $0.896 for the same period in fiscal 2006. The Company incurred cost in Canadian dollars of approximately C$21 million for the nine months ended July 31, 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 $208,000 for the quarter ended July 31, 2007, compared to a loss of $95,000 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
    (514) 332-4110
    or
    20-20 Technologies Inc.
    Steve Perrone
    Chief Financial Officer
    (514) 332-4110
    Website: www.2020Technologies.com