Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

February 01, 2007 11:55 ET

Calian Reports First Quarter Results: Solid Performance Delivered by Both Divisions

(All amounts in this release are in Canadian Dollars)

KANATA, ONTARIO--(CCNMatthews - Feb. 1, 2007) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the first quarter ended December 31, 2006. Revenues for the quarter were $45.1 million, a decrease of 5% from the $47.4 million reported in the same quarter of the previous year. Net earnings were $2.0 million or $0.24 per share basic and diluted, compared to $1.7 million or $0.20 per share basic and diluted in the same quarter of the previous year.

"We are very pleased with the results for this first quarter of 2007. Even in the absence of revenues and contribution associated with the call centre contract that ended in June 2006, the Company was still able to surpass last year's first quarter earnings per share by 20%" stated Ray Basler, President and CEO. "As a result of increased contract signings announced over the last few quarters, the SED division was able to improve its results considerably from the prior year. In addition, the BTS division performed well with respectable growth in all of its business units" continued Basler.

We anticipate continued solid performance in both divisions for 2007. Based on management's current outlook, giving due consideration to the volatility in both timing and magnitude of revenues in certain segments of the Company's business, consolidated revenues for fiscal 2007 are expected to be in the range of $180 million to $200 million and net earnings per share in the range of $0.95 to $1.10.

About Calian

Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.

DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.



CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(dollars in thousands except per share data)

Three months ended
December 31
(Unaudited)
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------
Revenues $45,066 $47,364
Cost of revenues 36,546 39,242
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Gross profit 8,520 8,122
Selling and marketing 1,284 1,249
General and administration 3,198 3,222
Facilities 694 677
Amortization of capital assets 271 262
Amortization of intangibles 78 78
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Earnings before other expense, interest
and income taxes 2,995 2,634
Unrealized loss on fair value of
conversion options of long-term investment (69) -
Interest income, net (Note 6) 238 102
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Earnings before income taxes 3,164 2,736
---------------------------------------------------------------------
Income taxes -- current 1,098 947
Income taxes -- future 30 75
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1,128 1,022
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NET EARNINGS 2,036 1,714

Retained earnings, beginning of period 28,448 25,807
Adjustment to opening retained earnings
(Note 2):
Unrealized loss on fair value of
conversion options of long-term
investment at October 1, 2006 (1,391) -
Accreted interest on host contract
component of long-term investment at
October 1, 2006 68 -
Dividend (840) (680)
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Retained earnings, end of period $28,321 $26,841
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Net earnings per share: (Note 7)
Basic $0.24 $0.20
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Diluted $0.24 $0.20
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Weighted average number of shares:
(Note 7)
Basic 8,403,554 8,504,273
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Diluted 8,403,554 8,575,254
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)

December 31, September 30,
2006 2006
(unaudited)
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ASSETS
CURRENT ASSETS
Cash $11,261 $17,018
Accounts receivable 29,884 27,529
Note receivable 190 186
Work in process 6,028 3,721
Prepaid expenses and other 906 493
Future income taxes 2,053 1,857
Derivative assets (Note 10) 142 -
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50,464 50,804

LONG-TERM INVESTMENT (Note 5) 2,784 3,623
CAPITAL ASSETS 3,731 3,584
INTANGIBLES 626 704
GOODWILL 9,518 9,518
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$67,123 $68,233
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LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities $17,350 $18,785
Unearned contract revenue 4,044 4,017
Derivative liabilities (Note 10) 282 -
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21,676 22,802

FUTURE INCOME TAXES 60 70
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$21,736 $22,872
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COMMITMENT (Note 9)

SHAREHOLDERS' EQUITY

Share capital $17,260 $17,236
Retained earnings 28,321 28,448
Accumulated other comprehensive income
(expense) (Note 2) (194) (323)
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45,387 45,361
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$67,123 $68,233
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)

Three Three
months ended months ended
December 31 December 31
2006 2005
(unaudited) (unaudited)
---------------------------------------------------------------------

Net earnings $2,036 $1,714

Unrealized gain on translating financial
statements of self-sustaining foreign
operation 75 14
Unrealized gain on fair value of host
contract component of long-term
investment, net of tax 53 -
Change in deferred loss on derivatives
designated as cash flow hedges, net of tax (327) -
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Other comprehensive income (expense),
net of tax (199) 14
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Comprehensive income $1,837 $1,728
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(dollars in thousands)

December 31, September 30,
2006 2006
(unaudited)
---------------------------------------------------------------------
Accumulated other comprehensive income,
beginning of period $(323) $-

Adjustment to accumulated other
comprehensive income, beginning of
period (Note 2):
Cumulative adjustment on translation of
financial statements of self-sustaining
foreign operations - (323)
Cumulative unrealized gain on fair value
of host contract component of long-term
investment at October 1, 2006 419 -
Cumulative change in deferred loss on
derivatives designated as cash flow
hedges at October 1, 2006 (91) -
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Accumulated other comprehensive income,
beginning of period 5 (323)

Other comprehensive income (expense),
net of tax (199) -
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Accumulated other comprehensive income
(expense), end of period $(194) $(323)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

Three months ended
December 31
(Unaudited)
---------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------

CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES

Net earnings $2,036 $1,714

Items not affecting cash:
Interest accreted on note receivable (4) (7)
Interest accreted on host contract
component of long-term investment (80) -
Employee share purchase plan
compensation expense 9 8
Amortization 349 340
Future income taxes 30 75
Unrealized loss on fair value of
conversion options of long-term
investment 69 -
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2,409 2,130

Change in non-cash working capital
Accounts receivable (2,345) 4,363
Work in process (2,307) 747
Prepaid expenses and other (413) (284)
Accounts payable and accrued liabilities (1,474) (3,167)
Unearned contract revenue (468) (522)
---------------------------------------------------------------------
(4,598) 3,267
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CASH FLOWS USED IN FINANCING ACTIVITIES
Issuance of common shares 24 8
Dividend (840) (680)
---------------------------------------------------------------------
(816) (672)
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CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of capital assets (418) (353)
Business acquisition - (2,847)
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(418) (3,200)
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FOREIGN CURRENCY ADJUSTMENT 75 14
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NET CASH OUTFLOW (5,757) (591)

CASH, BEGINNING OF PERIOD 17,018 17,889
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CASH, END OF PERIOD $11,261 $17,298
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CALIAN TECHNOLOGIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended December 31, 2006 and 2005
(dollars in thousands)
(Unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles except that these interim consolidated financial statements do not provide full note disclosure.

These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2006 with the exception of the application of the accounting policies described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.

2. ADOPTION OF NEW ACCOUNTING POLICIES

Effective October 1, 2006 the Company has adopted the following new accounting standards. Any changes in measurement resulting from applying the new standards on October 1, 2006 was recorded against opening retained earnings or opening other comprehensive income with no impact on net income.

Financial instruments

All financial assets and liabilities are recorded on the balance sheet. Initial recognition of financial assets and liabilities is at fair value. Subsequent measurement of the financial assets and liabilities is determined as follows:

i) Current monetary assets and liabilities

Cash is measured at fair value with changes in fair value recorded in net income. The carrying amount approximates fair value.

Accounts receivables and accounts payable and accrued liabilities are measured at amortized costs with interest accretion recorded in net income. Due to the short -term nature of these assets and liabilities, the carrying amounts approximate amortized cost.

ii) Note receivable

The note receivable is measured at amortized cost with interest accretion recorded in net income.

iii) Long-term investment

Under the previous standards, the long-term investment was recorded at cost with any loss in value that was other than a temporary decline recorded as a reduction of the investment and included in net income. The new standards related to financial instruments require a fair value measurement of the long-term investment at each reporting period. Under the new standards, the Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independently of the underlying preferred share investment "host contract". The conversion options are measured at fair value using a Black-Scholes model with changes in fair value recorded in net income. The host contract is adjusted to fair value each period end. The effective interest rate method is used to calculate interest income on the host contract. The remaining change in value of the host contract is recorded in other comprehensive income. Fair value of the host contract is determined using interest-rates in effect at each reporting period. The sum of the fair value of both the embedded derivative and the host contract represents the fair value of the long-term investment. This new policy is adopted prospectively with changes in fair value to October 1, 2006 recorded in opening retained earnings or opening other comprehensive income . On October 1, 2006, the Company recorded an adjustment to opening retained earnings of $1,391 net of tax representing the unrealized loss in fair value of the conversion options component of the long-term investment from the date the investment was acquired to September 30, 2006 and recorded an adjustment to opening retained earnings of $68 net of tax representing the accretion of interest. Also an adjustment of $419 net of tax was recorded to opening other comprehensive income representing the unrealized gain on fair value of the host contract portion of the long-term investment.

iv) Derivative financial instruments

Derivatives are recorded on the balance sheet at fair value with changes in fair value recorded in net income unless the derivative is designated as a cash flow hedge. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place at the end of the period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net income when the hedged item affects net income. This new policy is adopted on a prospective basis with changes related to the prior fis cal year recorded in opening retained earnings or opening accumulated other comprehensive income. On October 1, 2006, the Company recorded an adjustment to opening accumulated other comprehensive income of $91 representing the cumulative change in cash flow on derivatives designated as cash flow hedges to September 30, 2006. No adjustment was made to opening retained earnings.

Foreign currency translation

The accounts of a wholly -owned subsidiary, which is considered to be a self-sustaining foreign operation, have been translated into Canadian dollars using the current rate method of foreign currency translation. Under this method, assets and liabilities are translated at the rate of exchange in effect at year-end. Revenues and expenses are translated at rates in effect during the year. Translation gains and losses are included in other comprehensive income. Comparative statements have been restated to reflect the application of the new standards for foreign currency translation of a self-sustaining foreign operation.

Comprehensive income

Comprehensive income includes net earnings and other comprehensive income (OCI). OCI refers to changes in net assets from certain transactions and other events and circumstances, other than transactions with shareholders. These changes are recorded directly as a separate component of shareholders' equity and excluded from net earnings. The Company's OCI includes the foreign currency translation adjustment for its US subsidiary that does not use the Canadian dollar as its measurement currency, the unrealized gain or loss on fair value of the host contract portion of its long-term investment and the change in cash flow on effective portion of derivatives designated as cash flow hedges where the hedged item has not yet been recognized in income.

3. ACCOUNTING ESTIMATES

For the periods ended December 31, 2006 and December 31, 2005, other than the changes required in adopting new accounting standards as described in Note 2, there has been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.

4. SEASONALITY

The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.

5. LONG TERM INVESTMENT

On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares. The investment cost included acquisition costs of $116. The preferred shares will be convertible into 8,750,000 common shares of Med-Emerg at the Company's option. After two years, Med-Emerg is also entitled to cause the preferred shares to be converted into common shares when trading volumes of Med-Emerg common shares exceed 600,000 shares and the weighted average share price is at least $0.46 USD in the preceding 60 days. On a fully converted basis, this investment represents a 13% interest based on the current number of common shares outstanding. In the event the shares are not converted by July 11, 2011, the preferred shares will be redeemed, and at the option of Med-Emerg the face value will be satisfied either in cash or in Med- Emerg common shares based on the then fair market value of the common shares.



Fair value of long-term investment:

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---------------------------------------------------------------------
Long-term investment, at cost $3,623
Cumulative unrealized loss of conversion options (1,460)
Cumulative interest accretion on host contract 149
Cumulative unrealized gain on fair value of host
contract component 472
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Fair value of investment at December 31, 2006 $2,784
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6. INTEREST INCOME

Interest income is comprised of the following amounts:
---------------------------------------------------------------------
Three months ended
December 31
2006 2005
---------------------------------------------------------------------
Interest income, net of interest expense $153 $95
Accreted interest on host contract component
of long-term investment 81 -
Accreted interest on note receivable 4 7
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Interest income, net $238 $102
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7. NET EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as
follows:
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Three months ended
December 31
2006 2005
---------------------------------------------------------------------
Weighted average number of shares -- basic 8,403,554 8,504,273
Addition to reflect the dilutive effect of
employee stock options - 12,809
Shares to be issued for the Titan acquisition - 58,172
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Weighted number of shares -- diluted 8,403,554 8,575,254
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8. SEGMENTED INFORMATION

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services.

- Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business and technical needs, primarily in the satellite communications sector.

- Business and Technology Services involves both short and long-term placements of personnel to augment customers' workforces (Staffing) as well as the long-term management of projects, facilities and customer business processes (Outsourcing).

The Company evaluates performance and allocates resources based on earnings before interest and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.



Three months ended December 31, 2006
-------------------------------------------------------------------------
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Business and
Systems Technology
Engineering Services Corporate Total
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues $12,110 $32,956 $- $45,066
Earnings before other
expense, interest
and income taxes 1,244 2,315 (564) 2,995
Interest income, net 238
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) 69
Income taxes 1,128
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Net earnings $2,036
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Total assets other than
cash and goodwill $14,833 $31,025 $486 $46,344
Goodwill 9,518 9,518
Cash 11,261
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Total assets $67,123
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Three months ended December 31, 2005
-------------------------------------------------------------------------
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Business and
Systems Technology
Engineering Services Corporate Total
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues $8,879 $38,485 $- $47,364
Earnings before interest
and income taxes 910 2,325 (601) 2,634
Interest income, net 102
Income taxes 1,022
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Net earnings $1,714
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Year ended September 30, 2006
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Business and
Systems Technology
Engineering Services Corporate Total
-------------------------------------------------------------------------
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Total assets other than
cash and goodwill $10,403 $30,972 $322 $41,697
Goodwill 9,518 9,518
Cash 17,018
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Total assets $68,233
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9. COMMITMENTS

During the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. The Company currently has an agreement with a sub-tenant to lease a significant portion of the space for a period extending to the end of the lease period. The Company is required to assume the remaining portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $1,612 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $990 per year.

10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Foreign currency risk

The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects.

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At December 31, 2006, the Company had the following forward foreign exchange contracts:



------------------------------------------------------------------------
Fair Value
Equivalent December 31,
Type Notional Currency Maturity Cdn. Dollars 2006
------------------------------------------------------------------------
BUY 19,283 USD January 2007 $22,340 $133
BUY 70 EURO January 2007 106 1
BUY 690 GBP January 2007 1,567 6
SELL 73,947 JPY January 2007 726 2
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Derivative
assets $142
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SELL 39,942 USD January 2007 $46,273 $275
SELL 695 EURO January 2007 1,061 7
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Derivative
liabilities $282
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Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place on December 31, 2006.

Interest rate risk

The Company's long-term investment is not exposed to interest-rate risk. However, the fair value of long-term investment will be affected by interest rate fluctuations. An increase to the interest rate would result in a decrease in the fair value of the investment.

Credit risk

The Company has an unsecured credit facility, subject to annual renewal. The credit facility permits the Company to borrow funds up to an aggregate of $10 million. As of December 31, 2006 there were no direct borrowings under the Company's credit facility.

The Company is exposed to credit-related losses in the event of non-performance by counter-parties to derivative financial instruments but does not expect any counter-parties to fail to meet their obligations. The Company only deals with major financial institutions.

Management Discussion and Analysis -- December 31, 2006:

RESULTS OF OPERATIONS

Revenues:

For the first quarter of 2007, revenues were $45.1 million, compared to $47.4 million reported in the first quarter of 2006 representing a decrease of 5%.

Systems Engineering's (SED) revenues were $12.1 million in the quarter representing an increase of 36% from the $8.9 million recorded in the first quarter of last year. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period. During this quarter, SED ramped up work on several contracts signed in 2006.

Business and Technology Services (BTS) reported a 14% decrease in the quarter with revenues of $33.0 million compared to $38.5 million for the same period of last year. When excluding the revenue reduction of $7 million associated with call-center services, the BTS division reported a 5% increase in revenues, all from existing contracts. The call-center services contract was completed on June 30, 2006.

Both divisions continue to see increases in opportunities. During the first quarter of 2007, both the SED and BTS divisions signed several new contracts. Management expects that this market improvement, especially within the SED division, will have a positive impact on revenues relative to the prior year.

Gross margin:

Gross margin was 18.9% in the first quarter of 2007, which is a significant improvement over the 17.1% reported in the first quarter a year ago. The increase in this quarter's margin is a reflection of the changing revenue mix as a result of the wind-down of the call-center services contract and an increased proportion of SED revenues albeit at a slightly lower margin percentage.

Gross margin in Systems Engineering was 21.1% this quarter compared to 23.9% in the first quarter of 2006. Margins in the prior year reflected the positive impact associated with closeouts of certain large projects while margins in 2007 reflect a strong Canadian dollar and the highly competitive nature of the recent signings for the SED division.

Gross margin in Business and Technology Services was 18.1% compared to the 15.6% reported in the first quarter of 2006. The increase in this quarter margin is a reflection of the changing revenue mix as a result of the wind-down of the low margin call-center services contract.

Margins for the balance of 2007 are expected to approximate those experienced this quarter.

Operating expenses:

Selling, marketing, general and administration expenses totalled $5.2 million or 11.5% of revenues in the first quarter of 2007 which is similar to the $5.1 million or 10.9% of revenues reported in the first quarter of 2006. Although operating expenses where similar in absolute dollars, the decrease in revenues during the quarter resulted in a higher cost as a percentage of revenues. For 2007, management believes that it can maintain its operating expenses at similar levels experienced this quarter.

Interest income

Interest income for the first quarter of 2007 was $0.2 million compared to $0.1 million in 2006. As a result of the adoption of new accounting rules described below, interest income for 2007 includes $0.1 million related to interest accretion on the host contract portion of the long-term investment.

Unrealized loss on fair value of derivative component of long-term investment

As a result of the adoption of new accounting rules described below, the Company recorded $0.1 million unrealized loss on fair value of derivative component of long-term investment.

Income taxes

The provision for income taxes for the first quarter of 2007 was $1.1 million or 35.7% of earnings before tax compared to $1.0 million in 2006 or 37.3% of earnings before tax in line with the Company's current effective tax rate.

Net earnings:

As a result of the foregoing, in the first quarter of 2007 the Company recorded net earnings of $2.0 million or $0.24 per share basic and diluted, compared to $1.7 million or $0.20 per share basic and diluted in the same quarter of the prior year.

BACKLOG

The backlog at December 31, 2006 is $1,013 million with terms extending to fiscal 2014. This compares to $1,010 million reported at the end of September 2006. Contracted Backlog represents revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.

Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog consumption for 2007 and 2008 based on its current visibility into customers' planned utilization. Amounts shown as beyond 2008 represent the unearned portion of the contract value remaining after deducting the expected consumption for 2007 and 2008. These amounts exceed current utilization rates and known customer requirements by approximately $285 million. The majority of this amount relates to the health services support contract for DND. Should customer requirements for the company's services under these contracts not increase, this excess may not be realized. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value is unlikely.



(dollars in millions) TOTAL Fiscal 2007 Fiscal 2008 Beyond
2008

Contracted Backlog $424 $108 $89 $227
Option Renewals 589 11 33 545
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TOTAL $1,013 $119 $122 $772
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----------------------------------------------------------------

Business and
Technology
Services $956 $88 $101 $767
Systems
Engineering 57 31 21 5
----------------------------------------------------------------
TOTAL $1,013 $119 $122 $772
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----------------------------------------------------------------


FINANCIAL CONDITION AND CASHFLOWS:

Operating activities

Cash outflows from operating activities for the three-month period ending December 31, 2006 were $4.6 million compared to cash inflows of $3.3 million in the first quarter of 2006. Cash flows were in line with the normal ebbs and flows of the business. Specifically, accounts receivable increased as a result of large milestone billings near December 31, 2006, work-in-process increased as a result of a significant level of purchasing on SED projects near quarter-end and accounts payable decreased as a result of lower activity levels in the BTS division near the holiday season.

Financing activities:

The Company paid a dividend of $0.10 per share during the first quarter. During the first quarter of 2006, the Company paid a quarterly dividend of $0.08 per share.

Investing activities:

During the first quarter of 2006, the Company made its second payment related to the acquisition in 2004 of Titan amounting to $2.8 million.

Capital resources

At December 31, 2006 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2007 FINANCIAL RESULTS

As described in note 2 to these interim financial statements, the Company was required to adopt new accounting rules which came in effect for the Company's first fiscal quarter 2007.

Long-term investment:

The new standards require a fair value measurement of the long-term investment at each reporting period. Previously the long-term investment would have been measured at cost. Change in the valuation of the long-term investment resulting from applying the new standards at October 1, 2006 is recorded in opening retained earnings or opening other comprehensive income. Under the new standards, the Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract.

The conversion options are measured at fair value using a Black-Scholes model with changes in fair value recorded in net income. The Black-Scholes model derives a fair value of the conversion options using factors such as the option period and the volatility and price of the underlying instrument. On October 1, 2006, the application of these factors resulting in an unrealized loss in fair value of the conversion options of $1,391 which was recorded to opening retained earnings. At December 31, 2006 using the same approach, a further $69 unrealized loss in fair value of the conversion options was recorded to net earnings.

The host contract is measured initially at amortized cost using the effective interest rate method with the interest income recorded in net income. Interest accretion of $68 and $80 respectively were accrued to opening retained earnings and to the first quarter 2007 interest income. Subsequently the host contract is adjusted to fair value with changes in fair value recorded in other comprehensive income. Fair value of the host contract is determined using interest-rates in effect at each reporting period. As a result, the Company recorded an unrealized gain on the host contract component of $419 to opening other comprehensive income and $53 to changes in other comprehensive income for the first quarter of 2007.



PREVIOUS
STANDARDS NEW STANDARDS
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Acquisition Initial Transition Quarter
date recognition date -End
July 11, July 11, October 1, December 31,
2006 2006 2006 2006

Conversion Options $2,019 $628 $559
Host contract 1,604 2,091 2,225

Reported $3,623 $3,623 $2,719 $2,784

Opening retained earnings -- conversion options (1,391)
Opening retained earnings -- interest accretion 68
Opening other comprehensive income -- fair value
of the host contract 419
Accreted interest income on host
contract during the period 81
Unrealized loss on fair value of the conversion
options during the period (69)
Changes in other comprehensive income during the period 53


Foreign exchange hedging contracts:

As described in note 10 to these interim financial statements, the Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The new standards require the recognition of the fair value of the forward exchange contracts with the corresponding adjustment recorded to other comprehensive income. In addition, deferral of gains and losses associated with forward exchange contracts that meet the requirements of hedge accounting is now recorded in other comprehensive income until the hedged future transactions are recorded in net earnings. Previously this amount was recorded in accounts payable and accrued liabilities.

SELECTED QUARTERLY FINANCIAL DATA




Q1/07 Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05

Revenues $45,066 $41,067 $45,946 $48,469 $47,364 $50,405 $50,647 $38,688
Net
earnings $2,036 $1,815 $772 $2,322 $1,714 $3,097 $2,396 $1,752
Net
earnings
per share
Basic $0.24 $0.22 $0.09 $0.27 $0.20 $0.37 $0.28 $0.21
Diluted $0.24 $0.22 $0.09 $0.27 $0.20 $0.36 $0.28 $0.21


SEASONALITY

The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.

OUTLOOK

Management believes the Company is well positioned for sustained growth in the long-term. The Company operates in markets that will continue to require the services that the Company delivers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. Its acquisition strategy, focused on adding complementary businesses to the Company's mix, may also be a potential source of growth.

The Systems Engineering Division has been working within a depressed satellite sector for the last few years. In addition, several large satellite operators were purchased using highly leveraged financial structures and industry consolidation continues. This depressed environment resulted in reduced new opportunities during that period. However, management believes that new systems adopting the latest technologies will be required in the medium term to maintain and improve service offerings. Recently, the Company has seen a rejuvenated market and is currently experiencing increased demand for its products and services. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. The relative strength of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in US dollars and EUROs.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although Calian has experienced delays during the last few years, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. With existing standing agreements for SAP and Peoplesoft resources, the Company is positioned to take advantage of the expected growth in government ERP requirements.

Due to significant long term contracts in the BTS division, the Company's backlog is heavily biased towards BTS. Accordingly, management expects the current weighting in both revenue and profitability towards the BTS division to continue.

GUIDANCE

For 2007, we expect solid performance in both divisions. The BTS division will be pursuing new opportunities in traditional markets to offset the loss of contribution from the call centre. The SED division is seeing signs of recovery in the satellite communications market, even with the always-present risk of program delays associated with this sector. Based on the above, management expects that consolidated revenues for 2007 will be in the range of $180 million to $200 million and net earnings per share in the range of $0.95 to $1.10.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending December 31, 2006, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

FORWARD--LOOKING STATEMENT

Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the first quarter of 2007, and with the Management Discussion and Analysis in the 2006 annual report, including the section on risks and opportunities.

Date: February 1, 2007

Contact Information

  • Calian Technologies Ltd.
    Ray Basler
    President and Chief Executive Officer
    306-931-3425
    or
    Calian Technologies Ltd.
    Jacqueline Gauthier
    Chief Financial Officer
    613-599-8600
    ir@calian.com
    www.calian.com