Computer Modelling Group Ltd.
TSX : CMG

Computer Modelling Group Ltd.

November 12, 2008 19:34 ET

Computer Modelling Group Announces Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 12, 2008) - Computer Modelling Group Ltd. (TSX:CMG) is very pleased to announce our results for the second quarter and the six months ended September 30, 2008.



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$ thousands, unless otherwise noted September 30, September 30, %
For the three months ended 2007 2008 Change
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Annuity/Maintenance Software Licenses $ 4,042 $ 5,350 32
Perpetual Software Licenses 682 2,882(1) 323
Total Revenue $ 6,100 $ 9,585(1) 57
Gross Profit 4,458 7,157 61
Earnings 1,443 2,968 106
Earnings per share, basic $ 0.09 $ 0.17 89
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----------------------------------------------------------------------------
$ thousands, unless otherwise noted September 30, September 30, %
For the six months ended 2007 2008 Change
----------------------------------------------------------------------------
Annuity/Maintenance Software Licenses $ 7,996 $ 10,967(2) 37
Perpetual Software Licenses 895 4,053(2) 353
Total Revenue $ 11,654 $ 17,852(2) 53
Gross Profit 8,377 13,471(2) 61
Earnings 2,481 5,595(2) 126
Earnings per share, basic $ 0.15 $ 0.33(2) 120
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(1) Record quarterly results
(2) Record results for the first six months of a fiscal year


Management's Discussion and Analysis

The following discussion and analysis, presented as at November 12, 2008, is management's assessment of the financial and operating results of Computer Modelling Group Ltd. ("CMG" or the "Company") as well as its future opportunities and risks, and should be read in conjunction with the unaudited consolidated financial statements and related notes of the Company for the six months ended September 30, 2008 and the audited consolidated financial statements and MD&A for the years ended March 31, 2008 and 2007 contained in the 2008 annual report for CMG. The reader should be aware that historical results are not necessarily indicative of future performance. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com.

The financial data contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), and unless otherwise indicated, all comments in this report are expressed in Canadian dollars.

Forward Looking Statements

Certain statements in the Management's Discussion and Analysis for CMG may constitute forward-looking statements, which can generally be identified as such because of the context of the statements including words such as the Company believes, anticipates, expects, plans, estimates or words of a similar nature. The forward-looking statements are based on current expectations and are subject to known and unknown risks and uncertainties, certain of which are beyond CMG's control, including: the impact of general economic conditions in the oil and gas industry, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange and country risk in areas in which the Company currently does, or proposes to do, business. CMG's actual results, performance or achievement could differ materially from those expressed in, or implied by these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits CMG will derive there from. For more exhaustive information on these risks and uncertainties you should refer to our most recently filed Annual information Form, which can be found at www.sedar.com. 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.

Revenues

CMG's revenues are comprised of software license sales, which provide the majority of the Company's revenues, and consulting and contract research fees.



Quarterly Performance

----------------------------------------------------------------------------
Fiscal Fiscal Fiscal
2007 2008 2009
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$Thousands, unless
otherwise stated Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
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Annuity/maintenance
licenses 3,127 3,752 3,954 4,042 4,450 (1)5,587 (2)5,618 5,350
Perpetual licenses 1,305 2,313 213 682 1,449 2,230 1,171 2,882
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Software licenses 4,432 6,065 4,167 4,724 5,899 7,817 6,789 8,232
Consulting and
contract research 1,344 1,195 1,387 1,376 1,441 1,181 1,479 1,353
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Revenues 5,776 7,260 5,554 6,100 7,340 8,998 8,268 9,585
Gross Profit 4,397 5,714 3,918 4,458 5,640 7,192 6,314 7,157
Gross Profit % 76 79 71 73 77 80 76 75
Earnings before income
and other taxes 2,819 3,574 1,660 2,247 3,291 4,665 3,814 4,414
Income and other
taxes 975 1,330 622 804 1,180 1,657 1,187 1,446
Earnings for the
quarter 1,844 2,244 1,038 1,443 2,111 3,008 2,627 2,968
Cash dividends
declared and paid 576 828 2,745 1,264 1,260 1,684 3,843 2,073
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Per share amounts
- $
Earnings per share
- basic and diluted 0.11 0.14 0.06 0.09 0.13 0.18 0.15 0.17
Cash dividends
declared per share 0.035 0.05 0.165 0.075 0.075 0.10 0.225 0.12
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(1) Includes $0.8 million in revenue that pertains to usage of CMG's
products in prior quarters
(2) Includes $0.7 million in revenue that pertains to usage of CMG's
products in prior quarters


Software Licenses

Software license revenues were $15.0 million for the six months ended September 30, 2008, up 69 percent or $6.1 million from the $8.9 million recorded in the same period last year.

The annuity/maintenance component to our software license stream in the six months ended September 30, 2008 amounted to $11.0 million, up 38 percent or $3.0 million from the $8.0 million in the comparative period last year. As can be seen in the quarterly performance table, the annuity/maintenance revenue stream has continued to grow quarter over quarter, and our experience has been that this is both a growing and a recurring revenue base for CMG. Growth in this revenue stream has resulted from increased sales to existing customers and sales to new customers.

Software license revenues under perpetual sales for the six months ended September 30, 2008 were $4.1 million, up $3.2 million from the $0.9 million recorded in the same period last year. Sales of perpetual software licenses are variable and less predictable in nature and the magnitude thereof will fluctuate between reporting periods as the decision, and the timing thereof, by our customers to acquire our software through either annuity or perpetual licenses is their sole decision.

At September 30, 2008, CMG has pre-sold $8.5 million of software license revenue, $6.7 million of which relates to its current fiscal year ending March 31, 2009.

Consulting and Contract Research Revenues

CMG recorded consulting and contract research revenues of $2.8 million for the six months ended September 30, 2008, which is consistent to that recorded in the same period last year.

CMG performs consulting and contract research activities on an ongoing basis but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner combined with servicing our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within client companies.

At September 30, 2008, CMG has recorded approximately $0.2 million of pre-sold revenue relating to consulting and contract research revenues.

Expenses

CMG realized a gross profit of $13.5 million for the six months ended September 30, 2008, up 61 percent or $5.1 million from the $8.4 million recorded in the same period last year. This increase in gross profit resulted from growth in our software license sales.

CMG's total expenses, excluding depreciation and income and other taxes, amounted to $9.6 million for the six months ended September 30, 2008, up 30 percent or $2.2 million from the $7.4 million expended in the comparable period last year. This increase in total expenses between the two reporting periods is primarily due to growth in CMG's staff base; performance based compensation plans; and increased use of professional advisors in both the legal and taxation areas due to our growing international customer base. Offsetting these increased expenditures has been a reduction in our third party contract costs and greater benefits recorded in respect of the scientific research and experimental development investment tax credit program. The financial results for the six months ended September 30, 2008 include $0.2 million in scientific research and experimental development investment tax credits pertaining to expenditures on our DRMS project for CMG's fiscal years ended March 31, 2007 and 2008.

As a technology company, CMG's largest area of expenditure is for its people. Approximately $7.5 million of the total expenses in the six months ended September 30, 2008 related to staff costs. This compares to $5.5 million of the total expenses in the comparative period last year. As stated in CMG's 2008 Annual Report, staffing levels over its 2008 fiscal year grew throughout the company to support our continued growth. At September 30, 2008, CMG's staff complement was 105 employees, up from 93 employees as at September 30, 2007.

Investment in Research and Development

During the six months ended September 30, 2008, CMG has recorded an investment of $3.6 million (2007 - $3.0 million) in research and development, which includes its proportionate share of joint research and development costs on the DRMS system development, all of which is expensed to earnings.

This investment represented 20 percent (2007 - 25 percent) of its total revenues. CMG firmly believes that to become the dominant supplier of dynamic reservoir modelling systems in the world it must be responsive to clients needs today and anticipate their needs in the future. CMG invests a significant amount of resources each year towards advancing the technological dominance of its software product suite.

Interest income and foreign exchange

Interest income decreased to $0.3 million in the six months ended September 30, 2008 from $0.4 million recorded last year due to lower prevailing interest rates despite investing larger cash balances.

CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 63 percent (2007 - 61 percent) of CMG's revenues for the six months ended September 30, 2008 is denominated in US dollars whereas only approximately 18 to 20 percent of CMG's total costs is denominated in US dollars.



----------------------------------------------------------------------------
Six month
trailing
Canadian dollar to US dollar At September 30 average
----------------------------------------------------------------------------
2006 0.8966 0.8899
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2007 1.0037 0.9210
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2008 0.9435 0.9724
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Income and other taxes

CMG's effective tax rate for the six months ended September 30, 2008 is reflected as 32.0 percent (2007 - 36.5 percent) whereas the prevailing Canadian statutory tax rate is now 29.38 percent. The difference between our effective rate and the prevailing statutory rate is primarily due to a combination of the non-tax deductibility of stock-based compensation expense, income tax rate differences in other jurisdictions and recognizing a change in the valuation adjustment relating to our Venezuelan subsidiary.

The benefit recorded in CMG's books relating to the federal scientific research and experimental development investment tax credit program impacts future income taxes. As stated previously, the financial results for the six months ended September 30, 2008 include $0.2 million in scientific research and experimental development investment tax credits pertaining to expenditures on our DRMS project for CMG's fiscal years ended March 31, 2007 and 2008. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce federal income taxes otherwise payable for the current fiscal year and this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a current future income tax liability and then in the following fiscal year is transferred to income taxes payable.

Liquidity and Capital Resources

Operating activities

CMG generated $6.3 million from operating activities in the six months ended September 30, 2008, compared to $3.0 million in the comparative period last year. The changes in CMG's non-cash working capital for the six months ended September 30, 2008 are reflective of the growth in operations and the timing of customer purchases.

Financing activities

During the six months ended September 30, 2008, CMG employees and directors exercised options to purchase 432,076 Common Shares, which resulted in $1.6 million in cash proceeds.

Effective on the close of business on August 1, 2008, CMG's Common and Non-Voting Shares were split on a two-for-one basis. Accordingly, all comparative number of shares and per share amounts has been retroactively adjusted to reflect the two-for-one split.

In the six months ended September 30, 2008, CMG paid $5.9 million in dividends, representing two quarterly dividends of $0.10 Canadian and $0.12 Canadian respectively per share and a special dividend of $0.125 Canadian per share. On November 12, 2008, CMG announced the payment of a quarterly dividend of $0.14 Canadian per share on CMG's Common and Non-Voting Shares. The dividend will be paid on December 15, 2008 to shareholders of record at the close of business on December 1, 2008.

On February 26, 2008, CMG announced a Normal Course Issuer Bid ("NCIB") commencing February 28, 2008 to purchase for cancellation up to 970,000 of its Common Shares. During the six months ended September 30, 2008, 13,520 Common Shares were repurchased at market price for a total cost of $137,364.

Investing activities

During the six months ended September 30, 2008, CMG expended $0.3 million on property and equipment additions of its $1.3 million capital budget for its fiscal year ending March 31, 2009.

Liquidity and capital resources

At September 30, 2008, CMG has $25.2 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker.

During the six months ended September 30, 2008, 1,441,597 shares of CMG's public float were traded on the TSX Stock Exchange. As at September 30, 2008, CMG's market capitalization based upon its September 30, 2008 closing price was $155.6 million.

Commitments, Off Balance Sheet Items and Transactions with Related Parties -

CMG committed approximately $10.6 million to the five year DRMS research and development project with its industry partners Shell International Exploration and Production BV and Petroleo Brasileiro S.A., of which $3.8 million has been incurred from inception to September 30, 2008.

In conjunction with entering into this project, CMG Reservoir Simulation Foundation ("the Foundation"), the sole holder of CMG's Non-Voting Shares, agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50 percent of the Company's estimated share of project costs over the duration of the project. During the six months ended September 30, 2008, CMG has reflected $0.5 million (2007 - $0.4 million) in research grants from the Foundation in revenue with respect to this project. From commencement of the project to September 30, 2008, these research grants aggregate to $1.9 million.

CMG plans on funding its share of the project costs associated with the development of the newest generation reservoir simulation software system from internal cash and funding from the Foundation.

CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold revenues which are reflected as deferred revenue on its balance sheet. Contractual obligations for office premise leases are not considered to be significant and are estimated to be as follows: 2009 - $0.4 million; 2010 - $0.6 million; and 2011-2014 - $0.1 million each year.

Outstanding Share Data as at November 12, 2008

CMG's authorized share capital has remained unchanged from September 30, 2008 to November 12, 2008. CMG's issued and outstanding shares at November 12, 2008 are 14,388,522 Common Shares and 2,895,946 Non-Voting Shares.

Critical Accounting Estimates and Business Risks

These remain unchanged from the factors detailed in CMG's 2008 Annual Report.

Changes in Accounting Policies

Effective April 1, 2008, CMG adopted the recommendations included in the Canadian Institute of Chartered Accountants ("CICA") Handbook, Section 1535, Capital Disclosures. The new standard requires disclosure of qualitative and quantitative information that enables users of financial statements to evaluate the Company's objectives, policies and processes for managing capital. The adoption of this standard did not have a material impact on the Company's financial statements.

On April 1, 2008, CMG adopted CICA Handbook Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. Section 3862 requires disclosure about the significance of financial instruments for an entity's financial position, the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. Sections 3862 and 3863 replace Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of these standards did not have a material impact on the Company's financial statements.

Recent Accounting pronouncements

In February 2008, the Accounting Standards Board (AcSB) confirmed that all Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS) for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. We have not yet assessed the impact of the convergence of Canadian GAAP with IFRS on our results of operations, financial position and disclosures and therefore the impact on the transition to IFRS on the Company's financial statements is not yet determinable. A project team will be set up to manage this transition and to ensure successful implementation within the required timeframe.

Internal Controls

Management is responsible for establishing and maintaining disclosure controls and procedures as defined under Multilateral Instrument 52-109. At September 30, 2008, the President and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective and that material information relating to the Company, including its subsidiaries, was made known to them and was recorded, processed, summarized and reported within the time periods specified under applicable securities legislation.

Management is responsible for the design of its internal controls over financial reporting as defined under Multilateral Instrument 52-109. At March 31, 2008, the President and the Chief Financial Officer concluded that the design of these internal controls and procedures was effective in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The President and the Chief Financial Officer have evaluated whether there were changes to internal controls over financial reporting during the interim period ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. No such changes were identified.

Outlook

With petroleum production using conventional methods on the decline, the petroleum industry is using more difficult and costly advanced process extraction methods, while being faced with more governmental and regulatory requirements on environmental concerns. These factors are key drivers to the growth in demand for CMG technology. CMG's results for this second quarter of fiscal 2009 reflect its strongest second quarter ever.

While we believe that our customer base may become more pragmatic as to where and when they deploy their capital as a result of the recent credit constraints and low oil prices we remain optimistic that our software sales will continue to grow due to the utility provided by our technology to our customers.

On behalf of the Board of Directors

Kenneth M. Dedeluk, President and Chief Executive Officer

November 12, 2008



COMPUTER MODELLING GROUP LTD.
Consolidated Balance Sheets (unaudited)

September 30, March 31,
2008 2008
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Assets

Current assets:
Cash $ 25,198,482 $ 23,479,430
Accounts receivable 7,612,971 7,908,072
Prepaid expenses 661,695 659,348
----------------------------------------------------------------------------
33,473,148 32,046,850
Property and equipment (note 3) 1,239,699 1,252,544
Future income taxes (note 5) 48,778 39,763
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$ 34,761,625 $ 33,339,157
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----------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 3,452,873 $ 3,032,638
Income taxes payable 1,005,551 1,391,921
Deferred revenue 8,728,284 8,839,214
Future income taxes (note 5) 92,351 87,982
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13,279,059 13,351,755
Shareholders' equity:
Share capital (note 6) 15,983,300 14,087,179
Contributed surplus (note 6) 789,335 744,405
Retained earnings 4,709,931 5,155,818
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21,482,566 19,987,402
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$ 34,761,625 $ 33,339,157
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See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Earnings and Retained Earnings
(unaudited)

Three months ended Six months ended
September 30 September 30
2008 2007 2008 2007
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Revenue
Software licenses $ 8,231,888 $ 4,723,880 $ 15,020,735 $ 8,891,154
Consulting and
contract research 1,352,642 1,375,890 2,831,491 2,762,723
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9,584,530 6,099,770 17,852,226 11,653,877
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Cost of Sales
Marketing expenses 1,919,197 1,128,936 3,437,476 2,264,126
Direct consulting
expenses 485,551 411,660 919,562 777,149
Third-party
contract costs 22,696 101,047 24,303 235,976
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2,427,444 1,641,643 4,381,341 3,277,251
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Gross Profit 7,157,086 4,458,127 13,470,885 8,376,626

General and
administrative
expenses 848,934 674,287 1,742,134 1,356,553
Depreciation and
amortization 77,014 73,842 147,982 138,321
Product research
and development
costs (note 4) 1,975,657 1,579,854 3,626,013 2,959,383
Foreign exchange loss 11,377 90,999 72,578 431,307
Interest and
other income (170,101) (208,267) (345,927) (416,102)
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Earnings before
income and other taxes 4,414,205 2,247,412 8,228,105 3,907,164
Income and other
taxes (note 5) 1,446,247 804,658 2,633,376 1,426,219
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Earnings for the period 2,967,958 1,442,754 5,594,729 2,480,945
Retained earnings,
beginning of period 3,938,017 3,817,586 5,155,818 5,524,107
Dividends paid (2,073,299) (1,264,033) (5,917,871) (4,008,745)
Common shares
buy-back (note 6) (122,745) (416,334) (122,745) (416,334)
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Retained earnings,
end of period $ 4,709,931 $ 3,579,973 $ 4,709,931 $ 3,579,973
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Per share

Weighted average
number of shares
outstanding 17,180,433 16,752,636 17,080,128 16,669,308
Earnings for the
period
Basic $ 0.17 $ 0.09 $ 0.33 $ 0.15
Diluted $ 0.17 $ 0.08 $ 0.32 $ 0.14
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See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.
Consolidated Statements of Cash Flows
(unaudited)

Three months ended Six months ended
September 30 September 30
2008 2007 2008 2007
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Cash provided by
(used for)

Operating

Earnings for the period $ 2,967,958 $ 1,442,754 $ 5,594,729 $ 2,480,945
Items not involving
cash:
Depreciation and
amortization 177,213 163,502 340,046 298,572
Future income taxes
(note 5) 42,754 18,922 (4,646) (41,710)
Stock-based
compensation 203,016 128,930 357,648 222,624
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3,390,941 1,754,108 6,287,777 2,960,431

Changes in non-cash
working capital:
Accounts receivable (408,680) 856,494 295,101 3,005,387
Accounts payable and
accrued liabilities 577,612 (25,802) 420,235 (734,380)
Income taxes payable 205,931 6,976 (386,370) (1,274,092)
Prepaid expenses (80,153) (99,788) (2,347) (31,974)
Deferred revenue (325,576) (1,387,545) (110,930) (1,352,562)
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3,360,075 1,104,443 6,503,466 2,572,810
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Financing

Issue of common shares
(note 6 (b)) 914,107 812,963 1,598,022 1,049,081
Dividends paid (2,073,299) (1,264,033) (5,917,871) (4,008,745)
Common shares buy-back
(note 6 (c)) (137,364) (484,215) (137,364) (484,215)
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(1,296,556) (935,285) (4,457,213) (3,443,879)
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Investing

Property and equipment
additions (171,240) (343,999) (327,201) (453,243)
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Increase (decrease) in
cash 1,892,279 (174,841) 1,719,052 (1,324,312)
Cash, beginning of
period 23,306,203 19,628,979 23,479,430 20,778,450
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Cash, end of period $ 25,198,482 $19,454,138 $ 25,198,482 $ 19,454,138
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Supplemental disclosures (note 9 (d))

See accompanying notes to consolidated financial statements.


COMPUTER MODELLING GROUP LTD.

Notes to Consolidated Financial Statements (unaudited)

For the six months ended September 30, 2008 and 2007 and as at March 31, 2008

1. Significant Accounting Policies:

(a) Basis of Consolidation: These consolidated financial statements include the accounts of the Company and its subsidiaries, all 100% owned. All inter-company transactions have been eliminated.

(b) Revenue Recognition: Software license sales are recognized as revenue upon the fulfillment of all significant obligations under the terms of the license agreements. The Company recognizes an accounts receivable and software license revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. Any software license fees received relating to a future fiscal period are deferred and recognized in the appropriate future period. Consulting and contract research revenues are recorded on a percentage-of-completion basis whereby revenues and costs are recorded in operations based on work completed.

(c) Property and Equipment: Property and equipment are recorded at cost. Leases that transfer substantially all the benefits and risks of ownership to the Company are accounted for as capital leases whereby the asset values and related obligations are recorded in the consolidated financial statements.

Depreciation is provided using the following annual rates and methods that are expected to amortize the cost of the property and equipment over their estimated useful lives:



Computer equipment 33 1/3% straight-line
Furniture and equipment 20% straight-line
Leasehold improvements Straight-line over the lease term


(d) Product Research and Development Costs: All costs of product research and development are expensed to operations as incurred as the impact of both technological changes and competition require the Company to continually enhance its products on an annual basis.

(e) Joint Research and Development Costs: The Company participates in a joint project engaged in product research and development and accordingly records its proportionate share of costs incurred as product research and development costs.

(f) Foreign Currency: The Company's subsidiaries are considered to be integrated operations. Accordingly, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date while other consolidated balance sheet items are translated at historic rates.

Revenues and expenses are translated at the rate of exchange in effect on the transaction dates. Realized and unrealized foreign exchange gains and losses are included in operations in the period in which they occur.

(g) Income Taxes: The Company provides for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are more likely than not to be realized. Future income tax assets and liabilities are measured using tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net future income tax assets and liabilities is included in operations in the period it occurs.

(h) Per Share Amounts: Basic earnings per share is computed by dividing earnings by the weighted average number of Common and Non-Voting Shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments.

In computing diluted earnings per share, 309,594 shares (2007 - 473,396) and 299,228 shares (2007 - 485,184) were added to the weighted average number of Common and Non-Voting Shares outstanding during the three and six months ended September 30, 2008 for the dilutive effect of employee and directors' stock options. Reference is made to note 6(d).

(i) Stock-Based Compensation Plan: The Company has a stock-based compensation plan that is described in note 6(d). Commencing in the year ended March 31, 2004, the fair value of stock options has been expensed over the vesting period. The fair value of stock options that have been expensed is credited to contributed surplus. When the stock options are exercised for stock, the recorded amount is transferred from contributed surplus to common share capital.

(j) Financial Instruments: Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost.

(k) Use of Estimates and Assumptions: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the period. Actual results may differ from such estimates and the differences could be material.

(l) Reclassification: Certain amounts have been reclassified to conform with current period presentation.

2. Changes in Accounting Policies and Recent Accounting Pronouncements:

(a) Changes in accounting policies: On April 1, 2008, the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:

- "Capital Disclosures", Section 1535. The new standard requires the Company to disclose its objectives, policies and processes for managing its capital structure. Reference is made to note 7.

- "Financial Instruments - Presentation", Section 3863 and "Financial Instruments - Disclosures", Section 3862. These accounting standards replaced "Financial Instruments - Disclosure and Presentation", Section 3861. The disclosures required by Sections 3862 and 3863 provide additional information on the risks associated with our financial instruments and how we manage those risks. Reference is made to note 8.

(b) Recent accounting pronouncements: In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises. As the Company will be required to report its results in accordance with IFRS starting in 2011, the Company is assessing the potential impacts of this changeover and developing its plan accordingly.



3. Property and Equipment:

----------------------------------------------------------------------------
Accumulated
September 30, 2008 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Computer equipment $ 2,413,734 $ 1,619,073 $ 794,661
Furniture and equipment 647,743 504,434 143,309
Leasehold improvements 1,065,658 763,929 301,729
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$ 4,127,135 $ 2,887,436 $ 1,239,699
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Accumulated
March 31, 2008 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Computer equipment $ 2,210,966 $ 1,389,177 $ 821,789
Furniture and equipment 625,324 481,109 144,215
Leasehold improvements 972,553 686,013 286,540
----------------------------------------------------------------------------
$ 3,808,843 $ 2,556,299 $ 1,252,544
----------------------------------------------------------------------------
----------------------------------------------------------------------------

4. Product Research and Development Costs:

For the six months ended September 30, 2008 2007
----------------------------------------------------------------------------
Product research and development costs $ 3,980,918 $ 2,902,605
Depreciation 192,064 160,251
Scientific research and experimental development
investment tax credits (546,969) (103,473)
----------------------------------------------------------------------------
$ 3,626,013 $ 2,959,383
----------------------------------------------------------------------------
----------------------------------------------------------------------------

5. Income and Other Taxes:

The provision for income and other taxes reported differs from the amount
computed by applying the combined Canadian Federal and Provincial statutory
rate to the earnings before income and other taxes.

The reasons for this difference and the related tax effects are as follows:

For the six months ended September 30, 2008 2007
----------------------------------------------------------------------------
Statutory tax rate 29.38% 31.72%
----------------------------------------------------------------------------
Expected income tax $ 2,417,417 $ 1,239,352
Non-deductible costs 116,741 88,056
Change in valuation allowance 41,305 83,868
Other 57,913 14,943
----------------------------------------------------------------------------
$ 2,633,376 $ 1,426,219
----------------------------------------------------------------------------

Represented by:
Current income taxes $ 2,569,818 $ 1,425,660
Future income taxes (4,646) (41,710)
Foreign withholding and other taxes 68,204 42,269
----------------------------------------------------------------------------
$ 2,633,376 $ 1,426,219
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The components of the Company's net future income tax liability at September
30, 2008 are as follows:

----------------------------------------------------------------------------
Canada Other Total
----------------------------------------------------------------------------

Investment tax credits, net of future
tax liabilities $ 395,385 $ - $ 395,385
Property and equipment 48,778 - 48,778
Benefit of operating losses - 257,170 257,170
----------------------------------------------------------------------------
$ 444,163 $ 257,170 $ 701,333
Valuation allowance (744,906)
----------------------------------------------------------------------------
Future income tax liability, net $ (43,573)
----------------------------------------------------------------------------

Represented by:
Future income tax liability, current $ (92,351)
Future income tax asset, long-term 48,778
----------------------------------------------------------------------------
Future income tax liability, net $ (43,573)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The operating losses in other countries expire in varying amounts between
fiscal 2010 and 2011.

6. Share Capital:

(a) Authorized: An unlimited number of Common Shares, an unlimited number of
Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in
series.

Effective August 1, 2008, the Common and Non-Voting Shares were split on a
two-for-one basis. Accordingly, the comparative number of shares and per
share amounts have been retroactively adjusted to reflect the two-for-one
split.

(b) Issued:

Common Shares Non-Voting Shares Contributed
Number Consideration Number Consideration Surplus
----------------------------------------------------------------------------
Balance,
March 31,
2007 11,638,222 $ 12,254,620 4,919,550 $ 316,268 $544,006
Issued for
cash on
exercise of
stock options 472,940 1,368,061
Common Shares
buy-back (164,800) (171,904)
Converted
into Common
Shares 970,516 62,392 (970,516) (62,392)
Stock-based
compensation:
- current
period
expense 520,533
- stock
options
exercised 320,134 (320,134)
----------------------------------------------------------------------------
Balance,
March 31,
2008 12,916,878 13,833,303 3,949,034 253,876 744,405
Issued for
cash on
exercise of
stock options 432,076 1,598,022
Common Shares
buy-back (13,520) (14,619)
Converted
into Common
Shares 1,053,088 67,701 (1,053,088) (67,701)
Stock-based
compensation:
- current
period
expense 357,648
- stock
options
exercised 312,718 (312,718)
----------------------------------------------------------------------------
Balance,
September 30,
2008 14,388,522 $ 15,797,125 2,895,946 $ 186,175 $789,335
----------------------------------------------------------------------------


The Non-Voting Shares are convertible into an equivalent number of Common Shares at any time at the option of the holder.

On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "Plan") whereby the Company will issue one right in respect of each share outstanding at the close of business on May 18, 2006 and for each additional share issued by the Company thereafter. The issuance of the rights is not dilutive and will not affect reported earnings per share until the rights separate from the underlying shares and become exercisable or until the exercise of the rights. The Plan was approved by the Company's shareholders on July 13, 2006.

(c) Common Shares Buy-Back: On December 14, 2006, the Company announced a Normal Course Issuer Bid ("NCIB") commencing December 20, 2006 to purchase for cancellation up to 670,000 of its Common Shares. This NCIB ended on December 19, 2007 and a total of 164,800 Common Shares were repurchased at market price for a total cost of $1,187,686.

On February 26, 2008, the Company announced a NCIB commencing February 28, 2008 to purchase for cancellation up to 970,000 of its Common Shares. Pursuant to this NCIB 13,520 shares have been purchased through September 30, 2008 at market price for a total cost of $137,364.

(d) Stock-Based Compensation Plan: The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 10, 2008, which allows it to grant options to acquire Common Shares of up to 10 percent of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at September 30, 2008, the Company could grant up to 1,728,446 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. These outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates.

As a result of the two-for-one stock split, the number of outstanding options was adjusted in accordance with existing plan provisions. All prior period number of options as well as weighted average exercise prices and fair values per option have been retroactively adjusted to reflect the two-for-one stock split.

Changes in options in the period from March 31, 2007 were as follows:



For the six months ended For the year ended
September 30, 2008 March 31, 2008
----------------------------------------------------------------------------

Weighted Weighted
Average Average
Options Exercise Options Exercise
Granted Price Granted Price
----------------------------------------------------------------------------
Outstanding at beginning of period 1,235,150 $ 4.95 1,265,590 $ 3.28
Granted 602,000 11.12 475,000 7.39
Exercised (432,076) 3.70 (472,940) 2.90
Forfeited (5,000) 5.91 (32,500) 5.57
----------------------------------------------------------------------------
Outstanding at end of period 1,400,074 $ 7.98 1,235,150 $ 4.95
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable at end of period 389,574 $ 5.24 365,400 $ 3.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The weighted average life of all options outstanding at September 30, 2008
is 4.0 years.

We estimated the fair value of stock options granted using the Black-Scholes
option pricing model under the following assumptions:

September 30, March 31, March 31,
2008 2008 2007
----------------------------------------------------------------------------
Weighted-Average Fair
Value ($/option) $1.21 to $2.01 $1.15 to $1.77 $0.46 to $1.21
Risk-Free Interest Rate (%) 2.4 to 3.1 3.2 to 4.25 4.1
Estimated Hold Period
Prior to Exercise (years) 2 to 5 2 to 5 2 to 5
Volatility in the Price of
Common Shares (%) 32 30 to 33 29 to 32
Dividends per Common Share
($/share) $0.53 to $0.61 $0.30 to $0.40 $0.24 to $0.26
----------------------------------------------------------------------------


The Company recognized a total stock-based compensation expense for the six months ended September 30, 2008 of $357,648 (2007 - $128,930).

7.Capital Management: As required by Canadian GAAP, effective April 1, 2008, the Company must provide certain disclosures regarding its objectives, policies and processes for managing capital, as well as providing certain quantitative data about capital.

The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to provide returns to its shareholders. The capital structure of the Company consists of cash, credit facilities and shareholders' equity. The Company manages its capital with the objective of ensuring that there are adequate capital resources while maximizing the return to shareholders. The Company does not have any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.

The Company's policy is to pay quarterly dividends based on the Company's overall financial performance and cash flow generation. In addition, since May 2005, the Company declared a special dividend after review of the completion of the immediately prior fiscal year results. Decisions on dividend payments are made on a quarterly basis by the Board. There can be no assurance as to the amount or payment of such dividends in the future.

Since November 2002, the Company embarked on a series of normal course issuer bids to buy back its shares. The latest normal course issuer bid is effective from February 28, 2008 to February 27, 2009. Reference is made to note 6(c).

The Company makes adjustments to its capital structure in light of general economic conditions and the Company's working capital requirements. In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may pay dividends, buy back shares or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions not in the ordinary course of business.

8. Financial Instruments:

(a) Overview: The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company's risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to those risks. The principal financial risks to which the Company is exposed are described below:

(b) Credit Risk: Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligation and arises principally from the Company's cash and accounts receivable. The amounts reported in the balance sheet for accounts receivable are net of allowances for bad debts, estimated by the Company's management based on prior experience and their assessment of the current economic environment.

The Company's accounts receivable consist primarily of balances from customers operating in the oil and gas industry, both domestically and internationally as the Company sells its products and services in over 40 countries worldwide. Some of these countries have greater economic and political risk than experienced in North America and as a result there may be greater risk associated with sales in those jurisdictions. The Company manages this risk by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services on a percentage-of-completion basis. The Company recognizes an accounts receivable and software license revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectibility is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met. Historically the Company has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area.

As at September 30, 2008, the Company has a concentration of credit risk with 5 domestic and international customers who represent 46% of its accounts receivable and $1.0 million of its accounts receivable are over 90 days. The Company assesses the credit worthiness of its customers on an ongoing basis and it regularly monitors the amount and age of balances outstanding. Accordingly, the Company views the credit risks on these amounts as normal for the industry.

The Company minimizes the credit risk of cash by depositing only with a reputable financial institution and in highly liquid interest bearing cash accounts.

(c) Market Risk: Market risk is the risk that changes in market prices of the Company's foreign exchange rates and interest rates will affect the Company's income or the value of its financial instruments.

The Company operates internationally and primarily prices its products in either the Canadian or US dollar. This gives rise to exposure to market risks from changes in the foreign exchange rates between the Canadian and US dollar. Approximately 63 percent of the Company's revenues in the six months ended September 30, 2008 was denominated in US dollars and at September 30, 2008, the Company had approximately $4.9 million of its working capital denominated in US dollars. The Company currently does not use derivative instruments to hedge its exposure to those risks but as approximately 18 to 20 percent of the Company's total costs are also denominated in US dollars they provide a partial hedge against the fluctuation in this currency exchange.

Based upon the above-stated exposures to the US dollar, it is estimated that a 1 cent change in the US dollar would result in a net change of approximately $94,000 on net earnings in the six months ended September 30, 2008. A weaker US dollar with respect to the Canadian dollar will result in a negative impact while the reverse would result from a stronger US dollar.

The Company has significant cash balances and no interest-bearing debt. The Company's current policy is to invest excess cash in interest-bearing deposits and/or guaranteed investment certificates issued by its principal banker.

(d) Liquidity risk: Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Company manages liquidity risk through the management of its capital structure as outlined in note 7. The Company's growth is financed through a combination of the cash flows from operations and its cash balances on hand. Given the Company's available liquid resources as compared to the timing of the payments of its liabilities, management assesses the Company's liquidity risk to be low.

(e) Financial instruments:

(i) Classification of financial instruments



----------------------------------------------------------------------------
Classification Measurement
----------------------------------------------------------------------------
Cash Held to maturity Amortized cost
Accounts receivable Loans and receivables Amortized cost
Accounts payable and accrued
liabilities Other financial liabilities Amortized cost
----------------------------------------------------------------------------


(ii) Fair values of financial instruments

The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these instruments.

9. Other Information:

(a) Research Commitments:

(i) On May 1, 2006, the Company entered into a two phased joint research and development agreement (the "Agreement"). Phase 1 of this project was completed in fiscal 2007 and work is ongoing on Phase 2. It is estimated that the second phase will take 5 years and that the Company's annual expenditures will approximate $2 million for its portion of the aggregate project costs.

During Phase 2, the Agreement provides the participants with withdrawal rights upon the payment of a withdrawal fee to the other participants of an amount equal to one year of the withdrawing party's share of budgeted project costs. In addition to the withdrawal fee, the withdrawing party may be liable for (i) 100 percent of resizing costs if the project is scaled back or (ii) a proportionate share of wind down costs should the other participants decide to terminate the project as a result of the withdrawal of the participant.

In conjunction with entering into this project, CMG Reservoir Simulation Foundation (the "Foundation"), the sole holder of the Company's Non-Voting Shares, agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50 percent of the Company's estimated share of costs over the duration of the project. For the six months ended September 30, 2008, the Company has reflected $513,515 (2007 - $429,561) in research grants from the Foundation in revenue with respect to this project. To September 30, 2008 these research grants aggregate to $1,878,491 since commencement of the project.

(ii) Pursuant to a research and development agreement entered into on January 30, 2001, the Foundation provided specified research grants to the Company through the term of the agreement, which ended with the payment of the final grant in January 2008. During the Company's fiscal year ended March 31, 2008, it received $125,000 in cash each quarter which is reflected in consulting and contract research revenues.

(b) Lease Commitments: The Company has lease commitments relating to its office premises. The minimum operating lease rental payments pursuant to these contracts are estimated to be 2009 - $0.4 million; 2010 - $0.6 million; and 2011 - 2014: $0.1 million each year.

(c) Line of Credit: The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility and/or letters of credit. As at September 30, 2008, US $8,850 had been drawn on this line of credit for performance bonds.



(d) Supplemental Cash Flow Information:

For the six months ended September 30, 2008 2007
----------------------------------------------------------------------------
Interest received $ 349,251 $ 435,766
Income taxes paid $ 2,410,149 $ 2,596,278
----------------------------------------------------------------------------


10. Segmented Information:

Operating Segments Contract
For the three months ended Software Research and
September 30, 2008 Licenses Consulting Corporate Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $8,231,888 $ 778,659 $ 573,983 $9,584,530
----------------------------------------------------------------------------
Gross profit 6,365,162 217,941 573,983 7,157,086
----------------------------------------------------------------------------
General and administrative
expenses 848,934 848,934
Depreciation and
amortization 23,276 18,209 35,529 77,014
Product research and
development costs 1,975,657 1,975,657
Interest and other income
and foreign exchange (158,724) (158,724)
Income and other taxes 7,110 233 1,438,904 1,446,247
----------------------------------------------------------------------------
Earnings (loss) for the
period $6,334,776 $ 199,499 $ (3,566,317) $2,967,958
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Operating Segments Contract
For the three months ended Software Research and
September 30, 2007 Licenses Consulting Corporate Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $4,723,880 $ 706,766 $ 669,124 $6,099,770
----------------------------------------------------------------------------
Gross profit 3,613,476 175,527 669,124 4,458,127
----------------------------------------------------------------------------
General and administrative
expenses 674,287 674,287
Depreciation and
amortization 20,985 21,261 31,596 73,842
Product research and
development costs 1,579,854 1,579,854
Interest and other income
and foreign exchange (117,268) (117,268)
Income and other taxes (3,107) (2,702) 810,467 804,658
----------------------------------------------------------------------------
Earnings (loss) for the
period $3,595,598 $ 156,968 $ (2,309,812) $1,442,754
----------------------------------------------------------------------------


Operating Segments Contract
For the six months ended Software Research and
September 30, 2008 Licenses Consulting Corporate Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $15,020,735 $1,689,302 $ 1,142,189 $17,852,226
----------------------------------------------------------------------------
Gross profit 11,663,839 664,857 1,142,189 13,470,885
----------------------------------------------------------------------------
General and administrative
expenses 1,742,134 1,742,134
Depreciation and
amortization 41,836 35,458 70,688 147,982
Product and development
costs 3,626,013 3,626,013
Interest and other income
and foreign exchange (273,349) (273,349)
Income and other taxes 65,177 2,043 2,566,156 2,633,376
----------------------------------------------------------------------------
Earnings (loss) for the
period $11,556,826 $ 627,356 $ (6,589,453) $ 5,594,729
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Assets $ 6,299,206 $1,180,710 $ 27,281,709 $34,761,625
----------------------------------------------------------------------------
Capital Expenditures $ 89,262 $ 26,880 $ 211,059 $ 327,201
----------------------------------------------------------------------------



Operating Segments Contract
For the six months ended Software Research and
September 30, 2007 Licenses Consulting Corporate Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $8,891,154 $1,527,201 $ 1,235,522 $11,653,877
----------------------------------------------------------------------------
Gross profit 6,723,508 417,596 1,235,522 8,376,626
----------------------------------------------------------------------------
General and administrative
expenses 1,356,553 1,356,553
Depreciation and
amortization 39,938 35,921 62,462 138,321
Product and development
costs 2,959,383 2,959,383
Interest and other income
and foreign exchange 15,205 15,205
Income and other taxes 35,082 7,187 1,383,950 1,426,219
----------------------------------------------------------------------------
Earnings (loss) for the
period $6,648,488 $ 374,488 $ (4,542,031) $ 2,480,945
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Assets $2,358,311 $2,055,937 $ 21,850,971 $26,265,219
----------------------------------------------------------------------------
Capital Expenditures $ 37,859 $ 78,571 $ 336,813 $ 453,243
----------------------------------------------------------------------------


Geographic Segments
For the six months ended September 30,

2008 2007
----------------------------------------------------------------------------
Property and Property and
Revenue Equipment Revenue Equipment
----------------------------------------------------------------------------
Canada $ 6,241,969 $ 1,103,033 $ 4,331,646 $ 1,367,365
United States 2,710,819 95,998 2,049,889 19,966
Other Foreign 8,899,438 40,668 5,272,342 55,351
----------------------------------------------------------------------------
$ 17,852,226 $ 1,239,699 $ 11,653,877 $ 1,442,682
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In the six months ended September 30, 2008, the Company derived 12 percent (2007 - 14 percent) in revenue from one customer.

CORPORATE INFORMATION

Computer Modelling Group Ltd. is a computer software technology and consulting company serving the oil and gas industry. The Company, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, London, Caracas and Dubai. CMG is the leading supplier of advanced processes reservoir modelling software in the world with a blue chip client base of international oil companies and technology centers in over 40 countries.

The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information