March 01, 2007 11:57 ET

H2O Innovation Presents its Second Quarter Results

QUEBEC, QUEBEC--(CCNMatthews - March 1, 2007) - (TSX VENTURE:HEO)(Alternext:MNEMO:ALHEO). During the second quarter ending December 31st, 2006, Management gradually transferred to its Ham-Nord (Quebec) the manufacturing activities previously subcontracted by its newly acquired subsidiary Membrane Systems Inc. ("MSI"). At the same time, a major portion of the financial activities have been reallocated and are now performed by the head office were a new management system has been put in place. Revenues are up by 76% compared to the same period the previous year. Net loss of $683,810 was incurred, mainly due to the listing of the Company shares on Alternext and to the integration of MSI activities within the H2O Innovation Group.

The second quarter consolidated statements reflect the integration of MSI, acquired on October 2nd, 2006 and some of the anticipated synergies did not fully materialized by December 31st, 2006.

Sales increased by 76% during the second quarter ending December 31st, 2006, reaching $2,406,298 compared to $1,363,371 during the corresponding quarter of the previous year. Despite this increase in sales, gross margin went from $539,429 to $459,994 for the three month periods ending December 31st, 2005 and 2006 respectively. This 17% reduction is due to a lower profit margin on US municipal projects due to their larger size and the gradual integration of the transferred activities previously sub-contracted by MSI to the Ham-Nord (Quebec) manufacturing plant. The Company remains confident to positively rebuild its profit margin with the realization of the manufacturing synergies and expects a better efficiency in the execution of contracts, leading to a better control on delivery dates and quality

Sales expenses went up from $176,060 for the six month period ended December 31st, 2005 to $431,381 for the corresponding period ended December 31st, 2006. This increase in sales expenses is due to the hiring of new resources in business development and to the addition of two people in MSI sales force.

Administration expenses went up from $141,325 to $687,349 during the period ended December 31st, 2005 and December 31st, 2006 respectively. This important increase in administration expenses during the second quarter is essentially due to non-recurring charges of $340,000, mainly related to the listing of the Company on Alternext (by EuronextTM) exchange in Paris. As announced in a press release on January 17th, 2007, this first-off in North-America confers to the Company a significant leading edge in the realization of its business plan.

During the second quarter ended December 31st, 2006, no interest on long term debt is recorded. The debt was fully repaid during the fiscal year ended June 30th, 2006 following the 10.1 million $ equity financing completed on May 26st, 2006. It is worth mentioning that as of December 31st, 2006, the Company is in an unrivalled financial situation with a positive cash flow position of 5.1 million $ and no long term debt.

Additional information on the Company can be found on SEDAR at www.sedar.com

About H2O

H2O's mission is to develop, manufacture and market innovative, environmentally friendly products, intended for production of drinking water and treatment of sewage and industrial process water.

Prospective disclosures

This press release may contain prospective disclosures representing current expectations of H2O and are subject to certain risks and uncertainties. H2O rejects any obligation to revise or update the prospective disclosures contained in this press release.

The TSX Venture Exchange and the Alternext Exchange assume no responsibility for the relevance or accuracy of this press release.

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