EXFO Achieves GAAP Break-Even in Second Quarter

    Business Editors

    QUEBEC CITY, Quebec--(BUSINESS WIRE)--March 29, 2005--EXFO Electro-Optical Engineering Inc.(NASDAQ:EXFO)(TSX:EXF.SV) -

    - Sales increase 37.1% year-over-year to US$23.1 million

    - Bookings improve 39.8% year-over-year to US$24.9 million

    - Recipient of 2005 Growth Strategy Leadership Award for market-share gains

    - Leadership position in fiber-to-the-premises test market

    EXFO Electro-Optical Engineering Inc. (NASDAQ:EXFO)(TSX:EXF.SV) announced today that it achieved GAAP break-even in the second quarter of fiscal 2005.

    Sales increased 37.1% to US$23.1 million in the second quarter ended February 28, 2005, from US$16.9 million in the second quarter of 2004 and 7.1% from US$21.6 million in the first quarter of 2005. Net bookings improved 39.8% to US$24.9 million in the second quarter of fiscal 2005 from US$17.7 million in the same period last year and 6.5% from US$23.3 million in the first quarter of 2005.

    Gross margin accounted for 54.9% of sales in the second quarter of fiscal 2005 compared to 55.4% in the second quarter of 2004 and 52.7% in the first quarter of 2005.

    GAAP net earnings in the second quarter of fiscal 2005 totaled US$9 thousand, or US$0.00 per share, compared to a net loss of US$2.9 million, or US$ 0.04 per share, in the same period last year and a net loss of US$2.4 million, or US$0.03 per share, in the first quarter of 2005.

    On a pro forma basis(i), net earnings in the second quarter of fiscal 2005 amounted to US$1.5 million or US$0.02 per share, compared to a net loss of US$1.5 million, or US$0.02 per share, in the second quarter of 2004 and a net loss of US$0.8 million, or US$0.01 per share, in the first quarter of 2005.

    "I am delighted that we achieved GAAP break-even, posted our sixth consecutive quarterly increase in sales and bookings, while being recognized by Frost & Sullivan for capturing the largest market-share gains in the optical test and measurement industry in calendar 2004," said Germain Lamonde, EXFO's Chairman, President and CEO. "These milestones, combined with 36% sales growth in the first half of fiscal 2005 compared to the same period last year, represent clear-cut evidence that EXFO gained sizeable market-share, established a leadership position in fiber-to-the-premises testing, and strengthened its unique value proposition for next-generation IP networking through sustained R&D spending during the telecom downturn."

Segmented Results (In millions of US dollars)

Earnings (loss) Sales from operations -------------------------------------------------------------------- Q2 2005 Q1 2005 Q2 2004 Q2 2005 Q1 2005 Q2 2004 -------------------------------------------------------------------- Business Segment Telecom Division $19.4 $17.4 $13.3 $0.6 $(1.0) $(2.5) Photonics and Life Sciences Division 3.7 4.2 3.6 (0.8) (0.3) (1.0) -------------------------------------------------------------------- Total $23.1 $21.6 $16.9 $(0.2) $(1.3) $(3.5) -------------------------------------------------------------------- --------------------------------------------------------------------

    Operating Expenses

    Selling and administrative expenses amounted to US$7.7 million, or 33.4% of sales, in the second quarter of fiscal 2005 compared to US$6.8 million, or 40.0% of sales, in the same period last year and US$7.4 million, or 34.3% of sales, in the first quarter of 2005.

    Gross research and development expenses totaled US$3.8 million, or 16.5% of sales, in the second quarter of fiscal 2005 compared to US$4.3 million, or 25.4% of sales, in the second quarter of 2004 and US$3.8 million, or 17.6% of sales, in the first quarter of 2005.

    Second-Quarter Business Highlights

    - Growing through market-share gains, EXFO received for the second consecutive year the Growth Strategy Leadership Award from Frost & Sullivan following the quarter-end. The award is presented annually to the company whose visionary growth strategy generates the largest market-share gains in the global fiber-optic test equipment (FOTE) market. Based on a report by Frost & Sullivan, EXFO increased its market share from 8.4% to 10.4% overall in 2004 to attain the second overall position worldwide, while expanding its leadership position from 17.4% to 22.2% of the network service provider market.

    - Continuing its leadership in the FTTx (fiber-to-the-premises, fiber-to-the-node, fiber-to-the curb) test market, EXFO shipped several such orders to a US-based, Tier-1 telecom carrier, who accounted for 21.4% of sales in the second quarter of 2005, and the company received long-term, sole-source approval for a suite of FTTx test solutions from a second Tier-1 carrier in the United States.

    - Focusing on profitability, EXFO reached GAAP break-even in the second quarter of 2005 and was profitable on a pro forma basis(i) for the third time in the last four quarters.

    - Taking advantage of its strong R&D program, EXFO launched five new products in the second quarter, including amongst others an All-Band Component Analyzer for FTTx and coarse-wavelength division multiplexing (CWDM) manufacturing/R&D applications. Sales of new products that have been on the market two years or less accounted for 45.5% of sales in the second quarter of 2005.

    Business Outlook

    EXFO forecasts sales between US$23.0 million and US$26.0 million and GAAP net earnings (loss) between a net loss of US$0.02 per share and net earnings of US$0.01 per share for the third quarter of fiscal 2005. Excluding stock-based compensation costs, amortization of intangible assets, restructuring charges and other unusual items, the company expects to report pro forma net earnings between US$0.00 per share and US$0.03 per share.

    Conference Call and Webcast

    EXFO will host a conference call today at 5 p.m. (Eastern time) to review its financial results for the second quarter of fiscal 2005. To listen to the conference call and participate in the question period via telephone, dial 1-416-695-9716. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available until April 5, 2005. The replay number is 1-416-695-5275. The audio Webcast of the conference call will also be available on EXFO's Website at www.exfo.com, under the Investors section.


    Reconciliation of pro forma net earnings (loss) with GAAP net earnings (loss)

    (i) Pro forma net earnings (loss) represents net earnings (loss) excluding stock-based compensation costs, amortization of intangible assets, restructuring charges and an unusual tax recovery. All figures are in thousands of US dollars except per share data.

Actual Results Three months Six months Three months Six months ended ended ended ended February 28, February 28, February 29, February 29, 2005 2005 2004 2004 --------------------------------------------------------------------- (unaudited) Net earnings (loss) in accordance with GAAP $9 $(2,364) $(2,885) $(4,893)

Pro forma adjustments: Stock-based compensation costs 224 381 84 89 Amortization of intangible assets 1,225 2,447 1,291 2,576 Restructuring charges 54 254 - - Unusual tax recovery - - - (1,406) ---------------------------------------------------------------------

Pro forma net earnings (loss) $1,532 $718 $(1,510) $(3,634) --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic and diluted net earnings (loss) per share in accordance with GAAP $- $(0.03) $(0.04) $(0.08) --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic and diluted pro forma net earnings (loss) per share $0.02 $ 0.01 $(0.02) $(0.06) --------------------------------------------------------------------- ---------------------------------------------------------------------

Outlook

Three months ending May 31, 2005 --------------------------------------------------------------------- (unaudited)

Basic and diluted net earnings (loss) per share in accordance with GAAP From $(0.02) To $0.01

Pro forma adjustments: Stock-based compensations costs 0.00 0.00 Amortization of intangible assets 0.02 0.02 Restructuring charges 0.00 0.00 --------------------------------------------------------------------

Basic and diluted pro forma net earning per share From $0.00 To $0.03 -------------------------------------------------------------------- --------------------------------------------------------------------

    EXFO discloses pro forma financial data in order to provide supplemental information regarding its results of operations and to enhance investors' overall understanding of its core financial performance and its prospects for the future. EXFO believes that investors benefit from seeing its results through the eyes of management in addition to seeing the GAAP information. This non-GAAP information facilitates management's comparison of current results with the company's historical results of operations and strategic plan and with those of its peers. This information is not in accordance with, or an alternative to, GAAP and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net earnings (loss). As a result, EXFO's pro forma net earnings (loss) may not be comparable to similarly titled measures reported by other companies.

    About EXFO

    EXFO is a recognized test and measurement expert in the global telecommunications industry through the design and manufacture of advanced and innovative solutions as well as best-in-class customer support. The Telecom Division, which represents the company's main business activity, offers fully integrated and complete test solutions to network service providers, system vendors and component manufacturers in approximately 70 countries. One of EXFO's strongest competitive advantages is its PC/Windows-based modular platforms that host a wide range of tests across optical, physical, data and network layers, while maximizing technology reuse across several market segments. The Photonics and Life Sciences Division mainly leverages core telecom technologies to offer value-added solutions in the life sciences and high-precision assembly sectors. For more information about EXFO, visit www.exfo.com.

    Forward-Looking Statements

    This news release contains forward-looking statements within the meaning of the U. S. Private Securities Litigation Reform Act of 1995 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition that refer to expectations, projections or other characterizations of future events and circumstances. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including economic uncertainty; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; fluctuating exchange rates and our ability to execute in these uncertain conditions; the effects of the additional actions we have taken in response to such economic uncertainty (including workforce reductions, ability to quickly adapt cost structures with anticipated levels of business, ability to manage inventory levels with market demand); market acceptance of our new products and other upcoming products; limited visibility with regards to customer orders and the timing of such orders; our ability to successfully integrate our acquired and to-be-acquired businesses; the retention of key technical and management personnel; and future economic, competitive and market conditions. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report on Form 20-F and our other filings with the U. S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document and shall not be revised or updated to reflect events after the date of this document.

EXFO Electro-Optical Engineering Inc. Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at February 28, August 31, 2005 2004 --------------------------------------------------------------------- (unaudited)

Assets

Current assets Cash $4,258 $5,159 Short-term investments 94,515 83,969 Accounts receivable Trade, less allowance for doubtful accounts of $571 ($510 as at August 31, 2004) 13,227 12,080 Other 1,425 1,532 Income taxes and tax credits recoverable 4,118 7,836 Inventories 18,345 15,371 Prepaid expenses 1,226 1,513 ---------------------------------------------------------------------

137,114 127,460

Income taxes and tax credits recoverable 2,489 449

Property, plant and equipment 14,853 15,442

Long-lived asset held for sale 1,600 1,600

Intangible assets 7,699 9,447

Goodwill 19,667 18,393 ---------------------------------------------------------------------

$183,422 $172,791 --------------------------------------------------------------------- --------------------------------------------------------------------- Liabilities

Current liabilities Accounts payable and accrued liabilities $12,447 $11,393 Deferred revenue 1,341 805 Current portion of long-term debt 122 121 ---------------------------------------------------------------------

13,910 12,319

Deferred revenue 1,385 1,123

Deferred grants 1,807 1,690

Long-term debt 273 332 ---------------------------------------------------------------------

17,375 15,464 ---------------------------------------------------------------------

Contingency

Shareholders' Equity

Share capital 521,832 521,733 Contributed surplus 2,367 1,986 Cumulative translation adjustment 24,424 13,820 Deficit (382,576) (380,212) ---------------------------------------------------------------------

166,047 157,327 ---------------------------------------------------------------------

$183,422 $172,791 ---------------------------------------------------------------------

EXFO Electro-Optical Engineering Inc. Interim Unaudited Consolidated

(in thousands of US dollars, except share and per share data)

Three months Six months Three months Six months ended ended ended ended February 28, February 28, February 29, February 29, 2005 2005 2004 2004 ---------------------------------------------------------------------

Sales $23,135 $44,732 $16,880 $32,842

Cost of sales (1,2) 10,431 20,656 7,528 15,343 ---------------------------------------------------------------------

Gross margin 12,704 24,076 9,352 17,499 ---------------------------------------------------------------------

Operating expenses Selling and administrative (1) 7,728 15,141 6,759 12,616 Net research and development (1) 2,781 5,561 3,492 6,321 Amortization of property, plant and equipment 1,098 2,192 1,295 2,616 Amortization of intangible assets 1,225 2,447 1,291 2,576 Restructuring charges 54 254 - - ---------------------------------------------------------------------

Total operating expenses 12,886 25,595 12,837 24,129 ---------------------------------------------------------------------

Loss from operations (182) (1,519) (3,485) (6,630)

Interest and other income 625 1,349 514 670 Foreign exchange gain (loss) 263 (772) 427 (43) ---------------------------------------------------------------------

Earnings (loss) before income taxes 706 (942) (2,544) (6,003)

Income taxes 697 1,422 341 (1,110) ---------------------------------------------------------------------

Net earnings (loss) for the period $9 $(2,364) $(2,885) $(4,893) --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic and diluted net earnings (loss) per share $- $(0.03) $(0.04) $(0.08)

Basic weighted average number of shares outstanding (000's) 68,528 68,495 64,129 63,594

Diluted weighted average number of shares outstanding (000's) 68,968 68,978 64,772 64,217

(1) Stock-based compensation costs included in: Cost of sales $32 $57 $8 $8 Selling and administrative 165 252 54 59 Net research and development 47 72 22 22 ---------------------------------------------------------------------

$244 $381 $84 $89 --------------------------------------------------------------------- ---------------------------------------------------------------------

(2) The cost of sales is exclusive of amortization, shown separately.

EXFO Electro-Optical Engineering Inc. Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)

Three months Six months Three months Six months ended ended ended ended February 28, February 28, February 29, February 29, 2005 2005 2004 2004 --------------------------------------------------------------------- Cash flows from operating activities Net earnings (loss) for the period $9 $(2,364) $(2,885) $(4,893) Add (deduct) items not affecting cash Discount on short-term investments 470 320 101 332 Stock-based compensation costs 244 381 84 89 Amortization 2,323 4,639 2,586 5,192 Deferred revenue 275 660 252 783 Deferred grants - - (90) (212) --------------------------------------------------------------------- 3,321 3,636 48 1,291

Change in non-cash operating items Accounts receivable (381) (91) 2,088 227 Income taxes and tax credits 1,914 2,260 1,231 (1,916) Inventories (1,001) (1,948) (1,818) (968) Prepaid expenses 380 396 284 1,014 Accounts payable and accrued liabilities (82) 377 (224) (1,015) ---------------------------------------------------------------------

4,151 4,630 1,609 (1,367) --------------------------------------------------------------------- --------------------------------------------------------------------- Cash flows from investing activities Additions to short-term investments (223,561) (288,647) (166,987) (246,912) Proceeds from disposal of short-term investments 218,943 283,273 135,668 218,509 Additions to property, plant and equipment and intangible assets (246) (823) (171) (576) ---------------------------------------------------------------------

(4,864) (6,197) (31,490) (28,979) --------------------------------------------------------------------- --------------------------------------------------------------------- Cash flows from financing activities Repayment of long-term debt (30) (58) (27) (52) Net proceeds of offering - - 29,164 29,164 Share issue expenses - - (166) (166) Exercise of stock options 13 99 157 218 Redemption of share capital - - (1) (3) Resale of share capital - - 5 13 ---------------------------------------------------------------------

(17) 41 29,132 29,174

Effect of foreign exchange rate changes on cash 140 625 (1,007) (628) ---------------------------------------------------------------------

Change in cash (590) (901) (1,756) (1,800)

Cash - Beginning of period 4,848 5,159 5,322 5,366 ---------------------------------------------------------------------

Cash - End of period $4,258 $4,258 $3,566 $3,566 --------------------------------------------------------------------- ---------------------------------------------------------------------

    EXFO ELECTRO-OPTICAL ENGINEERING INC. (TSX:EXF.SV) (NASDAQ:EXFO)

--30--CB/na*

CONTACT: EXFO Electro-Optical Engineering Inc. Vance Oliver Manager, Investor Relations (418) 683-0913, Ext. 3733 vance.oliver@exfo.com

KEYWORD: NEW YORK INTERNATIONAL CANADA INDUSTRY KEYWORD: TELECOMMUNICATIONS MANUFACTURING EARNINGS SOURCE: EXFO ELECTRO-OPTICAL ENGINEERING INC.

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