QUEBEC CITY -- 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."

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.

EXFO Electro-Optical Engineering Inc.