SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

          [_]   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                   OF THE SECURITIES EXCHANGE ACT OF 1934; or

          [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended August 31, 2005; or

          [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
               For the transition period ________ to ________; or

          [_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

            Date of event requiring this shell company report.......

       FOR THE TRANSITION PERIOD FROM SEPTEMBER 1, 2004 TO AUGUST 31, 2005

                           Commission File No. 0-30895

                     EXFO ELECTRO-OPTICAL ENGINEERING INC. /
                      EXFO INGENIERIE ELECTRO-OPTIQUE INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                     CANADA
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

                                400 GODIN AVENUE
                         VANIER, QUEBEC G1M 2K2, CANADA
                                 (418) 683-0211
   (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

                                      None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

                     Subordinate Voting Shares, no par value

Securities for which there is a reporting obligation pursuant to Section 15(d)
                                  of the Act:

                                      None

As of November 1, 2005,  the  registrant  had  30,672,617  Subordinate  Voting
                             Shares outstanding.

Indicate  by check  mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the Securities  Exchange Act of
1934  during the  preceding  12 months (or for such  shorter  period  that the
registrant  was  required to file such  reports),  and (2) has been subject to
such filing requirements for the past 90 days.

                        Yes [X]                 No [_]

Indicate  by check mark which  financial  statement  item the  registrant  has
                              elected to follow:

                      Item 17 [ ]             Item 18 [X]

If this is an annual report,  indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act).

                       Yes [_]                 No [X]

<PAGE>

         DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

         This annual report contains or  incorporates by reference  statements
which  constitute  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  those that are discussed under "Risk Factors" set
forth  in  Item  3D  of  this   annual   report.   Assumptions   relating   to
forward-looking  statements  involve  judgments  and  risks,  all of which are
difficult or  impossible  to predict and many of which are beyond our control.
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.  We  undertake  no
obligation to revise or update any of them to reflect events or  circumstances
that may occur after the date of this document.


                                   PART I.

ITEM 1.           IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

         Not Applicable.

ITEM 2.           OFFER STATISTICS AND EXPECTED TIMETABLE

         Not Applicable.

ITEM 3.           KEY INFORMATION

A.       SELECTED FINANCIAL DATA


         The  consolidated  statements  of  earnings  data for the years ended
August 31, 2001 and 2002 and the consolidated balance sheets data as at August
31, 2001,  2002 and 2003 are derived from our audited  consolidated  financial
statements not included in this annual report. The consolidated  statements of
earnings data for each of the three years ended August 31, 2003, 2004 and 2005
and the  consolidated  balance  sheets data as at August 31, 2004 and 2005 are
derived from our audited  consolidated  financial statements that are included
elsewhere in this annual report.

         Our consolidated financial statements are prepared in accordance with
generally  accepted  accounting  principles  in Canada  ("Canadian  GAAP") and
significant  differences in measurement and disclosure from generally accepted
accounting principles in United States ("U.S. GAAP") are set out in note 21 to
our  consolidated  financial  statements  included  elsewhere  in this  annual
report.  The historical  results below are not  necessarily  indicative of the
results to be expected for any future periods.

         The selected  financial data should be read in  conjunction  with our
audited  consolidated  financial  statements  and the related  notes  included
elsewhere in this annual report,  and "Item 5. Operating and Financial  Review
and Prospects" of this annual report.


                                      2
<PAGE>

<TABLE>
<CAPTION>
                                                                             YEARS ENDED AUGUST 31,
                                                           ----------------------------------------------------------
                                                              2005        2004        2003        2002        2001
                                                              ----        ----        ----        ----        ----
                                                             (IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE
                                                                                      DATA)
<S>                                                        <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales..................................................    $   97,216  $   74,630  $   61,930  $   68,330  $  146,013
Cost of sales (1) .....................................        44,059      34,556      36,197      52,366      56,207
                                                           ----------  ----------  ----------  ----------  ----------
Gross margin...........................................        53,157      40,074      25,733      15,964      89,806
                                                           ----------  ----------  ----------  ----------  ----------
Operating expenses
Selling and administrative.............................        31,782      25,890      26,991      33,881      44,975
Net research and development...........................        12,190      12,390      15,879      12,782      13,601
Amortization of property, plant and equipment..........         4,256       4,935       5,210       5,096       3,267
Amortization of intangible assets......................         4,836       5,080       5,676      12,451      10,168
Impairment of long-lived assets and goodwill...........            --         620       7,427      23,657          --
Restructuring and other charges........................           292       1,729       4,134       2,880       3,288
                                                           ----------  ----------  ----------  ----------  ----------
Total operating expenses...............................        53,356      50,644      65,317      90,747      75,299
                                                           ----------  ----------  ----------  ----------  ----------
Earnings (loss) from operations........................          (199)    (10,570)    (39,584)    (74,783)     14,507
Interest and other income..............................         2,524       1,438       1,245       1,456       6,098
Foreign exchange gain (loss) ..........................        (1,336)       (278)     (1,552)       (458)      3,327
                                                           ----------  ----------  ----------  ----------  ----------
Earnings (loss) before income taxes and amortization
    and write-down of goodwill.........................           989      (9,410)    (39,891)    (73,785)     23,932
Income taxes...........................................         2,623        (986)     15,059     (25,451)      8,150
                                                           ----------  ----------  ----------  ----------  ----------
Earnings (loss) before amortization and write-down of
      goodwill.........................................        (1,634)     (8,424)    (54,950)    (48,334)     15,782
Amortization of goodwill...............................
                                                                   --          --          --      38,021      31,076
Write-down of goodwill.................................
                                                                   --          --          --     222,169          --
                                                           ----------  ----------  ----------  ----------  ----------
Net loss for the year..................................    $   (1,634) $   (8,424) $  (54,950) $ (308,524) $  (15,294)
                                                           ==========  ==========  ==========  ==========  ==========
Basic and diluted net loss per share...................    $    (0.02) $    (0.13) $    (0.87) $    (5.09) $    (0.29)
Basic weighted average number of shares used in per
    share calculations (000's).........................        68,526      66,020      62,852      60,666      53,014
OTHER CONSOLIDATED STATEMENTS OF EARNINGS DATA:
Gross research and development.........................    $   15,878  $   15,668  $   17,133  $   17,005  $   17,601
Net research and development...........................    $   12,190  $   12,390  $   15,879  $   12,782  $   13,601
AMOUNTS UNDER U.S. GAAP
Net loss for the year..................................    $   (2,920) $   (9,571) $  (48,201) $ (382,893) $  (29,478)
Basic and diluted net loss per share...................    $    (0.04) $    (0.14) $    (0.77) $    (6.31) $    (0.56)
Basic weighted average number of shares used in per
    share calculations (000's).........................        68,526      66,020      62,852      60,666      53,014

                                                                                AS AT AUGUST 31,
                                                           -----------------------------------------------------------
                                                              2005        2004        2003        2002        2001
                                                              ----        ----        ----        ----        ----
                                                                          (IN THOUSANDS OF US DOLLARS)
CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash...................................................    $    7,119  $    5,159  $    5,366  $    9,128  $    7,729
Short-term investments.................................       104,883      83,969      52,010      40,553      66,861
Working capital........................................       135,288     115,141      76,659      91,374     130,289
Total assets...........................................       190,957     172,791     146,254     177,926     442,577
Long-term debt (excluding current portion) ............           198         332         453         564         664
Share capital..........................................       521,875     521,733     492,452     489,611     429,995
Shareholders' equity...................................    $  173,400  $  157,327  $  129,826  $  165,406  $  414,805
AMOUNTS UNDER U.S. GAAP
Cash...................................................    $    7,119  $    5,159  $    5,366  $    9,128  $    7,729
Short-term investments.................................       104,883      83,969      52,010      40,553      66,861
Working capital........................................       138,225     117,116      78,225      91,305     129,987
Total assets...........................................       182,852     164,758     138,020     161,314     499,436
Long-term debt (excluding current portion) ............           198         332         453         564         664
Share capital..........................................       597,664     596,309     565,291     560,943     498,121
Shareholders' equity...................................    $  165,295  $  149,294  $  121,592  $  150,999  $  471,117
------------------------

(1)  The cost of sales is  exclusive of  amortization,  shown  below.  Includes  inventory  write-offs  of nil,  nil,
     $4,121,000,  $18,463,000 and nil for the years ended August 31, 2005, 2004,  2003, 2002 and 2001,  respectively,
     and an unusual gain of $473,000 for the year ended August 31, 2003.
</TABLE>


                                      3
<PAGE>

B.       CAPITALIZATION AND INDEBTEDNESS

         Not Applicable.

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

         Not Applicable.

D.       RISK FACTORS

         WE MUST CONTINUE TO OVERCOME SIGNIFICANT  COMPETITION IN OUR TARGETED
INDUSTRIES IN ORDER TO GAIN MARKET SHARE AND ACHIEVE OUR GROWTH STRATEGY.

         The  market for our  primary  business  activity - namely  designing,
manufacturing,  selling and marketing  telecommunications test and measurement
equipment  - is  rapidly  evolving  and is marked by intense  competition  and
technical innovation.  Likewise, the market for our selected life sciences and
industrial solutions is very competitive.  We anticipate the pace of change to
remain high or even accelerate for our targeted  industries in the future.  We
might see the emergence of new  competitors  or the  consolidation  of current
competitors,  as the  markets  for  telecommunications  test  and  measurement
equipment as well as for life sciences and industrial  solutions  might evolve
in response to technical  innovations and economic conditions.  Surpassing our
key  performance  indicator  of 15% sales  growth in fiscal 2006 will  largely
depend on our  ability to gain  market  share by  increasing  sales of current
products to existing  accounts,  expanding into new accounts,  introducing new
products and product enhancements, and exploiting new market opportunities.

         During the past year,  the  telecommunications  test and  measurement
industry   witnessed   consolidation.   Anritsu   Corporation   announced  the
acquisition of NetTest A/S in August 2005 and JDS Uniphase  Corporation (JDSU)
completed  its  acquisition  of Acterna  Corporation  during  the same  month.
Agilent Technologies Inc., meanwhile, announced it was divesting itself of its
semiconductor  division to refocus its efforts on test and  measurement.  With
the exception of JDSU (which also sells optical components), these competitors
are global test and  measurement  vendors who complement  their broad range of
products with  telecommunications  test and measurement equipment.  Similarly,
ANDO Corporation and Tektronix,  Inc. are global test and measurement  vendors
who compete  against us. Other  competitors,  such as Digital  Lightwave Inc.,
IXIA and Sunrise  Telecom  Inc.,  compete  against us in niche  markets.  Some
competitors  in both  groups  may have  greater  financial,  technical  and/or
marketing resources than us. Consequently,  they may be able to devote greater
resources to the development, marketing, manufacturing, selling and support of
their products in order to capture market share.

         Competitors  also may be better  positioned than us to capture market
share or to acquire  companies  and new  technologies  that would  potentially
displace  our  products or render them  obsolete.  We cannot  predict  whether
current  or future  competitors  will  develop or market  products  that offer
higher performance, more features, or are more cost-effective than our current
or future products.  To remain competitive and achieve our growth strategy, we
must  increase  our sales and  develop  cost-effective  products  and  product
enhancements that offer higher performance and more functionality,  in current
and new sectors,  so that we can increase our market share.  Our failure to do
so may harm our business, results of operations and financial condition.

                                      4
<PAGE>

         FLUCTUATIONS  IN THE EXCHANGE RATES BETWEEN THE CANADIAN  DOLLAR,  US
DOLLAR AND OTHER CURRENCIES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

         Most of our  sales  are  denominated  in  currencies  other  than the
Canadian dollar  (principally US dollars and Euros).  However, a large portion
of our operating expenses and capital expenditures are denominated in Canadian
dollars.  As a result,  even though we manage to some  extent our  exposure to
currency risk with forward exchange  contracts and certain operating  expenses
denominated in currencies  other than the Canadian  dollar,  we are exposed to
fluctuations in the exchange rates between the Canadian dollar on the one hand
and the US dollar  and the Euro on the  other.  As of October  31,  2005,  the
Canadian  dollar  increased  approximately  7.5%  versus  the  US  dollar  and
decreased 1.6% versus the Euro,  compared to October 31, 2004. Any increase in
the value of the Canadian dollar relative to other currencies,  especially the
US dollar,  could have a material adverse effect on our operating  results and
provide strategic advantages to our competitors.

         A CUSTOMER HAS  ACCOUNTED  FOR A HIGH  PERCENTAGE OF OUR SALES IN THE
PAST  TWO  YEARS,  AND ANY  ADVERSE  FACTOR  AFFECTING  THIS  CUSTOMER  OR OUR
RELATIONSHIP WITH THIS CUSTOMER COULD CAUSE OUR SALES TO DECREASE.

         Although  customer  base has been well  diversified  on a  historical
basis,  a Tier-1  carrier in the US accounted for 23.3% of our sales in fiscal
2005 and 13.8% in fiscal 2004.  Even if this  customer  has a supply  contract
with us, it could  change its  purchasing  practice,  force us to  renegotiate
prices and is not obligated to purchase a specific  amount of products from us
or provide us with binding purchase forecasts for any period. In addition, our
customers typically purchase our products under individual purchase orders and
may cancel or defer purchases on short notice without significant penalties.

         The loss of such a customer or the reduction,  delay, or cancellation
of orders from this customer or other  significant  customers  could cause our
sales and, therefore, net earnings to decline.

         RECENT SIGNS OF MARKET  STABILITY ARE NOT  NECESSARILY  INDICATIVE OF
LONG-TERM GROWTH. IF MARKET CONDITIONS SIGNIFICANTLY DETERIORATE OR IF OPTICAL
FIBER  IS  REPLACED   BY  ANOTHER   MEDIUM  AS  THE   PRIMARY   SOLUTION   FOR
BANDWIDTH-INTENSIVE  APPLICATIONS, DEMAND FOR OUR PRODUCTS MAY DECREASE, WHICH
COULD HAVE A MATERIAL  ADVERSE  EFFECT ON OUR BUSINESS,  RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.

         Notwithstanding  recent  signs  of  market  stability  and  generally
increasing  demand for our products,  average  selling  prices may decline and
revenue  and   profitability   targets  may  be  subject  to  uncertainty  and
variability.  Any downturn in our markets or in general  economic  conditions,
additional  bankruptcies  and decreased  capital  expenditures,  or if optical
fiber is replaced by a higher-performance  medium, would result in a reduction
in demand  for our  products  as well as low  visibility,  and could  harm our
consolidated financial condition,  results of operations, cash flows and stock
price.

         WE HAVE FACED  PRICING  PRESSURE ON OUR EXISTING  PRODUCTS AND EXPECT
THAT THIS PRESSURE WILL CONTINUE. IF WE DO NOT CONTROL OUR MANUFACTURING COSTS
OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS,  OUR GROSS MARGINS MAY DECREASE
AND OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED.

                                      5
<PAGE>

         We continued implementing measures to protect our gross margin, which
reached  54.7% of sales in  fiscal  2005  compared  to 53.7% in  fiscal  2004,
despite the  negative  impact of the  exchange  rate  between US and  Canadian
currencies.  However, increased competitiveness in the telecommunications test
and measurement industry will likely result in continuing downward pressure on
average selling prices, which may in turn negatively affect our gross margins.
Pricing pressure can result from a number of factors such as:

    o    Increased competition for business;
    o    Reduced demand;
    o    Limited number of potential customers;
    o    Competition  from companies with lower  production  costs,  including
         companies operating in lower cost environments;
    o    Introduction of new products by competitors;
    o    Greater economies of scale for higher-volume competitors;
    o    Large  customers,  who buy in high  volumes,  can  exert  substantial
         negotiating leverage over us;
    o    Resale of used equipment; and
    o    Equipment  sales  resulting  from  manufacturing  and rental  company
         bankruptcies.

         In  addition,  gross  margins  may  also be  negatively  affected  by
increased  costs of raw  materials as well as  obsolescence  and excess costs,
product mix and under-absorption of fixed manufacturing costs.

         As pricing  pressure  will  likely  continue  to affect our  existing
products,  we may have to increase  the number of units sold to  maintain  our
existing  sales levels.  If we are unable to increase our sales levels,  lower
our  manufacturing  costs, or introduce new products with higher margins,  our
gross margins may decline and our operating results may suffer.

         OUR  PRODUCTS  MAY  HAVE  UNFORESEEN  DEFECTS  THAT  COULD  HARM  OUR
REPUTATION, IMPEDE MARKET ACCEPTANCE OF OUR PRODUCTS AND NEGATIVELY IMPACT OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

         As a result of their complexity,  our products may contain undetected
software or hardware defects, inaccurate calibration or compatibility problems
or regulatory  compliance issues,  particularly when they are first introduced
or when new versions are released. There can be no assurance that, despite our
testing,  defects will not be found in new products after they have been fully
deployed and operated under peak stress conditions or that customized products
meet  customer  sign-off  acceptance  requirements.  If we are  unable  to fix
defects or other problems or meet custom  requirements,  we could  experience,
among other things:

    o    Costly repairs;
    o    Product returns or recalls;
    o    Damage to our brand reputation;
    o    Loss of customers, failure to attract new customers or achieve market
         acceptance;
    o    Diversion of development and engineering resources;
    o    Legal actions by our customers,  including  claims for  consequential
         damages and loss of profits; and
    o    Legal actions by governmental  entities,  including actions to impose
         product recalls and/or forfeitures.

                                      6
<PAGE>

         The  occurrence of any one or more of the foregoing  could  seriously
harm our business, results of operations and financial condition.

         WE MAY NOT BE ABLE TO MAKE THE NECESSARY  ACQUISITIONS NEEDED FOR THE
DEVELOPMENT  OF OUR BUSINESS  AND ANY  ACQUISITION  WE MAKE COULD  DISRUPT OUR
BUSINESS AND HARM OUR FINANCIAL CONDITION.

         We intend to carefully  seek  businesses,  products and  technologies
that are  complementary to ours or that will expand our markets.  There can be
no  assurance  that  we  will  ultimately  make  any  such  acquisition.   Our
competitors  may be in a better  position  to  acquire  the  same  businesses,
products  and  technologies  that  we  wish  to  acquire.  In  addition,   our
fluctuating stock price or our cash position at the time of an acquisition may
affect our ability to complete such an acquisition.

         We have  made  strategic  acquisitions  in the past and we  intend to
continue making acquisitions of businesses,  products and technologies as part
of our overall growth  strategy.  In the event of any future  acquisition,  we
could:

    o    Issue  shares that would  dilute  individual  shareholder  percentage
         ownership;
    o    Incur debt;
    o    Assume liabilities and commitments;
    o    Incur  significant  expenses  related to  amortization  of additional
         intangible assets;
    o    Incur significant impairment losses of goodwill and intangible assets
         related to such acquisitions; and
    o    Incur losses from operations.

         These acquisitions also involve numerous risks, including:

    o    Risk of not  realizing  the  expected  benefits or  synergies of such
         acquisition;
    o    Problems combining the acquired  operations,  technologies,  products
         and personnel;
    o    Risks   associated  with  the  transfer  of  acquired   know-how  and
         technology;
    o    Unanticipated costs or liabilities;
    o    Diversion of management's attention from our core business;
    o    Adverse effects on existing business relationships with suppliers and
         customers;
    o    Risks associated with entering markets in which we have no or limited
         prior experience; and
    o    Potential  loss of key  employees,  particularly  those  of  acquired
         organizations.

         WE  CANNOT  ASSURE  YOU  THAT  WE  WILL  SUCCESSFULLY  INTEGRATE  THE
BUSINESSES,  PRODUCTS,  TECHNOLOGIES  OR  PERSONNEL  OF OUR  PAST  AND  FUTURE
ACQUISITIONS, WHICH MAY HARM OUR BUSINESS.

         Mergers and acquisitions of high-technology businesses are inherently
risky.  For  our  past  and  future  transactions  to be  successful,  we must
appropriately integrate the businesses,  products,  technologies and personnel
already acquired - as well as those of any future  acquisitions - with our own
business,  product  portfolios  and personnel in a manner that  anticipates or
responds to new  technological  developments  and customer  requirements  on a
timely basis.  In addition,  we must  coordinate  the  operations  and product
portfolios of newly acquired  companies with our own and manage all aspects of
geographically  dispersed  operations.  Integration requires the dedication of
management  resources,  which may distract their attention from our day-to-day
business and operations. If the integration process takes longer than expected

                                      7
<PAGE>

or if we fail to integrate the  businesses,  we may not be able to realize the
benefits  and  synergies  that we expect  from these  transactions  and may be
required to shut down, rationalize or exit such activities.

         All of these factors could  materially harm our business,  results of
operations and financial condition.

         OUR  QUARTERLY   REVENUES  AND  OPERATING   RESULTS  ARE  SUBJECT  TO
SIGNIFICANT  FLUCTUATIONS  AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF
OUR FUTURE PERFORMANCE.

         Our sales and  operating  results  have  fluctuated  from  quarter to
quarter in the past and significant  fluctuations may occur in the future.  In
addition,  our sales and operating  results generally depend on the volume and
timing of the  orders we  receive  from  customers  as well as our  ability to
fulfill received orders.  Our operating  expenses,  which include research and
development,  selling  and  administrative,  and  amortization  expenses,  are
relatively   fixed  in  the  short  term.  If  we  sell  fewer  products  than
anticipated,  if there is a delay in the launch of new products,  or if prices
for our products  decline,  we may not be able to quickly reduce our operating
expenses in response to lower sales.  Factors that could affect the amount and
timing of our sales,  and cause  quarterly  fluctuations  in our  revenue  and
operating results include:

    o    Length of the product  sales cycle for certain  products,  especially
         those that are higher priced and more complex;
    o    Timing of product launches and market  acceptance of new products for
         us as well as our competitors;
    o    Our  ability to sustain  product  volumes  and high levels of quality
         across all product lines;
    o    Timing of shipments for large orders;
    o    Effect of potential seasonality in sales; and
    o    Losing key accounts and not successfully develop new ones.

         Our  sales  and  operating  results  could  also be  affected  by the
following factors, some of which we have little or no control over:

    o    Fluctuating  demand  for  telecommunications   test  and  measurement
         equipment as well as life sciences and industrial solutions;
    o    Changes  in  the  capital  spending  and  operating  budgets  of  our
         customers,  which may cause seasonal or other fluctuations in product
         mix,  volume,  timing  and  number  of  orders  we  receive  from our
         customers;
    o    Order cancellations or rescheduled delivery dates;
    o    Pricing changes by our competitors or suppliers;
    o    Customer   bankruptcies  and  difficulties  in  collecting   accounts
         receivable;
    o    Restructuring and impairment charges; and
    o    General economic conditions.

         In addition,  we may in the future choose to reduce prices,  increase
spending,   or  modify  our  product  portfolio  in  response  to  actions  by
competitors or as an effort to pursue new market opportunities.  These actions
may also adversely affect our business and operating results and may cause our
quarterly  results to be lower than the results of previous  quarters.  Due to
these factors,  you should not rely on  quarter-to-quarter  comparisons of our
results of operations as an indication of our future performance.

                                      8
<PAGE>

         IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY
OR IF WE ARE UNABLE TO INTRODUCE NEW AND ENHANCED  PRODUCTS ON A TIMELY BASIS,
OUR PRODUCTS MAY BECOME  OBSOLETE,  WHICH COULD PREVENT US FROM  ACHIEVING OUR
GROWTH STRATEGY AND ADVERSELY AFFECT OUR OPERATING RESULTS.

         The industries that we target are  characterized  by rapidly evolving
technology  and  industry  standards  that  result  in  frequent  new  product
introductions. Any failure by us to anticipate or respond to new technological
developments,  customer  requirements  or  evolving  standards  could  have  a
material  adverse effect on our business,  results of operations and financial
condition.  The  development of  proprietary  technology  entails  significant
technical  and  business  risks  and  requires  substantial  expenditures  and
lead-time. The success of our new product introductions will depend on several
factors, including our ability to:

    o    Properly identify customer needs;
    o    Innovate and develop new products;
    o    Gain timely market acceptance for new products;
    o    Manufacture  and deliver our new  products on time and in  sufficient
         volume;
    o    Price our products competitively;
    o    Continue investing in our research and development program; and
    o    Anticipate competitors' announcements of new products.

         Failure to do the above could be exploited by our competitors.  If we
lose  market  share as a result  of  lapses in our  product  development,  our
business would suffer.

         IF WE FAIL TO ADAPT  APPROPRIATELY TO THE CHALLENGES  ASSOCIATED WITH
OPERATING INTERNATIONALLY,  THE EXPECTED GROWTH OF OUR BUSINESS MAY BE IMPEDED
AND OUR OPERATING RESULTS MAY BE AFFECTED.

         For the fiscal year ended August 31, 2005,  customers  outside of the
United States and Canada accounted for 35.1% of our sales.  Our  international
sales will be limited if we cannot establish  relationships with international
distributors, set up additional foreign operations, expand international sales
channel  management,  hire additional  personnel,  develop  relationships with
international  service  providers  and operate  adequate  after-sales  support
internationally.   Even  if  we  are  able  to   successfully   continue   our
international  operations,  we  may  not  be  able  to  maintain  or  increase
international market demand for our products. Our international operations are
subject to a number of risks, including:

    o    Challenges  in staffing and managing  foreign  operations  due to the
         limited number of qualified candidates, employment laws and practices
         in foreign countries, any of which could increase the cost and reduce
         the efficiency of operating in foreign countries;
    o    Our ability to comply  with  customs,  import/export  and other trade
         compliance  regulations  of the  countries  in which we do  business,
         together with unexpected changes in such regulations;
    o    Difficulties in establishing and enforcing our intellectual  property
         rights;
    o    Tariffs and other trade barriers;
    o    Economic instability in foreign markets;
    o    Wars, acts of terrorism and political unrest;
    o    Language and cultural barriers;
    o    Integration of foreign operations;
    o    Currency fluctuations;

                                      9
<PAGE>

    o    Potential foreign and domestic tax consequences;
    o    Technology standards that differ from those on which our products are
         based,  which could  require  expensive  redesign  and  retention  of
         personnel familiar with those standards;
    o    Longer accounts  receivable payment cycles and possible  difficulties
         in collecting  payments  which,  may increase our operating costs and
         hurt our financial performance; and
    o    Certification requirements.

         Any of these  factors  could harm our  international  operations  and
negatively affect our business, results of operations and financial condition.
The recurrence of weakness in these  economies or of weakness in other foreign
economies  could have a significant  negative  effect on our future  operating
results.

         OUR PRODUCTS AND  ORGANIZATION  MAY BE REQUIRED TO CONFORM TO NEW AND
UNFORESEEN  REGULATORY  REQUIREMENTS  THAT COULD INCREASE OUR COSTS AND REDUCE
OUR MARKET SHARE.

         Our products are designed to conform to the  regulatory  requirements
of the  countries  in which they are  marketed.  In the event  that  technical
regulations  applicable  in a given  country  are in any way changed - such as
those  prescribed  by the European  Union for the disposal of  electrical  and
electronic  equipment (Waste Electrical and Electronic Equipment or WEEE) - we
may be required to modify,  redesign or recall some or all of our  products in
order to continue participating in that market. These changes may prove costly
and time-consuming and could create technical advantages for products marketed
by our  competitors.  We cannot assure that our products will continue to meet
evolving standards in the future. In addition,  failure to comply or delays in
compliance  with  such  regulatory  requirements,  or  delays  in  receipt  of
certifications,  could  delay the  introduction  of new  products or cause our
existing  products to become  obsolete.  We are also subject to  environmental
statutes  and  regulations.  We might not be able to adopt our  products  in a
timely matter to fully comply with all environmental requirements.

         WE MAY MAKE  MISJUDGMENTS  IN OUR STRATEGIC  PLANNING THAT COULD HAVE
MATERIAL ADVERSE EFFECTS ON OUR BUSINESS,  RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.

         We devise an annual  strategic  business  plan,  which is prepared by
management  and  approved  by our Board of  Directors.  This  strategic  plan,
reviewed by management on a regular basis,  is mainly based on market research
and analysis  related to future  market  trends and demands.  In our strategic
plans,  we have  made,  and  will  continue  to make,  judgments  based on our
analysis of future market  trends and demands which may involve,  for example,
substantial  investments by us in the  development of new product lines or the
diversification of our activities, either organically or through acquisitions.

         WE HAVE ADOPTED MEASURES AND MAY ADOPT ADDITIONAL MEASURES THAT ALIGN
OUR  COST  STRUCTURE  TO  EXISTING  MARKET  CONDITIONS.  IF  DEPRESSED  MARKET
CONDITIONS  RETURN,  IT COULD HAVE MATERIAL ADVERSE  LONG-TERM  EFFECTS ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

         We  implemented  a number of  restructuring  plans during the telecom
downturn to re-align our cost structure to existing  market  conditions.  Such
plans and, if needed, subsequent plans could have material adverse,  long-term
effects on our business,  results of operations and financial  condition if we
deplete  our pool of highly  qualified  personnel  or are unable to retain key

                                      10
<PAGE>

personnel;  if we are unable to sustain  sufficient  research and  development
efforts for the launch of new products;  if we are unable to meet the needs of
our  customers;  if we are incapable of ramping up  manufacturing  when market
conditions  improve;  and if we do  not  ensure  a  smooth  transition  in the
consolidation  of our  operations.  In  addition,  if we  fail  to  adopt  and
implement  adequate and pertinent measures on a timely basis to align our cost
structure to further  possibly  declining market  conditions,  it could have a
material adverse  long-term effect on our business,  results of operations and
financial condition.

         IF CUSTOMERS FAIL TO MEET THEIR FINANCIAL COMMITMENTS TO US, IT COULD
HAVE A MATERIAL  ADVERSE  EFFECT ON OUR BUSINESS,  RESULTS OF  OPERATIONS  AND
FINANCIAL CONDITION.

         Some of our customers have experienced,  or may experience, cash flow
problems. Consequently, we may have customers who delay payments or may not be
able to meet their  financial  commitments  to us.  Furthermore,  they may not
order as many  products  from us as  originally  forecasted or they may cancel
their orders outright. The failure of customers to order products would result
in decreased  revenues for us. We attempt to reduce the  possibility  of large
outstanding  bills remaining unpaid by carrying out credit checks on customers
and by having a diversified customer base. However, there is no assurance that
such measures will reduce our exposure to customer  credit risks. If customers
fail to meet  their  financial  commitments  to us, it could  have a  material
adverse effect on our business, results of operations and financial condition.

         AS OUR CUSTOMERS  CONSOLIDATE,  THEY MAY REDUCE OR HALT  PURCHASES OF
OUR PRODUCTS, WHICH WOULD HARM OUR SALES AND OPERATING RESULTS.

         Consolidation  in the  telecommunications  industry  could reduce the
number of customers to which our products are sold. Some of our customers have
been subject to  consolidation  and could obtain  products from a vendor other
than us, or demand more favorable  terms and  conditions  from us, which would
harm our sales and operating  results.  In addition,  some customers may merge
with or acquire our competitors and discontinue their relationships with us.

         IF WE FAIL TO PREDICT  OUR SUPPLY  REQUIREMENTS  ACCURATELY,  WE WILL
HAVE EXCESS INVENTORY OR INSUFFICIENT  INVENTORY,  EITHER OF WHICH COULD CAUSE
US TO INCUR ADDITIONAL COSTS AND/OR EXPERIENCE MANUFACTURING DELAYS.

         We provide  non-binding  forecasts of our requirements to some of our
suppliers  up to six months  prior to  scheduled  delivery  of products to our
customers. If we overestimate our forecasted requirements,  we may have excess
inventory,  which  could  harm our  relationships  with our  suppliers  due to
reduced future orders, increase our costs and require inventory write-offs. If
we  underestimate  our  requirements,  we may have an inadequate  inventory of
parts,  which could  interrupt  manufacturing  of our  products  and result in
shipment delays. In addition, lead times for materials and parts that we order
may be long and depend on factors such as the  procedures  of, or supply terms
with, a specific supplier and demand for each part at a given time.

         WE DEPEND ON A SINGLE  SUPPLIER OR A LIMITED  NUMBER OF SUPPLIERS FOR
SOME KEY COMPONENTS AND MATERIALS IN OUR PRODUCTS,  WHICH MAKES US SUSCEPTIBLE
TO SUPPLY  SHORTAGES OR PRICE  FLUCTUATIONS  THAT COULD  ADVERSELY  AFFECT OUR
OPERATING RESULTS.

                                      11
<PAGE>

         We depend on a limited number of suppliers for some of the parts used
to manufacture our products for which  alternative  sources may not be readily
available.  In addition, all our orders are placed through individual purchase
orders and,  therefore,  our suppliers may stop  supplying  parts to us at any
time.  The reliance on a single  source or limited  number of suppliers  could
result in increased costs,  delivery problems and reduced control over product
pricing and quality. Financial difficulties of suppliers could also affect our
ability to obtain  necessary  parts in a timely manner.  Any  interruption  or
delay in the supply of any of these parts could significantly harm our ability
to meet  scheduled  product  deliveries  to our customers and cause us to lose
sales.  Furthermore,  the process of qualifying a new manufacturer for complex
parts,  designed to our  specifications,  such as our  optical and  mechanical
parts,  is  lengthy  and  would  consume a  substantial  amount of time of our
technical   personnel   and   management.   If  we  were  required  to  change
manufacturers  in a short period of time, our business would be disrupted.  In
addition,  we may be unsuccessful in identifying a new manufacturer capable of
meeting and willing to meet our needs on terms that we would find  acceptable.
Consolidation   involving   suppliers  could  further  reduce  the  number  of
alternatives  available  to us and affect the cost of parts,  which would make
our products less competitive and result in lower margins.

         RECENTLY ENACTED  REGULATORY  CHANGES MAY CAUSE US TO INCUR INCREASED
COSTS.

         Recently enacted changes in the laws and regulations affecting public
companies,  including the provisions of the  Sarbanes-Oxley  Act of 2002, will
increase our expenses as we evaluate the  implications of new rules and devote
resources to respond to these new  requirements.  In particular,  we expect to
incur additional selling and general  administrative  expenses as we implement
Section 404 of the Sarbanes-Oxley Act, which requires management to report on,
and our independent  external auditor to attest to, our internal controls over
financial  reporting.  Compliance  with these new rules  could also  result in
continued  diversion of management's time and attention,  which could prove to
be disruptive to normal business operations.  Furthermore, the impact of these
changes could make it more  difficult  for us to attract and retain  qualified
persons to serve on our Board of  Directors or as  executive  officers,  which
could harm our business.

         In March  2005,  foreign  issuers,  such as us,  were  given an extra
year's grace by the Securities and Exchange  Commission to comply with Section
404 of  Sarbanes-Oxley,  which  means  August  31,  2006  for  EXFO.  While we
currently  anticipate  that we will  complete  all  such  actions  on time and
according to rules, we cannot at this time provide absolute assurance that all
such actions will be timely  completed and in compliance with rules,  with the
possible  consequence that our external auditors may not be able to provide an
unqualified  attestation  report  under  Section  404  of  Sarbanes-Oxley,  as
amended.

         WE ARE SUBJECT TO LAWS,  REGULATIONS AND CONTRACTUAL  OBLIGATIONS AND
REQUIREMENTS  RELATING TO OUR CUSTOMER  CONTRACTS,  AND OUR FAILURE TO ADDRESS
THESE LAWS,  REGULATIONS,  OBLIGATIONS AND  REQUIREMENTS  OR COMPLY  THEREWITH
COULD HARM OUR BUSINESS.

         We  have  agreements  relating  to the  sale of our  products  to our
customers and, as a result, we are subject to various statutes and regulations
and  contractual  obligations  and  requirements.   We  are  also  subject  to
environmental   statutes   and   regulations.   We  may  also  be  subject  to
investigation for compliance with such statutes, regulations,  obligations and
requirements. Any failure to comply therewith could harm our business.

         THE PRICE OF OUR SECURITIES IS VOLATILE AND MAY DECLINE.

                                      12
<PAGE>

         The market  price of our  securities  has been,  and is likely in the
future to be, subject to substantial and rapid fluctuations. Such fluctuations
may be due to  factors  specific  to us,  such  as  changes  in our  operating
results,  contract wins with major customers or new product introductions,  or
caused by our competitors,  changes in analysts' ratings,  or the liquidity of
our stock.  Fluctuations  in stock price may also be due to factors related to
the global  telecommunications  industry or the securities markets in general.
These  fluctuations  have  often been  unrelated  or  disproportionate  to the
operating performance of the specific companies whose stocks are traded. These
broad market and industry  factors may have a material  adverse  effect on the
market  price  of  our   securities,   regardless  of  our  actual   operating
performance.  Shareholders  should  be  willing  to  incur  the  risk  of such
fluctuations.

         WE REQUIRE  EMPLOYEES  WHO ARE  KNOWLEDGEABLE  ABOUT THE  SPECIALIZED
NATURE OF OUR  BUSINESS.  IF WE ARE  UNABLE TO ATTRACT  AND RETAIN  SUFFICIENT
NUMBERS OF HIGHLY SKILLED TECHNICAL,  SALES, MARKETING,  SENIOR MANAGEMENT AND
OTHER PERSONNEL, OUR OPERATIONS AND FINANCIAL RESULTS WILL SUFFER.

         Due  to  the  specialized  nature  of our  business,  we  are  highly
dependent on the continued  service of and on the ability to attract qualified
engineering,  sales,  marketing,  senior management and other personnel. If we
are unable to attract and retain  such  qualified  personnel,  it could have a
material  adverse effect on our business,  results of operations and financial
condition.

         We must also provide  significant  training for our employee base due
to the highly specialized nature of telecommunications test and measurement as
well as life sciences and industrial  technologies.  Our current personnel may
be inadequate and we may fail to assimilate  and train new  employees.  Highly
skilled employees with the education and training that we require - especially
employees with significant  experience and expertise,  international  business
development,  product  management,  sales,  engineering and operation - may be
difficult  to  find.  Once  trained,  our  employees  may also be hired by our
competitors or leave the organization.

         OUR  BUSINESS  STRATEGY  AND  ABILITY  TO  MAINTAIN  OUR  COMPETITIVE
POSITION DEPEND ON THE CONTINUED SERVICES OF GERMAIN LAMONDE,  OUR CHAIRMAN OF
THE BOARD,  PRESIDENT AND CHIEF  EXECUTIVE  OFFICER.  HIS LOSS COULD ADVERSELY
AFFECT OUR BUSINESS.

         Our  ability  to  maintain  our  competitive  position  depends  to a
significant  extent on the  efforts  and  abilities  of Germain  Lamonde,  our
Chairman of the Board,  President and Chief Executive Officer. His managerial,
technical  and other  services  could be difficult to replace.  We do not have
"key person" life insurance policies covering any employee.

         OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY ARE IMPORTANT TO
THE CONTINUED SUCCESS OF OUR BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY
TECHNOLOGY MAY SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION.

         Our success and ability to compete depend to a significant  extent on
our proprietary  technology,  since that is how we attempt to keep others from
using the innovations that are central to our existing and future products. We
currently  hold 32 U.S.,  six  Canadian,  six European and one  Chinese-issued
patents and have 15 U.S.,  14 Canadian  and one European  patent  applications
pending,   along  with  two  patent  applications  pending  under  the  Patent
Cooperation.  We also rely on a combination  of copyright and trademark  laws,
trade secrets, confidentiality procedures,  contractual provisions and license
agreements  to protect our  proprietary  technology.  We may have to engage in
litigation  in order to protect our patents  and other  intellectual  property

<PAGE>

rights,  or to determine  the validity or scope of the  proprietary  rights of
others.   This  kind  of  litigation  can  be  time-consuming  and  expensive,
regardless  of whether we win or lose.  Because it is  critical to our success
that we are able to prevent  competitors  from  copying  our  innovations,  we
intend  to  continue  to seek  patent  and  trade  secret  protection  for our
technologies.

         The process of seeking  patent  protection  can be long and expensive
and we cannot be certain  that any  currently  pending or future  applications
will actually result in issued  patents,  or that, even if patents are issued,
they will be of sufficient scope or strength to provide meaningful  protection
or any commercial advantage to us. We also rely on trade secret protection for
our technology, in part through confidentiality agreements with our employees,
consultants,  distributors and third parties. However, these agreements may be
breached or otherwise not effective and we may not have adequate  remedies for
any breach or shortfall of these  agreements.  In any case, others may come to
know about our trade secrets  through a variety of methods.  In addition,  the
laws of some  territories  in which we sell our  products  may not protect our
intellectual  property  rights to the same extent as do the laws of Canada and
the United States.

         Despite our efforts, our intellectual  property rights,  particularly
our existing or future patents, may be invalidated,  circumvented,  challenged
or  required  to be  licensed  to  others.  Furthermore,  others  may  develop
technologies  that are  similar or superior to our  technology,  duplicate  or
reverse  engineer  our  technology,  or design  around  the  patents  owned or
licensed  by us. We cannot be sure that the steps that we take to protect  our
technology  will  prevent  misappropriation  or  infringement.  If we  fail to
protect our technology so that others may copy or use it, we will be less able
to differentiate our products and our sales will decline.

         OTHERS MAY CLAIM THAT OUR PRODUCTS  INFRINGE UPON THEIR  INTELLECTUAL
PROPERTY RIGHTS,  OR THEY MAY INFRINGE OUR INTELLECTUAL  PROPERTY,  AND WE MAY
EXPEND  SIGNIFICANT  RESOURCES  ENFORCING  OR  DEFENDING  OUR RIGHTS OR SUFFER
COMPETITIVE INJURY.

         Litigation  regarding  intellectual  property rights is common in the
technology   industry  and,  for  this  reason,  we  expect  that  third-party
infringement  claims involving  technologies may increase.  If an infringement
claim  is  filed  against  us,  we may be  prevented  from  using  some of our
technologies and may incur significant costs to resolve the claim. Conversely,
we may be required to spend  significant  resources  to monitor and police our
intellectual property rights.

         We could  incur  substantial  costs in  defending  ourselves  and our
customers  against  infringement  claims or in  bringing  infringement  claims
against others. Litigation could also adversely affect sales of the challenged
product or technology  and divert the efforts of our  management and technical
personnel. In the event of an infringement claim, we may be required to obtain
one or more licenses from third parties.  We cannot assure you that we, or our
customers,  could obtain necessary licenses from third parties at a reasonable
cost or at all. If we fail to obtain a license where one is required, we could
incur  substantial  liabilities  and be forced to suspend the marketing of the
challenged products.

         OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL LIABILITY.
A SUCCESSFUL  CLAIM EXCEEDING OUR POLICY LIMITS WILL REDUCE OUR CASH POSITION,
INCREASE OUR EXPENSES AND HAVE A NEGATIVE  EFFECT ON OUR  BUSINESS,  OPERATING
RESULTS AND FINANCIAL CONDITION.

         Our products are designed to help network  service  providers,  cable
operators and  manufacturers of optical networks and components ensure network
reliability.  We also leverage our core telecom technologies for life sciences

                                      14
<PAGE>

and industrial applications.  The failure of our products to perform to client
expectations  could give rise to product  liability  and warranty  claims.  We
carry  insurance  for  product  liability  and take  accounting  reserves  for
warranty claims that we consider adequate in view of industry practice.

         In  addition,  we may face other types of claims by third  parties in
relation to the conduct of our business;  a successful claim against us for an
amount  exceeding our policy limits would force us to use our own resources to
pay the claim,  which could  result in a reduction of our cash  available  for
other uses,  increase our expenses and have a negative effect on our business,
results of operations and financial condition.

         WE MAY BECOME INVOLVED IN COSTLY AND  TIME-CONSUMING  LITIGATION THAT
MAY SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS.

         We may from time to time  become  involved  in various  lawsuits  and
legal proceedings.  For example,  we are a defendant in a putative  securities
class  action  filed in the  United  States  District  Court for the  Southern
District of New York  involving  approximately  300 other  issuing  companies.
Litigation  is subject to  inherent  uncertainties,  and an adverse  result in
these or other  matters that may arise from time to time could have a material
adverse effect on our business,  results of operations or financial condition.
Any litigation to which we are subject could require  significant  involvement
of our senior management and may divert management attention from our business
and operations.

         IF WE SUFFER LOSS TO OUR  FACTORIES  OR  FACILITIES,  OUR  OPERATIONS
COULD BE SERIOUSLY HARMED.

         Our factories and facilities are subject to catastrophic  loss due to
fire, vandalism,  terrorism or other natural or man-made disasters.  We do not
have  redundant  multiple  site  capacity  and if any  of  our  facilities  or
factories  were to  experience  a  catastrophic  loss,  it would  disrupt  our
operations,  delay  production,  shipments  and  revenue  and  result in large
expenses, thereby harming our results of operation.

         UNEXPECTED  DECLINES IN OUR  RESEARCH AND  DEVELOPMENT  AND OTHER TAX
CREDITS AND GRANTS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.

         Our historical  operating results reflect  substantial  benefits from
programs  sponsored by federal and provincial  governments  for the support of
research  and  development  activities,  as  well  as  in  relation  to  other
activities.  For  example,  research  and  development  tax credits and grants
represented 23.2% of our gross research and development  expenses for the year
ended August 31, 2005.

         If unexpected changes in the laws or government policies terminate or
adversely modify the Canadian and Quebec government  programs,  under which we
receive the majority of our research and development and other tax credits and
grants,  or if  we  unexpectedly  become  unable  to  participate  in or  take
advantage of these  programs,  then our net research and development and other
expenses  will  materially  increase  or we  may  decrease  our  research  and
development  activities.  In  addition,  to the extent  that we  increase  our
research and  development  activities  outside  Canada or Quebec,  which could
result from, among other things, future acquisitions, the increased activities
may not be eligible for these  programs.  If we were  required to decrease our
research and development activities,  or were unable to benefit from other tax

                                      16
<PAGE>

credits and grants, this could have a material adverse effect on our business,
results of operations and financial condition.

         OUR CURRENT  PRINCIPAL  STOCKHOLDER  HAS  EFFECTIVE  CONTROL OVER OUR
BUSINESS.

         As of November 1, 2005,  Germain Lamonde,  our Chairman of the Board,
President and Chief Executive Officer, held 92.54% of the voting rights in our
stock. By virtue of such stock  ownership,  Mr. Lamonde has effective  control
over all matters submitted to our stockholders,  including the election of our
Directors,  and exercises  significant  control over our policies and affairs.
Such  concentration  of  voting  power  could  have the  effect  of  delaying,
deterring  or  preventing a change in control or other  business  combinations
that might otherwise be beneficial to our stockholders.

         WE MAY  NEED  ADDITIONAL  CAPITAL,  AND  MAY  NOT BE  ABLE  TO  RAISE
ADDITIONAL CAPITAL ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY
TO GROW AND COULD INCREASE OUR COSTS.

         Our future  liquidity  and  capital  requirements  are  difficult  to
predict because they depend on numerous factors,  including the success of our
existing  and new product  offerings as well as  competing  technological  and
market  developments.  As a result, we may not be able to generate  sufficient
cash  flows  from  our   operations  to  meet   additional   working   capital
requirements,  support  additional  capital  expenditures or take advantage of
acquisition  opportunities.  Accordingly,  we may  need  to  raise  additional
capital in the future.

         Our  ability  to obtain  additional  financing  will be  subject to a
number of factors, including market conditions and our operations performance.
These  factors  may  render  the  timing,  amount,  terms  and  conditions  of
additional  financing  unattractive  for us. If we raise  additional  funds by
selling equity  securities,  the relative  ownership of our existing investors
could be diluted or the new investors  could obtain terms more  favorable than
previous  investors.  In  February  2004,  we closed a public  offering of 5.2
million   subordinate   voting   shares  to  a  syndicate  of   Canadian-based
underwriters  for net proceeds of US$29.2  million.  If we raise funds through
debt financing,  we could incur significant  borrowing costs. If we are unable
to raise  additional  funds when  needed or at terms  satisfactory  to us, our
ability to operate and grow our business could be impeded.

         OUR BUSINESS AND OPERATIONS WOULD SUFFER IN THE EVENT OF A FAILURE OF
OUR INFORMATION TECHNOLOGY INFRASTRUCTURE.

         We rely upon the capacity, efficiency and security of our information
technology  hardware  and software  infrastructures  as well as our ability to
expand and update these infrastructures in response to our evolving needs. Any
failure to manage, expand or update our information technology infrastructures
or any  failure  in the  operation  of  this  infrastructure  could  harm  our
business.

         Despite implementing  security measures,  our information systems are
vulnerable to damages from computer viruses,  natural disasters,  unauthorized
access and other similar disruptions. Any system failure, accident or security
breach could result in disruptions to our  operations.  To the extent that any
disruption  or  security  breach  results in a loss or damage to our data,  or
inappropriate  disclosure of our confidential  information,  it could harm our
business.  In  addition,  these  events may force us to devote  more money and
resources  in order to  protect  ourselves  against  damages  caused  by these
disruptions or security breaches in the future.

                                      16
<PAGE>

ITEM 4.           INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

         Our  legal  name  and   commercial   name  is  EXFO   Electro-Optical
Engineering  Inc.  /EXFO  Ingenierie  electro-optique  inc. Our head office is
located at 400 Godin  Avenue,  Vanier,  Quebec,  Canada,  G1M 2K2 and our main
telephone number is (418) 683-0211.  Our e-mail address is  info@exfo.com  and
our website is www.exfo.com. Information on our website is not incorporated by
reference in this annual report. Our agent for service in the United States is
CT  Corporation  System,  111 Eighth  Avenue,  New York,  New York 10011.  Our
Transfer  Agents and Registrars is CIBC Mellon Trust Company,  2001 University
Street,  Suite 1600,  Montreal,  Quebec,  Canada,  H3A 2A6. This annual report
contains trademarks and registered trademarks of us and other companies.

         We were  incorporated  on September  18, 1985  pursuant to the CANADA
BUSINESS  CORPORATIONS  ACT.  Since that date, we have amended our articles on
various occasions mainly to modify our legal and corporate names and our share
capital.

         On December 20, 2000,  we acquired all of the shares of EXFO Burleigh
Products Group Inc. (formerly Burleigh  Instruments,  Inc.) ("EXFO Burleigh"),
Burleigh  Instruments  GmBH  and  Burleigh  Instruments  (U.K.)  Ltd.  for  an
aggregate  purchase price of US$189.3  million,  comprised of 6,488,816 of our
subordinate voting shares and US$42.5 million in cash pursuant to the terms of
an Agreement of Merger and Plan of Reorganization among us, EXFO Sub, Inc. and
the selling  shareholders,  dated November 4, 2000, as amended on December 20,
2000.  In April 2002,  the name of Burleigh  Instruments,  Inc. was changed to
EXFO Burleigh Products Group Inc. On November 12, 2002,  Burleigh  Instruments
(UK)  Ltd.  was  dissolved.  EXFO  Burleigh  is  a  U.S.  company,  which  was
manufacturing  precision  scientific  instruments  used in basic  and  applied
research engineering and production test applications in a variety of fields.

         On March 15,  2001,  we acquired  all of the shares of EXFO  Photonic
Solutions  Inc.  (formerly  EFOS Inc.)  ("EXFO  Photonic"),  a privately  held
company in Toronto,  Canada, for a total consideration of US$110.1 million, of
which  US$25.1  million  was paid in cash.  We also  issued  3,700,000  of our
subordinate  voting shares in connection  with the  acquisition.  In September
2001, the name EFOS Inc. was changed to EXFO Photonic Solutions Inc.

         EXFO  Photonic,  operating  since 1984,  is a supplier  of  precision
light-based  adhesive spot curing  products as well as curing process  control
for the global optical  component  manufacturing  market and other non-telecom
markets.  Its products deliver precise doses of the appropriate spectral light
into  photo-sensitive and heat-cured adhesives to significantly reduce bonding
time and increase  repeatability in optical component and other  manufacturing
activities.  EXFO Photonic light-based curing technologies are supported by an
extensive  understanding  of  bonding  and  material  sciences  and by a broad
intellectual property portfolio,  including, as of November 1 2005, 15 patents
and 12 patents pending.

         Also on  March  16,  2001,  our  wholly  owned  subsidiary,  Burleigh
Automation Inc. ("Burleigh Automation"), acquired substantially all the assets
of  Vanguard  Technical  Solutions,  Inc.,  a wholly  owned  subsidiary  of DT
Industries, Inc. for a purchase price of US$600,000 paid in cash. Vanguard, an
automation  equipment  manufacturer  in Tucson,  Arizona,  specialized  in the
design and manufacturing of  ultra-precision  assembly equipment for sensitive
process  and  critical  assembly  challenges  on the  production  floor.  This
acquisition,  which  complemented our acquisition of Burleigh,  was planned to
fit with our  overall  strategy  at that time of  providing  customers  with a

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comprehensive  solution  for the  assembly,  alignment  and testing of optical
components and  subsystems.  Since  September  2001,  Burleigh  Automation has
ceased operations and we have transferred all material  intellectual  property
assets  and  most  of the  physical  assets  of  Burleigh  Automation  to EXFO
Burleigh.

         In November  2001, we acquired all of the shares of Avantas  Networks
Corporation  and  simultaneously  changed  the  name of that  company  to EXFO
Protocol Inc.  ("EXFO  Protocol").  We paid a total  consideration  of US$69.4
million (or US$95.0  million for the equity minus  US$25.6  million of cash in
the hands of the  acquired  company) to acquire EXFO  Protocol.  Consideration
paid  consisted  of  4,374,573  of our  subordinate  voting  shares and US$9.8
million in cash,  net of cash  acquired.  EXFO  Protocol,  a company  based in
Montreal, Canada operating since 1998 is a supplier of fiber-optic testing and
optical network performance management equipment that supports a wide range of
protocols and data transmission rates.

         During  fiscal  2001,  we were forced to align our cost  structure to
market   conditions.   On  June  27,  2001,  we  announced  the  reduction  of
non-customer-related  expenses,  postponement of plans to build a new facility
in the Quebec Metro  High-Tech  Park,  termination  of non-cure  operations of
Nortech,   a  subsidiary  that   specialized  in   manufacturing   fiber-optic
temperature sensors, and reduction of our work force by 15%.

         During fiscal 2002, we were forced to re-align our cost  structure to
market  conditions.  First,  on December 5, 2001, we announced the lowering of
our operating  expenses,  a freeze in employee salaries,  and the reduction of
our  workforce  by 10%.  Then,  on May 15,  2002,  we  announced a further 20%
reduction of our global workforce in an effort to lower our cost structure. In
May 2002,  we performed an  assessment  of the carrying  value of goodwill and
intangible  assets recorded in conjunction  with the three  acquisitions  made
during the previous eighteen (18) months. Considering the ongoing unfavourable
market  conditions,  we recorded a charge of US$222.2  million to write down a
significant  portion of goodwill and a charge of US$23.7 million to write down
a significant  portion of acquired core technology.  Also,  overall for fiscal
2002, we wrote off US$18.5 million in excess and obsolete inventories.

         In August 2002, EXFO Burleigh received  confirmation of the extension
of its contract with the U.S. Air Force Research  Laboratory into phase 2 of a
project for the  development by EXFO Burleigh of new  high-precision  actuator
system.  The contract for phase 2 provided for an additional funding of US$1.7
million and extended through the first quarter of 2005.

         In October 2002, our newly  created,  wholly owned  subsidiary,  EXFO
Gnubi Products  Group Inc.  ("EXFO  Gnubi"),  acquired  substantially  all the
assets of GNUBI  COMMUNICATIONS  L.P.,  including its  technology,  expertise,
customer base, inventories and capital assets. Consideration paid consisted of
US$1.9  million  in cash  and  1,479,290  of our  subordinate  voting  shares.
Furthermore, an additional cash amount of US$241,000,  based on sales volumes,
was paid in  fiscal  2004 in  accordance  with earn out  provisions.  With the
acquisition of these assets, EXFO Gnubi, based in Dallas, Texas, continues the
operations  of GNUBI  COMMUNICATIONS,  L.P.,  as a supplier  of  multi-channel
telecom and datacom  testing  solutions  serving optical  transport  equipment
manufacturers  and research and development  laboratories.  At the time of the
asset acquisition,  30 employees of gnubi  communications  transferred to EXFO
Gnubi.

         During   fiscal  2003,   we  were   required  to  implement   further
restructuring  measures  as a  result  of  depressed  spending  levels  in the
telecommunications  industry and  geo-political and economic  uncertainty.  We
reduced  our  workforce  by 30%,  rationalized  our  business  activities  and
consolidated certain manufacturing operations. These measures incurred charges
of US$4.1 million. The rationalization and consolidation  initiatives involved
the reorganization of  our business into two new reportable  market  segments:

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Telecom  Division and Photonics and Life Sciences  Division and the exiting of
the optical component manufacturing  automation business. Our Telecom Division
consists of the former Portable and Monitoring and telecom related  Industrial
and  Scientific  product  lines.  Our  Photonics  and Life  Sciences  Division
includes previous  non-telecom  Industrial and Scientific  product lines. Each
division has been  structured  with its own sales,  marketing,  manufacturing,
research and development and management teams.

         In May 2003,  we  performed  our annual  impairment  test on goodwill
recorded in conjunction with the acquisitions of EXFO Burleigh,  EXFO Photonic
and EXFO  Protocol and also reviewed the carrying  value of intangible  assets
related to these  acquisitions.  As a result of this assessment,  we concluded
that the carrying value of goodwill  related to EXFO Burleigh and the carrying
value of  intangible  assets  related to EXFO  Burleigh and EXFO  Photonic was
impaired and we recorded a charge of US$4.5 million to write down goodwill and
a pre-tax charge of US$2.9 million to write down acquired core technology.  Of
the total impairment loss of US$7.4 million, US$6.9 million is related to EXFO
Burleigh  for  goodwill and acquired  core  technology  and US$0.6  million is
related to EXFO Photonic for acquired core technology.

         In addition,  in an effort to simplify our structure and  stream-line
our operations,  the operations of EXFO Protocol were merged with those of the
Corporation  as of  September  1, 2003 and  effective  December  1, 2003,  the
operations of EXFO Gnubi were merged with those of EXFO America Inc.

         In fiscal  2004,  EXFO also  closed a public  offering of 5.2 million
subordinate  voting shares to a syndicate of  Canadian-based  underwriters for
net proceeds of $29.2 million (Cdn$38.4 million).

         Furthermore  in  fiscal  2004,  we  consolidated  our  protocol  test
operations  (EXFO  Protocol  and EXFO  Gnubi) in  Montreal,  Canada to improve
efficiency and reduce costs.

         In addition,  we renewed our  collective  bargaining  agreement  with
unionized  manufacturing employees in Quebec City, Canada. Such agreement will
expire in February 2009.

         During fiscal 2005,  our  Photonics  and Life  Sciences  Division was
renamed the Life Sciences and Industrial Division to better reflect its market
focus.

         Finally,  during fiscal 2005, we completed the  consolidation  of our
Life Sciences and Industrial  Division in Toronto and we recorded  $482,000 in
restructuring expenses.  Altogether, we incurred $2.5 million in restructuring
and other charges since the fourth  quarter of 2004 in  conjunction  with this
consolidation process.  Following this process all of the operating activities
of EXFO Burleigh were transferred mainly in Toronto.


B.       BUSINESS OVERVIEW

         COMPANY OVERVIEW

         EXFO is a recognized expert in the global telecommunications industry
through  the  design and  manufacture  of  advanced  and  innovative  test and
measurement  solutions.  The  Telecom  Division,  which  represents  our  main
business  activity,  offers a complete range of dedicated and integrated  test

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solutions to network service providers (NSPs), cable operators, system vendors
and component  manufacturers in approximately 70 countries.  One of our strong
competitive  advantages  is our  modular  test  platform  design  - based on a
PC/Windows-centric  architecture  - which offers a series of test modules that
maximize  technology reuse across multiple market segments at minimal redesign
cost. The Life Sciences and Industrial Division, formerly called the Photonics
and Life Sciences  Division,  mainly  leverages core telecom  technologies  to
offer value-added  solutions for life sciences applications and high-precision
assembly  processes,   such  as  those  required  for   microelectronics   and
optoelectronics.

         We were founded in 1985 in Quebec City, Canada. Our original products
were focused on the needs of installers and operators of fiber-optic networks.
Customers  use these  field-portable  testing  products for the  installation,
maintenance,  monitoring and troubleshooting of optical networks.  In 1996, we
supplemented our product portfolio with an extensive line of high-end products
that are mainly dedicated to research and development as well as manufacturing
activities of optical component manufacturers and system vendors.

         In the last four years,  we have  enhanced our  competitive  position
through the acquisition of two protocol test businesses in order to expand our
product offering and address our customers'  requirements more completely.  In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc.),  a  supplier  of  protocol-testing   and  optical-network   performance
management  equipment for NSPs. This transaction was highly strategic  because
it enabled us to combine  optical and protocol  test  modules  inside a single
field-portable  test  platform to help our  customers  increase  revenues  and
reduce  operating costs. In October 2002, our  wholly-owned  subsidiary,  EXFO
Gnubi, purchased substantially all the assets of gnubi communications, L.P., a
supplier of multi-channel telecom and datacom testing solutions for the system
manufacturer market. These strategic acquisitions,  which were consolidated in
Montreal  in fiscal  2004,  enabled  us to more than  double  our  addressable
market, as we expanded from optical testing to protocol testing  applications,
and to offer a more complete line of test solutions to our customers.

         Previously,  we had completed two  acquisitions  to bolster growth in
the optical component  manufacturing market. We acquired Burleigh Instruments,
Inc.  (renamed  EXFO  Burleigh  Products  Group Inc.) in December 2000 for its
wavelength measurement  instruments and nanopositioning  alignment systems. We
also added EFOS Inc. (renamed EXFO Photonic  Solutions Inc.) in March 2001 for
its precision  light-based,  adhesive  spot-curing  technology.  We have since
exited the optical component manufacturing automation business.

         In  fiscal   2005,   we  launched  15  new   products,   including  a
next-generation  SONET/SDH  analyzer for  characterizing  converged,  IP-based
networks;  a 10 Gigabit  Ethernet  (GigE) test  solution to assess  quality of
service in core and metro  networks;  a new software suite for remote Ethernet
testing and commissioning  applications;  an all-band  component  analyzer for
FTTx and coarse  wavelength-division  multiplexing  (CWDM) applications in the
manufacturing/R&D  market; a series of three handheld test instruments for the
installation and maintenance  market;  and an optical spectrum  analyzer (OSA)
for CWDM applications in metro and access networks.  In addition, we formed an
alliance  with ADC Telecom to provide a unique  remote  Ethernet test solution
for first-mile applications.

         In 2005, we also  consolidated  our  leadership  position in the FTTx
test market by recognizing  significant  revenue from two leading  carriers in
the United States deploying fiber in their access  networks.  Our top customer
accounted  for 23.3% of sales in 2005.  Subsequent  to the  year-end,  we were

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selected as sole-source supplier for all fiber deployment test applications by
Deutsche Telecom AG - including FTTx.

         We recorded a foreign  exchange  loss of $1.3  million in fiscal 2005
due to the significant increase in the value of the Canadian dollar versus the
US dollar during that year. In addition to this foreign exchange loss, our P&L
(profits and losses) line items in 2005 were also  negatively  affected by the
appreciation  of the  Canadian  dollar,  since a  significant  portion  of our
expenses  are incurred in Canadian  dollars  while we report our results in US
dollars.

         In the third quarter of fiscal 2005,  EXFO was named recipient of the
2005 Growth Strategy  Leadership  Award by Frost & Sullivan,  a leading market
research firm in the  telecommunications  test sector.  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  market in the
previous year. Based on a report by Frost & Sullivan,  we increased our market
share from 8.4% in 2003 to 10.3% in 2004.  This marked the second  consecutive
year that we earned this industry award.

         Finally,  during fiscal 2005, we completed the  consolidation  of our
Life Sciences and Industrial  Division in Toronto and we recorded  $482,000 in
restructuring expenses.  Altogether, we incurred $2.5 million in restructuring
and other charges since the fourth  quarter of 2004 in  conjunction  with this
consolidation process.


INDUSTRY OVERVIEW

         Leading  telecom  operators  (telcos),  mostly in the United  States,
accelerated fiber deployments  deeper in their access networks during the last
year  because of  competition  from  cable TV  operators  (cablecos)  to offer
consumers bundled voice, data and video services.  This broadband  competition
between  telcos and cablecos  contributed  to an increase in wireline  capital
expenditures in 2005, especially in the United States.

         Leading  US  telcos,  along  with a number of  Tier-II  and  Tier-III
players,  opted  for  an  assortment  of  deployment   strategies,   including
fiber-to-the-node (FTTN),  fiber-to-the-curb (FTTC),  fiber-to-the-home (FTTH)
or its equivalent  fiber-to-the premises (FTTP),  depending on their estimates
of how  much  bandwidth  will be  required  to meet  the  challenge  from  the
cablecos.  These deployments,  which fall under the generic FTTx name, are not
as  prevalent in Europe and Asia.  However,  test trials are underway in these
regions as a means to  increase  revenues  by  delivering  video  services  to
undercut  competition.  Note that Japan and Korea already have FTTx deployment
programs, aimed at delivering 100 Mb/s to every home, well underway.

         As the demand for broadband services increases worldwide, voice, data
and video are becoming  mere  applications  on converged,  IP-based  networks.
Telcos around the world are migrating from public switched  telephone networks
(PSTN) to packet-based, IP networks in order to achieve substantial reductions
in operating expenses and increased profitability.  British Telecom Group, for
example,  announced it will spend (British Pound)10 billion over five years on
its 21st  Century  Network  to reduce  operating  expenses  by up to  (British
Pound)1.0  billion per year through a single network carrying voice,  data and
video signals.

         Legacy  SONET/SDH  networks  were designed in the late 1970s to carry
voice traffic.  Their efficiency however can often times drop to as low as 30%
when combining voice, data and video services.  Next-generation networks, such
as  those  announced  by  British  Telecom,  represent  a major  technological
improvement,  since  they  can  deliver  triple-play  services  at  near  100%

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efficiency,  regardless of the payload content,  while significantly  reducing
the cost of operating and maintaining networks.

         These key market  trends  affected  multiple  segments  of the global
telecommunications  supply chain in 2005. System manufacturers  benefited from
orders by both telcos and cablecos for next-generation,  converged IP networks
as well as from  major  investments  by telcos in access  networks.  Component
vendors saw  incremental  demand for optical  components that support FTTx and
IP-based  systems.  Some test and measurement  equipment vendors attracted the
attention of telcos,  cablecos,  system  manufacturers and component  vendors,
especially ones offering test solutions for IP optical  networking and/or FTTx
applications.

KEY INDUSTRY TRENDS AND STRATEGY

         As a  market-driven  company,  we try to  identify  the key  industry
trends in order to leverage  technological  discontinuities  and convert  them
into value-creating market opportunities.  Following are key market trends for
fiscal 2006 and beyond and how we intend to take advantage of them.


BROADBAND COMPETITION LEADING TO ACCESS INVESTMENTS

         Intense competition between telcos and cablecos continues unabated in
North  America.   Both  industries  are  competing  to  increase  revenue  and
profitability through bundled offerings,  while reducing churn. This broadband
competition is prompting  massive  capital  investments in access  networks in
order to increase  bandwidth,  flexibility and  scalability,  while continuing
metro ring expansion. Telcos are deploying fiber-to-the-node (FTTN; ~20 Mb/s),
fiber-to-the-curb (FTTC; ~40 Mb/s) or fiber-to-the-premises (FTTP; ~100 Mb/s),
depending on estimates of which video  compression  techniques will be adopted
and how  much  bandwidth  will be  required  to meet  the  challenge  from the
cablecos  (~40 Mb/s).  The closer the fiber is to the  premises and the higher
the  transmission  rates,  the  better it is for EXFO,  which  offers the most
comprehensive line of FTTx test solutions on the market.  Following agreements
with  Verizon  and SBC  Communications,  we are  increasingly  leveraging  our
leadership in passive  optical  network  (PON) testing and broad  portfolio of
FTTx-ready  technologies  outside North  America,  given our  long-established
customer  relationships  in Europe and Asia. We are  participating  in several
FTTx trials  worldwide and recently were selected as sole-source  supplier for
all fiber  deployment  test  applications  by Deutsche  Telecom AG - including
FTTx. While our FTTx market penetration was excellent in 2005, we believe this
is just the beginning of a long-term deployment trend.


MIGRATION TOWARDS CONVERGED, IP-BASED NETWORKING

         Network operators around the world are migrating from public switched
telephone networks (PSTN) to packet-based,  Internet protocol (IP) networks in
order to achieve  substantial  reductions in operating  expenses and increased
profitability.  For example,  British  Telecom  Group  announced it will spend
(British Pound)10 billion over five years on its 21CN initiative (21st Century
Network) to reduce  operating  expenses by up to (British  Pound)1 billion per
year, while enabling revenue expansion into differentiated,  higher-margin new
services  - all  thanks to a single  network  carrying  voice,  data and video
signals.

         Legacy SONET/SDH networks were designed in the late 1970s to optimize
voice  traffic,  but they  can  drop to 30%  efficiency  when  data and  video
applications are added.  Next-generation  networks, such as those announced by
British Telecom, represent a major technological  improvement,  since they can
deliver  triple-play  services at almost 100% efficiency  while  significantly

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reducing operating and maintenance costs.

         Anticipating  this  market  opportunity,  we  shifted  our focus from
legacy SONET/SDH and Ethernet  technologies to  next-generation  protocol test
solutions  aimed at the deployment of converged,  IP-based  networks.  Product
launches in 2005 included a next-generation SONET/SDH analyzer,  featuring the
latest in generic framing procedure (GFP),  virtual  concatenation  (VCAT) and
link-capacity  adjustment  scheme (LCAS);  a 10 Gigabit  Ethernet  (GigE) test
solution,  a remote  Ethernet  tester to ensure quality of service (QoS);  and
additional   Ethernet  test   capabilities  to  help  carriers  operate  their
high-performance  core,  metro and edge  networks.  We also formed an alliance
with ADC  Telecom  to  provide a unique  remote  Ethernet  test  solution  for
first-mile  applications.  Subsequent to the year-end, we launched 10 GigE and
Fibre Channel test solutions for the system vendor market.

         Given the  protocol  test  market is  significantly  larger  than the
optical test market,  our rich product pipeline in protocol testing,  and four
consecutive quarters of sales growth in protocol testing with the last quarter
exceeding 10% of Telecom Division revenues, we have high expectations for this
product  line.  We expect that  protocol  sales will outgrow  optical sales to
eventually account for 50% of our Telecom Division  revenues,  even though our
optical segment will continue to increase.

On the life sciences and industrial side:

         Fluorescence  imaging is one of the  fastest-growing  segments of the
microscope  industry.  To take advantage of this market  opportunity,  we have
partnered with major microscope manufacturers in the last two years to deliver
the  leading  fluorescence  illumination  system in North  America.  We're now
seeking similar  penetration in Europe and Asia through regional  partnerships
with microscope manufacturers.

         The  aging  baby-boomer   market  is  placing  stringent  demands  on
manufacturers   of  medical   equipment  for  devices  like  in-vitro  balloon
catheters,  hearing aids and asthma inhalers.  Similarly,  high-tech consumers
are  pushing  for the  continued  miniaturization  of devices  such as digital
cameras,  personal digital  assistants  (PDAs) and cellular phones.  Given the
demand for higher volumes and miniature  sizes,  manufacturers  of medical and
electronic  devices are requiring  exceptional  control and  repeatability for
their precision assembly  applications.  EXFO has responded to this dual trend
by bringing to market an automated spot-curing platform that can be controlled
via a personal computer.

KEY PERFORMANCE INDICATORS FOR FISCAL 2006

         As  expected,   our  strategic   directions   for  fiscal  2006,  and
consequently  our key  performance  indicators  (KPIs),  will not be radically
different  from those in 2005.  Since we are highly  focused on creating value
for our shareholders,  delivering the highest level of profitable growth is at
the heart of our actions. We intend to:

         o    INCREASE  SALES  MORE  THAN 15%  YEAR-OVER-YEAR  MAINLY  THROUGH
              MARKET-SHARE  GAINS.  To achieve this goal, we intend to exploit
              the  aforementioned  market  opportunities  (See  "Key  Industry
              Trends and Strategy") and concentrate on solid execution.

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         o    GENERATE MORE THAN 5% IN EARNINGS FROM OPERATIONS.  Higher sales
              volumes, increased contribution from higher-margin protocol test
              solutions,  improved  operating  efficiencies and continued cost
              controls should help us reach our objective. This metric assumes
              no significant currency  fluctuations nor closed acquisitions in
              fiscal 2006. If an acquisition is completed in 2006, this metric
              will be revised accordingly.

         o    DERIVE AT LEAST 40% OF SALES  FROM  PRODUCTS  ON THE  MARKET TWO
              YEARS OR LESS. At EXFO, we remain attuned to customer and market
              requirements,  not to  technology  for  the  sake  of  it.  This
              ambitious   innovation   target  is  fully   aligned   with  our
              fundamental   goals  of   differentiating   ourselves  from  the
              competition,  increasing  market share and  revenue,  as well as
              improving gross margin and profitability.

THE EXFO SOLUTION

         We offer an extensive range of test and measurement  solutions to the
global telecommunications industry. Our success has been largely predicated on
our core  expertise  in  optical  telecommunications.  We also  leverage  this
expertise to develop  products for life sciences and  high-precision  assembly
applications. Our solution is based on the following key attributes:

         MODULAR SYSTEM  DESIGN.  In 1996, we established an industry first by
launching  the original  modular  optical test  platform.  This system  design
consists of a PC-based,  Windows-driven  platform that can accommodate several
test modules performing various types of measurements. We have since developed
new compatible  test platforms and extended our test module  offering for both
NSPs and system  manufacturers  based on the same modular design.  Our modular
design provides the following advantages:

         o    Unlike  stand-alone  units,  new  test  modules  can be  rapidly
              developed to address changing industry requirements.

         o    As customers'  testing  requirements  change,  they can purchase
              additional  modules that are  compatible  with their  previously
              purchased platforms, thus protecting their initial investments.

         o    Our standard  graphical  user interface  reduces  training costs
              because customers are familiar with previously acquired software
              products.

         o    The  flexibility  of our  systems  allows  customers  to develop
              customized  and  automated  solutions  for their  specific  test
              requirements.

         o    Our test  platforms are PC-based and  Windows-driven,  thus they
              can support third-party software solutions.

         HIGH DEGREE OF TECHNOLOGICAL INNOVATION. We have established a strong
reputation for  technological  innovation  over the last 20 years. In fact, we
believe  this  attribute  represents  a key  differentiator  for us  within  a
competitive marketplace. Following are some of our industry firsts:


                                      24
<PAGE>


         o    The first PC-based modular test platform for field applications;.

         o    The first  all-in-one  optical loss test set  combining  several
              instruments;.

         o    The first portable polarization mode dispersion (PMD) analyzer;

         o    The first modular  platform to combine optical and protocol test
              solutions; and

         o    The first line of portable  test  instruments  designed for FTTx
              testing.

         HIGH-QUALITY  PRODUCTS.  Product  quality is an integral  part of our
solution.   Our  Quebec   City-based   operations  have  maintained  ISO  9001
certification since 1994 and they are now certified to the new 2000 edition of
the  standard,  as are our  Toronto  operations.  Our  manufacturing  plant in
Montreal,  Quebec,  received ISO 9001/2000 certification on November 16, 2005.
All of our products meet required industry standards, and some of our products
meet additional voluntary standards, such as those set by Telcordia,  formerly
Bellcore,   IEC,  and  other   industry-leading   standards   bodies.   During
manufacturing,  each  product  has a  related  quality  assurance  plan,  with
rigorous  checkpoints,  to ensure  product  conformity.  Various  tasks in the
quality  assurance  process among all our facilities  include quality control,
conformity testing,  product  documentation,  product improvement,  regulatory
compliance, metrology and calibration.

         Our product designs comply with Directive  2002/96/EC,  a legislation
enacted by the European Union  regarding the disposal of waste  electrical and
electronic equipment (WEEE), for all products exported to Europe. In regard to
the  Directive   2002/96/EC   (RoHs),   we  and  other  test  and  measurement
manufacturers have been warranted an unlimited exemption.

PRODUCTS

         Our test platforms,  namely the FTB-400  Universal Test System (UTS),
IQS-500 Intelligent Test System (ITS) and EPX Multi-Channel Test Systems,  are
at the core of our  product  portfolio.  The  FTB-400  field-testing  platform
provides NSPs with a simple,  yet efficient way to perform multiple,  advanced
test   operations   for   installation,    maintenance   and   troubleshooting
applications.  Our IQS-500 ITS and EPX Multi-Channel  Test Systems,  which are
designed for manufacturing and R&D applications,  test converging  telecom and
datacom  networks  increasingly  based on IP  technology.  All  platforms  and
related  test  modules  are  supported  by  integrated  and  highly  intuitive
graphical user interfaces  (GUIs),  enabling the user to easily store,  handle
and retrieve a large amount of data.

         The  following   table   summarizes  the  principal   types  of  test
instruments for the telecommunications  industry, typical applications and the
format in which we offer them:

<TABLE>
<CAPTION>
                                                                                   FORMAT
                                                       --------------------------------------------------------------
  INSTRUMENT TYPE          TYPICAL APPLICATION               NSP MARKET                MANUFACTURER/R&D MARKET
-----------------    --------------------------------  ----------------------   -------------------------------------
                                                         FTB 400                  IQS-500
                                                        UTS MODULES HANDHELDS   ITS MODULES  EPX MODULES  INSTRUMENTS
                                                        ----------- ---------   -----------  -----------  -----------
<S>                  <C>                                <C>         <C>         <C>          <C>          <C>
Broadband source     Used  for   testing   wavelength
                     dependent   behavior   of  fiber
                     cables  and  DWDM  optical  com-
                     ponents.                                                        X                         X

Channel selector     Selects   and    isolates    any
                     International  Telecommunication
                     Union (ITU) DWDM  channel in the
                     CBand for bit-error-rate testing       X                        X
                     and   protocol-layer   analysis.
</TABLE>

                         25
<PAGE>

<TABLE>
<CAPTION>
                                                                                   FORMAT
                                                       --------------------------------------------------------------
  INSTRUMENT TYPE          TYPICAL APPLICATION               NSP MARKET                MANUFACTURER/R&D MARKET
-----------------    --------------------------------  ----------------------   -------------------------------------
                                                         FTB 400                  IQS-500
                                                        UTS MODULES HANDHELDS   ITS MODULES  EPX MODULES  INSTRUMENTS
                                                        ----------- ---------   -----------  -----------  -----------
<S>                  <C>                                <C>         <C>         <C>          <C>          <C>
Chromatic            Measures  increasing  levels   of
dispersion           chromatic  dispersion  in   high-
analyzer             capacity optical networks. Chrom-
                     atic  dispersion  is  a  physical
                     phenomenon  inherent  to  optical
                     fiber and optical components that
                     causes information bits to spread      X
                     along  a  network.  This degrades
                     the quality of  the  transmission
                     signal and, in turn,  limits the
                     transmission  speed  carried  by
                     optical networks.

Clip-on coupling     Clips to an  optical  fiber  and                   X
device               allows non-invasive testing.

Fibre Channel        Brings   FC-0,   FC-1  and  FC-2
tester               logical   layer  Fiber   Channel
                     testing  to  services  delivered
                     via transport protocols, such as
                     DWDM,  SONET/SDH and dark fiber.
                     It  provides   valuable   timing
                     information  and  buffer  credit       X                        X
                     estimation   for  Fiber  Channel
                     network deployment.

Gigabit Ethernet     Measures   data   integrity  for
tester               high-speed   Internet   protocol
                     telecommunications  in metro and
                     edge networks.                         X                        X            X

Laser wavelength     Performs high-accuracy, absolute
meter                wavelength measurements of  con-
                     tinuous wave  (CW) and/or pulsed                                                          X
                     laser sources

Laser spectrum       Performs high-resolution,   spec
analyzer             tral  characterization  of  con-                                                          X
                     continuous CW laser sources

Live fiber detector  Clips on to a fiber  and is used
                     to  detect  the   presence   and
                     direction  of a  signal  without
                     interrupting the traffic.                          X

Loss test set        Integrates  a power  meter and a
                     light   source  to  manually  or
                     automatically  measure  the loss       X           X            X                         X
                     of optical signal along a fiber.

Multiwavelength      Measures  the  power  and  drift
meter                for  multiple  wavelengths  in a       X                        X                         X
                     DWDM system.

Narrowly tunable     A laser  that  can be  precisely
laser                tuned to  simulate  a DWDM light
                     sources.   Used   primarily   in
                     testing optical amplifiers.                                     X

Next-generation      Full SONET/SDH  protocol testing
SONET/SDH analyzer   functionality,         including
                     support  for  GFP,  V.CAT,   and       X                        X
                     LCAS       next       generation
                     enhancements.

Optical amplifier    Boosts   the   power   of  laser
                     sources.  Used  for the  testing
                     and calibration of test systems.                                X

Optical coupler      Used in test  system to  combine
                     sources  or  signals.  Also used                                X
                     as splitters to monitor signals.
</TABLE>

                         26
<PAGE>

<TABLE>
<CAPTION>
                                                                                   FORMAT
                                                       --------------------------------------------------------------
  INSTRUMENT TYPE          TYPICAL APPLICATION               NSP MARKET                MANUFACTURER/R&D MARKET
-----------------    --------------------------------  ----------------------   -------------------------------------
                                                         FTB 400                  IQS-500
                                                        UTS MODULES HANDHELDS   ITS MODULES  EPX MODULES  INSTRUMENTS
                                                        ----------- ---------   -----------  -----------  -----------
<S>                  <C>                                <C>         <C>         <C>          <C>          <C>
Optical fiber        Measures   the   geometric   and
parameter analyzer   light  guiding  properties of an
                     optical   fiber.   Used  in  new
                     fiber  research and  development                                                          X
                     and   quality  control  applica-
                     tions.


Optical power meter  Measures   the   power   of   an
                     optical   signal.   It  is   the
                     basic tool for the  verification
                     of transmitters,  amplifiers and       X           X            X                         X
                     optical     transmission    path
                     integrity.

Optical power        Provides a highly  accurate  and
reference module     traceable  measurement  of power
                     for    the     calibration    or                                X
                     verification   of  other   power
                     measurement instruments.

Optical return       Combines  a  laser  and a  power
loss meter           meter to  measure  the amount of
                     potentially    degrading    back       X           X            X                         X
                     reflection.

Optical spectrum     Produces       a       graphical
analyzer             representation  of power  versus
                     wavelength    for   an   optical
                     signal. Useful for measuring the
                     drift, power and signal-to-noise
                     ratio for each  wavelength  in a       X                        X
                     DWDM system.

Optical switch       Provides    switching    between
                     fibers.    Used    to    provide
                     flexible  and   automated   test
                     setups  such as the  measurement
                     of     multiple     fibers    or       X                        X
                     components  with multiple  ports
                     with one instrument.

Optical time         Like a radar,  it  measures  the
domain               time of arrival  of  reflections
reflectometer        of   an   optical    signal   to
(OTDR)               determine  the  distance  to the
                     breaks or  points  of  excessive       X
                     loss in a fiber network.

Optical waveguide    Provides  the  refractive  index
analyzer             profile   of  glass   and  fused
                     silica-based   devices  used  in
                     next generation networks.                                                                 X

Passive component    Characterizes            passive
analyzer             wavelength-selective    devices,
                     such      as       multiplexers,
                     demultiplexers    and   add/drop
                     filters,    with    respect   to
                     absolute  wavelength in order to
                     guarantee   their    performance                                                          X
                     within DWDM systems.

Passive optical      Determines the power level of
network (PON)        different signal types,
power meter          including continuous (e.g., TV
                     signal  at 1550  nm) and  framed
                     (e.g.,  ATM or  Ethernet at 1490
                     nm or 1310 nm)  within a passive
                     optical  network.  Various  baud
                     rates are covered,  ranging from
                     155 Mb/s to 2.5  Gb/s,  for both
                     synchronous and  non-synchronous                   X
                     signals.

Polarization-        Measures the  difference in loss
dependent loss       of  power   for  the   different                                X
meter                states of polarization.

Polarization mode    Measures   the   dispersion   of
dispersion analyzer  light    that   is   caused   by
                     polarization.  Generally used to
                     determine   the   speed-distance       X                        X
                     limitation of fiber and cables.
</TABLE>

                         27
<PAGE>

<TABLE>
<CAPTION>
                                                                                   FORMAT
                                                       --------------------------------------------------------------
  INSTRUMENT TYPE          TYPICAL APPLICATION               NSP MARKET                MANUFACTURER/R&D MARKET
-----------------    --------------------------------  ----------------------   -------------------------------------
                                                         FTB 400                  IQS-500
                                                        UTS MODULES HANDHELDS   ITS MODULES  EPX MODULES  INSTRUMENTS
                                                        ----------- ---------   -----------  -----------  -----------
<S>                  <C>                                <C>         <C>         <C>          <C>          <C>
SONET/SDH            Provide  accurate bit-error rate
analyzer             and   performance  analysis   of
                     SONET/SDH overhead  format  that
                     reflect   the   quality   of   a       X                        X            X
                     transmission system.

Stable light source  Emitting  diode or  lasers  used
                     in   connection   with  a  power       X           X            X                         X
                     meter to measure signal loss.

Synchronization      Portable,   stand-alone   tester
analyzer             for   network    synchronization
                     analysis and wander  measurement                                                          X
                     in   wireless    and    wireline
                     transport networks.

Talk set             A  device  that  attaches  to an
                     optical  fiber  and  serves as a
                     temporary       voice       link       X           X
                     facilitating   coordination   of
                     work among installation crews.

Variable optical     Used   in   network   simulation
attenuator           setups  to  provide   calibrated
                     variable    reduction   of   the                   X            X                         X
                     strength of an optical signal.

Visual fault         A  visible  laser  that  can  be
locator              connected  to an  optical  fiber
                     network  to help  locate  breaks       X           X
                     or points of excessive loss.

Widely tunable       Can  produce  laser light across
laser                a broad  range  of  wavelengths.
                     Used to test DWDM components and                                X                         X
                     value-added optical modules.
</TABLE>


PRODUCTS FOR NETWORK SERVICE PROVIDERS

         We  offer  an  extensive  range  of   field-portable   optical  test,
measurement  and  monitoring  solutions  that are mainly used by NSPs, but can
also be utilized by system  vendors.  These products are available as handheld
test instruments,  portable platforms with related modules,  and as rack-mount
chassis with related modules.  Our handheld  instruments are durable,  compact
and easy to use. Our  second-generation  field-testing  platform,  the FTB-400
UTS, is available in three  configurations:  The two-slot  option is ideal for
OTDR,  OLTS and GigE  applications,  while the  seven-slot  option is used for
dispersion  characterization  (PMD and  CD),  DWDM  testing  (OSA and MWM) and
protocol  (SONET/SDH/datacom)  testing.  Our newest  addition,  the eight-slot
option, is a  high-performance,  multiple-protocol  configuration  that allows
users to combine  next-generation  SONET/SDH  functions with  Ethernet,  Fibre
Channel and optical-layer  testing  capabilities.  Our portable  platforms are
PC-centric,  Windows-based,  highly flexible and fully  scalable.  Their large
robust touchscreens are very practical for field use.

         In addition,  we offer the FTB-100 Mini-OTDR with an integrated power
meter option.  This  cost-effective  platform  provides field technicians with
basic OTDR testing capabilities.

         In 2005, we launched a new family of value-added handhelds to perform
optical  loss  testing  in the  outside  plant  environment.  Furthermore,  we
expanded our OTDR product line by adding a new four-lambda OTDR to better suit
the installers' market.

PRODUCTS FOR SYSTEM/COMPONENT MANUFACTURERS

         Our  system/component  vendor  solutions,  mainly  built  around  our
IQS-500 ITS and EPX  platforms,  are available as test modules or  stand-alone
benchtop instruments. The next-generation IQS-500 platform can efficiently run
as many as 100  optical  test  modules  using a single  controller  unit.  The
IQS-500  platform is equipped  with the software and  hardware  technology  to
support  single-button  operation  for  automated  testing.  Its  system-based

                                      28
<PAGE>

approach--one  box, several test  modules--combined  with an open architecture
(PXI, Windows, LabVIEW(TM),  etc.) and ease of programming,  produces a highly
flexible test environment.

         The  IQS-500  also  provides  backward   compatibility   with  recent
IQ-generation test modules, while delivering all the power and advantages of a
next-generation  platform.  EXFO's wide  selection  of  high-performance  test
modules includes  high-speed power meters,  light sources,  WDM laser sources,
tunable laser  sources,  variable  attenuators,  optical  spectrum  analyzers,
polarization mode dispersion (PMD) analyzers, multi-wavelength meters, channel
selectors,  polarization  dependent  loss (PDL) and optical  return loss (ORL)
meters, polarization controllers and optical switches.

         The highly flexible EPX platforms are available in two formats.  With
up to 17 protocol test modules per unit,  the EPX16  performs  numerous  tasks
within  one   hardware   platform.   The  EPX8  uses  the  same   upgradeable,
multi-channel  design  in  a  smaller  footprint.  Combining  multiple  rates,
protocols  and  channels  within a single  unit,  these  systems are ideal for
cross-connect,  ADM, DWDM, production and load testing. Direct Ethernet access
capability and a Java-based GUI make the EPX platforms powerful test solutions
that  are  easy  to use.  Other  user-friendly  features  include  saving  and
restoring  test  configurations,  connecting  remotely  with  a  Web  browser,
scripting, logging and sharing test resources with other users.

         In 2005, we introduced a new FTTH/CWDM  passive component test system
that    allows    manufacturers    to    measure    insertion    loss    (IL),
polarization-dependent  loss (PDL) and  optical  return loss (ORL) in a single
test sequence.

         Our system/component vendor products also address testing issues that
cannot  be  handled  by  standard  test  modules  or   stand-alone   bench-top
instruments.  We have developed a number of integrated  test systems and offer
them as  off-the-shelf  solutions to suit a wide range of customer  needs.  In
addition, we have created a software development kit for developers who prefer
writing  their  own  programs  for  our  instruments.  Following  is  list  of
integrated test systems that we provide for characterizing optical components,
sub-systems and networks:

         o   CWDM/FTTH passive optical      Used to automatically characterize
             component test system          all    critical    specifications,
                                            including spectral insertion loss,
                                            polarization-dependent   loss  and
                                            optical  return  loss  of  a  CWDM
                                            passive   component   or  a   FTTH
                                            splitter  with  a high  degree  of
                                            accuracy, ease of use and speed.

         o   Multifiber test system         Used for quality-assurance testing
                                            of   multifiber   patchcords   and
                                            interconnect   assemblies.   These
                                            devices,   including   hybrid  and
                                            fan-out  patchcords,  are commonly
                                            used in fiber systems.

         o   Cable assembly test system     Used to perform insertion loss and
                                            mandrel-free  reflection  measure-
                                            ments  with  the highest degree of
                                            accuracy  and   repeatability   on
                                            short fiber assemblies.

                                      29
<PAGE>

         o   Optical calibration test       Used  to  calibrate  power  meters,
             system                         light      sources,       variable
                                            attenuators   and   optical   time
                                            domain reflectometers.

         o   DWDM passive component test    Used to automatically characterize
             system                         all    critical    specifications,
                                            including spectral insertion loss,
                                            polarization-dependent   loss  and
                                            optical  return  loss  of  a  DWDM
                                            passive   component  with  a  high
                                            degree  of  accuracy,  ease of use
                                            and speed.


PRODUCTS FOR LIFE SCIENCES AND INDUSTRIAL APPLICATIONS

         Over the  years,  we have  developed  and  acquired  a number of core
technologies  that we leverage in selected  high-precision  assembly  and life
sciences markets.  For example,  we offer several light-based curing solutions
for optical component  manufacturing and have optimized our approach for other
industries,  such  as  semiconductor,   microelectronic,  and  medical  device
manufacturing,  in order to maximize revenues.  Our Novacure(R),  Acticure(R),
and Omnicure(R)  systems  deliver  precise doses of the  appropriate  spectral
light onto photosensitive  adhesives to significantly  reduce bonding time and
increase  repeatability.   These  light-based  curing  systems,  supported  by
patented optical feedback, thermal control, and radiometry technology, produce
a  high-quality  bonding  solution  that is  unmatched  in the  industry.  Our
technology and application knowledge place us at the forefront of this market.

         In 2005, our X-Cite(TM) 120 Fluorescence  Illumination  System, which
offers  1,500  hours  of  lamp  life,   established   itself  as  the  leading
fluorescence   microscopy   solution  in  North   America.   We  have  created
partnerships with major microscope  manufacturers,  who resell this microscope
accessory to their new and installed base of customers through their own sales
channels.

         On  the   light-based   curing  side,   we  introduced  an  automated
spot-curing platform,  the OmniCure(TM) Series 2000 that can be controlled via
a personal computer.

         The following table summarizes the principal types of  high-precision
assembly and life science solutions we provide and their typical applications:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------

                          LIGHT SOURCES AND ACCESSORIES
-------------------------------------------------------------------------------------------------------------

         PRODUCT TYPE                    PRODUCT                   TYPICAL APPLICATION
-------------------------------------------------------------------------------------------------------------
<S>                            <C>                          <C>
 UV Light Sources              Novacure(R)                  Used  to initiate  photo  chemistry reactions in
                               Acticure(R)                  polymer-based materials for a variety of end use
                               Omnicure(R) S1000            applications   such   as   adhesive  curing  for
                               Omnicure(R) S2000            manufacturing  of high value-added items such as
                                                            medical     devices,   micro-electronic      and
                                                            opto-electronic   components, displays, and data
                                                            storage devices.
-------------------------------------------------------------------------------------------------------------
 Fluorescent Light Sources     X-Cite(R) 120                Fluorescence light source that attaches directly
                               X-Cite(R) 120 PC             to  most microscopes   currently  sold by Nikon,
                                                            Zeiss,  Olympus and Leica.
-------------------------------------------------------------------------------------------------------------
 Computer Control Module       ACS-1000                     Electronic interface module used to connect EXFO
                                                            UV  light   sources  to  computers  or  computer
                                                            networks for process automation.
-------------------------------------------------------------------------------------------------------------
</TABLE>

                                                           30
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------

                          LIGHT SOURCES AND ACCESSORIES
-------------------------------------------------------------------------------------------------------------

         PRODUCT TYPE                    PRODUCT                   TYPICAL APPLICATION
-------------------------------------------------------------------------------------------------------------
<S>                            <C>                          <C>
  Optical Accessories                                       Optional  custom  delivery optics used with EXFO
                                                            UV light sources to tailor the properties of the
                                                            light beam to end-user applications.
-------------------------------------------------------------------------------------------------------------
 High Power Fiber Light Guide                               Provides an equal  distribution  of light energy
                                                            to multiple cure sites with 50% more  throughput
                                                            than standard fiber guides
-------------------------------------------------------------------------------------------------------------

                               OPTICAL INSTRUMENTS
-------------------------------------------------------------------------------------------------------------

         PRODUCT TYPE                    PRODUCT                    TYPICAL APPLICATION
-------------------------------------------------------------------------------------------------------------
 Radiometer                    R5000                        Handheld,  broadband  optical  radiometer used in
                                                            conjunction  with EXFO UV light sources to ensure
                                                            process quality control at the end-user location.

 Cure-Ring Radiometer                                       Measures  the output  power of light from an EXFO
                                                            cure ring; ideal for applications that requires a
                                                            uniform 360(degree) exposure
-------------------------------------------------------------------------------------------------------------
 Precise Motors/Stages         IW-700 Inchworm Motors       High resolution  optical  alignment,  fiber-optic
                               TSE-820 Inchworm Stages      alignment,  semiconductor positioning,  materials
                               UHVL Inchworm Motors         research
-------------------------------------------------------------------------------------------------------------

                        PRECISION POSITIONING INSTRUMENTS
-------------------------------------------------------------------------------------------------------------

         PRODUCT TYPE                 PRODUCT LINE                            TYPICAL APPLICATION
-------------------------------------------------------------------------------------------------------------
 Micromanipulators             PCS-6000 Micromanipulators   Electrophysiology  research  such as patch  clamp
                               PCS-5000 Micromanipulators   recording  experiments  on the brain and  central
                                                            nervous system

-------------------------------------------------------------------------------------------------------------
 Microscope Platforms          Gibraltar Platform/Stage     Applications using upright microscopes
-------------------------------------------------------------------------------------------------------------
 Microinjection Systems        MIS-5000 Microinjection      Microinjection and nuclear transfer for  genetics
                               Manipulator                  and reproductive sciences research
                               PiezoDrill Inertial Impact
                               Drill
-------------------------------------------------------------------------------------------------------------
 Microelectrode Positioner     LSS-8000 Inchworm System     Electrophysiology research such as intracellular
                                                            recording experiments
-------------------------------------------------------------------------------------------------------------
</TABLE>


RESEARCH AND DEVELOPMENT

         We believe that our future success  largely depends on our ability to
maintain and enhance our core  technology and product  functionality.  To keep
developing new products and  enhancements,  it is important that we retain and
recruit  highly  skilled  personnel.   Our  Telecom  Division's  research  and
development   department  is  headed  by  a  Vice-President  of  Research  and
Development, while our Life Sciences and Industrial Division has a Director of
Research and Development. As of November 1, 2005, our research and development
departments included 188 full-time engineers,  scientists and technicians,  of
whom  26  hold   post-graduate   degrees.   Gross  research  and   development
expenditures  in fiscal 2005 reached $15.9 million,  compared to $15.7 million
in 2004 and $17.1  million in 2003. We launched 15 new products in fiscal 2005
compared  to 20 in 2004 and 15 in 2003.  Approximately  42% of sales in fiscal
2005  originated  from products that have been on the market two years or less

                                      31
<PAGE>

compared to 32% in 2004 and 49% in 2003.

         Through  market-oriented  product  portfolio  review processes at our
telecom sites in Quebec City, Canada and Montreal,  Canada, we ensure that our
investments  in  research  and   development   are  aligned  with  our  market
opportunities  and customers'  needs.  This process enables us to maximize our
returns on R&D investments by focusing our resources on prioritized  projects.
Quarterly  product  portfolio review meetings enable us to choose a realistic,
balanced mix of new products and allocate the  necessary  resources  for their
development. All our projects, including those already underway, are reviewed,
given a priority  rating and  allocated  budgets and  resources.  Our existing
projects  can be  stopped  or  substantially  redefined  if  there  have  been
significant  changes  in  market  conditions,  or if the  project  development
schedule or budget have significantly changed.

         To manage our  research  projects  once they are  underway,  we use a
structured management process known as the stage-gate approach. The stage-gate
approach is based on a  systematic  review of a project's  progress at various
stages of its life  cycle.  The  following  are the key  review  stages of the
stage-gate approach:

     o   market study and research feasibility;
     o   product definition;
     o   development feasibility;
     o   development;
     o   qualification; and
     o   transfer to production.

         At each  stage,  we review our  project  risks,  costs and  estimated
completion time. We compare our design to anticipated  market needs and ensure
that  our  new  product   development  is  synchronized  with  other  internal
departments and external  industry  events.  Adherence to these  inter-related
portfolio  review and stage-gate  processes  enabled us to be named winners of
the Outstanding  Corporate  Innovator Award in 2000 by the U.S.-based  Product
Development and Management Association.

         We also  maintain  research  and  development  programs  for our life
science and industrial activities in Toronto,  Canada. The product development
process  is managed  using a similar  stage-gate  process,  and  projects  are
reviewed and approved through a quarterly portfolio review. The future success
of our life science and industrial  operations  largely depends on our ability
to  maintain  and  enhance  our  core   technology  in   light-based   curing,
fluorescence illumination systems and piezoelectric positioning.

         Strong R&D  capabilities  in Toronto have made it possible to bring a
number of  successful  new  products  to market  quickly  and retain  customer
intimacy.  In the process,  it has enhanced our ability to customize  products
for special applications and to develop original equipment manufacturing (OEM)
products under partnerships and exclusive  contracts.  Outside consultants are
often used for added  support in areas like software  development,  mechanical
design and rapid prototyping.

                                      32
<PAGE>

CUSTOMERS

         Our global and diversified  telecom  customer base relies on our test
and  measurement  solutions to enable optical  networks to perform  impeccably
during their  complete  life  cycles:  research,  development,  manufacturing,
installation,  maintenance  and  real-time  monitoring.  We also have selected
customers in high-precision assembly and life science sectors that require our
solutions  to render  them more  efficient  in their  respective  fields.  Our
telecom  customers  include  carriers,  cable  television  companies,   public
utilities, private network operators third-party installers,  equipment rental
companies, system manufacturers, component vendors and laboratory researchers.
Our life science and industrial  customers  consist of major  manufacturers of
medical  devices,  microelectronics,   optical  displays,  electronic  storage
systems and photonic  components,  as well as  universities,  medical schools,
governments,  as well as private  and  industrial  research  laboratories.  In
fiscal  2005,  our top customer  accounted  for 23.3% of our sales and our top
three  customers  represented  28.4%  of our  sales.  In  comparison,  our top
customer  accounted for 13.8% of sales and top three  customers 20.8% in 2004,
while in 2003, our top customer  accounted for 9.2% of sales and our top three
customers 17.5%.

         With regard to  geographic  distribution,  sales to  customers in the
Americas (US, Canada and Central & South America) represented 68% of our sales
in fiscal  2005,  while sales to customers  in EMEA  (Europe,  Middle East and
Africa) and Asia-Pacific accounted for 20% and 12% of sales, respectively.  In
2004 and 2003, the sales split was 66% for the Americas,  18% for EMEA and 16%
for Asia-Pacific.

SALES

         We sell our telecom test and measurement solutions through direct and
indirect sales channels in North America and around the world.

         In  North  America,  we use a hybrid  model,  combining  key  account
management  with direct and indirect  sales  coverage.  We  typically  use key
account  managers to serve large customers that generate high sales volumes or
might  potentially  represent  high  sales  volumes in the  future.  These key
account   managers  are   supplemented  by  regional  sales  managers,   sales
representatives  and distributors in US metropolitan  areas and regional sales
managers in Canada.

         We opt for a direct sales  approach when selling  higher-end,  highly
technical  products to  sophisticated  buyers.  Sales of low- to  medium-level
complexity  products  to less  stringent  technical  buyers are  usually  done
through a manufacturer representative organization supported by regional sales
managers.  Our main sales  offices  and service  centers in North  America are
located in Addison, Texas, and Quebec City, Canada. They are supplemented by a
regional presence in cities across the US and Canada.

         On  the  international   front,  we  have  sales  personnel  covering
strategic  areas  such  as  EMEA  (Europe,   Middle  East  and  Africa),  APAC
(Asia-Pacific  region)  and  Latin  America.  Our  sales  network  in  EMEA is
supported  by a main  office  and  service  center  in  Paris,  France,  which
maintains our head of European sales  operations and also provides  repair and
calibration  services for our EMEA customers.  We also have  additional  sales
offices in  multiple  countries  across  EMEA to serve and support our various
customers and distributors.

         As for APAC, our main sales offices for South East Asia is located in
Singapore,  while our main  office for  mainland  China is located in Beijing,
China,  which also acts as a service  center to better serve our customer base

                                      33
<PAGE>

in the whole Asia-Pacific region. In addition,  we have other sales offices in
strategic  locations  around the world to support our network of  distributors
and various customers.

         We rely on a network of more than 90  distributors  worldwide to work
with us in supporting mostly our  international  sales and to participate in a
large number of our  international  events. We believe that the local presence
and  cultural  attributes  of our  distributors  allow us to better  serve our
global markets.

         Our direct telecom sales team consists of a Vice-President  of Global
Sales  supported by five regional  sales  Directors  that are leading a widely
distributed  team of more  than 55  people  acting  as key  account  managers,
regional sales managers,  sales engineers and application engineers.  They are
located  throughout major  metropolitan  areas around the world. This group of
sales  professionals  has on average more than 12 years of  experience  in the
fields of telecommunications,  fiber optics, or test and measurement.  We also
have an in-house  Customer Service Group to meet the needs of existing and new
customers.  This group is responsible  for providing  quotations to customers,
supporting our sales force,  managing  demonstration  units, order management,
technical support and training as well as calibration and repair services.

         The main  office for our Life  Sciences  and  Industrial  Division is
located in  Toronto,  Canada.  We use mixed sales  channels  to serve  various
markets  supported by this division,  depending on product line and geography.
Optical light sources and related accessories used for industrial applications
are sold in North  America  through  a network  of more  than 10  manufacturer
representatives  and,  internationally,  through  a  network  of more  than 20
distributors.  The X-Cite 120 Fluorescence Illumination System is sold through
value-added  reseller  agreements with major  microscope  companies and system
integrators  in North  America;  negotiations  are  underway  to extend  these
agreements worldwide.  Nanopositioning products are sold directly to customers
in  North  America,   which  includes  the  United  States  and  Canada,   and
internationally  through  a  network  of  technical   distributors.   To  gain
additional access to the  nanopositioning  life science research market in the
United  States  and  Canada,  distributor  agreements  are in place with major
microscope manufacturers, which include Leica, Nikon, Olympus and Zeiss. These
companies often combine the sale of their microscopes with our product.

PRODUCT MANAGEMENT, MARKETING/COMMUNICATIONS AND CUSTOMER SUPPORT

PRODUCT MANAGEMENT

         Our telecom Product Management Group consists of two  Vice-Presidents
-  one responsible for our Optical product line and the other for our Protocol
product  line  - as well as  product  managers  who have  various  degrees  in
engineering, science and business administration.  Product managers, under the
direction of the respective  Vice-Presidents,  are responsible for all aspects
of our telecom  marketing  program  including  product  strategy,  new product
introductions,  definition  of new features and  functions,  pricing,  product
launches and advertising campaigns.  We follow up our marketing initiatives by
attending industry trade shows.  Furthermore,  we have a customer relationship
management (CRM) system to compile market and customer  information  including
forecasts,  opportunities, leads and competitive data. We use this information
to make strategic business decisions. Finally, strategic marketing specialists
analyze our markets, compile competitive information and identify macro-trends
in our sector.

                                      34
<PAGE>

         Our Life  Sciences  and  Industrial  Group  consists of a Director  -
responsible for both life sciences and precision  assembly  sectors -  as well
as product  managers  who have  various  degrees in  engineering,  science and
business  administration.   Product  managers,  under  the  direction  of  the
Director,  are  responsible  for all aspects of their  business line marketing
programs including product strategy, new product introductions,  definition of
new  features  and  functions,   pricing,  product  launches  and  advertising
campaigns.

MARKETING/COMMUNICATIONS

         The Telecom Division's  Marketing-Communications team, which consists
mainly  of  project  managers,  marketing  writers,  translators  and  graphic
artists,  supports our Product  Management  Group by producing  marketing  and
corporate documentation. Literature includes specification sheets, application
notes,  product  catalogues,  advertising  copy  and an  electronic  corporate
newsletter.  This  Marketing-Communications  team is also  responsible for all
sales  tools  required  by our  worldwide  sales  force and for  updating  the
marketing contents of our website.

         The Life  Sciences & Industrial  Division's  Marketing-Communications
team  shares a variety of  marketing  initiatives.  This group is  assisted by
product  managers,  who provide the technical data and  collaborative  support
required to produce  product  specification  sheets,  catalogues,  application
notes and multimedia  marketing tools. This  Marketing-Communications  team is
also  responsible  for  all  advertising  material,  Website  updates,  events
planning (including trade shows) and direct promotional marketing such as mass
mailings and  telemarketing.  This team also provides the sales tools required
by the Life  Sciences and  Industrial  Division's  worldwide  sales  channels,
including maintaining our elite partner program.

CUSTOMER SUPPORT

         Customer support is deemed a corporate  mandate at EXFO. As such, our
Customer Support Group handles requests from customers worldwide. Our Customer
Support Department consists of three distinct units:  Inside Sales,  Technical
Support and After-Sales Service.

         Inside  Sales  is  mainly   responsible  for  guiding   customers  in
purchasing the correct  equipment for their respective  applications,  issuing
quotations  and promoting our Flexcare  service  program.  In order to provide
customers with one central point of contact, our service  representatives work
with the  customer  from  purchasing  equipment  to helping  them  service the
equipment,  if  necessary.  These  services are  provided in English,  French,
Spanish and Chinese.

         Within  our  Technical  Support  team,  we have  agents  who  provide
troubleshooting  support to our  customers as well as trainers and  installers
who offer on-site servicing for more complex equipment.

         To offer  superior  after-sales  service  worldwide,  we have service
centers based in North America, Europe and Asia. These service centers provide
technical  support,  software  upgrades,   calibration  and  repairs  for  our
customers.

MANUFACTURING

         Our  manufacturing  operations  consist mainly of material  planning,
procurement,   sub-assembly,   final  assembly  and  test,  software  loading,
calibration,  quality assurance,  shipping, billing and customs management. As
of  November  1, 2005,  we had 250  employees  involved  in our  manufacturing

                                      35
<PAGE>

operations.  Most of our  manufacturing  activities,  which  occupy a total of
approximately  61,300  square feet,  are spread among four  buildings in three
cities.

         Our Telecom  Division  occupies  50,000  square feet in Quebec  City,
Canada,  spanning two sites, and 3,300 square feet in Montreal,  Canada. These
manufacturing operations include the following responsibilities:

     o   PRODUCTION.   From  production  planning  to  product  shipment,  our
         production  department is responsible for manufacturing  high-quality
         products on time.  Factories are  organized in work cells;  each cell
         consists  of  specialized  technicians  and  equipment  and has  full
         responsibility  over a product family.  Technicians are cross-trained
         and versatile enough,  so that they can carry out specific  functions
         in more than one cell.  This allows shorter lead times by alleviating
         bottlenecks.

     o   PRODUCT ENGINEERING AND QUALITY. This department,  which supports our
         production cells, acts like a gatekeeper to ensure the quality of our
         products and the effectiveness of our manufacturing  processes. It is
         responsible   for  the  transfer  of  products   from   research  and
         development to  manufacturing,  product  improvement,  documentation,
         metrology,  and  the  quality  assurance  and  regulatory  compliance
         process.   Quality   assurance   represents  a  key  element  in  our
         manufacturing operations.  Quality is assured through product testing
         at numerous  stages in the  manufacturing  process to ensure that our
         products meet  stringent  industry  requirements  and our  customers'
         performance  requirements.  Our  quality  assurance  program has been
         certified ISO  9001/2000 at our two locations in Quebec City,  Canada
         and our Montreal site received the same certification on November 16,
         2005.

     o   SUPPLY-CHAIN  MANAGEMENT.  This  department is responsible  for sales
         forecasting,  raw material procurement,  material-cost  reduction and
         vendor  performance  management.  Our  products  consist of  optical,
         electronic and mechanical  parts,  which are purchased from suppliers
         around  the  world.   Approximately   one-third   of  our  parts  are
         manufactured to our  specifications.  Materials represent the biggest
         portion  of our cost of goods  and will  continue  to grow as we rely
         more and more on outsourcing  our  manufacturing.  Our performance is
         tightly linked to vendor  performance,  requiring greater emphasis on
         this critical aspect of our business.

         Our Life Sciences and Industrial Division's  manufacturing operations
occupy 8,000 square feet in Toronto,  Canada.  This group  manufactures  light
sources and related accessories, fluorescence illumination systems and precise
positioning  equipment  for the  life  sciences  and  high-precision  assembly
markets.  Operations  consist  of  manufacturing,   procurement,  warehousing,
quality control and document  control  managed by various  elements of the ISO
9001  certified   quality  system.   Recognizing  the  importance  of  reduced
time-to-market  for  our  solutions,  we have  focused  efforts  on  designing
products with an emphasis on standardization,  modularity,  as well as ease of
fabrication and assembly. Following are key manufacturing  responsibilities in
Toronto:

         MANUFACTURING - consists  primarily of assembly and test capabilities
where all major  manufacturing  elements  are  subcontracted  to  various  key
suppliers. These components are integrated into assemblies and tested in order
to  ensure  all  operating  specifications  have  been  met for  each  product
manufactured.  Capacity  and  production  planning  are utilized on an ongoing

                                      36
<PAGE>

basis to ensure that adequate  resources are available to meet  forecasted and
actual demand.

         PROCUREMENT - activities are focused on developing key suppliers that
are able to manufacture components to our specifications and ensuring the most
competitive  price  has  been  attained.  Supplier  evaluation  is  the  joint
departmental effort of operations, engineering and the quality group.

         WAREHOUSE/RECEIVING   -  in-coming   inspection  and  warehousing  of
components  used for  product  realization,  along  with  shipping  and custom
transactions, are controlled in this area.

         DOCUMENT CONTROL - configuration  control on all released products is
maintained by managing the system for engineering change.

         QUALITY CONTROL - Receiving  inspection,  final product verification,
control of non-conforming product, control of inspection, test and measurement
equipment are control by in area.

COMPETITION

         The  telecommunications  test  and  measurement  industry  is  highly
competitive  and  subject  to  rapid  change  as  a  result  of  technological
developments and market conditions.  We compete with many different companies,
depending on product family and geographical  market. We believe that the main
competitive factors in the industry include the following:

    o    product performance and reliability;
    o    price;
    o    level of technological innovation;
    o    product lead times;
    o    breadth of product offering;
    o    ease of use;
    o    brand-name recognition;
    o    customer service and technical support;
    o    strength of sales and distribution relationships; and
    o    financial stability.

         Generally,  competitors fall into two categories.  The first category
consists of global test and measurement  vendors,  who complement  their broad
range of products with optical test and measurement equipment. These companies
include Agilent Technologies, Inc., Ando Corporation, Anritsu Corporation, JDS
Uniphase Corporation, Spirent plc and Tektronix, Inc.

         The  second  category  refers  to  niche  companies  in the  test and
measurement industry. These companies typically have limited product lines and
in some cases may be  geographically  limited  in their  customer  base.  Such
companies   include  Digital   Lightwave,   Inc.,  Ixia  and  Sunrise  Telecom
Incorporated.

         Competition  for our life sciences and industrial  solutions is quite
varied,  depending upon product line. Competitors that sell light-based curing
products  include  Hamamatsu,  Ushio and Matsushita  (Panasonic) in Asia, with
Hamamatsu increasing its presence in North America.  With regard to our X-Cite
120 Fluorescence  Illumination  System, main competitors consist of microscope
manufacturers who have developed lamp housings for low-wattage mercury burners

                                      37
<PAGE>

in-house.  Finally,  our motion  control Life Science  instruments,  which are
designed for various life science applications,  compete against products from
companies like Sutter Instruments and Narishige.

REGULATORY ENVIRONMENT

         In most  countries  where our  products are sold,  our products  must
comply  with  the  regulations  of one or more  governmental  entities.  These
regulations often are complex and vary from country to country. Depending upon
the country and the relevant product,  the applicable  regulations may require
product   testing,   approval,   registration,   marking  and  unique   design
restrictions.  Accordingly,  we have  appointed  a team of  engineers  who are
responsible  for  ensuring  that  our  products  comply  with  all  applicable
regulations.

         In the United States,  our products must comply with the  regulations
of several  agencies of the U.S.  federal  government,  including  the Federal
Communications  Commission (FCC), the Food and Drug  Administration  (FDA) and
the  Occupational  Safety and Health  Administration  (OSHA).  Under the FCC's
regulations,   our  products  must  comply  with  certain   electro   magnetic
compatibility (EMC) requirements to insure they do not generate and are immune
from electrical  noise which could possibly cause  undesirable  operation,  as
well  as  affect  other  surrounding  devices.  Depending  upon  the  product,
compliance with these rules may necessitate  applying for and obtaining an FCC
equipment  authorization  prior  to  importing  into  the  United  States,  or
marketing,  any  units  of the  relevant  product.  Additionally,  some of our
products  must comply with the FDA's  non-medical  performance  standards  and
related rules concerning  light-emitting  products,  such as lasers. The FDA's
regulations  are  intended  to promote  safety by limiting  human  exposure to
harmful  non-iodizing  radiation.  Similarly,  our  products  must comply with
safety standards adopted by OSHA.

         Similar regulations apply in other countries.  For example, in Canada
our  products  must  comply  with  the  applicable  standards  adopted  by the
Standards  Council of Canada (SCC).  These include  product  safety  standards
developed by the Canadian  Standards  association as well as EMC  requirements
adopted by Industry  Canada.  Countries in the European Union require  product
compliance as dictated by an  applicable  directive,  often  referred to as CE
marking.  This includes testing to ensure compliance with harmonized  European
Norm (EN)  standards  for both  product  safety  and EMC  requirements.  Other
significant  types of regulations not described in this annual report also may
apply, depending upon the relevant product and country of destination.

         In  Europe,  with  the  implementation  of the  WEEE  directives  for
recycling of electronic products in selected European Countries  (2002-96-CE),
we have  appointed a task force  committee  consisting of our  management  and
employees,  distributors and other partners as the case may be, to ensure full
compliance with regulations and oversee the management,  logistics,  recycling
rate,  disposal  services and  activities  related to recycling of  electronic
equipment and products within the member states.

INTELLECTUAL PROPERTY

         Our  success  and  ability to compete  are  dependent  in part on our
ability to develop and protect our  proprietary  technology.  We file U.S. and
Canadian   patent   applications   to  protect   technology,   inventions  and
improvements  important to the development of our business.  We also rely on a
combination  of  copyright,  trademark,  trade secret  rights,  licensing  and
confidentiality agreements.

                                      38
<PAGE>

         We currently  hold 32 from U.S.,  six from Canada,  two from Germany,
two from  the  United  Kingdom,  two from  France,  and one from  China-issued
patents and we have 15 from U.S.,  14 from  Canada,  two from China,  one from
Germany and two Patent Cooperation Treaty patent applications  pending.  These
issued  and  pending  patents  cover  various  aspects  of  our  products  and
processes.  The  expiration  dates of our issued  patents range from April 19,
2011 to October 5, 2025.

         We consider  eight of our  inventions  for which  patents have either
been granted or are pending to be material. These inventions are:

    o    a method and apparatus for  identification  and  characterization  of
         multiple   fibers   using   an   OTDR.    This   invention    targets
         fiber-to-the-home  testing  applications  where a  single  technician
         needs to verify that the multiple fibers in a distribution  cable are
         correctly identified and then measure their loss;

    o    the measurement of attenuation of optical fibers using  bidirectional
         transmission  of  information  via the fiber for which  patents  were
         granted in the United  States and Canada.  This  invention  forms the
         basis of our FOT-930 and FTB-3920 products;

    o    a method and  apparatus  for  characterizing  optical power levels in
         three-wavelength,   bidirectional   fiber-to-the-home  systems.  This
         invention  describes  how the  optical  power can be  measured at the
         two-downstream  and  one  upstream  wavelengths  used  to  connect  a
         residence  or  business   customer,   while  maintaining  the  signal
         continuity  necessary to keep the home-based Optical Network Terminal
         operating. A PCT patent application has been filed and is in process.
         This  invention  forms  the  basis  of the  two-port  version  of our
         PPM-350B PON Power Meter.

    o    a method and apparatus to determine optical phase delay,  which forms
         the  basis  of our  new  FTB-5800  product  for  the  measurement  of
         chromatic  dispersion in field-installed  optical fibers. A US patent
         has been granted,  and  applications  have been  submitted in Canada,
         Europe (pursuant to PCT), and China;

    o    an optical spectrum analyzer using optical fibers as input and output
         "slits".  This invention  forms the basis of our FTB-5240,  FTB-5240B
         and  IQ-5250  products.  A US patent and a Chinese  patent  have been
         granted and applications are in process in the United States, Canada,
         and Europe (pursuant to PCT);

    o    the  light-curing  system with  closed-loop  control  and  work-piece
         recording  which  is  at  the  heart  of  the   spot-curing   systems
         manufactured  by EXFO  Photonic  Solutions and for which patents were
         granted in the United States and Canada;

    o    Intelli-lampTM  patents  used in the  spot  curing  and  fluorescence
         microscopy  illumination  systems  optimize lamp  performance in EXFO
         Photonic Solutions systems.  Two patents have been granted in the US,
         and applications are pending in Canada and Germany.

    o    the portable test gear for TDM and  packet-based  communications  for
         which  patent  applications  have been  filed in  Canada,  the United
         States and pursuant to the Patent  Cooperation  Treaty form the basis
         of the technology  used by EXFO Protocol for a number of its protocol
         testing products.

         Confidentiality  and  proprietary  information  agreements  with  our
senior  management,   employees  and  others  generally   stipulate  that  all
confidential  information  developed or made known to these  individuals by us
during the course of their  relationship  is to be kept  confidential  and not
disclosed to third parties, except in specific  circumstances.  The agreements
also  generally  provide  that  all  intellectual  property  developed  by the
individual in the course of rendering  services to us belongs  exclusively  to
us. These efforts afford only limited protection.

                                      39
<PAGE>

C.       ORGANIZATIONAL STRUCTURE

         As of November 1, 2005, the following chart presents our corporate
structure, the jurisdiction of incorporation of our subsidiaries and the
percentage of shares that we hold in those subsidiaries.

[GRAPHIC OMITTED -- ORGANIZATIONAL CHART]

<TABLE>
<CAPTION>
                                           --------------------
                                           EXFO Electro-Optical
                                             Engineering Inc.
                                               18/09/1985
                                                (Canada)
                                               Operating
                                           --------------------
                                                    |
                                                    |
                                                    |
               100%             100%            100%          100%        100%              100%              100%              100%
-- ---------------   -------------   --------------  ------------  ----------  ----------------  ----------------  ----------------
   <S>               <C>             <C>             <C>           <C>         <C>               <C>               <C>
|  EXFO UK Limited   EXFO Photonic   GEXFO           GAP Optique   EXFO Asia   Nortech Fibronic  EXFO Protocol     Burleigh
|  (United Kingdom)  Solutions Inc.  Distribution    SA            Pacific     Inc.              Inc.(formerly)    Instruments GmbH
|    Dissolved       (formerly Efos  Internationale  17/05/1994    PTE Ltd.    14/08/1991        Avantas Networks  (Germany)
|   25/11/2003       Inc.)           Inc.            (Switzerland) 18/01/2001  (Canada)          Corporation)      Non-operating
|                    20/02/1984      17/12/1992      Non-Operating (Singapore)  Non-operating    02/11/2001
|                    (Ontario)       (Quebec)                      Operating                     (Canada)
|                    Operating        Holding                                                    Dissolved
|                                                                                                12/09/2003
|                                         |                                           |
|                    --------------------------------------------                -------------
|                                  100%         100%         100%                         100%
|                    ------------------  -----------   ----------                -------------
|                    EXFO Spain Holding  EXFO Europe   EXFO USA                   Nortech
|                    S.L. 08/02/1994     SARL          Inc.                      Fibronic Inc.
|                    (Spain)             08/02/1994    07/12/2000                (Texas)
|                    Holding             (France)      (Delaware)                Dissolved
|                                        Operating      Holding                   07/09/2001
|                        |                                |
|             -------------------     ------------------------------------------
|                            100%             100%        100%              100%
|             -------------------     ------------   ---------     -------------
|             EXFO International      EXFO America   EXFO          EXFO Gnubi
|             Services Management     Inc.           Burleigh      Products
|             LLC                     15/12/1992     Products      Group Inc.
|             22/11/2000              (Delaware)     Group Inc.    04/09/2002
|             (Hungary)-Operating     Operating      25/08/1972    (Delaware)
|                                                    (New York)    Non-Operating
|                                                    Non-Operating
|                                                 /                \
|                                    -------------------------------------------
|                                            71.5%                          100%
|                                    -------------                 -------------
|                                     Burleigh                     Burleigh
|                            28.5%   Instruments                   Automaton
-----------------------------------  (UK) Ltd.                     Inc.
                                      (United                       (Delaware)
                                      Kingdom)                     Non-Operating
                                      Dissolved
                                      12/11/2002
    </TABLE>


D.       PROPERTY, PLANT AND EQUIPMENT

         Our main offices and  facilities  are located in Quebec City,  Canada
where we now occupy two  buildings.  These  buildings  house our executive and
administrative  offices,  research and  development  facilities and production
facilities.  We also  have  facilities  in  Montreal,  Canada  (formerly  EXFO
Protocol) and in Toronto,  Canada (EXFO Photonic).  EXFO Burleigh's facilities
are located in Victor, New York and are presently for sale.

         In addition,  we maintain  sales offices  and/or have regional  sales
managers  located in China,  France,  Germany,  Great Britain,  Italy,  Japan,
Singapore and the United States.

         In September  2002,  we obtained  ownership  of one of the  buildings
housing production facilities in Quebec City that was previously leased from a
company  controlled  by EXFO's  president  and  chief  executive  officer.  In
September  2003, due to down-sizing  efforts,  we were able to move all of our
Quebec City  activities  into two buildings,  rather than three.  Though we no
longer occupy the facilities at 465 Godin Avenue in Vanier,  we remain bounded
by the lease until November 30, 2006.  However,  on September 1, 2004, we were
released from our obligations under the lease with a final payment of $194,000
(CA$250,000).


                                      40
<PAGE>

         The following table sets forth information with respect to the main
facilities that we occupy as of November 1, 2005.

<TABLE>
<CAPTION>
            LOCATION                         USE OF SPACE                 SQUARE FOOTAGE     TYPE OF INTEREST
            --------                         ------------                 --------------     ----------------
<S>                            <C>                                        <C>                <C>
436 Nolin Street               Manufacturing of telecom products                44,164             Owned
Vanier (Quebec)

400 Godin Avenue               Research and Development, Manufacturing,        128,800             Owned
Vanier (Quebec)                Executive and Administrative

2260 Argentia Road             Partially occupied for Research and              25,328 (1)        Leased
Mississauga (Ontario)          Development, Manufacturing of Life
                               Science and Industrial products and
                               Administrative

2650 Marie-Curie               Research and Development, Manufacturing          26,000            Leased
St-Laurent (Quebec)            and Administrative

7647 Main Street Fishers       Unoccupied                                            0 (2)         Owned
Victor (New York)
</TABLE>

1)   10,672 square feet have been subleased to a third party. The total square
     footage leased is 36,000.

2)   The total square footage owned is 40,000,  is unoccupied and is presently
     for sale.


                                      41
<PAGE>


ITEM 5.           OPERATING AND FINANCIAL REVIEW AND PROSPECTS

MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

         The following  discussion and analysis of the consolidated  financial
condition and results of operations of EXFO  Electro-Optical  Engineering Inc.
for the fiscal years ended August 31, 2003,  2004 and 2005,  should be read in
conjunction with our consolidated  financial  statements and the related notes
included  elsewhere  in  this  Annual  Report.   Our  consolidated   financial
statements  are  reported in US dollars and have been  prepared in  accordance
with generally  accepted  accounting  principles in Canada,  or Canadian GAAP.
Significant  differences in measurement and disclosure from generally accepted
accounting  principles in the United States, or U.S. GAAP, are set out in note
21 to our consolidated financial statements.

         The  following  discussion  and analysis of financial  condition  and
results of operations is dated November 3, 2005.


INDUSTRY OVERVIEW

         Leading  telecom  operators  (telcos),  mostly in the United  States,
accelerated fiber deployments  deeper in their access networks during the last
year because they are involved in a triple-play war (even  quadruple-play with
wireless  telephony) against cable TV operators  (cablecos) to offer consumers
bundled voice, data and video services.  This broadband war between telcos and
cablecos  contributed to an increase in wireline capital expenditures in 2005,
especially in the United States.

         Leading  US  telcos,  along  with a number of  Tier-II  and  Tier-III
players,  opted  for  an  assortment  of  deployment   strategies,   including
fiber-to-the-node (FTTN),  fiber-to-the-curb (FTTC),  fiber-to-the-home (FTTH)
or its equivalent  fiber-to-the  premises  (FTTP),  depending on the bets they
placed in terms of how much  bandwidth  will be required to meet the challenge
from the cablecos. These deployments,  which fall under the generic FTTx name,
are not as prevalent in Europe and Asia. However,  test trials are underway in
these regions as a means to increase  revenues by delivering video services to
undercut  competition.  Note that Japan and Korea already have FTTx deployment
programs, aimed at delivering 100 Mb/s to every home, well underway.

         As the demand for broadband services increases worldwide, voice, data
and video are becoming  mere  applications  on converged,  IP-based  networks.
Telcos around the world are migrating from public switched  telephone networks
(PSTN) to packet-based, IP networks in order to achieve substantial reductions
in operating expenses and increased profitability.  British Telecom Group, for
example,  announced it will spend (British Pound)10 billion over five years on
its 21st Century Network to reduce operating expenses by up to (British Pound)
1.0 billion per year through a single network  carrying voice,  data and video
signals.

         Legacy  SONET/SDH  networks  were designed in the late 1970s to carry
voice traffic.  Their efficiency however can often times drop to as low as 30%
when combining voice, data and video services.  Next-generation networks, such
as  those  announced  by  British  Telecom,  represent  a major  technological
improvement,  since  they  can  deliver  triple-play  services  at  near  100%
efficiency,  regardless of the payload content,  while significantly  reducing
the cost of operating and maintaining networks.

                                      42
<PAGE>

         These key market  trends  affected  multiple  segments  of the global
telecommunications  supply chain in 2005. System manufacturers  benefited from
orders by both telcos and cablecos for next-generation,  converged IP networks
as well as from  major  investments  by telcos in access  networks.  Component
vendors saw  incremental  demand for optical  components that support FTTx and
IP-based  systems.  Some test and measurement  equipment vendors attracted the
attention of telcos,  cablecos,  system  manufacturers and component  vendors,
especially ones offering test solutions for IP optical  networking and/or FTTx
applications.


COMPANY OVERVIEW

         EXFO is a recognized expert in the global telecommunications industry
through  the  design and  manufacture  of  advanced  and  innovative  test and
measurement  solutions.  The  Telecom  Division,  which  represents  our  main
business  activity,  offers a complete range of dedicated and integrated  test
solutions to network service providers (NSPs), cable operators, system vendors
and component  manufacturers in approximately 70 countries.  One of our strong
competitive  advantages  is our  modular  test  platforms  design,  based on a
PC/Windows-centric  architecture,  which  offers a series of test modules that
maximize  technology reuse across multiple market segments at minimal redesign
cost. The Life Sciences and Industrial Division, formerly called Photonics and
Life Sciences  Division,  mainly leverages core telecom  technologies to offer
value-added  solutions  for  life  sciences  applications  and  high-precision
assembly  processes,   such  as  those  required  for   microelectronics   and
optoelectronics.

         This year marked EXFO's 20th anniversary,  as the company was founded
in 1985 in Quebec  City,  Canada.  Our original  products  were focused on the
needs of installers and operators of fiber-optic networks. Customers use these
field-portable testing products for the installation,  maintenance, monitoring
and troubleshooting of optical networks.  In 1996, we supplemented our product
portfolio  with an  extensive  line  of  high-end  products  that  are  mainly
dedicated to research and development as well as  manufacturing  activities of
optical component manufacturers and system vendors.

         In the last four years,  we have  enhanced our  competitive  position
through the acquisition of two protocol test businesses in order to expand our
product offering and address our customers'  requirements more completely.  In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc.),  a  supplier  of  protocol-testing   and  optical-network   performance
management  equipment for NSPs. This transaction was highly strategic  because
it enabled us to combine  optical and protocol  test  modules  inside a single
field-portable  test  platform to help our  customers  increase  revenues  and
reduce  operating costs. In October 2002, our  wholly-owned  subsidiary,  EXFO
Gnubi, purchased substantially all the assets of GNUBI COMMUNICATIONS, L.P., a
supplier of multi-channel telecom and datacom testing solutions for the system
manufacturer market. These strategic acquisitions,  which were consolidated in
Montreal  in fiscal  2004,  enabled  us to more than  double  our  addressable
market, as we expanded from optical testing to protocol testing  applications,
and to offer a more complete line of test solutions to our customers.

         Previously,  we had completed two  acquisitions  to bolster growth in
the optical component  manufacturing market. We acquired Burleigh Instruments,
Inc.  (renamed  EXFO  Burleigh  Products  Group Inc.) in December 2000 for its
wavelength measurement  instruments and nanopositioning  alignment systems. We
also added EFOS Inc. (renamed EXFO Photonic  Solutions Inc.) in March 2001 for
its precision  light-based,  adhesive  spot-curing  technology.  We have since
exited the optical component manufacturing automation business.

                                      43
<PAGE>

         In  fiscal   2005,   we  launched  15  new   products,   including  a
next-generation  SONET/SDH  analyzer for  characterizing  converged,  IP-based
networks;  a 10 Gigabit  Ethernet  (GigE) test  solution to assess  quality of
service in core and metro  networks;  a new software suite for remote Ethernet
testing and commissioning  applications;  an all-band  component  analyzer for
FTTx and coarse  wavelength-division  multiplexing  (CWDM) applications in the
manufacturing/R&D  market; a series of three handheld test instruments for the
installation and maintenance  market;  and an optical spectrum  analyzer (OSA)
for CWDM applications in metro and access networks.  In addition, we formed an
alliance  with ADC Telecom to provide a unique  remote  Ethernet test solution
for first-mile applications.

         In 2005, we also  consolidated  our  leadership  position in the FTTx
test market by recognizing  significant revenue from two leading U.S. carriers
deploying fiber in their access networks. Our top customer accounted for 23.3%
of sales in 2005.  Subsequent to the year-end,  we were supplier for all fiber
deployment test applications by Deutsche Telecom AG - including FTTx.

         We recorded a foreign  exchange  loss of $1.3  million in fiscal 2005
due to the significant increase in the value of the Canadian dollar versus the
US dollar during that year. In addition to this foreign exchange loss, our P&L
(profits and losses) line items in 2005 were also  negatively  affected by the
appreciation  of the  Canadian  dollar,  since a  significant  portion  of our
expenses  are incurred in Canadian  dollars  while we report our results in US
dollars.

         In the third quarter of fiscal 2005,  EXFO was named recipient of the
2005 Growth Strategy  Leadership  Award by Frost & Sullivan,  a leading market
research firm in the  telecommunications  test sector.  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  market in the
previous year. Based on a report by Frost & Sullivan,  we increased our market
share  from 8.4% in  fiscal  2003 to 10.3% in 2004.  This  marked  the  second
consecutive year that we earned this industry award.

         Finally,  during fiscal 2005, we completed the  consolidation  of our
Life Sciences and Industrial  Division in Toronto and we recorded  $482,000 in
restructuring expenses.  Altogether, we incurred $2.5 million in restructuring
and other charges since the fourth  quarter of 2004 in  conjunction  with this
consolidation process.

SALES

         We sell our products to a diversified  customer base in approximately
70  countries  through  our  direct  sales  force  and,  indirectly,   through
distribution  channels.  Most of our sales are  denominated  in US dollars and
Euros.

         Historically,  it has been very unusual to have any customer  account
for more than 10% of our sales.  However, in both fiscal 2004 and 2005, we had
one customer that accounted for 13.8% and 23.3% of our sales, respectively. In
fiscal 2005, our top three customers accounted for 28.4%, compared to 20.8% in
2004. We believe the sales  concentration in fiscal 2005 is largely due to our
leadership  position in the FTTx test market,  as a large portion of our sales
to our top customer was for a series of products  related to FTTx  deployment.
We expect this sales  concentration to decrease in fiscal 2006, as we continue
efforts to diversify our customer base.

                                      44
<PAGE>

         Despite  the  fact  that we had one  customer  that  accounted  for a
substantial  part of our sales in fiscal 2005,  we believe that we have a vast
array of products and a diversified  customer base,  both in terms of industry
sector and  geographical  area,  which provides us with reasonable  protection
against concentration of sales and credit risk.

COST OF SALES

         Cost of sales includes raw materials,  salaries and related  expenses
for direct and indirect manufacturing  personnel (net of government grants) as
well as overhead  costs.  Excess,  obsolete  and scrapped  materials  are also
included  in  cost  of  sales.   However,   cost  of  sales  is  exclusive  of
amortization, which is shown separately in the statements of earnings.

OPERATING EXPENSES

         We  classify  our  operating  expenses  into three  main  categories:
selling and  administrative  expenses,  research and development  expenses and
amortization expenses.

         Selling and administrative expenses consist primarily of salaries and
related expenses for personnel (net of government grants),  sales commissions,
travel  expenses,  marketing  programs,   professional  services,  information
systems, human resources and other corporate expenses.

         Gross research and development expenses consist primarily of salaries
and related  expenses for engineers and other  technical  personnel,  material
component  costs  as well as fees  paid  to  third-party  consultants.  We are
eligible to receive research and development tax credits and government grants
on research  and  development  activities  carried out in Canada.  All related
research and development  tax credits and government  grants are recorded as a
reduction of gross research and development  expenses.  Tax credit  write-offs
are also included in net research and development expenses.

         Operating  charges  related  to our  restructuring  plans  have  been
recorded as a separate component of operating expenses.  These charges consist
primarily of severance  expenses,  costs to exit leased  facilities as well as
write-offs of long-lived assets.


OUR STRATEGY

STRATEGIC OBJECTIVES FOR FISCAL 2005

         In our fiscal 2004 Annual Report,  we had established three strategic
objectives for fiscal 2005. We planned to increase sales through  market-share
gains, maximize  profitability and focus on innovation.  The following section
reviews our strategic  objectives for fiscal 2005 and the results achieved for
each of these objectives.

INCREASE SALES THROUGH MARKET-SHARE GAINS

         In fiscal 2005, we focused on continued market-share gains to achieve
growth. We posted our second-best sales performance in history,  growing sales
30.3% to $97.2  million  in fiscal  2005,  compared  to a stated  goal of 20%.
Considering  that the  telecommunications  market slightly  improved in fiscal
2005,  this is a clear  indication  that we gained market share  overall.  For

                                      45
<PAGE>

fiscal  2005,  our  Telecom  Division  and our Life  Sciences  and  Industrial
Division reported sales increases of 36.1% and 8.6%, respectively.

MAXIMIZE PROFITABILITY

         Returning to profitability  remains a top priority at EXFO. In fiscal
2005, we substantially  reduced our loss from operations from $10.6 million in
fiscal 2004 to $199,000 in 2005. The loss from  operations  incurred in fiscal
2005  includes  restructuring  and other  charges  of  $292,000,  recorded  in
conjunction with the  consolidation of the operations of our Life Sciences and
Industrial Division and stock-based compensation costs of $963,000.

FOCUS ON INNOVATION

         In fiscal 2005,  innovation was a key driver at EXFO. We maintained a
significant  level of research and  development  investments and introduced 15
new products to the  marketplace.  We invested $15.9 million in gross research
and development  expenses, an amount similar to 2004. In fiscal 2005, 42.4% of
our sales  originated from products that have been on the market for two years
or less, which is slightly below our stated goal of 45% for fiscal 2005. While
we slightly missed our target, this represents a significant  improvement over
the  prior  year  (31.7%),  thanks  to  the  20 new  products  brought  to the
marketplace in fiscal 2004 - several of which were released in the second half
of the fiscal year - and the 15 new ones launched in fiscal 2005.

STRATEGIC OBJECTIVES FOR FISCAL 2006

         For fiscal 2006, we believe general market conditions will moderately
improve as carriers around the world will intensify triple-play investments in
an effort to bolster revenues and/or provide a defensive/offensive  measure in
the telcos vs.  cablecos  battle to deliver video,  data and voice services to
residential and business  customers.  This ongoing trend will prompt increased
capital expenditures (CAPEX) mainly in the access network market,  likely over
several years to come. On a more global basis, the migration of these services
onto  a  single,  IP-based  network  to  reduce  operating  expenditures  will
instigate  increased  CAPEX  in  the  network  core.  On the  strength  of our
market-driven R&D program,  we are  well-positioned  for these latest industry
trends.

         As one might expect, our strategic directions,  and therefore our key
performance  indicators,  will not be radically  different from those of 2005.
Since we are highly focused on creating value for our shareholders,  providing
the highest  degree of  profitable  growth is at the heart of our actions.  We
intend to maintain our  long-term  focus on  profitable  growth by  increasing
sales through  further  market-share  gains;  maximize  profitability  through
proper execution and efficiency of our cost-reduction  programs;  and focus on
innovation to positively  position the  organization  for the long-term growth
opportunities that exist in our space.

INCREASE SALES THROUGH MARKET-SHARE GAINS

         In fiscal 2006, we will continue  focusing on market-share  gains and
growing faster than our end markets. In fiscal 2005, our 30.3% sales growth in
a slightly increasing market condition clearly indicated that we gained market
share.  As  mentioned  earlier,  EXFO was named  recipient  of the 2005 Growth
Strategy  Leadership Award by Frost & Sullivan.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  market in the
previous year.  Based on Frost & Sullivan,  we increased our market share from
8.4% in fiscal 2003 to 10.3% in 2004. For fiscal 2006, we intend once again to

                                      46
<PAGE>

grow sales faster than the market by leveraging our sustained R&D  investments
in areas such as next-generation  Internet protocol (IP) and FTTx testing,  by
intensifying our sales and marketing efforts, both domestic and international,
as well as by  strengthening  and  expanding our business  relationships  with
major accounts.

MAXIMIZE PROFITABILITY

         Profitability  remains a top priority and we expect that sales growth
combined  with a strong focus on  operations  will  increase our earnings from
operations in fiscal 2006, assuming no acquisition.

FOCUS ON INNOVATION

         In fiscal 2006, innovation will continue to be a major growth vehicle
for us, as it significantly drives not only revenue and profitability but also
allows us to better position  ourselves in the long term. We remain  convinced
that our  commitment to  innovation  will pay off in the long term and support
our growth and  profitability  targets as demonstrated  during the last fiscal
year.  We have  maintained a  significant  level of R&D  investment  since the
telecom peak in 2001 and brought 15 new products to the  marketplace in fiscal
2005.  Now that our net R&D  investments as a percentage of sales are right in
line with our  long-term  model,  we intend,  for fiscal 2006 and  beyond,  to
increase our  investment in R&D  activities in proportion to our sales growth.
Our numerous  but focused R&D  initiatives  should  enable our new products to
continue   gaining  traction  with  customers  and  lead  to  further  growth,
market-share gains and increased profitability in the coming years.

KEY PERFORMANCE INDICATORS

         As measures to assess the  realization  of our strategic plan and its
objectives,  we have set out three consolidated key performance indicators for
fiscal 2006. They are summarized as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------

STRATEGIC OBJECTIVES FOR FISCAL 2006          KEY PERFORMANCE INDICATORS FOR FISCAL 2006
----------------------------------------------------------------------------------------
<S>                                                 <C>
Increase sales through market-share gains           15% sales growth year-over-year
----------------------------------------------------------------------------------------

Maximize profitability                              5% in earnings from operations
----------------------------------------------------------------------------------------

Focus on innovation                                 40% of sales from new products
                                                    (on the market two years or less)
----------------------------------------------------------------------------------------
</TABLE>

CAPABILITY TO DELIVER RESULTS

         At EXFO, we believe that we have the capabilities to deliver expected
results  thanks  to  outstanding  products,  an  excellent  reputation  in the
marketplace,  a sound financial position,  as well as an experienced workforce
and management team.

                                      47
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Management's  discussion  and  analysis of financial  conditions  and
results  of  operations  is based  on our  consolidated  financial  statements
included elsewhere in this Annual Report. As previously  mentioned,  they have
been prepared in accordance  with Canadian GAAP. The  preparation of financial
statements in accordance  with GAAP requires  management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent  assets and liabilities at the date of the financial
statements,  as well as the reported  amounts of revenues and expenses  during
the reporting  years.  On an ongoing basis,  we evaluate  these  estimates and
assumptions,  including  those related to revenue  recognition,  allowance for
doubtful accounts, allowance for excess and obsolete inventories, research and
development tax credits and government grants, impairment of long-lived assets
and  goodwill,  valuation  allowance  of future  income tax  assets,  warranty
obligations,  restructuring charges,  contingencies and other obligations,  as
well as stock-based  compensation costs. We base our estimates and assumptions
on historical experience and on other factors that we believe to be reasonable
under  the  circumstances,  the  result of which  form the  basis  for  making
judgments  about the carrying  values of assets and  liabilities  that are not
readily  apparent from other  sources.  Actual results could differ from these
estimates.

         The following  summarizes our critical accounting policies as well as
other policies that require the most significant judgment and estimates in the
preparation of our consolidated financial statements.

         REVENUE RECOGNITION. For products in which software is incidental, we
recognize  revenue when  persuasive  evidence of an  arrangement  exists,  the
product has been delivered, the price is fixed and determinable and collection
of the resulting receivable is reasonably assured. In addition, provisions are
made for estimated returns, warranties and support obligations.

         For  products  in which  software  is not  incidental,  revenues  are
separated into two  categories:  product and  post-contract  customer  support
(PCS) revenues,  based upon vendor-specific  objective evidence of fair value.
Product  revenues  for these sales are  recognized  as  described  above.  PCS
revenues  are deferred  and  recognized  ratably over the years of the support
arrangement.  PCS revenues are recognized at the time the product is delivered
when provided within one year of delivery; the costs of providing this support
are  insignificant  (and  accrued  at the time of  delivery)  and no  software
upgrades are provided.

         For all sales,  we use a binding  purchase  order as evidence  that a
sales arrangement exists.

         Delivery  generally  occurs  when the  product  is  handed  over to a
transporter for shipment.

         At  the  time  of  the  transaction,  we  assess  whether  the  price
associated with our revenue transaction is fixed and determinable, and whether
or not collection is reasonably  assured. We assess whether the price is fixed
and  determinable  based on the payment terms associated with the transaction.
We assess collection based on a number of factors,  including past transaction
history and the  creditworthiness  of the customer.  Generally,  collateral or
other security is not requested from customers.

                                      48
<PAGE>

         Most sales arrangements do not generally include acceptance  clauses.
However,  if  a  sales  arrangement  does  include  an  acceptance  provision,
acceptance  occurs  upon the  earliest  of the  receipt of a written  customer
acceptance  or the  expiration  of the  acceptance  period.  For  these  sales
arrangements, the sale is recognized when acceptance occurs.

         Revenue for extended  warranties  is  recognized  on a  straight-line
basis over the warranty period.

         ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We  estimate  collectibility  of
accounts receivable on an ongoing basis by reviewing balances outstanding over
a certain  period of time. We determine  our  allowance for doubtful  accounts
receivable based on our historical accounts receivable  collection  experience
and on  the  information  that  we  have  about  the  status  of our  accounts
receivable balances. If the financial conditions of our customers deteriorate,
resulting  in an  impairment  of  their  ability  to make  required  payments,
additional allowance may be required,  which could adversely affect our future
results.

         ALLOWANCE  FOR  EXCESS  AND  OBSOLETE   INVENTORIES.   We  state  our
inventories  at the lower of cost,  determined  on an  average  cost basis and
replacement cost or net realizable  value, and provide reserves for excess and
obsolete  inventories.  We  determine  our  reserves  for excess and  obsolete
inventories  based on the quantities we have on hand versus expected needs for
these  inventories,  so as to  support  future  sales of our  products.  It is
possible that additional inventory reserves may occur if future sales are less
than our forecasts or if there is a significant  shift in product mix compared
to our forecasts, which could adversely affect our future results.

         RESEARCH AND DEVELOPMENT TAX CREDITS AND GOVERNMENT GRANTS. We record
research  and  development  tax credits  and  government  grants  based on our
interpretation  of tax laws and grant programs,  especially  regarding related
eligible projects and expenses, and when there is reasonable assurance that we
have complied and will continue to comply with all conditions and laws.  Also,
our judgment and estimates are based on historical experience. It is possible,
however, that the tax authorities or the sponsors of the grant programs have a
different  interpretation of laws and application of conditions related to the
programs or that we do not comply with all conditions related to grants in the
future,  which  could  adversely  affect our future  results.  Furthermore,  a
significant  part of our tax  credits  are  refundable  against  income  taxes
payable,   causing  their  ultimate  realization  to  be  dependent  upon  the
generation  of  taxable  income.  If we obtain  information  that  causes  our
forecast  of future  taxable  income to  change  or if actual  taxable  income
differs from our forecast,  we may have to revise the carrying  value of these
tax credits,  which would affect our results in the period in which the change
was made.  We review the  recoverability  of such tax  credits on a  quarterly
basis.

         IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. We assess impairment of
goodwill on an annual basis, or more  frequently,  if events or  circumstances
indicate that it might be impaired.  Recoverability  of goodwill is determined
at the reporting  unit level using a two-step  approach.  First,  the carrying
value of a reporting  unit is compared to its fair value,  which is determined
based on a combination of discounted  future cash flows and a market approach.
If the carrying value of a reporting  unit exceeds its fair value,  the second
step is  performed.  In this step,  the  amount of  impairment  loss,  if any,
represents  the excess of the carrying  value of goodwill  over its fair value
and the loss is charged to earnings in the period in which it is incurred. For
the purposes of this impairment  test, the fair value of goodwill is estimated
in the same way as goodwill is determined in business  combinations;  that is,
the excess of the fair value of a reporting unit over the estimated fair value
of its net identifiable assets.

                                      49
<PAGE>

         We  assess   impairment   of   long-lived   assets   when  events  or
circumstances  indicate that costs may not be recoverable.  Impairment  exists
when the carrying value of an asset, or a group of assets, is greater than the
pre-tax undiscounted future cash flows expected to be provided by the asset or
the group of assets.  The amount of impairment  loss, if any, is the excess of
the  carrying  value over the fair value.  We assess fair value of  long-lived
assets based on discounted future cash flows.

         FUTURE INCOME TAXES.  We account for income taxes using the liability
method of tax  allocation.  Under this  method,  future  income tax assets and
liabilities   are  determined   based  on  deductible  or  taxable   temporary
differences  between  financial  statement values and tax values of assets and
liabilities,  using  enacted  income  tax  rates  for the  years in which  the
differences are expected to reverse.  In assessing the  recoverability  of our
future income tax assets,  we consider whether it is more likely than not that
some or all of the future income tax assets will not be realized. The ultimate
realization  of our future income tax assets is dependent  upon the generation
of  future  taxable  income  during  the  periods  in  which  those  temporary
differences will become deductible.  As at August 31, 2005, we had established
a full valuation allowance against our future income tax assets. The valuation
allowance  will  be  reversed  once   management   will  have  concluded  that
realization of future income tax assets is more likely than not.

         STOCK-BASED  COMPENSATION  COSTS. Since September 1, 2003, we account
for all forms of employee stock-based  compensation using the fair value-based
method.  This  method  requires  that we make  estimates  about the  risk-free
interest rate, the expected  volatility of our shares and the expected life of
the awards.

         On September 1, 2004,  we  prospectively  adopted the  following  new
Canadian Institute of Chartered Accountants (CICA) handbook sections:

    o    Section 1100, "Generally Accepted Accounting Principles"
    o    Section 1400, "General Standards of Financial Statement Presentation"

         Furthermore,  in January  2005,  the CICA issued four new  accounting
standards  in relation to  financial  instruments:  Section  3855,  "Financial
Instruments - Recognition and measurement";  Section 3865,  "Hedges";  Section
1530,  "Comprehensive Income"; and Section 3251, "Equity". These new standards
apply to fiscal years beginning on or after October 1, 2006, and we will adopt
them on September 1, 2007.

         Please  refer  to  note 2 to our  consolidated  financial  statements
included  elsewhere in this Annual Report for further  information about these
new standards and their impact on our financial statements.

                                      50
<PAGE>

RESULTS OF OPERATIONS

         The  following  table sets forth certain  Canadian GAAP  consolidated
financial  statements data in thousands of US dollars,  except per share data,
and as a percentage of sales for the years indicated:

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
EARNINGS DATA:                               2005          2004           2003        2005          2004         2003
-----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>             <C>           <C>          <C>
Sales.............................      $  97,216     $  74,630      $  61,930       100.0%        100.0%       100.0%

Cost of sales (1).................         44,059        34,556         36,197        45.3          46.3         58.4
-----------------------------------------------------------------------------------------------------------------------

Gross margin .....................         53,157        40,074         25,733        54.7          53.7         41.6
-----------------------------------------------------------------------------------------------------------------------
Operating expenses

  Selling and administrative......         31,782        25,890         26,991        32.7          34.7         43.6
  Net research and development ...         12,190        12,390         15,879        12.5          16.6         25.6
  Amortization of property, plant
     and equipment ...............          4,256         4,935          5,210         4.4           6.6          8.4
  Amortization of intangible
     assets ......................          4,836         5,080          5,676         5.0           6.8          9.2
  Impairment of long-lived assets
     and goodwill.................             --           620          7,427          --           0.8         12.0
  Restructuring and other charges.            292         1,729          4,134         0.3           2.3          6.7
-----------------------------------------------------------------------------------------------------------------------

Total operating expenses..........         53,356        50,644         65,317        54.9          67.8        105.5
-----------------------------------------------------------------------------------------------------------------------
Loss from operations..............                                                    (0.2)        (14.1)       (63.9)
                                             (199)      (10,570)       (39,584)

Interest and other income.........          2,524         1,438          1,245         2.6           1.9          2.0

Foreign exchange loss.............         (1,336)         (278)        (1,552)       (1.4)         (0.4)        (2.5)
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes           989        (9,410)       (39,891)        1.0         (12.6)       (64.4)

Income taxes......................          2,623          (986)        15,059         2.7          (1.3)        24.3
-----------------------------------------------------------------------------------------------------------------------
Net loss for the year.............      $  (1,634)    $  (8,424)     $ (54,950)       (1.7)%       (11.3)%      (88.7)%
=======================================================================================================================

Basic and diluted net loss
  per share.......................      $   (0.02)    $   (0.13)     $   (0.87)

Segment information
  Sales:
   Telecom Division...............      $  80,120     $  58,882      $  48,753        82.4%         78.9%        78.7%
   Life Sciences and
     Industrial Division..........         17,096        15,748         13,177        17.6%         21.1%        21.3%
-----------------------------------------------------------------------------------------------------------------------
                                        $  97,216     $  74,630      $  61,930       100.0%        100.0%       100.0%
=======================================================================================================================

 Operating earnings (loss): (2)
   Telecom Division...............      $     763     $  (5,557)     $     --          0.8%         (7.4)%         --%
   Life Sciences and Industrial
     Division.....................           (962)       (5,013)           --         (1.0)         (6.7)          --
-----------------------------------------------------------------------------------------------------------------------
                                        $    (199)    $ (10,570)     $     --         (0.2)%       (14.1)%         --%
=======================================================================================================================

Research and development data:
  Gross research and development..      $  15,878     $  15,668      $  17,133        16.3%         21.0%        27.7%
  Net research and development....      $  12,190     $  12,390      $  15,879        12.5%         16.6%        25.6%
-----------------------------------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS DATA:
Total assets......................      $  190,957    $  172,791     $ 146,254
=======================================================================================================================

(1)  The cost of sales is exclusive of amortization, shown separately. Including inventory write-offs of $4,121,000 and
     an unusual gain of $473,000 for the year ended August 31, 2003.
(2)  Comparative  information  for fiscal 2003 for the loss from  operations is not available and is  impracticable  to
     determine.
</TABLE>

                                      51
<PAGE>

SALES

FISCAL 2005 VS. 2004

         In fiscal 2005,  our global sales  increased  30.3% to $97.2  million
from $74.6  million in 2004,  with an  82%-18%  split in favor of our  Telecom
Division.

TELECOM DIVISION

         In fiscal  2005,  sales of our Telecom  Division  increased  36.1% to
$80.1  million  from $58.9  million in 2004.  Since the second  half of fiscal
2004,  we have  benefited  from an  increased  demand  for our test  solutions
following  the  deployment  of fiber deeper into access  networks  (FTTx).  In
fiscal 2005, we consolidated  our leadership  position in the FTTx test market
by recognizing  significant  revenue from two leading U.S. carriers  deploying
fiber in their access networks.  Our largest  customer,  who purchased several
orders of FTTx test equipment,  accounted for 28.2% of telecom sales in fiscal
2005 (17.5% in 2004). In addition, the positive spending environment helped us
increase our sales in 2005.

         Although sales of our protocol test products  increased  sequentially
each quarter in fiscal 2005 and reached  more than 10% of Telecom  revenues in
the  fourth  quarter of 2005,  they still fell below 10% for the whole  fiscal
year. Our  penetration  of the protocol test market has been modest since,  in
2003, we refocused our efforts onto  next-generation  solutions,  which are at
the basis of the whole trend toward IP  convergence.  We expect that  protocol
sales will equal optical sales on a medium- to long-term  basis given that the
protocol  test market is more than double the size of the optical test market,
our rich  product  pipeline  in  protocol  testing,  and  increasing  customer
traction. We remain confident that the solid product portfolio we are building
for this crucial end-market will lead to long-term growth for EXFO.

LIFE SCIENCES AND INDUSTRIAL DIVISION

         In fiscal 2005,  sales of our Life Sciences and  Industrial  Division
increased  8.6% to $17.1 million from $15.7  million in 2004.  The increase in
sales in fiscal 2005, compared to 2004, is mainly due to market-share gains in
the fluorescence  illumination market as well as increased sales activities in
the curing market.

         Overall,  for the two divisions,  net accepted orders increased 35.6%
to  $101.7  million  in  fiscal  2005  from  $75.0  million  in 2004.  Our net
book-to-bill  ratio  rose to 1.05 in  fiscal  2005,  from  1.00 in  2004.  The
increased  demand for our test solutions for FTTx  applications,  market-share
gains in the  telecommunications  and  life  sciences  markets  as well as the
slight  improvement in the  telecommunications  market  environment  helped us
increase our bookings year-over-year.

         For the upcoming quarters,  we expect the sales split between the two
divisions to remain in the same range as for fiscal 2005.

FISCAL 2004 VS. 2003

         In fiscal 2004,  our global sales  increased  20.5% to $74.6  million
from  $61.9  million  in 2003,  with a 79%-21%  split in favor of our  Telecom
Division.

                                      52
<PAGE>

TELECOM DIVISION

         In fiscal  2004,  sales of our Telecom  Division  increased  20.8% to
$58.9 million from $48.8 million in 2003. In 2004, despite a relatively stable
carrier  spending  environment  compared to the previous year, we continued to
gain market  share,  which  helped us increase  our sales  year-over-year.  We
believe  these  market-share  gains are  mainly  attributable  to our  optical
field-testing products,  which represent our traditional core business,  since
sales of our  protocol-layer  test solutions  represented just over 10% of our
Telecom sales in fiscal 2004. In addition, we benefited from a slight recovery
in the telecom system and optical  manufacturing  markets.  Finally,  revenues
from FTTx test solutions were higher than expected,  especially with a leading
U.S. carrier, which contributed to our sales increase.

LIFE SCIENCES AND INDUSTRIAL DIVISION

         In fiscal 2004,  sales of our Life Sciences and  Industrial  Division
increased  19.5% to $15.7 million from $13.2 million in 2003.  The increase in
sales is due to the greater demand for our high-precision assembly solutions.

GEOGRAPHIC DISTRIBUTION

         During fiscal 2005, sales to the Americas,  Europe-Middle East-Africa
(EMEA) and Asia-Pacific (APAC) accounted for 68%, 20% and 12% of global sales,
respectively.  Our sales to the Americas,  which increased 34% year-over-year,
benefited  from the  recent  deployments  of fiber  deeper in access  networks
(mainly in the United States).  Our sales to EMEA increased more significantly
(42%)  year-over-year,  mainly due to  market-share  gains in both  divisions,
following our efforts to develop this important end-market. Finally, our sales
to APAC remained flat in dollars year-over-year.  A significant portion of our
sales to this region of the world are made through  price-driven  tenders that
may  vary in  number  and  importance  from  quarter  to  quarter.  Also,  the
competitive landscape in this market led to pricing pressure,  which prevented
us from increasing our sales year-over-year.

         The  geographic  distribution  of our sales  remained  unchanged as a
percentage  of sales in fiscal 2004,  compared to 2003,  since all  geographic
areas had the same growth level.  Sales to Americas,  EMEA and APAC  accounted
for 66%, 18% and 16% of global sales, respectively, for both fiscal years.

         Through our two  divisions,  we sell our products to a broad range of
customers,  including  network service  providers,  cable  operators,  optical
system and component manufacturers,  as well as customers in the life sciences
and  high-precison  assembly  sectors.  In fiscal 2004 and 2005,  one customer
represented  more than 10% of our sales with 13.8% of sales ($10.3 million) in
fiscal  2004 and 23.3% of sales  ($22.6  million)  in 2005.  During  2003,  no
customer  accounted  for more than 10% of our sales.  In fiscal 2005,  our top
three customers accounted for 28.4% of sales, compared to 20.8% in 2004.


GROSS MARGIN

         Gross margin  amounted to 54.7%,  53.7% and 41.6% of sales for fiscal
2005, 2004 and 2003, respectively.


                                      53
<PAGE>

FISCAL 2005 VS. 2004

         The increase in our gross  margin in fiscal  2005,  compared to 2004,
can be explained by the following  factors.  First, we were able to reduce our
cost of goods sold by better  leveraging  our supplier  base and by developing
innovative new products with a  cost-effective  design.  Also, the significant
rise in sales (30.3% year-over-year)  resulted in an increase in manufacturing
activities,  allowing  us to  better  absorb  our fixed  manufacturing  costs.
Furthermore,  streamlined  operations  following our consolidation  actions in
fiscal 2004 and 2005 and cost-reduction programs allowed us to further improve
our gross margin. In addition, the shift in the geographic distribution of our
sales resulted in more sales made to the Americas market,  where gross margins
tend to be higher because we sell direct to the customers. However, a stronger
Canadian dollar, compared to the US dollar, prevented us, to some extent, from
further  improving  our  gross  margin  as some  cost of  sales  elements  are
denominated  in Canadian  dollars.  As well,  the  different  customer mix and
aggressive  pricing  pressure  observed in fiscal 2005 also  prevented us from
further improving our gross margin.

         Over the past months,  we adjusted the design of some of our products
and we experienced higher sales than expected.  Consequently,  we were able to
reuse excess inventories that were written off during the telecom downturn for
approximately  $1.6  million in fiscal  2005,  or 1.7% of sales,  compared  to
approximately $600,000 or 0.8% of sales in 2004. Inventory write-offs recorded
during the telecom  downturn  were based on  management  best estimate at that
time.

FISCAL 2004 VS. 2003

         The increase in our gross  margin in fiscal  2004,  compared to 2003,
can be  explained  by  several  factors.  First,  the  rise  in  sales  (20.5%
year-over-year)  helped  increase our gross  margin.  Increased  manufacturing
activities  allowed us to better  absorb  our fixed  manufacturing  costs.  In
addition,  our  cost-reduction  measures,  the  consolidation of manufacturing
sites and our enhanced efficiency further contributed to the increase in gross
margin.  However,  a  stronger  Canadian  dollar,  compared  to the US  dollar
year-over-year, prevented us, to some extent, from further improving our gross
margin as some cost of sales  elements are  denominated  in Canadian  dollars.
Finally,  the gross margin  recorded in fiscal 2003  included a charge of $4.1
million, or 6.7% of sales, for excess and obsolete  inventories and an unusual
gain of $473,000, or 0.7% of sales.

OUTLOOK FOR FISCAL 2006

         Considering  the  expected  sales  growth in 2006,  the effect of our
recent consolidation  actions,  the cost-effective  design of our products and
our tight control on operating costs, we expect our gross margin to improve in
fiscal 2006. However, our gross margin may fluctuate  quarter-over-quarter  as
our sales may  fluctuate.  Furthermore,  our gross  margin  can be  negatively
affected by increased  competitive  pricing pressure,  increased  obsolescence
costs,  shifts in product mix,  under-absorption  of fixed manufacturing costs
and  increases  in  product  offerings  by other  suppliers  in our  industry.
Finally,  a potential  increase in the strength of the  Canadian  dollar would
have a negative impact on our gross margin in 2006.


                                      54
<PAGE>

SELLING AND ADMINISTRATIVE

         Selling and administrative expenses were $31.8 million, $25.9 million
and $27.0 million for fiscal 2005, 2004 and 2003, respectively.

         As  a  percentage  of  sales,  selling  and  administrative  expenses
amounted  to  32.7%,   34.7%  and  43.6%  for  fiscal  2005,  2004  and  2003,
respectively.

FISCAL 2005 VS. 2004

         The increase in our selling and administrative expenses in dollars in
fiscal 2005,  compared to 2004, is mainly due to our decision to significantly
increase  our  sales   activities  to  better  leverage  the  significant  R&D
investments  of the prior years which  resulted in highest sales and marketing
expenditures (including head-counts). In addition, our significant increase in
revenues  allowed us to reduce our  selling and  administrative  expenses on a
percentage   basis.   In   addition,   our   commission   expenses   increased
year-over-year,  especially  due to the  increase  in  sales  to the  Americas
market; which resulted in higher sales and marketing  expenditures  (including
head-counts).  Furthermore,  a stronger  Canadian  dollar,  compared to the US
dollar  year-over-year,  as more than half of these are  incurred  in Canadian
dollars.  Also,  stock-based  compensation  costs were  higher in fiscal  2005
($626,000)  than  in 2004  ($265,000),  further  increasing  our  selling  and
administrative expenses year-over-year.  Finally, costs to comply with Section
404 of the  Sarbanes-Oxley Act of 2002 further increased our SG&A (selling and
administrative) year-over-year. However, we were able to mitigate the increase
in our selling and administrative expenses as well as reduce these expenses in
percentage of sales year-over-year due to tight cost-control  measures and the
consolidation of our Life Sciences and industrial Division.  In addition,  our
significant  increase  in  revenues  allowed  us to  reduce  our  selling  and
administrative expenses on a percentage basis.

FISCAL 2004 VS. 2003

         In  fiscal  2004,  thanks  to our  restructuring  actions  and  tight
cost-control  measures,  we were able to reduce our selling and administrative
expenses by 4%  year-over-year,  while our sales  increased 20.5% in that same
period.  However,  several  factors  prevented us from further  reducing these
expenses  year-over-year.  A higher sales  volume in fiscal 2004,  compared to
2003, caused our commission and marketing  expenses to increase.  In addition,
since September 1, 2003, we account for stock-based compensation costs related
to  awards   granted  to  our   employees,   which   caused  our  selling  and
administrative  expenses to increase  year-over-year.  Furthermore,  in fiscal
2003,  we recorded an unusual  gain of $239,000  related to a grant  recovery.
Finally, a stronger Canadian dollar, compared to the US dollar year-over-year,
further increased our selling and administrative  expenses,  as more than half
of these are incurred in Canadian dollars.

OUTLOOK FOR FISCAL 2006

         For fiscal 2006, we expect our selling and administrative expenses to
increase in dollars and remain  relatively stable as a percentage of sales. In
particular,  we expect our  commission  expenses to  increase as sales  volume
increases.  Also,  considering  our goal of becoming the leading player in the
telecom test and measurement  space, we will intensify our sales and marketing
efforts,  both domestic and international,  which will also cause our expenses
to rise.  Finally, a potential increase in the strength of the Canadian dollar
would also cause our selling and administrative expenses to increase.

                                      55
<PAGE>

RESEARCH AND DEVELOPMENT

GROSS RESEARCH AND DEVELOPMENT EXPENSES

         Gross research and development expenses totaled $15.9 million,  $15.7
million and $17.1 million for fiscal 2005, 2004 and 2003,  respectively.  As a
percentage  of sales,  gross  research and  development  expenses  amounted to
16.3%, 21.0% and 27.7% for fiscal 2005, 2004 and 2003, respectively, while net
research and  development  expenses  accounted for 12.5%,  16.6% and 25.6% for
these respective periods.

FISCAL 2005 VS. 2004

         We incurred most of our gross  research and  development  expenses in
Canadian dollars as we have  consolidated most of our research and development
activities in Canada.  Consequently,  the significant increase in the strength
of the Canadian dollar,  compared to the US dollar year-over-year,  caused our
gross research and development  expenses to increase in fiscal 2005,  compared
to 2004. However, this increase was mostly offset by the decrease in our gross
research and development expenses in our Life Sciences and Industrial Division
following the  consolidation of this Division in Toronto.  The decrease in our
gross  research and  development  expenses as a percentage  of sales in fiscal
2005 compared to 2004, is directly attributable to the significant increase in
sales year-over-year while these expenses remained relatively flat.

FISCAL 2004 VS. 2003

         The decrease in our gross research and development expenses in fiscal
2004,  compared to 2003,  both in dollars and as percentage  of sales,  can be
explained  by  several  factors.   First,  our  restructuring   actions,   the
consolidation  of our  protocol  operations  in  Montreal,  as well  as  tight
cost-control measures,  contributed to the reduction of our gross research and
development expenses year-over-year.  In addition, before the end of the year,
we refocused the research and development  activities of our Life Sciences and
Industrial  Division.  Finally, mix and timing of our research and development
projects,  especially in our Telecom  Division,  caused our gross research and
development expenses to decrease year-over-year. On the other hand, a stronger
Canadian dollar, compared to the US dollar year-over-year, increased our gross
research and development  expenses,  as most of these are incurred in Canadian
dollars.

TAX CREDITS AND GRANTS

         Tax  credits  and grants from the  Canadian  federal  and  provincial
governments  for research and development  activities were $3.7 million,  $3.3
million and $3.6 million for fiscal 2005, 2004 and 2003, respectively.

FISCAL 2005 VS. 2004

         The increase in our tax credits in fiscal 2005,  compared to 2004, is
mainly related to the increase in our eligible gross research and  development
expenses in Canada,  since we were entitled to similar grant  programs and tax
credits  year-over-year.  Following  the  consolidation  of our  research  and
development  activities  in  Canada,  we  incurred  most of our  research  and
development  expenses  in  Canada,  where  we are  entitled  to  research  and
development tax credits.

                                      56
<PAGE>

FISCAL 2004 VS. 2003

         The decrease in our tax credits and grants in fiscal  2004,  compared
to 2003, is mainly  related to the decrease in our eligible gross research and
development expenses incurred in Canada, since we were entitled to similar tax
credits year-over-year.

         We  still  invested   significantly   in  research  and   development
activities in fiscal 2005 as we firmly believe that innovation and new product
introductions  are  key  in  gaining  market  share  in the  current  economic
environment  and  ensuring  the  long-term  growth  and  profitability  of the
company.

OUTLOOK FOR FISCAL 2006

         For  fiscal  2006,  we expect to  increase  our  gross  research  and
development  expenses in proportion  to our  revenues,  as a reflection of our
focus on  innovation,  our desire to gain market  share and our goal to exceed
customer needs and expectations. Also, a potential increase in the strength of
the Canadian dollar would cause our net research and  development  expenses to
increase, as most of these are incurred in Canadian dollars.

AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT

         For fiscal 2005,  amortization  of property,  plant and equipment was
$4.3 million,  compared to $4.9 million in 2004 and $5.2 million in 2003.  The
decrease in amortization  expenses in fiscal 2005,  compared to 2004,  despite
the  significant  increase in the strength of the Canadian  dollar compared to
the US dollar, is mainly due to the fact that some of our property,  plant and
equipment became fully amortized during fiscal 2004.

OUTLOOK FOR FISCAL 2006

         For fiscal 2006,  despite a potential increase in the strength of the
Canadian dollar,  we expect the amortization of property,  plant and equipment
to decrease  compared to 2005  considering  that some of these  assets  became
fully amortized in 2005 or will become fully amortized in 2006.

AMORTIZATION OF INTANGIBLE ASSETS

         In conjunction  with the business  combinations we completed over the
past few years, we recorded  intangible assets,  primarily  consisting of core
technology.  These intangible assets resulted in amortization expenses of $4.8
million,  $5.1  million  and $5.7  million  for  fiscal  2005,  2004 and 2003,
respectively.  The decrease in amortization  expenses in fiscal 2005, compared
to 2004, is mainly due to the fact that some of our core  technologies  became
fully amortized during fiscal 2005.

         The decrease in  amortization  expenses in fiscal  2004,  compared to
2003,  is the result of the $2.9  million  impairment  charge  recorded in the
third quarter of fiscal 2003.

                                      57
<PAGE>

OUTLOOK FOR FISCAL 2006

         For fiscal 2006, we expect the  amortization of intangible  assets to
approximate  $3.3  million,  assuming  no  acquisitions  are made  during this
period.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

FISCAL 2003

         In May 2003, we performed our annual  impairment test of goodwill for
all  our  reporting  units,  except  for  newly  acquired  EXFO  Gnubi.  Also,
considering  market  conditions  in the  telecommunications  industry  and the
persisting  unfavorable  conditions affecting our subsidiaries'  industries at
that time,  we reviewed the carrying  value of  intangible  assets  related to
these reporting units, consisting primarily of acquired core technology.

         As a result of this assessment,  we concluded that the carrying value
of goodwill  related to EXFO  Burleigh  and the carrying  value of  intangible
assets related to EXFO Burleigh and EXFO Photonic Solutions were impaired, and
we recorded an impairment  charge of $4.5 million to write down goodwill and a
pre-tax  impairment  charge  of $2.9  million  to  write  down  acquired  core
technology.  Of the total impairment charge of $7.4 million,  $6.9 million was
related to EXFO  Burleigh  for  goodwill  and  acquired  core  technology  and
$555,000 was related to EXFO Photonic Solutions for acquired core technology.

         The  write-down  of goodwill and  acquired  core  technology  of EXFO
Burleigh  was  required,  considering  that we exited  the  optical  component
manufacturing  automation  business,  whose  revenue  potential  represented a
long-term  prospect.  The  write-down  of acquired core  technology  from EXFO
Photonic  Solutions was required  because  revenue  potential  related to this
long-lived  asset was less than  expected  in the short and medium term due to
the state of the market at the time.

         However, no impairment of goodwill and intangible assets was required
for  EXFO  Protocol  since  we  believed  that  revenue   potential  from  the
protocol-layer  testing  market  would  remain  strong in the short and medium
term.

         For the purposes of estimating  fair value,  we used a combination of
discounted  future cash flows and a market  approach  (sales  multiples).  The
discounted  future cash flows were  estimated  using periods  ranging  between
eight and ten years, discount rates ranging between 15% and 20%, and an annual
growth rate  ranging  between  nil and 35%.  The sales  multiples  used in the
market approach ranged between 0.7 and 2.3. The assumptions used reflected our
best estimates.

FISCAL 2004 AND 2005

         In fiscal 2004, we put one of our buildings located in Quebec City up
for sale and  received,  at the  beginning of fiscal  2005, a formal  purchase
offer for this building.  Based on that offer,  we concluded that the building
was impaired and we recorded an impairment  charge of $620,000 in fiscal 2004,
representing  the  excess  of the  carrying  value  of the  building  over its
expected selling price. However, during the first quarter of fiscal 2005, some
conditions of the formal offer were not met and the offer was declined. During
fiscal 2005, we withdrew the building from the market.  As at August 31, 2004,
the building was not shown as a long-lived  asset held for sale in the balance

                                      58
<PAGE>

sheet  because it was still used and,  consequently,  it was not available for
immediate sale. This building reports to the Telecom Division.

         In May 2004 and 2005,  we performed  our annual  impairment  test for
goodwill and concluded that it was not impaired. Goodwill will be reviewed for
impairment in May 2006, or prior if events or circumstances  indicate it might
be impaired.


RESTRUCTURING AND OTHER CHARGES

FISCAL 2003

         In fiscal 2003, we implemented a restructuring plan to align our cost
structure with market conditions. Under that plan, we recorded charges of $4.1
million,  including  $2.8 million in severance  expenses for the 172 employees
who were terminated  throughout the company,  $512,000 for impaired long-lived
assets and $855,000 for future  payments on exited leased  facilities  located
around the world.  Our  estimation  of the fair value of such future  payments
took into account the estimated  sublease  rentals over the remaining terms of
the exited leases.

FISCAL 2004 AND 2005

         In fiscal 2004, the Board of Directors  approved a restructuring plan
to consolidate  the  operations of our Life Sciences and Industrial  Division,
transferring  EXFO  Burleigh's  operations  mainly to EXFO Photonic  Solutions
facilities  in Toronto.  The  consolidation  process,  which started in August
2004, was completed during fiscal 2005.

         Overall,  for that process, we incurred $2.5 million in restructuring
and other charges from which $2.0 million were recorded in fiscal 2004 and the
remaining $482,000 were recorded in fiscal 2005. The overall costs, which were
recorded in the  restructuring and other charges in the statements of earnings
of the  corresponding  years, are detailed as follows:  $855,000 for severance
expenses for the layoff of all employees of EXFO Burleigh; $1.3 million mainly
for the impairment of the EXFO Burleigh  building;  and the remaining $399,000
for other  expenses such as training and  recruiting  expenses and transfer of
assets.

         The EXFO Burleigh building was put up for sale in fiscal 2004, but it
is not yet sold because of the difficult real estate market in Rochester,  NY.
The building is available  for sale in its present  condition and we expect to
sell the property within the next twelve months.  Consequently,  in accordance
with  CICA  handbook,   section  3475,  "Disposal  of  Long-Lived  Assets  and
Discontinued  Operations",  it was shown in the balance  sheet as a long-lived
asset held for sale. The fair value used to determine the  impairment  loss of
the building  represents our best estimate of its selling price based upon the
municipal  valuation.  Since  September  1, 2004,  the  building  is no longer
amortized.

         Finally,  in fiscal 2005, we recorded  adjustments of $190,000 to the
fiscal 2003 plan because actual  charges,  mainly for leased  equipment,  were
lower than expected.

         Our restructuring plans and cost-reduction  measures  represented our
best efforts to respond to the difficult market  conditions of the past years.
Although we believe  that such  restructuring  actions  were  appropriate  and
delivered the expected results,  changes in market or industry  conditions may
lead us to incur additional  restructuring actions and cost-reduction measures
in the coming years.

                                      59
<PAGE>

INTEREST AND OTHER INCOME

         Our interest income mainly resulted from our short-term  investments,
less  interests and bank charges.  Interest and other income  amounted to $2.5
million,  $1.4  million  and $1.2  million  for  fiscal  2005,  2004 and 2003,
respectively.  The  increase in interest  income in fiscal  2005,  compared to
2004,  is due in part to the increase in our cash and  short-term  investments
following our public  offering in February 2004, the cash flows from operating
activities and the increase in interest rates year-over-year.  Also, in fiscal
2005,  we  recovered  R&D tax  credits  earned in  previous  years and we were
granted $249,000 in interest by the tax authorities.

         In fiscal 2004, we recorded one-time revenue of $265,000 for the sale
of non-core  technologies.  Without  this  revenue,  interest and other income
would have been relatively flat compared to 2003.

         Assuming  no  acquisitions  are made in fiscal  2006,  we expect  our
interest  income to increase  during that  fiscal year should  interest  rates
increase and because our cash and short-term  investments should increase with
cash flows from operating activities.


FOREIGN EXCHANGE LOSS

         Foreign  exchange loss  amounted to $1.3  million,  $278,000 and $1.6
million for fiscal 2005, 2004 and 2003, respectively.

         Foreign  exchange gains and losses are the result of the  translation
of operating  activities  denominated  in  currencies  other than the Canadian
dollar.  The  significant  exchange  loss  recorded  during fiscal 2005 is the
result  of the  significant  increase  in the  value  of the  Canadian  dollar
compared to the US dollar in fiscal 2005. For instance,  the year-end exchange
rate was  Cdn$1.3167 = US$1.00 in fiscal 2004 compared to Cdn$1.1889 = US$1.00
in 2005,  representing  an increase of nearly 10% in the value of the Canadian
dollar.  The average  exchange rate for fiscal 2005 was  Cdn$1.2315 = US$1.00,
compared to Cdn$1.3301 = US$1.00 in 2004.

         During the same period last year, the Canadian  dollar value remained
relatively  stable  throughout the year,  resulting in a slight  exchange loss
during that  period.  In addition,  higher  levels of activity in fiscal 2005,
compared to 2004, further increased the foreign exchange loss in 2005.

         It should be noted that additional foreign exchange rate fluctuations
flow  through  the P&L line items as a  significant  portion of our  operating
elements are denominated in Canadian  dollars and and we report our results in
US dollars.

         We manage  our  exposure  to  currency  risks with  forward  exchange
contracts.  In addition,  some of our Canadian entities' operating  activities
are denominated in US dollars or other  currencies,  which further hedges this
risk.  However,  a  potential  increase in the value of the  Canadian  dollar,
compared  to the US  dollar,  would have a  negative  impact on our  operating
results.


                                      60
<PAGE>

INCOME TAXES

         Our income tax expense was $2.6 million for fiscal 2005,  compared to
an income tax  recovery  of  $986,000  for 2004,  and an income tax expense of
$15.1 million for 2003.

         The income tax  expense  recorded in fiscal  2005  represents  income
taxes  payable in some  specific  tax  jurisdictions,  mainly at the  Canadian
federal  level.  Income  taxes  payable at this  specific  level is reduced by
research and development tax credits that are recorded  against gross research
and development expenses.

         The income tax recovery  recorded in fiscal 2004 is mainly due to the
$1.4 million unusual income tax recovery  recorded during that year, offset in
part by income taxes payable in some specific tax jurisdictions, mainly at the
Canadian  Federal  level.  The unusual tax  recovery  was due to the  receipt,
during that period,  of income taxes paid in previous  periods  following  the
reception of a tax assessment.

         Since fiscal 2003, we have been recording a full valuation  allowance
against our future  income tax assets  because it is more likely than not that
these assets will not be recovered.  The valuation  allowance will be reversed
once  management  will have  concluded  that  realization of future income tax
assets  is more  likely  than  not.  Consequently,  our  income  tax rates are
distorted  compared  to  statutory  rates.  Please  refer  to  note  16 of our
consolidated financial statements included elsewhere in this Annual Report for
a full reconciliation of the income tax provision.


LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS AND CAPITAL RESOURCES

         As at August 31, 2005, cash and short-term  investments  consisted of
$112.0 million,  while our working capital was at $135.3 million. Our cash and
short-term  investments  increased  $22.9 million in fiscal 2005,  compared to
2004, mainly due to the cash flows from operating  activities of $14.0 million
as well as an  unrealized  foreign  exchange gain of $10.0 million on cash and
short-term  investments.  However,  this increase was partially  offset by the
cash payment of $1.5 million for the purchase of property, plant and equipment
as well as intangible  assets.  The unrealized  foreign exchange gain resulted
from the translation,  in US dollars, of our Canadian  dollar-denominated cash
and  short-term  investments  and was recorded in the  cumulative  translation
adjustment in the balance sheet.

         Our short-term  investments consist of commercial paper issued by six
high-credit quality corporations and trusts;  therefore,  we consider the risk
of  non-performance  of these  financial  instruments  to be  remote.  For the
purposes of managing our cash position,  we have established a cash management
policy,  which we follow and  monitor  on a regular  basis.  These  short-term
investments  will be used for  working  capital  and other  general  corporate
purposes, including potential acquisitions.

         We believe that our cash on hand and short-term investments, combined
with an available  line of credit of $5.8 million,  will be sufficient to meet
our liquidity and capital  requirements for the foreseeable  future.  However,
possible  additional  operating  losses  and/or  possible  investments  in  or
acquisitions of complementary businesses, products or technologies may require
additional financing. There can be no assurance that additional debt or equity

                                      61
<PAGE>

financing  will be available  when required or, if  available,  that it can be
secured on  satisfactory  terms.  Our line of credit  bears  interest at prime
rate.

         The following table summarizes our commitments as at August 31, 2005:

<TABLE>
<CAPTION>
YEARS ENDING                                                                      2010 AND
AUGUST 31,              2006           2007            2008            2009          LATER           TOTAL
-------------------------------------------------------------------------------------------------------------
<S>                <C>            <C>             <C>             <C>            <C>            <C>
Long-term debt     $   134,000    $   147,000     $    51,000     $       --     $        --    $   332,000
Operating
   leases            1,050,000        952,000         632,000        584,000       1,029,000      4,247,000
-------------------------------------------------------------------------------------------------------------

Total
commitments        $ 1,184,000    $ 1,099,000     $   683,000     $  584,000     $ 1,029,000    $ 4,579,000
=============================================================================================================
</TABLE>


SOURCES AND USES OF CASH

         We  finance  our   operations   and  meet  our  capital   expenditure
requirements mainly through cash flows from operating  activities,  the use of
our cash and  short-term  investments  as well as the issuance of  subordinate
voting shares.

         In fiscal 2004,  pursuant to a public  offering in Canada,  we issued
5.2  million  subordinate  voting  shares for net  proceeds  of $29.2  million
(Cdn$38.4  million) after deducting  underwriting  commissions of $1.2 million
(Cdn$1.6 million). These net proceeds were recorded as short-term investments.
Cash flows provided by financing  activities in fiscal 2004 were  attributable
to the net proceeds of this offering.

OPERATING ACTIVITIES

         Cash flows provided by operating activities amounted to $14.0 million
in fiscal 2005, compared to $751,000 in 2004 and $5.6 million in 2003.

         Cash flows  provided  by  operating  activities  in fiscal  2005 were
mainly attributable to the net earnings after items not affecting cash of $9.1
million  and the  positive  net  change in  non-cash  operating  items of $4.9
million.  This net  change in  non-cash  operating  items is mainly due to the
decrease  of $6.1  million of our  income  taxes and tax  credits  recoverable
following  the  collection,  during the year,  of income taxes and tax credits
recoverable from previous periods.  On the other hand, our accounts receivable
increased by $838,000 and our inventories increased by $699,000.  The increase
of  our  accounts  receivable  is  related  to  the  increase  in  sales.  Our
inventories  slightly  increased  despite the significant rise in sales due to
tight inventory management.

         Cash flows  provided  by  operating  activities  in fiscal  2004 were
mainly attributable to the net earnings after items not affecting cash of $5.7
million, offset in part by the net increase of our non-cash operating items of
$4.9 million;  that is, our accounts receivable increased by $2.7 million, our
income  taxes and tax credits  recoverable  increased  by $2.5 million and our
inventories decreased by $1.0 million. The increase in our accounts receivable
is  directly  related to the  significant  sales  growth in fiscal  2004.  The
increase in our income taxes and tax credits  recoverable is mainly due to the
payment  during the year of income  taxes and to the  recognition,  during the
year, of research and development tax credits not yet recovered.  On the other
hand,  our  increased  sales level  combined with tight  inventory  management
enabled us to reduce our inventories overall.

                                      62
<PAGE>

         We have delivered  positive cash flows from operating  activities for
the last three  fiscal  years,  despite  the fact that we posted a net loss in
each of these years.

INVESTING ACTIVITIES

         Cash flows used by  investing  activities  totaled  $13.0  million in
fiscal 2005, compared to $29.7 million in 2004 and $9.9 million in 2003.

         In  fiscal  2005,  we  acquired  $11.5  million  worth of  short-term
investments  with cash flows from  operating  activities  and cash on-hand and
paid $1.5 million for the purchase of property, plant and equipment as well as
intangible assets.

         In  fiscal  2004,  we  acquired  $28.6  million  worth of  short-term
investments with the net proceeds of the public offering. In addition, we paid
$1.1  million for the  purchase of  property,  plant and  equipment as well as
intangible assets.


FORWARD EXCHANGE CONTRACTS

         We utilize forward exchange  contracts to manage our foreign currency
exposure.  Our policy is not to utilize those derivative financial instruments
for trading or speculative purposes.

         Our forward exchange  contracts,  which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting;  therefore, foreign
exchange  translation gains and losses on these contracts are recognized as an
adjustment of the revenues when the corresponding hedged sales are recorded.

         As at August  31,  2005,  we held  contracts  to sell US  dollars  at
various forward rates, which are summarized as follows:

                                      CONTRACTUAL             WEIGHTED AVERAGE
 EXPIRY DATES                             AMOUNTS    CONTRACTUAL FORWARD RATES
------------------------------------------------------------------------------

September 2005 to August 2006     $    26,000,000                       1.2630
September 2006 to November 2007         7,600,000                       1.2500


         As at  August  31,  2005,  the  fair  value of our  forward  exchange
contracts,  which represents the difference between their contractual  amounts
and their current  trading  value,  amounted to an  unrecognized  gain of $2.9
million.


RELATED-PARTY TRANSACTIONS

         In fiscal 2003,  we acquired a building  from a company  owned by the
President of EXFO for a cash  consideration of $930,000.  This transaction was
measured at the fair market value since it was not conducted during the normal
course of  operations,  the change in  ownership  interest in the building was
substantive and the fair market value was supported by independent appraisal.

                                      63
<PAGE>

         In addition,  for the years ended August 31, 2003 and 2004, we leased
facilities  from the company owned by the President of EXFO. The annual rental
expense  amounted to $331,000 and nil,  respectively.  The rental  expense for
fiscal  2003  included  $234,000  for  future  payments  on an  exited  leased
facility.  As at August  31,  2004,  restructuring  charges  payable  included
$194,000 due to the company owned by the President of EXFO in connection  with
this exited leased  facility.  In September  2004,  EXFO was released from its
obligations  under that lease,  and it paid the full amount due to the related
company.  These rental  expenses  were measured at the fair market value since
they were incurred during the normal course of operations.


CONTINGENCY

         As  discussed  in note 12 to our  consolidated  financial  statements
included  elsewhere in this Annual Report,  EXFO was named as a defendant in a
U.S.  securities  class action related to its initial public offering (IPO) in
June 2000.  The complaints  allege that the  prospectus  and the  registration
statement  for the IPO  failed to  disclose  that the  underwriters  allegedly
received  excessive  commissions and that the  underwriters and some investors
collaborated   in  order  to  inflate  the  price  of  EXFO's   stock  in  the
after-market.

         In  June  2003,   a  committee  of  the  EXFO's  Board  of  Directors
conditionally  approved a proposed  settlement  between the issuer defendants,
the individual  defendants,  and the plaintiffs.  If approved,  the settlement
would provide, among other things, a release of the EXFO and of the individual
defendants for the conduct alleged in the action to be wrongful in the amended
complaint.  EXFO would agree to  undertake  other  responsibilities  under the
settlement,  including agreeing to assign away, not assert, or release certain
potential claims EXFO may have against its underwriters.  Any direct financial
impact of the proposed  settlement is expected to be borne by EXFO's insurance
carriers.

         On June 25, 2004, the Plaintiffs  moved for  Preliminary  Approval of
the settlement.  The court granted the preliminary approval motion on February
15, 2005,  subject to certain  modifications.  On August 31,  2005,  the court
issued  a  preliminary  order  further  approving  the  modifications  to  the
settlement and certifying the settlement classes. The court also appointed the
Notice  Administrator  for the  settlement  and ordered that the notice of the
settlement  be  distributed  to all  settlement  class  members  beginning  on
November 15, 2005, and completed by January 15, 2006. The settlement  fairness
hearing has been set for April 26, 2006.  Following the hearing,  if the court
determines  that the settlement is fair to the class  members,  the settlement
will be approved.  There can be no  assurance  that this  proposed  settlement
would be approved and  implemented in its current form, or at all.  Therefore,
it is not possible to predict the final outcome of the case, nor determine the
amount of any possible  losses.  If the settlement  process  fails,  EXFO will
continue to defend its position in this litigation that the claims against it,
and its officers, are without merit.  Accordingly,  no provision for this case
has been made in the consolidated financial statements as at August 31, 2005.


                                      64
<PAGE>


SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS

SHARE CAPITAL

         As at November 3, 2005,  EXFO had 37,900,000  multiple  voting shares
outstanding,  entitling to ten votes each, and 30,674,617  subordinate  voting
shares  outstanding.  The multiple  voting shares and the  subordinate  voting
shares are unlimited as to number and without par value.

LONG-TERM INCENTIVE PLAN

         In January 2005,  EXFO made certain  amendments to the existing Stock
Option Plan,  including the renaming of the plan to Long-Term  Incentive Plan,
which now includes restricted share units (RSUs) in addition to stock options.
RSUs are  "phantom"  shares  that rise and fall in value based on the value of
EXFO's  subordinate  voting shares and are redeemable  for actual  subordinate
voting  shares or cash, at the  discretion  of the Board of Directors,  on the
vesting dates  established by the Board of Directors at the time of grant. The
vesting  dates are  subject to a minimum  of three  years and a maximum of ten
years from the award date.  RSUs  granted  under the plan expire at the latest
ten years from the date of grant.

DEFERRED SHARE UNIT PLAN

         In January 2005,  EXFO  established a Deferred  Share Unit (DSU) Plan
for the members of the Board of  Directors  as part of their  annual  retainer
fees.  Each DSU entitles the Board members to receive one  subordinate  voting
share.  DSUs  are  acquired  on the  date of grant  and  will be  redeemed  in
subordinate  voting shares when the Board member will cease to act as Director
of EXFO.

         The aggregate  number of  subordinate  voting shares covered by stock
options,  RSUs and DSUs granted  under the  Long-Term  Incentive  Plan and the
Deferred  Share Unit Plan was  2,963,678  as at August 31,  2005.  The maximum
number of  subordinate  voting  shares  issuable  under these two plans cannot
exceed 6,306,153 shares.

         The following tables summarize  information about stock options, RSUs
and DSUs  granted to the members of the Board of Directors  and to  Management
and Corporate  Officers of the company and its  subsidiaries  as at August 31,
2005:

<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                               % OF ISSUED AND      AVERAGE
                      STOCK OPTIONS               NUMBER         OUTSTANDING     EXERCISE PRICE
--------------------------------------------- --------------- -----------------  ---------------
<S>                                                 <C>                 <C>      <C>
Chairman of the Board, President and CEO
(one individual)                                    168,424              6%      $       9.34
Board of Directors (five individuals)               194,375              7%      $       6.23
Management and Corporate Officers
(nine individuals)                                  340,091             12%      $      14.39
                                              --------------- -----------------  ---------------
                                                    702,890             25%      $      10.92
                                              =============== =================  ===============
</TABLE>

                                      65
<PAGE>


                  RESTRICTED SHARE UNITS         NUMBER       % OF ISSUED AND
                                                                OUTSTANDING
-------------------------------------------- ---------------  -----------------

Chairman of the Board, President and CEO
(one individual)                                   13,089                7%
Management and Corporate Officers
(nine individuals)                                151,096               86%
                                             ---------------  -----------------
                                                  164,185               93%
                                             ===============  =================

                   DEFERRED SHARE UNITS          NUMBER       % OF ISSUED AND
                                                                OUTSTANDING
-------------------------------------------- ---------------  -----------------

Board of Directors (five individuals)               23,734             100%
                                             ===============  =================


OFF-BALANCE SHEET ARRANGEMENTS

         As of August 31, 2005, our off-balance sheet  arrangements  consisted
of letters of guarantee and forward exchange contracts, which are respectively
described  in  details  in  note  12  and  18 to  our  consolidated  financial
statements, included elsewhere in this Annual Report.


VARIABLE INTEREST ENTITY

         As of August 31, 2005, we did not have  significant  interests in any
variable interest entities.


                                      66
<PAGE>


ITEM 6.           DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       DIRECTORS AND SENIOR MANAGEMENT

         The  following  table  sets  forth  information  about our  executive
officers, senior managers and Directors as of November 1, 2005.

<TABLE>
<CAPTION>
 NAME AND MUNICIPALITY OF RESIDENCE                     POSITIONS WITH EXFO
-----------------------------------       ----------------------------------------------------------
<S>                                       <C>
STEPHEN BULL                              Vice-President, Research and Development, Telecom Division
Cap-Rouge, Quebec

NORMAND DUROCHER                          Vice-President Human Resources
St-Sauveur, Quebec

ALLAN FIRHOJ                              Vice-President and General Manager, Life Sciences and
Georgestown, Ontario                      Industrial Division

BENOIT FLEURY                             Vice-President, Protocol-Layer Product Management and
Saint-Lazare, Quebec                      Business Development

ETIENNE GAGNON                            Vice-President, Optical-Layer Product Management and
Sillery, Quebec                           Customer Service

LUC GAGNON                                Vice-President, Telecom Manufacturing Operations
St-Augustin-de-Desmaures, Quebec

JUAN-FELIPE GONZALEZ                      Vice-President, Global Telecom Sales
Montreal, Quebec

GERMAIN LAMONDE                           Chairman of the Board, President and Chief Executive
Cap-Rouge, Quebec                         Officer

PIERRE MARCOUILLER                        Independent Director
Magog, Quebec

GUY MARIER                                Independent Director
Lakefield Gore, Quebec

PIERRE PLAMONDON, CA                      Vice-President, Finance and Chief Financial Officer
Quebec City, Quebec

BENOIT RINGUETTE                          Corporate Secretary and Legal Counsel
Quebec City, Quebec

DAVID A. THOMPSON                         Independent Director
Newton, North Carolina

ANDRE TREMBLAY                            Independent Director
Outremont, Quebec

MICHAEL UNGER                             Independent Lead Director
Woodbridge, Ontario
</TABLE>

         The address of each of our executive  officers,  senior  managers and
Directors is c/o EXFO  Electro-Optical  Engineering  Inc.,  400 Godin  Avenue,
Vanier,  Quebec,  Canada.  The  following is a brief  biography of each of our
executive officers, senior managers and Directors.

                                      67
<PAGE>

         STEPHEN  BULL  was   appointed  our   Vice-President,   Research  and
Development in December 1999. He joined us in July 1995 and held the positions
of Assistant  Director-Engineering  from  September  1997 to December 1999 and
Group Leader  (Engineering  Management) from July 1995 to September 1997. From
June 1990 to March  1995,  Mr. Bull held the  position of General  Manager and
Managing  Director  for Space  Research  Corporation,  a military  engineering
company  in  Belgium.  Mr.  Bull  holds  a  bachelor's  degree  in  Electrical
Engineering from Laval University in Quebec City, Canada.

         NORMAND DUROCHER was appointed  Vice-President  of Human Resources in
April 2004. In addition to managing the company's  human  resources  team, his
main  responsibility  is to develop and implement a human  resources plan that
supports  EXFO's  business  strategy.  Mr.  Durocher began his career in labor
relations  in the Cable  division of Nortel and then took on several key roles
at  Nortel  Networks  and  Nordx/CDT,  all  relating  to human  resources  and
operations.  Since then,  Normand Durocher has accumulated more than 25 years'
experience  in  operations   and  human   resources   management   within  the
telecommunications  industry.  Prior to joining EXFO, Mr. Durocher ran his own
human  resources  consulting  business.  Normand  Durocher holds a Bachelor of
Science from the  Universite de Montreal and also completed the Advanced Human
Resources program at Dalhousie University in Halifax, Nova Scotia, Canada

         ALLAN FIRHOJ was appointed  Vice-President and General Manager,  Life
Sciences  and  Industrial  Division in July 2003.  Prior to that,  he held the
position of General  Manager of EXFO Photonic  Solutions  Inc.  since November
2001. He is responsible for the overall strategic  direction and management of
the Life  Sciences and  Industrial  Division.  Mr.  Firhoj joined EFOS Inc. in
1996, where he was responsible for Sales,  Marketing and Business  Development
of the Dental Curing-Products Division. Following the sale of this division to
Dentsply  International  in 1997, he was  appointed  Director of Marketing and
Business  Development.  Mr.  Firhoj  continued  in this  capacity  until being
appointed to the position of General  Manager of EXFO Photonic  Solutions Inc.
Prior to joining the company,  Mr. Firhoj spent six years with The Horn Group,
a plastics  business  involved in medical  devices/instrumentation  and office
communication  equipment.  He  successively  held  the  positions  of ISO 9000
Implementation  Manager,  Technical  Sales  Manager as well as  Marketing  and
Business Development Manager. In this latter role, he successfully contributed
to increasing sales in their medical market by an annual average of 60% during
a three-year period. Mr. Firhoj holds a bachelor's degree in Political Science
from Bishop's University in Lennoxville, Quebec.

         BENOIT FLEURY was appointed  Vice-President,  Protocol-Layer  Product
Management and Business  Development  for our  protocol-layer  product line in
February 2004. His main  responsibility  consists in defining the product line
strategy and developing strategic partnerships to enhance our presence in this
market  segment.  Mr.  Fleury  has 20  years  of  experience  in  the  optical
telecommunications  industry.  He began his  career as a systems  engineer  at
Northern Telecom, and then progressed to various key positions in the areas of
product  management,  operations  engineering,  product  development,  account
marketing and product marketing - all associated with Nortel's leading optical
systems.   From  2001  to  2003,   prior  to  joining  EXFO,  Mr.  Fleury  was
Vice-President   of  Product  Line  Management  and  Marketing  at  Ceyba,  an
Ottawa-based  optical systems startup. Mr. Fleury holds a bachelor's degree in
Electrical  Engineering  from McGill  University as well as a master's degree,
also in Electrical Engineering, from Concordia University. He also completed a
Marketing Management Program from Duke University.

                                      68
<PAGE>

         ETIENNE GAGNON was appointed  Vice-President of Optical-Layer Product
Management and Customer  Service in May 2003. Mr. Etienne Gagon is not related
to Mr. Luc Gagnon. He is responsible for EXFO's general  marketing  direction,
on both the product  level and  communications  level,  and also  oversees our
customer service department.  For nearly three years, before returning to EXFO
in early  2003,  Mr.  Gagnon  was  Vice-President  of Sales and  Marketing  at
TeraXion,  an optical component  manufacturer based in Quebec City. Mr. Gagnon
began his career as a design engineer for Bombardier/Canadair, where he worked
on the Canadian Regional Jet project between 1990 and 1993. Later, he held the
position of Business  Development  Manager for France  Telecom in Hungary.  In
1994, he joined EXFO's  European  office as a Regional Sales  Manager,  and in
1996, he was brought back to Quebec City to head the OSP marketing  group. Mr.
Gagnon then went on to become the  Director of our Outside  Plant  division in
1998,  and remained in that  function  until he joined  TeraXion in 2000.  Mr.
Gagnon  holds a bachelor's  degree in  Mechanical  Engineering  from the Ecole
Polytechnique School of Engineering  (University of Montreal),  and a master's
degree  in  European   Business  from  the  Ecole  nationale   superieure  des
telecommunications in France.

         LUC  GAGNON  was  appointed  Vice-President,   Telecom  Manufacturing
Operations in May 2003. Mr. Luc Gagnon is not related to Mr.  Etienne  Gagnon.
He is  responsible  for  ensuring the smooth  operation  of all  manufacturing
activities, which include production, purchasing, product engineering, quality
assurance,   planning,   manufacturing  engineering,   product  configuration,
transportation and customs, as well as material resources. Prior to his recent
nomination,  Mr. Gagnon held the position of Production  Director  since 2000.
Before  joining EXFO,  he had similar  roles in several other  high-technology
companies.  He worked  for  Mendes  from 1999 to 2000,  for C-MAC from 1997 to
1999, for STERIS from 1993 to 1997 and for MITEL from 1991 to 1993. Mr. Gagnon
holds a bachelor's  degree in electrical  engineering  and master's  degree in
engineering, both from the Universite de Sherbrooke, in Canada.

         JUAN-FELIPE  GONZALEZ assumed the position of Vice-President,  Global
Telecom  Sales in July  2003.  Prior  to that he had been our  Vice-President,
International Sales since September 1998. From January 1997 to September 1998,
he was our  International  Sales  Director and, from September 1993 to January
1997, our Sales Manager for Latin America and the Caribbean.  Prior to joining
us in September  1993, Mr. Gonzalez was Marketing and Sales Director at Reyde,
Barcelona,  a plastics  technical  product  corporation in Spain. Mr. Gonzalez
holds a bachelor's degree in Industrial Chemistry from Complutense  University
of Madrid in Spain and a master's degree in Business  Administration  from the
School of Industrial Organization in Spain.

         GERMAIN LAMONDE,  a company founder,  has been Chairman of the Board,
President  and CEO of EXFO  since  its  inception  in  1985.  Mr.  Lamonde  is
responsible  for  the  overall  management  and  direction  of  EXFO  and  its
subsidiaries.  Mr.  Lamonde has served on the boards of several  organizations
such as the Canadian Institute for Photonic Innovations, the Pole QCA Economic
Development  Corporation  and the National Optics  Institute of Canada.  He is
also a  founding  member  and  Governor  of the  Canadian-based  International
Institute of Telecommunications and an Emeritus Member of the Canadian Academy
of Engineering.  Mr. Lamonde holds a bachelor's degree in physics  engineering
from the University of Montreal's School of Engineering,  a master's degree in
optics from Laval  University,  and is also a graduate  of the Ivey  Executive
Program offered by the University of Western Ontario.

         PIERRE  MARCOUILLER  has served as our Director  since May 2000.  Mr.
Marcouiller is Chairman of the Board and Chief Executive  Officer of Camoplast
Inc., an international manufacturer specialized in industrial manufacturing of
rubber  tracks,  molded  composite and  thermoplastic  components and off-road
tracked  vehicles.  He is the  founder  and has been the sole  shareholder  of
Nexcap Inc., an investment company in the manufacturing sector, since December

                                      69
<PAGE>

1996.  Mr.   Marcouiller  worked  with  Venmar  Ventilation  Inc.,  a  private
ventilation equipment  manufacturer,  from January 1983 to December 1996. From
1991 to 1996, he was the controlling shareholder of Venmar, where he also held
the  position  of  President  and  General  Manager  from  1986 to  1996.  Mr.
Marcouiller  is also a  Director  of  Heroux-Devtek  Inc.,  a  public  company
specialized in the design, development and manufacturing of aerospace, defense
and industrial products; more specifically in landing gear,  aerostructure and
gas turbine  components.  Mr.  Marcouiller  also holds  Directorships in other
privately held  companies.  Pierre  Marcouiller  holds a bachelor's  degree in
business  administration from Universite du Quebec in Trois-Rivieres and a MBA
from Universite de Sherbrooke, both in Canada.

         GUY MARIER has served as our Director  since January  2004.  Formerly
President  of Bell Quebec  between  1999 and 2003,  Guy Marier  completed  his
successful  33-year career at Bell as Executive  Vice-President of the Project
Management  Office of Bell  Quebec,  before  retiring at the end of 2003.  Mr.
Marier began at Bell Canada in 1970 and quickly became an executive. From 1988
to 1990, he headed up Bell Canada International's  investments and projects in
Saudi  Arabia and,  for the three  following  years,  served as  President  of
Telebec,  a subsidiary of Bell Canada.  He then returned to the parent company
to hold various senior management  positions.  Mr. Marier was appointed to our
Board of  Directors in January 2004 and also sits on the Board of Bell Nordiq,
a wholly-owned subsidiary of Bell Canada that manages the business and affairs
of both Telebec L.P. and NorthernTel  L.P. Mr. Marier holds a bachelor of Arts
from the University of Montreal and a Bachelor of Business Administration from
the UNIVERSITE DU QUEBEC A MONTREAL.

         PIERRE  PLAMONDON  has been our  Vice-President,  Finance  and  Chief
Financial  Officer since January 1996 and was a Director from December 1999 to
May 2000.  Prior to joining  us, Mr.  Plamondon  served as senior  manager for
Price  Waterhouse,  from September 1981 to December 1995 in Canada and France.
Mr.  Plamondon  holds a  bachelor's  degree in Business  Administration  and a
license in Accounting,  both from Laval University in Quebec City, Canada. Mr.
Plamondon has been a member of the Canadian Institute of Chartered Accountants
since 1983 and a member of the Board of  Directors  of SOVAR Inc.  (Societe de
valorisation  des  applications de la recherche de  l'Universite  Laval) since
December 2000.

         BENOIT  RINGUETTE  has been our in-house  Legal Counsel and Corporate
Secretary  since April 2004.  Prior to joining EXFO, Mr.  Ringuette  practiced
mainly in  commercial,  corporate and  securities  law from 1998 to 2003 as an
associate  in the law  firms of  O'Brien,  Flynn  Rivard  in  Quebec  City and
Desjardins  Ducharme  Stein Monast in Quebec City.  Mr.  Ringuette  has been a
member of the Quebec Bar since 1998. Mr.  Ringuette holds a bachelor's  degree
in Civil Law from Laval University in Quebec City, Canada.

         DAVID A.  THOMPSON  has served as our Director  since June 2000.  Dr.
David A.  Thompson  is  currently  Vice-President  and  Director of Hardware &
Equipment Technology Strategy at Corning Cable Systems, where he has held this
position  since January 2002.  Prior to this  nomination,  he acted as Corning
Incorporated's Division Vice-President for the Strategic Planning & Innovation
Effectiveness  in Research,  Development and  Engineering.  Dr. Thompson first
joined Corning  Incorporated's  Research and Development Division in 1976 as a
Senior  Chemist  in  glass  research.  He  then  took  on  several  technology
Directorship  and  strategic  planning  roles  for  Corning's   Component  and
Photonics  Technologies  Divisions between 1988 and 1998; and, in 1999, he was
appointed  technical  leader  for  the  creation  of the  new  Samsung-Corning
Micro-Optics  joint venture.  David A. Thompson holds a Bachelor of Science in
chemistry from Ohio State  University  and a doctorate in inorganic  chemistry
from the University of Michigan. He holds 13 patents and has over 20 technical
publications  in the  areas  of  inorganic  chemistry,  glass  technology  and
telecommunications.

                                      70
<PAGE>

         ANDRE  TREMBLAY  has served as our  Director  since June 2000.  Andre
Tremblay has more than 20 years experience in the telecommunications industry,
where  he  has  been  actively  involved  in  the  conception,  financing  and
management of several  companies.  For almost 10 years, Mr. Tremblay served as
President and Chief Executive  Officer of Microcell  Telecommunications  Inc.,
which he led  from its  formation  on  through  the  different  phases  of its
evolution.  He has also provided early-stage  financing,  along with strategic
advice and direction,  for start-up technology firms and sits on the Boards of
Directors of a number of  corporations  and  non-profit  organizations.  Andre
Tremblay holds  bachelor's  degrees in management and in accounting from Laval
University,  a master's  degree in taxation from the  Universite de Sherbrooke
and is also a  graduate  of  Harvard  Business  School's  Advanced  Management
Program.

         MICHAEL  UNGER has served as our Director  since May 2000.  He worked
with Nortel Networks Limited,  now Nortel Networks  Corporation,  from 1962 to
2000.  Mr.  Unger's  most recent  position was  President of Nortel's  Optical
Networks  Business Unit, a position he held from May 1998 to April 2000. Prior
to this appointment,  Mr. Unger was Nortel's Group  Vice-President,  Transport
Networks  from March 1990 to May 1998.  Mr.  Unger also serves on the Board of
Tundra  Semiconductor  Corporation a publicly  traded  company with its shares
listed on The  Toronto  Stock  Exchange  that  designs,  develops  and markets
networking   and  network  access   technology   for  use  by   communications
infrastructure  equipment  companies.  He is also a  member  of the  Board  of
Directors  of a number  of  privately-held  companies  active  in the areas of
photonic and optical  components,  optical  network  systems and solutions for
cable operators and other communications service providers.  Mr. Unger holds a
bachelor's degree in Science from Concordia University in Canada.

TERM OF EXECUTIVE OFFICERS

         Executive  officers are appointed  annually by the Board of Directors
and serve until their  successors are appointed and qualified or until earlier
resignation or removal.

B.       COMPENSATION

DIRECTOR COMPENSATION

         In the  financial  year ended August 31, 2005,  each director who are
not employees of the Corporation or any of its subsidiaries received the level
of compensation set forth in the table below as annual compensation payable in
a  combination  of cash and  Deferred  Share  Units  ("DSU")  as chosen by the
Director pursuant to the Deferred Share Unit Plan.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
 Annual Retainer for Directors: (1)                            CDN$50,000(2)  US$40,600 (3)
--------------------------------------------------------------------------------------------
 Annual Retainer for Committee Chairman:                        CDN$5,000      US$4,060 (3)
--------------------------------------------------------------------------------------------
 Annual Retainer for Committee Members:                         CDN$3,000      US$2,436 (3)
--------------------------------------------------------------------------------------------
 Fees for all Meetings Attended per day in Person:              CDN$1,000        US$812 (3)
--------------------------------------------------------------------------------------------
 Fees for all Meetings Attended per day by Telephone:             CDN$500        US$406 (3)
------------------------- ------------------------------------------------------------------
</TABLE>
-------------------------
(1)  All the Directors elected to receive 50% of their Annual Retainer in form
     of Deferred Share Units.
(2)  The Annual Retainer for Mr. David A. Thompson is US$50,000 (CDN$61,575).
(3)  The compensation  information has been converted from Canadian dollars to
     U.S.  dollars based upon an average foreign exchange rate of $CDN1.2315 =
     US$1.00 for 2005.

                                      71
<PAGE>

         In the  financial  year ended August 31, 2005,  the Directors who are
not employees received the following compensation in the form indicated:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                 ANNUAL                              FAIR VALUE OF DSUS AT       TOTAL ATTENDANCE
                           COMPENSATION PAID   ANNUAL COMPENSATION   THE TIME OF GRANT          FEES PAID IN CASH
         NAME              IN CASH (US$) (1)   PAID IN DSUS (#) (2)         (US$)(3)                (US$) (1)
--------------------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                     <C>                     <C>
Pierre Marcouiller (4)           25,173               4,537                   20,300                  4,466
--------------------------------------------------------------------------------------------------------------------
Guy Marier  (5)                  25,173               4,537                   20,300                  4,466
--------------------------------------------------------------------------------------------------------------------
Dr. David A. Thompson (6)        27,440               5,586                   25,000                  3,256
--------------------------------------------------------------------------------------------------------------------
Andre Tremblay (7)               26,797               4,537                   20,300                  4,466
--------------------------------------------------------------------------------------------------------------------
Michael Unger (8)                26,797               4,537                   20,300                  4,466
--------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------
(1)  The compensation  information has been converted from Canadian dollars to
     U.S.  dollars based upon an average foreign exchange rate of $CDN1.2315 =
     US$1.00  for 2005  except  for Mr.  David A.  Thompson  who is paid in US
     currency.  The  Annual  Compensation  includes,  as the case may be,  the
     retainer for Director, Committee Members and Committee Chairman.
(2)  Indicates  the number of  Subordinate  Voting  Shares  granted  under the
     Deferred  Share Unit Plan.  A DSU is converted  in a  Subordinate  Voting
     Share when a Director ceases to be a member of the Board.
(3)  The  value  at the  time of  grant  of a DSU is  determined  based on the
     highest of the closing  prices of the  Subordinate  Voting  Shares on the
     Toronto Stock Exchange and the NASDAQ National Market on the last trading
     day preceding  the grant date,  using the noon buying rate of the Federal
     Reserve Bank of New York on the grant date to convert the NASDAQ National
     Market  closing  price to Canadian  dollars,  as  required.  The value at
     vesting  of a DSU is  equivalent  to the  market  value of a  Subordinate
     Voting Share when a DSU is converted to such Subordinate Voting Share.
(4)  Member of the Audit Committee and the Human Resources Committee.
(5)  Member of the Audit Committee and the Human Resources Committee.
(6)  Member of the Human Resources Committee.
(7)  Member of the Human Resources Committee and Chairman of the Audit
     Committee.
(8)  Member of the Audit Committee,  Chairman of the Human Resources Committee
     and Lead Director.


EXECUTIVE COMPENSATION

         The table below shows compensation  information during the three most
recently  completed  financial years for Mr. Germain Lamonde,  the Chairman of
the Board,  President  and Chief  Executive  Officer of the  Corporation,  Mr.
Pierre Plamondon,  the Vice-President Finance and Chief Financial Officer, the
three other most highly compensated  executive officers of the Corporation and
its  subsidiaries who were serving the Corporation at the end of the financial
year (collectively, the "Named Executive Officers"). This information includes
the US dollar value of base  salaries,  bonus awards and  long-term  incentive
plan  payments,  the number of  options or  Restricted  Share  Units  ("RSUs")
granted, and other compensation, if any, whether paid or deferred.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                 OTHER ANNUAL    SECURITIES    RESTRICTED   ALL OTHER
 NAME AND PRINCIPAL     FINANCIAL  SALARY (1)                     COMPENSATION  UNDER OPTIONS      SHARE   COMPENSATION
      POSITION            YEARS       ($)       BONUS (2) ($)         ($)         (3) (#)       UNITS (4)      ($)
------------------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>           <C>                 <C>            <C>           <C>       <C>
Germain Lamonde,         2005     243,605 (US)  121,729 (US)        --             17,942        13,089      --
President and Chief               300,000 (CDN) 149,909 (CDN)
Executive Officer
                         2004     206,751 (US)   57,115 (US)        --                 --            --       --
                                  275,000 (CDN)  75,969 (CDN)

                         2003     185,848 (US)   25,247 (US)        --             50,000            --       --
                                  275,000 (CDN)  37,359 (CDN)
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      72
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                 OTHER ANNUAL    SECURITIES    RESTRICTED   ALL OTHER
 NAME AND PRINCIPAL     FINANCIAL  SALARY (1)                     COMPENSATION  UNDER OPTIONS      SHARE   COMPENSATION
      POSITION            YEARS       ($)       BONUS (2) ($)         ($)         (3) (#)       UNITS (4)      ($)
------------------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>           <C>                 <C>            <C>           <C>       <C>
Pierre Plamondon,        2005     151,441 (US)    48,735 (US)       --              5,383        33,927    2,316 (US)(5)
Vice-President                    186,500 (CDN)   60,017 (CDN)                                             2,852 (CDN)
Finance and Chief
Financial Officer        2004     135,328 (US)    17,451 (US)       --                 --            --    1,429 (US)(5)
                                  180,000 (CDN)   23,211 (CDN)                                             1,901 (CDN)

                         2003     118,267 (US)     9,547 (US)       --             25,000            --      866 (US)(5)
                                  175,000 (CDN)   14,127 (CDN)                                             1,281 (CDN)
------------------------------------------------------------------------------------------------------------------------
Juan-Felipe              2005     246,323 (US)     6,015 (US)       --              5,482        33,998       --
Gonzalez,                         303,347 (CDN)    7,407 (CDN)
Vice-President,
Global Telecom Sales     2004     231,597 (US)   563,867 (US)       --                 --            --       --
                                  308,047 (CDN)  750,000 (CDN)(6)

                         2003     163,896 (US)     7,500 (US)       --             30,000            --       --
------------------------------------------------------------------------------------------------------------------------
Stephen Bull             2005     121,803 (US)    32,559 (US)       --              3,589        32,618    1,758 (US)(5)
Vice-President                    150,000 (CDN)   40,097 (CDN)                                             2,165 (CDN)
Research &
Development              2004     112,773 (US)    12,437 (US)       --                 --            --   16,221 (US)(7)
                                  150,000 (CDN)   16,543 (CDN)                                            21,576 (CDN)

                         2003      81,098 (US)     8,138 (US)       --             15,000            --      588 (US)(5)
                                  120,000 (CDN)   12,042 (CDN)                                               871 (CDN)
------------------------------------------------------------------------------------------------------------------------
Etienne Gagnon           2005     113,683 (US)    34,389 (US)       --              3,158         9,804    1,067 (US)(5)
Vice-President,                   140,000 (CDN)   42,349 (CDN)                                             1,314 (CDN)
Optical-Layer
Product Management       2004      99,241 (US)     7,540 (US)       --                 --            --       --
and Customer Service              132,000 (CDN)   11,157 (CDN)

                         2003      81,098 (US)(8)  2,550 (US)       --             20,000            --      --
                                  120,000 (CDN)    4,013 (CDN)
------------------------------------------------------------------------------------------------------------------------
</TABLE>

----------------------
(1)  The  compensation  information for Canadian  residents has been converted
     from  Canadian  dollars to U.S.  dollars  based  upon an average  foreign
     exchange rate of CDN$1.2315 = US$1.00 for 2005,  CDN$1.3301 = US$1.00 for
     2004 and  CDN$1.4797 = US$1.00 for 2003. The currency  conversions  cause
     these  reported  salaries to fluctuate from  year-to-year  because of the
     fluctuation in exchange rate.
(2)  A portion of the bonus amounts is paid in cash in the year for which they
     are  awarded and the  balance is paid in cash in the year  following  the
     financial year for which they are awarded.
(3)  Indicates the number of Subordinate  Voting Shares underlying the options
     granted under the  Long-Term  Incentive  Plan during the  financial  year
     indicated.
(4)  Indicates  the  number  of  Restricted  Share  Units  granted  under  the
     Long-Term Incentive Plan during the financial year indicated.
(5)  Indicates the amount  contributed by the Corporation during the financial
     year indicated to the Deferred  Profit  Sharing Plan, as applicable,  for
     the benefit of the Named Executive  Officer.  Mr. Lamonde is not eligible
     to participate in the Deferred  Profit Sharing Plan and Mr.  Gonzalez did
     not participate.
(6)  Pursuant  to the  terms  of his  employment  agreement,  Mr.  Juan-Felipe
     Gonzalez  did  receive a cash  payment  of  CDN$750,000  since he did not
     voluntarily  resign and was not  dismissed  with cause prior to September
     2003. An amount of CDN$500,000  was disbursed on October 17, 2003 and the
     remaining CDN$250,000 was disbursed on January 25, 2004.
(7)  Indicates the amount paid by the  Corporation  during the financial  year
     for  relocation  allowance  (CDN$20,000)   (US$15,036)  plus  the  amount
     referred in note 5 above (CDN$1,576) (US$1,185).
(8)  This amount  represents  Mr. Gagnon annual base salary.  Since Mr. Gagnon
     joined the  Corporation  in January 13, 2003, the base salary paid to Mr.
     Gagnon for the financial year ended August 31, 2003 amounted to US$49,906
     (CDN$73,846).

EMPLOYMENT AGREEMENTS

         We have  an  employment  agreement  with  Mr.  Germain  Lamonde.  The
agreement  is for an  indeterminate  period and the  compensation  is reviewed
annually.  In the event of the termination of Mr. Lamonde's employment without
cause,  Mr.  Lamonde  will  be  entitled  to  severance  payments  (in no case
exceeding 24 months of remuneration) and the vesting of all stock  options  and

                                      73
<PAGE>

RSUs. In addition,  in the event that Mr.  Lamonde's  employment is terminated
following a merger or an acquisition by a third party of substantially  all of
the  Corporation's  assets or of the  majority of our share  capital or if Mr.
Lamonde  voluntarily  resigns, he will be entitled to the vesting of all stock
options and RSUs.

         We also have  employment  agreements with Mr. Pierre  Plamondon,  Mr.
Juan-Felipe Gonzalez, Mr. Stephen Bull and Mr. Etienne Gagnon.

         The   employment   agreement   with   Mr.   Pierre   Plamondon,   our
Vice-President,  Finance and Chief Financial  Officer is for an  indeterminate
period and the compensation is reviewed annually.  In the event of termination
of Mr. Plamondon's employment without cause, Mr. Plamondon will be entitled to
severance  payments  which in no case  exceeding 18 months of the current base
salary.  In addition,  in the event Mr.  Plamondon's  employment is terminated
following a merger or an acquisition by a third party of substantially  all of
our assets or of the majority of its share capital, he will be entitled to the
immediate vesting of all stock options and RSUs.

         The  agreement  with  Mr.  Gonzalez   provided  for  Mr.   Gonzalez's
employment as Vice-President Global Telecom Sales. In the event Mr. Gonzalez's
employment terminates for any reason whatsoever and he is unable to accept new
employment  due to his  non-competition  obligations  to us, Mr.  Gonzalez may
receive  compensation  for a  period  of  18  months  following  the  date  of
termination  in amounts  varying from 5% to 50% of his base monthly  salary at
the  time of  termination  depending  on the  cause  of the  termination.  The
employment  agreement  is for an  indeterminate  period  and  compensation  is
reviewed annually.

         The agreement with Mr. Stephen Bull, our Vice-President, Research and
Development is for an  indeterminate  period and the  compensation is reviewed
annually.  In the event of termination of Mr. Bull's employment without cause,
Mr. Bull will be entitled  to  severance  payments  (in no case  exceeding  18
months of the current  base  salary).  In  addition,  in the event Mr.  Bull's
employment is terminated following a merger or an acquisition by a third party
of substantially all of our assets or of the majority of our share capital, he
will be entitled to the immediate vesting of all stock options and RSUs.

         The employment agreement with Mr. Etienne Gagnon, our Vice-President,
Optical-Layer  Product Management and Customer Service is for an indeterminate
period and the compensation is reviewed annually.  In the event of termination
of Mr.  Gagnon's  employment  without cause,  Mr. Gagnon's will be entitled to
severance  payments  (in no case  exceeding  18  months  of the  current  base
salary).  In addition,  in the event Mr.  Gagnon's  employment  is  terminated
following a merger or an acquisition by a third party of substantially  all of
our assets or of the majority of our share capital, he will be entitled to the
immediate vesting of all stock options and RSUs.

LONG-TERM INCENTIVE COMPENSATION

LONG-TERM INCENTIVE PLAN

         We have a  Long-Term  Incentive  Plan  for our  Directors,  executive
officers,   employees  and  consultants  and  those  or  our  subsidiaries  as
determined  by our  Board  of  Directors,  to  attract  and  retain  competent
Directors,  executive  officers,  employees and consultants  motivated to work
toward  ensuring our success and to encourage them to acquire our shares.

                                      74
<PAGE>

         The  principal  component  of the  long-term  incentive  compensation
offered  by us is made  up of the  Long-Term  Incentive  Plan  for  Directors,
officers, employees and consultants of the Corporation and its subsidiaries.

         Introduced  in May 2000,  amended in October  2004 and  effective  in
January 2005, the Long-Term  Incentive Plan is designed to motivate Directors,
officers,  employees and  consultants to share interest with our  shareholders
over the long-term.  A copy of the Long-Term  Incentive Plan has been filed as
exhibit 4.35 to this annual report. It is subject to Human Resources Committee
review to ensure maintenance of its market competitiveness. Our Board has full
and complete  authority to interpret  the Plan and to establish  the rules and
regulations  applying  to it and to make  all  other  determinations  it deems
necessary or useful for the  administration  of the Plan,  provided  that such
interpretations, rules, regulations and determinations are consistent with the
rules of all stock  exchanges on which our securities are then traded and with
all relevant securities legislation.

         The Long-Term  Incentive Plan provides for the issuance of options to
purchase  Subordinate Voting Shares and the issuance of Restricted Share Units
("RSUs")  redeemable for actual Subordinate Voting Shares or the equivalent in
cash to Directors, officers, employees and consultants. Our Board of Directors
upon recommendation of the Human Resources Committee designates the recipients
of options or RSUs and  determines  the number of  Subordinate  Voting  Shares
covered by each option or RSU,  the dates of vesting,  the expiry date and any
other conditions relating to these options or RSUs, in each case in accordance
with the  applicable  legislation of the  securities  regulatory  authorities.
During the financial year ended August 31, 2005, options and RSUs were granted
based on merit.

         The  exercise  price of the  options  is  determined  by our Board of
Directors at the time of granting the options,  subject to compliance with the
rules of all stock exchanges on which the Subordinate Voting Shares are listed
and with all relevant securities legislation. In any event, the price at which
the  Subordinate  Voting  Shares  may be  purchased  may not be lower than the
highest of the closing prices of the Subordinate  Voting Shares on the Toronto
Stock  Exchange  and the  NASDAQ  National  Market  on the  last  trading  day
preceding  the grant date,  using the noon buying rate of the Federal  Reserve
Bank of New York on the grant  date to  convert  the  NASDAQ  National  Market
closing price to Canadian dollars. Any option issued is non-transferable.

         The aggregate number of subordinate  voting shares covered by options
granted  during the  financial  year ended  August 31,  2005 was  246,233 at a
weighted  average  exercise price of $4.59  (CDN$5.68) per subordinate  voting
share.  At the end of the  financial  year ended August 31,  2005,  there were
2,763,759 subordinate voting shares covered by options granted and outstanding
pursuant to the Long-Term  Incentive Plan having a weighted  average  exercise
price of  US$12.87  (CDN$19.22)  per option.  Since  August 31, 2005 and until
November 15, 2005 no options were granted.

         The fair  value at the time of grant of a RSU is equal to the  market
value of Subordinate Voting Shares at the time RSUs are granted. At the end of
financial  year ended  August  31,  2005,  there were a total of 176,185  RSUs
granted  pursuant to the Long-Term  Incentive  Plan having a weighted  average
fair value at the time of grant of US$4.68  (CDN$5.72)  per RSU.  Since August
31, 2005 and until November 15, 2005 we did not grant any RSUs.

         The maximum  number of  Subordinate  Voting  Shares that are issuable
under the Plan shall not exceed  6,306,153  Subordinate  Voting Shares,  which
represents 9.2% of our issued and outstanding  voting shares as of November 1,

                                      75
<PAGE>

2005. The maximum  number of Subordinate  Voting Shares that may be granted to
any  one  individual  shall  not  exceed  5%  of  the  number  of  outstanding
Subordinate Voting Shares.

         Some options granted to Directors vest on the first  anniversary date
of their grant.  Some options  granted in the financial  year ended August 31,
2004 and 2005 vest at a rate of 12.5% six (6) months  after the date of grant,
12.5% twelve (12) months  after the date of grant and 25% annually  thereafter
commencing  on the  second  anniversary  date of the  grant in  October  2005.
Otherwise  all options  vest a rate of 25%  annually  commencing  on the first
anniversary  date of the grant.  All options may be  exercised  in whole or in
part once vested.  All of the options that are granted  under the Plan must be
exercised  within a maximum  period of ten (10)  years  following  the date of
their grant or they will be forfeited.

         All RSUs first vesting can not be earlier than the third  anniversary
date of their grant.  Some RSUs granted in the financial year ended August 31,
2005 vest at a rate of 1/3 annually  commencing on the third  anniversary date
of the grant in February 2005 and others at a rate of 55%, 35% and 10%, on the
third,  fourth and fifth  anniversary dates of the grant in January 2005. Some
RSUs  granted in the  financial  year ended  August 31, 2005 vest on the fifth
anniversary date of the grant in January 2005 but are subject to early vesting
on the third and fourth  anniversary  dates of the grant on the  attainment of
performance  objectives as determined by our Board of Directors.  Accordingly,
subject to the attainment of performance  objectives,  the first early vesting
is up to 1/3 of the units on the third  anniversary  date of the grant and the
second  early  vesting  is up to 50%  of the  remaining  units  on the  fourth
anniversary  date of the grant.  If such vesting date falls into any black-out
period or any other  restrictive  period  during  which the RSU  holder is not
entitled to trade our Subordinate Voting Shares,  then the units shall vest on
the first trading day the RSU holder is entitled to trade after such black-out
period or restrictive period.

         Any option  granted  pursuant to the  Long-Term  Incentive  Plan will
lapse (i) immediately upon the termination of the relationship  with us or one
of our  subsidiaries for a good and sufficient cause for employees or officers
or at the date on which an  employee  or an  officer  resigns  or  leaves  his
employment  with  us or one of our  subsidiaries  (or  within  30  days if the
holder's  employment is terminated for reasons not related to cause); and (ii)
30 days after a Director  ceases to be a member of our Board of  Directors  or
one of our subsidiaries.  In the event of retirement or disability, any option
held by an employee  lapses 30 days after the date of any such  disability  or
retirement.  In the event of death,  any option held by the optionee  lapses 6
months after the date of death.

         Any RSU granted  pursuant to the Long-Term  Incentive Plan will lapse
(i)  immediately,  where  vesting of a unit is subject  to the  attainment  of
performance objectives,  if such performance objectives have not been attained
(or  postponed  at a  further  vesting  date as  determined  by the  Board  of
Directors);  (ii)  immediately,  whether  or  not  subject  to  attainment  of
performance  objectives,  upon the termination of the relationship  with us or
one of our  subsidiaries  for a good and  sufficient  cause for  employees  or
officers or at the date on which an  employee or an officer  resigns or leaves
his employment with us or one of our subsidiaries.

         Any RSU granted  pursuant to the Long-Term  Incentive  Plan will vest
immediately,  to a certain  proportion  as  determined  by the Plan,  upon the
termination  of the  relationship  of an employee or officer with us or one of
our subsidiaries  (i) for reasons not related to cause;  (ii) because of death
or permanent disability and (iii) retirement.

                                      76
<PAGE>

         The  following  table  summarizes  information  about  stock  options
granted  to the  members  of the Board of  Directors,  and to  Management  and
Corporate Officers of us and our subsidiaries as at August 31, 2005:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                % OF ISSUED AND     WEIGHTED AVERAGE EXERCISE
                                          NUMBER OF OPTIONS   OUTSTANDING OPTIONS     PRICE ($US/SECURITY)
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>                    <C>                     <C>
President and CEO (one individual)              168,424                6.09%                   9.34
--------------------------------------------------------------------------------------------------------------
Board of Directors (five individuals)           194,375                7.03%                   6.23
--------------------------------------------------------------------------------------------------------------
Management and Corporate Officers
(nine individuals)                              340,091               12.31%                  14.39
--------------------------------------------------------------------------------------------------------------
</TABLE>

         The following table summarizes  information about RSUs granted to the
members of the Board of Directors and to Management and Corporate  Officers of
us and our subsidiaries as at August 31, 2005:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                                      WEIGHTED AVERAGE FAIR
                                                                  % OF ISSUED AND      VALUE AT THE TIME OF
                                               NUMBER OF RSUS     OUTSTANDING RSUS         GRANT $US/RSU
------------------------------------------------------------------------------------------------------------
<S>                                               <C>                   <C>                   <C>
President and CEO (one individual)                13,089                7.43%                 4.69
------------------------------------------------------------------------------------------------------------
Board of Directors (five individuals)                 --                   --                   --
------------------------------------------------------------------------------------------------------------
Management and Corporate Officers                151,096               85.76%                 4.69
(nine individuals)
------------------------------------------------------------------------------------------------------------
</TABLE>

DEFERRED SHARE UNIT PLAN

         Introduced  in October  2004 and  effective as of January  2005,  the
Deferred  Share Unit Plan is designed to align more  closely the  interests of
its  non-employee  Directors  with  those of our  shareholders.  A copy of the
Deferred Share Unit Plan has been filed as exhibit 4.36 to this annual report.

         Under the  Deferred  Share Unit Plan,  non-employee  Directors  shall
receive up to 100 % of their retainer fees in the form of Deferred Share Units
("DSUs"),  each of which  has a fair  value at the time of grant  equal to the
market  value of a  Subordinate  Voting Share at the time DSUs are credited to
the  Directors.  The value of a DSU,  when  converted  to  Subordinate  Voting
Shares, is equivalent to the market value of a Subordinate Voting Share at the
time  the  conversion  takes  place.  DUSs  attract  dividends  in the form of
additional  DSUs at the same rate as dividends on  Subordinate  Voting  Share.
When a Director ceases to be a member of our Board of Directors,  the DSUs are
either  converted and paid in Subordinate  Voting Shares purchased on the open
market or issued by us. Such  Subordinate  Voting  Shares issued by us will be
issued from the same pool of Subordinate  Voting Shares  reserved for issuance
pursuant to the Long-Term  Incentive  Plan,  which is 9.2% of the total issued
and outstanding voting shares.

         The following table summarizes  information about DSUs granted to the
non-employee members of our Board of Directors as at August 31, 2005:

                                      77
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                  WEIGHTED AVERAGE FAIR
                                                             % OF ISSUED AND      VALUE AT THE TIME OF
                                           NUMBER OF DSUS    OUTSTANDING DSUS         GRANT $US/DSU
---------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>                    <C>
Board of Directors (five individuals)          23,734               100%                   4.47
---------------------------------------------------------------------------------------------------------
</TABLE>

DEFERRED SHARE UNIT GRANTS IN LAST FINANCIAL YEAR

         The aggregate  number of Deferred  Share Units  ("DSUs")  credited to
non-employee  Directors  during the  financial  year ended August 31, 2005 was
23,734.  The fair  value at the time of grant of a DSU is equal to the  market
value of a  Subordinate  Voting  Share at the time  DSUs are  credited  to the
Directors.  At the end of the financial year ended August 31, 2005, there were
a total of 23,734 DSUs  credited to Directors  pursuant to the Deferred  Share
Unit  Plan   having  a  fair  value  at  the  time  of  grant  of   US$105,998
(CDN$130,421).

         DSUs  attract  dividends in the form of  additional  DSUs at the same
rate as dividends on  Subordinate  Voting  Shares.  The DSUs are converted and
paid in Subordinate Voting Shares at the time a Director ceases to be a member
of our Board of Directors.

         Therefore,  the  value  at  vesting  of  a  DSU,  when  converted  to
Subordinate  Voting Shares, is equivalent to the market value of a Subordinate
Voting Share at the time the  conversion  takes  place.  The table below shows
information  regarding  DSU  grants  made under the  Deferred  Share Unit Plan
during the financial year ended August 31, 2005.

         During the financial  year ended August 31, 2005,  the following DSUs
were granted to the Directors:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
             WEIGHTED AVERAGE FAIR VALUE
  DSUS #    AT THE TIME OF GRANT US$/DSU                    VESTING
-------------------------------------------------------------------------------------------
 <S>                    <C>                <C>
 23,734                 4.47               At the time Director cease to be a member of the
                                           Board of the Corporation
-------------------------------------------------------------------------------------------
</TABLE>

RESTRICTED SHARE UNIT GRANTS IN LAST FINANCIAL YEAR

         The aggregate  number of Restricted Share Units (RSUs) granted during
the  financial  year ended August 31, 2005 was 176,185.  The fair value at the
time of  grant of a RSU is equal to the  market  value of  Subordinate  Voting
Shares at the time RSUs are granted.  At the end of the  financial  year ended
August 31, 2005,  there were a total of 176,185  RSUs granted  pursuant to the
Long-Term  Incentive Plan having a weighted  average fair value at the time of
grant of US$4.68 (CDN$5.72) per RSU. All RSUs first vesting can not be earlier
than the third  anniversary  date of their  grant.  Some RSUs  granted  in the
financial year ended August 31, 2005 vest at a rate of 1/3 annually commencing
on the third  anniversary  date of the grant in February  2005 and others at a
rate of 55%, 35% and 10%, on the third,  fourth and fifth anniversary dates of
the grant in  January  2005.  Some RSUs  granted in the  financial  year ended
August  31,  2005 vest on the fifth  anniversary  date of the grant in January
2005 but are  subject to early  vesting  on the third and  fourth  anniversary
dates of the grant on the attainment of  performance  objectives as determined
by  our  Board  of  Directors.  Accordingly,  subject  to  the  attainment  of
performance  objectives,  the first early vesting is up to 1/3 of the units on
the third  anniversary date of the grant and the second early vesting is up to
50% of the remaining units on the fourth anniversary date of the grant.

         RSUs  attract  dividends in the form of  additional  RSUs at the same
rate as  dividends on  Subordinate  Voting  Shares.  The RSUs are redeemed for
actual  Subordinate  Voting Shares or the equivalent in cash at the discretion

                                      78
<PAGE>

of our Board of Directors  on the vesting  dates  established  by our Board of
Directors at the time of grant in its sole discretion.

         Therefore,  the  value  at  vesting  of  a  RSU,  when  converted  to
Subordinate  Voting Shares, is equivalent to the market value of a Subordinate
Voting Share at the time the  conversion  takes  place.  The table below shows
information  regarding  RSU grants  made under the  Long-Term  Incentive  Plan
during the financial year ended August 31, 2005.

         During the financial  year ended August 31, 2005,  the following RSUs
were granted:

--------------------------------------------------------------------------------
               FAIR VALUE AT
                THE TIME OF
   RSUS #       GRANT S$/RSU                    VESTING (1)
--------------------------------------------------------------------------------
 129,000            4.69       55%,  35% and 10%,  on the  third,  fourth  and
                               fifth anniversary dates of the grant in January
                               2005 (2)
--------------------------------------------------------------------------------
  35,185            4.69       100% on the fifth anniversary date of the grant
                               in January 2005 subject to early  vesting up to
                               1/3 on the third  anniversary date of the grant
                               and up to 50% of  the  remaining  units  on the
                               fourth  anniversary  date of the  grant  if the
                               performance objectives are fully attained (3)
--------------------------------------------------------------------------------
  12,000            4.51       1/3 on  each of the  third,  fourth  and  fifth
                               anniversary dates of the grant in February 2005
                               (4)
--------------------------------------------------------------------------------
-------------
(1)  All RSUs first vesting can not be earlier than the third anniversary date
     of their grant.
(2)  Those RSUs granted in the financial  year ended August 31, 2005 vest at a
     rate of 55%, 35% and 10% on the third, fourth and fifth anniversary dates
     of the grant in January 2005.
(3)  Those RSUs  granted in the  financial  year ended August 31, 2005 vest on
     the fifth  anniversary  date of the grant in January 2005 but are subject
     to early vesting on the third and fourth  anniversary  dates of the grant
     on the attainment of performance objectives as determined by our Board of
     Directors.   Accordingly,   subject  to  the  attainment  of  performance
     objectives,  the  first  early  vesting  is up to 1/3 of the units on the
     third anniversary date of the grant and the second early vesting is up to
     50% of the remaining units on the fourth anniversary date of the grant.
(4)  Those RSUs granted in the financial  year ended August 31, 2005 vest at a
     rate of 1/3  annually  commencing  on the third  anniversary  date of the
     grant in February 2005.

NUMBER OF SUBORDINATE VOTING SHARES RESERVED FOR FUTURE ISSUANCE

         During the  financial  year ended  August 31, 2005,  23,734  Deferred
Share Units,  176,185  Restricted Share Units and 246,233 options were granted
to Directors,  officers and  employees.  Such awards were issued from the same
pool of  Subordinate  Voting  Shares  reserved  for  issuance  pursuant to the
Long-Term  Incentive  Plan which is 9.2% of the total and  outstanding  voting
shares.  Therefore,  as of November 1, 2005 the number of  Subordinate  Voting
Shares reserved for future issuance is 3,182,504.

SHARE PURCHASE PLAN

         In September 1998, we established a stock purchase plan for officers,
Directors  and key  employees  as  amended in April  2000.  A total of 707,264
subordinate  voting  shares  were  issued  and fully paid under the 1998 Stock
Purchase Plan, having a weighted average cash consideration of $0.67 (CA$0.98)
per  share.  The plan  provides  that all  shares  issued  under  the plan are
restricted as to sale and  transferability  for a minimum period of five years
upon the date of acquisition.

         On April 3,  2000,  we adopted a share  plan that  replaced  the 1998
Stock Purchase Plan. No additional shares will be issued under the share plan.
The share  plan  established  restrictions  on the  rights of the  holders  of
subordinate  voting shares who hold those shares as a result of the conversion
of the Class "F" shares issued under the 1998 Stock  Purchase  Plan. The share

                                      79
<PAGE>

plan also  required  the  subordinate  voting  shares to be held in trust by a
trustee until August 31, 2004,  except for 249,977  subordinate  voting shares
that were released  between  October 21, 2003 and January 20, 2004.  The share
plan also  provided  for the  earlier  release of shares in the event that the
employment  of a holder of shares is  terminated  or upon the  occurrence of a
change of control.  The share plan did not permit any transfer,  except within
the trust to a registered  retirement savings plan or a registered  retirement
income fund or to a trustee in bankruptcy. The share plan also established the
conditions pursuant to which the shares of a shareholder are to be sold by the
trustee  on the  public  market.  As of August  31,  2004,  all the  remaining
subordinate  voting  shares  that were held in trust under the share plan were
released.

RESTRICTED STOCK AWARD PLAN

         The EXFO  Electrical-Optical  Engineering Restricted Stock Award Plan
(the "RSAP") was  established  to provide a means through  which  employees of
EXFO Burleigh  Products Group Inc. can be granted awards of restricted  shares
("Restricted  Shares") of Subordinate  Voting Shares to promote  retention and
foster  identity  of  interest  between  stockholders  and  employees  of EXFO
Burleigh Products Group Inc.

         The effective  date of the RSAP was December 20, 2000. The expiration
date of the  RSAP is the  business  day  next  following  the  final  grant of
Restricted  Shares under the RSAP, which was December 20, 2000.  However,  the
administration  of the RSAP did continue until all awards of Restricted Shares
have been forfeited or settled.  The aggregate number of shares subject to the
RSAP was  360,000.  Stock  awards  granted  under  the RSAP vest over a 4 year
period,  with  25%  vesting  on  an  annual  basis  commencing  on  the  first
anniversary  of the date of grant.  The last vesting  occurred on December 20,
2004, the Human  Resources  Committee  administered  the RSAP until that date.
Therefore the administration of the RSAP terminated on December 20, 2004.

         Awards  of  Restricted   Shares  were  subject  to   forfeiture   and
restrictions  on transfer until the  Restricted  Shares became vested at which
point a stock  certificate  was issued to a  participant  with  respect to the
number of vested shares, which are then freely transferable. Restricted Shares
become vested, subject to a participant's  continued employment with us or our
affiliates, on each of the first four anniversaries of the date of grant of an
award of Restricted Shares.

         Upon a participant's  termination of employment with us or any of our
affiliates  due to the  participant's  death,  disability  or retirement on or
after age 60, the participant's award of restricted shares became fully vested
and was no longer subject to forfeiture.  However,  the transfer  restrictions
remained  in place  until  the  occurrence  of the  vesting  dates  originally
contemplated by the award.

         Upon the voluntary resignation of a participant, the termination of a
participant's  employment for cause,  the  termination of a participant who is
not designated a member of EXFO Burleigh Products Group Inc. "Management Team"
without  cause  prior to a change in  control of us or a  termination  without
cause of a participant  who is  designated a member of EXFO Burleigh  Products
Group Inc.  Management Team that is initiated by EXFO Burleigh  Products Group
Inc.  prior  to a  change  in  control  of us,  the  unvested  portion  of the
participant's  award of  Restricted  Shares were  forfeited.  However the RSAP
provided discretion to the Human Resources Committee in the application of the
forfeiture  provisions  where a change in  circumstances  rendered such action
appropriate.   During the financial  year ended August 31, 2005, EXFO Burleigh

                                      80
<PAGE>

Products Group Inc. was required to lay off the remaining of the  participants
(excluding a few that were  transferred to our other offices) as a result of a
consolidation  due to a sharp  downturn  in its  market.  The Human  Resources
Committee  decided  that  the  awards  of RSAP  participants  affected  by the
lay-offs would not be subject to forfeiture,  though the transfer restrictions
remained  in place  until  the  occurrence  of the  vesting  dates  originally
contemplated by the award.

         Upon  the  termination   without  cause  of  a  participant  who  was
designated a member of EXFO Burleigh Products Group Inc.  Management Team that
was initiated by us or a termination  of a  participant's  employment  without
cause following a change in control of the Corporation,  a participant's award
of Restricted Stock became fully vested and all restrictions lapsed.

         In the event of a change in control, the committee  administering the
RSAP could in its  discretion  remove  restrictions  on  Restricted  Shares or
provide for the  cancellation  of awards in exchange for payment in respect of
the Restricted Shares subject to an award.

STOCK APPRECIATION RIGHTS PLAN

         On August 4, 2001, we  established a Stock  Appreciation  Rights Plan
("SAR Plan") for the benefit of certain employees  residing in countries where
the  granting of options  under the Stock  Option Plan is not  feasible in our
opinion.  The Board has full and complete  authority to interpret the SAR Plan
and to  establish  the rules and  regulations  applying  to it and to make all
other  determinations  it deems necessary or useful for the  administration of
the SAR Plan.

         Under the SAR Plan, eligible employees are entitled to receive a cash
amount  equivalent  to  the  difference   between  the  market  price  of  the
Subordinate  Voting  Shares on the date of  exercise  and the  exercise  price
determined  on the date of grant.  No  Subordinate  Voting Shares are issuable
under the SAR Plan.

         Our  Board of  Directors  has  delegated  to  Management  the task of
designating the recipients of stock appreciation  rights, the date of vesting,
the expiry  date and other  conditions.  Under the terms of the SAR Plan,  the
exercise  price of the stock  appreciation  rights  may not be lower  than the
highest of the closing prices of the Subordinate  Voting Shares on the Toronto
Stock  Exchange  and on the NASDAQ  National  Market on the last  trading  day
preceding  the grant date,  using the noon buying rate of the Federal  Reserve
Bank of New York on the grant  date to  convert  the  NASDAQ  National  Market
closing   price  to   Canadian   dollars.   Stock   appreciation   rights  are
non-transferable.

         The stock appreciation  rights vest over a four-year period, with 25%
vesting  annually  commencing  on the  first  anniversary  date of the date of
grant.  Once vested,  stock  appreciation  rights may be exercised between the
second and the fifteenth  business day following each release of our quarterly
financial results. All of the stock appreciation rights that are granted under
the SAR Plan may be exercised  within a maximum  period of 10 years  following
the date of their grant. Any stock  appreciation  rights granted under the SAR
Plan will lapse  immediately upon the termination of the relationship  with us
or one of our  subsidiaries  for a good and sufficient cause or at the date on
which an  employee  resigns  or leaves  his  employment  with us or one of our
subsidiaries (or within 30 days if the holder is dismissed  without cause). In
the event of retirement or disability, any stock appreciation right held by an
employee  lapses 30 days after the date of any such  disability or retirement.
In the event of death, any stock  appreciation right lapses 6 months after the
date of death.

         As of November 1, 2005, there were 19,000 SAR's outstanding.

                                      81
<PAGE>

DEFERRED PROFIT SHARING PLAN

         We  maintain a deferred  profit  sharing  plan for  certain  eligible
Canadian  resident  employees.  Under this plan,  we may  contribute an amount
equal  to 1%  until  May  31,  2005  and 2%  starting  June 1,  2005,  of each
employee's gross salary to that employee's  individual deferred profit sharing
plan to the extent that such  employee  contributes  at least 2% of his or her
gross  salary  to his or her  individual  tax-deferred  registered  retirement
savings  plan.  As a  cost  control  measure,  we  temporarily  suspended  our
contributions  under  this plan  commencing  in June  2002 and  re-established
contributions  commencing January 2003. In the year ended August 31, 2005, the
aggregate  amount of contributions  under the plan was $179,000  (CA$221,000).
Mr. Germain Lamonde is not entitled to participate in this plan.

401(K) PLAN

         We  maintain  a  401(k)  plan for  eligible  United  States  resident
employees of our subsidiaries. Employees become eligible to participate in the
401(k) plan on the first day of the month  following  the  completion of three
months of  continuous  service.  Employees  may elect to defer  their  current
compensation  up  to  the  lesser  of  1%  of  eligible  compensation  or  the
statutorily  prescribed annual limit and have the deferral  contributed to the
401(k)  plan.  The  401(k)  plan  permits,  but does not  require,  us to make
additional matching contributions to the 401(k) plan on behalf of the eligible
participants, subject to a maximum of 50% of the first 6% of the participant's
current  compensation  subject  to  certain  legislated  maximum  contribution
limits. In the year ended August 31, 2005, we made an aggregate of $134,000 in
matching contributions to the 401(k) plan. Contributions by employees or by us
to the 401(k) plan and income earned on plan  contributions  are generally not
taxable to the employees until withdrawn and contributions by us are generally
deductible by us when made. At the direction of each participant, the trustees
of the 401(k) plan invest the assets of the 401(k) plan in selected investment
options.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

         Our by-laws require us, subject to the  limitations  provided by law,
to indemnify  our present or former  Directors and officers or any persons who
act or acted at our request as Directors or officers of a body  CORPORATE  for
all costs,  losses,  charges and expenses that arose or may arise by reason of
their status as Directors or officers of us or such body  corporate.  A policy
of  Directors'  and  officers'  liability  insurance is maintained by us which
insures our  Directors  and  officers  and those of our  subsidiaries  against
liability incurred by, arising from or against them for certain of their acts,
errors or omissions.  Accordingly,  we maintain  insurance  protection against
liability  incurred  by our  officers  and  Directors  as well as those of our
subsidiaries in the performance of their duties. The entire premium, amounting
to  US$245,000  from  September 30, 2005 to September 30, 2006, is paid by us.
The  aggregate  limit of  liability  in respect of any and all claims is US$10
million per year. The policy provides for the indemnification of Directors and
officers  in the case of claims for which we have not  indemnified  or are not
permitted by law to indemnify them, and for the  reimbursement  of us, subject
to a  deductible  of  US$100,000,  except  for  securities  claims  where  the
deductible is US$500,000.


                                      82
<PAGE>

C.       BOARD PRACTICES

BOARD OF DIRECTORS

         Our Directors are elected at the annual meeting of  shareholders  for
one-year  terms and serve until  their  successors  are elected or  appointed,
unless they  resign or are  removed  earlier.  Our  articles of  incorporation
provide  for a Board of  Directors  of a minimum of three (3) and a maximum of
twelve  (12)  Directors.  Our Board of  Directors  presently  consists  of six
Directors.  Under the CANADA BUSINESS CORPORATIONS ACT, twenty-five percent of
the  Directors  and of the members of any  committee of the Board of Directors
must be resident Canadians.  We have no arrangements with any of our Directors
providing  for the payment of benefits  upon their  termination  of service as
Director  except for the vesting of their  respective  Deferred Share Units as
detailed above.

         Since September 1, 2004 until November 1, 2005, the Board met a total
of seven (7) times.  Attendance at all meetings was perfect,  except Mr. David
A. Thompson who was absent two times and Mr. Andre Tremblay who was absent one
time.

COMMITTEES OF THE BOARD OF DIRECTORS

         Our Board of Directors has  established an audit  committee,  a human
resources committee and a disclosure committee.

         Our  audit  committee  will  recommend  a  firm  to be  appointed  as
independent  auditors to audit  financial  statements and to perform  services
related  to the  audit,  review  the scope and  results  of the audit with the
independent auditors,  review with management and the independent auditors our
annual operating results and consider the adequacy of the internal  accounting
procedures  and  the  effect  of the  procedures  relating  to  the  auditors'
independence.  Further  to changes to NASDAQ  corporate  governance  rules and
Securities and Exchange rules flowing from the adoption of the  SARBANES-OXLEY
ACT, our audit  committee  charter is being  revised every  financial  year to
ensure that we comply with all new requirements.  Accordingly,  in March 2005,
the Board updated and adopted an Audit Committee Charter. A copy of this Audit
Committee  Charter has been filed as Exhibit 11.6 to the annual  report and is
also  readily  available  from  EXFO's  website  at  www.exfo.com.  The  audit
committee is composed of four independent Directors:  Andre Tremblay,  Michael
Unger,  Guy  Marier  and  Pierre  Marcouiller.  The  chairperson  of the audit
committee is Andre Tremblay.

         During the fiscal year ended August 31, 2005, the Audit Committee met
a total of four (4) times and attendance  was perfect at all meetings,  as all
members attended all meetings.

         Our human resources committee will evaluate, review and supervise our
procedures  with regards to human resources and will assess the performance of
our executive  officers and the chief executive  officer.  This committee will
also review  annually the  remuneration of the Directors and will recommend to
the Board of  Directors  general  remuneration  policies  regarding  salaries,
bonuses and other forms of remuneration for our Directors,  executive officers
and employees as a whole.  Finally,  the human resources committee will review
our organizational structure annually and the development and maintenance of a
succession plan.  Accordingly,  in March 2005, the Board updated and adopted a
Human Resources Committee Charter which integrates the Compensation  Committee
Charter and the Nominating and Governance  Committee  Charter.  A copy of this
Human Resources Committee Charter has been filed as Exhibit 11.7 to the annual
report and is also readily available from EXFO's website at www.exfo.com.  The

                                      83
<PAGE>

human resources  committee is composed of five independent  Directors:  Pierre
Marcouiller,  Guy Marier, David A. Thompson, Andre Tremblay and Michael Unger.
The chairperson of the human resources committee is Michael Unger.

         During the fiscal year ended  August 31,  2005,  the Human  Resources
committee met a total of two times and attendance was perfect at all meetings,
with the excepton of one meeting missed by Mr. David A. Thompson.

         The disclosure committee is responsible for overseeing our disclosure
practices.  This committee consists of the chief executive officer,  the chief
financial officer,  investor relations the manager of financial  reporting and
accounting as well as our legal counsel and corporate secretary.

         In  addition,   in  order  to  deal  with  issues  arising  from  our
implication  in the IPO class  action  suit,  in  October  2002,  our Board of
Directors appointed a litigation committee composed of four of our independent
Directors.


D.       EMPLOYEES

         We have  fostered a  corporate  culture  where  growth and change are
strongly encouraged. In fact, employees are constantly evolving with the rapid
pace of technology to meet new challenges  and  realities.  We believe that we
possess  a  good  cross-section  of  experience  and  youth  to  handle  these
inevitable changes in the industry.

         As of November 1, 2005,  we had a total of 685  employees,  up from a
total of 649 on December 15, 2004. We have 614 employees in Canada,  primarily
based in Quebec, and 71 employees based outside of Canada. 194 are involved in
research and development, 250 in manufacturing, 128 in sales and marketing, 72
in general  administrative  positions  and 41 in  communications  and customer
support.  We  have  agreements  with  almost  all  of our  employees  covering
confidentiality  and  non-competition.  Only manufacturing  employees based in
Quebec City plants are represented by a collective bargaining agreement, which
expires in 2009. We have never  experienced a work  stoppage.  We believe that
relations with our employees and bargaining unit are good.


E.       SHARE OWNERSHIP

         The following table presents  information  regarding the ownership of
Subordinate  Voting Shares,  Exercisable  "in-the-money"  and  "out-the-money"
options and the  beneficial  ownership of our share  capital as of November 1,
2005 by our Chief Executive Officer,  Chief Financial Officer,  our Directors,
our  three  other  most  highly  compensated  executive  officers,  our  other
executive  officers as a group and all of our Directors and executive officers
as a group.

         Each multiple voting share is convertible at the option of the holder
into one subordinate  voting share.  Holders of our subordinate  voting shares
are  entitled  to one (1) vote per share and  holders of our  multiple  voting
shares are entitled to ten (10) votes per share.

                                      84
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                             TOTAL
                                      CURRENTLY EXERCISABLE OPTIONS       SUBORDINATE                               TOTAL
     NAME           SUBORDINATE        OWNED AS OF NOVEMBER 1, 2005      VOTING SHARES      MULTIPLE VOTING      PERCENTAGE
                   VOTING SHARES     ---------------------------------   BENEFICIALLY     SHARES BENEFICIALLY     OF VOTING
                       OWNED          IN-THE-MONEY(1)  OUT-THE-MONEY(2)     OWNED (3)          OWNED (3)            POWER
---------------------------------------------------------------------------------------------------------------------------
                   NUMBER    PERCENT  NUMBER  PERCENT  NUMBER  PERCENT   NUMBER   PERCENT   NUMBER     PERCENT    PERCENT
----------------------------------------------------------------------------------------------------------------------------
<S>               <C>          <C>    <C>       <C>   <C>        <C>   <C>          <C>   <C>            <C>        <C>
Germain Lamonde   93,000       *      37,500    *     100,482    *     230,982      *     37,900,000     100        92.6
(4)
----------------------------------------------------------------------------------------------------------------------------
Pierre Plamondon  35,427(5)    *      18,750    *      53,285    *     107,462      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
Pierre             5,000       *      15,625    *      23,003    *      43,628      *             --      --           *
Marcouiller
----------------------------------------------------------------------------------------------------------------------------
Guy Marier         1,000       *          --    *       3,125    *       4,125      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
David A.           2,100       *      15,625    *      17,734    *      35,459      *             --      --           *
Thompson
----------------------------------------------------------------------------------------------------------------------------
Andre Tremblay     6,650(6)    *      15,625    *      19,691    *      41,966      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
Michael Unger         --       *      15,625    *      20,568    *      36,193      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
Juan-Felipe       50,752       *       7,500    *      80,150    *     138,402      *             --      --           *
Gonzalez
----------------------------------------------------------------------------------------------------------------------------
Stephen Bull      21,573       *      11,255    *      24,727    *      57,550      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
Etienne Gagnon     5,000       *       5,000    *         789    *      10,789      *             --      --           *
----------------------------------------------------------------------------------------------------------------------------
Other executive
officers as a      8,452       *      18,750    *      45,169    *      72,371      *             --      --           *
group
----------------------------------------------------------------------------------------------------------------------------
All of our
Directors and
executive        228,954       *     161,250    *     388,723   1.3    778,927     2.5    37,900,000     100        92.7
officers as a
group
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------- ----------
* Less than 1%.

(1)  "In-the-money"  options  are  options  for which the market  value of the
     underlying  securities is higher than the price at which such  securities
     may be bought  from the  Corporation.  As of  November 1, 2005 the market
     value of a Subordinate Voting Share was US$4.43.
(2)  "Out-the-money"  options are  options  for which the market  value of the
     underlying  securities  is lower than the price of which such  securities
     may be bought from the Corporation.
(3)  Beneficial  ownership is determined  in accordance  with the rules of the
     SEC and generally  includes  voting or  investment  power with respect to
     securities.  Options that are currently  exercisable  (including  options
     that have an  exercise  price  above the  market  price) are deemed to be
     outstanding  and to be  beneficially  owned by the  person  holding  such
     options for the purpose of  computing  the  percentage  ownership of such
     person,  but are not treated as outstanding  for the purpose of computing
     the percentage ownership of any other person. Accordingly,  DSUs and RSUs
     are not included.
(4)  The number of shares held by Germain Lamonde includes  1,900,000 multiple
     voting  shares  held of record by  Fiducie  Germain  Lamonde,  36,000,000
     multiple  voting  shares  held of  record by G.  Lamonde  Investissements
     Financiers  inc. and 93,000  subordinate  voting shares held of record by
     Placements Lamonde SENC.
(5)  The number of shares held by Pierre Plamondon  includes 6,874 subordinate
     voting shares held of record by Fiducie Pierre Plamondon.
(6)  The number of subordinate  voting shares held of record by Andre Tremblay
     is held by 9104-5559 Quebec Inc, a company controlled by Mr. Tremblay.

                                      85
<PAGE>

         The following table presents information regarding stock options held
as of  November  1,  2005 by our  Chief  Executive  Officer,  Chief  Financial
Officer,  our  Directors,  our three other most highly  compensated  executive
officers and our other executive officers as a group.

<TABLE>
<CAPTION>
                                 SECURITIES UNDER OPTIONS    EXERCISE PRICE (2)
              NAME                     GRANTED (1) (#)         (US$/SECURITY)           EXPIRATION DATE
-------------------------------- ------------------------    ------------------      -------------------
<S>                                        <C>                    <C>                 <C>
Germain Lamonde.................           25,402                 $26.00                June 29, 2010
                                            5,080                 $22.25               January 10, 2011
                                           70,000                  $9.13               October 10, 2011
                                           50,000                  $1.58              September 25, 2012
                                           17,942                  $4.51               February 1, 2015

Pierre Plamondon................            8,700                 $26.00                June 29, 2010
                                           10,000                 $45.94              September 13, 2010
                                            5,000                 $34.07               October 11, 2010
                                            9,240                 $22.25               January 10, 2011
                                           19,000                  $9.13               October 10, 2011
                                           25,000                  $1.58              September 25, 2012
                                            5,383                  $5.13               October 26, 2014

Pierre Marcouiller..............            2,000                 $26.00                June 29, 2010
                                              400                 $22.25               January 10, 2011
                                           17,966                  $9.13               October 10, 2011
                                            1,037                 $12.69               December 1, 2011
                                            2,479                  $5.65                March 1, 2012
                                           12,500                  $1.58              September 25, 2012
                                           12,500                  $3.51               October 27, 2013

Guy Marier......................           12,500                  $4.65                March 24, 2014

David A. Thompson...............            2,000                 $26.00                June 29, 2010
                                              400                 $22.25               January 10, 2011
                                           15,334                  $9.13               October 10, 2011
                                           12,500                  $1.58              September 25, 2012
                                           12,500                  $3.51               October 27, 2013

Andre Tremblay..................            2,000                 $26.00                June 29, 2010
                                              400                 $22.25               January 10, 2011
                                           17,291                  $9.13               October 10, 2011
                                           12,500                  $1.58              September 25, 2012
                                           12,500                  $3.51               October 27, 2013

Michael Unger...................            2,000                 $26.00                June 29, 2010
                                              400                 $22.25               January 10, 2011
                                           18,168                  $9.13               October 10, 2011
                                           12,500                  $1.58              September 25, 2012
                                           12,500                  $3.51               October 27, 2013

Juan Felipe Gonzalez............            6,900                 $26.00                June 29, 2010
                                           15,000                 $45.94              September 13, 2010
                                           15,000                 $34.07               October 11, 2010
                                           15,630                 $22.25               January 10, 2011
                                           15,000                  $9.13               October 10, 2011
                                           15,000                 $12.22               January 3, 2012
                                           15,000                  $1.58              September 25, 2012
                                            5,482                  $5.13               October 26, 2014

Stephen Bull....................              900                 $26.00                June 29, 2010
                                            5,000                 $45.94              September 13, 2010
                                            2,930                 $22.25               January 10, 2011
                                           15,000                  $9.13               October 10, 2011
                                           15,000                  $1.58              September 25, 2012
                                            3,589                  $5.13               October 26, 2014
</TABLE>

                                      86
<PAGE>

<TABLE>
<CAPTION>
                                 SECURITIES UNDER OPTIONS    EXERCISE PRICE (2)
              NAME                     GRANTED (1) (#)         (US$/SECURITY)           EXPIRATION DATE
-------------------------------- ------------------------    ------------------      -------------------
<S>                                        <C>                    <C>                 <C>
Etienne Gagnon..................           15,000                  $3.19               January 7, 2013
                                            3,158                  $5.13               October 26, 2014

Other Executive Officers as a               3,000                 $45.94              September 13, 2010
group...........................            4,000                 $34.07               October 11, 2010
                                            3,250                 $22.25               January 10, 2011
                                           10,000                 $23.40                March 15, 2011
                                           18,000                  $9.13               October 10, 2011
                                           26,250                  $1.58              September 25, 2012
                                           15,000                  $4.65                March 24, 2014
                                           12,679                  $5.13               October 26, 2014
                                            2,000                  $4.51               February 1, 2015
</TABLE>
---------------------------------
(1)  Underlying securities: subordinate voting shares
(2)  The exercise price of options granted is determined  based on the highest
     of the closing  prices of the  subordinate  voting  shares on the Toronto
     Stock  Exchange  and the NASDAQ  National  Market on the last trading day
     preceding  the grant  date,  using the noon  buying  rate of the  Federal
     Reserve Bank of New York on the grant date to convert the NASDAQ National
     Market closing price to Canadian dollars, as required.


         The following  table presents  information  regarding  Deferred Share
Units and  Restricted  Share Units held by our Chief  Executive  Officer,  our
Chief  Financial  Officer,   our  Directors,   our  three  other  most  highly
compensated  executive  officers,  our other executive officers as a group and
all of our Directors and executive officers as a group.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                               DSUS                                           RSUS
----------------------------------------------------------------------------------------------------------------------
                                                           WEIGHTED
                                                         AVERAGE FAIR                                   FAIR VALUE AT
                                                         VALUE AT THE                                    THE TIME OF
                                                         TIME OF GRANT                                      GRANT
    NAME                      NUMBER       PERCENTAGE    US$/DSU (1)       NUMBER       PERCENTAGE       US$/RSU (2)
----------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>             <C>          <C>               <C>             <C>
Germain Lamonde                 --               --              --        13,089 (3)         7.4%           4.69
----------------------------------------------------------------------------------------------------------------------
                                --               --              --         3,927 (3)         2.2%           4.69
Pierre Plamondon      ------------------------------------------------------------------------------------------------
                                --               --              --        30,000 (4)        17.0%           4.69
----------------------------------------------------------------------------------------------------------------------
Pierre Marcouiller           4,537 (5)        19.1%            4.47            --               --             --
----------------------------------------------------------------------------------------------------------------------
Guy Marier                   4,537 (5)        19.1%            4.47            --               --             --
----------------------------------------------------------------------------------------------------------------------
David A. Thompson            5,586 (5)        23.6%            4.47            --               --             --
----------------------------------------------------------------------------------------------------------------------
Andre Tremblay               4,537 (5)        19.1%            4.47            --               --             --
----------------------------------------------------------------------------------------------------------------------
Michael Unger                4,537 (5)        19.1%            4.47            --               --             --
----------------------------------------------------------------------------------------------------------------------
                                --               --              --         3,998 (3)         2.3%           4.69
Juan-Felipe Gonzalez  ------------------------------------------------------------------------------------------------
                                --               --              --        30,000 (4)        17.0%           4.69
----------------------------------------------------------------------------------------------------------------------
                                --               --              --         2,618 (3)         1.5%           4.69
Stephen Bull          ------------------------------------------------------------------------------------------------
                                --               --              --        30,000 (4)        17.0%           4.69
----------------------------------------------------------------------------------------------------------------------
                                --               --              --         2,304 (3)         1.3%           4.69
Etienne Gagnon        ------------------------------------------------------------------------------------------------
                                --               --              --         7,500 (4)         4.3%           4.69
----------------------------------------------------------------------------------------------------------------------
Other executives                --               --              --         9,249 (3)         5.2%           4.69
officers as a group   ------------------------------------------------------------------------------------------------
                                --               --              --        31,500 (4)        17.9%           4.69
----------------------------------------------------------------------------------------------------------------------
All of the directors
and executive officers
as a group                      --               --              --        35,185 (3)        20.0%           4.69
----------------------------------------------------------------------------------------------------------------------
                            23,734             100%            4.47       129,000 (4)        73.2%           4.69
----------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------
(1)  The  weighted  average  fair value at the time of grant is the average of
     the fair value at the time of grant of a DSU which is equal to the market
     value of a Subordinate  Voting Share at the time DSUs are credited to the
     Directors.
(2)  The fair value at the time of grant of a RSU is equal to the market value
     of Subordinate Voting Shares at the time RSUs are granted.
(3)  Those  RSUs  will  vest on the  fifth  anniversary  date of the  grant in
     January  2005 but are  subject  to early  vesting on the third and fourth
     anniversary date of the grant on the attainment of performance objectives
     as  determined  by the Board of  Directors.  Accordingly,  subject to the
     attainment of  performance  objectives,  the first early vesting is up to
     1/3 of the  units on the  third  anniversary  date of the  grant  and the
     second early  vesting is up to 50% of the  remaining  units on the fourth
     anniversary date of the grant.
(4)  Those RSUs will vest at a rate of 55%, 35% and 10%, on the third,  fourth
     and fifth anniversary dates of the grant in January 2005.
(5)  Those  DSUs  will vest at the time  Director  cease to be a member of the
     Board of the Corporation.

                                      87
<PAGE>

ESCROWED SECURITIES

         The  following  table  presents  information  regarding the number of
securities  of  each  class  of the  Corporation  held,  to the  Corporation's
knowledge  as of November 1, 2005,  in escrow and the  percentage  outstanding
securities of that class.

<TABLE>
<CAPTION>
  DESIGNATION OF CLASS         NUMBER OF SECURITIES HELD IN ESCROW        PERCENTAGE OF CLASS
  --------------------         -----------------------------------        -------------------
<S>                                         <C>                                <C>
Subordinate Voting Shares                   493,096 (1)                        1.6%

Multiple Voting Shares                           --                             --
</TABLE>
---------------------
(1)  CIBC Mellon Trust Company is the Escrow agent. The shares held in Escrow
     will be released to shareholder on October 4, 2006.


                                      88
<PAGE>

ITEM 7.           MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       MAJOR SHAREHOLDERS

         The following  table  presents  information  regarding the beneficial
ownership of our share  capital as of November 1, 2005 by persons or groups of
affiliated persons known by us to own more than 5% of our voting shares.

<TABLE>
<CAPTION>
                                                                                            TOTAL PERCENTAGE OF
                                   MULTIPLE VOTING SHARES      SUBORDINATE VOTING SHARES    -------------------
                                   BENEFICIALLY OWNED (1)       BENEFICIALLY OWNED (1)         VOTING POWER
                                -------------------------     --------------------------    -------------------
              NAME                NUMBER         PERCENT        NUMBER         PERCENT          PERCENT
----------------------------    ----------      ---------     ----------      ----------    -------------------
<S>                             <C>                <C>          <C>             <C>                <C>
Germain Lamonde (2)             37,900,000         100%         230,982              *             92.57%

Fiducie Germain Lamonde (3)      1,900,000           5%             Nil            Nil              4.64%

G. Lamonde Investissements
Financiers inc. (4)             36,000,000          95%             Nil            Nil             87.88%

Placements Lamonde, SENC (5)           Nil          Nil          93,000              *                  *

Kern Capital Management, LLC (6)       Nil          Nil       4,658,000         15.19%              1.14%

FMR Corporation (7)                    Nil          Nil       4,597,100         14.99%              1.12%

Skyline Asset Management LP (8)        Nil          Nil       1,893,100          6.17%                  *
</TABLE>
---------------------------
*    Less than 1%

(1)  Beneficial  ownership is determined  in accordance  with the rules of the
     SEC and generally  includes  voting or  investment  power with respect to
     securities.  Options that are currently  exercisable  (including  options
     that have an  exercise  price  above the  market  price) are deemed to be
     outstanding  and to be  beneficially  owned by the  person  holding  such
     options for the purpose of  computing  the  percentage  ownership of such
     person,  but are not treated as outstanding  for the purpose of computing
     the percentage ownership of any other person.
(2)  The number of shares held by Germain Lamonde includes  1,900,000 multiple
     voting shares held of record by Fiducie  Germain  Lamonde and  36,000,000
     multiple  voting  shares  held of  record by G.  Lamonde  Investissements
     Financiers  inc. and 93,000  subordinate  voting shares held of record by
     Placements Lamonde, SENC.
(3)  Fiducie  Germain Lamonde is a family trust for the benefit of Mr. Lamonde
     and members of his family.
(4)  G. Lamonde Investissements Financiers inc. is a company controlled by Mr.
     Lamonde.
(5)  Placements Lamonde, SENC is a parternship controlled by Mr. Lamonde.
(6)  As of September 30, 2005, Kern Capital Management LLC controls the voting
     rights  attached  to this number of  subordinate  voting  shares  through
     relationships with several clients and does not beneficially own directly
     this number of subordinate voting shares.
(7)  As of September 30, 2005,  Fidelity  Management and Research  Company,  a
     wholly owned  subsidiary of FMR  Corporation,  is the beneficial owner of
     this  number  of  subordinate  voting  shares  as a result  of  acting as
     investment advisor to various investment companies.
(8)  As of September 30, 2005, Skyline Asset Management LP apparently controls
     the voting rights  attached to this number of  subordinate  voting shares
     but we were unable to obtain a confirmation from Skyline.

         Each multiple voting share is convertible at the option of the holder
into one subordinate  voting share.  Holders of our subordinate  voting shares
are entitled to one vote per share and holders of our multiple  voting  shares
are entitled to ten votes per share.

         As of November 21, 2005,  30,674,617  subordinate  voting shares were
outstanding.  Approximately 96% (29,525,530) of our subordinate  voting shares
were held in  bearer  form and the  remainder  (1,149,087  subordinate  voting
shares) was held by 178 record  holders.  As of November 21, 2005,  we believe
approximately  58% of our outstanding  subordinate  voting shares were held in
the United States.

                                      89
<PAGE>

B.       RELATED PARTY TRANSACTIONS

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES

         We have  guaranteed the repayment of a loan granted to an employee by
a  financial  institution  for the  purchase of our Class "F" shares that were
converted  into  subordinate  voting shares  immediately  prior to our initial
public  offering.  As of August  31,  2005 and  November  1,  2005,  the total
principal amount guaranteed by us was $56,200.

         Except as disclosed in this section, none of our Directors, executive
officers,   associates  or  affiliates  had  any  material   interest  in  any
transaction with us during the past three years or in any proposed transaction
which has materially affected or could materially affect us.

LEASES

         Until  September 1, 2004,  we had a lease  agreement  with G. Lamonde
Investissements  financiers inc., a company controlled by Mr. Germain Lamonde,
for premises located at 465 Godin Avenue in Vanier, Quebec. Until September 1,
2003,  these premises were used for our executive and  administrative  offices
which were,  since then,  moved into a building  that we own.  For fiscal year
2004, this space was  unoccupied.  This lease was renewed in December 2001 for
five years,  with all terms and  conditions  remaining the same.  However,  on
September 1, 2004, we were released from our obligations  under the lease with
a final payment of $194,000  (CA$250,000).  The annual rent for this lease was
$CA144,000.

    LOCATION          SQUARE FOOTAGE         ANNUAL RENT          EXPIRY DATE
    --------          --------------         -----------          -----------
    465 Godin             24,000              CA$144,000      November 30, 2006

         Based on third-party  valuations of the property  values,  we believe
this lease agreement was at prevailing market terms.

         In  September  2002,  we  acquired  from G.  Lamonde  Investissements
financiers  inc. the building  located at 436 Nolin Street that houses some of
our manufacturing  activities.  Previous to this  acquisition,  we had a lease
agreement with this company for these premises.  We paid  CA$1,450,000 for the
building  and this  purchase  price is based  on an  independent  third  party
valuation  and the  transaction  was approved by our audit  committee  and the
Board of Directors with Mr. Lamonde abstaining.

                                      90
<PAGE>

ITEM 8.           FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See Item 18, "Financial  Statements" for certain information  required by this
section.

Valuation and  qualifying  accounts as well as Export sales are as follows (in
thousands of US dollars);

<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS

                                                                        YEARS ENDED AUGUST 31,
                                                        -------------------------------------------------------
                                                                2005                 2004                2003
                                                        ---------------      --------------      --------------
<S>                                                     <C>                  <C>                 <C>
Balance - Beginning of year                             $        510         $        568        $        520
Addition charged to earnings                                     316                  403                 619
Write-offs of uncollectible accounts                             (23)                 (48)               (288)
Recovery of uncollectible accounts                              (464)                (456)               (315)
Foreign currency translation adjustment                           13                   43                  32
                                                        ---------------      --------------      --------------
Balance - End of year                                   $        352         $        510        $        568
                                                        ===============      ==============      ==============

VALUATION ALLOWANCE ON FUTURE INCOME TAX ASSETS

                                                                        YEARS ENDED AUGUST 31,
                                                        -------------------------------------------------------
                                                                2005                 2004                2003
                                                        ---------------      --------------      --------------
Balance - Beginning of year                             $     32,613         $     28,846        $        359
Addition charged to earnings                                   3,375                3,954              28,385
Foreign currency translation adjustment                        2,418                 (187)                102
                                                        ---------------      --------------      --------------
Balance - End of year                                   $     38,406         $     32,613        $     28,846
                                                        ===============      ==============      ==============
</TABLE>

EXPORT SALES

<TABLE>
<CAPTION>
Export and domestic  sales in  thousands of US dollars and as a percentage  of
total sales are as follows:

                                                          YEARS ENDED AUGUST 31,
                              --------------------------------------------------------------------------------
                                       2005                        2004                        2003
                              ------------------------    ------------------------    ------------------------
<S>                           <C>               <C>       <C>                <C>      <C>                <C>
Export Sales                  $      90,386     93%       $      68,812      92%      $      57,124      92%
Domestic Sales                        6,830      7                5,818       8               4,806       8
                              ------------------------    ------------------------    ------------------------

                              $      97,216    100%       $      74,630     100%      $      61,930     100%
                              ========================    ========================    ========================
</TABLE>

                                      91
<PAGE>

LEGAL PROCEEDINGS

On November  27,  2001,  a class  action  suit was filed in the United  States
District Court for the Southern District of New York against the company, four
of the  underwriters  of its Initial Public Offering and some of its executive
officers  pursuant  to the  Securities  Exchange  Act of 1934 and  Rule  10b-5
promulgated  thereunder  and Sections 11, 12 and 16 of the  Securities  Act of
1933. This class action alleges that the company's  registration statement and
prospectus filed with the Securities and Exchange Commission on June 29, 2000,
contained material  misrepresentations and/or omissions resulting from (i) the
underwriters  allegedly  soliciting  and receiving  additional,  excessive and
undisclosed  commissions  from  certain  investors  in exchange for which they
allocated  material  portions  of the  shares  issued in  connection  with the
company's  Initial  Public  Offering;  and  (ii)  the  underwriters  allegedly
entering into  agreements  with customers  whereby shares issued in connection
with  the  company's  Initial  Public  Offering  would be  allocated  to those
customers  in  exchange  for which  customers  agreed to  purchase  additional
amounts of shares in the after-market at pre-determined prices.

On April 19, 2002, the plaintiffs filed an amended complaint containing master
allegations  against all of the  underwriters in all of the 310 cases included
in  this  class  action  and  also  filed  an  amended  complaint   containing
allegations  specific to four of the company's  underwriters,  the company and
two of its executive officers. In addition to the allegations mentioned above,
the amended complaint alleges that the underwriters (i) used their analysts to
manipulate the stock market; and (ii) implemented  schemes that allowed issuer
insiders to sell their shares  rapidly  after an initial  public  offering and
benefit from high market prices. As concerns the company and its two executive
officers in particular,  the amended  complaint alleges that (i) the company's
registration  statement was materially false and misleading  because it failed
to disclose the  additional  commissions  and  compensation  to be received by
underwriters;  (ii) the two named executive  officers learned of or recklessly
disregarded the alleged  misconduct of the  underwriters;  (iii) the two named
executive  officers had motive and  opportunity to engage in alleged  wrongful
conduct due to personal  holdings of the company's  stock and the fact that an
alleged  artificially  inflated  stock  price  could be used as  currency  for
acquisitions;  and (iv) the two named executive  officers,  by virtue of their
positions  with the  company,  controlled  the company and the contents of the
registration statement and had the ability to prevent its issuance or cause it
to be corrected.  The plaintiffs in this suit seek an  unspecified  amount for
damages suffered.

In July 2002,  the issuers filed a motion to dismiss the  plaintiffs'  amended
complaint  and judgment  was  rendered on February  19, 2003.  Only one of the
claims  against  the  company was  dismissed.  On October 8, 2002,  the claims
against its officers were  dismissed  pursuant to the terms of  Reservation of
Rights and Tolling Agreements entered into with the plaintiffs.

In June 2003, a committee of the  company's  Board of Directors  conditionally
approved a proposed  settlement between the issuer defendants,  the individual
defendants,  and the plaintiffs.  If approved,  the settlement  would provide,
among other things, a release of the company and of the individual  defendants
for the conduct alleged in the action to be wrongful in the amended complaint.
The  company  would  agree  to  undertake  other  responsibilities  under  the
settlement,  including agreeing to assign away, not assert, or release certain
potential  claims the company may have  against its  underwriters.  Any direct
financial  impact of the  proposed  settlement  is expected to be borne by the
company's insurance carriers.

On June 25,  2004,  the  Plaintiffs  moved  for  Preliminary  Approval  of the
settlement.  The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications.

                                      92
<PAGE>

On August 31, 2005, the court issued a preliminary order further approving the
modifications  to the settlement and  certifying the settlement  classes.  The
court also appointed the Notice  Administrator  for the settlement and ordered
that notice of the settlement be  distributed to all settlement  class members
beginning  on November  15,  2005,  and  completed  by January 15,  2006.  The
settlement  fairness  hearing has been set for April 26, 2006.  Following  the
hearing,  if the court  determines  that the  settlement  is fair to the class
members, the settlement will be approved.  There can be no assurance that this
proposed  settlement would be approved and implemented in its current form, or
at all.  Therefore,  it is not  possible to predict  the final  outcome of the
case,  nor  determine  the amount of any possible  losses.  If the  settlement
process  fails,  the  company  will  continue  to defend its  position in this
litigation  that the claims  against it, and its officers,  are without merit.
Accordingly,  no  provision  for this case has been  made in the  consolidated
financial statements as at August 31, 2005.

There are no other legal or arbitration  proceedings  pending or threatened of
which we are  aware  which  may have or have had a  significant  effect on our
financial position.

DIVIDEND POLICY

We do not currently  anticipate  paying  dividends for at least the three next
years.  Our current  intention  is to reinvest  any  earnings in our  business
long-term growth.  Any future  determination by us to pay dividends will be at
the discretion of our Board of Directors and in accordance  with the terms and
conditions of any  outstanding  indebtedness  and will depend on our financial
condition,  results  of  operations,   capital  requirements  and  such  other
functions as our Board of Directors considers relevant.

B.       SIGNIFICANT CHANGES

No  significant  changes  occurred  since the date of our annual  consolidated
financial statements included elsewhere in this Annual Report.

                                      93
<PAGE>

ITEM 9.           OFFER AND LISTING

         Not Applicable, except for Item 9A (4) and Item 9C.

<TABLE>
<CAPTION>
                                                    NASDAQ (US$)              TSX (CDN$)
                                                HIGH         LOW          HIGH         LOW
<S>                                            <C>         <C>           <C>         <C>

September 1, 2000 to August 31, 2001           57.75       11.80         85.00       17.82
September 1, 2001 to August 31, 2002           15.00        1.35         23.80        2.05
September 1, 2002 to August 31, 2003            3.63        1.40          5.60        2.30
September 1, 2003 to August 31, 2004            7.09        2.71          9.15        3.75
September 1, 2004 to August 31, 2005            5.51        3.92          6.90        4.92

2004 1st Quarter                                4.26        2.71          5.53        3.75
2004 2nd Quarter                                7.09        3.29          9.15        4.40
2004 3rd Quarter                                5.23        4.08          6.90        5.68
2004 4th Quarter                                5.38        4.11          6.95        5.50

2005 1st Quarter                                5.51        4.27          6.90        5.73
2005 2nd Quarter                                5.24        4.29          6.42        5.35
2005 3rd Quarter                                4.99        3.93          6.05        4.95
2005 4th Quarter                                5.00        3.92          6.10        4.92

2005 May                                        4.28        3.93          5.30        4.95
2005 June                                       4.62        3.92          5.71        4.92
2005 July                                       4.91        4.12          6.05        5.12
2005 August                                     5.00        4.61          6.10        5.53
2005 September                                  5.00        4.76          5.92        5.60
2005 October                                    5.05        4.32          5.89        5.15
2005 November                                   4.75        4.43          5.71        5.24
(until November 21)
</TABLE>

         Our subordinate voting shares have been quoted on the NASDAQ National
Market under the symbol EXFO and listed on The Toronto  Stock  Exchange  under
the symbol EXF.SV since our initial public offering on June 29, 2000. Prior to
that time, there was no public market for our subordinate  voting shares.  The
following  table  sets  forth,  for the  periods  indicated,  the high and low
closing  sales prices per  subordinate  voting share as reported on the NASDAQ
National Market and the Toronto Stock Exchange.

         On  November  21,  2005,   the  last  reported  sale  price  for  our
subordinate voting shares on the NASDAQ National Market was US$ 4.72 per share
and the last  reported  sale price for our  subordinate  voting  shares on the
Toronto Stock Exchange was CA$ 5.62 per share.

                                      94
<PAGE>

ITEM 10.          ADDITIONAL INFORMATION

A.       SHARE CAPITAL

         Not Applicable

B.       MEMORANDUM AND ARTICLES OF ASSOCIATION

         Incorporated by reference to our  registration  statement on Form F-1
dated June 9, 2000 (File No. 333-38956).

C.       MATERIAL CONTRACTS

         Except as otherwise disclosed in this annual report and our financial
statements  and notes  included  elsewhere in this annual  report,  we have no
other material contracts.

D.       EXCHANGE CONTROLS

         Subject to the following  paragraph,  there is no law or governmental
decree or regulation in Canada that restricts the export or import of capital,
or  affects  the  remittance  of  dividends,  interest  or other  payments  to
non-resident  holders of our subordinate voting shares, other than withholding
tax requirements.

         There is no limitation  imposed by Canadian law or by our articles of
incorporation or our other charter documents on the right of a non-resident to
hold or  vote  subordinate  voting  shares,  other  than  as  provided  by the
INVESTMENT CANADA ACT, the NORTH AMERICAN FREE TRADE AGREEMENT  IMPLEMENTATION
ACT (Canada) and the WORLD TRADE ORGANIZATION  AGREEMENT  IMPLEMENTATION  ACT.
The INVESTMENT CANADA ACT requires notification and, in certain cases, advance
review and approval by the  Government of Canada of an investment to establish
a  new  Canadian  business  by a  non-Canadian  or  of  the  acquisition  by a
"non-Canadian"  of "control" of a "Canadian  business",  all as defined in the
INVESTMENT CANADA ACT.  Generally,  the threshold for review will be higher in
monetary terms for a member of the World Trade  Organization or North American
Free Trade Agreement.

E.       TAXATION

UNITED STATES TAXATION

         The  information  set forth below under the  caption  "United  States
Taxation" is a summary of the material U.S. federal income tax consequences of
the ownership and disposition of subordinate  voting shares by a U.S.  Holder,
as defined below.  These discussions are not a complete analysis or listing of
all of the possible tax  consequences of such  transactions and do not address
all tax considerations  that may be relevant to particular holders in light of
their  personal  circumstances  or to persons  that are subject to special tax
rules.  In particular,  the  information  set forth under the caption  "United
States  Taxation" deals only with U.S.  Holders that hold  subordinate  voting
shares as capital  assets  within the meaning of Section  1221 of the Internal
Revenue Code of 1986, as amended, and who do not at any time own individually,
nor are treated as owning 10% or more of the total  combined  voting  power of
all classes of our stock  entitled to vote. In addition,  this  description of
U.S. tax consequences does not address the tax treatment of special classes of
U.S. Holders, such as financial institutions,  regulated investment companies,
traders in securities who elect to mark-to-market their securities, tax-exempt

                                      95
<PAGE>

entities,  insurance  companies,  partnerships,  persons  holding  subordinate
voting shares as part of a hedging, integrated or conversion transaction or as
part of a "straddle,"  U.S.  expatriates,  persons  subject to the alternative
minimum tax, persons who acquired their subordinate  voting shares through the
exercise  or   cancellation   of  employee   stock  options  or  otherwise  as
compensation for services,  dealers or traders in securities or currencies and
holders whose "functional  currency" is not the U.S. dollar. This summary does
not address estate and gift tax  consequences  or tax  consequences  under any
foreign,  state or local laws other than as provided  in the section  entitled
"Canadian Federal Income Tax Considerations" provided below.

         As used in this  section,  the term "U.S.  Holder" means a beneficial
owner of  subordinate  voting  shares  that is for  U.S.  federal  income  tax
puposes:

         (a)  an individual citizen or resident of the United States;
         (b)  a corporation  created or organized under the laws of the United
              States or any state thereof and the District of Columbia;
         (c)  an estate  the  income  of which is  subject  to  United  States
              federal income taxation regardless of its source;
         (d)  a trust  if (1) a court  within  the  United  States  is able to
              exercise primary jurisdiction over its administration and one or
              more U.S.  persons  have  authority  to control all  substantial
              decisions of the trust or (2) the trust has a valid  election in
              effect under applicable U.S. Treasury  regulations to be treated
              as a U.S. person; or
         (e)  any other  person  whose  worldwide  income or gain is otherwise
              subject to U.S. federal income taxation on a net income basis;

         If a  partnership  or other  flow-through  entity  holds  subordinate
voting  shares,  the U.S.  federal  income  tax  treatment  of a partner  will
generally  depend  upon the status of the  partner or other owner and upon the
activities  of the  partnership  or other  flow-through  entity.  If you are a
partner of a partnership holding subordinate voting shares, you should consult
your tax advisor.

         Holders  of  subordinate  voting  shares  who are not  U.S.  Holders,
sometimes referred to as "Non-U.S. Holders", should also consult their own tax
advisors, particularly as to the applicability of any tax treaty.

         The following discussion is based upon:

         o    the Internal Revenue Code;
         o    U.S. judicial decisions;
         o    administrative pronouncements;
         o    existing and proposed Treasury regulations; and
         o    the Canada -- U.S. Income Tax Treaty.

         Any of the above is  subject  to change,  possibly  with  retroactive
effect, so as to result in U.S. federal income tax consequences different from
those discussed below. We have not requested,  and will not request,  a ruling
from the U.S. Internal Revenue Service with respect to any of the U.S. federal
income tax  consequences  described  below,  and as a result,  there can be no
assurance  that the U.S.  Internal  Revenue  Service will not disagree with or
challenge any of the conclusions we have reached and describe here.

                                      96
<PAGE>

         The following  discussion is for general  information only and is not
intended to be, nor should it be  construed  to be, legal or tax advice to any
holder of  subordinate  voting  shares and no opinion or  representation  with
respect to the U.S.  federal  income tax  consequences  to any holder is made.
Holders of  subordinate  voting shares are urged to consult their tax advisors
as to the particular consequences to them under U.S. federal, state, local and
applicable  foreign tax laws of the acquisition,  ownership and disposition of
subordinate voting shares.

DIVIDENDS

         Subject to the  discussion of passive  foreign  investment  companies
below, the gross amount of any  distribution  paid by us to a U.S. Holder will
generally be subject to U.S.  federal  income tax as foreign  source  dividend
income to the extent  paid out of our  current  or  accumulated  earnings  and
profits,  as determined under U.S. federal income tax principles.  Such income
will be includable in the gross income of a U.S. Holder on the day received by
the U.S.  Holder.  The amount of any  distribution of property other than cash
will  be  the  fair  market  value  of  such  property  on  the  date  of  the
distribution.  In the case of a taxable corporate U.S. Holder,  such dividends
will be taxable as ordinary  income and will not be eligible for the corporate
dividends  received  deduction,  which is generally allowed to U.S.  corporate
shareholders on dividends received from a domestic corporation. In the case of
an  individual  U.S.  Holder,  under  recently  enacted tax  legislation  such
dividends  should  generally  be  eligible  for a maximum  tax rate of 15% for
dividends  received  before  January 1, 2009,  provided  such holder holds the
subordinate  voting shares for at least 60 days and certain  other  conditions
are  satisfied,  including,  as we believe  to be the case,  that we are not a
"passive foreign investment  company" To the extent that an amount received by
a U.S.  Holder  exceeds  such  holder's  allocable  share of our  current  and
accumulated earnings and profits,  such excess will be applied first to reduce
such  U.S.  Holder's  tax  basis in his  subordinate  voting  shares,  thereby
increasing the amount of gain or decreasing the amount of loss recognized on a
subsequent  disposition of the subordinate voting shares.  Then, to the extent
such distribution  exceeds such U.S. Holder's tax basis, it will be treated as
capital gain. We do not currently  maintain  calculations  of our earnings and
profits for U.S. federal income tax purposes.

         The gross amount of distributions  paid in Canadian  dollars,  or any
successor or other  foreign  currency,  will be included in the income of such
U.S.  Holder in a U.S.  dollar  amount  calculated  by  reference  to the spot
exchange rate in effect on the day the  distributions  are paid  regardless of
whether the payment is in fact  converted into U.S.  dollars.  If the Canadian
dollars,  or any successor or other foreign currency,  are converted into U.S.
dollars on the date of the payment,  the U.S. Holder should not be required to
recognize  any foreign  currency  gain or loss with  respect to the receipt of
Canadian  dollars as  distributions.  If,  instead,  the Canadian  dollars are
converted at a later date,  any currency  gains or losses  resulting  from the
conversion  of the Canadian  dollars will be treated as U.S.  source  ordinary
income or loss for  foreign  tax credit  purposes.  U.S.  Holders are urged to
consult  their  own tax  advisors  concerning  the U.S.  tax  consequences  of
acquiring, holding and disposing of Canadian dollars.

         A U.S.  Holder  may be  entitled  to deduct,  or claim a foreign  tax
credit for, Canadian taxes that are withheld on dividends received by the U.S.
Holder,  subject to applicable limitations in the Code. Any amounts recognized
as dividends will generally  constitute foreign source "passive income" or, in
the case of certain U.S. Holders, "financial services income" for U.S. foreign
tax credit  purposes.  A U.S. Holder will have a basis in any Canadian dollars
distributed  equal to their U.S.  dollar value on the payment date.  The rules
governing the foreign tax credit are complex,  and  additional  limitations on
the credit apply to individuals  receiving dividends from foreign corporations
if the  dividends  are  eligible  for the 15%  maximum  tax rate on  dividends

                                      97
<PAGE>

described  above.  U.S.  Holders  are  urged to  consult  their  tax  advisors
regarding the  availability  of the foreign tax credit under their  particular
circumstances.

         A Non-U.S.  Holder of subordinate voting shares generally will not be
subject to U.S.  federal  income or withholding  tax on dividends  received on
subordinate voting shares unless such income is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United States.

SALE OR EXCHANGE

         A U.S.  Holder's  initial tax basis in the subordinate  voting shares
will generally be cost to the holder.  A U.S.  Holder's  adjusted tax basis in
the  subordinate  voting  shares will  generally be the same as cost,  but may
differ  for  various  reasons  including  the  receipt  by  such  holder  of a
distribution  that was not made up wholly of earnings and profits as described
above  under the heading  "Dividends."  Subject to the  discussion  of passive
foreign investment  companies below, gain or loss realized by a U.S. Holder on
the sale or other disposition of subordinate  voting shares will be subject to
U.S. federal income taxation as capital gain or loss in an amount equal to the
difference (if any) between the U.S.  Holder's  adjusted tax basis (determined
in U.S. dollars) in the subordinate voting shares and the U.S. dollar value of
the amount  realized on the  disposition  of such  subordinate  voting shares.
Capital gains of non-corporate taxpayers, including individuals,  derived with
respect to a sale,  exchange or other  disposition prior to January 1, 2009 of
subordinate voting shares held for more than one year are subject to a maximum
federal income tax rate of 15%. The deductibility of capital losses is subject
to limitations.  In the case of a non-corporate  U.S. Holder,  the federal tax
rate applicable to capital gains will depend upon:

         o    the holder's holding period for the subordinate voting shares,
              with a preferential rate available for subordinate voting shares
              held for more than one year; and
         o    the holder's marginal tax rate for ordinary income.

         Any gain realized will  generally be treated as U.S.  source gain and
loss realized by a U.S. Holder  generally also will be treated as from sources
within the United States.

         The ability of a U.S.  Holder to utilize foreign taxes as a credit to
offset  U.S.  taxes is subject  to complex  limitations  and  conditions.  The
consequences  of the  separate  limitation  calculation  will  depend upon the
nature and sources of each U.S.  Holder's income and the deductions  allocable
thereto.  Alternatively,  a U.S.  Holder may elect to claim all foreign  taxes
paid as an itemized  deduction  in lieu of  claiming a foreign  tax credit.  A
deduction  does not reduce U.S.  tax on a  dollar-for-dollar  basis like a tax
credit,  but the  availability  of the  deduction  is not  subject to the same
conditions and limitations applicable to foreign tax credits.

         If a U.S.  Holder  receives  any  foreign  currency  on the  sale  of
subordinate  voting shares,  such U.S. Holder may recognize ordinary income or
loss as a result  of  currency  fluctuations  between  the date of the sale of
subordinate  voting shares and the date the sale  proceeds are converted  into
U.S. dollars.

         A Non-U.S.  Holder of subordinate voting shares generally will not be
subject to U.S.  federal income or withholding tax on any gain realized on the
sale or exchange of such subordinate voting shares unless:

         o    such gain is  effectively  connected  with the  conduct  by such
              Non-U.S. Holder of a trade or business in the United States; or

                                      98
<PAGE>

         o    in the  case of any  gain  realized  by an  individual  Non-U.S.
              Holder, such Non-U.S. Holder is present in the United States for
              183 days or more in the  taxable  year of such sale and  certain
              other conditions are met.

FOREIGN PERSONAL HOLDING COMPANY

         Under recently  enacted  legislation,  the foreign  personal  holding
company rules are repealed for taxable years of U.S. shareholders ending after
December 31, 2004.

PASSIVE FOREIGN INVESTMENT COMPANY

         We believe that our subordinate voting shares should not currently be
treated as stock of a passive  foreign  investment  company for United  States
federal income tax purposes,  but this  conclusion is a factual  determination
made annually and thus may be subject to change based on future  operations as
well  as the  composition  and  valuation  of our  assets.  In  particular,  a
significant  portion of our gross assets are comprised of cash and  short-term
investments,  which the PFIC  rules  treat as  passive  without  regard to the
purpose for which we hold those  assets.  If the  proportion  of these passive
assets were to increase relative to the fair market value of our other assets,
we may be treated as a passive foreign investment company. In general, we will
be a passive foreign  investment company with respect to a U.S. Holder if, for
any taxable year in which the U.S. Holder holds our subordinate voting shares,
either:

         o    at least 75% of our gross income for the taxable year is passive
              income; or
         o    at least 50% of the average value of our assets is  attributable
              to assets that produce or are held for the production of passive
              income.

         For this purpose, passive income includes income such as:

         o    dividends;
         o    interest;
         o    rents or  royalties,  other  than  certain  rents  or  royalties
              derived from the active conduct of trade or business;
         o    annuities; or
         o    gains from assets that produce passive income.

         If a foreign  corporation  owns at least 25% by value of the stock of
another  corporation,  the foreign  corporation is treated for purposes of the
passive foreign investment company tests as owning its proportionate  share of
the  assets  of  the  other   corporation   and  as  receiving   directly  its
proportionate share of the other corporation's income.

         If we are treated as a passive  foreign  investment  company,  a U.S.
Holder that did not make a qualified  electing fund election or, if available,
a mark-to-market  election,  as described  below,  would be subject to special
rules with respect to:

         o    any  gain  realized  on  the  sale  or  other   disposition   of
              subordinate voting shares; and
         o    any "excess distribution" by us to the U.S. Holder.

         Generally,  "excess  distributions" are any distributions to the U.S.
Holder in respect of the  subordinate  voting shares  during a single  taxable
year that are greater than 125% of the average annual  distributions  received
by the U.S.  Holder in respect of the  subordinate  voting  shares  during the

                                      99
<PAGE>

three preceding taxable years or, if shorter, the U.S. Holder's holding period
for the subordinate voting shares.

         Under the passive foreign investment company rules,

         o    the gain or excess  distribution would be allocated ratably over
              the U.S.  Holder's  holding  period for the  subordinate  voting
              shares;
         o    the amount  allocated  to the taxable  year in which the gain or
              excess  distribution  was realized  would be taxable as ordinary
              income;
         o    the  amount   allocated   to  each  prior  year,   with  certain
              exceptions,  would be subject to tax at the  highest tax rate in
              effect for that year; and
         o    the interest charge generally applicable to underpayments of tax
              would be imposed in respect of the tax attributable to each such
              year.

         A U.S. Holder owning actually or constructively "marketable stock" of
a passive  foreign  investment  company may be able to avoid the imposition of
the passive foreign  investment  company tax rules described above by making a
mark-to-market  election.  Generally,  pursuant to this election,  such holder
would  include in ordinary  income,  for each  taxable  year during which such
stock is held,  an amount equal to the  increase in value of the stock,  which
increase will be determined by reference to the value of such stock at the end
of the current  taxable  year  compared  with their value as of the end of the
prior  taxable  year.  Holders  desiring to make the  mark-to-market  election
should consult their tax advisors with respect to the  application  and effect
of making such election.

         In the case of a U.S.  Holder  who  does  not  make a  mark-to-market
election,  the special passive foreign  investment company tax rules described
above will not apply to such U.S.  Holder if the U.S. Holder makes an election
to have us  treated  as a  qualified  electing  fund  and we  provide  certain
required  information  to  holders.  For a U.S.  Holder  to  make a  qualified
electing  fund  election,   we  would  have  to  satisfy   certain   reporting
requirements.  We have not determined  whether we will undertake the necessary
measures  to be able to satisfy  such  requirements  in the event that we were
treated as a passive foreign investment company.

         A U.S.  Holder that makes a qualified  electing fund election will be
currently  taxable  on its pro rata  share of our  ordinary  earnings  and net
capital gain, at ordinary  income and capital gains rates,  respectively,  for
each of our taxable  years,  regardless of whether or not  distributions  were
received.  The U.S.  Holder's basis in the  subordinate  voting shares will be
increased to reflect taxed but undistributed  income.  Distributions of income
that had  previously  been taxed will result in a  corresponding  reduction of
basis in the  subordinate  voting  shares  and  will  not be taxed  again as a
distribution to the U.S.  Holder.  U.S.  Holders  desiring to make a qualified
electing fund election  should  consult their tax advisors with respect to the
advisability of making such election.

UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING

         A U.S. Holder will generally be subject to information reporting with
respect to dividends paid on, or proceeds of the sale or other disposition of,
our  subordinate  voting  shares  that are paid  within the  United  States or
through some U.S. related financial intermediaries to U.S. Holders, unless the
U.S.  Holder is a  corporation  or comes within  certain  other  categories of
exempt  recipients.  A  U.S.  Holder  that  is not an  exempt  recipient  will
generally be subject to backup  withholding  with respect to the proceeds from
the sale or the disposition  of, or with respect to dividends on,  subordinate

                                     100
<PAGE>

voting shares unless the U.S. Holder provides a taxpayer identification number
and otherwise complies with applicable  requirements of the backup withholding
rules. In addition,  backup  withholding may apply if the U.S. Holder fails to
provide an accurate taxpayer  identification number, or to report interest and
dividends  required  to be shown on its  federal  income tax  returns.  Backup
withholding  is not an additional  tax. Any amount  withheld under these rules
will be creditable against the U.S. Holder's U.S. federal income tax liability
or refundable to the extent that it exceeds such  liability.  A U.S Holder who
does not provide a correct  taxpayer  identification  number may be subject to
penalties imposed by the United States Internal Revenue Service.

         Non-U.S.  Holders will generally be subject to information  reporting
and possible  backup  withholding  with respect to the proceeds of the sale or
other  disposition of  subordinate  voting shares  effected  within the United
States,  unless  the  holder  certifies  to its  foreign  status or  otherwise
establishes  an  exemption  and the broker does not have actual  knowledge  or
reason to know that the holder is a U.S.  holder.  Payments of dividends on or
proceeds from the sale of  subordinate  voting shares within the United States
by a payor within the United  States to a non-exempt  U.S. or Non-U.S.  Holder
will be  subject  to  backup  withholding  if such  holder  fails  to  provide
appropriate certification.  In the case of such payments by a payor within the
United States to a foreign  partnership other than a foreign  partnership that
qualifies as a "withholding  foreign  partnership"  within the meaning of such
Treasury  regulations,  the partners of such  partnership  will be required to
provide the  certification  discussed above in order to establish an exemption
from backup withholding tax and information reporting requirements.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

         The following is a summary of the material  Canadian  federal  income
tax considerations generally applicable to a U.S. person who holds subordinate
voting  shares and who, for the  purposes of the INCOME TAX ACT (Canada)  (the
"ITA"),  and the  CANADA-UNITED  STATES  INCOME  TAX  CONVENTION  (1980)  (the
"Convention"), as applicable and at all relevant times:

         o    is resident in the United States and not resident in Canada,
         o    holds the subordinate voting shares as capital property,
         o    does not have a  "permanent  establishment"  or "fixed  base" in
              Canada, as defined in the Convention; and
         o    deals at arm's  length  with us.  Special  rules,  which are not
              discussed  below,  may  apply to  "financial  institutions",  as
              defined in the ITA, and to non-resident  insurers carrying on an
              insurance business in Canada and elsewhere.

         This discussion is based on the current provisions of the ITA and the
Convention  and on the  regulations  promulgated  under the ITA,  all specific
proposals  to  amend  the ITA or the  regulations  promulgated  under  the ITA
announced  by or on behalf of the  Canadian  Minister of Finance  prior to the
date of this annual report and the current published  administrative practices
of the Canada  Customs and Revenue  Agency.  It does not  otherwise  take into
account or anticipate  any changes in law or  administrative  practice nor any
income tax laws or  considerations  of any  province or territory of Canada or
any jurisdiction other than Canada, which may differ from the Canadian federal
income tax consequences described in this document.

         Under the ITA and the  Convention,  dividends  paid or  credited,  or
deemed to be paid or  credited,  on the  subordinate  voting  shares to a U.S.
person who owns less than 10% of the voting shares will be subject to Canadian

                                     101
<PAGE>

withholding  tax at the rate of 15% of the gross amount of those  dividends or
deemed  dividends.  If a U.S.  person is a corporation and owns 10% or more of
the voting  shares,  the rate is reduced from 15% to 5%.  Subject to specified
limitations,  a U.S.  person may be entitled to credit  against  U.S.  federal
income tax liability for the amount of tax withheld by Canada.

         Under  the  Convention,   dividends  paid  to  specified   religious,
scientific,  charitable  and similar tax exempt  organizations  and  specified
organizations  that are resident and exempt from tax in the United  States and
that have complied with  specified  administrative  procedures are exempt from
this Canadian withholding tax.

         A capital gain realized by a U.S.  person on a disposition  or deemed
disposition of the subordinate  voting shares will not be subject to tax under
the ITA unless the  subordinate  voting  shares  constitute  taxable  Canadian
property  within  the  meaning  of the ITA at the time of the  disposition  or
deemed  disposition.  In general,  the  subordinate  voting shares will not be
"taxable  Canadian  property"  to a  U.S.  person  if  they  are  listed  on a
prescribed stock exchange, which includes The Toronto Stock Exchange,  unless,
at any time within the five-year period immediately preceding the disposition,
the U.S.  person,  persons  with  whom the U.S.  person  did not deal at arm's
length,  or the U.S.  person  together  with  those  persons,  owned or had an
interest in or a right to acquire  more than 25% of any class or series of our
shares.

         If the subordinate  voting shares are taxable Canadian  property to a
U.S. person,  any capital gain realized on a disposition or deemed disposition
of those subordinate voting shares will generally be exempt from tax by virtue
of the Convention if the value of the subordinate voting shares at the time of
the  disposition or deemed  disposition is not derived  principally  from real
property, as defined by the Convention,  situated in Canada. The determination
as to whether  Canadian tax would be  applicable  on a  disposition  or deemed
disposition of the  subordinate  voting shares must be made at the time of the
disposition or deemed disposition.

         Holders of  subordinate  voting shares are urged to consult their own
tax advisors to determine the particular tax  consequences to them,  including
the application and effect of any state, local or foreign income and other tax
laws, of the  acquisition,  ownership and  disposition of  subordinate  voting
shares.

F.       DIVIDENDS AND PAYING AGENTS

         Not Applicable.

G.       STATEMENT BY EXPERTS

         Not Applicable.

H.       DOCUMENTS ON DISPLAY

         Any  statement in this annual  report  about any of our  contracts or
other  documents is not necessarily  complete.  If the contract or document is
filed as an exhibit to the registration statement, the contract or document is
deemed to modify the  description  contained in this annual  report.  You must
review the exhibits  themselves for a complete  description of the contract or
document.

                                     102
<PAGE>

         You may review a copy of our filings with the SEC, including exhibits
and schedules filed with it, at the SEC's public reference facilities at 100 F
Street,  N.E.,  Washington,  D.C. 20549 and at the regional offices of the SEC
located at 233  Broadway,  New York,  New York  10279 and at the  Northwestern
Atrium Center, 500 West Madison Street,  Suite 1400, Chicago,  Illinois 60661.
You may also obtain copies of such materials from the Public Reference Section
of the SEC, Room 1024,  Judiciary Plaza, 450 Fifth Street,  N.W.,  Washington,
D.C. 20549, at prescribed  rates. You may call the SEC at  1-800-SEC-0330  for
further  information on the public  reference  rooms.  The SEC maintains a Web
site   (HTTP://WWW.SEC.GOV)  that  contains  reports,  proxy  and  information
statements   and   other   information   regarding   registrants   that   file
electronically with the SEC. Although we make many of our filings with the SEC
electronically as a foreign private issuer, we are not obligated to do so.

         You may read and copy any reports,  statements  or other  information
that we file with the SEC at the  addresses  indicated  above and you may also
access them  electronically at the Web site set forth above. These SEC filings
are also available to the public from commercial document retrieval services.

         We are  required to file reports and other  information  with the SEC
under the Securities Exchange Act of 1934. Reports and other information filed
by us with the SEC may be inspected  and copied at the SEC's public  reference
facilities  described  above. As a foreign private issuer,  we are exempt from
the rules under the Exchange Act  prescribing  the  furnishing  and content of
proxy  statements and our officers,  Directors and principal  shareholders are
exempt from the reporting and short-swing profit recovery provisions contained
in  Section 16 of the  Exchange  Act.  Under the  Exchange  Act,  as a foreign
private  issuer,  we are not  required  to  publish  financial  statements  as
frequently or as promptly as United States companies.

I.       SUBSIDIARY INFORMATION

         See Item 4.C. of this annual report.



                                     103
<PAGE>

ITEM 11.          QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

CURRENCY RISK

         Our  functional  currency is the Canadian  dollar.  We are exposed to
currency risks due to the export of our  Canadian-manufactured  products,  the
large  majority  of which  are  denominated  in US  dollars.  These  risks are
partially hedged by operating expenses denominated in US dollars, the purchase
of raw materials in US dollars and forward exchange  contracts.  The increased
strength of the Canadian dollar,  compared to the US dollar, over the last two
years caused our operating expenses,  as well as our foreign exchange loss, to
increase.  Any  further  increase in the value of the  Canadian  dollar in the
upcoming months will negatively affect our results of operations.

         We enter  into  forward  exchange  contracts  to  manage  the risk of
exchange  rate  fluctuations  between the Canadian and US dollar on cash flows
related to anticipated future revenue streams denominated in US dollars. We do
not enter into forward exchange contracts for hedging purposes.

         Considering  the  significant  increase in the value of the  Canadian
dollar  compared  to the  US  dollar  during  fiscal  2005,  we  entered  into
additional forward exchange contracts to protect our results of operations. As
at August 31, 2004, we held forward  exchange  contracts to sell US dollars at
various  forward  exchange  rates with a  contractual  value of $15.9  million
compared to $33.6 million as at August 31, 2005.

         The following  table  summarizes  the forward  exchange  contracts in
effect as at August 31, 2005,  classified by expected  transaction dates, none
of which exceed three fiscal  years,  as well as the notional  amounts of such
contracts  (in  thousands  of US  dollars)  along  with the  weighted  average
contractual exchange rates under such contracts.  The notional amounts of such
contracts  are used to  calculate  the  contractual  payments to be made under
these contracts.

<TABLE>
<CAPTION>
                                                              YEARS ENDING AUGUST 31,
                                                        ------------------------------------
                                                            2006         2007        2008
                                                        ----------    ----------  ----------
<S>                                                     <C>           <C>         <C>
Forward exchange contracts to sell US
dollars in exchange
for Canadian dollars
Contractual amounts...................................  $   26,000    $    7,000  $     600
Weighted average contractual exchange rates...........      1.2630        1.2516     1.2314
</TABLE>

FAIR VALUE

         The fair value of forward  exchange  contracts,  which represents the
difference between their contractual amounts and their current trading values,
amounted to an unrecognized gain of $2,937,000 as at August 31, 2005.

                                     104
<PAGE>

INTEREST RATE RISK

         We are exposed to the impact of interest  rate changes and changes in
the  market  values  of  our  available-for-sale  securities.  We do  not  use
derivative financial instruments for our available-for-sale  securities. As at
August 31, 2005, our available-for-sale securities consist of debt instruments
issued by six (seven in 2004)  high-credit  quality  corporations  and trusts.
These debt  instruments  bear  interest at fixed rates and may have their fair
market value adversely impacted due to a rise in interest rates.  However, due
to their very short-term maturity,  we consider this risk to be insignificant.
For the purposes of managing our cash  position,  we have  established  a cash
management  policy,  which we follow  and  monitor on a regular  basis.  These
available-for-sale  securities  will be used for  working  capital  and  other
general corporate purposes, including potential acquisitions.

CREDIT RISK

         Financial  instruments  that  potentially  subject us to credit  risk
consist  primarily  of our cash,  our  short-term  investments,  our  accounts
receivable and our forward  exchange  contracts.  As mentioned in the interest
rate risk section,  our  short-term  investments  consist of debt  instruments
issued by high-credit  quality  corporations and trusts.  Our cash and forward
exchange  contracts are held with or issued by high-credit  quality  financial
institutions;  therefore,  we consider  the risk of  non-performance  on these
instruments to be remote.

         Generally,  we do not  require  collateral  or  other  security  from
customers  for trade  accounts  receivable;  however,  credit is  extended  to
customers following an evaluation of creditworthiness. In addition, we perform
ongoing  credit  reviews of all our  customers  and establish an allowance for
doubtful accounts receivable when accounts are determined to be uncollectible.
Allowance for doubtful accounts amounted to $510,000 and $352,000 as at August
31, 2004 and 2005, respectively.


                                     105
<PAGE>

ITEM 12.          DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

         Not Applicable.



                                   PART II.
                                   --------

ITEM 13.          DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES

         Not Applicable.


ITEM 14.          MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
                  USE OF PROCEEDS

         Not Applicable.


ITEM 15.          CONTROLS AND PROCEDURES

         Under the supervision and with the  participation  of our management,
including the Chief  Executive  Officer and Chief Financial  Officer,  we have
evaluated the  effectiveness  of our disclosure  controls and procedures as of
the end of the period covered by this annual report. Based on that evaluation,
the Chief  Executive  Officer and Chief  Financial  Office have concluded that
these disclosure controls and procedures are effective.  There were no changes
in our internal control over financial  reporting during the period covered by
this annual report that have materially affected,  or are reasonably likely to
materially affect, our internal control over financial reporting.


                                     106
<PAGE>

ITEM 16.          [RESERVED]

ITEM 16A.         AUDIT COMMITTEE FINANCIAL EXPERT

         Our Board of Directors has determined  that Mr. Andre  Tremblay,  CA,
chairman of our audit committee is an audit committee  financial  expert.  Mr.
Tremblay is  independent of  management.  For a description of Mr.  Tremblay's
education  and  experience,  please refer to Item 6A. The other members of the
Audit  Committee are Mr. Pierre  Marcouiller,  Mr. Guy Marier and Mr.  Michael
Unger  which  are all  Independent.  For a  description  of  their  respective
education and experience, please also refer to Item 6A.

ITEM 16B.         CODE OF ETHICS

         In 2003,  we  adopted  a code of  ethics  that  applies  to our chief
executive  officer,  our chief financial  officer and our manager of financial
reporting  and  accounting.  A copy of this code of ethics  has been  filed as
exhibit  11.1 to this  annual  report.  In March 2005,  the Board  updated and
adopted the following policies:

         o    Board of Directors Corporate Governance Guidelines;
         o    Code of Ethics for our  Principal  Executive  Officer and Senior
              Financial Officers;
         o    Ethics and Business Conduct Policy;
         o    Statement of Reporting Ethical Violations (Whistle Blower).

         A copy of those policies has been filed respectively as exhibits 11.2
to 11.5 inclusively to this annual report. All these policies are also readily
available  on our website at  www.exfo.com.  Accordingly,  we believe that our
corporate   governance  practices  are  in  alignment  to  current  regulatory
requirements.

         As reported at item 7B of this annual report,  previous to the coming
into force of the  requirement  for a code of ethics,  we had  entered  into a
lease  agreement with G. Lamonde  Investissements  financiers  inc., a company
controlled by our chief executive  officer,  for premises located at 465 Godin
Avenue in Vanier,  Quebec and on September 1, 2004,  we were released from our
obligations under this lease with a final payment of $194,000. In addition, in
September  2002, we acquired from G. Lamonde  Investissements  financiers inc.
the building located at 436 Nolin Street. The purchase price paid was based on
an independent  third party  valuation and the transaction was approved by our
audit committee and Board of Directors with Mr. Lamonde abstaining.

ITEM 16C.         PRINCIPAL ACCOUNTANT FEES AND SERVICES

         AUDIT FEES

         During the financial years ended August 31, 2004 and August 31, 2005,
our  principal  accountant,  PricewaterhouseCoopers  LLP,  billed us aggregate
amounts of $189,000  and  $214,000,  respectively  for the audit of our annual
consolidated  financial  statements and services in connection  with statutory
and regulatory filings.


                                     107
<PAGE>

         AUDIT-RELATED FEES

         During the financial years ended August 31, 2004 and August 31, 2005,
our  principal  accountant,  PricewaterhouseCoopers  LLP,  billed us aggregate
amounts  of  nil  and   $62,000,   respectively   for   services   related  to
Sarbanes-Oxley Act.

         TAX FEES

         During the financial years ended August 31, 2004 and August 31, 2005,
our  principal  accountant,  PricewaterhouseCoopers  LLP,  billed us aggregate
amounts of $301,000 and  $185,000,  respectively  for services  related to tax
compliance, tax advice and tax planning.

         ALL OTHER FEES

         Not applicable.

         AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

         On September 25, 2002, our audit committee adopted a policy requiring
prior  approval by the audit  committee of the annual audit plan and fees.  In
the event any adjustments to audit fees may be required during the course of a
financial  year,  such  adjustments  shall be approved by the  chairman of the
audit  committee,  acting  alone,  and  shall be  reported  to the full  audit
committee at its next meeting.

         In the case of non-audit  fees  (excluding  tax matters),  the policy
provides  that  proposals  shall be  submitted  to the  chairman  of the audit
committee and our chief financial officer at the same time and the chairman of
the audit committee will be responsible for approval of such proposal, subject
to any modifications  that he may require.  The chairman will make a report to
the full audit committee at its next meeting.

         As concerns tax services to be provided by our principal  accountant,
our policy  provides that the principal  accountant  will present to the audit
committee for pre-approval, on or before the beginning of each financial year,
an engagement for tax matters that are  foreseeable  for the upcoming year and
the audit committee shall be responsible for pre-approval thereof,  subject to
any modifications it may make to such proposals. In the event tax services are
required that were not pre-approved by the audit committee,  the procedure set
forth in the previous paragraph will apply.

         During the financial year ended on August 31, 2005,  100% of tax fees
were  approved  by the audit  committee  pursuant to this  policy.  During the
financial year ended on August 31, 2005, only full-time permanent employees of
our principal accountant,  PricewaterhouseCoopers LLP, performed work to audit
our financial statements.

ITEM 16D.         EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

         Not Applicable.

ITEM 16E.         PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS

         Not Applicable.


                                     108
<PAGE>

                                  PART III.
                                  ---------

ITEM 17.          FINANCIAL STATEMENTS

         Not Applicable.


ITEM 18.          FINANCIAL STATEMENTS

         See pages F-2 to F-42.



                                     109
<PAGE>


ITEM 19.          EXHIBITS

<TABLE>
<CAPTION>
    NUMBER                                                      EXHIBIT
--------------   ---------------------------------------------------------------------------------------------------
<S>              <C>
      1.1        Amended  Articles of  Incorporation  of EXFO  (incorporated  by  reference to Exhibit 3.1 of EXFO's
                 Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
      1.2        Amended  By-laws of EXFO  (incorporated  by  reference  to Exhibit 1.2 of EXFO's  annual  report on
                 Form-20F dated January 15, 2003, File No. 000-30895).
      1.3        Amended and Restated Articles of Incorporation of EXFO (incorporated by reference to Exhibit 1.3 of
                 EXFO's annual report on Form 20-F dated January 18, 2001, File No. 000-30895).
      2.1        Form of Subordinate  Voting Share  Certificate  (incorporated by reference to Exhibit 4.1 of EXFO's
                 Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
      2.2        Form of  Registration  Rights  Agreement  between  EXFO and  Germain  Lamonde  dated  July 6, 2000)
                 (incorporated by reference to Exhibit 10.13 of EXFO's  Registration  Statement on Form F-1 filed on
                 June 9, 2000, File No. 333-38956).
      3.1        Form of Trust Agreement among EXFO, Germain Lamonde,  GEXFO  Investissements  Technologiques  inc.,
                 Fiducie Germain Lamonde and G. Lamonde  Investissements  Financiers inc. (incorporated by reference
                 to  Exhibit  4.2 of  EXFO's  Registration  Statement  on Form F-1 filed on June 9,  2000,  File No.
                 333-38956).
      4.1        Agreement of Merger and Plan of  Reorganization,  dated as of November 4, 2000,  by and among EXFO,
                 EXFO Sub, Inc., EXFO Burleigh Instruments,  Inc., Robert G. Klimasewki,  William G. May, Jr., David
                 J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.1 of EXFO's annual report
                 on Form 20-F dated January 18, 2001, File No. 000-30895).
      4.2        Amendment No. 1 to Agreement of Merger and Plan of Agreement, dated as of December 20, 2000, by and
                 among EXFO, EXFO Sub, Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May,
                 Jr.,  David J. Farrell and William S. Gornall  (incorporated  by reference to Exhibit 4.2 of EXFO's
                 annual report on Form 20-F dated January 18, 2001, File No. 000-30895).
      4.3        Agreement  of Merger,  dated as of August 20,  2001,  by and among  EXFO,  Buyer Sub,  and  Avantas
                 Networks Corporation and Shareholders of Avantas Networks corporation (incorporated by reference to
                 Exhibit 4.3 of EXFO's annual report on Form 20-F dated January 18, 2002, File No. 000-30895).
      4.4        Amendment  No. 1 dated as of November 1, 2002 to Agreement of Merger,  dated as of August 20, 2001,
                 by and among EXFO,  3905268 Canada Inc.,  Avantas Networks  Corporation and Shareholders of Avantas
                 Networks  (incorporated  by  reference  to Exhibit 4.4 of EXFO's  annual  report on Form 20-F dated
                 January 18, 2002, File No. 000-30895).
      4.5        Offer to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among EXFO, Claude Adrien
                 Noel,  9086-9314 Quebec inc., Michel Bedard,  Christine  Bergeron and Societe en Commandite Capidem
                 Quebec Enr. and  Certificate of Closing,  dated February 7, 2000 among the same parties  (including
                 summary in English)  (incorporated by reference to Exhibit 10.2 of EXFO's Registration Statement on
                 Form F-1 filed on June 9, 2000, File No. 333-38956).
      4.6        Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering,  Inc.,
                 John Kennedy, Glenn Harvey and EFOS Corporation (incorporated by reference to Exhibit 4.1 of EXFO's
                 Registration Statement on Form F-3 filed on July 13, 2001, File No. 333-65122).
      4.7        Amendment Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated as of March 5,
                 2001,  among  EXFO  Electro-Optical  Engineering,   Inc.,  John  Kennedy,  Glenn  Harvey  and  EFOS
                 Corporation. (incorporated by reference to Exhibit 4.2 of EXFO's Registration Statement on Form F-3
                 filed on July 13, 2001 File No. 333-65122).
      4.8        Share Purchase Agreement, dated as of November 2, 2001 between JDS Uniphase Inc. and 3905268 Canada
                 Inc.  (incorporated  by reference to Exhibit 4.8 of EXFO's annual report on Form 20-F dated January
                 18, 2002, File No. 000-30895).
      4.9        Intellectual  Property  Assignment  and Sale  Agreement  between  EFOS Inc.,  EXFO  Electro-Optical
                 Engineering,  Inc., John Kennedy, Glenn Harvey and EFOS Corporation.  (incorporated by reference to
                 Exhibit  4.3 of  EXFO's  Registration  Statement  on Form  F-3  filed  on July  13,  2001  File No.
                 333-65122).
     4.10        Offer to acquire a building,  dated February 23, 2000,  between EXFO and Groupe Mirabau inc. and as
                 accepted by Groupe Mirabau inc. on February 24, 2000 (including  summary in English)  (incorporated
                 by reference to Exhibit  10.3 of EXFO's  Registration  Statement on Form F-1 filed on June 9, 2000,
                 File No. 333-38956).
     4.11        Lease  Agreement,  dated December 1, 1996,  between EXFO and GEXFO  Investissements  Technologiques
                 inc.,  as assigned to 9080-9823  Quebec inc. on September  1, 1999  (including  summary in English)
                 (incorporated  by reference to Exhibit 10.4 of EXFO's  Registration  Statement on Form F-1 filed on
                 June 9, 2000, File No. 333-38956).
</TABLE>

                                     110
<PAGE>

<TABLE>
<CAPTION>
    NUMBER                                                      EXHIBIT
--------------   ---------------------------------------------------------------------------------------------------
<S>              <C>
     4.12        Lease Agreement,  dated March 1, 1996, between EXFO and GEXFO Investissements  Technologiques inc.,
                 as  assigned  to  9080-9823  Quebec  inc.  on  September  1, 1999  (including  summary in  English)
                 (incorporated  by reference to  Exhibit10.5 of EXFO's  Registration  Statement on Form F-1 filed on
                 June 9, 2000, File No. 333-38956).
     4.13        Lease renewal of the existing  leases between  9080-9823  Quebec inc. and EXFO,  dated November 30,
                 2001(incorporated  by reference to Exhibit 4.13 of EXFO's  annual report on Form 20-F dated January
                 18, 2002, File No. 000-30895).
     4.14        Loan Agreement between EXFO and GEXFO  Investissements  Technologiques inc., dated May 11, 1993, as
                 assigned to 9080-9823 Quebec inc. on September 1, 1999 (including summary in English) (incorporated
                 by reference to Exhibit  10.9 of EXFO's  Registration  Statement on Form F-1 filed on June 9, 2000,
                 File No. 333-38956).
     4.15        Resolution of the Board of Directors of EXFO, dated September 1, 1999,  authorizing EXFO to acquire
                 GEXFO Distribution  Internationale inc. from GEXFO  Investissements  Technologiques inc. (including
                 summary in English) (incorporated by reference to Exhibit 10.10 of EXFO's Registration Statement on
                 Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.16        Form of Promissory Note of EXFO issued to GEXFO Investissements  Technologiques inc. dated June 27,
                 2000 )  (incorporated  by reference to Exhibit 10.12 of EXFO's  Registration  Statement on Form F-1
                 filed on June 9, 2000, File No. 333-38956).
     4.17        Term Loan Offer,  dated March 28, 2000,  among EXFO and National Bank of Canada as accepted by EXFO
                 on April 3, 2000  (including  summary in English)  (incorporated  by reference to Exhibit  10.11 of
                 EXFO's Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.18        Employment  Agreement of Germain Lamonde dated May 29, 2000  (incorporated  by reference to Exhibit
                 10.15 of EXFO's Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.19        Employment  Agreement of Bruce Bonini dated as of September 1, 2000  (incorporated  by reference to
                 Exhibit 4.24 of EXFO's annual report on Form 20-F dated January 18, 2002, File No. 000-30895).
     4.20        Employment  Agreement  of  Juan-Felipe  Gonzalez  dated as of September  1, 2000  (incorporated  by
                 reference to Exhibit 4.25 of EXFO's  annual  report on Form 20-F dated  January 18, 2002,  File No.
                 000-30895).
     4.21        Employment  Agreement of David J. Farrell dated as of December 20, 2000  (incorporated by reference
                 to Exhibit 4.26 of EXFO's annual report on Form 20-F dated January 18, 2002, File No. 000-30895).
     4.22        Deferred Profit Sharing Plan, dated September 1, 1998 (incorporated by reference to Exhibit 10.6 of
                 EXFO's Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.23        Stock  Option  Plan,  dated May 25,  2000  (incorporated  by  Reference  to Exhibit  10.7 of EXFO's
                 Registration Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.24        Share Plan, dated April 3, 2000  (incorporated by reference to Exhibit 10.8 of EXFO's  Registration
                 Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.25        Directors'  Compensation  Plan  (incorporated by reference to Exhibit 10.17 of EXFO's  Registration
                 Statement on Form F-1 filed on June 9, 2000, File No. 333-38956).
     4.26        Restricted Stock Award Plan, dated December 20, 2000  (incorporated by reference to Exhibit 4.21 of
                 EXFO's annual report on Form 20-F dated January 18, 2001, File No. 000-30895).
     4.27        Asset Purchase  Agreement by and Among EXFO  Electro-Optical  Engineering Inc., EXFO Gnubi Products
                 Group  Inc.,  gnubi  communications,   L.P.,  gnubi  communications  General  Partner,  LLC,  gnubi
                 communications  Limited  Partner,  LLC,  gnubi  communications,  Inc.,  Voting Trust created by The
                 Irrevocable Voting Trust Agreement Among Carol Abraham Bolton,  Paul Abraham and James Ray Stevens,
                 James Ray Stevens and Daniel J. Ernst dated September 5, 2002 (incorporated by reference to Exhibit
                 4.30 of EXFO's annual report on Form 20-F dated January 15, 2003, File No. 000-30895).
     4.28        EXFO  Protocol  Inc.  Executive  Employment  Agreement  with Sami  Yazdi  signed  November  2, 2001
                 (incorporated  by reference to Exhibit 4.28 of EXFO's  annual report on Form 20-F dated January 15,
                 2003, File No. 000-30895).
     4.29        Second  Amending  Agreement  to the  Employment  Agreement of Bruce Bonini dated as of September 1,
                 2002, (incorporated by reference to Exhibit 4.29 of EXFO's annual report on Form 20-F dated January
                 15, 2004, File No. 000-30895).
     4.30        Severance and General Release  Agreement with Bruce Bonini dated August 8, 2003,  (incorporated  by
                 reference to Exhibit 4.30 of EXFO's  annual  report on Form 20-F dated  January 15, 2004,  File No.
                 000-30895).
     4.31        Separation  Agreement  and General  Release with Sami Yazdi dated April 1, 2003,  (incorporated  by
                 reference to Exhibit 4.31 of EXFO's  annual  report on Form 20-F dated  January 15, 2004,  File No.
                 000-30895).
     4.32        Executive  Employment  Agreement of James  Stevens  dated as of October 4, 2003,  (incorporated  by
                 reference to Exhibit 4.32 of EXFO's  annual  report on Form 20-F dated  January 15, 2004,  File No.
                 000-30895).
</TABLE>

                                     111
<PAGE>

<TABLE>
<CAPTION>
    NUMBER                                                      EXHIBIT
--------------   ---------------------------------------------------------------------------------------------------
<S>              <C>
     4.33        Termination  Terms for John Holloran Jr. dated May 28, 2003,  (incorporated by reference to Exhibit
                 4.33 of EXFO's annual report on Form 20-F dated January 15, 2004, File No. 000-30895).
     4.34        Employment Agreement of Pierre Plamondon dated as of September 1, 2002,  (incorporated by reference
                 to Exhibit 4.34 of EXFO's annual report on Form 20-F dated January 15, 2004, File No. 000-30895).
     4.35        Long-Term  Incentive Plan,  dated May 25, 2000,  amended in October 2004 and effective  January 12,
                 2005.
     4.36        Deferred Share Unit Plan, effective January 12, 2005.
      8.1        Subsidiaries of EXFO (list included in Item 4C of this annual report).
     11.1        Code of Ethics for senior financial officers,  (incorporated by reference to Exhibit 11.1 of EXFO's
                 annual report on Form 20-F dated January 15, 2004, File No. 000-30895).
     11.2        Board of Directors Corporate Governance Guidelines.
     11.3        Code of Ethics for our Principal Executive Officer and Senior Financial Officers.
     11.4        Ethics and Business Conduct Policy.
     11.5        Statement of Reporting Ethical Violations (Whistle Blower).
     11.6        Audit Committee Charter.
     11.7        Human Resources Committee Charter.
     12.1        Certification of the Chief Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley  Act of
                 2002.
     12.2        Certification of the Chief Executive Officer Pursuant to Section 906 of the  Sarbanes-Oxley  Act of
                 2002.
     13.1        Certification of the Chief Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley  Act of
                 2002.
     13.2        Certification of the Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley  Act of
                 2002.
</TABLE>


                                                        112
<PAGE>


SIGNATURES

The  registrant  hereby  certifies that it meets all of the  requirements  for
filing  on  Form  20 -F and  that  it  has  duly  caused  and  authorized  the
undersigned to sign this annual report on its behalf.


                                    EXFO ELECTRO-OPTICAL ENGINEERING INC.





                                    By:    /s/ Germain Lamonde
                                           --------------------------------
                                    Name:  Germain Lamonde
                                    Title: Chairman of the Board, President
                                           and Chief Executive Officer

                                    Date:   November 23, 2005.





                                 113
<PAGE>


CERTIFICATIONS

         I, Germain Lamonde, Chairman of the Board, President and Chief
Executive Officer, certify that:

1.       I  have   reviewed   this   annual   report  on  Form  20-F  of  EXFO
         Electro-Optical Engineering Inc. ("EXFO");

2.       Based on my  knowledge,  this  report  does not  contain  any  untrue
         statement  of a  material  fact  or omit to  state  a  material  fact
         necessary to make the statement  made, in light of the  circumstances
         under which such statements were made, not misleading with respect to
         the period covered by this report;

3.       Based on my knowledge, the financial statements,  and other financial
         information  included in this report,  fairly present in all material
         respects the  financial  condition,  results of  operations  and cash
         flows of EXFO as of, and for, the periods presented in this report;

4.       EXFO's  other   certifying   officer  and  I  are   responsible   for
         establishing and maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules  13a-15(e) and  15d-15(e)) for EXFO and
         have:

         a)       Designed such disclosure controls and procedures,  or caused
                  such disclosure controls and procedures to be designed under
                  our  supervision,   to  ensure  that  material   information
                  relating to EXFO,  including its consolidated  subsidiaries,
                  is  made  known  to  us by  others  within  those  entities,
                  particularly during the period in which this report is being
                  prepared;

         b)       Evaluated the  effectiveness of EXFO's  disclosure  controls
                  and procedures and presented in this report our  conclusions
                  about  the  effectiveness  of the  disclosure  controls  and
                  procedures,  as of the  end of the  period  covered  by this
                  report based on such evaluation;and

         c)       Disclosed  in this  report  any  change in  EXFO's  internal
                  control over financial  reporting  that occurred  during the
                  period  covered by the  annual  report  that has  materially
                  affected,  or is  reasonably  likely to  materially  affect,
                  EXFO's internal control over financial reporting.

5.       EXFO's other  certifying  officer and I have disclosed,  based on our
         most recent evaluation of internal control over financial  reporting,
         to  EXFO's  auditors  and the  audit  committee  of  EXFO's  Board of
         Directors (or persons performing the equivalent functions):

         a)       All significant  deficiencies and material weaknesses in the
                  design or  operation  of  internal  control  over  financial
                  reporting  which are reasonably  likely to adversely  affect
                  EXFO's  ability to  record,  process,  summarize  and report
                  financial information; and

         b)       Any fraud, whether or not material, that involves management
                  or other  employees  who have a  significant  role in EXFO's
                  internal control over financial reporting.


                                114
<PAGE>


         Date:    November 23, 2005.


         /s/  Germain Lamonde
         -------------------------------------
         Germain Lamonde
         Chairman of the Board,
         President and Chief Executive Officer


Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of  section  1350,  chapter  63 of title  18,  United  States  Code),  the
undersigned  officer of EXFO, hereby certifies,  to such officer's  knowledge,
that:

1.   The annual report of Form 20-F for the year ended August 31, 2005 of EXFO
     fully  complies  with the  requirements  of section 13(a) or 15(d) of the
     Securities Exchange Act of 1934; and

2.   The information  contained in this annual report fairly presents,  in all
     material respects,  the financial  condition and results of operations of
     EXFO.


         Date:    November 23, 2005.


         /s/  Germain Lamonde
         -------------------------------------
         Germain Lamonde
         Chairman of the Board,
         President and Chief Executive Officer

         The foregoing  certification  is being  furnished  solely pursuant to
section  906 of the  Sarbanes-Oxley  Act of 2002  (subsections  (a) and (b) of
section  1350,  chapter 63 of title 18,  United  States Code) and is not being
filed as part of the Report or as separate disclosure document.


                                     115
<PAGE>


         I, Pierre Plamondon, Vice-President Finance and Chief Financial
Officer, certify that:

1.       I  have   reviewed   this   annual   report  on  Form  20-F  of  EXFO
         Electro-Optical Engineering Inc. ("EXFO");

2.       Based on my  knowledge,  this  report  does not  contain  any  untrue
         statement  of a  material  fact  or omit to  state  a  material  fact
         necessary to make the statement  made, in light of the  circumstances
         under which such statements were made, not misleading with respect to
         the period covered by this report;

3.       Based on my knowledge, the financial statements,  and other financial
         information  included in this report,  fairly present in all material
         respects the  financial  condition,  results of  operations  and cash
         flows of EXFO as of, and for, the periods presented in this report;

4.       EXFO's  other   certifying   officer  and  I  are   responsible   for
         establishing and maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules  13a-15(e) and  15d-15(e)) for EXFO and
         have:

         a)       Designed such disclosure controls and procedures,  or caused
                  such disclosure controls and procedures to be designed under
                  our  supervision,   to  ensure  that  material   information
                  relating to EXFO,  including its consolidated  subsidiaries,
                  is  made  known  to  us by  others  within  those  entities,
                  particularly during the period in which this report is being
                  prepared;

         b)       Evaluated the  effectiveness of EXFO's  disclosure  controls
                  and procedures and presented in this report our  conclusions
                  about  the  effectiveness  of the  disclosure  controls  and
                  procedures,  as of the  end of the  period  covered  by this
                  report based on such evaluation;

         c)       Disclosed  in this  report  any  change in  EXFO's  internal
                  control over financial  reporting  that occurred  during the
                  period  covered by the  annual  report  that has  materially
                  affected,  or is  reasonably  likely to  materially  affect,
                  EXFO's internal control over financial reporting.

5.       EXFO's other  certifying  officer and I have disclosed,  based on our
         most recent evaluation of internal control over financial  reporting,
         to  EXFO's  auditors  and the  audit  committee  of  EXFO's  Board of
         Directors (or persons performing the equivalent functions):

         a)       All significant  deficiencies and material weaknesses in the
                  design or  operation  of  internal  control  over  financial
                  reporting  which are reasonably  likely to adversely  affect
                  EXFO's  ability to  record,  process,  summarize  and report
                  financial information; and

         b)       Any fraud, whether or not material, that involves management
                  or other  employees  who have a  significant  role in EXFO's
                  internal control over financial reporting.


                                     116
<PAGE>


         Date:    November 23, 2005.



         /s/ Pierre Plamondon
         ----------------------------
         Pierre Plamondon, CA
         Vice-President Finance
         and Chief Financial Officer

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of  section  1350,  chapter  63 of title  18,  United  States  Code),  the
undersigned  officer of EXFO, hereby certifies,  to such officer's  knowledge,
that:

1.   The annual report of Form 20-F for the year ended August 31, 2005 of EXFO
     fully  complies  with the  requirements  of section 13(a) or 15(d) of the
     Securities Exchange Act of 1934; and

2.   The information  contained in this annual report fairly presents,  in all
     material respects,  the financial  condition and results of operations of
     EXFO.


         Date:    November 23, 2005.


         /s/ Pierre Plamondon
         ----------------------------
         Pierre Plamondon, CA
         Vice-President Finance
         and Chief Financial Officer

         The foregoing  certification  is being  furnished  solely pursuant to
section  906 of the  Sarbanes-Oxley  Act of 2002  (subsections  (a) and (b) of
section  1350,  chapter 63 of title 18,  United  States Code) and is not being
filed as part of the Report or as separate disclosure document.



                                     117
<PAGE>


REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS OF
EXFO ELECTRO-OPTICAL ENGINEERING INC.

We have audited the balance sheets of EXFO ELECTRO-OPTICAL ENGINEERING INC. as
at August  31,  2005 and 2004 and the  consolidated  statements  of  earnings,
deficit and contributed  surplus and cash flows for each of the three years in
the  period  ended  August  31,  2005.  These  financial  statements  are  the
responsibility of the Company's  management.  Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits in  accordance  with  Canadian  generally  accepted
auditing  standards  and  the  standards  of  the  Public  Company  Accounting
Oversight  Board (United  States).  Those  standards  require that we plan and
perform  an  audit  to  obtain  reasonable  assurance  whether  the  financial
statements are free of material misstatement.  An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes  assessing the accounting  principles used
and  significant  estimates  made by  management,  as well as  evaluating  the
overall financial statement presentation.

In our opinion,  these financial  statements  present fairly,  in all material
respects, the financial position of the Company as at August 31, 2005 and 2004
and the  results  of its  operations  and its cash flows for each of the three
years  in the  period  ended  August  31,  2005 in  accordance  with  Canadian
generally accepted accounting  principles.  Furthermore,  in our opinion,  the
financial  statement  schedules on the changes in the  allowance  for doubtful
accounts and in the valuation  allowance of future income tax assets  included
in Form 20-F present  fairly,  in all material  respects,  the information set
forth therein when read in conjunction with the related consolidated financial
statements.


/s/ PriceWaterhouseCoopers LLP


CHARTERED ACCOUNTANTS

Quebec, Quebec, Canada
September 30, 2005



COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES

In the United States of America,  reporting standards for auditors require the
addition of an explanatory  paragraph  (following the opinion  paragraph) when
there are changes in accounting  principles that have a material effect on the
comparability  of the  Company's  financial  statements,  such as the  changes
described in note 2 to the consolidated  financial  statements.  Our report to
the  Shareholders  dated  September 30, 2005 is expressed in  accordance  with
Canadian reporting  standards which do not require a reference to such changes
in accounting principles in the auditors' report when the changes are properly
accounted for and adequately disclosed in the financial statements.


/s/ PriceWaterhouseCoopers LLP


CHARTERED ACCOUNTANTS

Quebec, Quebec, Canada
September 30, 2005


<PAGE>


                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                           CONSOLIDATED BALANCE SHEETS

                          (in thousands of US dollars)

<TABLE>
<CAPTION>
                                                                         AS AT AUGUST 31,
                                                                  -----------------------------
                                                                     2005               2004
                                                                  ---------           ---------

<S>                                                               <C>                 <C>
ASSETS

CURRENT ASSETS
Cash                                                              $   7,119           $   5,159
Short-term investments (notes 8 and 18)                             104,883              83,969
Accounts receivable (notes 8 and 18)
     Trade                                                           13,945              12,080
     Other                                                            2,007               1,532
Income taxes and tax credits recoverable (notes 4 and 8)              2,392               7,836
Inventories (notes 4, 5 and 8)                                       17,749              15,371
Prepaid expenses                                                      1,112               1,513
                                                                  ---------           ---------

                                                                    149,207             127,460

INCOME TAXES AND TAX CREDITS RECOVERABLE (notes 4 and 8)                459                 449

PROPERTY, PLANT AND EQUIPMENT (notes 4, 6 and 8)                     13,719              15,442

LONG-LIVED ASSET HELD FOR SALE (note 4)                               1,600               1,600

INTANGIBLE ASSETS (notes 4, 7 and 8)                                  5,602               9,447

GOODWILL (notes 4 and 7)                                             20,370              18,393
                                                                  ---------           ---------

                                                                  $ 190,957           $ 172,791
                                                                  =========           =========
LIABILITIES

CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 9)                 $  12,201           $  11,393
Deferred revenue                                                      1,584                 805
Current portion of long-term debt                                       134                 121
                                                                  ---------           ---------

                                                                     13,919              12,319

DEFERRED REVENUE                                                      1,568               1,123

GOVERNMENT GRANTS (note 15)                                           1,872               1,690

LONG-TERM DEBT (note 10)                                                198                 332
                                                                  ---------           ---------

                                                                     17,557              15,464
                                                                  ---------           ---------

COMMITMENTS (note 11)

CONTINGENCIES (note 12)

SHAREHOLDERS' EQUITY

Share capital (note 13)                                             521,875             521,733
Contributed surplus                                                   2,949               1,986
Deficit                                                            (381,846)           (380,212)
Cumulative translation adjustment                                    30,422              13,820
                                                                  ---------           ---------

                                                                    173,400             157,327
                                                                  ---------           ---------

                                                                  $ 190,957           $ 172,791
                                                                  =========           =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                      F-2

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS

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

<TABLE>
<CAPTION>
                                                                            YEARS ENDED AUGUST 31,
                                                                ----------------------------------------------
                                                                  2005               2004               2003
                                                                --------           --------           --------
<S>                                                             <C>                <C>                <C>
 SALES (note 19)                                                $ 97,216           $ 74,630           $ 61,930

 COST OF SALES (1,2)                                              44,059             34,556             36,197
                                                                --------           --------           --------

 GROSS MARGIN                                                     53,157             40,074             25,733
                                                                --------           --------           --------

 OPERATING EXPENSES
 Selling and administrative (1)                                   31,782             25,890             26,991
 Net research and development (1) (notes 4 and 15)                12,190             12,390             15,879
 Amortization of property, plant and equipment                     4,256              4,935              5,210
 Amortization of intangible assets                                 4,836              5,080              5,676
 Impairment of long-lived assets and goodwill (note 4)                --                620              7,427
 Restructuring and other charges (note 4)                            292              1,729              4,134
                                                                --------           --------           --------

 TOTAL OPERATING EXPENSES                                         53,356             50,644             65,317
                                                                --------           --------           --------

 LOSS FROM OPERATIONS                                               (199)           (10,570)           (39,584)

 Interest and other income                                         2,524              1,438              1,245
 Foreign exchange loss                                            (1,336)              (278)            (1,552)
                                                                --------           --------           --------

 EARNINGS (LOSS) BEFORE INCOME TAXES (note 16)                       989             (9,410)           (39,891)

 INCOME TAXES (notes 4 and 16)                                     2,623               (986)            15,059
                                                                --------           --------           --------

 NET LOSS FOR THE YEAR                                          $ (1,634)          $ (8,424)          $(54,950)
                                                                ========           ========           ========

 BASIC AND DILUTED NET LOSS PER SHARE                           $  (0.02)          $  (0.13)          $  (0.87)

 BASIC WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING (000'S)                                         68,526             66,020             62,852

 DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING (000'S)
      (note 17)                                                   68,981             66,615             63,317

(1)   STOCK-BASED COMPENSATION
      COSTS INCLUDED IN: (note 14)
      Cost of sales                                             $    143           $     62           $     --
      Selling and administrative                                     626                265                 --
      Net research and development                                   194                122                 --
                                                                --------           --------           --------

                                                                $    963           $    449           $     --
                                                                ========           ========           ========

 (2)  The cost of sales is exclusive of amortization, shown separately. The cost of sales for the year ended
      August 31, 2003 includes inventory write-offs of $4,121 (note 4).

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                      F-3
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
           CONSOLIDATED STATEMENTS OF DEFICIT AND CONTRIBUTED SURPLUS

                          (in thousands of US dollars)

<TABLE>
<CAPTION>
DEFICIT

                                                  YEARS ENDED AUGUST 31,
                                     -------------------------------------------------
                                        2005                2004                2003
                                     ---------           ---------           ---------
<S>                                  <C>                 <C>                 <C>
BALANCE - BEGINNING OF YEAR          $(380,212)          $(371,788)          $(316,838)

ADD
Net loss for the year                   (1,634)             (8,424)            (54,950)
                                     ---------           ---------           ---------

BALANCE - END OF YEAR                $(381,846)          $(380,212)          $(371,788)
                                     =========           =========           =========


<CAPTION>
CONTRIBUTED SURPLUS

                                                  YEARS ENDED AUGUST 31,
                                     -------------------------------------------------
                                        2005                2004                2003
                                     ---------           ---------           ---------
<S>                                  <C>                 <C>                 <C>

BALANCE - BEGINNING OF YEAR            $1,986              $1,519              $1,487

ADD
Premium on resale of share capital         --                  18                  32
Stock-based compensation costs            963                 449                  --
                                       ------              ------              ------

BALANCE - END OF YEAR                  $2,949              $1,986              $1,519
                                       ======              ======              ======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                      F-4

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          (in thousands of US dollars)

<TABLE>
<CAPTION>
                                                                         YEARS ENDED AUGUST 31,
                                                           ------------------------------------------------
                                                              2005                2004               2003
                                                           ---------           ---------           ---------

<S>                                                        <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year                                      $  (1,634)          $  (8,424)          $ (54,950)
Add (deduct) items not affecting cash
     Discount on short-term investments                         (302)                197                 (96)
     Stock-based compensation costs                              963                 449                  --
     Inventory and tax credit write-offs                          --                  --               6,418
     Amortization                                              9,092              10,015              10,886
     Impairment of long-lived assets and goodwill                 --                 620               7,427
     Restructuring and other charges                              --               1,261                 512
     Future income taxes                                          --                  --              10,138
     Deferred revenue                                            977               1,404                 (24)
     Government grants                                            --                 154                 817
                                                           ---------           ---------           ---------
                                                               9,096               5,676             (18,872)

Change in non-cash operating items
     Accounts receivable                                        (838)             (2,677)              3,957
     Income taxes and tax credits                              6,096              (2,464)             13,489
     Inventories                                                (699)              1,016               7,925
     Prepaid expenses                                            544                (449)               (569)
     Accounts payable and accrued liabilities                   (164)               (351)               (349)
                                                           ---------           ---------           ---------

                                                              14,035                 751               5,581
                                                           ---------           ---------           ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments                         (585,665)           (653,348)           (401,105)
Proceeds from disposal and maturity of short-term
     investments                                             574,207             624,722             395,699
Additions to property, plant and equipment and
     intangible assets                                        (1,501)               (851)             (2,652)
Business combination                                              --                (241)             (1,867)
                                                           ---------           ---------           ---------

                                                             (12,959)            (29,718)             (9,925)
                                                           ---------           ---------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt                                     (121)               (109)               (133)
Net proceeds of offering (note 13)                                --              29,164                  --
Share issue expenses                                              (6)               (137)                 --
Exercise of stock options                                        148                 254                  45
Redemption of share capital                                       --                  (5)                (16)
Resale of share capital                                           --                  23                  48
                                                           ---------           ---------           ---------

                                                                  21              29,190                 (56)

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                  863                (430)                638
                                                           ---------           ---------           ---------

CHANGE IN CASH                                                 1,960                (207)             (3,762)

CASH - BEGINNING OF YEAR                                       5,159               5,366               9,128
                                                           ---------           ---------           ---------

CASH - END OF YEAR                                         $   7,119           $   5,159           $   5,366
                                                           =========           =========           =========

SUPPLEMENTARY INFORMATION
Interest paid                                              $      30           $     408           $     417
Income taxes paid (recovered)                              $    (669)          $     120           $ (10,351)


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                      F-5

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

1    NATURE OF ACTIVITIES

     EXFO Electro-Optical Engineering Inc. ("EXFO") designs,  manufactures and
     markets a comprehensive  line of test and  measurement  solutions for the
     global   telecommunications   industry.   The  Telecom  Division,   which
     represents the company's main business  activity,  offers integrated test
     solutions to network service providers,  cable operators,  system vendors
     and optical  component  manufacturers.  The Life Sciences and  Industrial
     Division mainly leverages core telecom  technologies to offer value-added
     solutions  life  sciences   applications  and   high-precision   assembly
     processes,  such as those required for microelectronics,  optoelectronics
     and  medical  devices.  EXFO's  products  are  sold in  approximately  70
     countries around the world.


2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION

     These consolidated  financial statements have been prepared in accordance
     with  generally  accepted  accounting  principles  ("GAAP") in Canada and
     significant  differences in measurement and disclosure from U.S. GAAP are
     set out in note 21. These consolidated  financial  statements include the
     accounts of the company and its domestic and international  subsidiaries.
     All  significant   intercompany   accounts  and  transactions  have  been
     eliminated.

     ACCOUNTING ESTIMATES

     The  preparation  of financial  statements in accordance  with  generally
     accepted accounting  principles requires management to make estimates and
     assumptions  that affect the reported  amounts of assets and  liabilities
     and the  disclosures of contingent  assets and liabilities at the date of
     the financial statements, as well as the reported amounts of revenues and
     expenses during the reporting years.  Significant  estimates  include the
     allowance  for doubtful  accounts  receivable,  tax credits  recoverable,
     provision  for excess and obsolete  inventories,  useful lives of capital
     assets, valuation of intangible assets and goodwill,  future income taxes
     valuation   allowance,   certain  accrued   liabilities  and  stock-based
     compensation costs. Actual results could differ from those estimates.

     REPORTING CURRENCY

     The  functional  currency  of the  company is the  Canadian  dollar.  The
     company  has  adopted  the US  dollar  as  its  reporting  currency.  The
     financial statements are translated into the reporting currency using the
     current rate method.  Under this method,  the  financial  statements  are
     translated into the reporting currency as follows: assets and liabilities
     are  translated at the exchange rate in effect on the date of the balance
     sheet,  while revenues and expenses are translated at the monthly average
     exchange rate. All gains and losses resulting from the translation of the
     financial  statements  from  the  functional  currency  to the  reporting
     currency  are  included  in  the  cumulative  translation  adjustment  in
     shareholders' equity.

     In the event that management decides to declare dividends, such dividends
     would be declared in Canadian dollars.


                                      F-6
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     FOREIGN CURRENCY TRANSLATION

     FOREIGN CURRENCY TRANSACTIONS

     Transactions denominated in currencies other than the functional currency
     are translated into the functional  currency as follows:  monetary assets
     and liabilities are translated at the exchange rate in effect on the date
     of the balance  sheet,  and revenues and expenses are  translated  at the
     exchange  rate in  effect  on the date of the  transaction.  Non-monetary
     assets and  liabilities  are  translated at historical  rates.  Gains and
     losses arising from such  translation  are reflected in the statements of
     earnings.

     FOREIGN SUBSIDIARIES

     The financial  statements of integrated foreign operations are remeasured
     into the  functional  currency  using the  temporal  method.  Under  this
     method,  monetary  assets and  liabilities are remeasured at the exchange
     rate in effect on the date of the balance sheet.  Non-monetary assets and
     liabilities  are remeasured at historical  rates,  unless such assets and
     liabilities are carried at market,  in which case, they are translated at
     the exchange  rate in effect on the date of the balance  sheet.  Revenues
     and expenses are remeasured at the monthly average  exchange rate.  Gains
     and  losses  resulting  from  such  remeasurement  are  reflected  in the
     statements of earnings.

     FORWARD EXCHANGE CONTRACTS

     Forward  exchange  contracts  are  utilized  by the company to manage its
     foreign currency  exposure.  The company's policy is not to utilize those
     derivative financial instruments for trading or speculative purposes.

     The  company's  forward  exchange  contracts,  which  are  used to  hedge
     anticipated  US-dollar-denominated  sales,  qualify for hedge accounting;
     therefore,  foreign  exchange  translation  gains  and  losses  on  these
     contracts  are  recognized  as an  adjustment  of the  revenues  when the
     corresponding hedged sales are recorded.

     Realized and unrealized gains or losses  associated with forward exchange
     contracts,  which have been  terminated or cease to be effective prior to
     maturity,  are  deferred  in the  balance  sheet  and  recognized  in the
     earnings  of the period in which the  underlying  hedged  transaction  is
     recognized.

     SHORT-TERM INVESTMENTS

     Short-term  investments are valued at the lower of cost and market value.
     Cost consists of acquisition  cost plus  amortization of discount or less
     amortization of premium.  All investments with original maturity of three
     months or less and that are not  required  for the  purposes  of  meeting
     short-term cash requirements are classified as short-term investments.

     INVENTORIES

     Inventories are valued on an average cost basis, at the lower of cost and
     replacement  cost  for raw  materials  and at the  lower  of cost and net
     realizable value for work in progress and finished goods.


                                      F-7
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     PROPERTY, PLANT AND EQUIPMENT AND AMORTIZATION

     Property,   plant  and  equipment  are  recorded  at  cost  less  related
     government grants and research and development tax credits.  Amortization
     is provided on a straight-line  basis over the estimated  useful lives as
     follows:

                                            TERM
     Land improvements                      5 years
     Buildings                              25 years
     Equipment                              2 to 10 years
     Leasehold improvements                 The lesser of useful life and
                                            remaining lease term

     INTANGIBLE ASSETS, GOODWILL AND AMORTIZATION

     Intangible  assets  primarily  include  the cost of core  technology  and
     software, net of accumulated amortization. Core technology represents the
     existing  technology  acquired in business  combinations that has reached
     technological  feasibility.  Amortization  is provided on a straight-line
     basis over the estimated  useful lives of five years for core  technology
     and four and ten years for software.

     Goodwill  represents  the  excess  of  the  purchase  price  of  acquired
     businesses  over the  estimated  fair  value of net  identifiable  assets
     acquired.  Goodwill is not amortized but must be tested for impairment on
     an annual basis or more  frequently if events or  circumstances  indicate
     that it might be impaired.  Recoverability  of goodwill is  determined at
     the reporting unit level using a two-step  approach.  First, the carrying
     value  of a  reporting  unit is  compared  to its  fair  value,  which is
     determined  based on a combination of discounted  future cash flows and a
     market  approach.  If the carrying  value of a reporting unit exceeds its
     fair value,  the second step is  performed.  In this step,  the amount of
     impairment  loss, if any,  represents the excess of the carrying value of
     goodwill  over its fair value and the loss is charged to  earnings in the
     period in which it is incurred. For the purposes of this impairment test,
     the fair value of  goodwill is  estimated  in the same way as goodwill is
     determined  in  business  combinations;  that is,  the excess of the fair
     value of a  reporting  unit  over  the  estimated  fair  value of its net
     identifiable assets.

     The company elected to perform its annual  impairment test in May of each
     fiscal  year for all its  existing  reporting  units and it  recorded  an
     impairment charge for goodwill in fiscal 2003 (note 4).

     IMPAIRMENT OF LONG-LIVED ASSETS

     Long-lived   assets  are   reviewed  for   impairment   when  events  and
     circumstances  indicate  that  cost  may not be  recoverable.  Impairment
     exists when the carrying  value of an asset or group of assets is greater
     than the  undiscounted  future cash flows  expected to be provided by the
     asset or group of assets.  The amount of impairment  loss, if any, is the
     excess of the carrying  value over the fair value.  The company  assesses
     fair value of long-lived  assets based on  discounted  future cash flows.
     The company recorded  impairment  charges for long-lived assets in fiscal
     2003 and 2004 (note 4).


                                      F-8
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     WARRANTY

     The  company  offers  its  customers  warranties  of one to three  years,
     depending on the specific  products and terms of the purchase  agreement.
     The  company's  typical  warranties  require  it  to  repair  or  replace
     defective products during the warranty period at no cost to the customer.
     Costs related to original warranties are accrued at the time of shipment,
     based  upon  estimates  of  expected  rework  and  warranty  costs  to be
     incurred. Costs associated with separately priced extended warranties are
     expensed as incurred.

     REVENUE RECOGNITION

     For  products in which  software is  incidental,  the company  recognizes
     revenue when persuasive  evidence of an arrangement  exists,  the product
     has been delivered,  the price is fixed and determinable,  and collection
     of  the  resulting   receivable  is  reasonably   assured.  In  addition,
     provisions  are  made  for  estimated  returns,  warranties  and  support
     obligations.

     For products in which software is not incidental,  revenues are separated
     into two categories:  product and  post-contract  customer  support (PCS)
     revenues,  based upon  vendor-specific  objective evidence of fair value.
     Product  revenues for these sales are recognized as described  above. PCS
     revenues  are  deferred  and  recognized  ratably  over the  years of the
     support arrangement.  PCS revenues are recognized at the time the product
     is delivered  when  provided  within one year of  delivery;  the costs of
     providing  this  support are  insignificant  (and  accrued at the time of
     delivery) and no software upgrades are provided.

     For all sales, the company uses a binding purchase order as evidence that
     a sales arrangement exists.

     Delivery   generally  occurs  when  the  product  is  handed  over  to  a
     transporter for shipment.

     At the time of the  transaction,  the company  assesses whether the price
     associated  with its revenue  transaction is fixed and  determinable  and
     whether or not  collection is reasonably  assured.  The company  assesses
     whether the price is fixed and  determinable  based on the payment  terms
     associated with the transaction. The company assesses collection based on
     a  number  of  factors,   including  past  transaction  history  and  the
     creditworthiness of the customer. Generally, collateral or other security
     is not requested from customers.

     Most sales  arrangements  do not generally  include  acceptance  clauses.
     However,  when a sales arrangement does include an acceptance  provision,
     acceptance  occurs  upon the  earliest  of receipt of a written  customer
     acceptance  or  expiration  of the  acceptance  period.  For these  sales
     arrangements, the sale is recognized when acceptance occurs.

     Revenue for extended  warranties is recognized on a  straight-line  basis
     over the warranty period.

     ADVERTISING COSTS

     Advertising costs are expensed as incurred.


                                      F-9
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     GOVERNMENT GRANTS

     Grants  related to operating  expenses are included in earnings  when the
     related expenses are incurred. Grants related to capital expenditures are
     deducted  from the related  assets.  Grants  related to job  creation and
     training  programs for extended  periods are deferred and  amortized on a
     straight-line  basis over the minimum period during which the created job
     must be maintained or training provided.  Grants are included in earnings
     or  deducted  from the  related  assets,  provided  there  is  reasonable
     assurance  that the  company  has  complied  and will comply with all the
     conditions related to the grant.

     RESEARCH AND DEVELOPMENT EXPENSES

     All expenses related to research, as well as development  activities that
     do not meet  generally  accepted  criteria  for  deferral are expensed as
     incurred,  net of related tax credits and government grants.  Development
     expenses  that  meet  generally   accepted  criteria  for  deferral,   in
     accordance with the Canadian  Institute of Chartered  Accountants  (CICA)
     handbook Section 3450, "Research and Development",  are capitalized,  net
     of related tax credits and government  grants,  and are amortized against
     earnings  over the estimated  benefit  period.  Research and  development
     expenses are mainly comprised of salaries and related expenses,  material
     costs as well as fees paid to third-party consultants.

     As at August 31, 2005, the company had not deferred any development costs.

     INCOME TAXES

     The company  provides for income taxes using the liability  method of tax
     allocation.  Under this method,  future income tax assets and liabilities
     are  determined  based on  deductible  or taxable  temporary  differences
     between  financial   statement  values  and  tax  values  of  assets  and
     liabilities,  using  enacted  income tax rates for the years in which the
     differences are expected to reverse.

     The company  establishes a valuation  allowance against future income tax
     assets if,  based on  available  information,  it is more likely than not
     that some or all of the future  income tax assets  will not be  realized.
     Since 2003, the company records a full valuation allowance against future
     income tax assets (notes 4 and 16).

     EARNINGS PER SHARE

     Basic earnings per share are determined using the weighted average number
     of common shares outstanding during the year.

     Diluted  earnings per share are  determined  using the  weighted  average
     number of common shares  outstanding  during the year, plus the effect of
     dilutive potential common shares outstanding during the year. This method
     requires  that  diluted  earnings  per  share be  calculated  (using  the
     treasury  stock  method) as if all dilutive  potential  common shares had
     been  exercised at the latest at the beginning of the year or on the date
     of  issuance,  as the case may be,  and that the funds  obtained  thereby
     (plus  an  amount  equivalent  to  the  unamortized  portion  of  related
     stock-based  compensation costs) be used to purchase common shares of the
     company at the average market price of the common shares during the year.


                                      F-10
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     STOCK-BASED COMPENSATION COSTS

     Since  September 1, 2003, the company  accounts for all forms of employee
     stock-based  compensation using the fair value-based method.  Stock-based
     compensation costs are amortized to expense over the vesting periods.

     Prior to fiscal 2004, no stock-based  compensation  costs were recognized
     for employee stock-based  compensation.  However, the company is required
     to disclose pro forma  information  with respect to net loss and net loss
     per share as if  stock-based  compensation  costs were  recognized in the
     financial  statements using the fair  value-based  method for outstanding
     stock options granted prior to September 1, 2003 (note 14).

     NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS

     ADOPTED IN FISCAL 2005

     On September 1, 2004, the company prospectively adopted the CICA handbook
     Sections 1100 and 1400,  "Generally Accepted  Accounting  Principles" and
     "General  Standards of  Financial  Statement  Presentation".  Among other
     things,   these  new  sections  define  generally   accepted   accounting
     principles  (GAAP),  establish the relative authority of various types of
     CICA Accounting  Standards Board  pronouncements  and clarify the role of
     "industry practice" in applying GAAP. The adoption of these new standards
     had no impact on the financial statements of the company.

     TO BE ADOPTED AFTER FISCAL 2005

     In  January  2005,  the CICA  issued  four new  accounting  standards  in
     relation to financial instruments: Section 3855, "Financial Instruments -
     Recognition  and  measurement";  Section  3865,  "Hedges";  Section 1530,
     "Comprehensive Income"; and Section 3251, "Equity".

     Section 3855 expands on Section 3860, "Financial Instruments - Disclosure
     and  Presentation",  by prescribing when a financial  instrument is to be
     recognized on the balance sheet and at what amount. It also specifies how
     financial  instrument  gains  and  losses  are  to be  presented  in  the
     financial statements.

     Section 3865  provides an  alternative  to Section 3855 for entities that
     choose to  designate  qualifying  transactions  as hedges for  accounting
     purposes.  It replaces and expands on Accounting  Guideline 13,  "Hedging
     Relationships",  and on the hedging  guidance in Section  1650,  "Foreign
     Currency Translation",  by specifying how hedge accounting is applied and
     what disclosures it requires.

     Section 1530,  "Comprehensive  Income",  introduces a new  requirement to
     temporarily present certain gains and losses outside net income.

     Consequently,  Section 3250, "Surplus", has been revised as Section 3251,
     "Equity".

     Sections 1530,  3251, 3855 and 3865 apply to fiscal years beginning on or
     after  October 1, 2006.  The company  will adopt these new  standards  on
     September 1, 2007.  While the company is currently  assessing the effects
     of these new standards, impacts consistent with the adjustments described
     under  note 21 item b) of these  consolidated  financial  statements  are
     expected.


                                      F-11
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

3    BUSINESS COMBINATION

     GNUBI COMMUNICATIONS, L.P.

     On  October 7,  2002,  a newly  created  wholly-owned  subsidiary  of the
     company,  EXFO  Gnubi  Products  Group  Inc.  ("EXFO  Gnubi"),   acquired
     substantially  all the  assets  of  GNUBI  COMMUNICATIONS,  L.P.,  a U.S.
     company supplying multi-channel telecom and datacom testing solutions for
     optical  transport  equipment  manufacturers  as  well  as  research  and
     development laboratories.

     This  acquisition  was  settled  for  a  total  consideration  valued  at
     $4,904,000   including   acquisition-related   costs  of  $162,000.   The
     consideration  paid  consisted of  $2,108,000  in cash  (including a cash
     contingent  consideration of $241,000, paid in fiscal 2004, based on EXFO
     Gnubi sales volume for the twelve months  following the  acquisition) and
     the  issuance  of  1,479,290   subordinate   voting  shares,   valued  at
     $2,796,000.

     The cash  contingent  consideration  was  accounted  for as an additional
     acquisition cost and was allocated to acquired core technology.

     The fair value of the  subordinate  voting shares  issued was  determined
     based on the market price of the shares  beginning  three days before and
     ending  three  days after the number of shares  became  fixed  based on a
     formula, being September 10, 2002.

     This  acquisition  was  accounted  for using  the  purchase  method  and,
     consequently,  the results of  operations  of the acquired  business have
     been  included in the  consolidated  statement of earnings of the company
     since October 7, 2002, being the date of acquisition.

     During fiscal 2004, EXFO Gnubi's  operations were  consolidated  with the
     parent company's operations in Montreal, Canada.

     The purchase price,  including  acquisition-related  costs, was allocated
     based  on  the  estimated  fair  value  of net  assets  at  the  date  of
     acquisition as follows:

    Assets acquired
         Current assets                                             $    755
         Property, plant and equipment                                   334
         Core technology                                                 750
    Current liabilities assumed                                         (134)
                                                                    ----------

    Net identifiable assets acquired                                   1,705

    Goodwill                                                           2,958
                                                                    ----------
    Purchase price                                                     4,663

    Less: Subordinate voting shares issued                             2,796
                                                                    ----------
    Cash paid on the date of acquisition                            $  1,867
                                                                    ==========

     Acquired goodwill is deductible for income tax purposes.


                                      F-12
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

4    SPECIAL CHARGES

     IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

     2003

     In May 2003, the company performed its annual impairment test on goodwill
     for all its reporting units,  except for newly acquired EXFO Gnubi. Also,
     considering market conditions in the telecommunications  industry and the
     persisting unfavorable conditions affecting the subsidiaries'  industries
     at the time, the company reviewed the carrying value of intangible assets
     related to these reporting units,  consisting  primarily of acquired core
     technology.

     As a result of this assessment,  the company  concluded that the carrying
     value of goodwill  related to EXFO  Burleigh  and the  carrying  value of
     intangible  assets  related to EXFO Burleigh and EXFO Photonic  Solutions
     was  impaired,  and it  recorded  a charge of  $4,505,000  to write  down
     goodwill and a pre-tax  charge of  $2,922,000 to write down acquired core
     technology.  Of the total  impairment loss of $7,427,000,  $6,872,000 was
     related to EXFO Burleigh for goodwill and acquired core  technology,  and
     $555,000  was  related  to EXFO  Photonic  Solutions  for  acquired  core
     technology.

     For the  purposes of  estimating  the fair  values,  the  company  used a
     combination of discounted  future cash flows and a market approach (sales
     multiples). The discounted future cash flows were estimated using periods
     ranging  between eight and ten years,  discount rates ranging between 15%
     and 20% and annual  growth rates  ranging  between nil and 35%. The sales
     multiples used in the market approach ranged between 0.7 and 2.3.

     The  assumptions  supporting  the  estimates  of the fair  values and the
     undiscounted future cash flows, including industry conditions,  reflected
     management's best estimations.

     2004

     In fiscal 2004,  the company put one of its buildings  (located in Quebec
     City) up for sale and received, at the beginning of fiscal 2005, a formal
     purchase  offer  for this  building.  Based on that  offer,  the  company
     concluded  that the building  was impaired and it recorded an  impairment
     loss of $620,000 in fiscal 2004,  representing the excess of the carrying
     value of the building over its expected  selling price.  However,  during
     the first  quarter of fiscal 2005,  some  conditions  of the formal offer
     were not met and the offer was declined.  During fiscal 2005, the company
     withdrew  the  building  from the  market.  As at August  31,  2004,  the
     building was not shown as a long-lived asset held for sale in the balance
     sheet because it was still used by the company and, consequently,  it was
     not available for immediate  sale.  This building  reports to the Telecom
     Division.



                                      F-13
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     RESTRUCTURING AND OTHER CHARGES AND INVENTORY WRITE-OFFS

     2003

     During fiscal 2003, the company implemented a restructuring plan to align
     its cost  structure to market  conditions.  Under that plan,  the company
     recorded  charges  of  $4,134,000,   including  $2,767,000  in  severance
     expenses  for  the 172  employees  who  were  terminated  throughout  the
     company,  $512,000 for impaired long-lived assets and $855,000 for future
     payments on exited leased facilities.  Those charges were included in the
     restructuring and other charges in the statement of earnings for the year
     ended August 31, 2003. In addition,  the company  recorded  $4,121,000 in
     inventory  write-offs  for excess and  obsolete  inventories,  which were
     included in the cost of sales in the  statement of earnings for that same
     year.

     2004 AND 2005

     During  fiscal  2004,  the  company  approved  a  restructuring  plan  to
     consolidate the operations of its Life Sciences and Industrial  Division,
     transferring EXFO Burleigh's operations mainly to EXFO Photonic Solutions
     facilities  in Toronto.  This  consolidation  process,  which  started in
     August 2004, was completed during fiscal 2005.

     Overall,   for  that  process,   the  company   incurred   $2,515,000  in
     restructuring  and other charges from which  $2,033,000  were recorded in
     fiscal 2004 and the remaining  $482,000 were recorded in fiscal 2005. The
     overall costs, which were recorded in the restructuring and other charges
     in the statements of earnings of the corresponding years, are detailed as
     follows:  $855,000 for severance expenses for the layoff of all employees
     of EXFO  Burleigh,  $1,261,000  mainly  for the  impairment  of the  EXFO
     Burleigh  building and the remaining  $399,000 for other expenses such as
     training and recruiting expenses and transfer of assets.

     The EXFO Burleigh  building was put up for sale in fiscal 2004, but it is
     not yet sold because of the  difficult  real estate  market in Rochester,
     NY. The  building  is  available  for sale in its present  condition  and
     management  expects to sell the property  within the next twelve  months.
     Consequently,  in accordance with CICA handbook,  section 3475, "Disposal
     of Long-Lived  Assets and Discontinued  Operations",  it was shown in the
     balance sheet as a long-lived asset held for sale. The fair value used to
     determine the  impairment  loss of the building  represents the company's
     best estimate of its selling  price based upon the  municipal  valuation.
     Since September 1, 2004, the building is no longer amortized.

     Finally, in fiscal 2005, the company recorded  adjustments of $190,000 to
     the fiscal 2003 plan because actual charges, mainly for leased equipment,
     were lower than expected.


                                      F-14
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

The following table summarizes  changes in the  restructuring  charges payable
since August 31, 2002:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 2005

                                     BALANCE AS AT                                                            BALANCE AS AT
                                       AUGUST 31,                                                               AUGUST 31,
                                          2004           ADDITIONS         PAYMENTS          ADJUSTMENTS           2005
                                     -------------       ---------        ----------        ------------      --------------
<S>                                  <C>                 <C>              <C>               <C>               <C>

FISCAL 2004 PLAN
Severance expenses                      $   467           $    83           $  (550)           $    --            $    --
Other                                        --               399              (399)                --                 --
                                        -------           -------           -------            -------            -------
                                            467               482              (949)                --                 --
                                        -------           -------           -------            -------            -------

FISCAL 2003 PLAN
Severance expenses                          109                --               (77)               (32)                --
Exited leased facilities                    386                --              (229)                (7)               150
Other                                       197                --               (46)              (151)                --
                                        -------           -------           -------            -------            -------
                                            692                --              (352)              (190)               150
                                        -------           -------           -------            -------            -------

FISCAL 2001 PLAN
Exited leased facilities                     10                --               (10)                --                 --
                                        -------           -------           -------            -------            -------
                                             10                --               (10)                --                 --
                                        -------           -------           -------            -------            -------
Total for all plans (note 9)            $ 1,169           $   482           $(1,311)           $  (190)           $   150
                                        =======           =======           =======            =======            =======

<CAPTION>
YEAR ENDED AUGUST 31, 2004

                                     BALANCE AS AT                                                            BALANCE AS AT
                                       AUGUST 31,                                                               AUGUST 31,
                                          2003           ADDITIONS         PAYMENTS          ADJUSTMENTS           2004
                                     -------------       ---------        ----------        ------------      --------------
<S>                                  <C>                 <C>              <C>               <C>               <C>
FISCAL 2004 PLAN
Severance expenses                      $    --           $   772           $  (305)           $    --            $   467
                                        -------           -------           -------            -------            -------
                                             --               772              (305)                --                467
                                        -------           -------           -------            -------            -------

FISCAL 2003 PLAN
Severance expenses                        1,233                --              (870)              (254)               109
Exited leased facilities                    748                --              (362)                --                386
Other                                       295                --               (90)                (8)               197
                                        -------           -------           -------            -------            -------
                                          2,276                --            (1,322)              (262)               692
                                        -------           -------           -------            -------            -------

FISCAL 2002 PLANS
Other                                        68                --               (68)                --                 --
                                        -------           -------           -------            -------            -------
                                             68                --               (68)                --                 --
                                        -------           -------           -------            -------            -------

FISCAL 2001 PLAN
Exited leased facilities                    124                --               (72)               (42)                10
                                        -------           -------           -------            -------            -------
                                            124                --               (72)               (42)                10
                                        -------           -------           -------            -------            -------
Total for all plans (note 9)            $ 2,468           $   772           $(1,767)           $  (304)           $ 1,169
                                        =======           =======           =======            =======            =======
</TABLE>

                                      F-15
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>
     YEAR ENDED AUGUST 31, 2003

                                          BALANCE AS AT                                                            BALANCE AS AT
                                            AUGUST 31,                                                               AUGUST 31,
                                               2002           ADDITIONS         PAYMENTS          ADJUSTMENTS           2003
                                          -------------       ---------        ----------        ------------      --------------
<S>                                       <C>                 <C>              <C>               <C>               <C>
     FISCAL 2003 PLAN
     Severance expenses                     $    --            $ 2,767           $(1,534)            $    --            $ 1,233
     Exited leased facilities                    --                855              (107)                 --                748
     Other                                       --                512              (217)                 --                295
                                            -------            -------           -------             -------            -------
                                                 --              4,134            (1,858)                 --              2,276
                                            -------            -------           -------             -------            -------

     FISCAL 2002 PLANS
     Severance expenses                         231                 --              (231)                 --                 --
     Other                                       68                 --                --                  --                 68
                                            -------            -------           -------             -------            -------
                                                299                 --              (231)                 --                 68
                                            -------            -------           -------             -------            -------

     FISCAL 2001 PLAN
     Exited leased facilities                   483                 --              (359)                 --                124
                                            -------            -------           -------             -------            -------
                                                483                 --              (359)                 --                124
                                            -------            -------           -------             -------            -------
     Total for all plans                    $   782            $ 4,134           $(2,448)            $    --            $ 2,468
                                            =======            =======           =======             =======            =======
</TABLE>

     FUTURE INCOME TAX ASSETS AND RESEARCH AND DEVELOPMENT TAX CREDITS
     RECOVERABLE

     During fiscal 2003, the company reviewed the carrying value of its future
     income  tax  assets  and  its  research  and   development   tax  credits
     recoverable.  Considering  market  conditions  and  because  the  company
     recorded  losses in fiscal 2002 and 2003,  it concluded  that it was more
     likely  than  not that  its  future  income  tax  assets  and some of its
     non-refundable  research and development tax credits were not recoverable
     and  that  a  valuation   allowance  and  a  write-off   were   required.
     Accordingly,   the  company  recorded  a  full  valuation   allowance  of
     $28,385,000  against its future income tax assets,  mainly related to the
     parent company,  EXFO Protocol and EXFO Burleigh and wrote off $2,297,000
     in  non-refundable  research and  development tax credits related to EXFO
     Protocol. The valuation allowance was included in the income taxes in the
     statement  of  earnings  for the year ended  August  31,  2003 (note 16).
     Research and development  tax credit  write-offs were included in the net
     research and  development  expenses in the statement of earnings for that
     same year (note 15).


5    INVENTORIES

                                                         AS AT AUGUST 31,
                                                    -------------------------
                                                      2005               2004
                                                    -------           -------
     Raw materials                                  $ 9,373           $ 7,244
     Work in progress                                   934             1,370
     Finished goods                                   7,442             6,757
                                                    -------           -------

                                                    $17,749           $15,371
                                                    =======           =======


                                      F-16

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>
6    PROPERTY, PLANT AND EQUIPMENT

                                                                              AS AT AUGUST 31,
                                               --------------------------------------------------------------------------------
                                                               2005                                      2004
                                               --------------------------------------    --------------------------------------
                                                                         ACCUMULATED                               ACCUMULATED
                                                         COST           AMORTIZATION               COST           AMORTIZATION
                                               ---------------    -------------------    ---------------    -------------------
<S>                                            <C>                <C>                    <C>                <C>
     Land and land improvements                $        3,179     $              815     $        2,868     $              558
     Buildings                                          9,206                  2,250              8,311                  1,699
     Equipment                                         33,216                 29,553             29,110                 23,422
     Leasehold improvements                             2,395                  1,659              2,110                  1,278
                                               ---------------    -------------------    ---------------    -------------------
                                                       47,996     $           34,277             42,399     $           26,957
                                                                  ===================                       ===================
     Less:
         Accumulated amortization                      34,277                                    26,957
                                               ---------------                           ---------------
                                               $       13,719                            $       15,442
                                               ===============                           ===============
</TABLE>

     As at August 31, 2004 and 2005, unpaid purchases of property, plant and
     equipment amounted to $358,000 and $111,000, respectively.

<TABLE>
<CAPTION>
7    INTANGIBLE ASSETS AND GOODWILL

                                                                              AS AT AUGUST 31,
                                               --------------------------------------------------------------------------------
                                                               2005                                      2004
                                               --------------------------------------    --------------------------------------
                                                                         ACCUMULATED                               ACCUMULATED
                                                         COST           AMORTIZATION               COST           AMORTIZATION
                                               ---------------    -------------------    ---------------    -------------------
<S>                                            <C>                <C>                    <C>                <C>
     Core technology                           $       35,554     $           32,214     $       32,815     $           25,733
     Software                                           6,607                  4,345              5,847                  3,482
                                               ---------------    -------------------    ---------------    -------------------
                                                       42,161     $           36,559             38,662     $           29,215
                                                                  ===================                       ===================
     Less:
         Accumulated amortization                      36,559                                    29,215
                                               ---------------                           ---------------
                                               $        5,602                            $        9,447
                                               ===============                           ===============
</TABLE>

     Amortization  expenses  for  intangible  assets  in each of the next five
     fiscal  years  will  amount  to  $3,190,000  in 2006,  $893,000  in 2007,
     $429,000 in 2008, $352,000 in 2009 and $325,000 in 2010.


                                      F-17
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     Changes in the carrying value of goodwill are as follows:

<TABLE>
<CAPTION>
                                                                                      AS AT AUGUST 31,
                                                                                 ----------------------------
                                                                                       2005            2004
                                                                                 ------------    ------------
<S>                                                                              <C>             <C>
      Balance - Beginning of year                                                $   18,393      $   17,673
      Foreign currency translation adjustment                                         1,977             720
                                                                                 ------------    ------------

      Balance - End of year (note 19)                                            $   20,370      $   18,393
                                                                                 ============    ============
</TABLE>


8    CREDIT FACILITIES

     The company has a line of credit  which  provides  for  advances of up to
     Cdn$10,000,000  (US$8,411,000).  This line of credit,  which is renewable
     annually,  bears interest at prime rate (prime rate in 2004).  Short-term
     investments,  accounts  receivable,  inventories  and  all  tangible  and
     intangible assets of the company were pledged as collateral  against this
     line of  credit.  As at August  31,  2005,  an  amount  of  Cdn$3,163,000
     (US$2,661,000)  was  reserved  from this line of credit  for  letters  of
     guarantee and forward exchange contracts.


<TABLE>
<CAPTION>
9    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

                                                                                        AS AT AUGUST 3
                                                                                ------------------------------
                                                                                     2005             2004
                                                                                ------------    --------------
<S>                                                                              <C>              <C>
      Trade                                                                      $  5,781         $  4,484
      Salaries and social benefits                                                  4,526            3,932
      Warranty                                                                        725              390
      Tax on capital                                                                  538              526
      Restructuring charges (notes 4 and 20)                                          150            1,169
      Other                                                                           481              892
                                                                                ------------    --------------
                                                                                 $ 12,201         $ 11,393
                                                                                ============    ==============

<CAPTION>
     Changes in the warranty provision are as follows:

                                                                                     AS AT AUGUST 31,
                                                                                ------------------------------
                                                                                     2005             2004
                                                                                ------------    --------------
<S>                                                                              <C>              <C>
      Balance - Beginning of year                                                $    390         $    687
      Provision                                                                       869              564
      Settlements                                                                    (583)            (889)
      Foreign currency translation adjustment                                          49               28
                                                                                ------------    --------------

      Balance - End of year                                                      $    725         $    390
                                                                                ============    ==============
</TABLE>


                                      F-18
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>
10       LONG-TERM DEBT
                                                                                       AS AT AUGUST 31,
                                                                                ------------------------------
                                                                                     2005             2004
                                                                                ------------    --------------
<S>                                                                              <C>              <C>
     Loans collateralized by equipment, bearing interest at 9.6%,
         repayable in monthly instalments of $13,000 including
         principal and interest, maturing in 2008                               $       332       $       453

     Less: Current portion                                                              134               121
                                                                                ------------    --------------
                                                                                $       198       $       332
                                                                                ============    ==============
</TABLE>

     As at August 31, 2005, minimum principal  repayments  required in each of
     the next three years will  amount to  $134,000 in 2006,  $147,000 in 2007
     and $51,000 in 2008.


11   COMMITMENTS

     The company entered into operating leases for certain of its premises and
     equipment,  which expire at various  dates through May 2011. As at August
     31, 2005, minimum rentals payable under these operating leases in each of
     the next five years will amount to $1,050,000 in 2006,  $952,000 in 2007,
     $632,000 in 2008, $584,000 in 2009 and $594,000 in 2010. As at August 31,
     2005,  the total  commitment  under  these  operating  leases  amounts to
     $4,247,000.

     For the years  ended  August 31,  2003,  2004 and 2005,  rental  expenses
     amounted to $1,718,000,  $1,219,000 and  $1,370,000,  respectively  (note
     20).


12   CONTINGENCIES

     CLASS ACTION

     On November 27, 2001, a class action suit was filed in the United  States
     District Court for the Southern District of New York against the company,
     four of the  underwriters  of its Initial Public Offering and some of its
     executive  officers  pursuant to the Securities  Exchange Act of 1934 and
     Rule  10b-5  promulgated  thereunder  and  Sections  11, 12 and 16 of the
     Securities  Act of 1933.  This class action  alleges  that the  company's
     registration  statement  and  prospectus  filed with the  Securities  and
     Exchange    Commission   on   June   29,   2000,    contained    material
     misrepresentations  and/or omissions  resulting from (i) the underwriters
     allegedly soliciting and receiving additional,  excessive and undisclosed
     commissions  from certain  investors in exchange for which they allocated
     material  portions of the shares issued in connection  with the company's
     Initial Public  Offering;  and (ii) the underwriters  allegedly  entering
     into agreements  with customers  whereby shares issued in connection with
     the  company's  Initial  Public  Offering  would  be  allocated  to those
     customers in exchange for which customers  agreed to purchase  additional
     amounts of shares in the after-market at pre-determined prices.

     On April 19, 2002, the plaintiffs filed an amended  complaint  containing
     master  allegations  against  all of the  underwriters  in all of the 310
     cases  included in this class action and also filed an amended  complaint
     containing  allegations  specific to four of the company's  underwriters,
     the  company  and  two of its  executive  officers.  In  addition  to the
     allegations  mentioned  above,  the amended  complaint  alleges  that the


                                      F-19
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     underwriters (i) used their analysts to manipulate the stock market;  and
     (ii)  implemented  schemes  that  allowed  issuer  insiders to sell their
     shares  rapidly  after an initial  public  offering and benefit from high
     market prices. As concerns the company and its two executive  officers in
     particular,   the  amended  complaint  alleges  that  (i)  the  company's
     registration  statement was materially  false and  misleading  because it
     failed to disclose the  additional  commissions  and  compensation  to be
     received by underwriters;  (ii) the two named executive  officers learned
     of or recklessly  disregarded the alleged misconduct of the underwriters;
     (iii) the two named  executive  officers  had motive and  opportunity  to
     engage in  alleged  wrongful  conduct  due to  personal  holdings  of the
     company's stock and the fact that an alleged artificially  inflated stock
     price could be used as currency for acquisitions;  and (iv) the two named
     executive  officers,  by  virtue  of their  positions  with the  company,
     controlled the company and the contents of the registration statement and
     had the ability to prevent its issuance or cause it to be corrected.  The
     plaintiffs in this suit seek an unspecified amount for damages suffered.

     In July  2002,  the  issuers  filed a motion to dismiss  the  plaintiffs'
     amended  complaint  and judgment was rendered on February 19, 2003.  Only
     one of the claims against the company was dismissed.  On October 8, 2002,
     the claims against its officers were  dismissed  pursuant to the terms of
     Reservation  of  Rights  and  Tolling  Agreements  entered  into with the
     plaintiffs.

     In  June  2003,  a  committee  of  the   company's   Board  of  Directors
     conditionally   approved  a  proposed   settlement   between  the  issuer
     defendants,  the individual defendants,  and the plaintiffs. If approved,
     the  settlement  would  provide,  among  other  things,  a release of the
     company and of the individual  defendants for the conduct  alleged in the
     action to be wrongful in the amended  complaint.  The company would agree
     to  undertake  other  responsibilities  under the  settlement,  including
     agreeing to assign away, not assert,  or release certain potential claims
     the  company  may have  against its  underwriters.  Any direct  financial
     impact  of  the  proposed  settlement  is  expected  to be  borne  by the
     company's insurance carriers.

     On June 25, 2004, the Plaintiffs  moved for  Preliminary  Approval of the
     settlement. The court granted the preliminary approval motion on February
     15, 2005, subject to certain modifications. On August 31, 2005, the court
     issued a preliminary  order further  approving the  modifications  to the
     settlement  and  certifying  the  settlement  classes.   The  court  also
     appointed the Notice  Administrator  for the  settlement and ordered that
     notice of the settlement be  distributed to all settlement  class members
     beginning on November 15, 2005,  and  completed by January 15, 2006.  The
     settlement  fairness  hearing has been set for April 26, 2006.  Following
     the hearing,  if the court  determines that the settlement is fair to the
     class members, the settlement will be approved. There can be no assurance
     that this proposed  settlement  would be approved and  implemented in its
     current  form,  or at all.  Therefore,  it is not possible to predict the
     final  outcome of the case,  nor  determine  the  amount of any  possible
     losses.  If the settlement  process  fails,  the company will continue to
     defend its position in this  litigation  that the claims  against it, and
     its officers, are without merit. Accordingly,  no provision for this case
     has been made in the consolidated  financial  statements as at August 31,
     2005.

     LETTERS OF GUARANTEE

     As at August  31,  2005,  in the  normal  course of its  operations,  the
     company  had   outstanding   letters  of   guarantee   of   Cdn$1,418,000
     (US$1,193,000),  which expire at various  dates  through  fiscal 2008 and
     that were reserved from the line of credit.


                                      F-20
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

13   SHARE CAPITAL

     Authorized - unlimited as to number, without par value
         Subordinate  voting  and  participating,   bearing  a  non-cumulative
              dividend to be  determined  by the Board of  Directors,  ranking
              pari passu with multiple voting shares
         Multiple  voting  and  participating,  entitling  to ten votes  each,
              bearing a non-cumulative  dividend to be determined by the Board
              of   Directors,   convertible   at  the  holder's   option  into
              subordinate voting shares on a one-for-one  basis,  ranking pari
              passu with subordinate voting shares

     The following  table  summarizes the share capital  activity since August
     31, 2002:

<TABLE>
<CAPTION>
                                                   MULTIPLE VOTING SHARES           SUBORDINATE VOTING SHARES
                                               ---------------------------------  -------------------------------
                                                                                                                          TOTAL
                                                        NUMBER          AMOUNT          NUMBER           AMOUNT           AMOUNT

<S>                                                 <C>          <C>                 <C>          <C>              <C>
      Balance as at August 31, 2002                 37,900,000   $           1       23,565,185   $     489,610    $     489,611

        Business combination (note 3)                        -               -        1,479,290           2,796            2,796
        Exercise of stock options (note 14)                  -               -           25,498              45               45
        Exercise of stock awards (note 14)                   -               -           69,935               -                -
        Redemption                                           -               -          (21,515)            (16)             (16)
        Resale                                               -               -           21,515              16               16
                                               ----------------  ---------------  --------------- ---------------  --------------

      Balance as at August 31, 2003                 37,900,000               1       25,139,908         492,451          492,452

        Public offering (1)                                  -               -        5,200,000          29,164           29,164
        Exercise of stock options (note 14)                  -               -          111,071             254              254
        Exercise of stock awards (note 14)                   -               -           89,504               -                -
        Redemption                                           -               -           (5,340)             (5)              (5)
        Resale                                               -               -            5,340               5                5
        Share issue expenses                                 -               -                -            (137)            (137)
                                               ----------------  ---------------  --------------- ---------------  --------------

      Balance as at August 31, 2004                 37,900,000               1       30,540,483         521,732          521,733

        Exercise of stock options (note 14)                  -               -           71,699             148              148
        Exercise of stock awards (note 14)                   -               -           53,592               -                -
        Share issue expenses                                 -               -                -              (6)              (6)
                                               ----------------  ---------------  --------------- ---------------  --------------

      Balance as at August 31, 2005                 37,900,000   $           1       30,665,774   $     521,874    $     521,875
                                               ================  ===============  =============== ===============  ==============
</TABLE>

     (1)  On February 12, 2004,  pursuant to a Canadian public  offering,  the
          company issued 5,200,000  subordinate voting shares for net proceeds
          of $29,164,000  (Cdn$38,438,400),  after  deduction of  underwriting
          commission of $1,215,000  (Cdn$1,601,000).  The net proceeds of this
          offering were invested in commercial  paper that is presented in the
          short-term investments in the balance sheet (note 18).


                                      F-21

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

14   STOCK-BASED COMPENSATION PLANS

     The  maximum  number of  subordinate  voting  shares  issuable  under the
     Long-Term  Incentive  Plan and the Deferred Share Unit Plan cannot exceed
     6,306,153  shares.  The maximum number of subordinate  voting shares that
     may be granted to any  individual  on an annual basis cannot exceed 5% of
     the number of outstanding subordinate voting shares.

     LONG-TERM INCENTIVE PLAN

     In May 2000,  the company  established a Stock Option Plan for Directors,
     executive officers,  employees and consultants and those of the company's
     subsidiaries,  as determined by the Board of Directors.  In January 2005,
     the company made certain  amendments  to the existing  Stock Option Plan,
     including  the renaming of the plan to Long-Term  Incentive  Plan,  which
     includes stock options and restricted share units.

     STOCK OPTIONS

     The exercise price of stock options granted under the Long-Term Incentive
     Plan is the market price of the common shares on the date of grant. Stock
     options  granted under the plan generally  expire ten years from the date
     of grant.  Stock  options  granted under the plan  generally  vest over a
     four-year  period,  with 25% vesting on an annual basis commencing on the
     first  anniversary  of the date of  grant.  The  Board of  Directors  may
     accelerate the vesting of any or all  outstanding  stock options upon the
     occurrence of a change of control.

<TABLE>
<CAPTION>
     The following table summarizes stock option activity since August 31, 2002:

                                                                       YEARS ENDED AUGUST 31,
                                        -------------------------------------------------------------------------------------
                                                    2005                        2004                        2003
                                        ---------------------------    --------------------------   --------------------------
                                                          WEIGHTED                      WEIGHTED                     WEIGHTED
                                                           AVERAGE                       AVERAGE                      AVERAGE
                                                          EXERCISE                      EXERCISE                    EXERCISE
                                              NUMBER         PRICE          NUMBER         PRICE          NUMBER        PRICE
                                                             (CDN$)                        (CDN$)                       (CDN$)
<S>                                        <C>         <C>               <C>         <C>               <C>         <C>
      Outstanding - Beginning of year      2,934,518   $        21       3,176,613   $        23       2,597,574   $       34
           Granted                           246,233             6         536,500             5       1,268,450            3
           Exercised                         (71,699)           (3)       (111,071)           (3)        (25,498)          (3)
           Forfeited                        (345,293)          (27)       (667,524)          (23)       (663,913)         (25)
                                        -------------  ------------    ------------   -----------   ------------   -----------
      Outstanding - End of year            2,763,759   $        19       2,934,518   $        21       3,176,613   $        23
                                        =============  ============    ============   ===========   ============   ===========
      Exercisable - End of year            1,650,404   $        28       1,331,707   $        32       1,068,595   $        33
                                        =============  ============    ============   ===========   ============   ===========
</TABLE>

     The  weighted  average  grant-date  fair value of stock  options  granted
     during fiscal 2004 and 2005 amounted to $2.73 and $3.51, respectively.


                                      F-22
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     The fair value of stock  options  granted  in fiscal  2003 (for pro forma
     only),  2004 and 2005  was  estimated  using  the  Black-Scholes  options
     valuation model with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                               YEARS ENDED AUGUST 31,
                                                -------------------------------------------------------
                                                         2005                2004                2003
                                                --------------    ----------------    -----------------
<S>                                             <C>               <C>                 <C>
     Risk-free interest rate                             3.6%                2.7%                4.8%
     Expected volatility                                  95%                100%                 80%
     Dividend yield                                       Nil                 Nil                 Nil
     Expected life                                  66 months           49 months           36 months
</TABLE>

     If the fair value-based  method had been applied to stock options granted
     prior to September 1, 2003 and  outstanding  as at August 31, 2003,  2004
     and  2005,  the net loss and the net loss per  share  would  have been as
     follows on a pro forma basis:

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED AUGUST 31,
                                                                       ----------------------------------------------------------
                                                                                 2005                2004                2003
                                                                       ------------------  ------------------  ------------------
<S>                                                                    <C>                 <C>                 <C>
       Net loss for the year                                           $        (1,634)    $       (8,424)     $       (54,950)
       Pro forma adjustment for stock-based compensation costs                     131               (174)                (683)
                                                                       ------------------  ------------------  ------------------
       Pro forma net loss for the year                                 $        (1,503)    $       (8,598)     $       (55,633)
                                                                       ==================  ==================  ==================
       Basic and diluted net loss per share                            $        (0.02)     $       (0.13)      $        (0.87)
       Basic and diluted pro forma net loss per share                  $        (0.02)     $       (0.13)      $        (0.88)

<CAPTION>
     The following table summarizes information about stock options as at August 31, 2005:

                                            STOCK OPTIONS OUTSTANDING                            STOCKS OPTIONS EXERCISABLE
                             -----------------------------------------------------------     ------------------------------------
                                                       WEIGHTED        WEIGHTED AVERAGE                                WEIGHTED
                                                        AVERAGE               REMAINING                                 AVERAGE
      EXERCISE PRICE                NUMBER      EXERCISE PRICE         CONTRACTUAL LIFE             NUMBER      EXERCISE PRICE
               (CDN$)                                    (CDN$)                                                          (CDN$)
<S>                             <C>             <C>                    <C>                    <C>              <C>
      $2.50 to $3.36               542,054       $         2.50               7.1 years            226,993      $          2.50
      $3.96 to $5.60               620,342                 5.04               5.2 years            122,275                 4.78
      $6.22 to $9.02               243,770                 6.53               8.4 years             70,397                 7.01
      $14.27 to $20.00             507,446                15.87               6.2 years            380,592                15.87
      $29.70 to $43.00             600,846                36.29               5.2 years            600,846                36.29
      $51.25 to $68.17             205,771                65.83               5.0 years            205,771                65.83
      $83.66                        43,530                83.66               5.0 years             43,530                83.66
                             ---------------   ------------------   --------------------     ---------------  -------------------
                                 2,763,759       $        19.22               6.0 years          1,650,404      $         28.28
                             ===============   ==================   ====================     ===============  ===================
</TABLE>


                                      F-23
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     RESTRICTED SHARE UNITS (RSUS)

     RSUs are "phantom"  shares that rise and fall in value based on the value
     of the company's  subordinate voting shares and are redeemable for actual
     subordinate  voting  shares  or cash at the  discretion  of the  Board of
     Directors on the vesting dates  established  by the Board of Directors at
     the time of grant.  The vesting  dates are  subject to a minimum  term of
     three  years and a maximum  term of ten years from the award  date.  RSUs
     granted  under the plan  expire at the  latest ten years from the date of
     grant.

     During  fiscal  2005,  the  company   granted   176,185  RSUs  that  were
     outstanding as at August 31, 2005. However, none of them were exercisable
     at that date.  As at August 31,  2005,  the  weighted  average  remaining
     contractual  life of the  outstanding  RSUs was 9.4 years.  The  weighted
     average grant-date fair value of these RSUs was $4.68.

     DEFERRED SHARE UNIT PLAN

     In January 2005, the company established a Deferred Share Unit (DSU) Plan
     for the  members  of the  Board  of  Directors  as part of  their  annual
     retainer  fees.  Each DSU  entitles  the Board  members  to  receive  one
     subordinate voting share. DSUs are acquired on the date of grant and will
     be redeemed in subordinate voting shares when the Board member will cease
     to be Director of the company.

     During fiscal 2005, the company granted 23,734 DSUs that were outstanding
     as at August 31, 2005 to the members of the Board of Directors.

     The weighted average grant-date fair value of these DSUs was $4.47.

     STOCK APPRECIATION RIGHTS PLAN

     In August 2001, the company  established  the Stock  Appreciation  Rights
     Plan for  certain  employees.  Under that plan,  eligible  employees  are
     entitled to receive a cash amount  equivalent to the  difference  between
     the market  price of the common  shares on the date of  exercise  and the
     exercise price determined on the date of grant. Stock appreciation rights
     granted under the plan generally expire ten years from the date of grant.
     Stock appreciation  rights vest over a four-year period, with 25% vesting
     on an annual basis  commencing  on the first  anniversary  of the date of
     grant.

     Considering  the market price of the common  shares of $4.67 as at August
     31,  2005,  compensation  cost for those  stock  appreciation  rights was
     nominal as at August 31, 2005.


                                      F-24
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     The following table summarizes stock  appreciation  rights activity since
     August 31, 2002:

<TABLE>
<CAPTION>
                                                                          YEARS ENDED AUGUST 31,
                                        -------------------------------------------------------------------------------------
                                                    2005                        2004                        2003
                                        ---------------------------    --------------------------   --------------------------
                                                          WEIGHTED                      WEIGHTED                     WEIGHTED
                                                           AVERAGE                       AVERAGE                      AVERAGE
                                                          EXERCISE                      EXERCISE                    EXERCISE
                                              NUMBER         PRICE          NUMBER         PRICE          NUMBER        PRICE
<S>                                        <C>            <C>            <C>            <C>            <C>          <C>
      Outstanding - Beginning of year           13,000    $     16           9,000      $     24          10,000    $      26
         Granted                                 6,000           4           6,000             5           5,000            2
         Forfeited                                   -           -          (2,000)          (19)         (6,000)          (9)
                                           -----------    ---------      ----------    ----------      ----------   ----------

      Outstanding - End of year                 19,000    $     12          13,000      $     16           9,000    $      24
                                           ===========    =========      ==========    ==========      ==========   ==========

      Exercisable - End of year                  7,500    $     24           4,250      $     30           3,500    $      30
                                           ===========    =========      ==========    ==========      ==========   ==========

<CAPTION>
     The  following  table  summarizes  information  about stock  appreciation
     rights as at August 31, 2005:

                                                              STOCK APPRECIATION                         STOCK APPRECIATION
                                                              RIGHTS OUTSTANDING                         RIGHTS EXERCISABLE
                                                  --------------------------------------------      -----------------------------
                                                                             WEIGHTED AVERAGE
                                                                        REMAINING CONTRACTUAL
      EXERCISE PRICE                                       NUMBER                        LIFE                    NUMBER

<S>                                                   <C>               <C>                              <C>
      $2.10                                                 2,000                  7.6  years                     1,000
      $4.51 to $4.65                                       12,000                  9.0  years                     1,500
      $22.25                                                2,500                  5.4  years                     2,500
      $45.94                                                2,500                  5.0  years                     2,500
                                                  -----------------     ----------------------      -----------------------------
                                                           19,000                  7.9  years                     7,500
                                                  =================     ======================      =============================
</TABLE>

     RESTRICTED STOCK AWARD PLAN

     In December 2000, the company  established a Restricted  Stock Award Plan
     for employees of EXFO Burleigh.  This plan expired in December 2004. Each
     stock award entitled employees to receive one subordinate voting share at
     a purchase  price of nil. Stock awards granted under the plan vested over
     a four-year period, with 25% vesting on an annual basis commencing on the
     first  anniversary of the date of grant.  According to the plan, upon the
     involuntary  termination of a member of the defined  management team, all
     outstanding   restricted   stock  awards  granted  to  such  an  employee
     automatically vested.


                                      F-25
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     The following  table  summarizes  restricted  stock awards activity since
     August 31, 2002:

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED AUGUST 31,
                                                                       ----------------------------------------------------------
                                                                                 2005                2004                2003
                                                                       ------------------  ------------------  ------------------
<S>                                                                         <C>               <C>                  <C>
       Outstanding - Beginning of year                                          53,592            143,096              215,249
           Exercised                                                           (53,592)           (89,504)             (69,935)
           Forfeited                                                                 -                  -               (2,218)
                                                                       ------------------  ------------------  ------------------
       Outstanding - End of year                                                     -             53,592              143,096
                                                                       ==================  ==================  ==================
</TABLE>


15   OTHER DISCLOSURES

     NET RESEARCH AND DEVELOPMENT EXPENSES

     Net research and development expenses comprise the following:

<TABLE>
<CAPTION>
                                                                                          YEARS ENDED AUGUST 31,
                                                                           ------------------------------------------------------
                                                                                     2005              2004               2003
                                                                           -----------------  ----------------  -----------------
<S>                                                                        <C>                <C>               <C>
       Gross research and development expenses                             $        15,878    $        15,668   $        17,133
       Research and development tax credits and grants                              (3,688)            (3,278)           (3,551)
       Research and development tax credit write-offs
         (note 4)                                                                        -                  -             2,297
                                                                           -----------------  ----------------  -----------------
                                                                           $        12,190    $        12,390   $        15,879
                                                                           =================  ================  =================
</TABLE>

     Tax credits  written off in fiscal  2003 can be carried  forward  against
     future years' income taxes payable over the next eight years.

     GOVERNMENT GRANTS

     During  1998,  the  company  entered  into an  agreement  with the Quebec
     Minister of Industry,  Commerce, Science and Technology (the "Minister").
     Pursuant to this  agreement,  the Minister  agreed to contribute,  in the
     form of grants, up to a maximum of Cdn$2,220,000  (US$1,867,000) over the
     period from January 1, 1998,  through December 31, 2002, payable based on
     the number of full-time jobs created during the period.

     The above grants are subject to the condition that jobs created  pursuant
     to the agreement be  maintained  for a period of at least five years from
     the date of creation.  Should this  condition  not be met by the company,
     the  Minister  may  enforce  various  recourse  options,   which  include
     suspension  or  cancellation  of the  agreement  or  repayment of amounts
     received by the company. Since the beginning of this program, the company
     has claimed the maximum amount of Cdn$2,200,000 (US$1,867,000),  of which
     Cdn$770,000  (US$647,000)  was  credited  to  earnings.  The  balance  of
     Cdn$1,450,000  (US$1,220,000)  was included in  government  grants in the
     balance  sheet.  This  latter  amount will be  recognized  upon the final
     approval by the sponsor of the program.


                                      F-26
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     Furthermore,  since 2000, companies operating in the Quebec City area are
     eligible  for a  refundable  credit  granted  by  the  Quebec  provincial
     government.  This  credit is earned  based on the  increase  of  eligible
     production and marketing  salaries  incurred in the Quebec City area at a
     rate of 40%. Since 2000, the company has claimed a total of Cdn$5,815,000
     (US$4,891,000) under this program, of which Cdn$5,041,000  (US$4,239,000)
     was credited to earnings,  the balance of  Cdn$774,000  (US$652,000)  was
     included in government  grants in the balance  sheet.  This latter amount
     will be recognized  in the statement of earnings upon the final  approval
     of eligible salaries by the sponsor of the program.

     Should repayments of any amounts received pursuant to these agreements be
     required, such repayments, less related deferred revenue, will be charged
     to earnings as the amount of any repayment becomes known.

     Following is a summary of the  classification  of these and certain other
     grants and credits  (government  grants) in the statements of earnings of
     the reporting years.

     Cost of sales for the years ended August 31, 2003,  2004 and 2005, is net
     of government grants of $518,000, $3,000 and $89,000, respectively.

     Selling and administrative  expenses for the years ended August 31, 2003,
     2004 and 2005,  are net of  government  grants of  $286,000,  $5,000  and
     $32,000, respectively.

     Research  and  development  expenses for the years ended August 31, 2003,
     2004 and 2005,  are net of  government  grants of  $45,000,  $80,000  and
     $22,000, respectively.

     DEFINED CONTRIBUTION PLANS

     The company  maintains  separate defined  contribution  plans for certain
     eligible  employees.  These plans,  which are accounted for on an accrual
     basis, are summarized as follows:

     o   Deferred profit-sharing plan

          The company  maintains a plan for certain eligible Canadian resident
          employees, under which the company may elect to contribute an amount
          equal to 1%  (until  May 2005 and 2%  thereafter)  of an  employee's
          gross salary, provided that the employee has contributed at least 2%
          of his/her  gross  salary to a  tax-deferred  registered  retirement
          savings plan. Cash  contributions  to this plan and expenses for the
          years ended August 31, 2003,  2004 and 2005,  amounted to Cdn$93,000
          (US$63,000),  Cdn$141,000 (US$106,000) and Cdn$221,000 (US$179,000),
          respectively.

     o   401K plan

          The  company  maintains  a 401K  plan  for  eligible  U.S.  resident
          employees.  Under this plan,  the company must  contribute an amount
          equal to 3% of an employee's current compensation.  During the years
          ended  August 31, 2003,  2004 and 2005,  the company  recorded  cash
          contributions and expenses totaling $253,000, $187,000 and $134,000,
          respectively.


                                      F-27
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands of US dollars, except share and per share
data and as otherwise noted)

16   INCOME TAXES

     The  reconciliation  of the income  tax  provision  calculated  using the
     combined  Canadian federal and provincial  statutory income tax rate with
     the income tax provision in the financial statements is as follows:




                                      F-28
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED AUGUST 31,
                                                                            -----------------------------------------------------
                                                                                     2005               2004              2003
                                                                            ----------------  -----------------  ----------------
<S>                                                                         <C>               <C>                <C>
      Income tax provision at combined Canadian federal and provincial      $           307   $        (3,011)   $       (13,563)
           statutory tax rate (31% in 2005, 32% in 2004 and 34% in 2003)

      Increase (decrease) due to:
      Foreign income taxed at different rates                                          (580)             (767)              (999)
      Non-taxable income                                                               (827)             (128)              (298)
      Non-deductible expenses                                                           784             1,205              1,609
      Tax deductions                                                                    (81)             (169)               (80)
      Reduction of Canadian federal statutory tax rate                                    -               274                 92
      Effect of consolidation of subsidiaries                                          (209)           (1,384)               184
      Previous year tax recovery upon a tax assessment                                    -            (1,406)              (645)
      Other                                                                            (146)              446                374
      Change in valuation allowance                                                   3,375             3,954             28,385
                                                                            ----------------  -----------------  ----------------
                                                                            $         2,623   $          (986)   $        15,059
                                                                            ----------------  -----------------  ----------------
      The income tax provision consists of the following:
      Current
           Canadian                                                         $         2,513   $          (577)   $         4,829
           United States                                                                  6                 -               (247)
           Other                                                                        104              (409)               339
                                                                            ----------------  -----------------  ----------------

                                                                                      2,623              (986)             4,921
      Future
           Canadian                                                                  (1,445)           (1,104)           (13,553)
           United States                                                             (1,723)           (2,448)            (4,307)
           Other                                                                       (207)             (402)              (387)
                                                                            ================  =================  ================
                                                                                     (3,375)           (3,954)           (18,247)

      Valuation allowance
           Canadian                                                                   1,445             1,104             20,359
           United States                                                              1,723             2,448              7,374
           Other                                                                        207               402                652
                                                                            ----------------  -----------------  ----------------

                                                                                      3,375             3,954             28,385
                                                                            ----------------  -----------------  ----------------

                                                                            $         2,623   $          (986)   $        15,059
                                                                            ================  =================  ================
      Details of the company's income taxes:
           Earnings (loss) before income taxes
               Canadian                                                     $         3,092   $        (7,740)   $       (20,449)
               United States                                                           (953)           (5,879)           (13,116)
               Other                                                                 (1,150)            4,209             (6,326)
                                                                            ----------------  -----------------  ----------------
                                                                            $           989   $        (9,410)   $       (39,891)
                                                                            ================  =================  ================
</TABLE>

     Most of the company's  income tax  provision  for fiscal 2005  represents
     income taxes payable at the Canadian federal level,  which are reduced by
     research and  development  tax credits that are  recorded  against  gross
     research and development expenses.


                                      F-29
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     Significant  components  of the  company's  future  income tax assets and
     liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                                   AS AT AUGUST 31,
                                                                                        -----------------------------------------
                                                                                                   2005                   2004
                                                                                        ------------------    -------------------
<S>                                                                                         <C>                          <C>
      Future income tax assets
           Long-lived assets                                                                $      4,902          $      3,291
           Provisions and accruals                                                                 7,406                 8,755
           Government grants                                                                         209                   188
           Deferred revenue                                                                          318                   336
           Share issue expenses                                                                      590                   657
           Research and development expenses                                                       7,292                 5,064
           Losses carried forward                                                                 18,424                15,110
                                                                                            ------------          ------------
                                                                                                  39,141                33,401
      Valuation allowance                                                                        (38,406)              (32,613)
                                                                                            ------------          ------------
                                                                                                     735                   788
      Future income tax liabilities
           Research and development tax credits                                                     (735)                 (788)
                                                                                            ------------          ------------
      Future income tax assets, net                                                         $          -          $          -
                                                                                            ============          ============
</TABLE>

     As at August 31,  2005,  the company had  available  operating  losses in
     several tax  jurisdictions,  against which a full valuation  allowance of
     $18,424,000 was  established.  The following table summarizes the year of
     expiry of these operating losses by tax jurisdiction:

<TABLE>
<CAPTION>
                                                           CANADA                                     UNITED STATES
     YEAR OF EXPIRY                           FEDERAL                    PROVINCIAL                       AND OTHER
                                      ---------------              ----------------               -----------------
<S>                                   <C>                          <C>                            <C>
     2006                             $        63,000              $              -               $               -
     2007                                   1,710,000                        73,000                         206,000
     2008                                   5,614,000                        61,000                       1,916,000
     2009                                   5,921,000                     3,563,000                         571,000
     2010                                   4,211,000                     2,211,000                         257,000
     2014                                      81,000                             -                               -
     2015                                   1,775,000                     1,778,000                               -
     2022                                           -                             -                       9,025,000
     2023                                           -                             -                      10,517,000
     2024                                           -                             -                       6,818,000
     2025                                           -                             -                       8,207,000
     Indefinite                             2,041,000                     2,349,000                       1,750,000
                                      ---------------              ----------------               -----------------
                                      $    21,416,000              $     10,035,000               $      39,267,000
                                      ===============              ================               =================
</TABLE>

     In addition to operating  losses,  as at August 31, 2005, the company had
     available  research  and  development  expenses  in Canada  amounting  to
     $24,420,000 at the federal level and $20,668,000 at the provincial level,
     against which a full valuation  allowance of $7,292,000 was  established.
     These expenses can be carried forward  indefinitely against future years'
     taxable income in their respective tax jurisdiction.


                                      F-30
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

17   LOSS PER SHARE

     The following table summarizes the  reconciliation  of the basic weighted
     average number of shares  outstanding  and the diluted  weighted  average
     number of shares outstanding:

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED AUGUST 31,
                                                                          -----------------------------------------------------
                                                                                     2005               2004               2003
                                                                          ---------------      -------------        -----------
<S>                                                                       <C>                  <C>                  <C>
      Basic weighted average number of shares
           outstanding (000's)                                                     68,526             66,020             62,852
      Dilutive effect of stock options (000's)                                        422                502                301
      Dilutive effect of restricted stock awards (000's)                               17                 93                164
      Dilutive effect of deferred share units (000's)                                   8                  -                  -
      Dilutive effect of restricted share units (000's)                                 8                  -                  -
                                                                          ---------------      -------------        -----------

      Diluted weighted average number of shares outstanding (000's)                68,981             66,615             63,317
                                                                          ===============      =============        ===========

      Stock options excluded from the calculation of the
      diluted weighted average number of shares because
      their exercise price was greater than the average
      market price of the common shares (000's)                                     1,962              2,128              2,533
                                                                          ===============      =============        ===========
</TABLE>

     The diluted net loss per share for the years ended August 31, 2003,  2004
     and 2005, was the same as the basic net loss per share since the dilutive
     effect of stock options,  restricted  stock awards,  deferred share units
     and  restricted  share units  should not be included in the  calculation;
     otherwise,  the effect would be anti-dilutive.  Accordingly,  diluted net
     loss per share for those years was  calculated  using the basic  weighted
     average number of shares outstanding.


18   FINANCIAL INSTRUMENTS

     SHORT-TERM INVESTMENTS



                                      F-31
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>
      Short-term investments consist of the following:
                                                                                                     AS AT AUGUST 31,
                                                                                            ---------------------------------
                                                                                                 2005                2004
                                                                                            -------------        ------------
<S>                                                                                         <C>                  <C>
       Commercial paper denominated in Canadian dollars, bearing
            interest  at  annual rates of 2.44% to 2.75% in 2005
            and 2.00% to  2.14%  in 2004,  maturing on different
            dates  between  September  2005 and  January 2006 in
            fiscal 2005, and  October 2004  and  January 2005 in
            fiscal 2004                                                                     $     104,883        $     65,359
       Mutual funds denominated in Canadian dollars                                                     -              18,610
                                                                                            -------------        ------------
                                                                                            $     104,883        $     83,969
                                                                                            =============        ============
</TABLE>




                                      F-32
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     FAIR VALUE

     Cash,  accounts  receivable,  as well as  accounts  payable  and  accrued
     liabilities,  are financial instruments whose carrying values approximate
     their fair values.

     The fair value of the long-term debt amounted to $481,000 and $344,000 as
     at August 31, 2004 and 2005.  The fair value of  short-term  investments,
     based on market value,  amounted to $83,969,000  and  $104,883,000  as at
     August 31, 2004 and 2005, respectively.

     The fair  value of  forward  exchange  contracts,  which  represents  the
     difference  between their  contractual  amounts and their current trading
     value,  amounted to an unrecognized  gain of $1,975,000 and $2,937,000 as
     at August 31, 2004 and 2005, respectively.

     CREDIT RISK

     Financial instruments that potentially subject the company to credit risk
     consist primarily of cash,  short-term  investments,  accounts receivable
     and forward  exchange  contracts.  The company's  short-term  investments
     consist of debt  instruments  issued by six  (seven in 2004)  high-credit
     quality  corporations and trusts. The company's cash and forward exchange
     contracts  are held  with or  issued  by  high-credit  quality  financial
     institutions;    therefore,   the   company   considers   the   risk   of
     non-performance on these instruments to be remote.

     Generally, the company does not require collateral or other security from
     customers for trade accounts receivable;  however,  credit is extended to
     customers following an evaluation of creditworthiness.  In addition,  the
     company  performs  ongoing  credit  reviews  of  all  its  customers  and
     establishes an allowance for doubtful  accounts  receivable when accounts
     are  determined  to be  uncollectible.  Allowance  for doubtful  accounts
     amounted  to  $510,000  and  $352,000  as at  August  31,  2004 and 2005,
     respectively.

     INTEREST RATE RISK

     As at August 31, 2005,  the  company's  exposure to interest rate risk is
     summarized as follows:

     Cash                                                 Non-interest bearing
     Short-term investments                                 As described above
     Accounts receivable                                  Non-interest bearing
     Accounts payable and accrued liabilities             Non-interest bearing
     Long-term debt                                    As described in note 10


                                      F-33
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     FORWARD EXCHANGE CONTRACTS

     The company is exposed to currency  risks as a result of its export sales
     of  products  manufactured  in  Canada,  substantially  all of which  are
     denominated  in US dollars.  These risks are partially  hedged by forward
     exchange contracts and certain operating expenses.  As at August 31, 2004
     and 2005,  the  company  held  contracts  to sell US  dollars  at various
     forward rates, which are summarized as follows:

<TABLE>
<CAPTION>
                                                CONTRACTUAL                 WEIGHTED AVERAGE
                                                    AMOUNTS        CONTRACTUAL FORWARD RATES
                                                -----------        -------------------------
<S>                                             <C>                <C>
      As at August 31, 2004
           September 2004 to August 2005        $     7,480                           1.5427
           September 2005 to March 2007               8,400                           1.3622
      As at August 31, 2005
           September 2005 to August 2006        $    26,000                           1.2630
           September 2006 to November 2007            7,600                           1.2500
</TABLE>


19   SEGMENT INFORMATION

     In  September  2003,  the  company  reorganized  its  business  under two
     reportable  segments:  the Telecom  Division  and the Life  Sciences  and
     Industrial   Division.   The  Telecom  Division  offers  integrated  test
     solutions to network service providers,  cable operators,  system vendors
     and  component  manufacturers  throughout  the global  telecommunications
     industry.  The Life Sciences and  Industrial  Division  mainly  leverages
     developed  and acquired  core  telecom  technologies  for  high-precision
     assembly and research sectors.

     The reporting structure reflects how the company manages its business and
     how it classifies its operations for planning and measuring performance.

     Until August 31, 2003,  the company was  organized  under one  reportable
     segment,   being  the   development,   manufacturing   and  marketing  of
     fiber-optic  test,  measurement  and monitoring  solutions for the global
     telecommunications industry.


                                      F-34
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     The following tables present information by segment:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED AUGUST 31, 2005
                                                     ---------------------------------------------------------------------
                                                                                  LIFE SCIENCES AND
                                                     TELECOM DIVISION            INDUSTRIAL DIVISION                 TOTAL
                                                     ----------------            -------------------         -------------
<S>                                                  <C>                               <C>                   <C>
     Sales                                           $         80,120                  $      17,096         $      97,216
     Earnings (loss) from operations                 $            763                  $        (962)        $        (199)
     Unallocated items:
     Interest and other income                                                                                       2,524
     Foreign exchange loss                                                                                          (1,336)
                                                                                                             -------------

     Earnings before income taxes                                                                                      989
     Income taxes                                                                                                    2,623
                                                                                                             -------------

     Net loss for the year                                                                                   $      (1,634)
                                                                                                             =============

     Amortization of capital assets                  $          6,504                  $       2,588         $       9,092
                                                     ================                  =============         =============

     Stock-based compensation costs                  $            897                  $          66         $         963
                                                     ================                  =============         =============

     Capital expenditures                            $          1,408                  $          93         $       1,501
                                                     ================                  =============         =============


<CAPTION>
                                                                          YEAR ENDED AUGUST 31, 2004
                                                     ---------------------------------------------------------------------
                                                                                  LIFE SCIENCES AND
                                                     TELECOM DIVISION            INDUSTRIAL DIVISION                 TOTAL
                                                     ----------------            -------------------         -------------
<S>                                                  <C>                               <C>                   <C>
     Sales                                           $         58,882                  $      15,748         $      74,630
     Loss from operations                            $         (5,557)                 $      (5,013)        $     (10,570)
     Unallocated items:
     Interest and other income                                                                                       1,438
     Foreign exchange loss                                                                                            (278)
                                                                                                             -------------

     Loss before income taxes                                                                                       (9,410)
     Income taxes                                                                                                     (986)
                                                                                                             -------------

     Net loss for the year                                                                                          (8,424)
                                                                                                             =============

     Amortization of capital assets                  $          6,643                  $       3,372         $      10,015
                                                     ================                  =============         =============

     Stock-based compensation costs                  $            417                  $          32         $         449
                                                     ================                  =============         =============

     Impairment of long-lived assets (note 4)        $            620                  $           -         $         620
                                                     ================                  =============         =============

     Restructuring and other charges (note 4)        $              -                  $       1,261         $       1,261
                                                     ================                  =============         =============

     Capital expenditures                            $            607                  $         244         $         851
                                                     ================                  =============         =============
</TABLE>


                                      F-35
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

<TABLE>
<CAPTION>

                                                                          YEAR ENDED AUGUST 31, 2003
                                                     ---------------------------------------------------------------------
                                                                                  LIFE SCIENCES AND
                                                     TELECOM DIVISION            INDUSTRIAL DIVISION                 TOTAL
                                                     ----------------            -------------------         -------------
<S>                                                  <C>                               <C>                   <C>
     Sales                                           $         48,753                  $    13,177           $      61,930
</TABLE>

     Comparative  information for fiscal 2003 for the loss from operations and
     related  information as well as capital  expenditures is not provided for
     each reportable  segment because this information is not available and is
     impracticable to determine.

     Total assets by reportable segment are detailed as follows:

<TABLE>
<CAPTION>
                                                                                                  AS AT AUGUST 31,
                                                                                        ------------------------------------
                                                                                                2005                    2004
                                                                                        ------------           -------------
<S>                                                                                     <C>                    <C>
      Telecom Division                                                                  $     64,655           $      60,284
      Life Sciences and Industrial Division                                                   11,449                  15,094
      Unallocated assets                                                                     114,853                  97,413
                                                                                        ------------           -------------
                                                                                        $    190,957           $     172,791
                                                                                        ============           =============
</TABLE>

     Unallocated  assets are  comprised of cash,  short-term  investments  and
     income taxes and tax credits recoverable.

     Carrying value of goodwill by reportable segment is detailed as follows:

<TABLE>
<CAPTION>
                                                                                                  AS AT AUGUST 31,
                                                                                        ------------------------------------
                                                                                                2005                    2004
                                                                                        ------------           -------------
<S>                                                                                     <C>                    <C>
      Telecom Division                                                                  $     16,092           $      14,530
      Life Sciences and Industrial Division                                                    4,278                   3,863
                                                                                        ------------           -------------
                                                                                        $     20,370           $      18,393
                                                                                        ============           =============

<CAPTION>
     Sales to external customers by geographic region are detailed as follows:

                                                                                            YEARS ENDED AUGUST 31,
                                                                              -------------------------------------------------
                                                                                    2005               2004               2003
                                                                              -----------        -----------         ----------
<S>                                                                           <C>                <C>                 <C>
      United States                                                           $    56,282        $    40,019         $   31,561
      Canada                                                                        6,830              5,818              4,806
      Latin America                                                                 3,127              3,547              4,467
                                                                              -----------        -----------         ----------

                                                                                   66,239             49,384             40,834
      Europe, Middle East and Africa                                               19,396             13,706             11,092
      Asia-Pacific                                                                 11,581             11,540             10,004
                                                                              -----------        -----------         ----------
                                                                              $    97,216        $    74,630         $   61,930
                                                                              ===========        ===========         ==========
</TABLE>

                                      F-36
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     Sales  were  allocated  to  geographic  regions  based on the  country of
     residence of the related customers. In fiscal 2004 and 2005, one customer
     represented  more than 10% of sales with 13.8% of sales  ($10,325,000) in
     fiscal 2004 and 23.3%  ($22,629,000)  in fiscal 2005.  In fiscal 2003, no
     single  customer  accounted for 10% of sales or more. For fiscal 2004 and
     2005, the most important customer purchased from the Telecom Division.

     Long-lived assets by geographic region are detailed as follows:

                                                       AS AT AUGUST 31,
                                               --------------------------------
                                                       2005                2004
                                               -------------       ------------
      Canada                                   $      35,690       $     37,948
      United States                                    5,601              6,934
                                               -------------       ------------
                                               $      41,291       $     44,882
                                               =============       ============

     Long-lived assets consist of property, plant and equipment, the long-lived
     asset held for sale, intangible assets and goodwill.


20   RELATED PARTY TRANSACTIONS

     In fiscal 2003,  the company  acquired a building from a company owned by
     the  President  of  EXFO  for a  cash  consideration  of  $930,000.  This
     transaction  was  measured  at the  fair  market  value  since it was not
     conducted during the normal course of operations, the change in ownership
     interest in the  building was  substantive  and the fair market value was
     supported by an independent appraisal.

     For the  years  ended  August  31,  2003 and  2004,  the  company  leased
     facilities  from the company owned by the  President of EXFO.  The annual
     rental  expense  amounted to $331,000 and nil,  respectively.  The rental
     expense  for fiscal  2003  included  $234,000  for future  payments on an
     exited leased  facility;  this expense was recorded in the  restructuring
     and other charges in the statement of earnings for that year (notes 4 and
     9).  As at  August  31,  2004,  restructuring  charges  payable  included
     $194,000  due to the  company  owned  by the  President  of the  EXFO  in
     connection with this exited leased facility.  However, in September 2004,
     EXFO was released from its obligations  under that lease, and it paid the
     full  amount due to the  related  company.  These  rental  expenses  were
     measured at the fair market  value  since they were  incurred  during the
     normal course of operations.


21   UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

     As a registrant with the Securities and Exchange Commission in the United
     States  (SEC),  the  company  is  required  to  reconcile  its  financial
     statements  for  significant   differences   between  generally  accepted
     accounting  principles  as  applied in Canada  (Canadian  GAAP) and those
     applied  in  the  United  States  (U.S.  GAAP).  Furthermore,  additional
     significant  disclosures  required  under U.S. GAAP and Regulation S-X of
     the SEC are also provided in the accompanying financial statements and


<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     notes. The following summarizes the significant  quantitative differences
     between Canadian and U.S. GAAP, as well as other significant  disclosures
     required  under  U.S.  GAAP  and  Regulation  S-X of the SEC not  already
     provided in the accompanying financial statements.

     RECONCILIATION OF NET LOSS TO CONFORM TO U.S. GAAP

     The following  summary sets out the significant  differences  between the
     company's reported net loss and net loss per share under Canadian GAAP as
     compared to U.S. GAAP. Please see corresponding  explanatory notes in the
     Reconciliation Items section.

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED AUGUST 31,
                                                                              ------------------------------------------------
                                                                                    2005              2004               2003
                                                                              -----------       -----------        -----------
<S>                                                                           <C>               <C>                <C>
      Net loss for the year in accordance with Canadian GAAP                  $   (1,634)       $   (8,424)        $  (54,950)
      Stock-based compensation costs                                 a)                -              (867)              (832)
      Unrealized gains (losses) on forward exchange contracts        b)           (1,286)             (280)             1,645
      Amortization of intangible assets                              c)                -                 -                832
      Write-down of goodwill and intangible assets                   c)                -                 -              6,178
      Income tax effect on reconciliation items                                        -                 -             (1,074)
                                                                              -----------       -----------        -----------

      Net loss for the year in accordance with
           U.S. GAAP                                                              (2,920)           (9,571)           (48,201)

      Other comprehensive income (loss)

      Foreign currency translation adjustment                                     15,669             5,969             15,089
      Unrealized gains on forward exchange contracts                 b)            2,313               689                  -

      Reclassification of losses on forward exchange contracts in
           net loss                                                  b)              (65)                -                  -
                                                                              -----------       -----------        -----------
      Comprehensive income (loss)                                             $   14,997        $   (2,913)        $  (33,112)
                                                                              ===========       ===========        ===========

      Basic and diluted net loss per share in accordance                      $    (0.04)       $    (0.14)        $    (0.77)
           with U.S. GAAP

      Basic weighted average number of shares outstanding (000's)                 68,526            66,020             62,852
</TABLE>


                                      F-38

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     RECONCILIATION OF SHAREHOLDERS' EQUITY TO CONFORM TO U.S. GAAP

     The following  summary sets out the significant  differences  between the
     company's reported  shareholders'  equity under Canadian GAAP as compared
     to  U.S.  GAAP.  Please  see  corresponding   explanatory  notes  in  the
     Reconciliation Items section.

<TABLE>
<CAPTION>
                                                                                           AS AT AUGUST 31,
                                                                          ---------------------------------------------------
                                                                                    2005              2004               2003
                                                                          --------------     -------------      -------------
<S>                                                                       <C>                <C>                <C>
      Shareholders' equity in accordance with Canadian GAAP               $      173,400     $     157,327      $     129,826
      Forward exchange contracts                                     b)            2,937             1,975              1,566
      Goodwill                                                       c)          (11,042)          (10,008)            (9,771)
      Other                                                                            -                 -                (29)
                                                                          --------------     -------------      -------------

      Shareholders' equity in accordance with U.S. GAAP                   $      165,295     $     149,294      $     121,592
                                                                          ==============     =============      =============
</TABLE>



                                      F-39

<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     The following table  summarizes the  shareholders'  equity activity under
     U.S. GAAP since August 31, 2002:

<TABLE>
<CAPTION>
                                                                              DEFERRED                 ACCUMULATED
                                                                            STOCK-BASED                   OTHER
                                    SHARE       CONTRIBUTED                 COMPENSATION    OTHER      COMPREHENSIVE   SHAREHOLDERS'
                                   CAPITAL        SURPLUS       DEFICIT        COSTS       CAPITAL     INCOME (LOSS)      EQUITY
                                 ----------     ----------    ----------   ------------   ---------    -------------   ------------
<S>                              <C>            <C>           <C>          <C>            <C>          <C>             <C>
      Balance as at August
        31, 2002                  $ 560,943      $  1,487     $(406,387)    $ (2,867)    $  7,693      $   (9,870)    $  150,999

      Net loss for the year               -             -       (48,201)           -            -               -        (48,201)
      Stock-based
        compensation costs      a)    1,507             -             -        1,589       (2,264)              -            832
      Foreign currency
        transaction adjustment            -             -             -            -            -          15,089         15,089
      Business combination
        (note 13)                     2,796             -             -            -            -               -          2,796
      Exercise of stock
        options (note 13)                45             -             -            -            -               -             45
      Premium on resale of
        share capital                     -            32             -            -            -               -             32
                                 ----------     ---------     ---------    ----------    ---------      ----------     ----------

      Balance as at August
        31, 2003                    565,291         1,519      (454,588)      (1,278)       5,429           5,219        121,592

      Net loss for the year               -             -        (9,571)           -            -               -         (9,571)
      Stock-based               a)
        compensation costs      e)    1,737             -             -          339         (760)              -          1,316
      Foreign currency
        transaction adjustment            -             -             -            -            -           5,969          5,969
      Unrealized gains on
        forward exchange
        contracts               b)        -             -             -            -            -             689            689
      Public offering (note 13)      29,164             -             -            -            -               -         29,164
      Exercise of stock
        options (note 13)               254             -             -            -            -               -            254
      Share issue expenses
        (note 13)                      (137)            -             -            -            -               -           (137)
      Premium on resale of
        share capital                     -            18             -            -            -               -             18
                                 ----------     ---------     ---------    ----------    ---------      ----------     ----------

      Balance as at August
        31, 2004                    596,309         1,537      (464,159)        (939)       4,669          11,877        149,294

      Net loss for the year               -             -        (2,920)           -            -               -         (2,920)
      Stock-based               a)
        compensation costs      e)    1,213             -             -         (776)         425               -            862
      Foreign currency
        transaction adjustment            -             -             -            -            -          15,669         15,669
      Unrealized gains on
        forward exchange
        contracts               b)        -             -             -            -            -           2,248          2,248
      Exercise of stock
        options (note 13)               148             -             -            -            -               -            148
      Share issue expenses
        (note 13)                        (6)            -             -            -            -               -             (6)
                                 ----------     ---------     ---------    ----------    ---------      ----------     ----------
      Balance as at August
        31, 2005                 $  597,664     $   1,537     $(467,079)   $  (1,715)    $  5,094       $  29,794      $ 165,295
                                 ==========     =========     =========    ==========    =========      ==========     ==========
</TABLE>

                                      F-40
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     Accumulated  other  comprehensive  income  (loss)  is  comprised  of  the
     following:

<TABLE>
<CAPTION>
                                                                                AS AT AUGUST 31,
                                                                ------------------------------------------------
                                                                    2005              2004              2003
                                                                -----------       -----------       ------------
<S>                                                             <C>               <C>               <C>
      Foreign currency translation adjustment
           Current year                                         $    15,669       $     5,969       $     15,089
           Cumulative effect of prior years                          11,188             5,219             (9,870)
                                                                -----------       -----------       ------------

                                                                     26,857            11,188              5,219
      Unrealized gains on forward exchange contracts
           Current year                                               2,248               689                  -
           Cumulative effect of prior years                             689                 -                  -
                                                                -----------       -----------       ------------

                                                                      2,937               689                  -
                                                                -----------       -----------       ------------

                                                                $    29,794       $    11,877       $      5,219
                                                                ===========       ===========       ============
</TABLE>

     STATEMENTS OF CASH FLOWS

     For the  years  ended  August  31,  2003,  2004 and 2005,  there  were no
     significant  differences  between  the  statements  of cash  flows  under
     Canadian GAAP as compared to U.S.  GAAP,  except for the subtotal  before
     change in non-cash  operating items,  whose presentation is not permitted
     under U.S. GAAP.

     RECONCILIATION ITEMS

     a)   ACCOUNTING FOR STOCK-BASED COMPENSATION

          Until  August 31,  2003,  and to conform to U.S.  GAAP,  the company
          measured  stock-based  compensation  costs using the intrinsic value
          method  (APB  25,  "Accounting  for  Stock  Issued  to  Employees").
          However, since September 1, 2003, and as described in item e) below,
          the company accounts for stock-based  compensation  costs for awards
          granted  after  that  date,  using  the fair  value-based  method to
          conform to Statement of Financial  Accounting  Standard  (SFAS) 123,
          "Accounting for Stock-Based Compensation".

          STOCK PURCHASE PLAN

          Under APB 25,  compensation costs related to the stock purchase plan
          were  measured  as the  difference  between  the  fair  value of the
          purchased  stock and the purchase  price paid by plan  participants.
          Compensation  costs were  amortized to expense over a period of five
          years,  being the  restriction  period.  This plan terminated at the
          time of the Initial Public  Offering on June 29, 2000.  Compensation
          costs  related to this plan became  fully  amortized  during  fiscal
          2004.


                                      F-41
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

          LONG-TERM INCENTIVE PLAN (FORMELY STOCK OPTION PLAN)

          Until August 31, 2003, and under APB 25,  compensation costs related
          to the  long-term  incentive  plan were  measured as the  difference
          between  the  market  price of the  underlying  stock at the date of
          grant and the exercise price of the option. These compensation costs
          were amortized to expense over the estimated  vesting period up to a
          maximum of four years.  Compensation  costs related to stock options
          granted  prior to September 1, 2003,  and accounted for under APB 25
          became fully amortized during fiscal 2004.

          RESTRICTED STOCK AWARD PLAN

          Under APB 25,  compensation  costs related to the  restricted  stock
          award plan were measured as the difference  between the market price
          of the underlying stock at the date of grant and the exercise price,
          which is nil.  These  compensation  costs were  amortized to expense
          over the  estimated  vesting  period up to a maximum of four  years,
          being the  acquisition  period.  Compensation  costs related to this
          plan became fully amortized during fiscal 2004.

          Until August 31, 2003, no  compensation  costs were  recognized  for
          these stock-based compensation plans under Canadian GAAP.

     b)   FORWARD EXCHANGE CONTRACTS

          The forward exchange  contracts entered into by the company prior to
          September  1, 2003,  do not qualify for hedge  accounting  treatment
          under SFAS 133,  "Accounting for Derivative  Instruments and Hedging
          Activities";  accordingly,  changes  in  the  fair  value  of  these
          derivatives are charged to earnings.  However, on September 1, 2003,
          the  company  implemented  the  documentation  for the  designation,
          documentation  and  assessment of the  effectiveness  of its forward
          exchange  contracts,  for the purposes of applying hedge accounting.
          With this  documentation in place,  the forward  exchange  contracts
          entered into by the company  after  September  1, 2003,  qualify for
          hedge accounting treatment under U.S. GAAP. Consequently, under U.S.
          GAAP,  changes in the fair value of these  contracts  are charged to
          other  comprehensive  income.  Upon the  recognition  of the  hedged
          sales,  accumulated  changes in fair value are  reclassified  in the
          statements of earnings.

          Under Canadian GAAP,  foreign exchange  translation gains and losses
          on forward exchange contracts are recognized as an adjustment of the
          revenue when the  corresponding  sales are  recorded,  regardless of
          whether the contracts were entered into before or after September 1,
          2003.

          The company  estimates to $950,000 the amount of unrealized  gain on
          forward  exchange  contracts  as of  August  31,  2005  that will be
          reclassified to net earnings over the next twelve months.



                                      F-42
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

     c)   WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS

          2003

          In fiscal 2003,  Canadian and U.S. GAAP were harmonized to eliminate
          the  existing  differences  in the  assessment  and  measurement  of
          impairment loss for goodwill and intangible assets.  Thus, in fiscal
          2003,  goodwill  and  intangible  assets were tested for  impairment
          using similar methodologies.  However, considering that the existing
          carrying  value of goodwill  and  intangible  assets was lower under
          U.S. GAAP than under  Canadian GAAP,  the required  impairment  loss
          under U.S. GAAP was lower and a permanent difference in the carrying
          value of goodwill exists between Canadian and U.S. GAAP.

          Upon the impairment  test,  under U.S. GAAP, the company  recorded a
          charge of $872,000 to write down the goodwill of EXFO Burleigh and a
          pre-tax   charge  of  $377,000  to  write  down  the  acquired  core
          technology of EXFO Burleigh,  compared to a write-down of $4,505,000
          for goodwill and a write-down of $2,922,000  for  intangible  assets
          under Canadian GAAP, creating a reconciliation item of $6,178,000 in
          the statement of earnings for the year ended August 31, 2003.

          Furthermore,  considering  differences  in  the  carrying  value  of
          intangible  assets  between  Canadian  GAAP  and  U.S.  GAAP  due to
          impairment  losses,  adjustments to the  amortization of such assets
          and related future income taxes were also required in fiscal 2003.

      d)  RESEARCH AND DEVELOPMENT TAX CREDITS

          Under Canadian GAAP,  all research and  development  tax credits are
          recorded as a reduction of gross research and development  expenses.
          Under U.S.  GAAP, tax credits that are  refundable  against  taxable
          income are recorded in the income taxes.  These tax credits amounted
          to $1,761,000 and $2,169,000 for fiscal 2004 and 2005, respectively.
          In fiscal  2003,  we had a net  expense of  $176,000  following  the
          write-off of tax credits.  This  difference had no impact on the net
          loss and the net loss per share figures for the reporting years.

     e)   NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS

          ADOPTED IN FISCAL 2004 AND STILL APPLICABLE IN 2005

          On September 1, 2003,  the company  prospectively  adopted SFAS 123,
          "Accounting  for  Stock-Based   Compensation",   under  the  revised
          transition  provisions  of SFAS  148,  "Accounting  for  Stock-Based
          Compensation - Transition and Disclosure". Upon the adoption of SFAS
          123 and SFAS 148, the company  recognized  stock-based  compensation
          costs for stock  options  granted to  employees  since  September 1,
          2003,  using the fair value-based  method.  The company adopted this
          Statement  in order to  conform  to the newly  adopted  rules  under
          Canadian  GAAP. As a result of the adoption of the fair  value-based
          method,  the accounting for stock-based  compensation under Canadian
          GAAP  and  U.S.  GAAP is the same  for  awards  granted  on or after
          September 1, 2003.



                                      F-43
<PAGE>

                      EXFO ELECTRO-OPTICAL ENGINEERING INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular  amounts in thousands of US dollars,  except share and per share data
and as otherwise noted)

          TO BE ADOPTED AFTER FISCAL 2005

          In November  2004,  the Financial  Accounting  Standard Board (FASB)
          issued SFAS 151,  "Inventory  Costs",  an  amendment  to ARB No. 43,
          Chapter 4. The  amendments  made by SFAS 151 will improve  financial
          reporting by  clarifying  that any abnormal  amount of idle facility
          expenses,  freight,  handling costs, and wasted materials (spoilage)
          should be recognized as current-period  charges and by requiring the
          allocation of fixed  production  overheads to inventory based on the
          normal capacity of the production facilities. This SFAS is effective
          for inventory  costs incurred  during fiscal years  beginning  after
          June  15,  2005.  The  company  will  adopt  this new  statement  on
          September 1, 2005, and its adoption will have no significant  impact
          on its financial statements.

          In  December  2004,  the  FASB  issued  SFAS  123(R),   "Share-Based
          Payments".  This statement  supersedes ABP 25, "Accounting for Stock
          Issued  to  Employees"  and  related  implementation  guidance,  and
          revises SFAS 123 in a number of areas.  Under SFAS 123(R), all forms
          of  share-based  payment to employees  result in  compensation  cost
          recognized in financial statements.  This statement is effective for
          fiscal years  beginning  after June 15, 2005. The company will adopt
          this  statement on September 1, 2005,  and its adoption will have no
          significant impact on its financial statements.

          In May 2005,  the FASB  issued  SFAS 154,  "Accounting  Changes  and
          Errors  Corrections - a  replacement  of APB Opinion No. 20 and FASB
          Statement  No. 3".  This  statement  replaces  APB  Opinion  No. 20,
          "Accounting   Changes",   and  FASB  Statement  No.  3,   "Reporting
          Accounting Changes in Interim Financial Statements", and changes the
          requirements  for the  accounting  for and  reporting of a change in
          accounting  principle.  This  statement  applies  to  all  voluntary
          changes in accounting principle. It also applies to changes required
          by an  accounting  pronouncement  in the unusual  instance  that the
          pronouncement does not include specific  transition  provisions.  In
          general,  this  statement  requires  a company  to  account  for the
          adoption of a new accounting policy by applying the new principle to
          prior  accounting  periods  as if that  principle  had  always  been
          adopted.  This  statement is  effective  for  accounting  changes or
          corrections of errors in fiscal years  beginning  after December 15,
          2005.

     ACCOUNTING FOR STOCK-BASED COMPENSATION

     Under U.S. GAAP,  until August 31, 2003,  the company  elected to measure
     compensation  costs  related to grants of stock  options and stock awards
     using  the  intrinsic  value  method  of  accounting.  In this  instance,
     however,  under  SFAS 123,  the  company  is  required  to make pro forma
     disclosures  of  net  loss,  and  net  loss  per  share  as if  the  fair
     value-based method of accounting had been applied to awards granted prior
     to September 1, 2003.  Consequently,  if the fair value-based  method had
     been applied to these awards, the pro forma net loss per share would have
     been the same as the net loss per share in fiscal  2005,  lower  than the
     net loss per share in 2004 (by $0.01)  and  higher  than the net loss per
     share in 2003 (by $0.01).

     The fair value of  options  or awards  granted  was  estimated  using the
     Black-Scholes options pricing model.



                                      F-44
<PAGE>



                                TABLE OF CONTENTS

PART I.......................................................................2

       ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS......2

       ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE....................2

       ITEM 3.    KEY INFORMATION............................................2

                  A.  SELECTED FINANCIAL DATA................................2
                  B.  CAPITALIZATION AND INDEBTEDNESS........................4
                  C.  REASONS FOR THE OFFER AND USE OF PROCEEDS..............4
                  D.  RISK FACTORS...........................................4

       ITEM 4.    INFORMATION ON THE COMPANY................................17

                  A.  HISTORY AND DEVELOPMENT OF THE COMPANY................17
                  B.  BUSINESS OVERVIEW.....................................19
                  C.  ORGANIZATIONAL STRUCTURE..............................40
                  D.  PROPERTY, PLANT AND EQUIPMENT.........................40

       ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS..............42

       ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................67

                  A.  DIRECTORS AND SENIOR MANAGEMENT.......................67
                  B.  COMPENSATION..........................................71
                  C.  BOARD PRACTICES.......................................83
                  D.  EMPLOYEES.............................................84
                  E.  SHARE OWNERSHIP.......................................84

       ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.........89

                  A.  MAJOR SHAREHOLDERS....................................89
                  B.  RELATED PARTY TRANSACTIONS............................90

       ITEM 8.    FINANCIAL INFORMATION.....................................91

                  A.  CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
                      INFORMATION...........................................91
                  B.  SIGNIFICANT CHANGES...................................93

       ITEM 9.    OFFER AND LISTING.........................................94







<PAGE>


       ITEM 10.    ADDITIONAL INFORMATION...................................95

                  A.  SHARE CAPITAL.........................................95
                  B.  MEMORANDUM AND ARTICLES OF ASSOCIATION................95
                  C.  MATERIAL CONTRACTS....................................95
                  D.  EXCHANGE CONTROLS.....................................95
                  E.  TAXATION..............................................95
                  F.  DIVIDENDS AND PAYING AGENTS..........................102
                  G.  STATEMENT BY EXPERTS.................................102
                  H.  DOCUMENTS ON DISPLAY.................................102
                  I.  SUBSIDIARY INFORMATION...............................103

       ITEM 11.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
                  MARKET RISK..............................................104

       ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...106

PART II....................................................................106

       ITEM 13.   DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES.........106

       ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
                  HOLDERS AND USE OF PROCEEDS..............................106

       ITEM 15.   CONTROLS AND PROCEDURES..................................106

       ITEM 16.   [RESERVED]...............................................107
                  ITEM 16A.   AUDIT COMMITTE FINANCIAL EXPERT..............107
                  ITEM 16B.   CODE OF ETHICS...............................107
                  ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.......107
                  ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS
                              FOR AUDIT COMMITTEES.........................108
                  ITEM 16E.   PURCHASES OF EQUITIES SECURITIES
                              BY THE ISSUER AND AFFILIATED
                              PURCHASERS...................................108

PART III...................................................................109

       ITEM 17.   FINANCIAL STATEMENTS.....................................109

       ITEM 18.   FINANCIAL STATEMENTS.....................................109

       ITEM 19.   EXHIBITS.................................................110




<PAGE>

                                   EXHIBIT INDEX

--------------------------------------------------------------------------------
    NUMBER                             EXHIBIT
--------------------------------------------------------------------------------

      1.1        Amended Articles of  Incorporation  of EXFO  (incorporated by
                 reference to Exhibit 3.1 of EXFO's Registration  Statement on
                 Form F-1 filed on June 9, 2000, File No. 333-38956).

      1.2        Amended By-laws of EXFO (incorporated by reference to Exhibit
                 1.2 of EXFO's  annual  report on Form-20F  dated  January 15,
                 2003, File No. 000-30895).

      1.3        Amended  and  Restated  Articles  of  Incorporation  of  EXFO
                 (incorporated  by reference  to Exhibit 1.3 of EXFO's  annual
                 report  on  Form  20-F  dated  January  18,  2001,  File  No.
                 000-30895).

      2.1        Form of Subordinate Voting Share Certificate (incorporated by
                 reference to Exhibit 4.1 of EXFO's Registration  Statement on
                 Form F-1 filed on June 9, 2000, File No. 333-38956).

      2.2        Form  of  Registration  Rights  Agreement  between  EXFO  and
                 Germain  Lamonde  dated  July  6,  2000)   (incorporated   by
                 reference to Exhibit 10.13 of EXFO's  Registration  Statement
                 on Form F-1 filed on June 9, 2000, File No. 333-38956).

      3.1        Form of Trust Agreement among EXFO,  Germain  Lamonde,  GEXFO
                 Investissements  Technologiques inc., Fiducie Germain Lamonde
                 and G. Lamonde Investissements  Financiers inc. (incorporated
                 by reference to Exhibit 4.2 of EXFO's Registration  Statement
                 on Form F-1 filed on June 9, 2000, File No. 333-38956).

      4.1        Agreement of Merger and Plan of  Reorganization,  dated as of
                 November 4, 2000,  by and among EXFO,  EXFO Sub,  Inc.,  EXFO
                 Burleigh Instruments,  Inc., Robert G. Klimasewki, William G.
                 May,   Jr.,   David  J.   Farrell  and  William  S.   Gornall
                 (incorporated  by reference  to Exhibit 4.1 of EXFO's  annual
                 report  on  Form  20-F  dated  January  18,  2001,  File  No.
                 000-30895).

      4.2        Amendment No. 1 to Agreement of Merger and Plan of Agreement,
                 dated as of December 20, 2000,  by and among EXFO,  EXFO Sub,
                 Inc., EXFO Burleigh Instruments, Inc., Robert G. Klimasewski,
                 William G. May, Jr.,  David J. Farrell and William S. Gornall
                 (incorporated  by reference  to Exhibit 4.2 of EXFO's  annual
                 report  on  Form  20-F  dated  January  18,  2001,  File  No.
                 000-30895).

      4.3        Agreement  of  Merger,  dated as of August 20,  2001,  by and
                 among EXFO, Buyer Sub, and Avantas  Networks  Corporation and
                 Shareholders of Avantas Networks corporation (incorporated by
                 reference to Exhibit 4.3 of EXFO's annual report on Form 20-F
                 dated January 18, 2002, File No. 000-30895).

      4.4        Amendment  No. 1 dated as of November 1, 2002 to Agreement of
                 Merger,  dated as of August  20,  2001,  by and  among  EXFO,
                 3905268  Canada  Inc.,   Avantas  Networks   Corporation  and
                 Shareholders of Avantas  Networks  (incorporated by reference
                 to  Exhibit  4.4 of EXFO's  annual  report on Form 20-F dated
                 January 18, 2002, File No. 000-30895).

      4.5        Offer to  purchase  shares of Nortech  Fibronic  Inc.,  dated
                 February 6, 2000 among EXFO,  Claude  Adrien Noel,  9086-9314
                 Quebec inc., Michel Bedard, Christine Bergeron and Societe en
                 Commandite  Capidem  Quebec Enr. and  Certificate of Closing,
                 dated  February  7, 2000  among the same  parties  (including
                 summary in English)  (incorporated  by  reference  to Exhibit
                 10.2 of EXFO's  Registration  Statement  on Form F-1 filed on
                 June 9, 2000, File No. 333-38956).

      4.6        Share Purchase  Agreement,  dated as of March 5, 2001,  among
                 EXFO Electro-Optical  Engineering,  Inc., John Kennedy, Glenn
                 Harvey and EFOS  Corporation  (incorporated  by  reference to
                 Exhibit  4.1 of  EXFO's  Registration  Statement  on Form F-3
                 filed on July 13, 2001, File No. 333-65122).

      4.7        Amendment  Number One,  dated as of March 15, 2001,  to Share
                 Purchase  Agreement,  dated as of March 5,  2001,  among EXFO
                 Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey
                 and EFOS  Corporation.  (incorporated by reference to Exhibit
                 4.2 of  EXFO's  Registration  Statement  on Form F-3 filed on
                 July 13, 2001 File No. 333-65122).

      4.8        Share  Purchase  Agreement,  dated  as of  November  2,  2001
                 between  JDS   Uniphase   Inc.   and   3905268   Canada  Inc.
                 (incorporated  by reference  to Exhibit 4.8 of EXFO's  annual
                 report  on  Form  20-F  dated  January  18,  2002,  File  No.
                 000-30895).

      4.9        Intellectual  Property  Assignment and Sale Agreement between
                 EFOS  Inc.,  EXFO  Electro-Optical  Engineering,  Inc.,  John
                 Kennedy, Glenn Harvey and EFOS Corporation.  (incorporated by
                 reference to Exhibit 4.3 of EXFO's Registration  Statement on
                 Form F-3 filed on July 13, 2001 File No. 333-65122).

     4.10        Offer to acquire a building, dated February 23, 2000, between
                 EXFO and  Groupe  Mirabau  inc.  and as  accepted  by  Groupe
                 Mirabau  inc. on  February  24,  2000  (including  summary in
                 English) (incorporated by reference to Exhibit 10.3 of EXFO's
                 Registration  Statement  on Form F-1  filed on June 9,  2000,
                 File No. 333-38956).

     4.11        Lease  Agreement,  dated  December 1, 1996,  between EXFO and
                 GEXFO  Investissements  Technologiques  inc.,  as assigned to
                 9080-9823 Quebec inc. on September 1, 1999 (including summary
                 in English)  (incorporated  by  reference  to Exhibit 10.4 of
                 EXFO's  Registration  Statement  on Form F-1 filed on June 9,
                 2000, File No. 333-38956).
<PAGE>

--------------------------------------------------------------------------------
    NUMBER                             EXHIBIT
--------------------------------------------------------------------------------

     4.12        Lease Agreement,  dated March 1, 1996, between EXFO and GEXFO
                 Investissements Technologiques inc., as assigned to 9080-9823
                 Quebec  inc.  on  September  1, 1999  (including  summary  in
                 English) (incorporated by reference to Exhibit 10.5 of EXFO's
                 Registration  Statement  on Form F-1  filed on June 9,  2000,
                 File No. 333-38956).

     4.13        Lease renewal of the existing leases between 9080-9823 Quebec
                 inc.  and  EXFO,  dated  November  30,  2001(incorporated  by
                 reference  to Exhibit  4.13 of EXFO's  annual  report on Form
                 20-F dated January 18, 2002, File No. 000-30895).

     4.14        Loan  Agreement   between  EXFO  and  GEXFO   Investissements
                 Technologiques  inc.,  dated May 11,  1993,  as  assigned  to
                 9080-9823 Quebec inc. on September 1, 1999 (including summary
                 in English)  (incorporated  by  reference  to Exhibit 10.9 of
                 EXFO's  Registration  Statement  on Form F-1 filed on June 9,
                 2000, File No. 333-38956).

     4.15        Resolution of the Board of Directors of EXFO, dated September
                 1,  1999,  authorizing  EXFO to  acquire  GEXFO  Distribution
                 Internationale inc. from GEXFO Investissements Technologiques
                 inc.   (including   summary  in  English)   (incorporated  by
                 reference to Exhibit 10.10 of EXFO's  Registration  Statement
                 on Form F-1 filed on June 9, 2000, File No. 333-38956).

     4.16        Form   of   Promissory   Note  of  EXFO   issued   to   GEXFO
                 Investissements  Technologiques  inc.  dated June 27,  2000 )
                 (incorporated   by  reference  to  Exhibit  10.12  of  EXFO's
                 Registration  Statement  on Form F-1  filed on June 9,  2000,
                 File No. 333-38956).

     4.17        Term  Loan  Offer,  dated  March  28,  2000,  among  EXFO and
                 National  Bank of Canada as accepted by EXFO on April 3, 2000
                 (including summary in English)  (incorporated by reference to
                 Exhibit  10.11 of EXFO's  Registration  Statement on Form F-1
                 filed on June 9, 2000, File No. 333-38956).

     4.18        Employment  Agreement of Germain  Lamonde  dated May 29, 2000
                 (incorporated   by  reference  to  Exhibit  10.15  of  EXFO's
                 Registration  Statement  on Form F-1  filed on June 9,  2000,
                 File No. 333-38956).

     4.19        Employment Agreement of Bruce Bonini dated as of September 1,
                 2000  (incorporated  by  reference  to Exhibit 4.24 of EXFO's
                 annual report on Form 20-F dated  January 18, 2002,  File No.
                 000-30895).

     4.20        Employment  Agreement  of  Juan-Felipe  Gonzalez  dated as of
                 September 1, 2000  (incorporated by reference to Exhibit 4.25
                 of EXFO's  annual report on Form 20-F dated January 18, 2002,
                 File No. 000-30895).

     4.21        Employment Agreement of David J. Farrell dated as of December
                 20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO's
                 annual report on Form 20-F dated  January 18, 2002,  File No.
                 000-30895).

     4.22        Deferred  Profit  Sharing  Plan,   dated  September  1,  1998
                 (incorporated   by   reference  to  Exhibit  10.6  of  EXFO's
                 Registration  Statement  on Form F-1  filed on June 9,  2000,
                 File No. 333-38956).

     4.23        Stock  Option  Plan,  dated  May 25,  2000  (incorporated  by
                 Reference to Exhibit 10.7 of EXFO's Registration Statement on
                 Form F-1 filed on June 9, 2000, File No. 333-38956).

     4.24        Share Plan, dated April 3, 2000 (incorporated by reference to
                 Exhibit  10.8 of EXFO's  Registration  Statement  on Form F-1
                 filed on June 9, 2000, File No. 333-38956).

     4.25        Directors'  Compensation  Plan  (incorporated by reference to
                 Exhibit  10.17 of EXFO's  Registration  Statement on Form F-1
                 filed on June 9, 2000, File No. 333-38956).

     4.26        Restricted   Stock  Award  Plan,   dated  December  20,  2000
                 (incorporated  by reference to Exhibit 4.21 of EXFO's  annual
                 report  on  Form  20-F  dated  January  18,  2001,  File  No.
                 000-30895).

     4.27        Asset  Purchase  Agreement by and Among EXFO  Electro-Optical
                 Engineering  Inc.,  EXFO Gnubi  Products  Group  Inc.,  gnubi
                 communications,  L.P., gnubi communications  General Partner,
                 LLC,  gnubi  communications   Limited  Partner,   LLC,  gnubi
                 communications, Inc., Voting Trust created by The Irrevocable
                 Voting  Trust  Agreement  Among Carol  Abraham  Bolton,  Paul
                 Abraham and James Ray  Stevens,  James Ray Stevens and Daniel
                 J. Ernst dated September 5, 2002  (incorporated  by reference
                 to Exhibit  4.30 of EXFO's  annual  report on Form 20-F dated
                 January 15, 2003, File No. 000-30895).

     4.28        EXFO Protocol Inc. Executive  Employment  Agreement with Sami
                 Yazdi signed November 2, 2001  (incorporated  by reference to
                 Exhibit  4.28 of EXFO's  annual  report  on Form  20-F  dated
                 January 15, 2003, File No. 000-30895).

     4.29        Second  Amending  Agreement  to the  Employment  Agreement of
                 Bruce Bonini dated as of September 1, 2002,  (incorporated by
                 reference  to Exhibit  4.29 of EXFO's  annual  report on Form
                 20-F dated January 15, 2004, File No. 000-30895).

     4.30        Severance  and General  Release  Agreement  with Bruce Bonini
                 dated August 8, 2003,  (incorporated  by reference to Exhibit
                 4.30 of EXFO's  annual  report on Form 20-F dated January 15,
                 2004, File No. 000-30895).


<PAGE>

--------------------------------------------------------------------------------
    NUMBER                             EXHIBIT
--------------------------------------------------------------------------------

     4.31        Separation  Agreement  and  General  Release  with Sami Yazdi
                 dated April 1, 2003,  (incorporated  by  reference to Exhibit
                 4.31 of EXFO's  annual  report on Form 20-F dated January 15,
                 2004, File No. 000-30895).

     4.32        Executive  Employment  Agreement of James Stevens dated as of
                 October 4, 2003,  (incorporated  by reference to Exhibit 4.32
                 of EXFO's  annual report on Form 20-F dated January 15, 2004,
                 File No. 000-30895).

     4.33        Termination  Terms for John  Holloran Jr. dated May 28, 2003,
                 (incorporated  by reference to Exhibit 4.33 of EXFO's  annual
                 report  on  Form  20-F  dated  January  15,  2004,  File  No.
                 000-30895).

     4.34        Employment   Agreement  of  Pierre   Plamondon  dated  as  of
                 September 1, 2002, (incorporated by reference to Exhibit 4.34
                 of EXFO's  annual report on Form 20-F dated January 15, 2004,
                 File No. 000-30895).

     4.35        Long-Term  Incentive  Plan,  dated May 25,  2000,  amended in
                 October 2004 and effective January 12, 2005.

     4.36        Deferred Share Unit Plan, effective January 12, 2005.

      8.1        Subsidiaries of EXFO (list included in Item 4C of this annual
                 report).

     11.1        Code of Ethics for senior financial  officers,  (incorporated
                 by reference to Exhibit 11.1 of EXFO's  annual report on Form
                 20-F dated January 15, 2004, File No. 000-30895).

     11.2        Board of Directors Corporate Governance Guidelines.

     11.3        Code of Ethics for our Principal Executive Officer and Senior
                 Financial Officers.

     11.4        Ethics and Business Conduct Policy.

     11.5        Statement of Reporting Ethical Violations (Whistle Blower).

     11.6        Audit Committee Charter.

     11.7        Human Resources Committee Charter.

     12.1        Certification  of the Chief  Executive  Officer  Pursuant  to
                 Section 302 of the Sarbanes-Oxley Act of 2002.

     12.2        Certification  of the Chief  Executive  Officer  Pursuant  to
                 Section 906 of the Sarbanes-Oxley Act of 2002.

     13.1        Certification  of the Chief  Financial  Officer  Pursuant  to
                 Section 302 of the Sarbanes-Oxley Act of 2002.

     13.2        Certification  of the Chief  Financial  Officer  Pursuant  to
                 Section 906 of the Sarbanes-Oxley Act of 2002.