Edgar Filing: EXFO ELECTRO OPTICAL ENGINEERING INC

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, 2000

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

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)

465 GODIN AVENUE
VANIER, QUEBEC G1M 3G7, 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 30, 2000, the registrant had 8,757,264 Subordinate
Voting Shares outstanding.

Indicate by check mark whether EXFO (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 EXFO 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 EXFO has elected
to follow:

Item 17 [_] Item 18 [X]

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 year ended August
31, 1996 and the consolidated balance sheets data as of August 31, 1996 and 1997
are derived from our unaudited consolidated financial statements not included in
this Annual Report. The consolidated statement of earnings data for the year
ended August 31, 1997 and the consolidated balance sheet data as of August 31,
1998 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, 1998, 1999 and 2000 and the consolidated
balance sheets data as of August 31, 1999 and 2000 are derived from our
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in
this Annual Report.

Our consolidated financial statements are prepared in accordance with
Canadian GAAP, which differ in certain respects from U.S. GAAP. For a
description of the material differences between Canadian GAAP and U.S. GAAP in
regard to our consolidated financial statements, see note 20 to our consolidated
financial statements. The historical results below are not necessarily
indicative of the results to be expected for any future period.

See "Exchange Rate Information" in this Item 3.A. below for historical
exchange rate information. The selected financial data should be read in
conjunction with our consolidated financial statements and the notes to our
consolidated financial statements included elsewhere in this Annual Report, and
"Item 5. Operating and Financial Review and Prospects" of this Annual Report.

YEARS ENDED AUGUST 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales....................................... $ 19,229 $ 24,475 $ 31,605 $ 42,166 $ 71,639
Cost of sales............................... 8,456 9,652 11,345 14,998 24,712
Gross margin................................ 10,773 14,823 20,260 27,168 46,927
Operating expenses
Selling and administrative.................. 6,644 7,827 9,898 13,279 24,304
Net research and development................ 1,216 1,592 3,014 4,315 6,402
Amortization of capital and other assets.... 387 479 657 898 1,498
Total operating expenses.................... 8,247 9,898 13,569 18,492 32,204
Earnings from operations.................... 2,526 4,925 6,691 8,676 14,723
Interest expense (income)-- net............. 418 89 (40) (136) (1,480)
Foreign exchange loss (gain) ............... 7 184 (126) 506 684
Earnings before income taxes and amortization
of goodwill............................... 2,101 4,652 6,857 8,306 15,519
Income taxes................................ 430 1,582 2,356 2,492 5,298
--------- --------- --------- --------- --------
Earnings before amortization of goodwill.... 1,671 3,070 4,501 5,814 10,221
Amortization of goodwill.................... -- -- -- -- 297
Net earnings for the year................... $ 1,671 $ 3,070 $ 4,501 $ 5,814 $ 9,924
--------- --------- --------- --------- --------
Basic and fully diluted net earnings per share. $ 0.04 $ 0.08 $ 0.12 $ 0.14 $ 0.25
Basic weighted average number of shares used
in per share calculations................. 38,000 38,000 38,000 38,001 39,951
OTHER FINANCIAL DATA:
Gross research and development..............
$ 2,667 $ 2,753 $ 4,406 $ 6,390 $ 9,374
Net research and development................ $ 1,216 $ 1,592 $ 3,014 $ 4,315 $ 6,402
Dividends per share
Class "A" shares.................... $ 0.005 $ -- $ -- $ 0.08 $ 0.45
Class "C" share..................... $ -- $ -- $ -- $ 340 $ --
Class "E" shares.................... $ -- $ 0.005 $ 0.005 $ -- $ --
Class "F" shares.................... $ -- $ -- $ -- $ -- $ 0.45
AMOUNTS UNDER U.S. GAAP
Sales....................................... $ 26,752 $ 32,853 $ 41,858 $ 71,639
Net earnings for the year................... $ 3,356 $ 4,538 $ 5,901 $ 7,922
Basic and diluted net earnings per share.... $ 0.09 $ 0.12 $ 0.15 $ 0.20
Basic weighted average number of shares used
in per share calculations................. 38,000 38,000 38,001 40,086
Dividends per share
Class "A" shares.................... $ 0.006 $ -- $ -- $ 0.08 $ 0.45
Class "C" shares.................... $ -- $ -- $ -- $ 333 $ --
Class "E" shares.................... $ -- $ 0.006 $ 0.005 $ -- $ --
Class "F" shares.................... $ -- $ -- $ -- $ -- $ 0.45

AS AT AUGUST 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS)

CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash and cash equivalents.................. $ 482 $ 354 $ 1,262 $ 423 $ 729
Working capital (1) ....................... 3,550 5,973 9,797 12,745 194,167
Total assets............................... 11,725 13,238 17,643 22,840 219,723
Long-term debt (excluding current portion) .... 40 20 -- -- 16
Shareholders' equity....................... $ 4,676 $ 7,644 $ 12,045 $ 14,679 $206,994
AMOUNTS UNDER U.S. GAAP
Cash and cash equivalents.................. $ 1,201 $ 423 $ 729
Working capital (2) ....................... 9,179 12,781 194,204
Total assets............................... 16,785 22,899 219,760
Long-term debt (excluding current portion) . -- -- --
Shareholders' equity....................... $ 11,318 $ 14,715 $207,031
------------------------

(1) Includes 19,000,000 mandatorily redeemable preferred shares with a
nominal carrying value as at August 31, 1997 and 1998 and 800,000
mandatorily redeemable preferred shares with a carrying value of $ 543
as at August 31, 2000.

(2) Includes 19,000,000 mandatorily redeemable preferred shares, with a
nominal carrying value as at August 31, 1998 and 800,000 mandatorily
redeemable preferred shares with a carrying value of $543 as at August
31, 2000.

EXCHANGE RATE INFORMATION

The following table sets forth, for each period indicated, the high and
low exchange rates based on the noon buying rate in the city of New York for
cable transfers in Canadian dollars as certified by the Federal Reserve Bank of
New York, which is often referred to as the "noon buying rate." The exchange
rates are presented as Canadian dollars per $1.00. On December 11, 2000, the
noon buying rate was $1.00 equals C$1.5227 and the inverse noon buying rate was
C$1.00 equals $0.6567.

YEARS ENDED AUGUST 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----

High C$1.3822 C$1.3995 C$1.5770 C$1.5570 C$1.5085
Low 1.3285 1.3310 1.3713 1.4512 1.4350
Average(1) 1.3634 1.3707 1.4490 1.5055 1.4694
End of Period 1.3685 1.3890 1.5745 1.4965 1.4720

-------------------------

(1) The average of the noon buying rate on the last business day of each
month in the period indicated.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable

D. RISK FACTORS

RISKS RELATED TO OUR INDUSTRY AND BUSINESS

IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY,
OUR PRODUCTS MAY BECOME OBSOLETE.

Any failure by us to anticipate or respond to new technological
developments and customer requirements could have a material adverse effect on
our business, financial condition and results of operations. Moreover, the
markets addressed by our current and planned products are rapidly evolving and
are characterized by emerging standards and competing technological platforms.
There can be no assurance that products destined by us for sale into these
markets will adequately address the requirements dictated by evolving standards,
or that we will be able to adapt our products to changes in technology.
Accordingly, we may invest in products and technologies that never gain market
acceptance. Such investments could have a material adverse effect on our
business, financial condition and results of operations.

WE MUST CONTINUE TO OVERCOME SIGNIFICANT AND INCREASING COMPETITION IN OUR
INDUSTRY IN ORDER TO CONTINUE OUR GROWTH AND PRODUCTIVITY.

The market for fiber-optic test, measurement and monitoring equipment
is rapidly evolving and is marked by intense competition and technical
innovations. We expect the pace of change to accelerate in the future. We also
expect many new competitors to emerge as the market for fiber-optic test,
measurement and monitoring equipment expands and evolves in response to
technical innovations.

Some of our current and potential competitors are global electronic
test and measurement manufacturers who complement their broad range of products
with fiber-optic test, measurement and monitoring equipment. Competitors, such
as Agilent Technologies Inc., GN Nettest and Acterna Corporation have longer
operating histories and significantly greater financial, technical and marketing
resources. Consequently, these competitors are able to devote greater resources
to the development, marketing, sale and support of their products. They are also
better positioned than we are to acquire companies and new technologies that may
displace our products or make them obsolete.

WE DEVOTE CONSIDERABLE TIME AND RESOURCES TO SECURING NEW CUSTOMERS AND
IMPROVING SALES TO EXISTING CUSTOMERS. IF WE ARE UNSUCCESSFUL, OUR FUTURE
OPERATING RESULTS MAY SUFFER.

The long sales cycle for our products may cause our sales and operating
results to vary significantly from period to period. The period of time between
our initial contact with a customer and the receipt of a purchase order may span
a year or more. In addition, customers perform and require us to perform,
extensive product evaluation and testing of new instruments before purchasing
them. If we are unable to satisfy customer demands, considerable resources would
have been expended without deriving corresponding sales.

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 four U.S. and two Canadian issued patents, three foreign issued
patents and have seven U.S. and nine Canadian patent applications pending. In
addition, Burleigh Instruments, Inc. ("Burleigh"), our newly-acquired
subsidiary, has five U.S., one Canadian and one Japanese issued patent and has
five U.S. patent applications pending. 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 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.
Furthermore, others may develop technologies that are similar or superior to our
technology, or design around the patents that we own. 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, our foreign issued patents only cover France, Germany and Japan, and
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.

IF OTHERS CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY
RIGHTS, WE MAY BE FORCED TO SEEK EXPENSIVE LICENSES, RE-ENGINEER OUR PRODUCTS,
ENGAGE IN EXPENSIVE AND TIME-CONSUMING LITIGATION OR STOP MARKETING THE
CHALLENGED PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS AND COULD INCREASE OUR COSTS.

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.

We could incur substantial costs in defending ourselves and our
customers against infringement claims. 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 a claim of infringement, 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.

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 AND MARKETING AND OTHER PERSONNEL, OUR OPERATIONS AND
FINANCIAL RESULTS WOULD SUFFER.

Due to the specialized nature of our business, we are highly dependent
on the continued service of and on the ability to attract and retain, qualified
engineering, sales, marketing and senior management personnel in the area of
fiber optics. The competition for such personnel is intense. The loss of key
employees or management personnel could have a material adverse effect on our
business and operating results. We may not be able to continue to attract and
retain

the qualified personnel necessary for the development of our business. In
addition, if we are unable to hire additional qualified personnel as needed, we
may not be able to adequately manage and complete our existing sales commitments
and to bid for and execute additional sales.

We must provide significant training for our growing employee base due
to the highly specialized nature of fiber-optic test, measurement and monitoring
equipment. Our current engineering 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 in fiber optics, are in high demand. Once trained, our
employees may be hired by our competitors.

OUR BUSINESS STRATEGY AND OUR ABILITY TO OPERATE PROFITABLY DEPEND ON THE
CONTINUED SERVICES OF OUR SENIOR MANAGEMENT TEAM LED BY GERMAIN LAMONDE, OUR
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, OR ANY OF OUR
SENIOR MANAGEMENT, THE LOSS OF WHOM WOULD ADVERSELY AFFECT OUR BUSINESS.

Our ability to maintain our competitive position depends to a
significant extent on the efforts and abilities of our senior management,
particularly Germain Lamonde, our Chairman of the Board, President and Chief
Executive Officer. Although we have entered into an employment agreement with
Mr. Lamonde, Mario Larose, Vice President, Marketing Bruce Bonini, Vice
President, North American Sales and Juan-Filipe Gonzalez, Vice President,
International Sales, we do not have employment agreements with any of our other
key executives. Their managerial, technical and other services would be
difficult to replace and if we lose the services of one or more of our executive
officers, or if one of them decides to join a competitor or otherwise compete
directly or indirectly against us, our business would be seriously harmed. The
loss of their services would jeopardize our ability to maintain our competitive
position. We do not have "key person" life insurance policies covering any of
our employees.

IF WE ARE NOT ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY NOT BE ABLE TO
MAINTAIN OR IMPROVE OUR CURRENT LEVEL OF PROFITABILITY.

We expect our business and the industry in which we compete to continue
to undergo rapid change. We plan to significantly expand our distribution and
marketing capabilities by opening additional international sales offices and
service centers, by bolstering our key account management program, by hiring
application engineers and by increasing our sales network worldwide. Finally, we
have had a significant increase in our number of employees from 455 on November
15, 1999 to 874 on November 15, 2000. Our ability to be profitable depends on
our ability to manage this rapid growth. The failure of our management to
respond effectively to and manage changing technological and business conditions
could have a material adverse impact on our business, financial condition and
results of operations.

WE MAY BE SUBJECT TO CERTAIN LIABILITIES ASSUMED IN CONNECTION WITH OUR
ACQUISITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS.

We conduct due diligence in connection with our acquisitions. In
particular, to the extent that prior owners of any acquired businesses failed to
comply with or otherwise violated applicable laws, we may be financially
responsible for these violations or otherwise be adversely

affected. The discovery of any material liabilities could have a material
adverse effect on our financial condition and results of operations. In
connection with our acquisition of Burleigh, there may be liabilities that we
fail to discover or that we inadequately assess in our due diligence efforts.

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

We depend on a limited number of suppliers for parts used to
manufacture our products. 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
delivery problems and reduced control over product pricing and quality. The
process of qualifying a new contract manufacturer for complex products, 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 sought 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 and willing to meet our needs on terms that we
would find acceptable.

WE EXPECT THE PRICE OF OUR EXISTING PRODUCTS TO DECLINE AND IF WE DO NOT REDUCE
OUR MANUFACTURING COSTS OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS, OUR GROSS
MARGINS WILL DECLINE AND WE COULD INCUR LOSSES.

Our industry is very competitive and prices for fiber-optic test,
measurement and monitoring equipment will likely decline. These price declines
result from factors such as:

o increased competition for business;

o a limited number of potential customers;

o competition from companies with lower labor and production
costs;

o introduction of new products by competitors; and

o greater economies of scale for higher-volume manufacturers.

We may have to increase our manufacturing capacity and our unit volume
sold in order to maintain our existing sales. If we add capacity, our fixed
costs will increase. As a result, we would have to increase the level of sales
to maintain operating margins. If we are unable to continuously reduce our
manufacturing costs or introduce new products with higher margins, our gross
margins could decline.

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

For the fiscal year ended August 31, 2000, customers outside of the
United States and Canada accounted for 38.4% of our sales. We plan to increase
our international sales activities and have recently opened offices in Great
Britain, China, Japan, and Singapore. Our international sales will be limited if
we cannot establish relationships with international distributors, establish
additional foreign operations, expand international sales channel management,
hire additional personnel and develop relationships with international service
providers. 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 unexpected changes in regulatory requirements, tax rates or
tariffs that make our products and services more expensive and
therefore less attractive to potential customers;

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 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;

o political and economic instability; and

o certification requirements.

Any of these factors could harm our international operations and
negatively affect our financial performance. For example, we currently face
problems with increasing, and constantly changing, certification requirements.
In addition, although the amounts involved were not material, we have in the
past encountered difficulties collecting accounts receivable in countries
experiencing economic instability. 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 MAY HAVE UNFORESEEN DEFECTS THAT COULD HARM OUR REPUTATION, IMPEDE
MARKET ACCEPTANCE OF OUR PRODUCTS AND NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.

As a result of their complexity, our products may contain undetected
errors 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, errors will not be found in new products after they have been fully
deployed and operated under peak stress conditions. If we are unable to fix
defects or other problems, we could experience, among other things:

o loss of customers;

o damage to our brand reputation;

o 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.

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

OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS. A SUCCESSFUL CLAIM EXCEEDING OUR POLICY LIMIT WILL REDUCE OUR
WORKING CAPITAL, INCREASE OUR EXPENSES AND HAVE A NEGATIVE EFFECT ON OUR
OPERATING RESULTS.

Our products are designed to help telecommunications carriers and
manufacturers of optical components, value-added optical modules and optical
networking systems ensure network reliability. The failure of our products to
perform to client expectations could give rise to product liability and warranty
claims. We carry product liability insurance that we consider adequate in view
of industry practice. However, a successful claim against us for an amount
exceeding our policy limit would force us to use our own resources to pay the
claim, which could result in a reduction of our working capital available for
other uses, increase our expenses and have a negative effect on our results of
operations.

AS OUR COMPETITORS CONSOLIDATE, THEY MAY OFFER PRODUCTS OR PRICING THAT WE
CANNOT MEET, WHICH COULD CAUSE OUR SALES TO DECLINE.

Consolidation in the fiber-optic test, measurement and monitoring
industry could intensify the competitive pressures that we face. Recently, some
of our competitors have merged or have been acquired by larger companies. These
combined companies could produce more high-performance products and offer them
at more competitive prices.

OUR QUARTERLY 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 may fluctuate significantly in the future. In addition, our
revenue and operating results generally

depend on the volume and timing of the orders we receive from customers as well
as our ability to fulfill the orders received. Our operating expenses, which
include research and development, and selling and administrative expenses, are
relatively fixed in the short term. If our revenue is lower than we expect
because we sell fewer products than we anticipate or if there is a delay in the
release of new products, we may not be able to quickly reduce our operating
expenses in response. Factors that could affect the amount and timing of our
revenues, and cause quarterly fluctuations in our operating results include:

o the length of our product sales cycle, especially for our
higher priced and more complex products;

o our ability to sustain product volumes and high levels of
quality across all product lines; and

o the timing of introduction and market acceptance of new
products by us, our competitors or our suppliers.

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

o changes in the capital budgets of our customers, which may
cause seasonal or other fluctuations in the product mix,
volume, timing and number of orders we receive from our
customers; and

o difficulties in collecting accounts receivable.

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.

IF OPTICAL FIBER IS REPLACED BY ANOTHER MEDIUM AS THE PRIMARY SOLUTION FOR
BANDWIDTH-INTENSIVE APPLICATIONS, OR IF HIGH-BANDWIDTH TRANSMISSION NETWORKS ARE
NO LONGER IN GREAT DEMAND, WE COULD EXPERIENCE A SIGNIFICANT LOSS OF SALES.

The increase in fiber-optic cable production and the growth in fiber
deployment are causing increased demand for fiber-optic test, measurement and
monitoring equipment. If the demand for these markets decreases or disappears,
or if optical fiber is replaced by a higher-performance medium, it could have a
material adverse effect on our business, financial condition and results of
operations.

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 OR EXPERIENCE MANUFACTURING DELAYS.

We provide 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 requirements, we may have excess inventory, which could
increase our costs and harm our relationships with our suppliers due to reduced
future orders. If we underestimate our requirements, we may have an

inadequate inventory of parts. Inadequate inventory could interrupt
manufacturing of our products and result in delays in shipments. In addition,
lead times for materials and parts that we order are 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. In the case of some parts in short supply,
suppliers have imposed strict allocations that limit the number of these parts
that they will supply to a given customer in a specified time period. Although
to date suppliers have not made selective allocations that adversely affected
us, these suppliers may choose, in the future, to increase allocations to
larger, more established companies, which could reduce our allocations and harm
our ability to manufacture our products.

WE MAY NOT BE ABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS,
WHICH COULD PREVENT US FROM ACHIEVING OUR GROWTH STRATEGY AND ADVERSELY AFFECT
OUR OPERATING RESULTS.

The development of proprietary technologies entails significant
technical and business risks and requires substantial expenditures and lead
time. If we experience product delays in the future, we may face:

o customer dissatisfaction;

o cancellation of orders;

o negative publicity;

o loss of sales;

o slower market acceptance of our products; and

o legal actions by customers.

In the future, our efforts to remedy product delays may not be
successful and we may lose customers as a result. Delays in bringing to market
new products or product enhancements could be exploited by our competitors. If
we lose market share as a result of lapses in our product development, our
business would suffer.

FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE CANADIAN DOLLAR AND THE U.S.
DOLLAR MAY ADVERSELY AFFECT OUR OPERATING MARGINS.

The majority of our sales is denominated in U.S. dollars. However, a
majority of our operating expenses and capital expenditures are denominated in
Canadian dollars. As a result, we are exposed to fluctuations in the exchange
rates between the Canadian dollar and the U.S. dollar. An increase in the value
of the Canadian dollar relative to the U.S. dollar could have a material adverse
effect on our operating margins.

AS OUR CUSTOMERS CONSOLIDATE, THEY MAY REDUCE PURCHASES OF OUR PRODUCTS, WHICH
WOULD CAUSE OUR SALES TO DECLINE.

Consolidation in the telecommunications industry could reduce the
number of customers to whom our products could be sold. Some of our customers
have merged. Although to date we have not experienced any adverse effects as a
result of these mergers, these merged customers could, in the future, obtain
products from a source other than us, which would cause our sales to decline. In
addition, some of our manufacturer customers may merge with or acquire our
competitors and, as a result, discontinue their relationships with us.

OUR CUSTOMERS ARE NOT OBLIGATED TO BUY MATERIAL AMOUNTS OF OUR PRODUCTS AND MAY
CANCEL OR DEFER PURCHASES ON SHORT NOTICE.

Our customers typically purchase our products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. Accordingly, sales in a particular period are difficult to predict.
Decreases in purchases, cancellations of purchase orders, or deferrals of
purchases may have a material adverse effect on our operating results,
particularly if we do not anticipate them.

WE MAY NOT BE ABLE TO SUSTAIN OUR RESEARCH AND DEVELOPMENT ACTIVITIES AS OUR
RESEARCH AND DEVELOPMENT CREDITS AND GRANTS DECLINE BECAUSE OF THE INCREASING
EFFECTIVE COST OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES.

Our historical operating results reflect substantial benefits from
programs sponsored by the Canadian and Quebec governments for the support of
research and development. Research and development tax credits and grants
represented 32.5% of our gross research and development expenses for the year
ended August 31, 1999 and 31.7% for the fiscal year ended August 31, 2000. These
tax credits and grants will decline as our assets grow. Accordingly, the
effective cost of our future research and development activities will increase.

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

If unexpected changes in the laws or government policies terminate or
adversely modify the government programs, under which we receive research and
development 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 expenses will materially increase. To the extent that we increase
our 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 are required to decrease our research and development
activities, we may be unable to compete effectively.

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

We intend to aggressively seek acquisitions of businesses, products and
technologies that are complementary to ours. There can be no assurance that we
will ultimately make any such acquisition. The consolidation of our competitors
may improve their capacity to acquire the same businesses, products and
technologies that we wish to acquire.

We have in the past made strategic acquisitions, such as our
acquisitions of GAP Optique S.A., Nortech Fibronic Inc. and Burleigh. We
anticipate that in the future, as part of our business strategy, we will
continue to make strategic acquisitions of complementary companies, products and
technologies. 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; or

o incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.

These acquisitions also involve numerous risks, including:

o problems combining the acquired operations, technologies or
products;

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 that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.

WE MAY NOT BE ABLE TO REALIZE THE POTENTIAL BENEFITS OF OUR ACQUISITION OF
BURLEIGH.

In December 2000, we acquired Burleigh. In order for our acquisition to
be successful, we must coordinate the operations and technologies of Burleigh
with those of our company and manage the geographically dispersed operations.
Integration will require the dedication of management resources that may
distract management's attention from the day-to-day business of

our company. If we fail to integrate the companies quickly and efficiently, we
may not be able to realize the benefits we expect from the acquisition.

OUR SALES WOULD SUFFER IF A KEY SALES REPRESENTATIVE OR DISTRIBUTOR STOPPED
SELLING OR REDUCED SALES OF OUR PRODUCTS.

We sell substantially all of our products through a network of
independent sales representatives and distributors, the majority of whom have
exclusive rights to sell our products in specific territories or markets. If we
are unable to provide competitive sales commissions, maintain an appropriate
sales volume, or offer sufficient channel-support, our independent sales
representatives and distributors may discontinue sales of our products and
switch to representing one or more of our competitors, which would result in
reduced sales for us.

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 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 operating 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. If
we raise additional funds through debt financing, we could incur significant
borrowing costs. If we are unable to raise additional funds when needed, our
ability to operate and grow our business could be impeded.

OUR PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY
REQUIREMENTS WHICH 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 the technical
regulations applicable in a given country are in any way changed, 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 likely would increase
manufacturing costs and could create technical advantages for products marketed
by our competitors.

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 465
Godin Avenue, Vanier, Quebec, Canada, G1M 3G7 and our telephone number is (418)
683-0211. Our e-mail address is info@exfo.com and our Web site is www.exfo.com.
Information on our Web site is not incorporated by reference in this Annual
Report. This Annual Report contains trademarks and registered trademarks of EXFO
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 corporate name and our share capital.

In 1996, GEXFO Investissements Technologiques inc. ("GEXFO"), a company
controlled by Germain Lamonde, acquired a majority interest in GAP Optique S.A.
("GAP Optique"), a Swiss limited liability company carrying out activities in
the field of fiber-optic testing and measurement technology. In 1996, GEXFO,
EXFO, GAP Optique and the University of Geneva entered into agreements whereby
GAP Optique, EXFO and GEXFO obtained worldwide exclusive rights to commercially
develop, manufacture and market specified technologies relating to fiber-optic
telecommunications testing and measurement instruments developed by the
University of Geneva. In addition, GAP Optique, EXFO and GEXFO acquired priority
rights over the marketing of fiber-optic telecommunication testing and
measurement instruments prototypes designed by the University of Geneva. This
agreement was renegotiated under similar terms and conditions in 1999 for a
five-year term. On June 1, 2000, we acquired the 85% interest held by GEXFO in
GAP Optique for a consideration equal to its book value of approximately $16,000
and GEXFO transferred all of its rights in the agreements to us.

In February 2000, we acquired all of the shares of Nortech Fibronic
Inc., a company specializing in fiber-optic testing and temperature-sensing for
a total consideration of $2.8 million of which $2.1 million was paid in cash. We
also issued C$800,000 (approximately $553,000) of Class "G" shares, which were
converted into preferred shares series 1 in June 2000, and a debenture of
$200,000 (approximately $138,000) bearing no interest and payable on November
30, 2000. In November 2000, the former shareholders of Nortech agreed with us to
make a purchase price adjustment, as a result of which we received $104,000 in
cash from a portion of the purchase price previously held in escrow and reduced
the purchase price for the preferred shares series 1 from C$800,000 ($553,000)
to C$544,000 ($355,000), which were purchased by us on November 30, 2000 and
subsequently cancelled.

In connection with and immediately prior to our initial public
offering, we modified our authorized share capital to its current status, which
consists of:

o an unlimited number of subordinate voting shares without par
value;

o an unlimited number of multiple voting shares without par
value; and

o an unlimited number of preferred shares without par value,
issuable in series; and proceeded with the following
exchanges:

o the 38,000,000 Class "A" shares were exchanged into 38,000,000
multiple voting shares;

o the 707,264 Class "F" shares were exchanged into 707,264
subordinate voting shares; and

o the 800,000 Class "G" shares were exchanged into 800,000
preferred shares series 1.

The exchange of Class "A" shares into multiple voting shares, of Class
"F" shares into subordinate voting shares and of Class "G" shares into preferred
shares series 1 was part of our capital reorganization and did not involve any
disbursement of funds.

On July 6, 2000, we completed our initial public offering as a result
of which we issued a total of 8,050,000 subordinate voting shares, including
1,050,000 subordinate voting shares pursuant to the exercise of the
over-allotment by the underwriters. All the 8,050,000 subordinate voting shares
were sold to the public at an offering price of $26.00.

On November 30, 2000, we purchased all outstanding 800,000 preferred
shares series 1 for an aggregate price of C$544,000 ($355,000) and they were
subsequently cancelled.

In December 2000, we acquired all of the shares of Burleigh for a total
consideration of approximately $187 million of which approximately $40 million
was paid in cash. We also issued approximately 6.5 million of our subordinate
voting shares.

B. BUSINESS OVERVIEW

We are a leading designer, manufacturer and marketer of fiber-optic
test, measurement and monitoring instruments for the telecommunications
industry. We believe that we are the largest manufacturer of test, measurement
and monitoring instruments that is exclusively dedicated to fiber optics.
Fiber-optic test, measurement and monitoring equipment is mainly used by optical
network carriers, manufacturers and research and development laboratories to
measure the physical characteristics of optical fiber and related hardware.

EXFO was founded in 1985 in Quebec City. We have grown from a
two-employee supplier of portable handheld test instruments to a leading
designer, manufacturer and marketer of an extensive line of fiber-optic test,
measurement and monitoring instruments. We currently employ 874 employees and
our products are distributed in over 70 countries. We have been profitable each
year of our 15-year history.

We develop products mainly for two markets. Our Portable and Monitoring
Division provides solutions primarily to telecommunications carriers, cable
television companies, public utilities, private network operators as well as
third-party installers and equipment rental companies. Our Industrial and
Scientific Division, established in 1996, designs an extensive line of more
sophisticated and higher performance instruments for manufacturers of optical
components, value-added optical modules and optical networking systems as well
as for research and development markets. We leverage technologies that we
develop for our Industrial and Scientific Division into products for our
Portable and Monitoring Division.

In August 2000, we released our second-generation remote fiber test
system with wavelength monitoring to detect faulty channels in DWDM systems. Our
remote fiber test system consists of rack-mounted remote test units, which are
strategically deployed along a fiber-optic network, and a test system controller
that retrieves information from as many remote test units as required. The test
system controller is typically located inside a network operations center. The
information obtained from these remote test units is combined with data from a
geographic information system in our software to pinpoint the exact location of
a system failure.

We have received more than 40 industry and commerce awards. In 2000, we
were named winners of the Outstanding Corporate Innovator Award by the
U.S.-based Product Development and Management Association (PDMA). Prior to
becoming a public company in June 2000, we had been recognized as one of the 50
Best-Managed Private Companies in Canada by Arthur Andersen Consulting and the
Financial Post for five consecutive years. We have maintained ISO 9001
certification since 1994.

In December 2000, we acquired Burleigh, a leading supplier of DWDM
wavelength measurement instrumentation and precision positioning equipment. For
almost three decades, Burleigh has advanced the science of interferometric
measurement techniques and developed a deep understanding of precision
positioning technology. As a result, Burleigh's Wavemeter(TM) products offer one
of the highest wavelength measurement accuracy in the industry, while its
Inchworm(TM) motor-based precision positioning line enables unmatched position
control.

THE EXFO SOLUTION

We believe that we offer the most extensive range of products in the
fiber-optic test, measurement and monitoring industry. Our success has been
largely based on our exclusive focus on fiber-optic test, measurement and
monitoring instruments. We have developed optical technologies and advanced
testing algorithms that we leverage across our various product lines.

The success of our solution is based on the following key attributes:

MODULAR SYSTEM DESIGN. In 1996, we introduced the first products
designed around our modular system design. This system design consists of a
Windows-based platform that can accommodate several data acquisition test
modules. We have since developed products for each of our divisions 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 the changing requirements of the
industry.

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 directed at specific
testing requirements.

HIGH DEGREE OF TECHNOLOGICAL INNOVATION. We have continually been at
the forefront of fiber-optic test, measurement and monitoring technology. For
example, we were the first in our industry to develop and commercialize a number
of fiber-optic test and measurement products:

o ALL-IN-ONE LOSS TEST SET. In 1992, we launched the first
handheld unit for automated bidirectional loss testing. This
rugged and compact loss test set combined four
high-performance instruments in a single unit. The all-in-one
loss test set, based upon our patented technology, allowed the
user to save a considerable amount of time in the field. In
1997, we released a second-generation product which combines
six instruments in a single unit.

o PORTABLE MODULAR PLATFORM. In 1996, we released the FTB-300
Universal Test System, which was the first portable test
platform in our industry based on a modular design. This
portable modular platform, which includes multiple optical
testing technologies, enables the user to carry out numerous
test operations for outside plant installation, maintenance
and troubleshooting applications.

o PORTABLE POLARIZATION MODE DISPERSION ANALYZER. In 1996, we
introduced the industry's first handheld polarization mode
dispersion analyzer. Polarization mode dispersion is a
physical phenomenon inherent to optical fiber and other
optical components that causes a spreading of light pulses as
they travel along a fiber, thus degrading the transmission
signal.

PRODUCTS OF HIGH QUALITY. Product quality is an integral part of our
solution. We have implemented a comprehensive quality assurance program, which
has been certified ISO 9001 since 1994. Our products meet industry standards,
such as those set by Telcordia, formerly Bellcore, an industry-leading standards
body. During manufacturing, each product has a related quality assurance plan,
with rigorous checkpoints, to reduce defects to a minimum. More than 50 people
are dedicated to various tasks in the quality assurance process including
quality control, conformity testing, product documentation, product improvement,
regulatory compliance, metrology and calibration.

SUPERIOR CUSTOMER SUPPORT. We use highly qualified and specialized
internal groups to offer pre-sales evaluation, installation, channel and
customer training, communications and post-sales support. We believe that this
approach provides us with an advantage over our competitors, who often outsource
some of these functions. Our inside sales group is mainly responsible for
supporting our sales force, selecting instruments that best match our customers'
testing, measurement and monitoring needs and for providing detailed quotations.
Our customer support group manages three main tasks: order management, technical
support and training as well as calibration and repair services. Furthermore,
our communications and marketing group, which operates like an internal
advertising agency, educates our customers and our sales force by providing
detailed marketing and technical information. Literature includes specification
sheets, application notes, media releases, product catalogues and a quarterly
corporate newsletter. Finally, our writing services group, which consists of
more than 14 university-trained

professionals, provides technical writing for product instruction manuals and
online help. We provide most of our documentation in five different languages.

OUR STRATEGY

We intend to expand our leadership position in the fiber-optic test,
measurement and monitoring industry and to increase our market share through the
following initiatives:

EXPAND TECHNOLOGICAL LEADERSHIP. We believe that our ultimate success
will depend on our ability to introduce enhanced products that meet the changing
needs of our customers. We, therefore, will continue to invest heavily in
research and development. We increased gross research and development
expenditures from $6.4 million in fiscal 1999 to $9.4 million in fiscal 2000 and
we intend to spend between 12% to 16% of our sales on research and development
during the next three years. We also intend to dedicate more than 25% of our
employees to research and development, including an advanced research group that
carries out research activities, monitors technological trends in the industry
and maintains links with numerous universities, industry associations and
standards bodies.

We have maintained our profile as experts in the field of fiber-optic
test, measurement and monitoring instrumentation through activities such as
publishing the second edition of our Guide to WDM Technology and Testing, a
reference book in the fiber-optic industry, and presenting scientific papers at
industry conferences such as the Optical Fiber Conference and the National
Fiber-Optic and Engineering Conference.

INVEST IN STRATEGIC SECTORS. We have established a structured review
process to ensure that our research and development activities are aligned with
our corporate strategy. This rigorous review process has led us to focus on the
following strategic sectors:

o DWDM MARKET. We launched a number of DWDM testing solutions,
including optical spectrum analyzers, tunable laser sources, a second-generation
remote fiber test system and fully automated test systems to capitalize on the
DWDM market opportunity. We believe that we are well positioned to take
advantage of this growing market because we offer one of the most comprehensive
selections of DWDM test products. We intend to further improve our DWDM testing
solutions to address the requirements of systems requiring higher channel counts
and increased transmission speeds.

o INDUSTRIAL AND SCIENTIFIC PRODUCT MARKET. We believe that
several new market opportunities exist for our family of industrial and
scientific products, especially with the increasing reliance of optical
component, value-added optical module and optical networking system
manufacturers on automated test, measurement and monitoring equipment. We intend
to provide manufacturers with both off-the-shelf and customized test solutions.
We have established a team of 12 product managers in this division, consisting
of engineers and scientists, several of whom hold master's or doctorate degrees
in Optical Sciences or Electrical Engineering.

LEVERAGE OUR MODULAR DESIGN. The modularity and compatibility of our
Windows-based platforms enable us to offer the same instrument design to as many
as three different

market segments with a single research and development project. This practice
lessens the number of different designs, including optical, mechanical,
electronics and software, that we must develop and manufacture. We intend to
capitalize on the flexible architecture of our Windows-based systems to expand
our solutions portfolio and to offer specialized products to specific markets.
By being able to provide new functionality through the design of a new module
rather than through the design of a complete instrument, we can be quicker to
market with new testing technologies and provide more specialized testing
solutions.

EXPAND SALES AND MARKETING EFFORTS. We have adopted a focused sales and
marketing approach to improve service to existing customers and to pursue new
customer opportunities. We intend to:

o expand our direct sales force by opening additional
international offices;

o bolster our key account management program by hiring
application engineers dedicated to large system manufacturers
that are current customers such as Nortel Networks
Corporation, Lucent Technologies, Inc. and Alcatel Optronics;

o increase our network of distributors worldwide;

o open additional service centers in selected, high-growth
markets to support our sales activities with calibration and
repair services; and

o deploy a customer relationship management software initiative
to keep better track of our customers' individual demands and
to store information about potential customer opportunities,
profiles and histories.

REDUCE DELIVERY LEAD TIMES. The majority of our sales are derived from
complex products that are assembled to order. We maintained an average delivery
lead time of approximately 33.4 calendar days for our products during the 12
months ended November 15, 2000. We believe that our delivery lead times are
shorter than most of those of our competitors. To further reduce our delivery
lead times, we have adopted a number of measures:

o ADHERE TO VERTICALLY INTEGRATED MANUFACTURING. We handle all
major manufacturing operations in-house because we generally produce short runs
of complex products. We believe it is a competitive advantage to have our
manufacturing operations centralized since we have greater flexibility and
better control over our delivery lead times.

o INCREASE MANUFACTURING CAPACITY. Following the purchase of a
new building in June 2000, we make use of 182,000 square feet -- including
55,000 square feet dedicated to manufacturing -- among three buildings. Once we
complete the construction of a 150,000 square-foot building in the Quebec
Metropolitan High-Tech Park in the fall of 2001, we will move our
administrative, R&D and marketing departments and use the former buildings
exclusively for manufacturing. Consequently, manufacturing capacity will more
than triple from 55,000 to 182,000 square feet.

o IMPLEMENT ENTERPRISE RESOURCE PLANNING AND SUPPLY-CHAIN
MANAGEMENT SOFTWARE TOOLS. We intend to improve our information systems
environment by implementing enterprise resource planning and supply-chain
management software tools. This will enable us to enhance our forecasting,
planning and scheduling and procurement activities.

PURSUE COMPLEMENTARY ACQUISITIONS. We believe that market fragmentation
in the test, measurement and monitoring industry creates opportunities for
consolidation. We plan to aggressively pursue strategic acquisitions that will
provide us with additional key technologies, complement our product offerings,
increase our sales channels and add to our overall level of expertise.

RECENT DEVELOPMENTS

In December 2000, we acquired all of the issued and outstanding shares
of common stock of Burleigh Instruments, Inc., Burleigh Instruments GmbH and
Burleigh Instruments (U.K.) Ltd. at an aggregate purchase price of approximately
$187 million, comprised of approximately 6.5 million of our subordinate voting
shares and approximately $40 million in cash. Burleigh is a leading supplier of
DWDM wavelength measurement instruments and precision positioning equipment. We
selected Burleigh because we hope it will enable us to accelerate growth in our
Industrial and Scientific Division, which mainly focuses on the needs of the
growing optical component and DWDM transmission system market. In addition, we
hope to be able to expand the capabilities of our automated test systems by
offering precision alignment as well as testing during the assembly and
packaging of optical components.

Burleigh, which has been in operation for 28 years and has 110
employees, as of December 20, 2000, has received industry recognition for its
high-performance optical wavelength meters and precision positioning equipment.
Its Wavemeter(TM) instruments offer one of the highest wavelength measurement
accuracy in the industry. These products are able to determine the absolute
wavelength of a laser under test within 0.3 picometers at 1500 nm. Its
Inchworm(TM) precision positioning equipment provides nanometer accuracy, which
is critical for precision alignment in the optical component manufacturing
process. Both of these product lines are supported by a broad proprietary
intellectual property portfolio.

PRODUCTS

Our products are designed for the fiber-optic test, measurement and
monitoring industry. We have adapted our product offerings to meet the needs of
two main markets: portable and monitoring products for the carrier market and
industrial and scientific products for the optical component, value-added
optical module and optical networking system manufacturer market.

The carrier market primarily encompasses the needs of
telecommunications carriers, such as AT&T Corporation, Bell Atlantic
Corporation, GTE Corporation and TelMex S.A. de C.V., cable television
companies, public utilities, private network operators, as well as third-party
network installers and equipment rental companies. This market requires rugged,
field-portable and easy-to-use equipment.

The industrial and scientific product market includes optical component
and value-added optical module companies such as JDS Uniphase Inc.; optical
system manufacturers such as Nortel Networks Corporation and Lucent
Technologies, Inc.; optical fiber and cable manufacturers such as Corning
Incorporated, Lucent Technologies, Inc. and Sumitomo Electric Lightwave Corp.;
as well as university and government research laboratories.

At the core of our test, measurement and monitoring instruments are our
FTB-300 Universal Test System (UTS) and IQ-200 Optical Test System (OTS)
platforms. Our FTB-300 UTS provides carriers with a simple, yet efficient way to
perform multiple, advanced test operations for installation, maintenance and
troubleshooting applications. Our IQ-200 OTS is a scalable unit that is suited
for manufacturing, laboratory engineering and research applications. The added
benefit of our IQ-200 OTS is that manufacturers can design their own automated
test setup or we can customize a setup for them. Our FTB-300 UTS and IQ-200 OTS
platforms are fully supported by integrated and highly intuitive graphical user
interfaces, enabling the user to easily store, handle and retrieve a large
amount of data.

In fiscal 2000, we introduced 14 new products, including optical
spectrum analyzer test modules for our FTB-300 UTS and IQ-200 OTS platforms,
widely tunable laser sources for DWDM testing, automated test systems for DWDM
optical components and value-added optical modules, a single-slot optical time
domain reflectometer platform and related test modules, as well as high-power
and low-polarization sensitivity power meters.

The following table summarizes the principal types of instruments we
provide, their typical applications and the format in which we offer them:

FORMAT
--------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
--------------- ------------------- -------- ----------
FTB 300 IQ200 BENCHTOP
UTS MODULES HANDHELD OTS MODULES INSTRUMENTS
----------- -------- ----------- -----------

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

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

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

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

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

Polarization mode Measures the dispersion of light X X
Dispersion that is caused by polarization.
Analyzers Generally used to determine the
bandwidth capacity of fiber and
cables.

Multi-wavelength Measures the power and drift for X X
Meters multiple wavelengths in a DWDM
system.

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

Polarization Measures the difference in loss of X
Dependent loss power for the different states of
Meters polarization.

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

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

Optical fiber Measures the geometric and light X
Parameters guiding properties of an optical
Analyzer fiber. Used in new fiber research
and development and quality control
applications.

Optical Amplifiers which boost the power of source X
amplifier lasers. Used for the testing and calibration
of test systems.

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

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

Broadband source Used for testing wavelength X
dependent behavior of DWDM optical
components and value-added optical
modules.

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

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

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

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

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

PORTABLE AND MONITORING PRODUCTS

We offer an extensive range of products for fiber-optic testing,
measurement and monitoring in the carrier market.

Our test and measurement products are available as handheld test
instruments or as field-portable platforms with related modules. Our handheld
instruments are durable, compact and easy to use. Our portable platforms are
rugged, Windows-based, battery-powered units. Their large, environmentally
robust touchscreens are very practical for field use.

In August 2000, we introduced our second-generation remote fiber test
system, better known as FiberVisor, with wavelength monitoring to detect faulty
channels in DWDM systems. FiberVisor consists of rack-mounted remote test units,
which are strategically deployed along a fiber-optic network and a test system
controller that retrieves information from as many remote test units as
required. The test system controller is typically located inside a network
operations center. The information obtained from these remote test units is
combined with data from a geographic information system in our FiberVisor system
to pinpoint the exact location of a system failure and rapidly provide the
required information to a restoration team.

INDUSTRIAL AND SCIENTIFIC PRODUCTS

Our industrial and scientific product line is mainly built around our
IQ-200 OTS platform and is available as modules or stand-alone benchtop
instruments. This base platform is a Windows-based system, which includes a
Pentium processor, liquid crystal screen and three slots

to accept test modules. This base platform can be supplemented by as many as
four expansion platforms, each capable of housing six additional modules, which
can be connected and controlled to provide additional functionality and
capacity. These expansion platforms can also be controlled via a personal
computer. Altogether, the IQ-200 OTS platform and expansion platforms can hold
as many as 27 modules and test as many as 105 channels.

The modular nature of our IQ-200 OTS platform is adapted for complex
applications involving the synchronized operation of several instruments. For
example, several types of lasers, a variable attenuator and an optical spectrum
analyzer can be combined to automatically characterize a number of key
performance parameters of fiber-optic amplifiers.

Our Industrial and Scientific Division also addresses testing problems
that cannot be handled by standard modules or stand-alone benchtop instruments.
We have dedicated a team of engineers to develop custom-made, integrated test
systems for customers with specific needs. Some of these integrated test
systems, in turn, are modified and offered as off-the-shelf test systems to suit
a wider range of customers. In addition, we have created a software development
kit for developers who prefer writing their own programs for our instruments. We
provide automated systems for assembly, calibration and environmental testing
for optical components, value-added optical modules and optical networking
systems such as:

o Fiber assembly test system Used for quality assurance
testing of optical connector
cables known as jumpers.
Jumpers are used to
interconnect optical
networking equipment.

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

o Environmental test system Allows users to perform
long-term qualification
testing of optical components
and value-added optical
modules under varying
environmental conditions
primarily to ensure compliance
with industry standards.

o DWDM passive component test Provides optical DWDM
system component and value-added
optical module manufacturers
an automated testing, quality
assurance and test data
storage solution.

o Optical amplifier test system Provides manufacturers of
optical amplifiers with an
integrated automated testing,
quality assurance and test
data storage solution.

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 recruit and retain highly skilled
engineers, scientists and technicians. As of November 15, 2000, our research and
development department included 236 full-time engineers, scientists and
technicians, of whom 40 hold post-graduate degrees. Gross research and
development expenditures for fiscal 2000 were $9.4 million compared to $6.4
million for fiscal 1999.

Through a market-oriented, product portfolio review process, we ensure
that our investments in research and development are aligned with our customers'
needs. This approach enables us to maximize our returns on research and
development investments by focusing our resources on a limited number of
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 has been significantly exceeded.

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 feasibility 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 project is synchronized with other internal departments and external
industry events. The 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 (PDMA).

CUSTOMERS

Since 1985, we have sold more than 100,000 product units to more than
1,800 customers and our products are distributed in over 70 countries. Our
customers include telecommunications carriers, cable television companies,
public utilities, private network operators, third-party installers, equipment
rental companies, as well as optical component, value-added optical module and
optical networking system manufacturers. During fiscal 2000, we delivered
products to more than 800 customers and no single customer accounted for more
than 5.8% of our sales.

UNITED STATES AND CANADA

During fiscal 2000, U.S. and Canadian customers accounted for 50.4% and
11.2% of our sales.

The following table is an alphabetical list of our top U.S. and
Canadian customers based on gross sales during the last 12 months:

AT&T Corporation
Bell Atlantic Corporation
GTE Corporation
Lucent Technologies
MCI Telecommunications
Newcourt Technologies Corp
Nortel Networks Corporation
Pacific Bell Communications Inc.
Qwest Communications International, Inc.
US West Communications, Inc.

INTERNATIONAL

Our international sales are largely handled by a network of
distributors around the world. During fiscal 2000, international customers
accounted for 38.38% of our sales.

The following is an alphabetical list of some international end-users
of our products:

Bestel S.A. de C.V. (Mexico)
Daewon Corporation (Korea)
ECI Telecom LTD. (Israel)
FOCI Fiber-Optic Communications Inc. (Taiwan)
Instituto Costarricense de Electricidad (Costa Rica)
Korea Informatics Telesis Inc. (Korea)
Marconi Communications SPA (Italy)
Nortel Networks Corporation (United Kingdom)
Telecom Argentina (Argentina)
Telkom S.A. LTD. (South Africa)

SALES

We sell our fiber-optic test, measurement and monitoring products
through direct and indirect sales networks in the United States and Canada as
well as around the world. We also have an inside sales group, consisting of 15
people, to meet the needs of existing and new customers. Our inside sales group
is responsible for providing quotations to customers, supporting our sales force
and managing more than 2,400 demonstration units.

UNITED STATES AND CANADA SALES

In the United States and Canada, our direct sales network consists of a
vice-president, four national sales managers and 16 regional sales managers and
application engineers, who are located throughout major metropolitan areas. Our
main sales office in the United States is located in Richardson, Texas. We also
maintain sales personnel in the following metropolitan areas: Atlanta, Georgia;
Charlotte, North Carolina; Chicago, Illinois; Columbus, Ohio; Dallas, Texas;
Denver, Colorado; Los Angeles, California; Newark, New Jersey; Wilmington,
Delaware; Montreal, Quebec; Ottawa, Ontario; Toronto, Ontario; and Vancouver,
British Columbia. Our group of 26 sales professionals has an average of 12 years
of experience in the fields of telecommunications, fiber optics, or test,
measurement and monitoring.

In the United States, we have adopted a market-specific sales strategy.
Two different sales organizations have been created to maximize coverage and
penetration of our main markets:

o CARRIER MARKET. This sales team targets customers who own,
operate or install networks as their primary business. This market includes
telecommunications carriers, cable television companies, public utilities,
private network operators, as well as third-party installers and equipment
rental companies. A national sales manager, nine regional sales managers, sales
engineers and application engineers and a team of independent sales
representatives and distributors concentrate on selling our product line to this
customer market.

o MANUFACTURING/R&D MARKET. This sales team targets customers
who research, develop or manufacture optical networking products. This sales
group consists of one national sales manager and eight regional sales managers
and application engineers, who oversee a network of independent sales
representatives. Some regional sales managers also have direct responsibility
for serving our larger manufacturing customers. This organizational structure
allows us to adequately cover the demands of a highly technical customer base
and to identify and penetrate the large number of start-up companies in the
component manufacturer market.

INTERNATIONAL SALES

Our international sales network includes a vice-president, one general
manager in Europe, two sales directors covering Latin America and Asia, 10
regional sales managers and three sales engineers. Our direct sales network
around the world is supported by a main office in Paris, France, which maintains
our head European sales operations and also provides repair and calibration
services for our European, Middle East and African customers. We also have
established several sales offices in strategic locations around the world to
support our network of distributors and customers. These offices are located in
China, Great Britain, Japan and Singapore. Finally, we rely on more than 50
distributors to support our international sales. We feel that the local presence
and cultural attributes of our distributors allow us to better serve our global
markets.

MARKETING, COMMUNICATIONS AND CUSTOMER SUPPORT

MARKETING

Our marketing group consists of 30 product managers and marketing
analysts who have various degrees in engineering, science and business
administration. Product managers, with the assistance of marketing analysts, are
responsible for all aspects of our marketing program including new product
introductions, definition of new features and functions, pricing, product
launches and advertising campaigns. Marketing analysts help product managers
develop marketing programs with tools such as our Web site, CD-ROMs,
advertisements, mailouts and customer presentations. We follow up our marketing
initiatives by attending industry trade shows. Furthermore, we are implementing
a customer relationship management system to compile market and customer
information including forecasts, leads and competitive data. We use this
information to make strategic business decisions.

COMMUNICATIONS

Our communications group, which is mainly composed of commercial
writers and graphic artists, supports our marketing group by producing marketing
and corporate documentation. Literature includes specification sheets,
application notes, media releases, product catalogues, advertising copy and a
bi-monthly corporate newsletter. Our communications group is also responsible
for maintaining and updating our Web site.

CUSTOMER SUPPORT

We have developed a customer support group that serves customers and
distributors around the world in English, French, Spanish and German. Our
customer support group consists of three distinct units: technical support,
order management and a repair and calibration authorization service center. A
frequently asked question database is also updated regularly on our Web site.

MANUFACTURING

Manufacturing operations consist mainly of material planning,
procurement, sub-assembly, final assembly, testing, software loading,
calibration, quality assurance and shipping and billing. As of November 15,
2000, we had 357 employees involved in our manufacturing operations. We have two
surface-mount, circuit-board assembly lines and we occupy more than 55,000
square feet for manufacturing purposes. After we move our research and
development, administrative and marketing departments to a new 150,000
square-foot building in the Quebec Metro High-Tech Park in the fall of 2001, we
will make use of our former buildings exclusively for manufacturing purposes. As
a result, manufacturing capacity will increase three-fold to 182,000 square
feet. Our manufacturing operations are handled by three inter-related
departments:

o PRODUCTION. Our production department, which is divided into
15 cells, is responsible for manufacturing high-quality products on time. Each
cell consists of specialized technicians and has full responsibility over a
product group. Technicians are versatile enough so

that they can perform specific functions within a cell and they can be
transferred to other cells when required to alleviate bottlenecks. Furthermore,
this department is responsible for manufacturing schedules, finished goods
warehousing, customs management, shipping and billing.

o PRODUCTION 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, repairs and the
quality assurance and regulatory compliance process. Quality assurance
represents a key element in our manufacturing operations. We meticulously verify
our instruments to ensure that they meet stringent industry requirements and
provide our customers with detailed product test sheets. Our quality assurance
program has been certified ISO 9001 since 1994.

o SUPPLY-CHAIN MANAGEMENT. This department is responsible for
parts procurement, raw materials, forecasting and special projects. Our products
consist of optical, electronic and mechanical parts. Approximately one-third of
our parts are manufactured to our specifications. Some parts are obtained from
single-source suppliers. We manage risks associated with single-source
suppliers, as well as parts that are subject to industry shortages or long
delivery lead times, through a strategic forecasting process that involves
procuring excess inventory where appropriate.

COMPETITION

The fiber-optic test, measurement and monitoring industry is highly
competitive and subject to rapid change as a result of technological
developments and other factors. 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 level of technological innovation;

o product lead times;

o breadth of product offering;

o ease of use;

o customer service and technical support;

o strength of sales and distribution relationships; and

o price.

Generally, our competitors fall into two categories. The first category
consists of global electronic test and measurement manufacturers, who complement
their broad range of products

with fiber-optic test, measurement and monitoring equipment. These companies
include Agilent Technologies, Inc., Acterna Corporation (resulting from the
merger of Telecommunications Technique Corporation and Wavetek Wandel &
Golterman), Anritsu Corporation, Ando Corporation, Tektronix, Inc., GN Nettest
and Newport Corporation. The second category refers to niche companies in the
fiber-optic test, measurement and monitoring industry. These companies typically
have limited product lines and are often geographically limited in their
customer base. Such companies include Santec Corporation, Fotec, Inc., ILX
Lightwave Corporation and Kingfisher International PTY Ltd. We also face
competition from JDS Uniphase Corp., an optical component and value-added
optical module vendor that designs and markets its own line of test and
measurement instruments.

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, or the FCC, the Food and Drug Administration, or the
FDA and the Occupational Safety and Health Administration, or OSHA. Under the
FCC's regulations, our products must comply with, among other things, rules
concerning unintentional radio frequency emissions that interfere with protected
radio communications systems. 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
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 electromagnetic radiation. Similarly, our products
must comply with OSHA's design safety standards for systems that utilize
electricity. These rules are intended to reduce the risk of accidental human
electrocution.

Similar regulations apply in other countries. For example, our products
are subject to the safety standards of Industry Canada and the Canadian
Standards Association with respect to electricity utilization and radio
frequency emissions. Other countries in the world require equipment marking in
accordance with the standards of the European Community, often referred to as CE
marking, testing to ensure compliance with International Electrotechnical
Commission standards and other international product approval. Other significant
types of regulations not described in this Annual Report also may apply,
depending upon the relevant product and country.

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.

We currently hold four U.S.-issued, two Canadian-issued and three
foreign-issued patents and we have seven U.S. and nine Canadian 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 July 17, 2011 to October 9, 2016. In addition, Burleigh has five U.S., one
Canadian and one Japanese issued patents and has five U.S. patent applications
pending. These issued and pending patents cover various aspects of Burleigh's
products and processes. The expiration of Burleigh's issued patents range from
2008 to 2016.

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

o the optical time domain reflectometer with internal reference
reflector for which a patent was granted in the United States and is pending in
Canada. This invention permits the control of the optical time domain
reflectometer detector gain and the determination of the loss of the initial
optical connector and is used in most of our optical time domain
reflectometer-based products;

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-920 and FTB-3920 products; and

o an adapter for interconnecting optical fiber connectors for
which patents are pending in Canada and the United States. This invention
permits a wide variety of connectors to be joined to our test and measurement
instruments.

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.

LEGAL PROCEEDINGS

GAP Optique has recently instituted legal proceedings with the
Juridiction des Prud'hommes in Geneva, Switzerland against an ex-employee for
breach of a confidentiality obligation as stipulated in his employment contract.
GAP is claiming monetary damages only since Swiss law does not allow injunctive
relief in this case.

Mr. Patrick Stamp was hired by EXFO's subsidiary, GAP Optique on May
1st 1998. Mr. Stamp's employment contract contained a confidentiality clause
which prohibits disclosure or use of any confidential information he may obtain
during the course of his work. The contract

provides that this obligation continues for a period of one year following
termination of the employment agreement.

Mr. Stamp left GAP Optique in February 2000 to create a start-up
company called LUCIOL Instruments, S.A ("LUCIOL") with the help of two former
employees of the University of Geneva. LUCIOL presently manufactures and sells
fiber optic test instruments, of which two (a chromatic dispersion analyzer and
a photon-counting OTDR) were developed jointly by GAP Optique and the University
of Geneva. Mr. Stamp participated in the development of these instruments during
employment with GAP Optique and the University. Therefore, it is the contention
of GAP Optique that Mr. Stamp is now using illegally, through LUCIOL, the
proprietary and confidential information he obtained during his employment in
order to market the particular test instruments.

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.

C. ORGANIZATIONAL STRUCTURE

As of December 20, 2000, 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]
[ORGANIZATION CHART]

EXFO Electro-Optical
Engineering Inc.
(Canada)

85% 100% 100% 100%

GEXFO
GAP Optique S.A. Distribution Nortech Fibronic Inc. Burleigh Instruments,
(Switzerland) Internationale Inc. (Canada) Inc.
(Quebec) (New York)

100% 100% 100% 100% 100%

EXFO Europe EXFO America Inc. Nortech Fibronic U.S.A. Burleigh Instruments Burleigh Instruments
S.A.R.L. (France) (Delaware) Inc. (U.K.) Ltd. GmbH
(Texas) (United Kingdom) (Germany)

D. PROPERTY, PLANT AND EQUIPMENT

Our main offices and facilities are located near Quebec City, Canada.
We occupy four buildings, totaling approximately 193,868 square feet. These
buildings house our executive and administrative offices, research and
development facilities and production facilities. In addition, we maintain sales
offices in Brazil, China, France, Germany, Great Britain, Japan and Singapore
and the United States.

We plan on investing $20 million to triple our manufacturing capacity.
We will increase our manufacturing operations at the plant in the building
acquired in June, 2000 and move our research and development, administration and
marketing departments to a new 150,000 square foot building in the fall of 2001.
Thus making a third building available for manufacturing activities. We have
already spent $1 million on the project and plan on spending a total of $20
million. The project will be financed through our short-term investments.

The following table sets forth information with respect to the main
facilities that we occupy.

LOCATION USE OF SPACE SQUARE FOOTAGE TYPE OF INTEREST
-------- ------------ -------------- ----------------

436 Nolin Street Manufacturing 44,164 Leased
Vanier (Quebec)

400 Godin Avenue Research and Development, 112,000 Owned
Vanier (Quebec) Manufacturing and Administrative(1)

465 Godin Avenue Executive and Administrative 24,000 Leased
Vanier (Quebec)

500 St-Jean-Baptiste Street Administrative and Manufacturing 13,694 Leased
Quebec (Quebec)

-------------------------
(1) 55,000 square feet are leased to a third-party until December 31, 2000.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis 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 U.S.
dollars and have been prepared in accordance with accounting principles
generally accepted in Canada, or Canadian GAAP. To the extent applicable to our
consolidated financial statements included elsewhere in this annual report,
these principles conform in all material respects with accounting principles
generally accepted in the United States, or U.S. GAAP, except as described in
note 20 of our consolidated financial statements.

CORPORATE HIGHLIGHTS

EXFO Acquires Burleigh Instruments: Subsequent to the year-end, EXFO acquired
Burleigh Instruments, Inc. for $235 million in EXFO stock and $40 million in
cash. Burleigh, a privately held company in Fishers, upstate New York, is a
leading supplier of DWDM wavelength measurement instruments and precision
positioning equipment.

EXFO Expands into Quebec Metro High-Tech Park: Subsequent to the year-end, EXFO
announced an agreement that provides it with an option to purchase 4.2 million
square feet of land in the Quebec Metro High-Tech Park. A facility will be built
to house administrative services, research and development, marketing and some
manufacturing. The first phase of construction, which will include a 150,000
square-foot building, is expected to be completed in the fall of 2001.

EXFO Reports Record Revenues and Operating Results for Fiscal 2000: EXFO
announced that it had increased its revenues by 70% to $71.6 million for the
fiscal year ended August 31, 2000 from $42.2 million in 1999. Net income
increased 71% to $9.9 million, or $0.25 per share, for fiscal 2000 from $5.8
million, or $0.14 per share, for 1999.

EXFO Increases Manufacturing Capacity: EXFO unveiled plans in June 2000 to
increase its manufacturing capacity with the purchase of a 112,000 square-foot
building, of which the company was already renting 25,000 square feet. An
additional 25,000 square feet were made available in October 2000, including
one-third for manufacturing, and the remaining 62,000 square feet will become
available by April 2001. EXFO currently dedicates 55,000 square feet to
manufacturing.

EXFO Completes Successful Initial Public Offering: EXFO announced in June 2000
that it had closed its offering of 8,050,000 subordinate voting shares at
US$26.00 per share in the United States and at C$38.55 per share in Canada.
Total proceeds to EXFO, including the over-allotment option exercised by the
underwriters, were approximately $209 million.

EXFO Introduces More Than a Dozen Products at OFC: EXFO introduced more than a
dozen new products in March 2000 at the Optical Fiber Conference in Baltimore,
Maryland. Key product launches included optical spectrum analyzer test modules
for field and manufacturing testing, widely tunable laser sources for DWDM
testing, automated test systems for DWDM optical components and value-added
optical modules, a single-slot optical time domain

reflectometer platform and related test modules, as well as high-power and
low-polarization sensitivity power meters.

EXFO Acquires Nortech Fibronic Inc.: EXFO announced in February 2000 that it had
purchased Nortech Fibronic Inc. for $2.8 million to complement its Portable and
Monitoring product line. The acquisition enabled EXFO to add more than 60
employees to its personnel.

INDUSTRY OVERVIEW

OPTICAL NETWORKING MARKET

The past decade has witnessed an explosive growth in the volume of data
traffic largely due to the soaring popularity of the Internet and related
bandwidth-intensive applications. According to the Angus Reid Group, a leading
polling firm, the number of Internet users around the world is expected to
increase from 300 million in 2000 to 1 billion by 2005. Ryan, Hankin & Kent, a
leading telecom market research firm, forecasts that Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month at the end of
1999, to more than 15 million terabytes per month in 2003, representing a
compound annual growth rate of 156%.

The dramatic increase in Internet users and traffic has created a
tremendous need for high-bandwidth communications networks. To meet this
increasing demand for bandwidth, many communications service providers are
designing and installing new networks based on optical fiber, deploying
additional fiber within their existing networks or using advances in optical
technology such as Dense Wavelength Division Multiplexing, or DWDM. DWDM
involves combining beams of light of slightly different wavelengths through a
single fiber, with each wavelength carrying its own stream of information. This
technique requires separate laser sources for each signal or channel and more
complex equipment to control and amplify the signal in the network. Some DWDM
systems can carry as many as 160 separate channels per optical fiber. DWDM has
wide market acceptance because it incorporates technologies that greatly reduce
the cost of optical transmission over long distances and because it provides
network flexibility in local and metropolitan areas. According to Ryan, Hankin &
Kent, the global optical transport market is expected to increase from $47
billion in 2000 to $64 billion in 2001, a 36% increase year over year.

OPTICAL TEST, MEASUREMENT AND MONITORING EQUIPMENT MARKET

Conventional test, measurement and monitoring instruments used by
telecommunications carriers and manufacturers of communications equipment were
designed for electrical transmission systems and are unsuitable for optical
networking. Unlike traditional electrical transmission systems, which transmit
electrical signals along copper wires, fiber-optic transmission systems use
pulses of light along glass or plastic fiber, often referred to as optical
fiber. When light travels along optical fiber and through the optical components
and systems that link optical fibers together, it is subject to unwanted effects
such as reflection, attenuation, noise and various types of dispersion, all of
which degrade signal quality and reduce transmission performance. Fiber-optic
test, measurement and monitoring equipment is critical for measuring these
effects and helping communications carriers and manufacturers of optical
components, value-added optical modules and optical networking systems ensure
network performance and

reliability. The main uses for fiber-optic test, measurement and monitoring
equipment include research and development, manufacturing, network installation
and maintenance as well as network monitoring.

CORPORATE OVERVIEW

EXFO was incorporated on September 18, 1985. Our original products were
focused primarily on the needs of installers and operators of fiber-optic
networks. In 1996, we supplemented our product line with an extensive line of
Industrial and Scientific products that are dedicated to the manufacturing and
research and development markets in the fiber-optic industry. Our Industrial and
Scientific products tend to be more complex and higher priced than our
field-testing products. In 1999, we entered the market for remote fiber test
systems. Remote fiber test systems allow carriers to deploy test equipment
throughout their networks in order to monitor the status of their fiber-optic
networks.

We sell our products to customers through our direct sales force and
indirectly through distribution channels. We deliver products to a large number
of customers. No customer accounted for more than 5.8% of total sales in fiscal
2000; in fiscal 1999, this figure was 6.8%.

Cost of sales include raw materials, salaries and related expenses for
direct and indirect manufacturing personnel and manufacturing overhead.

Gross research and development expenses consist primarily of salaries
and related expenses for engineers and other technical personnel and fees paid
to third-party consultants. We are entitled to research and development tax
credits granted by the Canadian federal government and the government of the
province of Quebec. See note 2. We are also entitled to government grants
resulting from agreements entered into with the government of the province of
Quebec. See note 15. Research and development tax credits and certain government
grants are recorded as a reduction of gross research and development expenses.
Selling and administrative expenses consist primarily of salaries and related
expenses for personnel, sales commissions, travel expenses, marketing programs,
professional services, management information systems, human resources and other
corporate expenses. We intend to expand our sales organization by opening
additional international sales offices and service centers. We expect that in
support of our continued growth, the expansion of our sales efforts and our
operations as a public company, selling and administrative expenses will
continue to increase with sales for the foreseeable future.

Effective September 1, 1999, we adopted the U.S. dollar as the
reporting currency for our consolidated financial statements. The financial
statements for all periods prior to fiscal 2000 are presented in U.S. dollars in
accordance with a translation of convenience method under Canadian GAAP, using
the representative exchange rate as at August 31, 1999 of $1.00 = C$1.4958. The
following historical results are not necessarily indicative of the results to be
expected for any future period.

RESULTS OF OPERATIONS
$ %
YEARS ENDED AUGUST 31, 1998 1999 2000 1998 1999 2000

Sales............................ $31,605 $42,166 $71,639 100.0% 100.0% 100.0%
Cost of Sales.................... 11,345 14,998 24,712 35.9 35.6 34.5
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Gross margin..................... 20,260 27,168 46,927 64.1 64.4 65.5
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------
Operating expenses...............
Selling and administrative..... 9,898 13,279 24,304 31.3 31.5 33.9
Net research and development... 3,014 4,315 6,402 9.5 10.2 8.9
Amortization of capital and other 657 898 1,498 2.1 2.1 2.1
assets
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Earnings from operations......... 6,691 8,676 14,723 21.2 20.6 20.6
Interest income, net............. (40) (136) (1,480) (0.1) (0.3) (2.1)
Foreign exchange loss (gain)..... (126) 506 684 (0.4) 1.2 1.0
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Earnings before income taxes and
amortization of goodwill......... 6,857 8,306 15,519 21.7 19.7 21.7

Income taxes..................... 2,356 2,492 5,298 7.5 5.9 7.4
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Earnings before amortization of
goodwill......................... 4,501 5,814 10,221 14.2 13.8 14.3
Amortization of goodwill......... --- --- 297 --- --- 0.4
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Net earnings for the year........ $4,501 $5,814 $9,924 14.2% 13.8% 13.9%
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

Research and development data:
Gross research and development. $4,406 $6,390 $9,374 13.9% 15.2% 13.1%
Net research and development... $3,014 $4,315 $6,402 9.5% 10.2% 8.9%
-------------------------------------- ------------ ------------ -------------- ------------ ----------- -----------

The above table sets forth certain consolidated statements of earnings
data in thousands of U.S. dollars and as a percentage of sales for the years
indicated.

SALES

Sales totaled $71.6 million, $42.2 million and $31.6 million for fiscal
2000, 1999 and 1998, respectively. Sales increased 69.9% from fiscal 1999 to
fiscal 2000 and 33.4% from fiscal 1998 to fiscal 1999 mainly due to a higher
demand for our Industrial and Scientific products as well as a general sales
increase in our other products. Accepted orders increased 102.3% from $42.9
million for fiscal 1999 to $86.7 million for fiscal 2000.

North American sales accounted for 61.6%, 56.3% and 50.6% of total
sales for fiscal 2000, 1999 and 1998, respectively. International sales
represented 38.4%, 43.7% and 49.4% of total sales for fiscal 2000, 1999 and
1998, respectively. The steady growth in North American sales during the past
three years reflects a higher demand for our test, measurement and monitoring
products in this region.

GROSS MARGIN

Gross margin amounted to 65.5% of sales for fiscal 2000, 64.4% for 1999
and 64.1% for 1998. The improvement in the gross margin from fiscal 1999 to 2000
is mainly due to the increase in the amount of government grants earned in
fiscal 2000. However, the level of grants that will be received in future years
may fluctuate based on the number of employees hired and changes in government
legislation. The slight increase in gross margin from fiscal 1998 to 1999 can be
attributed to increased economies of scale in our production process and
increased sales of higher margin products.

Although competitive pricing pressures continue, EXFO has been able to
mitigate such pricing pressures through increased sales of higher margin
products and cost-reduction manufacturing programs. Gross margin can be
negatively affected by increases in component costs, shifts in product mix and
increases in product offerings by other suppliers in the test, measurement and
monitoring market.

SELLING AND ADMINISTRATIVE

Selling and administrative expenses totaled $24.3 million, $13.3
million and $9.9 million for fiscal 2000, 1999 and 1998, respectively. As a
percentage of sales, selling and administrative expenses amounted to 33.9%,
31.5% and 31.3% in fiscal 2000, 1999 and 1998, respectively. The $11.0 million
increase in selling and administrative expenses from fiscal 1999 to 2000
reflects increased personnel expenses for sales and marketing staff, increased
expenses related to customer support, increased sales commissions related to
higher sales, increased promotional and product marketing expenses as well as
the expenses related to operating a public company. The $3.4 million increase
from fiscal 1998 to 1999 reflects the hiring of additional sales personnel,
marketing and administrative personnel, the opening of offices in Asia and
commissions on higher sales volume.

RESEARCH AND DEVELOPMENT

Gross research and development expenses totaled $9.4 million, $6.4
million and $4.4 million for fiscal 2000, 1999 and 1998, respectively. As a
percentage of sales, gross R&D expenses were 13.1%, 15.2% and 13.9% in fiscal
2000, 1999 and 1998, respectively. Gross R&D expenses increased $3.0 million
from fiscal 1999 to 2000 and $2.0 million from fiscal 1998 to 1999. These
increases are due to the hiring of additional R&D personnel in order to develop
new products and enhance current ones. During fiscal 2000, we added 45 employees
in our R&D Department, which reflects our continued focus on R&D activities.

Tax credits and grants from federal and provincial governments for our
R&D activities amounted to $3.0 million, $2.1 million and $1.4 million in fiscal
2000, 1999 and 1998, respectively. This increase in tax credits and grants is
directly related to the hiring of additional research and development personnel.
As a result, net R&D expenses increased 48.4% from fiscal 1999 to 2000 and 43.2%
from fiscal 1998 to 1999. Our net R&D expenses represented 8.9%, 10.2% and 9.5%
of sales in fiscal 2000, 1999 and 1998, respectively.

INTEREST INCOME

Interest income amounted to $1.5 million, $0.1 million and nil for
fiscal 2000, 1999 and 1998, respectively. The increase in fiscal 2000 primarily
results from the interest income derived from investment of the remaining net
proceeds of the Initial Public Offering on June 29, 2000. This income is offset
by interest expenses associated with borrowings under our line of credit.

INCOME TAXES

Our effective income tax rates were 34.1%, 30.0% and 34.4% for fiscal
2000, 1999 and 1998, respectively. The lower effective tax rate in 1999 compared
to 2000 and 1998 was the result of non-deductible expenses and other items that
have reduced overall income tax expenses.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our Initial Public Offering, we had financed operations and
met our capital expenditure requirements mainly through cash flows from our
operations, research and development tax credits and government grants. Cash
flows used for operating activities for fiscal 2000 were $4.0 million compared
to cash flows provided by operating activities in 1999 and 1998 of $3.7 million
and $3.2 million, respectively. Cash flows used for operating activities during
fiscal 2000 were mainly due to the significant increase in accounts receivable,
which is related to a higher volume of sales and inventories that are required
to ensure minimal manufacturing and delivery lead times. As at August 31, 2000,
we had cash and cash equivalents of $729,000, short-term investments of $162.7
million and working capital of $194.2 million.

Cash flows used for investing activities were $169.0 million, $1.2
million and $2.0 million for fiscal 2000, 1999 and 1998, respectively. Cash
flows during fiscal 1999 and 1998 were mainly used for capital expenditures and
short-term investments. The cash flows used during fiscal 2000 mainly resulted
from the investment of the remaining net proceeds from the Initial Public
Offering in June 2000, the acquisition of Nortech Fibronic Inc. in February 2000
and the purchase of a building located in Vanier, Quebec in June 2000.

For the year ended August 31, 2000, cash flows provided by financing
activities amounted to $172.8 million compared to cash flows used in the amount
of $3.3 million and $0.3 million for the years ended August 31 of 1999 and 1998,
respectively. Financing from the Initial Public Offering was the main source of
cash flows provided for fiscal 2000. Proceeds of the Initial Public Offering
were used to pay the share issue expenses of $16.7 million, to pay dividends of
$17.6 million and to repay our debts. For fiscal 1999 and 1998, cash flows used
for financing activities were mainly due to dividends paid as well as repayments
of bank advances and long-term debts. We do not foresee payments of additional
dividends during the next three fiscal years.

We have available credit facilities that provide for advances of up to
C$10.0 million (US$6,793,000) under lines of credit and C$3.0 million
(US$2,038,000) as an operating loan. These facilities, which are renewable
annually, bear interest at prime rate. Accounts receivable, inventories and all
tangible and intangible assets have been pledged as security against these
facilities. As at August 31, 2000, C$15,000 has been drawn against the
facilities. The interest

rate of credit facilities drawn in Canadian dollars is the Canadian prime rate
(7.5% as at August 31, 2000) and the credit facilities drawn in United States
dollars is the U.S. prime rate (10.0% as at August 31, 2000).

We believe that our existing cash balances and short-term investments,
together with cash flows from operations and available lines of credit, will be
sufficient to meet our liquidity and capital spending requirements through the
end of fiscal 2001. However, possible investments in or acquisitions of
complementary businesses, products or technologies may require additional
financing prior to such time. There can be no assurance that additional debt or
equity financing will be available when required or, if available, can be
secured on terms satisfactory to us.

An amount of $40 million was used in December 2000 in order to complete
the acquisition of Burleigh. This amount was paid by funds becoming available
from the expiry of short-term investments.

NEW ACCOUNTING STANDARDS

In 1999, the Canadian Institute of Chartered Accountants issued section
3461, "Employee future benefits," which is effective for the fiscal year
beginning on or after January 1, 2000. Adopting this standard will not have a
significant impact on our earnings or shareholders' equity. For new U.S.
accounting standards, see note 20.

RISKS AND UNCERTAINTIES

CURRENCY RISKS

We are exposed to currency risks as a result of our export of products
manufactured in Canada, substantially all of which are denominated in U.S.
dollars. Our exposure to foreign exchange rate fluctuations is partially hedged
by operating expenses of our U.S. and European subsidiaries and the portion of
our raw materials purchased in U.S. dollars. In addition, we frequently enter
into forward exchange contracts to sell U.S. dollars at fixed forward rates in
exchange for Canadian dollars. We enter into such contracts to manage the risk
of exchange rate fluctuations between the Canadian and U.S. dollars on cash
flows related to anticipated future revenue streams and firmly committed future
sales transactions denominated in U.S. dollars. In the last quarter of fiscal
2000, we entered into forward exchange contracts to buy U.S. dollars at the
maturity dates of certain short-term investments denominated in Canadian
currency.

The following table summarizes the forward exchange contracts in effect
as at August 31, 2000, classified by expected transaction dates, none of which
exceed two years. The table below presents the notional amounts of such
contracts (in thousands of dollars) along with the weighted average contractual
forward rates under such contracts. The notional amounts of such contracts are
used to calculate the contractual payments to be exchanged under these
contracts.

The fair value of the contracts to sell U.S. dollars as at August 31,
2000, based on the prevailing exchange rate at that date of $1.00 = C$1.4722,
amounted to C$9.7 million compared to a contractual value of C$9.8 million,
resulting in a deferred unrealized loss of C$65,790 (approximately US$45,000).

YEARS ENDING AUGUST 31, 2001 2002
----------------------- ---- ----

FORWARD EXCHANGE CONTRACTS TO SELL U.S. DOLLARS
IN EXCHANGE FOR CANADIAN DOLLARS
Contractual amounts $ 5,400 $ 1,200
Weighted average contractual exchange rates 1.4871 1.4602

FORWARD EXCHANGE CONTRACTS TO BUY U.S. DOLLARS
IN EXCHANGE FOR CANADIAN DOLLARS
Contractual amount $40,500 --
Weighted average contractual exchange rates 1.4777 --

The fair value of the contracts to buy U.S. dollars as at August 31,
2000 amounted to US$27,431,000 compared to a contractual value of US$27,407,000,
resulting in an unrealized loss of US$24,000.

OPERATIONAL RISKS

Gross margin has varied in the past and may continue to vary
significantly in the future depending on the mix of products sold, our capacity
to introduce new products with higher margins, our ability to achieve economies
of scale in our production process, the impact of large orders with reduced
margins, fluctuations in raw material costs, increases in personnel costs and
level of government grants earned. In addition, we plan to significantly
increase our operating expenses to expand our manufacturing, sales and
marketing, customer support, administration and research and development
activities.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. We have identified these statements by
the use of words such as "may," "will," "expect," "anticipate," "intend,"
"plan," "estimate," "believe," "continue" or other similar expressions. These
forward-looking statements reflect our current expectations and assumptions as
to future events that may not prove to be accurate. Our actual results are
subject to a number of risks and uncertainties and could differ materially from
those discussed in these statements. Factors that could contribute to these
differences include, but are not limited to, our ability to adapt to current and
future changes in technology; our ability to introduce new and enhanced products
on a timely basis; our ability to overcome significant and increasing
competition in our industry; the impact of depending on a single supplier or a
limited number of suppliers for key components and materials in our products;
our ability to attract and retain sufficient numbers of highly skilled
technical, sales and marketing and other personnel; and our ability to sustain
research and development activities. In addition, such forward-looking
statements could be affected by general industry and market conditions as well
as growth rates, general international economic conditions including exchange
rate fluctuations, and other future factors. In light of the many risks and
uncertainties surrounding our business and operations, you should keep in mind
that we cannot guarantee that the forward-looking statements described in this
annual report will

transpire. We undertake no obligation and do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable law.

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 October 1, 2000.

NAME AND MUNICIPALITY OF RESIDENCE AGE POSITIONS WITH EXFO
--------------------------------------------- ------------- -----------------------------------------------

GERMAIN LAMONDE 41 Chairman of the Board, President and Chief
Cap-Rouge, Quebec Executive Officer
PIERRE PLAMONDON 42 Vice-President, Finance and Chief Financial
Quebec City, Quebec Officer
BRUCE BONINI 43 Vice-President, North American Sales
Fairview, Texas
JUAN-FELIPE GONZALEZ 41 Vice-President, International Sales
Quebec City, Quebec
JEAN-FRANCOIS BOULET 44 Vice-President, Human Resources
Montmagny, Quebec
MARIO LAROSE 46 Vice-President, Marketing
Laval, Quebec
STEPHEN BULL 41 Vice-President, Research and Development
Lac-Beauport, Quebec
ROXANE VEZINA 36 Information Technology and Supply-Chain
Quebec City, Quebec Management Director
LUC GAGNON 41 Manufacturing Director
Saint-Augustin-de-Desmaures, Quebec
GREGORY SCHINN 42 Chief Technology Officer
Quebec City, Quebec
KIMBERLEY ANN OKELL 40 Secretary and Legal Counsel
Quebec City, Quebec
PIERRE MARCOUILLER 44 Director
Magog, Quebec
DAVID A. THOMPSON 50 Director
Horseheads, New York
ANDRE TREMBLAY 46 Director
Outremont, Quebec
MICHAEL UNGER 60 Director
Woodbridge, Ontario

The address of each of our executive officers, senior managers and
directors is c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue,
Vanier, Quebec, Canada. The following is a brief biography of each of our
executive officers, senior managers and directors.

GERMAIN LAMONDE is one of our founders. Germain Lamonde has been our
Chairman of the Board, President and Chief Executive Officer since our inception
in 1985. Mr. Lamonde holds a bachelor's degree in Physics Engineering from Ecole
Polytechnique, University of Montreal in Canada and a master's degree in Optics
from Laval University in Canada. Mr. Lamonde is a member of the board of
directors of Laval University's Research Center for Excellence in Photonics.

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, now PricewaterhouseCoopers

LLP, 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 Canada. Mr. Plamondon has been a
member of the Canadian Institute of Chartered Accountants since 1983.

BRUCE BONINI has been our Vice-President, North American Sales since
December 1998. Prior to joining us, Mr. Bonini held the position of
Vice-President Sales-Eastern Region for Wandel & Golterman, now Wavetek Wandel &
Golterman, a company specializing in communications test solutions, from
September 1997 to December 1998. Mr. Bonini was successively Sales Director and
Vice-President of Sales for Digital Lightwave Inc., a synchronous optical
network test equipment manufacturer, from August 1996 to January 1997. From
August 1987 to August 1996, Mr. Bonini held different sales and senior
management positions for Laser Precision Corporation, an optical test equipment
manufacturer. Following the acquisition of Laser Precision by GN Nettest, Mr.
Bonini was named Global Vice-President of Sales for GN Nettest/Fiber-Optics
Division. Mr. Bonini holds a bachelor's degree in Business Administration
(industrial marketing) from Western Michigan University in the United States.

JUAN-FELIPE GONZALEZ has 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.

JEAN-FRANCOIS BOULET joined us in March 2000 as Vice-President, Human
Resources. Mr. Boulet was formerly employed by Societe de portefeuille du Groupe
Desjardins -- Assurances Generales since 1996 where he had been successively
Senior Vice-President, Human Resources and Senior Vice-President, Human
Resources and Corporate Communications. From 1992 to 1996, Mr. Boulet held
different senior management positions related to human resources and
organizational development for Inglis Limited, a leading manufacturer of home
appliances. Mr. Boulet holds a bachelor's degree in Industrial Relations from
Laval University in Canada.

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 Canada.

MARIO LAROSE was appointed Vice-President, Marketing on June 7, 2000.
Prior to joining us, Mr. Larose was Interim General Manager with C-MAC
Corporation, a manufacturer of microelectronic products, from September 1999 to
January 2000. Prior to the acquisition by C-MAC of L.G. Technologies Ltee, Mr.
Larose held the position of Vice-President, Marketing and Sales with L.G.
Technologies Ltee, a sub-contract electronic manufacturer from January 1998 to
September 1999. Prior to that, Mr. Larose was Vice-President, Engineering with

Unican Security Systems Limited, a public security systems manufacturer, from
August 1995 to December 1997. Prior to joining Unican, Mr. Larose held various
positions with Northern Telecom, now Nortel Networks Limited, a provider of
telephony, data, wireless and wire-line solutions for the Internet. Mr. Larose
is President and a shareholder of LAMA2 inc., a private management consulting
company. Mr. Larose holds a bachelor's degree in Applied Sciences, Engineering
Physics from Ecole Polytechnique, University of Montreal in Canada and a
master's in Business Administration from Universite du Quebec a Montreal in
Canada.

ROXANE VEZINA joined us in January 2000 as Information Technology and
Supply-Chain Management Director. From October 1995 to December 1999, Ms. Vezina
served as Vice-President, Information Systems and Strategic Planning for Venmar
Ventilation and Broan-NuTone Canada, manufacturers of home comfort and indoor
air quality products. From August 1991, when she joined Venmar, to October 1995,
Ms. Vezina acted as the Quality Improvement and Special Projects Manager. Ms.
Vezina holds a bachelor's degree in Industrial Engineering from Ecole
Polytechnique, University of Montreal in Canada.

LUC GAGNON joined us in March 2000 as Manufacturing Director. Prior to
joining us, Mr. Gagnon served as Operations Manager for Mendes Inc., a company
specializing in amusement equipment, from March 1999 to March 2000. From
December 1997 to February 1999, Mr. Gagnon was Plant Manager for C-MAC
Corporation, Micro-Circuits Division. Prior to that, Mr. Gagnon served as
Operations Manager for Steris Corporation, a manufacturer of specialized
cleaning equipment, from March 1993 to December 1997. Previously, Mr. Gagnon
held various engineering positions with Unitel Inc., a telecommunications
carrier. Mr. Gagnon holds a bachelor's degree in Electrical Engineering and a
master's degree in Engineering from Sherbrooke University in Canada.

GREGORY SCHINN was appointed our Chief Technology Officer in November
1999, after simultaneously holding the positions of Scientific Director and Head
of the Research Group since joining us in April 1996. Prior to joining us, Dr.
Schinn led the research and development team responsible for optical amplifier
and fiber laser development at MPB Technologies, Inc., a diversified technology
company, in Montreal from 1990 to 1996. Dr. Schinn holds a bachelor's degree in
Engineering Science and a master's degree in Aerospace Engineering from the
University of Toronto. He also holds a Ph.D. in Physics from the University of
Colorado at Boulder and has spent two years as a post-doctoral research
associate at the University of Virginia. Dr. Schinn has been published in
numerous scientific journals and he has served on the technical organizing
committees of several international scientific conferences. He is currently the
Director of the Division of Applied Physics of the Canadian Association of
Physicists.

KIMBERLEY ANN OKELL has been our in-house legal counsel since February
2000 and our Secretary since May 2000. Prior to joining us, Ms. Okell was
Vice-President Legal Affairs and Secretary with Groupe Equiconcept Inc. from
October 1999 to February 2000 and Director of Legal Services and Secretary with
Informission Group Inc., now nurun Inc., an information technology company, from
December 1997 to October 1999. Prior to that, Ms. Okell was an associate with
the law firm McCarthy Tetrault from August 1994 to December 1997. Ms. Okell has
been a member of the Quebec Bar since September 1993. Ms. Okell holds a
bachelor's degree in Civil Law from Laval University in Canada, a bachelor's
degree in Common Law from

The University of Western Ontario in Canada and an Honors bachelor of Arts
degree from York University in Canada.

PIERRE MARCOUILLER has served as our director since May 2000. Mr.
Marcouiller is Chairman of the Board of Camoplast Inc., a supplier of components
to the recreational and motorized vehicle and automotive parts markets. He is
the founder and has been sole shareholder of Nexcap Inc., an investment company
in the manufacturing sector, since December 1996. Mr. Marcouiller worked with
Venmar Ventilation Inc., a private ventilation equipment manufacturer, from
January 1983 to December 1996. Mr. Marcouiller was the controlling shareholder
of Venmar from 1991 to 1996 and held the position of President and General
Manager of Venmar from December 1986 to December 1996. Mr. Marcouiller is also a
director of Heroux Inc., a publicly traded company that manufactures aerospace
and industrial turbines, and holds directorships in other privately companies.
Mr. Marcouiller holds a bachelor's degree in Business Administration from
Universite du Quebec a Trois-Rivieres in Canada and a Master in Business
Administration from Sherbrooke University in Canada.

DAVID A. THOMPSON has served as our director since June 2000. He has
held various positions with Corning Inc., a manufacturer of optical fiber and
other products for the telecommunications, television and other
communications-related industries, since 1976. Mr. Thompson was the Director --
Technology and Strategy of Corning's Components Business-Photonic Technologies
since March 1995 and was recently named Director, Operations and Project
Management for the Optical Physics Technology Directorate. Mr. Thompson holds a
bachelor's degree in Chemistry from the Ohio State University, in the United
States, and a doctorate in Inorganic chemistry from the University of Michigan,
in the United States.

ANDRE TREMBLAY has served as our director since May 2000. He has been
President and Chief Executive Officer of Microcell Telecommunications Inc., a
wireless telecommunications provider, since May 1995. Mr. Tremblay has been a
member of the board of directors of Microcell since November 1995. Mr. Tremblay
is also a member of the executive committee and a member of the board of
directors of Telesystem Ltd. and, since 1992, Executive Vice-President of
Telesystem Ltd. Prior to joining Telesystem Ltd., a privately-held holding
company, Mr. Tremblay was a tax partner and member of the management committee
of Raymond, Chabot, Martin, Pare, a Canadian accounting firm. Mr. Tremblay holds
a bachelor's degree in Business Administration and a license in Accounting from
Laval University in Canada, as well as a master's degree in taxation from
Sherbrooke University in Canada. He also completed the Advanced Management
Program offered by the Harvard Business School in the United States.

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 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

Our directors who are not officers or employees will receive annual
compensation of C$6,000 comprised of cash, the equivalent value of our
subordinate voting shares under our directors' compensation plan or options to
purchase some of our subordinate voting shares under our stock option plan.
Directors who are also committee members will receive additional annual
compensation of C$3,000 per committee and committee chairpersons will receive
C$5,000 annually comprised of cash, the equivalent value of our subordinate
voting shares under our directors' compensation plan or options to purchase some
of our subordinate voting shares under our stock option plan. This compensation
for chairing or participating on a committee is also payable by way of stock
options. All directors will be reimbursed for travelling and other expenses
incurred in connection with attendance at meetings.

In the financial year ended August 31, 2000, 8,000 options were granted
to directors who were not employees under our Stock Option Plan.

EXECUTIVE COMPENSATION

The table below shows certain compensation information for Mr. Germain
Lamonde, the President and Chief Executive Officer of the Corporation, and the
four other most highly compensated executive officers of the Corporation and its
subsidiaries during the financial year ended August 31, 2000 (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 granted, and certain other compensation, if any, whether paid or
deferred.

SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL SECURITIES ALL OTHER
FINANCIAL SALARY BONUS(1) COMPENSATION UNDER COMPENSATIONS
NAME AND PRINCIPAL POSITION YEAR (US$) (US$) (US$) OPTIONS(2)(#) (US$)
--------------------------- ---- ----- ----- ----- ------------- -----

Germain Lamonde 2000 134,932 63,566 -- 25,402 --
President and Chief Executive
Officer
Bruce Bonini 2000 309,801 20,000 -- 3,900 --
Vice-President, North American
Sales
Juan-Felipe Gonzalez 2000 153,502 15,879 -- 6,900 --
Vice-President, International Sales
Mario Larose(3) 2000 25,880 -- -- 20,000 --
Vice-President, Marketing
Jean-Francois Boulet(3), 2000 38,814 12,658 -- -- --
Vice-President, Human Resources
-------------------------

(1) 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.

(2) Indicates the number of Subordinate Voting Shares underlying the
options granted under the Stock Option Plan during the 2000 financial
year.

(3) Mr. Boulet and Mr. Larose commenced employment with the Corporation in
March and June 2000 respectively.

The following table indicates additional information on the options
granted to our Named Executive Officers during the 2000 fiscal year.

PERCENTAGE OF
NET
TOTAL OF MARKET VALUE OF
OPTIONS SECURITIES
SECURITIES GRANTED TO EXERCISE OR UNDERLYING
UNDER OPTIONS EMPLOYEES IN BASE OPTIONS ON THE
GRANTED(1) FINANCIAL YEAR PRICE(2) DATE OF GRANT
NAME (#) (%) (SECURITY/US$) (SECURITY/US$) EXPIRATION DATE
-------------------------- --------------- -------------- -------------- --------------- ---------------

Germain Lamonde 25,402 4.2 $26.00 $26.00 June 29, 2010
Bruce Bonini 3,900 .006 $26.00 $26.00 June 29, 2010
Juan-Felipe Gonzalez 6,900 .011 $26.00 $26.00 June 29, 2010
Mario Larose 20,000 3.3 $26.00 $26.00 June 29, 2010
Jean-Francois Boulet -- -- -- -- --
-------------------------

(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.
These options were granted as of the date of the Corporation's initial
public offering at an exercise price equal to the initial price of the
Subordinate Voting Shares.

EMPLOYMENT AGREEMENT

We entered into an employment agreement with Germain Lamonde. The
agreement provides for Mr. Lamonde's employment as our President and Chief
Executive Officer at a base salary, without adjustment, from May 2000 to August
31, 2000 of C$275,000 per year. Mr. Lamonde is also entitled to receive, during
the period from September 1, 2000 to August 31, 2001, a base salary of C$275,000
plus a variable portion based on a formula established by our board of
directors. The agreement is for an indeterminate period and the salary will be
reviewed annually after September 1, 2001. In the event of the termination of
Mr. Lamonde's employment with us, other than for cause, Mr. Lamonde will be
entitled to severance payments (in no case exceeding 24 months of remuneration)
and the vesting of all stock options, upon the incapacity of Mr. Lamonde, a
merger, acquisition by a third party of substantially all of our assets or of
the majority of our share capital or termination of Mr. Lamonde without cause by
us.

We have also entered into employment agreements with Mr. Bruce Bonini,
Mr. Juan-Felipe Gonzalez and Mr. Mario Larose.

The agreement with Mr. Bonini provides for Mr. Bonini's employment as
Vice-President, North American Sales at a base salary of US$135,000 plus
commissions of US$125,000 if sales objectives are met, for the period from
September 1, 1999 to August 31, 2000. The agreement is for an indeterminate
period and salary is reviewed annually. In the event Mr. Bonini's employment
terminates for any reason whatsoever and he is unable to accept new employment
due to his non-competition obligations to the Corporation, Mr. Bonini may
receive compensation for a period of 18 months following the date of termination
in amounts varying from 5% to 125% of his base monthly salary at the time of
termination depending on the cause of the termination.

The agreement with Mr. Gonzalez provides for Mr. Gonzalez's employment
as Vice-President International Sales at a base salary of US$95,000, plus
commissions on sales of US$58,502, for the period from September 1, 1999 to
August 31, 2000. The agreement is for an indeterminate period and salary is
reviewed annually. 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 the Corporation, 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 agreement with Mr. Larose provides for Mr. Larose's employment as
Vice-President, Marketing at an annual base salary of US$122,341 for the period
from his commencement in June 2000 to August 31, 2000. No bonus is payable to
Mr. Larose for the financial year ended August 31, 2000. The agreement is for an
indeterminate period and salary is reviewed annually. In the event of
termination of Mr. Larose's employment other than for cause, Mr. Larose will be
entitled to severance payments equivalent to 12 months of remuneration. In the
event of Mr. Larose's termination due to a merger or acquisition by a third
party of substantially all of the Corporation's assets or of the majority of its
share capital, Mr. Larose shall be entitled to severance benefits ranging from
12 to 24 months of remuneration, based on his length of service with the
Corporation.

STOCK OPTION PLAN

We have a stock option plan for our directors, executive officers,
employees and consultants and those of 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.

All of the options that will be granted under the plan may be exercised
within a maximum period of ten years following the grant date of the options.
The board of directors will designate the recipients of options and determine
the number of subordinate voting shares covered by each of these options, the
date of vesting of each option, the exercise price of each option, the expiry
date and any other conditions relating to these options, in each case in
accordance with the applicable legislation of the securities regulatory
authorities. The price at which the subordinate voting shares may be purchased
under the plan will not be lower than the highest of the closing prices of the
subordinate voting shares on the stock exchanges where the subordinate voting
shares are listed at the date preceding the date of grant.

The maximum number of subordinate voting shares that is issuable under
the plan may not exceed 4,470,961 shares. The maximum number of subordinate
voting shares that may be granted to any individual may not exceed 5% of the
outstanding subordinate voting shares. The board of directors may accelerate the
vesting of any or all outstanding options of any or all options upon the
occurrence of a change of control.

As of August 31, 2000, we have granted to 561 of our employees and to
all directors who are not officers or employees options to purchase a total of
609,734 subordinate voting shares with an exercise price of C$38.55 with vesting
over four years commencing one year following the date of the grant. On
September 1, 2000, on September 13, 2000 and on October 11, 2000,

122,908, 313,835 and 75,000 options respectively were granted to employees and
consultants to purchase the same amounts of subordinate voting shares at the
price of C$83.66, C$68.17 and C$51.25 respectively. In October 2000, NASDAQ and
The Toronto Stock Exchange conditionally approved the re-pricing of the options
granted on September 1, 2000 and September 13, 2000. These options were granted
at exercise prices of C$83.66 and C$68.17 respectively and were all to be
re-priced at C$51.25. However, on December 6, 2000, our Board of Directors
adopted a resolution to re-price all options at a price of C$33.00, with the
exception of all options granted to Mr. Germain Lamonde. No subordinate voting
shares may be issued by us at this new price until shareholder approval and
NASDAQ and The Toronto Stock Exchange final approvals have been obtained.
Following these grants and net of cancelled options for departures, there are
3,382,570 options that are available for future grants under the plan.

SHARE PLAN

In September 1998, we established a stock purchase plan for officers,
directors and key employees as amended in April 2000. As of August 31, 2000,
705,704 subordinate voting shares had been issued and fully paid under the 1998
Stock Purchase Plan for a weighted average cash consideration of C$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 new share plan which replaced the 1998
Stock Purchase Plan. No additional shares will be issued under the new share
plan. The new 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 new share
plan also requires the subordinate voting shares to be held in trust by a
trustee until August 31, 2004, except for 256,017 subordinate voting shares
which will be released between October 21, 2003 and January 20, 2004. The new
share plan also provides 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 new share plan does 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 new 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.

RESTRICTED STOCK AWARD PLAN

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

The effective date of the Plan is December 20, 2000. The expiration
date of the Plan is the business day next following the final grant of
Restricted Shares under the Plan. However, the administration of the Plan shall
continue until all awards of Restricted Shares have been forfeited or settled.
The aggregate number of shares subject to the Plan is 360,000. Grants of
Restricted Shares are to be made in accordance with a pre-determined schedule.
The Plan is administered by the committee that is designated to administer our
Stock Option Plan.

Awards of Restricted Shares are subject to forfeiture and restrictions
on transfer until the Restricted Shares become vested at which point a stock
certificate will be 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 the Company or its
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 becomes fully vested and is
no longer subject to forfeiture. However, the transfer restrictions remain 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 Burleigh's "Management Team" without cause prior to a
change in control of EXFO or a termination without cause of a participant who is
designated a member of Burleigh's Management Team that is initiated by Burleigh
prior to a change in control of EXFO, the unvested portion of the participant's
award of Restricted Shares will be forfeited.

Upon the termination without cause of a participant who is designated a
member of Burleigh's Management Team that is initiated by us or a termination of
a participant's employment without cause following a change in control of EXFO,
a participant's award of Restricted Stock will become fully vested and all
restrictions will lapse.

In the event of a change in control, the committee administering the
Plan may 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.

DEFERRED PROFIT SHARING PLAN

Under the plan, we contribute an amount equal to 1% 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. In the
year ended August 31, 2000, the aggregate amount of contributions under the plan
was $137,000 (C$202,000).

401(K) PLAN OF EXFO AMERICA INC.

We maintain a 401(k) plan to provide employees of EXFO America Inc. who
are residents of the United States, with a tax preferential savings and
investment program. 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. The contributions made by and on behalf of
employees may not exceed the maximum contribution limitation currently equal to
the lesser of 15% of their compensation or $10,500 per year under current
statutory limitations. In the year ended August 31, 2000, we made an aggregate
of $23,000 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 trustee of the 401(k) plan invests 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 of which we
are or were a shareholder and for all costs, losses, charges and expenses that
arose or may arise by reason of their status as directors or officers of EXFO 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.

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 and a maximum of 12 directors. Our
board presently consists of five directors. Under the CANADA BUSINESS
CORPORATIONS ACT, a majority of the directors and of the members of any
committee of the board of directors must be composed of resident Canadians.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has established an audit committee and a human
resources 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. In addition, the audit committee will monitor the board's
corporate governance practices, propose nominees annually for election to the
board, make recommendations as to the composition of the committees of the board
and review the functioning of the board and the powers, mandates and performance
of the committees. The audit committee is composed of three independent
directors: Andre Tremblay, Michael Unger and Pierre Marcouiller. The chairperson
of the audit committee is Andre Tremblay.

Our human resources committee will evaluate, review and supervise our
procedures with regards to human resources and will assess the performance of
our officers. 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 and executive officers. The human resources committee is composed of
three independent directors: David A. Thompson, Michael Unger and Pierre
Marcouiller. The chairperson of the human resources committee is Michael Unger.

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. The average age of our employees is around 30 years
old. Over the years, we have benefited from our proximity to Laval University,
which is located near Quebec City. Laval University has post-graduate programs
in optical and electronic engineering.

As of November 15, 2000, we employed 874 full-time employees who
originate from approximately 20 countries. 236 are involved in research and
development, 357 in manufacturing, 98 in sales and marketing, 105 in general
administrative positions and 78 in communications and customer support. Our
employees are based primarily in Quebec, Canada with 49 employees based outside
of Canada. During the 12-month period ended November 15, 2000, we added 419
employees. We have agreements with almost all of our employees covering
confidentiality and non-competition. Only manufacturing employees are
represented by a collective bargaining agreement, which expires in 2004. We have
never experienced a work stoppage. We believe that relations with our employees
are good.

E. SHARE OWNERSHIP

The following table presents information regarding the beneficial
ownership of our share capital as of November 30, 2000 by:

o our directors;

o our Chief Executive Officer and our three highest compensated
executive officers; and

o 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 vote per share and holders of our multiple voting shares are
entitled to ten votes per share.

Unless otherwise indicated, the address of each director and executive
officer is c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue, Vanier,
Quebec, Canada.

TOTAL
PERCENTAGE
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES OF VOTING
BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) POWER
---------------------- ----------------------- -----------
NAME NUMBER PERCENT NUMBER PERCENT PERCENT
---- ------ ------- ------ ------- -------

Germain Lamonde (2)............. 38,000,000 100 Nil Nil 97.7%
Juan Felipe Gonzalez............ -- -- 56,352 * *
Bruce Bonini.................... -- -- 54,824 * *
Jean-Francois Boulet............ -- -- 15,603 * *
Pierre Marcouiller.............. -- -- 6,000 * *
David A. Thompson............... -- -- 2,100 * *
Andre Tremblay (3)............. -- -- 7,000 * *
Michael Unger................... -- -- 6,000 * *
All directors and executive
officers as a group (11 persons). 38,000,000 100 209,179 2.39% *

-------------------------
* 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 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 35,340,000
multiple voting shares held of record by GEXFO Investissements
Technologiques inc., 1,900,000 multiple voting shares held of record by
Fiducie Germain Lamonde and 760,000 multiple voting shares held of
record by G. Lamonde Investissements Financiers inc.

(3) The number of subordinate voting shares held of record by Andre
Tremblay includes 6,650 subordinate voting shares held of record by
9044-6451 Quebec Inc. and 350 subordinate voting shares held of record
by 9089-3082 Quebec Inc., companies controlled by Mr. Tremblay.

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 30, 2000 by persons or groups of
affiliated persons known by us to own more than 5% of our voting shares.

Unless otherwise indicated, the address of each person who beneficially
owns 5% or more of our subordinate voting shares or multiple voting shares is
c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue, Vanier, Quebec,
Canada.

Germain Lamonde (2) 38,000,000 100% Nil Nil 97.7%

GEXFO Investissements
Technologiques inc. (3) 35,340,000 93% Nil Nil 90.9%

Fiducie Germain Lamonde (4) 1,900,000 5% Nil Nil 4.9%

G. Lamonde Investissements
Financiers inc. (5) 760,000 2% Nil Nil 1.9%
-------------------------

(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 are deemed by the
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.

(3) GEXFO Investissements Technologiques inc. is a company controlled by
Mr. Lamonde.

(4) Fiducie Germain Lamonde is a family trust for the benefit of Mr.
Lamonde and members of his family.

(5) G. Lamonde Investissements Financiers inc. is a company controlled by
Mr. Lamonde.

B. RELATED PARTY TRANSACTIONS

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES

We have guaranteed the repayment of loans granted to employees 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, 2000, the total principal amount guaranteed by us is
C$177,399 (approximately $115,773) and $56,200. We loaned to some of our
employees up to $26,000 to finance the acquisition of our Class "F" shares.
These loans are to be reimbursed no later than five years from the date of the
loans. These loans will accrue interest at prime rate and will be secured by a
pledge of the employees' shares to us.

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

We have entered into lease agreements with 9080-9823 Quebec inc., a
company controlled by Mr. Germain Lamonde, for the manufacturing facilities
located at 436 Nolin Street and the executive and administrative offices located
at 465 Godin Avenue in Vanier, Quebec. The table below sets forth the leased
space, annual rent and term of the leases:

LOCATION SQUARE FOOTAGE ANNUAL RENT EXPIRY DATE
-------- -------------- ----------- -----------
436 Nolin 44,164 C$220,820 February 28, 2001
465 Godin 24,000 C$144,000 November 30, 2001

Based on third-party valuations of the property values, we believe
these lease agreements are at prevailing market terms.

LOAN TO GEXFO INVESTISSEMENTS TECHNOLOGIQUES INC.

In February 2000, we extended a non-interest-bearing loan with a
principal amount of C$1.0 million to GEXFO Investissements Technologiques inc.,
a company controlled by Germain Lamonde. This loan was repaid on July 14, 2000
from the proceeds of our initial public offering.

PROMISSORY NOTES ISSUED TO OUR SHAREHOLDERS

On June 27, 2000, we declared a dividend of C$26.0 million
(approximately $17.5 million) to the holders of Class "A" and Class "F" shares.
Holders of Class F shares received a cash payment of C$475,075 (approximately
$320,000). We issued promissory notes to the holders of Class "A" shares. The
promissory notes bore no interest and were payable on demand. We repaid
indebtedness under the promissory notes on July 6, 2000 from the proceeds of our
initial public offering and such promissory notes were subsequently cancelled.

ACQUISITION OF GEXFO DISTRIBUTION INTERNATIONALE INC.

On September 1, 1998, we acquired all the issued and outstanding shares
of GEXFO Distribution Internationale inc. from GEXFO Investissements
Technologiques inc., a company controlled by Germain Lamonde, in exchange for
one Class "C" share of EXFO. This share was redeemed on September 1, 1998 at a
price of C$509,000 ($340,000). GEXFO Distribution Internationale inc. has two
wholly-owned subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which
markets fiber-optic test and measurement instruments for the U.S. and European
markets.

LOAN FROM 9080-9823 QUEBEC INC.

As of February 29, 2000, we had outstanding a loan of approximately
$1.4 million owed to 9080-9823 Quebec inc., a company controlled by Germain
Lamonde. This loan bore interest at prime rate plus 1% and was repayable on
demand. We repaid all amounts outstanding on this loan on August 22, 2000 from
the proceeds of our initial public offering.

CAPITAL REORGANIZATION OF GEXFO INVESTISSEMENTS TECHNOLOGIQUES INC.

In connection with the capital reorganization of GEXFO Investissements
Technologiques inc., Germain Lamonde undertook to cause us to declare a dividend
in an amount sufficient for GEXFO Investissements Technologiques inc. to be able
to redeem those of its shares not currently owned by Mr. Lamonde and we
undertook to apply our retained earnings primarily for this purpose. To that
end, we declared on June 27, 2000 a dividend in an amount of C$26.0 million to
our shareholders of which C$23.7 million was paid to GEXFO Investissements
Technologiques inc. on June 27, 2000 in the form of a promissory note, which was
repaid on July 6, 2000 from the proceeds of our initial public offering. See "--
Promissory Notes Issued to Our Shareholders."

REGISTRATION RIGHTS AGREEMENTS

REGISTRATION RIGHTS AGREEMENT WITH MR. LAMONDE

In July 2000, we entered into a registration rights agreement with
Germain Lamonde, under which Mr. Lamonde and entities affiliated with him were
granted demand registration rights in the United States in respect of the
subordinate voting shares, including the subordinate voting shares issued upon
conversion of the multiple voting shares held by him or entities affiliated with
him. With respect to the demand registration rights of Mr. Lamonde, subject to
minimum dollar amounts, Mr. Lamonde may make a demand once every 12 consecutive
month period. Mr. Lamonde also has an unlimited number of piggyback registration
rights in respect of the subordinate voting shares issued upon conversion of the
multiple voting shares held by him or entities affiliated with him. The
piggyback registration rights generally will allow Mr. Lamonde to include all or
a portion of the subordinate voting shares issuable upon conversion of the
multiple voting shares under any registration statement filed by us.

We will pay all expenses, other than underwriting discounts and
commissions and taxes, in connection with the exercise of any demand
registration rights or piggyback registration rights. We also will agree to
indemnify any sellers and underwriters against some liabilities, including
liabilities arising under applicable securities laws. Mr. Lamonde has agreed not
to exercise his registration rights without the prior written consent of Merrill
Lynch on behalf of the underwriters of the initial public offering for a period
of 180 days following June 29, 2000.

REGISTRATION RIGHTS AGREEMENT WITH BURLEIGH SHAREHOLDERS

In December 2000 in connection with the acquisition of Burleigh, we
issued registration rights to the former shareholders of Burleigh. We agreed,
subject to minimum dollar amounts, to use our commercially reasonable efforts to
file a registration statement on Form F-1 in the United States within 90 days
from the date of closing of the Burleigh acquisition in order to register the
resale of the shares issued to the former shareholders of Burleigh. Upon the
effectiveness of the registration statement, we will facilitate an underwritten
secondary public offering. If the secondary offering is not completed by March
30, 2001, the former Burleigh shareholders were granted, subject to minimum
dollar amounts, one demand registration right in the United States in respect of
their subordinate voting shares. The Burleigh shareholders also have an
unlimited number of piggyback registration rights in respect of their
subordinate voting shares. The piggyback registration rights generally will
allow the Burleigh shareholders to include all or a portion of their subordinate
voting shares under any registration statement filed by us. The piggyback
registration rights cease to apply on June 1, 2002. We are required as soon as
practicable after June 29, 2001, to prepare and file a registration statement on
Form F-3 or F-10 relating to the resale of the subordinate voting shares held by
the Burleigh shareholders.

We will pay all expenses, other than underwriting commissions or
discounts, taxes and fees and expenses of counsel and advisors to the Burleigh
shareholders, in connection with the preparation and filing of any of the
foregoing registration statements. We also will agree to indemnify any sellers
and underwriters against some liabilities, including liabilities arising under
applicable securities laws, incurred in connection with the registration
statement on Form F-3 or F-10.

ITEM 8. FINANCIAL INFORMATION

Pages F-1 to F-24.

ITEM 9. THE OFFER AND LISTING

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

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" 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 January 16, 2001, the last reported sale price for our subordinate
voting shares on the NASDAQ National Market was $29.38 per share and the last
reported sale price for our subordinate voting shares on The Toronto Stock
Exchange was C$44.85 per share.

NASDAQ NATIONAL MARKET THE TORONTO STOCK EXCHANGE
---------------------- --------------------------

PERIOD............................. High Low High Low
Past 6 Calendar Months............. 92 1/2 16 3/4 134.00 26.00
2001 January (1-16)..................... 29 3/8 21 15/16 44.85 32.95
2000 December........................... 36 1/8 17 5/8 55.00 27.50
November........................... 37 5/8 16 3/4 58.25 26.00
October............................ 48 29 7/8 72.00 46.50
September.......................... 63 40 92.00 60.50
August............................. 66 42 97.50 62.25
July............................... 92 1/2 39 1/2 134.00 55.05
June (29-30)....................... 56 26 68.50 51.00

Quarterly Data Since Q4 2000
First Quarter Ended November 30, 2000 63 16 3/4 92.00 26.00
Quarter

2000: Period from June 29, 2000 to August 92 1/2 26 134.00 51.00
31, 2000

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
(Reg. No. 333-38956).

C. MATERIAL CONTRACTS

Not Applicable

D. EXCHANGE CONTROLS

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 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 will hold subordinate voting shares as capital
assets within the meaning 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 banks, tax-exempt
entities, insurance companies, persons holding subordinate voting shares as part
of a hedging or conversion transaction or as part of a "straddle," U.S.
expatriates, persons subject to the alternative minimum tax, 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) 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 including the District of Columbia;

(d) a trust if 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

(e) a partnership to the extent the interests therein are owned by
any of the persons described in clauses (a), (b), (c) or (d) above.

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. 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.

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. 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. Dividends received by a U.S.
Holder will not be eligible for the dividends received deduction allowed to
corporations. 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 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. 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 dollar value on the payment date.

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 between the U.S.
Holder's adjusted tax basis in the subordinate voting shares and the amount
realized on the disposition. 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

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.

PERSONAL HOLDING COMPANY

We could be classified as a personal holding company for U.S. federal
income tax purposes if both of the following tests are satisfied:

o if at any time during the last half of our taxable year, five
or fewer individuals own or are deemed to own more than 50% of the total value
of our shares; and

o we receive 60% or more of our U.S. related gross income from
specified passive sources, such as royalty payments.

A personal holding company is taxed on a portion of its undistributed
U.S. source income, including specific types of foreign source income which are
connected with the conduct of a U.S. trade or business, to the extent this
income is not distributed to shareholders. We do not believe we are a personal
holding company presently and we do not expect to become one. However, we can
not assure you that we will not qualify as a personal holding company in the
future.

FOREIGN PERSONAL HOLDING COMPANY

We could be classified as a foreign personal holding company if in any
taxable year both of the following tests are satisfied:

o five or fewer individuals who are United States citizens or
residents own or are deemed to own more than 50% of the total voting power of
all classes of our shares entitled to vote or the total value of our shares; and

o at least 60%, 50% in some cases, of our gross income, as
adjusted, consists of "foreign personal holding company income", which generally
includes passive income such as dividends, interests, gains from the sale or
exchange of shares or securities, rent and royalties.

If we are classified as a foreign personal holding company and if you
hold shares in us, you may have to include in your gross income as a dividend
your pro rata portion of our undistributed foreign personal holding company
income. If you dispose of your shares prior to such date, you will not be
subject to tax under these rules. We do not believe we are a foreign personal
holding company presently and we do not expect to become one. However, we can
not assure you that we will not qualify as a foreign personal holding company in
the future.

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 and
composition and valuation of our assets. 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 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, 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 at a rate of
31% with respect to the proceeds from the sale or the disposition of, or with
respect to dividends on, subordinate voting shares unless the U.S. Holder
provides a taxpayer identification number and otherwise complies with applicable
requirements of the backup withholding rules. 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 if the broker does not have actual knowledge that the holder is a U.S.
holder. A payor within the United States will be required to withhold 31% of any
payments of dividends on or proceeds from the sale of subordinate voting shares
within the United States to a non-exempt U.S. or Non-U.S. Holder 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), or the
ITA, and the CANADA-UNITED STATES INCOME TAX CONVENTION (1980), or 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, or the 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 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%. As described above and 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 dispositions, 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 under the ITA
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.

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 in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 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

ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT RISK

MARKET RISK

CURRENCY RISKS

We are exposed to currency risk as a result of our export of products
manufactured in Canada, substantially all of which are denominated in U.S.
dollars. Our exposure to foreign exchange rate fluctuations is partially hedged
by operating expenses of our U.S. and European subsidiaries and the portion of
our raw materials purchased in U.S. dollars. In addition, we frequently enter
into forward exchange contracts to sell U.S. dollars at fixed forward rates in
exchange for Canadian dollars. We enter into such contracts to manage the risk
of exchange rate fluctuations between the Canadian and U.S. dollars on cash
flows related to anticipated future revenue streams and firmly committed future
sales transactions denominated in U.S. dollars. We do not enter into forward
exchange contracts for trading purposes. In the last quarter of fiscal 2000, we
entered into forward exchange contracts to buy U.S. dollars at the maturity
dates of certain short-term investments denominated in Canadian currency.

YEARS ENDING
------------------
AUGUST 31,
2001 2002
---- ----

Forward exchange contracts to sell U.S. dollars in exchange
for Canadian dollars
Contractual amounts........................................... $ 5,400 $ 1,200
Weighted average contractual exchange rates................... 1.4871 1.4602
Forward exchange contracts to buy U.S. dollars in exchange
for Canadian dollars
Contractual amounts........................................... $ 40,500 --
Weighted average contractual exchange rates................... 1.4777 --

FAIR VALUE

The fair value of the contracts to buy U.S. dollars as at August 31,
2000 amounted to US$27,431,000 compared to a contractual value of US$27.407,000
resulting in an unrealized loss of US$24,000.

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. [RESERVED]

ITEM 16. [RESERVED]

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

ITEM 17. FINANCIAL STATEMENTS

Not Applicable.

ITEM 18. FINANCIAL STATEMENTS

See pages F-1 to F-24

ITEM 19. EXHIBITS

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, File No. 38956).
1.2 By-laws of EXFO (incorporated by reference to Exhibit 3.2 of
EXFO's Registration Statement on Form F-1, File No. 38956).
1.3 Amended and Restated Articles of Incorporation. of EXFO.
2.1 Form of Subordinate Voting Share Certificate (incorporated by
reference to Exhibit 4.1 of EXFO's Registration Statement on
Form F-1, File No. 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,
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, 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., Burleigh
Instruments, Inc., Robert G. Klimasewki, William G. May, Jr.,
David J. Farrell and William S. Gornall
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., Burleigh Instruments, Inc., Robert G. Klimasewski,
William G. May, Jr., David J. Farrell and William S. Gornall.
4.3 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, File No.
333-38956).
4.4 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, File No. 333-38956).
4.5 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, File No.
333-38956).
4.6 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, File No. 333-38956).
4.7 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, File No.
333-38956).
4.8 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,
File No. 333-38956).
4.9 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, File No. 333-38956).
4.10 Credit Agreement, dated July 6, 1995, among EXFO, National
Bank of Canada and Banque Nationale de Paris(Canada), as
amended on December 22, 1999 and on March 28, 2000 (including
summary in English) (incorporated by reference to Exhibit 10.1
of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.11 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, File No.
333-38956).
4.12 Sale Agreement, dated September 1, 1999, between EXFO and
GEXFO Investissements Technologiques inc. (including summary
in English) (incorporated by reference to Exhibit 10.14 of
EXFO's Registration Statement on Form F-1, File No.
333-38956).

4.13 Purchase Agreement to acquire a building dated June 7, 2000,
between EXFO and Groupe Mirabau inc. (incorporated by
reference to Exhibit 10.16 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
4.14 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, File No. 333-38956).
4.15 Employment Agreement of Mario Larose dated as of May 30, 2000.
4.16 First Amending Agreement to Employment Agreement of Mario
Larose dated as of September 1, 2000.
4.17 Deferred Profit Sharing Plan, dated September 1, 1998
(incorporated by reference to Exhibit 10.6 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.18 Stock Option Plan, dated May 25, 2000 (incorporated by
Reference to Exhibit 10.7 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
4.19 Share Plan, dated April 3, 2000 (incorporated by reference to
Exhibit 10.8 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
4.20 Directors' Compensation Plan (incorporated by reference to
Exhibit 10.17 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
4.21 Restricted Stock Award Plan, dated December 20, 2000.
8.1 Subsidiaries of EXFO (included on page 34 of this Annual
Report).

AUDITORS' REPORT

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, 1999 and 2000 and the consolidated statements of earnings,
retained earnings and cash flows for each of the years in the three-year period
ended August 31, 2000. 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 and United States
generally accepted auditing standards. 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 consolidated financial statements present fairly,
in all material respects, the financial position of the company as at August 31,
1999 and 2000 and the results of its operations and its cash flows for each of
the years in the three-year period ended August 31, 2000 in accordance with
Canadian generally accepted accounting principles.

(Signed) PRICEWATERHOUSECOOPERS LLP

LOGO

PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Quebec City, Quebec, Canada
September 20, 2000 (except for note 21, dated December 20, 2000)

F-1

EXFO ELECTRO-OPTICAL ENGINEERING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

AS AT AUGUST 31,
1999 2000
---- ----
ASSETS

CURRENT ASSETS
Cash and cash equivalents......................................... $ 423 $ 729
Short-term investments (notes 9 and 19)........................... 1,371 162,659
Accounts receivable (note 9)
Trade........................................................... 8,869 18,272
Other (note 5).................................................. 1,026 2,790
Income taxes receivable (note 9).................................. 381 284
Inventories (notes 6 and 9)....................................... 7,591 18,868
Prepaid expenses and deposits..................................... 475 1,023
Future income taxes (note 17)..................................... -- 995
------------ ------------
20,136 205,620
Capital assets (notes 7 and 9).................................... 2,639 8,694
Goodwill and other assets (notes 8 and 9)......................... 65 2,320
Future income taxes (note 17)..................................... -- 3,089
------------ ------------
$ 22,840 $ 219,723
============ ============
LIABILITIES
CURRENT LIABILITIES
Bank advances (note 9)............................................ $ -- $ 10
Accounts payable and accrued liabilities (note 10)................ 5,523 10,353
Dividend payable.................................................. 51 --
Mandatorily redeemable preferred shares (note 11)................. -- 543
Loan from a company under common control (note 15)................ 1,337 --
Deferred revenue.................................................. 218 395
Current portion of long-term debt................................. -- 152
Future income taxes (note 17)..................................... 262 --
------------ ------------
7,391 11,453
Deferred revenue.................................................. 109 151
Deferred grants................................................... 533 1,109
Long-term debt (note 12).......................................... -- 16
Future income taxes (note 17)..................................... 128 --
------------ ------------
8,161 12,729
------------ ------------
SHAREHOLDERS' EQUITY
Share capital (note 13)........................................... 87 198,459
Cumulative translation adjustment................................. -- 1,555
Retained earnings................................................. 14,592 6,980
------------ ------------
14,679 206,994
------------ ------------
$ 22,840 $ 219,723
============ ============

On behalf of the Board

/s/Germain Lamonde /s/Andre Tremblay

Germain Lamonde Andre Tremblay
Director Director

The accompanying notes are an integral part of these
consolidated financial statements.

F-2

EXFO ELECTRO-OPTICAL ENGINEERING INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands of U.S. dollars, except share and per share data)

YEARS ENDED AUGUST 31,
--------------------------------------------
1998 1999 2000
---------- ---------- ----------
(note 3) (note 3)

SALES (note 18)............................................... $ 31,605 $ 42,166 $ 71,639
COST OF SALES................................................. 11,345 14,998 24,712
---------- ---------- ----------
GROSS MARGIN.................................................. 20,260 27,168 46,927
---------- ---------- ----------
OPERATING EXPENSES............................................
Selling and administrative.................................... 9,898 13,279 24,304
Net research and development (note 15)........................ 3,014 4,315 6,402
Amortization of capital assets................................ 609 857 1,451
Amortization of other assets.................................. 48 41 47
---------- ---------- ----------
TOTAL OPERATING EXPENSES...................................... 13,569 18,492 32,204
---------- ---------- ----------
EARNINGS FROM OPERATIONS...................................... 6,691 8,676 14,723
Interest income, net.......................................... (40) (136) (1,480)
Foreign exchange loss (gain).................................. (126) 506 684
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL..... 6,857 8,306 15,519
INCOME TAXES (note 17)........................................ 2,356 2,492 5,298
---------- ---------- ----------
EARNINGS BEFORE AMORTIZATION OF GOODWILL...................... 4,501 5,814 10,221
AMORTIZATION OF GOODWILL...................................... -- -- 297
---------- ---------- ----------
NET EARNINGS FOR THE YEAR..................................... $ 4,501 $ 5,814 $ 9,924
========== ========== ==========
BASIC AND FULLY DILUTED EARNINGS PER SHARE....................
Earnings before amortization of goodwill.................... $ 0.12 $ 0.14 $ 0.26
Net earnings................................................ $ 0.12 $ 0.14 $ 0.25
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S)... 38,000 38,001 39,951

The accompanying notes are an integral part of these
consolidated financial statements.

F-3

EXFO ELECTRO-OPTICAL ENGINEERING INC.

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

(in thousands of U.S. dollars, except per share data)

YEARS ENDED AUGUST 31,
------------------------------------------------
1998 1999 2000
-------------- ----------- -----------
(note 3) (note 3)

BALANCE-- BEGINNING OF YEAR......................... $ 7,643 $ 12,044 $ 14,592

ADD
Net earnings for the year........................... 4,501 5,814 9,924
-------------- ----------- -----------
12,144 17,858 24,516
-------------- ----------- -----------
DEDUCT
Dividends
Class A shares.................................... -- 2,926 17,216
Class C share (note 4)............................ -- 340 --
Class E shares.................................... 100 -- --
Class F shares.................................... -- -- 320
-------------- ----------- -----------
100 3,266 17,536
-------------- ----------- -----------
BALANCE-- END OF YEAR $ 12,044 $ 14,592 $ 6,980
============== =========== ===========
DIVIDENDS PER SHARE
Class A shares................................... $ -- $ 0.08 $ 0.45
Class C share.................................... $ -- $ 340 $ --
Class E shares................................... $ 0.005 $ -- $ --
Class F shares................................... $ -- $ -- $ 0.45

The accompanying notes are an integral part of these
consolidated financial statements.

F-4

EXFO ELECTRO-OPTICAL ENGINEERING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

YEARS ENDED AUGUST 31,
----------------------------------------
1998 1999 2000
-------- -------- -------
(note 3) (note 3)

CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings for the year..................................... $ 4,501 $ 5,814 $ 9,924
Add (deduct) items not affecting cash and cash equivalents....
Amortization of discount on short-term investments.......... -- -- (807)
Amortization of capital assets.............................. 609 857 1,451
Amortization of goodwill and other assets................... 48 41 344
Future income taxes......................................... 289 (42) (33)
Change in non-cash operating working capital items
Accounts receivable......................................... (1,297) (3,875) (10,476)
Income taxes receivable..................................... -- (381) 2,149
Inventories................................................. (758) (1,259) (10,732)
Prepaid expenses and deposits............................... (117) (205) (519)
Accounts payable and accrued liabilities.................... 369 1,965 3,917
Income taxes payable........................................ (490) (115) --
Deferred revenue............................................ -- 327 215
Deferred grants............................................. -- 533 567
-------- -------- ---------
3,154 3,660 (4,000)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances................................................. (142) (136) (357)
Repayment of loan from a company under common control......... -- -- (1,349)
Repayment of long-term debt................................... (21) (20) (812)
Issuance of share capital..................................... -- 86 209,690
Share issue expenses.......................................... -- -- (16,743)
Dividends paid................................................ (100) (3,215) (17,587)
-------- -------- ---------
(263) (3,285) 172,842
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments........................... (647) (33) (519,645)
Proceeds from disposal of short-term investments.............. -- -- 359,886
Additions to capital and other assets......................... (1,336) (1,181) (7,180)
Business combination, net of cash and cash equivalents
acquired (note 4)........................................... -- -- (2,108)
-------- -------- ---------
(1,983) (1,214) (169,047)
-------- -------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS........................... 908 (839) (205)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................................... -- -- 511
CASH AND CASH EQUIVALENTS-- BEGINNING OF YEAR................. 354 1,262 423
-------- -------- ---------
CASH AND CASH EQUIVALENTS-- END OF YEAR....................... $ 1,262 $ 423 $ 729
======== ======== =========
SUPPLEMENTARY INFORMATION
Interest paid................................................. $ 145 $ 148 $ 480
Interest received............................................. $ (40) $ (98) $ (949)
Income taxes paid............................................. $ 2,032 $ 2,801 $ 3,761

The accompanying notes are an integral part of these
consolidated financial statements.

F-5

EXFO ELECTRO-OPTICAL ENGINEERING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands of U.S. dollars, except share and

per share data and as otherwise noted)

1. INCORPORATION AND NATURE OF ACTIVITIES

The company, incorporated in 1985 under the Canada Business
Corporations Act, designs, manufactures and markets a full line of fiber-optic
test, measurement and monitoring equipment and instruments for the
telecommunications industry. The company derives substantially all of its
revenue from customers located in the United States, Canada, Europe and Asia.
Marketing activities outside Canada are carried out by subsidiaries located in
the United States and Europe and independent representatives worldwide. The
company's customers consist primarily of telecommunications carriers, cable
television companies, public utilities, private network operators, third-party
installers, equipment rental companies, as well as optical component,
value-added optical module, and optical networking system manufacturers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada. These
principles conform, in all material respects, with accounting principles
generally accepted in the United States, except as described in note 20. The
principal accounting policies of the company, which have been consistently
applied, are summarized as follows:

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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
year. Significant estimates include the allowance for doubtful accounts
receivable, tax credits receivable, provisions for obsolete inventories, the
useful lives of capital assets and goodwill and certain accrued liabilities.
Actual results could differ from those estimates.

CONSOLIDATION

These consolidated financial statements include the accounts of the
company and its subsidiaries.

F-6

FOREIGN CURRENCY TRANSLATION

FOREIGN SUBSIDIARIES

The company's subsidiaries are considered to be integrated. As a
result, the subsidiaries' accounts are remeasured into the functional currency
using the temporal method. Under this method, monetary assets and liabilities
are remeasured at the exchange rates in effect at the balance sheet date.
Non-monetary assets and liabilities are remeasured at historical rates. Revenue
and expenses are remeasured at the average rate for the year. Gains and losses
resulting from remeasurement are reflected in the statement of earnings.

FOREIGN CURRENCY TRANSACTIONS

Transactions denominated in foreign currencies are measured into the
functional currency using the temporal method.

FORWARD EXCHANGE CONTRACTS

The company enters into forward exchange contracts in order to hedge
against potential exchange rate fluctuations on cash flows related to
anticipated future revenue streams denominated in foreign currencies. Unrealized
gains and losses on these forward exchange contracts are deferred and recognized
upon settlement of the related transactions. Accordingly, cash flows resulting
from forward exchange contract settlements are classified as cash flows from
operating activities along with the corresponding cash flows being hedged.

Furthermore, the company has entered into forward exchange contracts to
sell Canadian dollars in exchange for U.S. dollars. These contracts, which are
speculative in nature, are carried on the balance sheet at fair value. Any
unrealized gains or losses on these contracts at each balance sheet date are
included in earnings for the year.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand and balances with
banks and all highly liquid short-term investments with original maturities of
three months or less.

SHORT-TERM INVESTMENTS

Short-term investments are valued at the lower of cost and market
value. Cost is composed of acquisition cost plus amortization of discount or
less amortization of premium.

INVENTORIES

Inventories are valued at the lower of cost and net realizable value.
The cost of raw materials and work in progress inventories is determined using
the first-in, first-out method. The cost of finished goods is determined using
the average cost method.

F-7

CAPITAL ASSETS AND AMORTIZATION

Capital assets 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 of the capital assets as
follows:

TERM
------------------------------------
Building....................... 25 years
Equipment...................... 3 to 5 years
Leasehold improvements......... Remaining lease term including lease
renewal option

The carrying value of capital assets is evaluated whenever significant
events occur which may indicate an impairment in value, based upon a comparison
of the carrying value to the net recoverable amount.

GOODWILL, OTHER ASSETS AND AMORTIZATION

Goodwill, which represents the excess of the purchase price of an
acquired business over the net identifiable assets acquired, is amortized on a
straight-line basis over the estimated useful life of five years. The company
assesses the carrying value of goodwill for future recoverability on an annual
basis by estimating the associated net undiscounted future cash flows. The
amount of impairment loss, if any, is the excess of the carrying value over the
estimated net undiscounted cash flows. Goodwill is written down for any
permanent impairment in value of the unamortized portion.

Other assets include the cost of acquired patents, net of accumulated
amortization. Patents are amortized on a straight-line basis over the estimated
useful lives of four years.

GOVERNMENT GRANTS

Government grants are accrued as a receivable when there is reasonable
assurance that the company has complied and will continue to comply with all the
conditions related to the grant. 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 asset. Grants related to job
creation and training programs for extended periods are deferred and amortized
on a straight-line basis over the minimum period for which the created job must
be maintained or training provided.

REVENUE RECOGNITION

For products where the software is incidental, the company recognizes
revenue when the products are delivered, with provisions made for estimated
returns, warranties and support obligations.

For products where software is not incidental, the revenues are
separated into two categories, product and customer support revenues based upon
vendor-specific objective evidence of fair value. The product revenues for these
sales are recognized when the products are delivered with provisions made for
estimated returns and warranties. The customer support

F-8

revenues are deferred and recognized ratably over the year of the support
arrangement, except where provided within one year of delivery, costs of
providing this support is insignificant and accrued at the time of delivery and
no upgrades of software are provided. Prior to September 1, 1998, the revenues
for support were included in sales upon delivery with a provision for any costs
associated with future support obligations. The effect of this accounting change
for the years ended prior to 1999 was not determinable by the company. For the
year ended August 31, 1999, the company deferred revenues amounting to $327,000
which had an effect on net earnings of $226,000. The change resulted in a
reduction in net earnings per share for the year ended August 31, 1999 of $0.01.

ADVERTISING COSTS

Advertising costs are expensed as incurred.

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 expected to be in effect for the year 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.

TAX CREDITS

The company is entitled to scientific research and experimental
development ("SRED") tax credits granted by the Canadian federal government
("Federal") and the government of the Province of Quebec ("Provincial"). Federal
SRED tax credits are earned on qualified Canadian SRED expenditures at a rate of
20% and can only be used to offset Federal income taxes otherwise payable.
Provincial SRED tax credits, which are refundable, are earned on qualified SRED
salaries in the Province of Quebec at a rate of 20%. Additional refundable
provincial SRED tax credits are earned at a rate of up to 20%. These additional
tax credits are reduced to nil, on a pro-rata basis, as total assets of the
company increase from Cdn$25 million to Cdn$50 million.

SRED and other tax credits are accounted for as a reduction of the
related expenditures. The refundable portion of SRED and other tax credits is
recorded in the year in which the related expenditures are incurred. The
non-refundable portion of SRED tax credits is recorded in the year in which the
related expenditures are incurred, provided the company has reasonable assurance
that the credits will be realized.

F-9

RESEARCH AND DEVELOPMENT EXPENSES

All expenses related to development activities, which do not meet
generally accepted criteria for deferral, and research are expensed as incurred.
Development expenses which meet generally accepted criteria for deferral are
capitalized and amortized against earnings over the estimated period of benefit.

As at August 31, 2000, the company had not deferred any development
costs.

STOCK-BASED COMPENSATION PLANS

The company maintains two stock-based compensation plans, which are
described in note 13. Under accounting principles generally accepted in Canada,
no compensation cost is recognized for those plans when stocks or stock options
are issued to plan participants. Any consideration received from plan
participants upon the purchase of stock or the exercise of stock options is
credited to share capital.

EARNINGS AND DIVIDENDS PER SHARE

Basic earnings and dividends per share are determined using the
weighted average number of common shares outstanding during the year, as
adjusted for the effects of stock splits and other reorganizations of share
capital in prior years.

Fully diluted earnings per share are determined using the weighted
average number of shares and dilutive share equivalents outstanding during the
year. Earnings for the year are increased by the estimated additional earnings,
net of applicable income taxes, on the proceeds, if any, from the exercise of
dilutive common share equivalents.

NEW ACCOUNTING STANDARD

In 1999, the CICA issued section 3461, "Employee future benefits" which
is effective for fiscal beginning on or after January 1, 2000. Adopting this
standard will not have a significant impact on the company's earnings or
shareholders' equity.

3. CHANGE IN REPORTING CURRENCY

The consolidated financial statements of the company were presented in
Canadian dollars up to August 31, 1999. Effective September 1, 1999, the U.S.
dollar has been adopted as the reporting currency. The functional currency
continues to be the Canadian dollar. The financial statements for the years
ended August 31, 1998 and 1999 are presented in U.S. dollars in accordance with
a translation of convenience method using the representative exchange rate as at
August 31, 1999 of US$1.00 = Cdn$1.4958. The translated amount for monetary and
non-monetary items as at August 31, 1999 becomes the historical basis for those
items in subsequent years.

The financial statements as at August 31, 2000 and for the year then
ended have been translated using the current rate method. Under this method, the
financial statements are

F-10

translated into the reporting currency as follows: assets and liabilities are
translated at the exchange rate in effect at the date of the balance sheet and
revenue and expenses are translated at the average exchange rate for the year.
All gains and losses from the translation of the financial statements into the
reporting currency are included in the cumulative translation adjustment in
shareholders' equity. Changes in the cumulative translation adjustment during
each year result solely from the application of this translation method.

4. BUSINESS COMBINATIONS

NORTECH FIBRONIC INC.

On February 4, 2000, the company acquired a 100% interest in Nortech
Fibronic Inc. ("Nortech"), a company specializing in fiber-optic testing and
temperature sensing, in exchange for total consideration valued at Cdn$4,051,000
(US$2,799,000). The consideration paid consisted of Cdn$3,051,000 (US$2,108,000)
in cash, the issuance of 800,000 Class G shares which are mandatorily
redeemable, for cash or subordinate voting shares at the option of the company,
on November 30, 2000 for an amount of Cdn$800,000 (US$553,000) (note 11), and a
non-interest-bearing debenture in the amount of Cdn$200,000 (US$138,000) due
November 30, 2000 (note 12).

This acquisition, which has been accounted for using the purchase
method, resulted in goodwill amounting to Cdn$3,677,000 (US$2,542,000) based on
the following allocation of the purchase price to the identifiable assets
acquired and liabilities assumed.

Current assets.................................................. $1,842
Capital assets.................................................. 409
Future income taxes............................................. 237
---
2,488
Current liabilities............................................. 1,933
Long-term debt.................................................. 298
---
2,231
Net identifiable assets acquired................................ 257
Goodwill........................................................ 2,542
-----
Purchase price.................................................. 2,799
Less: Class G shares issued.................................... 553
Less: Non-interest-bearing debenture........................... 138
Less: Cash and cash equivalents acquired....................... --
--
------
Cash paid net of cash and cash equivalents acquired............. $2,108
======

The net earnings of Nortech have been included in the consolidated
statement of earnings of the company from the date of acquisition, February 4,
2000.

PRO FORMA INFORMATION

The following unaudited pro forma information regarding the acquisition
of Nortech has been prepared by the company's management based upon the audited
consolidated financial statements of the company for the years ended August 31,
1999 and 2000 and the unaudited consolidated financial statements of Nortech.

F-11

This pro forma information includes adjustments related to the
amortization of goodwill as well as the income tax effects of the acquisition.
Consequently, such information is not necessarily indicative of the actual
results which would have been achieved, nor is it necessarily indicative of
future consolidated results of the company.

The following unaudited pro forma information for the year ended August
31, 1999 has been prepared as if the acquisition had occurred on September 1,
1998. The unaudited pro forma information for the year ended August 31, 2000 has
been prepared as if the acquisition had occurred on September 1, 1999:

YEARS ENDED AUGUST 31,
----------------------
1999 2000
-------- -------
(unaudited) (unaudited)
(note 3)
Sales........................................... $44,948 $73,024
Earnings before amortization of goodwill........ 6,091 10,179
Net earnings.................................... $5,602 $9,716
Basic and fully diluted earnings per share
Earnings before amortization of goodwill...... $0.15 $0.26
Net earnings.................................. $0.14 $0.24

GEXFO DISTRIBUTION INTERNATIONALE INC.

On September 1, 1998, the company acquired, from its parent company,
all the issued and outstanding shares of GEXFO Distribution Internationale Inc.
in exchange for 1 Class C share of the company, which was redeemed at a price of
Cdn$509,000 (US$340,000). This holding company has two wholly-owned
subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which market
fiber-optic test and measurement and monitoring equipment and instruments for
the American and European markets.

Since the exchange was between entities under common control, the
exchange has been accounted for in a manner similar to a pooling of interests.
The assets, liabilities and shareholders' equity of the company and the other
companies have been combined using their respective carrying amounts and
financial statements of prior years have been restated as if the companies had
always been combined. The statements of earnings and cash flows for 1998 reflect
the results of operations and cash flows on a combined basis. The creation,
issuance and redemption of the Class C share on September 1, 1998 has been
presented as a mandatorily redeemable preferred share and a dividend
distribution from the combined retained earnings.

The combined companies' net assets as at August 31, 1998 are as
follows:

EXFO GEXFO
ELECTRO-OPTICAL DISTRIBUTION
ENGINEERING INTERNATIONALE
INC. INC. ELIMINATIONS TOTAL
---------- ---------- ------------ ----------
(note 3)

Total assets................. $ 17,384 $ 639 $ (380) $ 17,643
Total liabilities............ (5,679) (299) 380 (5,598)
---------- ---------- ---------- ----------
Net assets................... $ 11,705 $ 340 $ -- $ 12,045
========== ========== ========== ==========

F-12

Consolidated sales and net earnings for GEXFO Distribution
Internationale Inc. during the year ended August 31, 1998 were insignificant.

GAP-OPTIQUE S.A.

On June 1, 2000, the company acquired the 85% interest in GAP-Optique
S.A. held by its parent company for a cash consideration of $16,000. The
carrying value of the net assets of GAP-Optique S.A. was $19,000 as at December
31, 1999. GAP-Optique S.A. did not have any operations in 1998, 1999 or 2000.
Since the exchange occurred between entities under common control, the exchange
has been accounted for in a manner similar to a pooling of interests. The
assets, liabilities and shareholders' equity of the company and GAP-Optique S.A.
have been combined using their respective carrying amounts and financial
statements of prior year have been restated as if the companies had always been
combined.

5. OTHER RECEIVABLES

AS AT AUGUST 31,
-----------------------
1999 2000
---- ----
Grants receivable....................... $ 479 $ 2,046
Company under common control............ 27 --
Other................................... 520 744
--------- ---------
$ 1,026 $ 2,790
========= =========

6. INVENTORIES

AS AT AUGUST 31,
-----------------------
1999 2000
---- ----
Raw materials........................... $ 4,005 $ 12,057
Work in progress........................ 1,177 2,910
Finished goods.......................... 2,409 3,901
-------- --------
$ 7,591 $ 18,868
======== ========

7. CAPITAL ASSETS

AS AT AUGUST 31, 1999
------------------------------
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
Equipment................................ $4,426 $2,469 $1,957
Leasehold improvements................... 1,146 464 682
------ ------ ------
$5,572 $2,933 $2,639
====== ====== ======

AS AT AUGUST 31, 2000
------------------------------
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
Land.................................... $ 299 $ -- $ 299
Building................................ 3,442 32 3,410
Equipment............................... 8,451 4,158 4,293
Leasehold improvements.................. 1,373 681 692
------- ------ ------
$13,565 $4,871 $8,694
======= ====== ======

8. GOODWILL AND OTHER ASSETS

AS AT AUGUST 31,
----------------
1999 2000
---- ----
Goodwill-- net of accumulated amortization of $297,000..... $ -- $2,252

F-13

Patents-- net of accumulated amortization of $111,000 and
$159,000 as at August 31, 1999 and 2000, respectively.... 65 68
----- ------
$ 65 $2,320
===== ======
9. CREDIT FACILITIES

The company has available credit facilities which provide for advances
of up to Cdn$10,000,000 (US$6,793,000) under a line of credit and Cdn$3,000,000
(US$2,038,000) as an operating loan. These facilities, which are renewable
annually, bear interest at prime rate. Accounts receivable, inventories and all
tangible and intangible assets of the company have been pledged as security
against these facilities. Amounts of nil and Cdn$15,000 (US$10,000) were drawn
against the facilities as at August 31, 1999 and 2000, respectively.

10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

AS AT AUGUST 31,
----------------
1999 2000
---- ----
Trade................................................ $1,884 $ 6,473
Salaries and social benefits......................... 1,112 1,698
Outstanding cheques in excess of bank balances....... 1,942 374
Commissions.......................................... 421 966
Other................................................ 164 842
------ -------
$5,523 $10,353
====== =======

11. MANDATORILY REDEEMABLE PREFERRED SHARES

Authorized-- unlimited as to number, without par value
Preferred, non-voting, ranking in priority to subordinate and multiple
voting shares, each series ranking pari passu with the preferred shares of every
other series, issuable in one or more series
Preferred Series 1, non-voting, mandatorily redeemable on November 30,
2000 at their paid-in value, ranking in priority to all other existing and
future classes of shares. The company may elect to settle the redemption value
by issuing the number of subordinate voting shares obtained by dividing the
paid-in value of the preferred shares Series 1, being Cdn$800,000, by the
average trading price of the subordinate voting shares for a period of ten
trading days preceding November 30, 2000

On February 7, 2000, the company filed articles of amendment pursuant
to which the Class G shares were created.

Prior to June 29, 2000, the company's authorized mandatorily redeemable
preferred shares consisted of Class B, C, E and G shares.

On June 29, 2000, the company filed articles of amendment pursuant to
which preferred shares issuable in series and preferred shares Series 1 were
created, the 800,000 issued and outstanding Class G shares were converted into
800,000 preferred shares Series 1 and Class B, C, E and G shares were cancelled.

F-14

The following table summarizes the preferred share activity since
August 31, 1997:

CLASS C SHARE CLASS E SHARES
------------- -------------- ---------
TOTAL
-----
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
------ ------ ------ ------ ------

Balance as at August 31, 1997 and 1998............. -- $ -- 19,000,000 $ -- $ --
Business combination (note 4)...................... 1 340 -- -- 340
Redemption of Class C share........................ (1) (340) (340) -- --
Conversion of Class E shares into Class A shares -- -- (19,000,000) -- --
------ ------ ---------- ------ ------
(note 13)........................................
Balance as at August 31, 1999 and 2000............. -- $ -- -- $ -- $ --
====== ====== ========== ====== ======

CLASS G SHARES PREFERRED SHARES SERIES 1
-------------- -------------------------
TOTAL
-----
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
------ ------ ------ ------ ------
Balance as at August 31, 1997, 1998 and 1999......... -- $ -- -- $ -- $ --
Business combination (note 4)........................ 800,000 555 -- -- 555
Conversion of Class G shares into preferred shares 800,000 555 --
Series 1........................................... (800,000) (555)
Foreign currency translation adjustment.............. -- -- -- (12) (12)
-- -- -- ------ ------
Balance as at August 31, 2000........................ -- $ -- 800,000 $ 543 $ 543
======= ====== ======= ====== ======

12. LONG-TERM DEBT

AS AT
AUGUST 31,
----------
1999 2000
---- ----
Unsecured non-interest-bearing debenture
due November 30, 2000........................... $ -- $ 136
Unsecured non-interest-bearing loan
repayable through July 2002..................... -- 32
-- --
-- 168
Less: Current portion............................ -- 152
------ ------
$ -- $ 16
====== ======

As at August 31, 2000, minimum principal repayments required in each of
the next two years are as follows:

2001............................................ $ 152
2002............................................ 16

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

Prior to June 29, 2000, the company's authorized share capital
consisted of Class A, D and F shares.

On September 2, 1998, the company filed articles of amendment pursuant
to which the Class A shares were split on a 190,000-to-one basis. Pursuant to
articles of amendment dated

F-15

September 3, 1998, the 100 issued and outstanding Class E shares (note 11) were
converted into Class A shares on a 190,000-to-one basis. All references to
numbers of shares and per share amounts have been restated in order to reflect
the share split and conversion noted above.

On June 29, 2000, the company filed articles of amendment pursuant to
which subordinate and multiple voting shares were created, the 38,000,000 issued
and outstanding Class A shares were converted into 38,000,000 multiple voting
shares, the 707,264 issued and outstanding Class F shares were converted into
707,264 subordinate voting shares and the Class A, D and F shares were
cancelled.

The following tables summarize the share capital activity since August
31, 1997:

CLASS A SHARES CLASS F SHARES
-------------- --------------
TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
------ ------ ------ ------ ------

Balance as at August 31, 1997 and 1998.............. 19,000,000 $ 1 -- $ -- $ 1
Conversion of Class E shares into Class A shares
(note 11)......................................... 19,000,000 -- -- -- --
Issued for cash under stock purchase plan........... -- -- 197,588 86 86
---------- ------ ------- ------ ------
Balance as at August 31, 1999....................... 38,000,000 1 197,588 86 87
Issued for cash under stock purchase plan........... -- -- 509,676 390 390
Conversion of Class F shares into subordinate
voting shares..................................... -- -- (707,264) (476) (476)
Conversion of Class A shares into multiple voting
shares............................................ (38,000,000) (1) -- -- (1)
---------- ------ ------- ------ ------
Balance as at August 31, 2000....................... -- $ -- -- $ -- $ --
========== ====== ======= ====== ======

MULTIPLE VOTING SHARES SUBORDINATE VOTING
SHARES
---------------------- ---------------------
TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
------ ------ ------ ------ ------

Balance as at August 31, 1997, 1998 and 1999.. -- $ -- -- $ -- $ --
Conversion of Class F shares into subordinate
voting shares............................ -- -- 707,264 476 476
Conversion of Class A shares into multiple
voting shares............................ 38,000,000 1 -- -- 1
Issued pursuant to the initial public offering -- -- 8,050,000 209,300 209,300
Share issue expenses, net of related income
taxes of $5,425,000...................... -- -- -- (11,318) (11,318)
---------- ------ --------- --------- --------
Balance as at August 31, 2000.............. 38,000,000 $ 1 8,757,264 $ 198,458 $198,459
========== ====== ========= ========= ========

STOCK PURCHASE PLAN

The company's stock purchase plan terminated at the time of the initial
public offering. In accordance with that plan, officers, directors and key
employees could purchase Class F shares up to a maximum of 5% of all
participating, issued and outstanding shares of the company. The maximum number
of shares held by one person could not exceed 1% of all issued and outstanding
shares of the company. The purchase price of shares under that plan was
determined as a multiple of the company's equity as at the end of the preceding
fiscal year. Shares issued under that plan are restricted as to sale and
transferability for a period of at least five years. Prior to June 29, 2000, the
date of the initial public offering, the company issued 707,264 Class F shares
in exchange for a weighted average cash consideration of Cdn$0.98 (US$0.68) per
share. As at August 31, 2000, the company has guaranteed the repayment of third
party loans totaling Cdn$270,000 (US$183,000) obtained by certain employees with
respect to the purchase of Class F shares.

F-16

STOCK OPTION PLAN

On May 25, 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.

The maximum number of subordinate voting shares issuable under the plan
shall not exceed 4,470,961 shares. The maximum number of subordinate voting
shares that may be granted to any individual shall not exceed 5% of the number
of outstanding subordinate voting shares. The exercise price shall be the market
price of the common shares on the date of granting. Options granted under the
plan generally expire ten years from the date of granting. Options granted under
the plan generally vest over a four-year period, with 25% becoming exercisable
at the end of each of the first four fiscal years of the company following the
date of granting. The number of options, which ultimately become exercisable in
any given year, and in aggregate, depends on the degree to which the company's
financial performance objectives are met. The Board of Directors may accelerate
the vesting of any or all outstanding options upon the occurrence of a change of
control.

On June 27, 2000, the company granted options to purchase a total of
609,734 subordinate voting shares at the initial public offering price. As at
August 31, 2000, there were 3,861,227 shares reserved for issuance under the
stock option plan.

The following table summarizes the stock option activity since May 25,
2000:

YEAR ENDED AUGUST 31, 2000
--------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
------ --------------
Outstanding-- Beginning of year......... -- $ --
Granted................................. 609,734 26
------- --
Outstanding-- End of year............... 609,734 $ 26
======= ====
Options exercisable-- End of year....... -- $ --
======= ====

As at August 31, 2000, the weighted average remaining contractual life
of the outstanding options was 4.83 years.

14. COMMITMENTS

OPERATING LEASES

The company has entered into operating leases for its premises, which
expire at various dates through to 2003. As at August 31, 2000, the minimum
rentals payable during each of the next three years are as follows:

2001.................................... $397
2002.................................... 209
2003.................................... 49
----
$655

F-17

During the years ended August 31, 1998, 1999 and 2000, rental expense
amounted to $283,000, $344,000 and $579,000, respectively.

15. OTHER DISCLOSURES

LOAN FROM A COMPANY UNDER COMMON CONTROL

The loan from a company under common control bearing interest at prime
rate plus 1% and unsecured was reimbursed during the year.

During the years ended August 31, 1998, 1999 and 2000, the effective
interest rate on this loan was 6.25%, 6.95% and 7.75%, respectively.

NET RESEARCH AND DEVELOPMENT EXPENSES

Net research and development expenses comprise the following:

YEARS ENDED AUGUST 31,
------------------------------
1998 1999 2000
---- ---- ----
(note 3) (note 3)

Gross research and development expenses...... $ 4,406 $ 6,390 $ 9,374
Research and development tax credits......... (1,332) (1,935) (2,436)
Government grants............................ (60) (140) (536)
-------- -------- -------
$ 3,014 $ 4,315 $ 6,402
======== ======== =======

OTHER GRANTS AND TAX CREDITS

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$600,000 (US$417,000) towards interest costs
incurred over the period from January 1, 1998 through December 31, 2002. In
addition, the Minister agreed to provide grants up to a maximum of Cdn$2,220,000
(US$1,541,000) 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 the company maintain
its Canadian principal place of business within the Province of Quebec until at
least December 31, 2002 and that jobs created pursuant to the agreement be
maintained for a period of at least five years from the date of creation. Should
these conditions not be met by the company, the Minister may enforce various
recourse options, which include suspension or cancellation of the agreement or
requiring the repayment of amounts received by the company. During the period
from January 1, 1998 to August 31, 2000, the company recognized a total of
Cdn$2,396,000 (US$1,627,000) under this program, of which Cdn$1,048,000
(US$712,000) has been credited to earnings with the balance of Cdn$1,348,000
(US$915,000) having been included in deferred grants.

Furthermore, in 1999, the company entered into another agreement with
the Minister. Pursuant to this agreement, the Minister agreed to provide grants
up to a maximum of Cdn$3,756,000 (US$2,551,000) over the period from February
1998 to June 2002, payable based on the number of jobs created and certain
specific training expenses related to such jobs. The

F-18

above grant is subject to the condition that 361 jobs be created pursuant to the
agreement and that the new employees continue to participate in the specific
training program for a period of at least ten consecutive months. Should these
conditions not be met by the company, the Minister may enforce various recourse,
which include suspension or cancellation of the agreement or requiring the
repayment of amounts received by the company. Since 1998, the company has
recognized a total of Cdn$1,322,000 (US$898,000) under this program, of which
Cdn$1,037,000 (US$704,000) has been credited to earnings with the balance of
Cdn$285,000 (US$194,000) having been included in deferred grants. Should any
repayments of amounts received pursuant to these agreements be required, such
repayments will be charged to earnings as the amounts of any repayments become
known.

Finally, since 2000, companies operating in the Quebec city area are
entitled to a refundable tax credit granted by the government of the Province of
Quebec. This credit is earned on the increase of production and marketing
salaries incurred in the Quebec City area at a rate of 40%. The company has
recognized a total of Cdn$1,297,000 (US$881,000) under this program which has
been credited to earnings.

Following is a summary of the classification of these and certain other
grants and tax credits in the statements of earnings.

Interest income for the years ended August 31, 1998, 1999 and 2000 is
net of related government grants of $66,000, $126,000 and $196,000,
respectively.

Cost of sales for the years ended August 31, 1998, 1999 and 2000 is net
of government grants of $11,000, $33,000 and $915,000, respectively.

Selling and administrative expenses for the years ended August 31,
1998, 1999 and 2000 are net of government grants of $22,000, $21,000 and
$386,000, respectively.

Research and development expenses for the years ended August 31, 1998,
1999 and 2000 are net of government grants of $60,000, $140,000 and $536,000,
respectively.

DEFINED CONTRIBUTION EMPLOYEE BENEFITS PLANS

The company maintains two separate defined contribution employee
benefits plans for certain eligible employees. These plans, which are accounted
for on an accrual basis, are summarized as follows:

o Deferred profit sharing plan

This plan, maintained for eligible Canadian resident employees,
requires the company to contribute an amount equal to 1% of an employee's gross
salary, provided that the employee has contributed at least 2% of gross salary
to a tax-deferred registered retirement savings plan. In addition, at the end of
each fiscal year, the company may contribute an additional amount of up to 4% of
an employee's gross salary to the employee's tax-deferred registered retirement
savings plan. Contributions paid to this plan during the years ended August 31,
1998, 1999 and 2000 amounted to nil, Cdn$156,000 (US$104,000) and Cdn$202,000
(US$137,000), respectively.

F-19

o 401K plan

The company maintains a 401K plan for eligible U.S. resident employees.
Under the plan, the company may elect to contribute an amount of up to 50% of
the first 6% of an employee's current compensation, subject to certain
legislated maximum contribution limits. During the years ended August 31, 1998,
1999 and 2000, the company made contributions totaling US$8,000, US$21,000 and
US$23,000, respectively.

16. RELATED PARTY TRANSACTIONS

In the normal course of operations, the company entered into
transactions with certain companies under common control. These transactions
have been measured at the exchange amount which is the amount of consideration
agreed upon by the related parties. These transactions have been reflected in
the financial statements as follows:

YEARS ENDED AUGUST 31,
------------------------------
1998 1999 2000
---- ---- ----
(note 3) (note 3)
Rent......................................... $ 219 $ 232 $ 241
Interest expense............................. 84 92 105

17. INCOME TAXES

The reconciliation of the income tax provision calculated using the
Canadian federal and provincial statutory income tax rates to the provision for
income taxes per the financial statements is as follows:

YEARS ENDED AUGUST 31,
------------------------------
1998 1999 2000
---- ---- ----
(note 3) (note 3)
Income taxes at combined Canadian federal and
provincial statutory tax rate (38%)........ $2,606 $3,156 $5,897
Increase (decrease) due to:
Manufacturing and processing deduction... (387) (519) (645)
Non-deductible expenses.................. 43 40 57
Other.................................... 94 (185) (11)
------ ------ ------
$2,356 $2,492 $5,298
====== ====== ======
Income taxes consist of:
Current.................................. $2,067 $2,534 $5,331
Future................................... 289 (42) (33)
------ ------ ------
$2,356 $2,492 $5,298
====== ====== ======

Significant components of the company's future tax assets and liabilities are as
follows:

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
Future tax assets
Provisions and accruals................... $ -- $ 266
Government grants......................... 18 --
Deferred revenue.......................... 101 175
Share issue expenses...................... -- 4,358
Other..................................... 4 193
----- ------
123 4,992
----- ------
Future tax liabilities
Capital assets............................. (183) (419)
Research and development tax credits....... (330) (474)

F-20

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
Government grants.......................... -- (15)
----- ------
(513) (908)
----- ------
$(390) $4,084
===== ======
Presented as:
Current.................................... $(262) $ 995
Long-term.................................. (128) 3,089
----- ------
$(390) $4,084
===== ======

18. SEGMENT INFORMATION

Management has organized the company under one operating segment, that
being the development, manufacture and marketing of fiber-optic test,
measurement and monitoring equipment and instruments. Substantially all of the
company's long-lived assets are located in Canada.

Sales by geographic region are detailed as follows:

YEARS ENDED AUGUST 31,
--------------------------
1998 1999 2000
---- ---- ----
(note 3) (note 3)

United States................................ $13,644 $20,755 $36,139
Canada....................................... 2,353 2,973 8,006
Europe....................................... 6,717 8,721 14,503
Asia......................................... 3,229 3,199 6,486
Other........................................ 5,662 6,518 6,505
------- ------- -------
$31,605 $42,166 $71,639
======= ======= =======

Sales have been allocated to geographic regions based on the country of
residence of the related customers.

During all years presented above, there were no customers from which
10% or more of total sales were derived.

19. FINANCIAL INSTRUMENTS

SHORT-TERM INVESTMENTS

Short-term investments consist of the following:

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
Corporate bonds denominated in Canadian dollars
bearing interest at annual rates of 4.9% to 5% ........ $ 1,371 $ --
Commercial paper denominated in Canadian dollars,
bearing interest at annual rates of 5.77% to 5.93%,
maturing on different dates between November 22, 2000
and February 2, 2001 .................................. -- 41,872
Commercial paper denominated in U.S dollars, bearing
interest at annual rates of 6.51% to 6.79%, maturing
at different dates between November 14, 2000 and
March 2, 2001 ......................................... -- 120,787
--------- --------
$ 1,371 $162,659
========= ========

F-21

FAIR VALUE

Cash and cash equivalents, accounts receivable, bank advances, accounts
payable and accrued liabilities, dividend payable, mandatorily redeemable
preferred shares, loan from a company under common control and long-term debt
are financial instruments whose fair values approximate their carrying values.

The fair value of short-term investments, determined based on market
value, amounted to $1,430,000 and $162,719,000 as at August 31, 1999 and 2000,
respectively.

CREDIT RISK

Financial instruments which potentially subject the company to credit
risk consist principally of cash and cash equivalents, short-term investments,
accounts receivable and forward exchange contracts. The company's short-term
investments consist of debt instruments issued by high-credit quality financial
institutions and corporations and the company's cash and cash equivalents 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.

Due to the North American and European distribution of the company's
customers, there is no particular concentration of credit risk. 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.

INTEREST RATE RISK

As at August 31, 2000, the company's exposure to interest rate risk is
summarized as follows:

Cash and cash equivalents ........................ Non-interest bearing
Short-term investments ........................... As described above
Accounts receivable .............................. Non-interest bearing
Bank advances .................................... Prime rate
Accounts payable and accrued liabilities ......... Non-interest bearing
Mandatorily redeemable preferred shares .......... Non-interest bearing
Long-term debt ................................... As described in note 12

FORWARD EXCHANGE CONTRACTS

The company is exposed to currency risks as a result of its export
sales, substantially all of which are denominated in U.S. dollars, of products
manufactured in Canada. These risks are partially hedged by forward exchange
contracts and certain operating expenses. As at August 31, 1999 and 2000, the
company held contracts to sell U.S. dollars at various forward rates, which are
summarized as follows:

F-22

WEIGHTED AVERAGE
CONTRACTUAL CONTRACTUAL
AMOUNT FORWARD RATES
------ -------------
As at August 31, 1999
September 1999 to August 2000................... $ 5,800 1.4815
September 2000 to June 2001..................... 3,000 1.5014
As at August 31, 2000
September 2000 to August 2001................... $ 5,400 1.4871
September 2001 to April 2002.................... 1,200 1.4602

As at August 31, 1999 and 2000, these contracts resulted in deferred
unrealized losses amounting to US$35,000 and US$45,000, respectively.

As at August 31, 2000, the company held forward exchange contracts to
buy U.S. dollars at various forward rates which are summarized as follows:

WEIGHTED AVERAGE
CONTRACTUAL CONTRACTUAL
AMOUNT FORWARD RATE
------ ------------
Maturing between November 2000 and January 2001... $40,500 1.4777

As at August 31, 2000, the fair value of these contracts amounted to
US$27,431,000 compared to contractual value of US$27,407,000, resulting in an
unrealized loss of US$24,000 which has been reflected in the statement of
earnings for the year.

20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

As a registrant with the Securities and Exchange Commission in the
United States, the company is required to reconcile its financial results for
significant differences between generally accepted accounting principles as
applied in Canada (Canadian GAAP) and those applied in the United States (U.S.
GAAP).

Additional disclosures required under U.S. GAAP have been provided in
the accompanying financial statements and notes. In addition, the following
summarizes differences between Canadian and U.S. GAAP and other required
disclosures under U.S. GAAP.

ACCOUNTING FOR STOCK-BASED COMPENSATION

To conform with U.S. GAAP, the company measures stock-based
compensation costs using the intrinsic value method (APB 25 "Accounting for
Stock Issued to Employees").

Stock purchase plan

Under APB 25, compensation cost related to the stock purchase plan is
measured as the difference between the fair value of the purchased stock and the
purchase price paid by plan participants. Compensation cost is amortized to
expense over a period of five years, being the restriction period.

During the years ended August 31, 1999 and 2000, the weighted average
fair value per share under the stock purchase plan amounted to approximately
$0.68 and $10.80, respectively. The fair value per share since inception of the
plan ranged between $0.68 and $18.00. As at

F-23

August 31, 1999 and 2000, the balance of deferred stock-based compensation
amounted to $40,000 and $2,144,000, respectively.

Stock option plan

In accordance with APB 25, the company's stock option plan is
considered to be a variable plan. Accordingly, subsequent increases in the fair
value of the underlying stock, in excess of the exercise price of the option,
are accounted for as additional compensation costs. Compensation cost is
amortized to expense over the estimated vesting period up to a maximum of four
years. As at August 31, 2000, the balance of deferred stock-based compensation
amounted to $17,285,000.

Under Canadian GAAP, no compensation cost is recognized for these
stock-based compensation plans.

CHANGE IN REPORTING CURRENCY

As mentioned in note 3, on September 1, 1999, the company adopted the
U.S. dollar as its reporting currency. Under U.S. GAAP, the financial
statements, including prior years, are translated according to the current rate
method. Under Canadian GAAP, at the time of change in reporting currency, the
historical financial statements are presented using a translation of
convenience.

Under Canadian GAAP, the statements of earnings for the years ended
August 31, 1998 and 1999 were translated into U.S. dollars using an exchange
rate of US$1.00 = Cdn$1.4958. Under U.S. GAAP, revenue and expenses would be
translated at exchange rates prevailing at the respective transaction dates.
Average exchange rates for the years ended August 31, 1998 and 1999 were US$1.00
= Cdn$1.4390 and Cdn$1.5068, respectively. The exchange rates as at August 31,
1998 and 1999 were US$1.00 = Cdn$1.5722 and Cdn$1.4958, respectively.

SHORT-TERM INVESTMENTS

Under U.S. GAAP, the short-term investments would be classified as
"available for sale" securities. Consequently, these securities would be carried
at fair value, with any unrealized holding gains or losses at each balance sheet
date being reflected in other comprehensive income on a net of tax basis. Under
Canadian GAAP, short-term investments are carried at the lower of cost and
market value and cost is composed of acquisition cost plus amortization of
discount or less amortization of premium.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS 121, Accounting for the impairment of
long-lived assets and for long-lived assets to be disposed of, the company
reviews the carrying value of its long-lived assets, including goodwill
associated with assets acquired in a purchase business combination, when events
or changes in circumstances indicate that the carrying value may not be
recoverable. If this review indicates that the carrying amounts of the assets
and goodwill, where applicable, will not be recoverable, as determined based on
estimated undiscounted cash flows, an

F-24

impairment loss is recorded. Impairment losses, if any, are measured as the
excess of the carrying values over the fair values of the related assets. In
addition, goodwill is reviewed periodically as disclosed in note 2.

FORWARD EXCHANGE CONTRACTS

Under U.S. GAAP, in accordance with SFAS 52, certain of the forward
exchange contracts held for hedging and other purposes in 1998 and 1999, for
which the underlying transactions are not firmly committed, would not qualify
for hedge accounting. Consequently, unrealized gains or losses on these
contracts at each balance sheet date would be reflected in earnings for the
corresponding year. Under Canadian GAAP, the company's forward exchange
contracts held for the purpose of hedging anticipated sales qualify for hedge
accounting and any unrealized gains or losses are deferred and recognized in the
statement of earnings upon settlement of the related transactions.

EARNINGS PER SHARE

For purposes of earnings per share calculations, the subordinate voting
shares and multiple voting shares (previously Class A, E and F shares),
collectively, are considered to constitute common shares.

Under U.S. GAAP, diluted net earnings per share is calculated based on
the weighted average number of common shares outstanding during the year, plus
the effects of potential common shares, such as options, and conversions of
senior shares outstanding during the year. This method requires that diluted net
earnings per share be calculated, using the treasury stock method, as if all
potential common shares had been exercised at the later of the beginning of the
period or the date of issue, as the case may be, and that the funds obtained
thereby were used to purchase common shares of the company at the average fair
value of the common shares during the period.

Under Canadian GAAP, fully diluted earnings per share is calculated
based on the current imputed earnings method (note 2).

Under U.S. GAAP, the presentation of per share figures for earnings
before amortization of goodwill is not permitted. In addition, under U.S. GAAP,
amortization of goodwill would be included in the computation of earnings from
operations.

FUTURE INCOME TAXES

As a result of adjustments from Canadian GAAP to U.S. GAAP, future
income tax liabilities under U.S. GAAP include an adjustment of $23,000 as at
August 31, 1999 and 2000, related to short-term investments and forward exchange
contracts carried at fair value.

NEW ACCOUNTING STANDARDS

In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging

F-25

Activities". The standard, which must be applied prospectively, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The only
derivatives held by the company are forward exchange contracts. The new standard
is effective September 1, 2000 and will be applied prospectively, as required.
On September 1, 2000, the company hedged certain firm sales commitments with
forward exchange contracts, as disclosed in note 19. The impact of adopting the
standard related to these derivatives will not be material. The other
derivatives currently disclosed in note 19 do not qualify as hedging instruments
and the method of accounting for these derivatives will not change as a result
of the application of SFAS 133.

On December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition". SAB 101, as
amended by SAB101B, is effective no later than the fourth fiscal quarter of the
first fiscal year beginning after December 15, 1999. The implementation of this
SAB is not expected to have any material effect on the company's financial
statements or revenue recognition policy in future years.

In March 2000, the Financial Accounting Standards Board issued
Interpretation 44 "Accounting for Certain Transactions Including Stock
Compensation", an interpretation of APB 25, which provides guidance on applying
APB 25 for certain stock compensation issues. FIN 44 is effective since July 4,
2000. The implementation of this FIN did not have any effect on the company's
financial statements.

RECONCILIATION OF NET EARNINGS TO CONFORM WITH U.S. GAAP

The following summary sets out the material adjustments to the
company's reported net earnings and net earnings per share which would be made
to conform with U.S. GAAP.

YEARS ENDED AUGUST 31,
-------------------------------
1998 1999 2000
---- ---- ----

Net earnings for the year in accordance with Canadian
GAAP........................................................... $ 4,501 $ 5,814 $ 9,924
Non-cash stock-based compensation costs related to stock
purchase plan*................................................. -- (10) (538)
Non-cash stock-based compensation costs related to stock
option plan under variable accounting*......................... -- -- (1,464)
Change in reporting currency..................................... 178 (44) --
Unrealized gains (losses) on forward exchange contracts.......... (208) 208 --
Future income taxes on forward exchange contracts................ 67 (67) --
------- ------- -------
Net earnings for the year in accordance with U.S. GAAP........... 4,538 5,901 7,922
Other comprehensive income (loss)
Foreign currency translation adjustments....................... (1,350) 606 1,555
Unrealized holding gains on short-term investments, net of
related income taxes of $23,000 in 1999 and nil in
2000........................................................... -- 36 1
------- ------- -
Comprehensive income............................................. $ 3,188 $ 6,543 $ 9,478
======= ======= =======
Basic and diluted net earnings per share in accordance
with U.S. GAAP................................................. $ 0.12 $ 0.15 $ 0.20

----------

* Required under APB 25

F-26

Earnings available to common shareholders is reconciled as follows:

YEARS ENDED AUGUST 31,
--------------------------
1998 1999 2000
---- ---- ----
Net earnings for the year.................... $4,538 $5,901 $7,922
Dividend on Class C share.................... -- (333) --
------- ------ ------
Earnings available to common shareholders.... $4,538 $5,568 $7,922
====== ====== ======

The diluted weighted average number of common shares outstanding
calculated according to U.S. GAAP is as follows:

YEARS ENDED AUGUST 31,
--------------------------
1998 1999 2000
---- ---- ----
Weighted average number of common shares
outstanding--
Basic (000's).............................. 38,000 38,001 39,951
Conversion of preferred shares Series 1...... -- -- 26
Exercise of stock options.................... -- -- 109
------ ------ ------
Weighted average number of common shares
outstanding--
Diluted (000's)............................ 38,000 38,001 40,086
====== ====== ======

The number of common shares issuable upon the assumed conversion of the
preferred shares Series 1 has been determined by dividing the paid-in value of
the preferred shares Series 1 (previously Class G shares) by the market value of
the former Class A shares as at February 4, 2000 (the date the Class G shares
were issued), or $18.00 per Class A share, weighted from the date of issuance of
the Class G shares to the end of the year.

As a result of the above adjustments to net earnings, differences with
respect to the shareholders' equity under U.S. GAAP are as follows:

SHARE CAPITAL

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
Share capital in accordance with Canadian GAAP......... $ 87 $ 198,459
Stock-based compensation costs related to stock
purchase plan
Current year......................................... 10 538
Cumulative effect of prior years.................... -- 10
------ ---------
Share capital in accordance with U.S. GAAP............. $ 97 $ 199,007

OTHER CAPITAL

AS AT AUGUST 31,
-------------------
1999 2000
---- ----

Other capital in accordance with Canadian GAAP.... $ -- $ --
Stock-based compensation costs related to stock
option plan under variable accounting........... -- 1,464
------ ------
Other capital in accordance with U.S. GAAP........ $ -- $1,464
====== ======

RETAINED EARNINGS

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
Retained earnings in accordance
with Canadian GAAP.............................. $14,592 $ 6,980
Stock-based compensation costs ................... (10) (2,002)

F-27

Current year......................................
Cumulative effect of prior years -- (10)
Change in reporting currency
Current year
Net earnings................................ (44)
Dividends................................... 24
Cumulative effect of prior years............... 1,036 1,016
------- -------
Retained earnings in accordance with U.S. GAAP.... $15,598 $ 5,984
======= =======

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

YEARS ENDED
AUGUST 31,
-----------------
1999 2000
---- ----
Foreign currency translation adjustments
Balance-- Beginning of year.................... $ (1,622) $ (1,016)
Change during the year......................... 606 1,555
-------- --------
Balance-- End of year.......................... (1,016) 539
-------- --------
Unrealized holding gains on short-term investments,
net of income taxes -- 36
Balance -- Beginning of year
Unrealized gains arising during the year, net of
related income taxes of $23,000 in 1999 and 2000. 36 37
Reclassification adjustment for amounts included
in net earnings, net of related income taxes of
$23,000 ..................................... -- (36)
-------- --------
Balance-- End of year.......................... 36 37
-------- --------
Accumulated other comprehensive income (loss)..... $ (980) $ 576
======== ========

Following are condensed statements of earnings for the years ended
August 31, 1998, 1999 and 2000 and condensed balance sheets as at August 31,
1999 and 2000 prepared under U.S. GAAP:

YEARS ENDED AUGUST 31,
----------------------------
1998 1999 2000
---- ---- ----
STATEMENTS OF EARNINGS
Sales................................... $32,853 $41,858 $71,639
Cost of sales........................... 11,793 14,889 24,712
------ ------- -------
Gross margin............................ 21,060 26,969 46,927
Total operating expenses................ 14,105 18,367 34,503(1)
------ ------- -------
Earnings from operations................ 6,955 8,602 12,424
===== ======= =======
Net earnings for the year............... $4,538 $ 5,901 $ 7,922
====== ======= =======

(1) includes the non-cash stock compensation costs totaling $2,002,000.

F-28

AS AT AUGUST 31,
-------------------
1999 2000
---- ----
BALANCE SHEETS
Current assets
Cash and cash equivalents........................ $ 423 $ 729
Available-for-sale securities................... 1,430 162,719
Accounts receivable............................. 9,895 21,062
Inventories..................................... 7,591 18,868
Other current assets............................ 856 1,307
Future income taxes............................. -- 972
------- --------
20,195 205,657
Capital assets..................................... 2,639 8,694
Goodwill and other assets.......................... 65 2,320
Future income taxes................................ -- 3,089
------- --------
$22,899 $219,760
======= ========
Current liabilities
Bank advances.................................... $ -- $ 10
Accounts payable and accrued liabilities........ 5,523 10,353
Other current liabilities....................... 1,891 1,090
------- --------
7,414 11,453
Long-term liabilities.............................. 770 1,276
------- --------
8,184 12,729
Shareholders' equity
Share capital.................................... 97 199,007
Other capital................................... -- 1,464
Accumulated other comprehensive income (loss)... (980) 576
Retained earnings............................... 15,598 5,984
------- --------
14,715 207,031
------- --------
$22,899 $219,760
======= ========

STATEMENT OF CASH FLOWS

Under Canadian GAAP, the statements of cash flows, which have been
prepared on a basis consistent with International Accounting Standards, for the
years ended August 31, 1998 and 1999 were translated into U.S. dollars using an
exchange rate of US$1.00 = Cdn$1.4958. Under U.S. GAAP, the historical exchange
rates on the dates of the cash flow activities would be used. Following are
summary statements of cash flows under U.S. GAAP:

YEARS ENDED
AT AUGUST 31,
----------------
1998 1999
---- ----
Operating activities........................................ $ 3,278 $3,633
Financing activities........................................ (273) (3,261)
Investing activities........................................ (2,061) (1,206)
-------- ------
Change in cash and cash equivalents......................... 944 (834)
Effect of foreign exchange rate changes on cash and cash
equivalents............................................... (124) 56
Cash and cash equivalents
--Beginning of year....................................... 381 1,201
-------- ------
Cash and cash equivalents
--End of year............................................. $ 1,201 $ 423
======== ======

For the year ended August 31, 2000, there are no material differences
between the statement of cash flows under Canadian GAAP as compared to U.S.
GAAP.

F-29

ACCOUNTING FOR STOCK-BASED COMPENSATION

Under U.S. GAAP, the company has elected to measure compensation cost
related to awards of stock options using the intrinsic value method of
accounting. In this instance, however, under SFAS 123, Accounting for
Stock-Based Compensation, the company is required to make pro forma disclosures
of net earnings, basic net earnings per share and diluted net earnings per share
as if the fair value based method of accounting had been applied.

The fair value of options granted was estimated using the Black-Scholes
options pricing model with the following weighted average assumptions: a
risk-free interest rate of 6.04%, an expected volatility of 75%, dividends of
nil and a weighted average expected life of 32 months. The weighted average
grant-date fair value of options granted during the year was $13.

The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions,
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

If the fair value based method had been used to account for stock-based
compensation costs related to stock options issued to employees, directors and
executive officers, the net earnings and related net earnings per share figures
under U.S. GAAP would be as follows:

YEAR ENDED
---------------
AUGUST 31, 2000
---------------
Pro forma net earnings for the year......................... $8,939
Pro forma basic and diluted net earnings per share.......... $0.22

21. SUBSEQUENT EVENTS

On December 20, 2000, the company acquired a 100% interest in Burleigh
Instruments, Inc. ("Burleigh"), a manufacturer of precision scientific
instruments used in basic and applied research, engineering and production test
applications in a variety of fields, in exchange for a total consideration value
at US$186,809,000. The consideration paid consisted of US$40 million in cash and
the issuance of 6,488,816 subordinate voting shares for an amount of
US$146,809,000. This acquisition will be accounted for using the purchase
method.

Under U.S. GAAP, the value of shares issued upon a business combination
should be determined based on the market price of the shares over a reasonable
period of time before and after the companies have reached an agreement on the
purchase price, the significant terms of the agreement are known and the
proposed transaction is announced.

In view of this standard, the measurement date occurred on December 14,
2000, the date on which all significant terms of the agreement were known. The
average market price of the shares a few days before and after that date was
US$31.09. Considering the number of shares to be issued, the total consideration
for U.S. GAAP purposes amounts to US$241,737,000.

F-30

Furthermore, the company established a restricted stock award plan for
employees of Burleigh. A total of 360,000 subordinate voting shares will be
granted under that plan with an exercise price of nil. Shares granted under the
plan will vest over a four-year period, with 25% vesting on an annual basis
commencing on the first anniversary of the date of grant.

Under U.S. GAAP, compensation costs related to the restricted stock
award plan will be measured as the difference between the fair value of the
awarded stock and the exercise price which is nil. As at December 20, 2000, the
balance of deferred stock-based compensation amounted to US$8,145,000 and will
be recognized over the vesting period.

Under Canadian GAAP, no compensation cost will be recognized for this
stock-based compensation plan.

F-31

(tabular amounts in thousands of U.S. dollars, except share and
per share data and as otherwise noted)

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

F-32

INDEX TO EXHIBITS

F-33

(tabular amounts in thousands of U.S. dollars, except share and
per share data and as otherwise noted)

TABLE OF CONTENTS
Page

PART I. ...................................................................... 1
-------

Item 1. Identity of Directors, Senior Management and Advisors......... 1

Item 2. Offer Statistics and Expected Timetable....................... 1

Item 3. Key Information............................................... 1

Item 4. Information on the Company................................... 14

Item 5. Operating and Financial Review and Prospects................. 36

Item 6. Directors, Senior Management and Employees................... 44

Item 7. Major Shareholders and Related Party Transactions............ 55

Item 8. Financial Information........................................ 59

Item 9. The Offer and Listing........................................ 59

Item 10. Additional Information....................................... 59

Item 11. Qualitative and Quantitative Disclosures about Risk.......... 69

Item 12. Description of Securities Other than Equity Securities....... 70

PART II. ............................................................. 70
--------

Item 13. Defaults, Dividends Arrearages and Delinquencies............. 70

Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds ......................................... 70

Item 15. [Reserved]................................................... 70

Item 16. [Reserved]................................................... 70

PART III. ............................................................. 71
---------

Item 17. Financial Statements......................................... 71

Item 18. Financial Statements......................................... 71

Item 19. Exhibits..................................................... 71