EXFO INC. (Form: 20-F, Received: 11/24/2010 10:55:05)

152

Independent Auditors' Report

To the Shareholders of EXFO Inc.

We have completed integrated audits of EXFO Inc.'s 2010, 2009 and 2008 consolidated financial statements and of its internal control over financial reporting as at August 31, 2010. Our opinions, based on our audits, are presented below.

Consolidated financial statements

We have audited the accompanying consolidated balance sheets of EXFO Inc. as at August 31, 2010 and August 31, 2009, the consolidated statement of accumulated other comprehensive income for each of the years in the two-year period ended August 31, 2010, and the related consolidated statements of earnings, comprehensive income (loss), retained earnings and contributed surplus and cash flows for each of the years in the three-year period ended August 31, 2010. We have also audited the financial statement schedule, Valuation and Qualifying Accounts in item 8.A. of this Annual Report on Form 20-F. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits of the Company's financial statements as at August 31, 2010 and for each of the years in the three-year period then ended in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at August 31, 2010 and August 31, 2009 and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2010 in accordance with Canadian generally accepted accounting principles. Furthermore, in our opinion, the financial statement schedule, Valuation and Qualifying Accounts, in Item 8.A. of this Annual Report on Form 20-F presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

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Internal control over financial reporting

We have also audited EXFO Inc.'s internal control over financial reporting as at August 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting, appearing in Item 15 on page 138 of this Annual Report on Form 20-F. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures

may deteriorate.

As described in Management's Annual Report on Internal Control over Financial Reporting, management has excluded NetHawk Oyj from its assessment of internal control over financial reporting as at August 31, 2010 because it was acquired by EXFO Inc. in a purchase business combination during 2010. We have also excluded NetHawk Oyj from our audit of internal control over financial reporting. NetHawk Oyj is a subsidiary whose total assets and total sales represent 20.2% and 7.1% respectively of the related consolidated financial statement amounts as at and for the year ended August 31, 2010.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at August 31, 2010 based on criteria established in Internal Control – Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP 1

Quebec City, Quebec, Canada

October 12, 2010, except Note 16 d) which is as of November 5, 2010

1 Chartered accountant auditor permit No. 18144

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EXFO INC.

Consolidated Balance Sheets

(in thousands of US dollars)

	As at August 31,
	2010		2009
Assets

Current assets
Cash	$	21,440	$	9,777
Short-term investments (note 7)		10,379		59,105
Accounts receivable (note 7)
Trade		50,190		22,933
Other		5,217		2,620
Income taxes and tax credits recoverable		2,604		2,253
Inventories (note 8)		40,328		29,416
Prepaid expenses		2,816		1,842
Future income taxes (note 19)		6,191		5,538
Current assets held for sale (note 4)		3,991		2,727

		143,156		136,211

Tax credits recoverable		29,397		24,961
Forward exchange contracts (note 7)		–		428
Property, plant and equipment (note 9)		23,455		18,801
Intangible assets (note 10)		27,947		16,824
Goodwill (notes 3, 5 and 10)		29,355		17,840
Future income taxes (note 19)		12,884		18,164
Long-term assets held for sale (note 4)		7,308		7,142

	$	273,502	$	240,371
Liabilities

Current liabilities
Accounts payable and accrued liabilities (note 12)	$	30,870	$	19,803
Income taxes payable		426		–
Current portion of long-term debt (note 13)		568		–
Deferred revenue		10,354		6,481
Current liabilities related to assets held for sale (note 4)		2,531		1,847

		44,749		28,131

Deferred revenue		5,775		4,195
Long-term debt (note 13)		1,419		–
Other liabilities		603		–
Long-term liabilities related to assets held for sale (note 4)		537		–

		53,083		32,326

Commitments (note 14)
Contingencies (note 15)

Shareholders’ equity
Share capital (note 16)		106,126		104,846
Contributed surplus		18,563		17,758
Retained earnings		50,528		43,909
Accumulated other comprehensive income		45,202		41,532

		220,419		208,045

	$	273,502	$	240,371

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

On behalf of the Board
/s/ Germain Lamonde	/s/ André Tremblay
GERMAIN LAMONDE	ANDRÉ TREMBLAY
Chairman, President and CEO	Chairman, Audit Committee

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EXFO INC.

Consolidated Statements of Earnings

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

	Years ended August 31,
	2010			2009			2008

Sales (note 21)	$	202,757		$	153,082		$	160,981

Cost of sales (1,2) (note 8)		73,901			57,897			64,364

Gross margin		128,856			95,185			96,617

Operating expenses
Selling and administrative (1)		66,612			58,067			54,869
Net research and development (1) (note 18)		37,847			27,213			24,580
Amortization of property, plant and equipment		5,757			4,453			4,137
Amortization of intangible assets		7,773			5,033			3,862
Restructuring charges (note 5)		–			963			–
Impairment of goodwill (note 5)		–			21,713			–
Total operating expenses		117,989			117,442			87,448

Earnings (loss) from operations		10,867			(22,257	)		9,169

Interest income (expense), net		(292	)		592			4,381
Foreign exchange gain (loss)		(1,496	)		1,074			404

Earnings (loss) before income taxes (note 19)		9,079			(20,591	)		13,954

Income taxes (note 19)
Current		715			587			(7,154	)
Future		4,814			(321	)		12,815
Recognition of previously unrecognized future income tax assets		–			–			(5,324	)
		5,529			266			337

Earnings (loss) from continuing operations before extraordinary gain		3,550			(20,857	)		13,617

Net earnings from discontinued operations (note 4)		3,069			4,272			1,771

Earnings (loss) before extraordinary gain		6,619			(16,585	)		15,388

Extraordinary gain (note 3)		–			–			3,036

Net earnings (loss) for the year	$	6,619		$	(16,585	)	$	18,424

Basic and diluted earnings (loss) from continuing operations before extraordinary gain per share	$	0.06		$	(0.34	)	$	0.20

Basic and diluted net earnings (loss) per share	$	0.11		$	(0.27	)	$	0.27

Basic weighted average number of shares outstanding (000’s)		59,479			61,845			68,767

Diluted weighted average number of shares outstanding (000’s) (note 20)		60,616			61,845			69,318

(1) Stock-based compensation costs included in:
Cost of sales	$	138		$	133		$	138
Selling and administrative		1,042			782			771
Net research and development		470			383			261
Net earnings from discontinued operations		136			111			102
	$	1,786		$	1,409		$	1,272

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

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

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EXFO INC.

Consolidated Statements of Comprehensive Income (Loss)

and Accumulated Other Comprehensive Income

(in thousands of US dollars)

Comprehensive income (loss)

	Years ended August 31,
	2010			2009			2008

Net earnings (loss) for the year	$	6,619		$	(16,585	)	$	18,424
Foreign currency translation adjustment		3,728			(10,671	)		(2,289	)
Changes in unrealized losses on short-term investments		–			22			31
Unrealized gains (losses) on forward exchange contracts		940			(1,467	)		962
Reclassification of realized (gains) losses on forward exchange contracts in net earnings (loss)		(1,022	)		3,167			(3,915	)
Future income tax effect of the above items		24			(528	)		909

Comprehensive income (loss)	$	10,289		$	(26,062	)	$	14,122

Accumulated other comprehensive income

	Years ended August 31,
	2010			2009

Foreign currency translation adjustment
Cumulative effect of prior years	$	40,458		$	51,129
Current year		3,728			(10,671	)

		44,186			40,458
Unrealized gains (losses) on forward exchange contracts
Cumulative effect of prior years		1,076			(96	)
Current year, net of realized gains (losses) and future income taxes		(58	)		1,172

		1,018			1,076

Unrealized losses on short-term investments
Cumulative effect of prior years		(2	)		(24	)
Current year, net of future income taxes		–			22

		(2	)		(2	)

Accumulated other comprehensive income	$	45,202		$	41,532

Total retained earnings and accumulated other comprehensive income amounted to $85,441 and $95,730 as at August 31, 2009 and 2010, respectively.

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

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EXFO INC.

Consolidated Statements of Retained Earnings and Contributed Surplus

(in thousands of US dollars)

Retained earnings

	Years ended August 31,
	2010		2009			2008

Balance – Beginning of year	$	43,909	$	60,494		$	42,275

Add (deduct)
Cumulative effect of prior years		–		–			55
Net earnings (loss) for the year		6,619		(16,585	)		18,424
Premium on redemption of share capital (note 16)		–		–			(260	)

Balance – End of year	$	50,528	$	43,909		$	60,494

Contributed surplus

	Years ended August 31,
	2010			2009			2008

Balance – Beginning of year	$	17,758		$	5,226		$	4,453

Add (deduct)
Stock-based compensation costs		1,756			1,407			1,287
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards (note 16)		(954	)		(540	)		(514	)
Discount on redemption of share capital (note 16)		3			11,665			–

Balance – End of year	$	18,563		$	17,758		$	5,226

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

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EXFO INC.

Consolidated Statements of Cash Flows

(in thousands of US dollars)

	Years ended August 31,
	2010			2009			2008

Cash flows from operating activities
Net earnings (loss) for the year	$	6,619		$	(16,585	)	$	18,424
Add (deduct) items not affecting cash
Change in discount on short-term investments		19			597			1,035
Stock-based compensation costs		1,786			1,409			1,272
Amortization		13,729			9,674			8,163
Deferred revenue		3,672			1,706			47
Loss on disposal of capital assets		–			237			–
Impairment of goodwill (note 5)		–			21,713			–
Future income taxes		5,787			(300	)		8,770
Extraordinary gain (note 3)		–			–			(3,036	)
Change in unrealized foreign exchange gain/loss		471			(1,955	)		(1,093	)
		32,083			16,496			33,582

Change in non-cash operating items
Accounts receivable		(22,522	)		9,654			(4,338	)
Income taxes and tax credits		(4,073	)		(3,391	)		(12,833	)
Inventories		(9,302	)		2,624			(2,166	)
Prepaid expenses		105			(350	)		(127	)
Accounts payable and accrued liabilities		5,168			(2,409	)		(1,416	)
Other liabilities		308			–			–
		1,767			22,624			12,702

Cash flows from investing activities
Additions to short-term investments		(233,388	)		(438,460	)		(717,020	)
Proceeds from disposal and maturity of short-term investments		285,805			456,612			760,310
Additions to capital assets		(8,966	)		(6,945	)		(6,508	)
Business combinations, net of cash acquired (note 3)		(33,042	)		(2,414	)		(41,016	)
		10,409			8,793			(4,234	)

Cash flows from financing activities
Repayment of long-term debt		(274	)		–			–
Redemption of share capital (note 16)		(14	)		(26,871	)		(8,068	)
Exercise of stock options		343			56			61
		55			(26,815	)		(8,007	)

Effect of foreign exchange rate changes on cash		(733	)		95			(88	)

Change in cash		11,498			4,697			373
Cash – Beginning of year		10,611			5,914			5,541
Cash – End of year	$	22,109		$	10,611		$	5,914

Supplementary information
Interest paid	$	34		$	23		$	55
Income taxes paid	$	796		$	86		$	759

Cash related to:
Continuing operations	$	21,440		$	9,777		$	5,329
Discontinued operations (note 4)		669			834			585
	$	22,109		$	10,611		$	5,914

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

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EXFO INC.

Notes to Consolidated Financial Statements

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

1	Nature of Activities and Change in Registered Name

EXFO Inc. (“EXFO”) designs, manufactures and markets test and service assurance solutions for wireless and wireline network operators and equipment manufacturers in the global telecommunications industry. The company offers core-to-edge solutions to assess the performance and reliability of converged IP (Internet protocol) fixed and mobile networks. EXFO’s products are sold in approximately 100 countries around the world.

In February 2010, the company changed its name from EXFO Electro-Optical Engineering Inc. to EXFO Inc.

2	Summary of Significant Accounting Policies

Basis of presentation

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada, and significant differences in measurement and disclosure from U.S. GAAP are set out in note 22. These consolidated financial statements include the accounts of the company and its domestic and international subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Accounting estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant estimates include the fair value of financial instruments, the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the provision for excess and obsolete inventories, the estimated useful lives of capital assets, the valuation of long-lived assets, the impairment of goodwill, the valuation allowance for future income taxes, the amount of certain accrued liabilities and deferred revenue, as well as stock-based compensation costs. Actual results could differ from those estimates.

Foreign currency translation

Reporting currency and self-sustaining foreign operations

The principal measurement currency of the company is the Canadian dollar. The company has adopted the US dollar as its reporting currency. The financial statements are translated into the reporting currency using the current rate method. Under this method, assets and liabilities of the company and its self-sustaining foreign operations with functional currency other than the US dollar are translated in US dollars using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the monthly average exchange rate. The cumulative foreign currency translation adjustment arising from such translation is included in accumulated other comprehensive income in shareholders’ equity.

Foreign currency transactions

Transactions denominated in currencies other than the measurement currency are translated into the relevant measurement currency as follows: monetary assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, and revenues and expenses are translated at the exchange rate in effect on the date of the transaction. Non-monetary assets and liabilities are translated at historical rates. Foreign exchange gains and losses arising from such translation are reflected in the statements of earnings.

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EXFO INC.

Notes to Consolidated Financial Statements

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

To be adopted after fiscal 2010

In January 2009, the CICA issued Section 1582, “Business Combinations”, which replaces Section 1581, “Business Combinations”. This new section establishes the standards for the accounting of business combinations and states that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent consideration and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This standard applies prospectively to business combinations with acquisition dates on or after January 1, 2011; earlier adoption is permitted.

In January 2009, the CICA issued Section 1601, “Consolidated Financial Statements”, which replaces Section 1600, “Consolidated Financial Statements”, and establishes the standards for preparing consolidated financial statements. This new section applies to fiscal years beginning on or after January 1, 2011; earlier adoption is permitted. The company has not yet determined the impact that adopting this standard will have on its consolidated financial statements.

In January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination. This new section applies to fiscal years beginning on or after January 1, 2011; earlier adoption is permitted as of the beginning of a fiscal year.

Should the company decide to adopt one of these three new sections earlier, it must adopt all three at the same date.

In December, 2009, the CICA’s Emerging Issues Committee (EIC) issued EIC-175, “Multiple Deliverable Revenue Arrangements”, which will be applicable prospectively (with retrospective adoption permitted) to revenue arrangements with multiple deliverables entered into or materially modified in the first annual period beginning on January 1, 2011. EIC-175 amends the guidance contained in EIC-142, “Revenue Arrangements with Multiple Deliverables“, and establishes additional requirements regarding revenue recognition related to multiple deliverables as well as supplementary disclosures. The company will adopt this standard on September 1, 2010 at the same time it will adopt similar new U.S. GAAP requirements (note 22), and is currently evaluating the impact that EIC-175 will have on its consolidated financial statements.

3	Business Combinations

NetHawk Oyj

On March 12, 2010, the company acquired 91% of the issued and outstanding common shares of NetHawk Oyj. Headquartered in Oulu, Finland, NetHawk Oyj was a privately owned company providing 2G, 3G and 4G/LTE protocol analyzers and simulators aimed mostly at network equipment manufacturers and wireless network operators.

On March 15, 2010, the company made a voluntary offer to purchase the remaining issued and outstanding shares; this offer expired on April 30, 2010. Simultaneously, the company entered into a statutory procedure under the Finnish Companies Act by which it acquired the remaining of the issued and outstanding common shares that were not tendered under the voluntary offer.

Total consideration was comprised of a cash consideration of €37,264,000 (US$51,139,000), including acquisition-related costs of $2,842,000, or €25,121,000 (US$34,438,000), excluding NetHawk’s cash of €12,143,000 (US$16,701,000) at the acquisition date, plus a cash contingent consideration of up to €8,700,000 (US$11,000,000) based on a certain sales volume of NetHawk products over the three years following the acquisition. The cash contingent consideration will be accounted for as additional goodwill when the amounts of any contingent consideration can be reasonably estimated and the outcome of the contingency is resolved. Acquisition-related costs include an amount of $780,000 for a statutory transfer tax payable in Finland based on the purchase price of shares.

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EXFO INC.

Notes to Consolidated Financial Statements

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

This acquisition was accounted for using the purchase method under CICA Handbook Section 1581, “Business Combinations”, and the requirements of Section 1600, “Consolidated Financial Statements”; consequently, the purchase price was allocated to the assets acquired and liabilities assumed based on management’s best estimate of their fair value as of the acquisition date. The results of operations of the acquired business have been included in the consolidated financial statements of the company since March 12, 2010, being the date of acquisition.

The purchase price, including acquisition related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:

Assets acquired, net of cash acquired
Accounts receivable	$	7,710
Inventories		2,315
Other current assets		797
Property, plant and equipment		2,994
Core technology		8,638
Customer relationships		7,180
Other intangible assets		2,033
Current liabilities assumed
Accounts payable and accrued liabilities		(5,710	)
Deferred revenue		(1,615	)
Long-term debt		(2,464	)
Net identifiable assets acquired		21,878
Goodwill		12,560
Purchase price, net of cash acquired	$	34,438

Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of five years.

Upon completion of the final purchase price allocation in the fourth quarter of fiscal 2010, the company revised the estimated fair value assigned to accounts receivable, property, plant and equipment, intangible assets and accounts payable and accrued liabilities. The fair value assigned to accounts receivable decreased by $717,000. The fair value assigned to property, plant and equipment, intangible assets and accounts payable and accrued liabilities increased by $476,000, $1,184,000 and $613,000, respectively. The net increase in the fair value of these net assets reduced goodwill by $330,000.

Future income tax assets at the acquisition date amounted to $8,066,000 and were mainly comprised of net operating losses and research and development expenses carried forward. A valuation allowance of $3,065,000 was recorded against these assets at the acquisition date. In the event that the company would reverse a portion or all of the valuation allowance, the amount of such reversal would reduce the amount of goodwill recognized at the date of acquisition.

Acquired goodwill mainly reflects NetHawk Oyj’s acquired work force. It also reflects the competitive advantages the company expected to realize from NetHawk Oyj’s standing in the wireless protocol testing industry as well as certain synergies with the company’s service assurance products. Acquired goodwill is not deductible for tax purposes.

Navtel Communications Inc.

On March 26, 2008, the company acquired all issued and outstanding shares of Navtel Communications Inc. Based in Toronto, Canada, Navtel Communications Inc. was a privately held company specializing in tests for next-generation Internet protocol networks. On March 26, 2008, Navtel Communications Inc. was liquidated into the parent company.

This acquisition was settled for a total cash consideration of $11,477,000, or $11,332,000 net of $145,000 of cash acquired. The total consideration included acquisition-related costs of $172,000.

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EXFO INC.

Notes to Consolidated Financial Statements

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

This acquisition was accounted for using the purchase method and, consequently, the results of operations of the acquired business have been included in the consolidated financial statements of the company since March 26, 2008, being the date of acquisition.

The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:

Assets acquired, net of cash acquired
Accounts receivable	$	776
Inventories		447
Other current assets		320
Tax credits		7,074
Core technology		2,919
Future income tax assets		8,586
Current liabilities assumed
Accounts payable and accrued liabilities		(431	)
Deferred revenue		(523	)
Future income tax liabilities		(2,737	)
Net identifiable assets acquired		16,431
Purchase price, net of cash acquired		11,332
Excess of the fair value of net identifiable assets acquired over the purchase price	$	(5,099	)

The excess of the fair value of the net identifiable assets acquired over the purchase price in the amount of $5,099,000 has been eliminated in part by fully reducing the value assigned to acquired core technology and related future income tax liabilities. The remaining excess in the amount of $3,036,000 has been presented as an extraordinary gain in the statement of earnings for the year ended August 31, 2008. The basic and diluted extraordinary gain per share amounted to $0.05 for the year ended August 31, 2008.

Brix Networks Inc. (renamed EXFO Service Assurance Inc.)

On April 22, 2008, the company acquired all issued and outstanding shares of Brix Networks Inc. (renamed EXFO Service Assurance Inc.). Based in the Boston, MA area, Brix Networks Inc. was a privately held company offering VoIP and IPTV test solutions across the three areas that most affect the success of a real-time service: signaling quality (signaling path performance), delivery quality (media transport performance) and content quality (overall quality of experience).

This acquisition was settled for a cash consideration of $29,696,000, or $29,684,000 net of $12,000 of cash acquired, plus a cash contingent consideration of $2,414,000; this cash contingent consideration was paid in fiscal 2009 based upon the achievement of a certain bookings volume during the 12 months following the acquisition. The amount paid for the cash contingent consideration increased goodwill.

The purchase price allocation took into account severance expenses of $497,000 (note 5) for the termination of employees of the acquired business.

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EXFO INC.

Notes to Consolidated Financial Statements

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

The purchase price, including acquisition-related costs, was allocated based on the estimated fair value of acquired net assets at the date of acquisition as follows:

Assets acquired, net of cash acquired
Accounts receivable	$	1,106
Inventories		1,229
Other current assets		488
Capital assets		1,097
Core technology		13,765
Future income tax assets		1,641
Current liabilities assumed
Accounts payable and accrued liabilities		(2,565	)
Deferred revenue		(2,445	)
Net identifiable assets acquired		14,316
Goodwill		15,368
Purchase price, net of cash acquired	$	29,684

Intangible assets are amortized on a straight-line basis over their estimated useful life of five years.

Future income tax assets at the acquisition date amounted to $13,701,000 and were mainly comprised of net operating losses and research and development expenses carried forward. A valuation allowance of $8,195,000 was recorded against these assets at the acquisition date. In the event that the company would reverse a portion or all of the valuation allowance, the amount of such reversal would reduce the amount of goodwill recognized at the date of acquisition.

Acquired goodwill reflects Brix Network’s acquired work force. It also reflects the competitive advantages the company expected to realize from Brix Network’s standing in the telecommunication service assurance industry. Acquired goodwill is not deductible for tax purposes.

4	Operation Held for Sale Presented as Discontinued Operations

During the fourth quarter of 2010, the company engaged in a plan to sell its Life Sciences and Industrial Division to focus its activities in the telecom test and service assurance market. On October 1 st , 2010, the company closed the sale of that Division for a selling price of $24,300,000. As such, this Division has been considered as an operation held for sale and presented as discontinued operations. Assets and liabilities have been reclassified as assets held for sale and liabilities related to assets held for sale and revenues and expenses have been reclassified from continuing operations to discontinued operations for all reporting years. As a result of the classification of the operations of the Life Sciences and Industrial Division as operation held for sale and as discontinued operations, the company has only one operating segment for all reporting years.

The results of the discontinued operations are as follows:

	Years ended August 31,

	2010		2009		2008

Sales	$	25,359	$	19,796	$	22,809
Gross margin	$	13,563	$	10,801	$	11,549
Earnings from operations	$	4,281	$	4,179	$	2,814
Net earnings from discontinued operations	$	3,069	$	4,272	$	1,771
Basic and diluted net earnings from discontinued operations per share	$	0.05	$	0.07	$	0.02

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Notes to Consolidated Financial Statements

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

The assets and liabilities of the discontinued operations have been reclassified and are presented as assets held for sale and liabilities related to assets held for sale as follows:

	As at August 31,

	2010		2009
Assets

Current assets
Cash	$	669	$	834
Accounts receivable		84		145
Income taxes and tax credits recoverable		188		100
Inventories		2,670		1,447
Prepaid expenses		158		201
Future income taxes		222		–

Current assets held for sale		3,991		2,727

Tax credits recoverable		2,142		1,801
Property, plant and equipment		349		299
Intangible assets		48		35
Goodwill		4,769		4,638
Future income taxes		–		369

Long-term assets held for sale		7,308		7,142

	$	11,299	$	9,869
Liabilities

Current liabilities related to assets held for sale	$	2,531	$	1,847

Long-term liabilities related to assets held for sale		537		–

	$	3,068	$	1,847

5	Special Charges

Impairment of goodwill

In the third quarter of fiscal 2009, the company performed its annual impairment test for goodwill for all reporting units. Recoverability of goodwill is determined at the reporting unit level, using a two-step approach. First, the carrying value of the reporting units is compared to their fair value. If the carrying value of a reporting unit exceeds its fair value, the second step is performed to determine the amount of the impairment loss. Following the decrease in the company’s stock price in June 2009, the company came to the conclusion that the carrying value of one of its reporting units exceeded its fair value, and it recorded an impairment charge of $21,713,000 in fiscal 2009, to bring the goodwill of this reporting unit to its fair value. This impairment resulted in a future income tax recovery of $2,070,000.

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EXFO INC.

Notes to Consolidated Financial Statements

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

Restructuring charges

During fiscal 2009, the company implemented a restructuring plan to align its cost structure to the current economic and market conditions. Under that plan, the company recorded charges of $1,171,000 in severance expenses for the 65 employees who were terminated throughout the company. From that amount, $963,000 are included in the restructuring charges in the statement of earnings for the year ended August 31, 2009 and the remaining of $208,000 is included in net earnings from discontinued operations in the statement of earnings for that year.

The following tables summarize changes in restructuring charges payable since August 31, 2007:

Year ended August 31, 2010

	Balance as at August 31, 2009		Additions		Payments		Balance as at August 31, 2010
Fiscal 2009 plan
Severance expenses	$	24	$	−	$	24	$	−

Year ended August 31, 2009

	Balance as at August 31, 2008		Additions		Payments			Balance as at August 31, 2009
Fiscal 2009 plan
Severance expenses	$	−	$	963	$	(939	)	$	24

Fiscal 2008 plan (note 3)
Severance expenses		292		−		(292	)		−

Total for all plans (note 12)	$	292	$	963	$	(1,231	)	$	24

Year ended August 31, 2008

	Balance as at August 31, 2007		Additions		Payments			Balance as at August 31, 2008
Fiscal 2008 plan (note 3)
Severance expenses	$	−	$	497	$	(205	)	$	292

6	Capital Disclosures

The company is not subject to any external restrictions on its capital.

The company’s objectives when managing capital are:

·	To maintain a flexible capital structure, which optimizes the cost of capital at acceptable risk;

·	To sustain future development of the company, including research and development activities, market development, and potential acquisitions of complementary businesses or products; and

·	To provide the company’s shareholders with an appropriate return on their investment.

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EXFO INC.

Notes to Consolidated Financial Statements

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

The company defines its capital as shareholders’ equity, excluding accumulated other comprehensive income. Accumulated other comprehensive income’s main components are the cumulative foreign currency translation adjustment, which is the result of the translation of the company’s consolidated financial statements into US dollars (the reporting currency) as well as after-tax unrealized gains (loss) on forward exchange contracts.

The capital of the company amounted to $166,513,000 and $175,217,000 as at August 31, 2009 and 2010, respectively.

7	Financial Instruments

Financial assets and liabilities are initially recognized at fair value and their subsequent measurement depends on their classification, as described below. Their classification depends on the intended purpose when the financial instruments have been acquired or issued, as well as on their characteristics and their designation by the company.

Classification

Financial assets
Cash Short-term investments Accounts receivable Forward exchange contracts	Held for trading Available for sale Loans and receivables Cash flow hedge
Financial liabilities
Accounts payable and accrued liabilities Long-term debt Other liabilities Forward exchange contracts	Other financial liabilities Other financial liabilities Other financial liabilities Cash flow hedge

Held-for-trading, available-for-sale and cash flow hedge financial assets are subsequently measured at fair value. Loans and receivables and other financial liabilities are subsequently measured at amortized cost using the effective interest method.

Fair value hierarchy

The company’s cash, short-term investments and forward exchange contracts are measured at fair value at each balance sheet date. The company’s short-term investments are classified within level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company’s cash and forward exchange contracts are classified within level 2 of the hierarchy because they are valued using quoted prices and forward foreign exchange rates at the balance sheet date.

Market risk

Currency risk

The principal measurement currency of the company is the Canadian dollar. The company is exposed to currency risks as a result of its export sales of products manufactured in Canada and China, the majority of which are denominated in US dollars and euros. These risks are partially hedged by forward exchange contracts (US dollars) and certain operating expenses (US dollars and euros). Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

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EXFO INC.

Notes to Consolidated Financial Statements

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

As at August 31, 2010, the company held contracts to sell US dollars for Canadian dollars at various forward rates, which are summarized as follows:

Expiry dates	Contractual amounts		Weighted average contractual forward rates

September 2010 to August 2011	$	29,500		1.0897
September 2011 to August 2012		20,400		1.0802
September 2012 to January 2013		1,500		1.0722
Total	$	51,400		1.0854

The carrying amount of forward exchange contracts is equal to fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net gains of $530,000 and $597,000 as at August 31, 2009 and 2010, respectively.

Based on the portfolio of forward exchange contracts as at August 31, 2010, the company estimates that the portion of the unrealized gains on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings over the next 12 months, amounts to $522,000.

As at August 31, 2010, forward exchange contracts, in the amount of $754,000, are presented as current assets in other receivable in the balance sheet and forward exchange contracts, in the amount of $232,000, are presented as current liabilities in the accounts payable and accrued liabilities in the balance sheet (note 12). As at August 31, 2009, forward exchange contracts, in the amount of $874,000, are presented as current assets in other receivable in the balance sheet, forward exchange contracts, in the amount of $428,000, are presented as long-term assets in forward exchange contracts in the balance sheet, and forward exchange contracts, in the amount of $704,000, are presented as current liabilities in the accounts payable and accrued liabilities in the balance sheet (note 12).

During the years ended August 31, 2008, 2009 and 2010, the company recognized within its sales foreign exchange gains (losses) on forward exchange contracts of $4,171,000, $(3,178,000) and $1,517,000, respectively.

The following table summarizes significant financial assets and liabilities that are subject to currency risk as at August 31, 2009 and 2010:

	As at August 31,

	2010				2009

	Carrying/ nominal amount (in thousands of US dollars)		Carrying/ nominal amount (in thousands of euros)		Carrying/ nominal amount (in thousands of US dollars)		Carrying/ nominal amount (in thousands of euros)

Financial assets
Cash	$	6,947	€	1,287	$	5,485	€	779
Accounts receivable		30,218		3,860		17,397		2,642
		37,165		5,147		22,882		3,421
Financial liabilities
Accounts payable and accrued liabilities		8,932		438		5,451		332
Forward exchange contracts		5,900		–		5,600		−
		14,832		438		11,051		332
Net exposure	$	22,333	€	4,709	$	11,831	€	3,089

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EXFO INC.

Notes to Consolidated Financial Statements

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

The value of the Canadian dollar compared to the US dollar was CA$1.0967 = US$1.00 and CA$1.0665 = US$1.00 as at August 31, 2009 and 2010, respectively.

The value of the Canadian dollar compared to the euro was CA$1.5741 = €1.00 and CA$1.3515 = €1.00 as at August 31, 2009 and 2010, respectively.

The following sensitivity analysis summarizes the effect that a change in the value of the Canadian dollar (compared to the US dollar and euro) on financial assets and liabilities denominated in US dollars and euros, would have on net earnings, net earnings per diluted share and comprehensive income, based on the foreign exchange rates as at August 31, 2009 and 2010:

·	An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the US dollar would decrease (increase) net earnings by $1,185,000, or $0.02 per diluted share, and $2,101,000, or $0.03 per diluted share, as at August 31, 2009 and 2010, respectively.

·	An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the euro would decrease (increase) net earnings by $445,000, or $0.01 per diluted share, and $621,000, or $0.01 per diluted share, as at August 31, 2009 and 2010, respectively.

·	An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the US dollar would increase (decrease) comprehensive income by $2,500,000 and $3,238,000 as at August 31, 2009 and 2010, respectively.

The impact of the change in the value of the Canadian dollar compared to the US dollar and the euro on these financial assets and liabilities is recorded in the foreign exchange gain or loss line item in the consolidated statements of earnings, except for outstanding forward contracts, which impact is recorded in other comprehensive income. The change in the value of the Canadian dollar compared to the US dollar and the euro also impacts the company’s balances of income tax and tax credits recoverable or payable and future income tax assets and liabilities related to integrated foreign subsidiaries; this may result in additional and significant foreign exchange gain or loss. However, these assets and liabilities are not considered financial instruments and are excluded from the sensitivity analysis above. The foreign exchange rate fluctuations also flow through the statements of earnings line items, as a significant portion of the company’s operating expenses is denominated in Canadian dollars and euros, and the company reports its results in US dollars; that effect is not reflected in the sensitivity analysis above.

Interest rate risk

The company is exposed to interest rate risks through its short-term investments and its long-term debt.

Short-term investments

Short-term investments consist of the following:

	As at August 31,

	2010		2009

Commercial paper denominated in Canadian dollars, bearing interest at annual rates of 0.6% to 0.9% in 2010 and 0.2% to 0.6% in 2009, maturing in September and October 2010 in fiscal 2010, and between September 2009 and December 2009 in fiscal 2009	$	6,383	$	45,109
Bankers acceptance denominated in Canadian dollars, bearing interest at an annual rate of 0.8% in 2010 and 0.2% in 2009, maturing in September 2010 in fiscal 2010 and September and October 2009 in fiscal 2009		3,996		13,996
	$	10,379	$	59,105

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EXFO INC.

Notes to Consolidated Financial Statements

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

The fair value of short-term investments based on market value amounted to $59,105,000 and $10,379,000 as at August 31, 2009 and 2010, respectively.

Due to their short-term maturity of usually three months or less, the company’s short-term investments are not subject to significant fair value interest rate risk. Accordingly, change in fair value has been nominal to the degree that amortized cost has historically approximated the fair value. Any change in fair value of the company’s short-term investments, all of which are classified as available for sale, is recorded in other comprehensive income.

Long-term debt

As at August 31, 2010, the company’s long-term debt, in the amount of $1,987,000, bears interest at an annual rate of 2.95% and matures in December 2013 (note 13).

Other financial instruments

Cash, accounts receivable and accounts payable and accrued liabilities are non-interest-bearing financial assets and liabilities. Accounts receivable and accounts payable are financial instruments whose carrying value approximates their fair value due to their short-term maturity.

Credit risk

Financial instruments that potentially subject the company to credit risk consist primarily of cash, short-term investments, accounts receivable and forward exchange contracts (with a positive fair value). As at August 31, 2010, the company’s short-term investments consist of debt instruments issued by nine (eleven as at August 31, 2009) high-credit quality corporations and trusts. None of these debt instruments are expected to be affected by a significant liquidity risk. The company’s cash and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore, the company considers the risk of non-performance on these instruments to be limited.

Generally, the company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended to customers following an evaluation of creditworthiness. In addition, the company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Allowance for doubtful accounts amounted to $1,220,000 and $1,243,000 as at August 31, 2009 and 2010, respectively. Bad debt expense amounted to $148,000, $967,000 and $24,000 for the years ended August 31, 2008, 2009 and 2010, respectively.

For the year ended August 31, 2009, one customer represented more than 10% of sales with 13.1% ($20,049,000). In fiscal 2008 and 2010, no customer represented more than 10% of sales.

The following table summarizes the age of trade accounts receivable:

	As at August 31,

	2010		2009

Current	$	38,663	$	16,476
Past due, 0 to 30 days		6,787		3,551
Past due, 31 to 60 days		1,991		1,464
Past due, more than 60 days, less allowance for doubtful accounts of $1,220 and $1,243 as at August 31, 2009 and 2010, respectively.		2,749		1,442
Total accounts receivable	$	50,190	$	22,933

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EXFO INC.

Notes to Consolidated Financial Statements

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

Changes in the allowance for doubtful accounts are as follows:

	Years ended August 31,

	2010			2009

Balance – Beginning of year	$	1,220		$	305
Addition charged to earnings		150			979
Write-off of uncollectible accounts		–			(45	)
Recovery of uncollectible accounts		(127	)		(19	)

Balance – End of year	$	1,243		$	1,220

Liquidity risk

Liquidity risk is defined as the potential that the company cannot meet its obligations as they become due.

The following tables summarize the contractual maturity of the company’s financial liabilities:

	As at August 31, 2010

	0-12 months			13-24 months			25-36 months			Over 36 months

Accounts payable and accrued liabilities	$	29,711		$	–		$	–		$	–
Long-term debt		568			568			568			283
Forward exchange contracts
Outflow		29,500			20,400			1,500			–
Inflow		(30,141	)		(20,662	)		(1,508	)		–
Total	$	29,638		$	306		$	560		$	283

	As at August 31, 2009

	0-12 months			13-24 months			25-36 months

Accounts payable and accrued liabilities	$	18,160		$	−		$	−
Forward exchange contracts
Outflow		27,600			14,600			1,000
Inflow		(27,730	)		(14,938	)		(1,028	)
Total	$	18,030		$	(338	)	$	(28	)

As at August 31, 2010, the company had $31,819,000 in cash and short-term investments and $50,190,000 in accounts receivable. In addition to these financial assets, the company has unused available lines of credit totaling $14,700,000 for working capital and other general corporate purposes, including potential acquisitions and its share repurchase program as well as unused lines of credit of $16,486,000 for foreign currency exposure related to its forward exchange contracts (note 11).

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EXFO INC.

Notes to Consolidated Financial Statements

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

8	Inventories

	As at August 31,

	2010		2009

Raw materials	$	21,505	$	13,918
Work in progress		1,975		1,801
Finished goods		16,848		13,697

	$	40,328	$	29,416

The cost of sales comprised almost exclusively the amount of inventory recognized as an expense during the reporting periods, except for the related amortization, which is shown separately in operating expenses.

Inventory write-down amounted to $2,330,000, $2,982,000 and $2,664,000 for the years ended August 31, 2008, 2009 and 2010, respectively.

9	Property, Plant and Equipment

	As at August 31,

	2010				2009

	Cost		Accumulated amortization		Cost		Accumulated amortization

Land and land improvements	$	2,287	$	1,200	$	2,224	$	1,157
Buildings		14,395		4,987		12,374		4,354
Equipment		39,734		28,282		34,142		25,420
Leasehold improvements		2,976		1,468		3,076		2,084

		59,392	$	35,937		51,816	$	33,015
Less:
Accumulated amortization		35,937				33,015

	$	23,455			$	18,801

As at August 31, 2008, 2009 and 2010, unpaid purchases of property, plant and equipment amounted to $414,000, $348,000 and $391,000, respectively.

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EXFO INC.

Notes to Consolidated Financial Statements

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

10	Intangible Assets and Goodwill

Intangible assets

	As at August 31,

	2010				2009

	Cost		Accumulated amortization		Cost		Accumulated amortization

Core technology	$	34,858	$	17,496	$	33,643	$	19,468
Customer relationships		6,615		622		−		−
Brand name		659		62		−		−
Software		11,557		7,562		8,966		6,317

		53,689	$	25,742		42,609	$	25,785
Less:
Accumulated amortization		25,742				25,785

	$	27,947			$	16,824

Estimated amortization expense for intangible assets in each of the next five fiscal years amounts to $8,573,000 in 2011, $7,638,000 in 2012, $5,936,000 in 2013, $3,620,000 in 2014 and $1,841,000 in 2015.

Additions to intangible assets for the years ended August 31, 2008, 2009 and 2010 amounted to $14,815,000, $2,543,000 and $19,369,000 respectively.

Goodwill

Changes in the carrying value of goodwill are as follows:

	Years ended August 31,

	2010			2009

Balance – Beginning of year	$	17,840		$	37,866
Addition from business combinations (note 3)		12,560			2,414
Impairment (note 5)		−			(21,713	)
Foreign currency translation adjustment		(1,045	)		(727	)

Balance – End of year	$	29,355		$	17,840

11	Credit Facilities

The company has lines of credit that provide for advances of up to CA$15,000,000 (US$14,065,000) and up to US$2,000,000. These lines of credit bear interest at the Canadian prime rate. As at August 31, 2010, an amount of CA$5,721,000 (US$5,364,000) was drawn from theses lines of credit for letters of guarantee in the normal course of the company’s operations. From this amount, the company had $964,000 worth of letters of guarantee for its own selling and purchase requirements, and the remainder of $4,400,000 was used by the company to secure its line of credit in CNY. These lines of credit are subject to a negative pledge whereby the company has agreed with the bank not to pledge its assets to any other party without its consent.

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EXFO INC.

Notes to Consolidated Financial Statements

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

The company line of credit, in CNY, provides for advances of up to US$4,000,000. This line of credit bears interest at the Chinese prime rate for advances made in CNY and at LIBOR plus 3.5% for advances made in US dollars. As at August 31, 2010, this line of credit was unused.

Finally, the company has lines of credit of US$22,308,000 for the foreign currency risk exposure related to its forward exchange contracts (note 7). As at August 31, 2010, an amount of US$5,822,000 was reserved from these lines of credit. These lines of credit are renewable annually and unsecured.

12	Accounts Payable and Accrued Liabilities

	As at August 31,

	2010		2009

Trade	$	14,244	$	8,121
Salaries and social benefits		12,400		8,231
Warranty		579		647
Commissions		831		647
Restructuring charges (note 5)		–		24
Forward exchange contracts (note 7)		232		704
Other		2,584		1,429

	$	30,870	$	19,803

Changes in the warranty provision are as follows:

	Years ended August 31,

	2010			2009

Balance – Beginning of year	$	647		$	920
Provision		810			590
Settlements		(878	)		(863	)

Balance – End of year	$	579		$	647

13	Long-Term Debt

	Years ended August 31,

	2010		2009

Loan collateralized by assets of NetHawk Oyj denominated in euros (€1,568), bearing interest at 2.95%, repayable in semi-annual installments of $284 (€224), maturing in December 2013 (note 3)	$	1,987	$	–
Less: current portion		568		–

	$	1,419	$	–

Capital repayments required in the next four years amount to $568,000 in 2011, $568,000 in 2012, $568,000 in 2013 and $283,000 in 2014.

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EXFO INC.

Notes to Consolidated Financial Statements

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

14	Commitments

The company entered into operating leases for certain of its premises and equipment, which expire at various dates through June 2017. As at August 31, 2010, minimum rental expenses of these operating leases in each of the next five years will amount to $4,716,000 in 2011, $2,983,000 in 2012, $1,754,000 in 2013, $997,000 in 2014 and $867,000 in 2015. Total commitments for these operating leases amount to $12,498,000.

For the years ended August 31, 2008, 2009 and 2010, rental expenses amounted to $2,199,000, $2,534,000 and $3,798,000, respectively.

15	Contingencies

a) Class action

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

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

In July 2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint and a decision was rendered on February 19, 2003. Only one of the claims against the company was dismissed. On October 8, 2002, the claims against its officers were dismissed, without prejudice, pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs (the “Tolling Agreements”). Subsequent addenda to the Tolling Agreements extended the tolling period through August 27, 2010.

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EXFO INC.

Notes to Consolidated Financial Statements

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

In June 2004, an agreement of partial settlement was submitted to the court for preliminary approval. The proposed partial settlement was between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications. On August 31, 2005, the court issued a preliminary order further approving the modifications to the settlement and certifying the settlement classes. The court also appointed the notice administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members by January 15, 2006. The settlement fairness hearing occurred on April 24, 2006, and the court reserved decision at that time.

While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. The company's case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision.

On April 6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc . In light of the Second Circuit’s opinion, liaison counsel for all issuer defendants, including the company, informed the court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and, on September 27, 2007, again moved for class certification. On November 12, 2007, certain defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the district court denied the motions to dismiss, except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification motion was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.

On April 2, 2009, a stipulation and agreement of settlement between the plaintiffs, issuer defendants and underwriter defendants was submitted to the Court for preliminary approval. The Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement fairness hearing was held on September 10, 2009. On October 6, 2009, the Court entered an opinion granting final approval to the settlement and directing that the Clerk of the Court close these actions. On August 26, 2010, based on the expiration of the tolling period stated in the Tolling Agreements, the plaintiffs filed a Notice of Termination of Tolling Agreement and Recommencement of Litigation against the two named executive officers. The plaintiffs stated to the Court that they do not intend to take any further action against the named executive officers at this time. Notices of appeal of the opinion granting final approval have been filed. Given that the settlement remains subject to appeal as of the date of issuance of these financial statements, the ultimate outcome of the contingency is uncertain. However, based on the settlement approved on October 6, 2009, and the related insurance against such claims, management has determined the impact to its financial position and results of operations as at and for the year ended August 31, 2010 to be immaterial.

b) Cash contingent consideration

Following the purchase of assets in fiscal 2009, the company has a cash contingent consideration of up to $825,000 payable based upon the achievement of a certain booking volume in the next six months.

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EXFO INC.

Notes to Consolidated Financial Statements

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

16	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 10 votes each, bearing a non-cumulative dividend to be determined by the Board of Directors, convertible at the holder’s option into subordinate voting shares on a one-for-one basis, ranking pari passu with subordinate voting shares

The following table summarizes the share capital activity since August 31, 2007:

	Multiple voting shares				Subordinate voting shares
	Number		Amount		Number			Amount			Total amount

Balance as at August 31, 2007		36,643,000	$	1		32,361,561		$	150,018		$	150,019

Exercise of stock options (note 17)		–		–		18,500			61			61
Redemption of restricted share units (note 17)		–		–		65,870			–			–
Redemption of deferred share units (note 17)		–		–		20,695			–			–
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards		–		–		–			514			514
Redemption of share capital		–		–		(1,682,921	)		(7,808	)		(7,808	)

Balance as at August 31, 2008		36,643,000		1		30,783,705			142,785			142,786

Exercise of stock options (note 17)		–		–		27,500			56			56
Redemption of restricted share units (note 17)		–		–		106,190			–			–
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards		–		–		–			540			540
Redemption of share capital		–		–		(8,181,093	)		(38,536	)		(38,536	)

Balance as at August 31, 2009		36,643,000		1		22,736,302			104,845			104,846

Exercise of stock options (note 17)		–		–		83,700			343			343
Redemption of restricted share units (note 17)		–		–		120,307			–			–
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards		–		–		–			954			954
Redemption of share capital		–		–		(3,600	)		(17	)		(17	)

Balance as at August 31, 2010		36,643,000	$	1		22,936,709		$	106,125		$	106,126

F-30

Table of Contents

EXFO INC.

Notes to Consolidated Financial Statements

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

On November 6, 2008, the company announced that its Board of Directors had authorized a renewal of its share repurchase program, by way of a normal course issuer bid on the open market, of up to 10% of its public float (as defined by the Toronto Stock Exchange), or 2,738,518 subordinate voting shares, at the prevailing market price. The period of the normal course issuer bid commenced on November 10, 2008, and ended on November 9, 2009. All shares repurchased under the bid were cancelled. In fiscal 2009, the company redeemed 488,786 subordinate voting shares for an aggregate net purchase price of $1,416,000. In fiscal 2010, the company did not redeem shares under that program.

On November 10, 2008, the company announced that its Board of Directors had authorized a substantial issuer bid (the “Offer”) to purchase for cancellation subordinate voting shares for an aggregate purchase price not to exceed CA$30,000,000. On December 18, 2008, pursuant to the Offer, the company purchased for cancellation 7,692,307 subordinate voting shares for the aggregate purchase price of CA$30,000,000 (US$24,879,000), plus related fees of $576,000. The company used cash and short-term investments to fund the purchase of shares.

On November 6, 2009, the company announced that its Board of Directors had authorized the second renewal of its share repurchase program, by way of a normal course issuer bid on the open market, of up to 10% of its public float (as defined by the Toronto Stock Exchange), or 2,256,431 million subordinate voting shares, at the prevailing market price. The period of the normal course issuer bid started on November 10, 2009, and ended on November 9, 2010. All shares repurchased under the bid were cancelled. In fiscal 2010, the company redeemed 3,600 shares under that program for an aggregate net purchase price of $14,000.

On November 5, 2010 the company announced that its Board of Directors approved the third renewal of its share repurchase program, by way of a normal course issuer bid on the open market of up to 10% of its public float (as defined by the Toronto Stock Exchange), or 2,012,562 subordinate voting shares at the prevailing market price. The company expects to use cash, short-term investments or future cash flow from operations to fund the repurchase of shares. The normal course issuer bid will start on November 10, 2010, and will end on November 9, 2011, or on an earlier date if the company repurchases the maximum number of shares permitted under the bid. The program does not require that the company repurchases any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid will be cancelled.

17	Stock-Based Compensation Plans

The maximum number of additional subordinate voting shares issuable under the Long-Term Incentive Plan and the Deferred Share Unit Plan cannot exceed 6,306,153 shares. The maximum number of subordinate voting shares that may be granted to any individual on an annual basis cannot exceed 5% of the number of outstanding subordinate voting shares. The company settles stock options and redeems restricted share units and deferred share units through the issuance of common shares from treasury.

Long-Term Incentive Plan

In May 2000, the company established a Stock Option Plan for directors, executive officers and employees and those of the company’s subsidiaries, as determined by the Board of Directors. In January 2005, the company made certain amendments to the existing Stock Option Plan, including the renaming of the plan to Long-Term Incentive Plan, which includes stock options and restricted share units. This plan was approved by the shareholders of the company.

Stock Options

The exercise price of stock options granted under the Long-Term Incentive Plan is the market price of the common shares on the date of grant. Stock options granted under the plan generally expire 10 years from the date of grant and vest over a four-year period, being the required period of service from employees, generally with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. The Board of Directors may accelerate the vesting of any or all outstanding stock options upon the occurrence of a change of control.

F-31

Table of Contents

EXFO INC.

Notes to Consolidated Financial Statements

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

The following table summarizes stock option activity since August 31, 2007:

	Years ended August 31,

	2010					2009					2008

	Number			Weighted average exercise price		Number			Weighted average exercise price		Number			Weighted average exercise price
				(CA$)					(CA$)					(CA$)
Outstanding – Beginning of year		1,666,589		$	21		1,821,481		$	21		1,929,388		$	21
Exercised		(83,700	)		4		(27,500	)		3		(18,500	)		3
Forfeited		−			−		(1,000	)		6		(8,750	)		6
Expired		(234,102	)		36		(126,392	)		26		(80,657	)		29

Outstanding – End of year		1,348,787		$	19		1,666,589		$	21		1,821,481		$	21

Exercisable – End of year		1,348,787		$	19		1,660,090		$	21		1,762,969		$	21

CORPORATE GOVERNANCE PRACTICES

CSA Guidelines			EXFO’s Corporate Governance Practices
1.	Board of Directors
	(a)	Disclose the identity of directors who are independent.	The following directors are independent: Mr. Pierre-Paul Allard Mr. Pierre Marcouiller Mr. Guy Marier Dr. David A. Thompson Mr. André Tremblay
	(b)	Disclose the identity of directors who are not independent, and describe the basis for that determination.	Mr. Germain Lamonde – non-independent – is President and Chief Executive Officer of the Corporation and the majority shareholder of the Corporation as he has the ability to exercise a majority of the votes for the election of the Board of Directors.
	(c)	Disclose whether or not a majority of directors are independent. If a majority of directors are not independent, describe what the board of directors does to facilitate its exercise of independent judgment in carrying out its responsibilities.	The majority of directors are independent (5 out of 6).
	(d)	If a director is presently a director of any other issuer that is a reporting issuer (or the equivalent) in a jurisdiction or a foreign jurisdiction, identify both the director and the other issuer.	Pierre Marcouiller is a Director of Canam Group Inc., a publicly listed corporation of Saint-Georges de Beauce, Quebec, Canada. André Tremblay is a Director of Transcontinental Inc., a publicly listed corporation of Montreal, Quebec, Canada.
	(e)	Disclose whether or not the independent directors hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance. If the independent directors hold such meetings, disclose the number of meetings held since the beginning of the issuer’s most recently completed financial year. If the independent directors do not hold such meetings, describe what the board does to facilitate open and candid discussion among its independent directors.	The independent Directors hold as many meeting, as needed, annually and any Director may request such meeting at any time. Since September 1, 2009 and prior to November 1, 2010, six (6) meetings of independent Directors without management occurred.

(f)	Disclose whether or not the chair of the board is an independent director. If the board has a chair or lead director who is an independent director, disclose the identity of the independent chair or lead director, and describe his or her role and responsibilities. If the board has neither a chair that is independent nor a lead director that is independent, describe what the board does to provide leadership for its independent directors.			The Chair of the Board of Directors (being the majority shareholder) is not an independent director. Since 2002, the Corporation has named an independent director to act as “Lead Director”. Mr. Guy Marier acts as the independent “Lead Director” of the Corporation since January 2007. The Lead Director is an outside and unrelated director appointed by the Board of Directors to ensure that the Board of Directors can perform its duties in an effective and efficient manner independent of management. The appointment of a Lead Director is part of EXFO’s ongoing commitment to good corporate governance. The Lead Director will namely:
				●	provide independent leadership to the Board of Directors;
				●	select topics to be included in the Board of Directors meetings;
				●	facilitate the functioning of the Board of Directors independently of the Corporation’s management;
				●	maintain and enhance the quality of the Corporation’s corporate governance practices;
				●	in the absence of the Executive Chair, act as chair of meetings of the Board of Directors;
				●	recommend, where necessary, the holding of special meetings of the Board of Directors;
				●	serve as Board of Directors ombudsman, so as to ensure that questions or comments of individual directors are heard and addressed;
				●	manage and investigate any report received through the Corporation website pursuant to the Corporation’s Statement on reporting Ethical Violations and Ethics and Business Conduct Policy;
				●	work with the Board of Directors to facilitate the process for developing, monitoring and evaluating specific annual objectives for the Board of Directors each year.
(g)	Disclose the attendance record of each director for all board meetings held since the beginning of the issuer’s most recently completed financial year.			The table below indicates the directors’ record of attendance at meetings of the Board of Directors and its committees during the financial year ended August 31, 2010:
		Director	Board meetings attended	Audit Committee meetings attended		Human Resources Committee meetings attended	Independent Directors meetings attended	Total Board and Committee meetings attendance rate
		Lamonde, Germain	9 of 9	n/a		n/a	n/a	100%
		Allard, Pierre-Paul	8 of 9	4 of 4		3 of 4	4 of 4	90%
		Marcouiller, Pierre	9 of 9	4 of 4		4 of 4	4 of 4	100%
		Marier, Guy	9 of 9	4 of 4		4 of 4	4 of 4	100%
		Thompson, David	9 of 9	4 of 4		4 of 4	4 of 4	100%
		Tremblay, André	7 of 9	3 of 4		3 of 4	3 of 4	76%
		Attendance Rate:	94%	95%		90%	95%	94%

2.	Board Mandate – Disclose the text of the board’s written mandate. If the board does not have a written mandate, describe how the board delineates its role and responsibilities.
	(a)	Assuring the integrity of the executive officers and creating a culture of integrity throughout the organization.	The Board of Directors is committed to maintaining the highest standards of integrity throughout the organization. Accordingly, the Board of Directors adopted an Ethics and Business Conduct Policy and a Statement on Reporting Ethical Violations (“Whistleblower Policy”) which are available on EXFO website at www.EXFO.com to all employees and initially distributed to every new employees of the Corporation.
	(b)	Adoption of a strategic planning process	The Board of Directors provides guidance for the development of the strategic planning process and approves the process and the plan developed by management annually. In addition, the Board of Directors carefully reviews the strategic plan and deals with strategic planning matters that arise during the year.
	(c)	Identification of principal risks and implementing of risk management systems	The Board of Directors works with management to identify the Corporation’s principal risks and manages these risks through regular appraisal of management’s practices on an ongoing basis.
	(d)	Succession planning including appointing, training and monitoring senior management	The Human Resources Committee is responsible for the elaboration and implementation of a succession planning process and its updates as required. The Human Resources Committee is responsible to monitor and review the performance of the Chief Executive Officer and that of all other senior officers.
	(e)	Communications policy	The Chief Financial Officer of the Corporation is responsible for communications between Management and the Corporation’s current and potential shareholders and financial analysts. The Board of Directors adopted and implemented Disclosure Guidelines to ensure consistency in the manner that communications with shareholders and the public are managed. The Audit Committee reviews press releases containing the quarterly results of the Corporation prior to release. In addition, all material press releases of the Corporation are reviewed by the President and Chief Executive Officer, Chief Financial Officer, Investor Relations Manager, Director of Financial Reporting and Accounting and General Counsel. The Disclosure Guidelines have been established in accordance with the relevant disclosure requirements under applicable Canadian and United States securities laws.
	(f)	Integrity of internal control and management information systems	The Audit Committee has the responsibility to review the Corporation’s systems of internal controls regarding finance, accounting, legal compliance and ethical behavior. The Audit Committee meets with the Corporation’s external auditors on a quarterly basis. Accordingly, the Corporation fully complies with Sarbanes-Oxley Act requirements within the required period of time.

	(g)	Approach to corporate governance including developing a set of corporate governance principles and guidelines that are specifically applicable to the issuer	The Board of Directors assumes direct responsibility for the monitoring of the Board of Directors’s corporate governance practices, the functioning of the Board of Directors and the powers, mandates and performance of the committees. These responsibilities were previously assumed by the Human Resources Committee. Accordingly, the Board of Directors updated and adopted in March 2005 the following policies to fully comply with these responsibilities, which are updated on a regular basis:
			●	Audit Committee Charter*;
			●	Board of Directors Corporate Governance Guidelines*;
			●	Code of Ethics for our Principal Executive Officer and Senior Financial Officers*;
			●	Disclosure Guidelines;
			●	Ethics and Business Conduct Policy*;
			●	Human Resources Committee Charter*;
			●	Securities Trading Policy;
			●	Statement on Reporting Ethical Violations (Whistle Blower)*.
			The Board of Directors also adopted in October 2006 the Policy Regarding Hiring Employees and Former Employees of Independent Auditors which is also available on EXFO website at www.EXFO.com . The Board of Directors also adopted in April 2007 the Best Practice regarding the Granting Date of Stock Incentive Compensation and adopted in October 2008 the Guidelines regarding the filing and disclosure of material contracts. The Board of Directors also adopted in November 2010 the Majority Voting Policy which is also available on EXFO website at www.EXFO.com. * available on EXFO website at www.EXFO.com .
	(h)	Expectations and responsibilities of Directors, including basic duties and responsibilities with respect to attendance at board meetings and advance review of meeting materials	The Board of Directors is also responsible for the establishment and functioning of all Board of Directors committees, their compensation and their good standing. At regularly scheduled meetings of the Board of Directors, the Directors receive, consider and discuss committee reports. The Directors also receive in advance of any meeting, all documentation required for the upcoming meetings and they are expected to review and consult this documentation.
3.	Position Descriptions
	(a)	Disclose whether or not the board has developed written position descriptions for the chair of the board and the chair of each board committee. If the board has not developed written position descriptions for the chair and/or the chair of each board committee, briefly describe how the board delineates the role and responsibilities of each such position.	There is no specific mandate for the Board of Directors, however the Board of Directors is, by law, responsible for managing the business and affairs of the Corporation. Any responsibility which is not delegated to senior management or to a committee of the Board of Directors remains the responsibility of the Board of Directors. Accordingly, the chair of the Board of Directors, of the Audit Committee and of the Human Resources Committee will namely:
			●	provide leadership to the Board of Directors or Committee;
			●	ensure that the Board of Directors or Committee can perform its duties in an effective and efficient manner;
			●	facilitate the functionary of the Board of Directors or Committee;
			●	promote best practices and high standards of corporate governance.

	(b)	Disclose whether or not the board and CEO have developed a written position description for the CEO. If the board and CEO have not developed such a position description, briefly describe how the board delineates the role and responsibilities of the CEO.		No written position description has been developed for the CEO. The President and Chief Executive Officer, along with the rest of management placed under his supervision, is responsible for meeting the corporate objectives as determined by the strategic objectives and budget as they are adopted each year by the Board of Directors.
4.	Orientation and Continuing Education
	(a)	Briefly describe what measures the board takes to orient new directors regarding
		i.	the role of the board, its committees and its directors, and	The Human Resources Committee Charter foresees that the Human Resource Committee maintains an orientation program for New Directors.
		ii.	the nature and operation of the issuer’s business.	Presentations and reports relating to the Corporation’s business and affairs are provided to new Directors. In addition, new Board of Directors members meet with senior management of the Corporation to review the business and affairs of the Corporation.
	(b)	Briefly describe what measures, if any, the board takes to provide continuing education for its directors. If the board does not provide continuing education, describe how the board ensures that its directors maintain the skill and knowledge necessary to meet their obligations as directors.		The Human Resources Committee Charter foresees that the Human Resources Committee maintains a continuing education program for Directors. In 2010, the independent directors of the Corporation attended a training session that concerned director liability and governance. The training session addressed the legal duties of directors and governance as a way to discharge director’s duties.
5.	Ethical Business Conduct
	(a)	Disclose whether or not the board has adopted a written code for the directors, officers and employees. If the board has adopted a written code:		The Corporation is committed to maintaining the highest standard of business conduct and ethics. Accordingly, the Board of Directors updated and established (i) a Board of Directors Corporate Governance Guidelines (ii) a Code of Ethics for our Principal Executive Officer and senior Financial Officers (iii) Ethics and Business Conduct Policy and (iv) a Statement on Reporting Ethical Violations “Whistleblower Policy” which are available on the Corporation’s website at www.EXFO.com .
		i.	disclose how a person or company may obtain a copy of the code;
		ii.	describe how the board monitors compliance with its code, or if the board does not monitor compliance, explain whether and how the board satisfies itself regarding compliance with its code; and	The Board of Directors will determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of a violation of the Code of Ethics for our Principal Executive Officer and senior Financial Officers. Someone that does not comply with this Code of Ethics will be subject to disciplinary measures, up to and including discharge from the Corporation. Furthermore, a compliance affirmation must be filled in a written form agreeing to abide by the policies of the Code of Ethics.

		iii.	provide a cross-reference to any material change report filed since the beginning of the issuer’s most recently completed financial year that pertains to any conduct of a director or executive officer that constitutes a departure from the code.	No material change report has been required or filed during our financial year ended August 31, 2010 with respect to any conduct constituting a departure from our Code of Ethics.
	(b)	Describe any steps the board takes to ensure directors exercise independent judgement in considering transactions and agreements in respect of which a director or executive officer has a material interest.		Activities that could give rise to conflicts of interest are prohibited. Board of Directors members should contact the Lead Director or in-house legal counsel regarding any issues relating to possible conflict of interest. If such event occurs, the implicated Board of Directors member will not participate in the meeting and discussion with respect to such possible conflict of interest and will not be entitled to vote on such matter. Senior executives should also contact the in-house legal counsel regarding any issues relating to possible conflict of interest.
	(c)	Describe any other steps the board takes to encourage and promote a culture of ethical business conduct.		The Corporation has instituted and follows a “Whistleblower Policy” where each member of the Board of Directors as well as any senior officer, every employee of the Corporation and any person is invited and encouraged to report anything appearing or suspected of being non-ethical to our Lead Director, in confidence. The Lead Director has the power to hire professional assistance to conduct an internal investigation should he so fell required.
6.	Nomination of Directors
	(a)	Describe the process by which the board identifies new candidates for board nomination.		The Board of Directors adopted and implemented a Human Resources Committee Charter which integrates the Compensation Committee Charter and the Nominating and Governance Committee Charter. The Human Resources Committee is responsible for nomination, assessment and compensation of directors and Officers.
	(b)	Disclose whether or not the board has a nominating committee composed entirely of independent directors. If the board does not have a nominating committee composed entirely of independent directors, describe what steps the board takes to encourage an objective nomination process.		The Human Resources Committee consists of five members all of who are independent Directors. The Chairman of the Human Resources Committee is Mr. Guy Marier. The Human Resources Committee Charter foresees:
				● ●	recommending a process for assessing the performance of the Board of Directors as a whole, the Chair of the Board of Directors and the Committee chairs and the contribution of individual directors, and seeing to its implementation; recommending the competencies, skills and personal qualities required on the Board of Directors in order to create added value, taking into account the opportunities and risks faced by the Corporation and subsequently identifying and recommending to the Board of Directors.
	(c)	If the board has a nominating committee, describe the responsibilities, powers and operation of the nominating committee.

7.	Compensation
	(a)	Describe the process by which the board determines the compensation for the issuer’s directors and officers.	The Human Resources Committee reviews periodically compensation policies in light of market conditions, industry practice and level of responsibilities. Only independent Directors are compensated for acting as a Director of the Corporation.
	(b)	Disclose whether or not the board has a compensation committee composed entirely of independent directors. If the board does not have a compensation committee composed entirely of independent directors, describe what steps the board takes to ensure an objective process for determining such compensation.	The Human Resources Committee consists of five members all of who are independent Directors. The Chairman of the Human Resources Committee is Mr. Guy Marier.
	(c)	If the board has a compensation committee, describe the responsibilities, powers and operation of the compensation committee.	The Human Resources Committee Charter foresees:
			●	The Committee to review and approve on an annual basis with respect to the annual compensation of all senior officers;
			●	The Committee to review and approve, on behalf of the Board of Directors (“the Board”) or in collaboration with the Board as applicable, on the basis of the attribution authorized by the Board, to whom options to purchase shares of the Corporation, RSUs or DSUs shall be offered as the case may be and if so, the terms of such options, RSUs or DSUs in accordance with the terms of the Corporation’s LTIP or the Deferred Share Unit Plan provided that no options, RSUs or DSUs shall be granted to members of this committee without the approval of the Board;
			●	The Committee to recommend to the Board from time to time the remuneration to be paid by the Corporation to Directors;
			●	The Committee to make recommendations to the Board with respect to the Corporation’s incentive compensation plans and equity-based plans.

	(d)	If a compensation consultant or advisor has, at any time since the beginning of the issuer’s most recently completed financial year, been retained to assist in determining compensation for any of the issuer’s directors and officers, disclose the identity of the consultant or advisor and briefly summarize the mandate for which they have been retained. If the consultant or advisor has been retained to perform any other work for the issuer, state that fact and briefly describe the nature of the work.	In 2007, the Corporation engaged two human resources consultants, Mercer (Canada) Ltd. (“Mercer”) and Aon Corporation (“Aon”), to advise whether the compensation positioning of the Corporation was still aligned with the comparative market. Further to recommendations from Mercer and Aon, the Corporation decided to gradually align the compensation positioning (for the base salary, short-term and long-term incentives) from the fiftieth percentile to the sixtieth percentile for selected position (hereinafter in this Circular referred to as the “Target Compensation Positioning”) over the following three (3) years. In 2008, the Corporation engaged Hewitt Associates LLC to conduct a world-wide market analysis for selected international positions. The survey included annual base salary, bonuses and commission plans. In 2009, the Corporation appointed Mercer to review the compensation positioning of the Corporation. Mercer confirmed that the Corporation’s compensation scheme (base salary, short-term compensation, long-term compensation) was still aligned with the comparative market but some adjustments were proposed to be made for certain executive officers. Considering the overall economic situation, the adjustments proposed by Mercer were postponed. In 2010, the Corporation engaged Mercer to conduct a study of the Corporation’s executive compensation plans. The study examined the total compensation including the fix components (i.e., base salary, pension, benefits and perquisites) and the variable components (i.e., short-term and long-term incentives). The analysis of Mercer indicated that adjustments were required primarily to base salary levels, long-term incentive plan as well as pension value. Any adjustments were made from a total compensation perspective. Mercer has suggested modifying the compensation philosophy to progressively align the executive compensation toward a total compensation to the fiftieth percentile for expected performance with an opportunity, conditional on performance, to exceed the fiftieth percentile total compensation (hereinafter in this Circular referred to as the “Target Total Compensation”). Further to such recommendations, the Corporation has decided to gradually align over the following three (3) years the compensation positioning according to the Target Total Compensation scheme proposed by Mercer for the compensation plans of the financial year starting September 1 st , 2010.


8.	Other Board Committees – If the board has standing committees other than the audit, compensation and nominating committees identify the committees and describe their function.		The Board has no other standing committee.

Assessments – Disclose whether or not the board, its committees and individual directors are regularly assessed with respect to their effectiveness and contribution. If assessments are regularly conducted, describe the process used for the assessments. If assessments are not regularly conducted, describe how the board satisfies itself that the board, its committees, and its individual directors are performing effectively.

The Board assumes direct responsibility for the monitoring of the Board’s corporate governance practices, the functioning of the Board and the powers, mandates and performance of the Human Resources Committee. The Human Resources Committee, composed solely of independent Directors, initiates a self-evaluation of the Board’s performance on an annual basis. Questionnaires are distributed to each independent director for the purpose of evaluation the Board’s responsibilities and functions and the performance of the Board’s Committees. The results of the questionnaires are compiled on a confidential basis to encourage full and grank commentary and are discussed at the next regular meeting of the Human Resources Committee or Independent Board members meeting.

Title of each class	Name of each exchange on which registered
Subordinate Voting Shares without par value	NASDAQ
Subordinate Voting Shares without par value	TSX

Instrument Type	Typical Application	Network Operator Market				Manufacturer /R&D Market
		FTB 500 Modules	FTB 200 Modules	FTB-1 Modules	Handhelds	IQS-600 Modules	Bench top Instruments

ADSL/ADSL2+ Service Verification Tool	Based on a DSL “golden modem”, these units are used to test the function, speed and quality of a DSL service at the subscriber premises.				X

Broadband source	Used for testing wavelength-dependent behavior of fiber cables and dense wavelength division multiplexing (DWDM) optical components.					X	X

Chromatic dispersion analyzer	Measures increasing levels of chromatic dispersion in high-capacity optical networks. Chromatic dispersion is a physical phenomenon inherent to optical fiber and optical components that causes information bits to spread along a network. This degrades the quality of the transmission signal and, in turn, limits the transmission speed carried by optical networks.	X	X

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

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

10 Gigabit Ethernet tester	Benchmarks and verifies high-speed 10 Gbit/s Ethernet network performance and service-level agreements.	X	X			X

HDTV, SDTV and IPTV service test instrument	Used to test the quality and functionality of standard and high definition television signals that are delivered over higher-rate ADSL, ADSL2+ and VDSL2 transmission technologies.				X

Telephone for traditional voice and VoIP service testing	Used by telephone line and DSL installers to test the proper functioning of both traditional and next-generation voice and data communication services.				X

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

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

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

Next-generation SONET/SDH analyzer	Full SONET/SDH protocol testing functionality, including support for generic framing procedure (GFP), virtual concatenation (VCAT), and link-capacity adjustment scheme (LCAS) next generation enhancements.	X				X

Optical coupler	Used in test system to combine sources or signals. Also uses as splitters to monitor signals.					X

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

Optical power reference module	Provides a highly accurate and traceable measurement of power for the calibration or verification of other power measurement instruments.					X
Optical return loss meter	Combines a laser and a power meter to measure the amount of potentially degrading back reflection.	X	X		X	X

Instrument Type	Typical Application	Network Operator Market				Manufacturer /R&D Market
		FTB 500 Modules	FTB 200 Modules	FTB-1 Modules	Handhelds	IQS-600 Modules	Bench top Instruments


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

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

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

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

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

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

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

SONET/ SDH analyzer	Provides accurate bit-error rate and performance analysis of SONET/SDH overhead format that reflects the quality of a transmission system.	X	X			X

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

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

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

Telephone wire analyzer	Used by telecommunications service providers that have networks that are comprised mostly or partially of twisted-pair local loops to ensure that those loops are of sufficient quality to carry higher-frequency signals required for DSL.				X

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

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

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

Service Assurance Solutions
Product Type	Product	Typical Application
Software Products	BrixWorx	Central site operations center
	BrixCall	Advanced analysis and correlation of VoIP calls
	BrixVision	Advanced analysis and correlation of live video sessions
	BrixNGN	Network core and MPLS analysis, correlation and reporting
Brix Verifiers (Hardware)	Brix 10 Verifier	Performance Demarcation Point
	Brix 100M Verifier	Customer premise end point monitoring
	Brix 1000 Verifier	Network edge and lower capacity monitoring
	Brix 2500 Verifier	Network core, at a higher capacity
	Brix 3500T Verifier	PSTN monitoring
	Brix 4100 Verifier family	In-network live voice or video monitoring

· CWDM/FTTH passive optical component test system	Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a CWDM passive component or a FTTH splitter with a high degree of accuracy, ease of use and speed.
· Cable assembly and component test system	Used to perform insertion loss and mandrel-free reflection measurements with the highest degree of accuracy and repeatability on short fiber assemblies (including multifiber patchcords, hybrids and fan-out patchcords) and components like PLC splitters and fiber arrays.
· DWDM passive component test system	(mmm) Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss and optical return loss of a DWDM passive component with a high degree of accuracy, ease of use and speed.

Wireless Test and Service Assurance Solutions
Product Type	Product Line	Typical Application
Protocol Analyzer	NetHawk M5	Protocol analysis to verify correct network behavior
Network Simulator	NetHawk EAST	Regression and load testing of network elements
IP Tester	iPro	Solutions for capturing, analyzing and testing all IP networks
Service Assurance	NetHawk EYE	Monitoring, reporting and troubleshooting of next-generation mobile networks.
Mobile Communications Intelligence Tools	NetHawk F10, NetHawk X6 and NetHawk C2	Intelligence tools for police, armed forces and other governmental organizations to fight organized crime and terrorists.

Light Sources and Accessories
Product Type	Product	Typical Application
UV Curing Light Sources	Omnicure® S1000 Omnicure® S1500 Omnicure® S2000	Used to initiate photo chemical reactions in polymer-based materials for a variety of end-user applications. Examples include adhesive curing for manufacturing of high value-added items such as medical devices, micro-electronic and opto-electronic components, displays, and data storage devices.
UV LED Curing Light Sources	Omnicure® LX400
Fluorescent Light Sources	X-Cite® 120XL X-Cite® 120 PC X-Cite® exacte	Fluorescence light source that attaches directly to most microscopes currently sold by major microscopes manufacturers.
Optical Accessories		Optional custom delivery optics used with EXFO UV light sources to tailor the properties of light beams to end-user applications.
High Power Fiber Light Guide		Provides an equal distribution of light energy to multiple cure sites with 50% more throughput than standard fiber guides.
UV LED Pinning System	Excelerate TM PIN-100 Excelerate TM PIN-101	Used to pin (partially cure) UV ink immediately after jetting to enhance the management of drop size and image integrity, minimizing the unwanted mixing of drops and providing the highest possible image quality and the sharpest color rendering.
Optical Instruments
Product Type	Product	Typical Application
Radiometer	R5000 R2000 X-Cite® Radiometer and Optical Power Measurement System	Handheld, broadband optical radiometers used in conjunction with EXFO UV light sources to ensure process quality control at the end-user location. The X-Cite® Optical Power Measurement System is used in conjunction with EXFO UV light sources to enable measurement and control of optical power at a Microscope’s objective plane.
Cure-Site Radiometer		Attachments for the R2000 and R5000 radiometers that enable optical measurements under customer specific configurations. Examples include the cure-ring radiometer, which measures the output power of light from an EXFO cure ring; ideal for applications that requires a uniform 360° exposure.

Precision Positioning Instruments
Product Type	Product Line	Typical Application
Micromanipulators	PCS-6000 Micromanipulators	Electrophysiology research such as patch clamp recording experiments on cells from the brain and central nervous system.
Micromanipulators	PCS-5000 Micromanipulators
Microscope Platforms	Gibraltar Platform/Stage	Stable mechanical platforms that facilitate cellular research with micropositioning and microinjection systems.

Location	Use of Space	Square Footage	Type of Interest
436 Nolin Street Quebec (Quebec) G1M 1E7	Fully occupied for manufacturing of telecom products	44,000	Owned
400 Godin Avenue Quebec (Quebec) G1M 2K2	Fully occupied for research and development, manufacturing, management and administration	129,000 (1)	Owned
2650 Marie-Curie St-Laurent (Quebec) H4S 2C3	Fully occupied for research and development, management and administration	26,000	Leased
160 Drumlin Circle Concord (Ontario) L4K 3E5	Partially occupied for research and development, product management and administration	23,500 (2)	Owned
270 Billerica Road Chelmsford, MA 01824 United States	Partially occupied for research and development, manufacturing, management and administration	29,000 (3)	Leased
Omega Enterprise Park Electron Way, Chandlers Ford, Eastleigh, Hampshire S053 4SE United Kingdom	Fully occupied for European customer service, sales management and administration	10,000	Leased

3 rd Floor, Building 10, Yu Sheng Industrial Park (Gu Shu Crossing) No. 467, National Highway 107 Xixiang, Bao An District Shenzhen 518126, China	Partially occupied for manufacturing of telecom products	56,000 (4)	Leased
113/1, Lane 4A Koregaon Park Pune 411001, India	Fully occupied for research and development	5,986	Leased
Office No 701, Building 1 The Cerebrum IT Park Wadgaon Sheri, Pune 411014 India	Fully occupied for research and development	16,840	Leased
NetHawk Oyj (Headquarters) Elektroniikkatie 2 FI-90590 Oulu, Finland	Partially occupied for research and development, manufacturing, management and administration	16,554 (5)	Leased
NetHawk Networks India Pvt. Ltd. 5th floor, IDCO Tower 2000 Mancheswar Industrial Area Bhubaneswar 751010, India	Fully occupied for research and development	25,239	Leased

Key accounting areas	Differences with potential impact
Hedge accounting	·	IAS 39, “Financial Instruments: Recognition and Measurement”, does not permit to use the shortcut method to assess hedge effectiveness of hedging relationships. We have elected to use the dollar-offset method, as permitted by IFRS, to assess the effectiveness of our cash flow hedges and we will recalculate the effectiveness with this new method, which may potentially result into ineffectiveness that did not exist under the previous method. However, we do not anticipate significant reclassification of hedge relationships. The review of our documentation was completed as at September 1, 2010, being the transition date.
Presentation of financial statements	·	Under IAS 1, “Presentation of Financial Statements”, expenses must be classified by their nature or by their function in the income statement. We elected to present our income statement by function. Accordingly, upon the adoption of IFRS, amortization expenses will be allocated to function rather than being showed as separate lines in the income statement as currently permitted under Canadian GAAP.
Impairment of assets	·	IAS 36, “Impairment of Assets”, requires a single-step approach for impairment testing of individual assets or a group of assets in cash generating units (CGUs) on the basis of independent cash inflows whereas Canadian GAAP uses a two-step approach. However, we do not anticipate significant additional impairment due to that one-step approach.

Consolidated statements of earnings data:	2010			2009			2008			2010			2009			2008
Sales	$	202,757		$	153,082		$	160,981			100.0	%		100.0	%		100.0	%
Cost of sales (1)		73,901			57,897			64,364			36.4			37.8			40.0
Gross margin		128,856			95,185			96,617			63.6			62.2			60.0
Operating expenses
Selling and administrative		66,612			58,067			54,869			32.9			37.9			34.1
Net research and development		37,847			27,213			24,580			18.7			17.8			15.3
Amortization of property, plant and equipment		5,757			4,453			4,137			2.8			2.9			2.6
Amortization of intangible assets		7,773			5,033			3,862			3.8			3.3			2.3
Restructuring charges		–			963			–			–			0.6			–
Impairment of goodwill		–			21,713			–			–			14.2			–
Total operating expenses		117,989			117,442			87,448			58.2			76.7			54.3
Earnings (loss) from operations		10,867			(22,257	)		9,169			5.4			(14.5	)		5.7
Interest income (expense), net		(292	)		592			4,381			(0.1	)		0.4			2.7
Foreign exchange gain (loss)		(1,496	)		1,074			404			(0.8	)		0.7			0.3
Earnings (loss) before income taxes		9,079			(20,591	)		13,954			4.5			(13.5	)		8.7
Income taxes
Current		715			587			(7,154	)		0.4			0.4			(4.5	)
Future		4,814			(321	)		12,815			2.3			(0.2	)		8.0
Recognition of previously unrecognized future income tax assets		–			–			(5,324	)		–			–			(3.3	)
		5,529			266			337			2.7			0.2			0.2
Earnings (loss) from continuing operations before extraordinary gain		3,550			(20,857	)		13,617			1.8	%		(13.6	) %		8.5	%
Net earnings from discontinued operations		3,069			4,272			1,771
Earnings (loss) before extraordinary gain		6,619			(16,585	)		15,388
Extraordinary gain		–			–			3,036
Net earnings (loss) for the year	$	6,619		$	(16,585	)	$	18,424
Basic and diluted earnings (loss) from continuing operations before extraordinary gain per share	$	0.06		$	(0.34	)	$	0.20

Basic and diluted net earnings (loss) per share	$	0.11		$	(0.27	)	$	0.27


Research and development data:
Gross research and development	$	44,551		$	33,584		$	30,167			22.0	%		21.9	%		18.7	%
Net research and development	$	37,847		$	27,213		$	24,580			18.7	%		17.8	%		15.3	%

Consolidated balance sheets data:
Total assets	$	273,502		$	240,371		$	293,066

	Year ended August 31, 2010			Year ended August 31, 2009		Change in $			Change in %

Sales	$	202,757		$	153,082	$	49,675			32.4	%

(Gains) losses on forward exchange contracts		(1,517	)		3,178		(4,695	)

Sales, excluding gains/losses on forward exchange contracts (non-GAAP measure)		201,240			156,260		44,980			28.8

Impact of the recent acquisition (NetHawk)		(14,483	)		–		(14,483	)

Organic sales (non-GAAP measure)	$	186,757		$	156,260	$	30,497			19.5	%

	Year ended August 31, 2009			Year ended August 31, 2008			Change in $			Change in %

Sales	$	153,082		$	160,981		$	(7,899	)		(4.9	) %

(Gains) losses on forward exchange contracts		3,178			(4,171	)		7,349

Sales, excluding gains/losses on forward exchange contracts (non-GAAP measure)		156,260			156,810			(550	)		(0.4	)

Impact of the recent acquisitions (1)		(25,327	)		(5,423	)		(19,904	)

Organic sales (non-GAAP measure)	$	130,933		$	151,387		$	(20,454	)		(13.5	) %

Stock Options	Number		% of issued and outstanding			Weighted average exercise price

Chairman of the Board, President and CEO (one individual)		154,240		11	%	$	6.26
Board of Directors (four individuals)		117,807		9			5.95
Management and Corporate Officers (eight individuals)		187,039		14			14.79

		459,086		34	%	$	9.66

Restricted Share Units (RSUs)	Number		% of issued and outstanding

Chairman of the Board, President and CEO (one individual)		197,533		12	%
Management and Corporate Officers (thirteen individuals)		589,093		37

		786,626		49	%

Deferred Share Units (DSUs)	Number		% of issued and outstanding

Board of Directors (five individuals)		135,003		100	%

	Year ended August 31,
	2010			2009			2008

GAAP net earnings (loss) for the year	$	6,619		$	(16,585	)	$	18,424

Add (deduct):

Amortization of property, plant and equipment
Continuing operations		5,757			4,453			4,137
Discontinued operations		154			154			155
Amortization of intangible assets
Continuing operations		7,773			5,033			3,862
Discontinued operations		45			34			9
Interest (income) expense, net
Continuing operations		292			(592	)		(4,381	)
Discontinued operations		1			(5	)		(258	)
Income taxes
Continuing operations		5,529			266			337
Discontinued operations		1,136			(5	)		1,339
Impairment of goodwill (continuing operations)		–			21,713			–
Extraordinary gain (continuing operations)		–			–			(3,036	)

EBITDA for the year	$	27,306		$	14,466		$	20,588

EDITDA in percentage of total sales		12.0	%		8.4	%		11.2	%

Name and Municipality of Residence		Positions with EXFO
PIERRE-PAUL ALLARD Pleasanton, California		Independent Director
JON BRADLEY Worminghall, United Kingdom		Vice-President, Sales — EMEA
STEPHEN BULL Quebec City, Quebec		Vice-President, Research and Development
NORMAND DUROCHER St-Sauveur, Quebec		Vice-President, Human Resources
ÉTIENNE GAGNON Quebec City, Quebec		Vice-President, Wireline Division and Corporate Marketing
LUC GAGNON St-Augustin-de-Desmaures, Quebec		Vice-President, Manufacturing Operations and Customer Service
VIVIAN HUDSON Beaconsfield, Quebec		Vice-President, Service Assurance Division
JOHN J. JONES, IV Hong Kong, China		Vice-President, Sales — APAC
GERMAIN LAMONDE St-Augustin-de-Desmaures, Quebec		Chairman of the Board, President and Chief Executive Officer
PIERRE MARCOUILLER Magog, Quebec		Independent Director
GUY MARIER Lakefield Gore, Quebec		Independent Lead Director
PIERRE PLAMONDON Quebec City, Quebec		Vice-President, Finance and Chief Financial Officer
BENOIT RINGUETTE Boischatel, Quebec		General Counsel and Corporate Secretary
DAVID A. THOMPSON Newton, North Carolina		Independent Director
ANDRÉ TREMBLAY Outremont, Quebec		Independent Director
DANA YEARIAN Lake Forest, Illinois		Vice-President, Sales — Americas

Meeting		Main activities of the Human Resources Committee
October 13, 2009	·	Review and approval of the Short-Term Incentive Plan for the financial year beginning September 1, 2009;
	·	Review of the proposed salary scales and salary increases for the year beginning September 1, 2009;
	·	Review and approval of the compensation plans of executive officers for the financial year beginning September 1, 2009 being the Base Salary, the Short-Term Incentive Plan and the stock-based compensation delivered through the Long-Term Incentive Plan
	·	Review and approval of the stock-based compensation plan for the sales force delivered through the Long-Term Incentive Plan for the financial year beginning September 1, 2009;
	·	Review and approval of the quantum for the stock-based compensation plan for the performing employees delivered through the Long-Term Incentive Plan for the financial year beginning September 1, 2009;
	·	Review and approval of the executive compensation section of the management proxy circular for the financial year ended August 31, 2009 during a Board of Directors meeting;
	·	Review of the succession planning program
	·	Review of the Management Improvement Performance Program.
January 12, 2010	·	Review of the quarterly payments under the Short-Term Incentive Plan for the financial year beginning September 1, 2009 and being part of the Short-Term Incentive Plan;
	·	Review and approval of the stock-based compensation plan for the performing employees delivered through the Long-Term Incentive Plan for the financial year beginning September 1, 2009;
	·	Review and approval of the CEO objectives;
	·	Review of the Mobilization / Motivation Plan;
	·	Review of the sales forces achievement and percentage of commissions;
	·	Review of a coaching program for the CEO;
	·	Review and amendment of the Stock Appreciation Rights Plan.
March 30, 2010	·	Review of the quarterly payments under the Short-Term Incentive Plan for the financial year beginning September 1, 2009 and being part of the Short-Term Incentive Plan;
	·	Review of the Human Resources Integration Plan following the acquisition of NetHawk;
	·	Review and approval of the stock-based compensation plan for the key employees of NetHawk delivered through the Long-Term Incentive Plan;
	·	Review of a coaching program for the CEO;
	·	Governance training for the Board Members.
June 29, 2010	·	Review of the quarterly payments under the Short-Term Incentive Plan for the financial year beginning September 1, 2009 and being part of the Short-Term Incentive Plan;
	·	Review and approval of the stock-based compensation plan for the recently hired executive officers delivered through the Long-Term Incentive Plan for the financial year beginning September 1, 2009;
	·	Review of the sales force structure following the acquisition of NetHawk;
	·	Renewal of the Collective Bargaining Agreement;
	·	Determination by the Members of their respective DSU percentage of their Annual Retainer.

Type of Fee	Financial 2010 Fees	Percentage of Financial 2010 Fees
Fees for Board of Directors and Human Resources Committee mandates	CA$61,820	97%
Fees for other Corporation mandates	CA$2,000	3%
Total	CA$63,820	100%

Name & Position	Annual incentive target as % of base salary	Business Performance				Individual Performance Multiplier (2)
		Measure	Weight		Multiplier (1)
Germain Lamonde, CEO	55%		Telecom (3)	LSI (3)	0% to 150%	0% to 125%
		Ÿ Sales	35%	30%
		Ÿ EBITDA	20%	30%
Pierre Plamondon, CFO	35%	Ÿ Gross margin	20%	25%
		Ÿ Customer satisfaction (4)	25%	15%
			Total: 100%
Hannu Huttunen, Vice-President, Wireless Division	30%	Ÿ Sales	Telecom 35%
		Ÿ EBITDA	20%
		Ÿ Gross margin	20%
		Ÿ Customer satisfaction (4)	25%
			Total: 100%
Jon Bradley, Vice-President, Sales-EMEA	66.7%				See note 8
		Ÿ Revenue target (5)	45%
		Ÿ Margin target (6)	45%
Dana Yearian, Vice-President, Sales-Americas	66.7%	Ÿ Personal objectives (7)	10%

Positions	Grant Levels (1) (% of base salary)
CEO	70%
Other NEOs	25% - 30%

Financial year ended	Grant Date	RSUs granted (#)	Fair Value at the Time of Grant (US$/RSU)	Vesting schedule
August 31, 2010	October 20, 2009	36,500	3.74	50% after 3 and 4 years of the grant date.
	January 19, 2010	130,000	5.13
	April 7, 2010	37,900	5.68
	April 7, 2010	6,155	5.68	1/3 on the third, fourth and fifth anniversary date of the grant.
	July 7, 2010	3,759	5.32
	October 20, 2009	174,686	3.74	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
	April 7, 2010	7,575	5.68
	July 7, 2010	18,963	5.32
August 31, 2009	October 22, 2008	71,003	2.36	50% after 3 and 4 years of the grant date.
	January 20, 2009	243,700	3.22
	April 7, 2009	11,000	3.52
	July 8, 2009	3,000	2.99	100% after 3 years of the grant date.
	January 20, 2009	5,000	3.22	1/3 on the third, fourth and fifth anniversary date of the grant.
	October 22, 2008	216,685	2.36	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
	October 22, 2008	135,584	2.36	100% after 3 years of the grant if performance is achieved (long-term growth of revenue and profitability). Otherwise 100% vested after 5 years of the grant date.
August 31, 2008	October 23, 2007	29,000	6.28	50% after 3 and 4 years of the grant date.
	January 15,2008	76,200	4.16
	April 8, 2008	21,600	6.09
	April 22, 2008	185,570	5.82
	July 7, 2008	71,310	4.39
	October 23, 2007	86,167	6.28	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.

Name	RSUs granted (#)	Percentage of Total RSUs Granted to Employees in Financial Year (%) (1)	Fair Value at the Time of Grant (US$/RSU)	Grant Date	Vesting schedule (2)
Germain Lamonde	66,081	15.90%	3.74	October 20, 2009	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (3)
Pierre Plamondon	16,794	4.04%	3.74	October 20, 2009	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (3)
Jon Bradley	10,367	2.49%	3.74	October 20, 2009	100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (3)

	Number of RSUs (#)	% of Issued and Outstanding RSUs	Weighted Average Fair Value at the Time of Grant ($US/RSU)
President and CEO (one individual)	197,533	12.32%	4.01
Board of Directors (five individuals)	–	–	–
Management and Corporate Officers (thirteen individuals)	589,093	36.75%	3.62

	Number of Options (#)	% of Issued and Outstanding Options	Weighted Average Exercise Price ($US/Security)
President and CEO (one individual)	154,240	11.44%	6.26
Board of Directors (four individuals)	117,807	8.73%	5.95
Management and Corporate Officers (eight individuals)	187,039	13.87%	14.79

DSUs #	Weighted Average Fair Value at the Time of Grant (US$/DSU)	Total of the Fair Value at the Time of Grant (US$)	Vesting
20,079	4.79	96,094	At the time director ceases to be a member of the Board of Directors of the Corporation

	Number of DSUs (#)	% of Issued and Outstanding DSUs	Total of the Fair Value at the Time of Grant (US$)	Weighted Average Fair Value at the Time of Grant (US$/DSU)
Board of Directors (five individuals)	135,003	100%	626,922	4.64

2010 Performance Indicators		Corporation’s Performance
Short-Term Incentive Plan (STIP)		Telecom (% of achievement)		LSI (% of achievement)
Financial · Sales · EBITDA · Gross margin		96% 109% 102%		110% 126% 96%
Customer Satisfaction · Quality · On-time delivery		100% 98%		98% 100%
Sales Force · Revenue (billings) · Margins (quotas)		94% 84%		n/a n/a
Long-Term Incentive Plan (LTIP) - RSUs
Date of Grant	Vesting Date		% of early vesting achievement (1)
October 25, 2006	October 25, 2010		35%
October 23, 2007	October 25, 2010		31%

Compensation Elements	2010	2009	2-Year Total
Cash
Base Salary	CA$400,000	CA$371,000	CA$771,000
Short-term incentive	CA$257,127	CA$159,452	CA$416,579
Equity
Long-term incentive	CA$259,698	CA$192,499	CA$452,197
Total Direct Compensation	CA$916,825	CA$722,951	CA$1,639,776
Pension Value	–	–	–
All Other Compensation	–	–	–
Total Compensation	CA$916,825	CA$722,951	CA$1,639,776
Annual Average	–	–	CA$819,888
Total Market Capitalization Growth (CA$ millions)	156.2 (1)	(106.0) (1)	50.1 (1)
Total Cost as a % of Market Capitalization Growth	0.6%	–	3.3%

Name	Paid during the financial year ended August 31, 2010 (i) ($)		Paid in the first quarter of the financial year ending on August 31, 2011 (i) ($)		Total bonus earned during the financial year ended August 31, 2010 (i) ($)
Germain Lamonde	117,993 123,255	(US) (CA)	128,156 133,872	(US) (CA)	246,149 257,127	(US) (CA)
Pierre Plamondon	43,362 45,296	(US) (CA)	48,698 50,870	(US) (CA)	92,060 96,166	(US) (CA)
Jon Bradley	80,263 83,843 51,296	(US) (CA) (£)	16,100 16,818 10,289	(US) (CA) (£)	96,363 100,661 61,585	(US) (CA) (£)
Hannu Huttunen	92,509 96,635 67,800	(US) (CA) (€)	– – –	(US) (CA) (€)	92,509 96,635 67,800	(US) (CA) (€)
Dana Yearian	154,672 161,570	(US) (CA)	15,625 16,322	(US) (CA)	170,297 177,892	(US) (CA)

Name	Outstanding Option-based Awards (Options)				Outstanding Share-based Awards (RSUs)
Name	Number of securities underlying unexercised options (#)	Option Exercise Price (US$) (1)	Option expiration date	Value (2) of unexercised in- the-money options (US$) (3)	Number of shares or units of shares that have not vested (#)	Market or payout value of share-based awards that have not vested (US$) (4)
Germain Lamonde	5,080	22.25	Jan. 10, 2011	–	197,533	1,096,308
	70,000	9.13	Oct. 10, 2011	–
	50,000	1.58	Sept. 25, 2012	198,500
	17,942	4.51	Feb. 1, 2015	18,660
	11,218	4.76	Dec. 6, 2015	8,862
Pierre Plamondon	10,000	45.94	Sept. 13, 2010	–	82,396	457,298
	5,000	34.07	Oct. 11, 2010	–
	9,240	22.25	Jan. 10, 2011	–
	19,000	9.13	Oct. 10, 2011	–
	20,000	1.58	Sept. 25, 2012	79,400
	5,383	5.13	Oct. 26, 2014	2,261
	3,653	4.76	Dec. 6, 2015	2,886
Jon Bradley	5,000	45.94	Sept. 13, 2010	–	58,731	325,957
	5,000	22.25	Jan. 10, 2011	–
	1,000	12.22	Jan. 3, 2012	–
Hannu Huttunen	–	–	–	–	23,128	128,360
Dana Yearian	–	–	–	–	78,874	437,751

Name	Exercised Option-based Awards (Options)
Name	Number of securities underlying exercised options (#)	Option Exercise Price (US$)	Option grant date	Gains realized (US$)
Germain Lamonde	–	–	–	–
Pierre Plamondon	–	–	–	–
Jon Bradley	1,500	3.19	January 7, 2003	1,332
	10,000	3.50	December 17, 2003	12,269
	4,000	4.51	February 1, 2005	1,077
Hannu Huttunen	–	–	–	–
Dana Yearian	–	–	–	–