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«Management Discussion and Analysis of Financial Position and Operating Results This management discussion and analysis (MD&A) is intended to provide ...»

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In the third quarter ended December 31, 2004, the change in non-cash items was impacted by a $2.4 million decrease in accounts receivable and a $2.6 million decrease in inventories. The $13.2 million net change in non-cash items for the first nine months of 2004 consisted primarily of a $3.0 million reduction in accounts receivable, a $4.9 million increase in inventories and a $4.8 million decrease in customers’ advances that represented unearned amounts received from customers last year, which are liquidated based on units delivered to customers (see under Consolidated Balance Sheets below and Note 9 to the interim consolidated financial statements).

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Third quarter purchase of property, plant and equipment and finite-life intangible assets (capital expenditures) were $4.4 million this year compared to $2.4 million last year.

Year-to-date capital expenditures stood at $7.1 million this year compared to $9.1 million last year. Additional capital expenditures of about $8 million are expected to be made during the remaining quarter of the current fiscal year.

On May 20, 2005, the Company concluded the sale of its Logistics and Defence Division, Diemaco. The final total sale price amounted to $19.0 million. The 2004 business acquisition figure reflects the purchase price of Progressive Incorporated on April 1, 2004 (see Notes 2 and 3 to the interim consolidated financial statements).

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During the first quarter of the current fiscal year, subsequent to the sale of the Logistics and Defence Division, Diemaco, the Company repaid $15.3 million on its Secured Syndicated Revolving Term Credit Facilities (Credit Facilities).

9 On November 10, 2005, the Company closed a public offering of 4.5 million common shares priced at $3.75 per share for net proceeds of $15.7 million (net of $1.2 million in fees and expenses). This offering was co-led by National Bank Financial and GMP Securities Ltd. Raymond James Ltd. and Versant Partners Inc. also acted as underwriters on the offering (see Note 6 to the interim consolidated financial statements). The Company also applied the net proceeds from the sale of common shares to the reduction of its lines of credit under its credit facilities, but not as a permanent reduction thereof. For the year to date, net capital repayments on the credit facilities totalled $24.9 million (see Note 5 to the interim consolidated financial statements).

In 2004, the Company drew $36.4 million (US $27.7 million) on its credit facilities, issued 3.5 million common shares through private placements for a net cash consideration of $16.2 million, and used $18.7 million of its available cash to finance the acquisition of Progressive (see Note 2 to the interim consolidated financial statements).

Extension of Secured Syndicated Revolving Credit Facilities (“Credit Facilities”) At the end of the third quarter ended December 31, 2005, the Company concluded the annual extension of its Credit Facilities from March 21, 2006 to March 21, 2007. These Credit Facilities allow the Company to borrow up to $80 million (either in Canadian or equivalent US currency), including up to $30 million and $50 million for the revolving operating Credit Facilities and revolving term Credit Facilities respectively, based essentially on the same terms and conditions. These Credit Facilities are used for working capital, capital expenditures and other general corporate purposes. In the event that the Credit Facilities are not extended at the end of the revolving period (March 21, 2007), the revolving operating Credit Facilities will mature. The revolving term Credit Facilities will convert at the end of the revolving period into a three-year term loan with a five-year amortization period. These Credit Facilities are extendible annually from July 1st to October 31st of each year.

The Company was in compliance with all its restrictive debt covenants at December 31, 2005, and expects to remain so for the balance of the current fiscal year.

Stock Option Plan The Company has a stock option plan whereby options to purchase common shares are issued to directors, officers and key employees. At December 31, 2005, the Company had 873,021 outstanding stock options at an average strike price of $5.72 that will expire over the next seven years (between June 2007 and August 2012). The Company has also a stock purchase and ownership incentive plan for management employees and a stock appreciation right plan for its non-employee directors. (See Note 6 to the interim consolidated financial statements).

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At December 31, 2005 and March 31, 2005, the Company’s working capital ratio, cash

and cash equivalents and long-term debt-to-equity ratio were as follows:

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Improvements to the above-mentioned ratios and to cash and cash equivalents reflect the Company’s increased cash flows from operations this year, along with the net capital repayment on long-term debt from the net proceeds of the sale of Diemaco and the treasury common share issue already explained above.

CHANGES IN ACCOUNTING POLICIES

Changes in accounting policies adopted in the last fiscal year ended March 31, 2005 along with the future changes in accounting policies are discussed in the Company’s MD&A included in its annual report for fiscal 2005.

RISKS AND UNCERTAINTIES

Héroux-Devtek operates in industry segments that have a variety of risk factors and uncertainties that could have a material adverse effect on the Company’s business, financial condition and results of operations. Such risks and uncertainties include, but are not limited to, those mentioned below, which are more fully described in the Company’s MD&A for the year ended March 31, 2005.

• Reliance on large customers

• Operational risks

• General economic conditions

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OUTLOOK The Company expects its business to continue to improve through the remainder of this year and into next year as we continue to execute on our business plan. Military sales should remain solid. At this time, sales for large commercial aircraft, business jets and turboprops (commuters) should increase as the civil market continues to improve, while regional jet product sales will remain at a lower level, as seen in the last quarter. Aircraft Engine Component sales have been impacted by ongoing delivery and quality issues at the Gas Turbine Components Division, and while improvements have been made, sales are expected to remain flat or could even decline in the coming quarter. However, the Company’s recent move into the wind energy markets is starting to bear fruit and will contribute positively to future industrial product sales.

Additional Information and Continuous Disclosure This MD&A was prepared as of February 1st, 2006. Updated information on the Company, including the annual information form, can be found on the SEDAR web site at www.sedar.com.

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