12.08.04

12.8.2004: Meldung: Trojan Technologies Announces Record Quarterly Revenue

Trojan Technologies (TUV:TSX) today announced
its results for the three and six months ended June 30, 2004.
"I am very pleased to report our results for the second quarter of 2004,"
said Marvin DeVries, Trojan"s President and CEO. "As these numbers show,
Trojan is on plan with record revenues, strong margins and improved operating
expense performance. Bottom-line, we have delivered a solid profit consistent
with our expectations and are on track to deliver on our 2004 business plan."

Financial highlights include:

- Revenue for the quarter was $34.7 million; an increase of 18.0%
compared to $29.4 million in the three-month period ended June 30,
2003. Revenue includes $3.1 million from the acquisition of the
majority interest of U.S. Peroxide, LLC of Laguna Niguel, California.
For the six months ended June 30, 2004, revenues grew 12.9%
to $63.2 million from $56.0 million in the six months ended
June 30, 2003.

- For the quarter, consolidated gross margin was $14.3 million or
41.3%, an improvement from $11.5 million or 39.1% in the three-month
period ended June 30, 2003. Consolidated gross margin for the six-
month period was $25.7 million or 40.7%, compared to $21.8 million or
38.9% in the six-month period ended June 30, 2003.

- For the quarter, income before other income and expenses more than
doubled to $2.8 million compared to $1.3 million in the second
quarter of 2003. Net income in the second quarter of 2003 was
adversely impacted by $0.6 million of costs associated with
management changes. On a year-to-date basis, income before other
income and expenses amounted to $4.1 million compared to $2.0 million
in the six months ended June 30, 2003.

- Operating expenses, excluding amortization, totalled $10.2 million
representing 29.3% of revenue compared to $9.4 million or 31.8%
of revenue in the second quarter of 2003. For the six months ended
June 30, 2004, operating expenses were $19.2 million or 30.4%
compared to $18.0 million or 32.2% of revenue in the six months
ended June 30, 2003.

- In the second quarter, Trojan reported net income after tax of
$1.9 million or $0.09 per share compared to income of $0.8 million or
$0.04 per share in the second quarter of 2003. For the six-month
period, Trojan reported a profit of $2.9 million or $0.13 per share
compared to a loss of $6.3 million or $0.28 per share in the same
period of 2003. The results for the six months ended June 30, 2003
were negatively impacted by $9.5 million of abandoned transaction
costs recognized in the first quarter.

- Order backlog at June 30, 2004 stood at $67.1 million, compared to
$72.1 million at March 31, 2004 and $77.3 million at June 30, 2003.

- Cash and cash equivalents totalled $3.0 million at June 30, 2004
compared to $16.6 million at December 31, 2003. During the first
quarter, the Company purchased 51% of U.S. Peroxide for cash of
$5.4 million with an outstanding balance of $1.6 million which was
paid in the second quarter. Net cash inflow from operations was
$4.1 million for the quarter compared to an outflow of $6.7 million
in the same three-month period last year.

- Shareholders" equity was $81.7 million at June 30, 2004 compared to
$78.4 million at December 31, 2003.

More details about Trojan Technologies" financial performance are
contained in the following Report to Shareholders.



REPORT TO SHAREHOLDERS
THREE AND SIX MONTHS ENDED JUNE 30, 2004

PRESIDENT"S MESSAGE

I am very pleased to report our results for the second quarter of 2004.
As these numbers show, Trojan Technologies is on plan with an increase in
revenue, strong margins and improved operating expense performance. Bottom-
line, we have delivered a solid profit consistent with our expectations and
are on track to deliver on our 2004 business plan.

Financial Results

Our financial results are examined in greater detail later in this Report
to Shareholders but let me provide you with some highlights. Revenue for the
quarter reached a record $34.7 million, increasing by 18% over last year. Much
of the revenue growth is attributed to the acquisition of U.S. Peroxide but is
also due to increases in our Municipal Wastewater and Environmental
Contaminant Treatment (ECT) markets.
Order backlog has declined from last quarter to $67.1 million. During the
quarter, we were awarded additional municipal project orders worth $18.0
million. We continue to see higher bidding levels in the Municipal Drinking
Water arena, but, as expected, the Municipal Wastewater market is showing
slower growth. In both markets, we believe we are holding or increasing our
market share. The ECT arena continues to be an emerging market and quote
volume remains strong.
My objective is to maintain margins at approximately 40% and to see SG&A
expenses decline as a percentage of revenue as the business grows. Gross
margins in the quarter were strong at 41% compared to 39% last year reflecting
the benefit of the higher revenue level and economies of scale. Operating
expenses excluding amortization decreased to 29% of revenue compared to 32%
last year. Overall, I am very pleased with our progress as we achieved a
profit of $1.9 million or $0.09 cents per share.

2004 Strategy Update

I"d like to update you on our progress in delivering on our strategy for
2004. Our first of five priorities is to deliver innovative solutions that
solve our customers" water treatment problems. With U.S. Peroxide, we have
been developing an innovative solution, combining UV and hydrogen peroxide, to
solve taste and odour problems commonly experienced by many municipalities who
rely on surface water, such as lakes and reservoirs, for their drinking water
supply. Often in the late summer months, unpleasant taste and odour compounds
are caused by algae blooms giving water a musty taste and smell. In June, we
were selected for our first taste and odour treatment project by the City of
Cornwall, Ontario. This project represents a breakthrough in the new market
for the combined disinfection and taste and odour treatment of drinking water.
During the quarter, production of UV systems was underway for the PWN
Water Supply Company North Holland in the Netherlands. As we first announced
in April, 2001, Trojan was selected to optimize, design and supply UV
equipment for disinfection and to destroy pesticides found in contaminated
drinking water supplies. The new facility, which will have its grand opening
this fall, will be the first of its kind in the world treating both waterborne
microorganisms and micropollutants. It will serve as a significant
demonstration site for other major municipalities faced with the need to treat
a growing array of contaminants in their water supplies.
We are also focused on expanding customer relationships to provide better
service and deliver value beyond our core product offerings. During the
quarter, we continued to move forward on implementing our Global Service
Strategy. Many of our Manufacturer"s Representatives are now authorized to
provide service and support to our customers on our behalf. Many have now
become involved in the installation and start-up of our municipal systems. As
this strategy is rolled out, we will be able to provide better service to our
customers, while at the same time; we expect to increase our parts, supplies
and service revenues.
Parts, supplies and service revenues increased in the quarter by 47% over
the same quarter last year primarily due to the sales of hydrogen peroxide to
clients of U.S. Peroxide. This revenue is an annuity that, while not included
in backlog, represents a growing revenue stream for Trojan. We have also begun
to roll-out U.S. Peroxide"s product offering to our existing client base.
While it is too early to see a financial impact, the product offering has been
well-received to date.
Our efforts in globalizing our business have resulted in an increase of
$0.8 million in wastewater revenue from Asia so far this year; more than
double the revenue in the same period last year. This success is particularly
strong in China where we have won the majority of projects on which we have
bid to date. China"s water treatment concerns are widely recognized and
acknowledged, and the country has made major commitments to build new plants
and upgrade existing plants to adequately address disinfection concerns. The
evidence for this is emerging as the number of UV projects bidding over the
next year has increased dramatically.
We have also been diligent in accelerating demand for our products
through initiatives to build awareness and acceptance of UV technology among
regulators, customers and end-users. We have met with regulators in a number
of jurisdictions to provide information and guidance on the benefits of
including UV in water treatment strategies. Our marketing team has also
initiated an aggressive campaign to increase awareness of UV among smaller
municipalities faced with the challenges of providing safe drinking water for
their communities.
And finally, we remain committed to improving our execution to achieve a
level of excellence that enables us to grow the business quickly and
efficiently. We have tightened management processes and are involved in
selecting a core business operating system that will support our Company"s
objectives. Through continued efficiency improvements, we will further reduce
operating costs as a percentage of sales.

Outlook

Over the next six months, management believes that momentum in quarterly
revenue growth will continue. Our current municipal order backlog provides us
with good visibility for the remainder of the year and we expect revenues in
the second half of the year to be higher.

Marvin DeVries,
President and CEO



MANAGEMENT"S DISCUSSION AND ANALYSIS OF RESULTS

This section of the Interim Report to Shareholders presents a discussion
and analysis of the operating results and financial condition of Trojan
Technologies Inc. for the period ended June 30, 2004. The results presented
in this analysis cover the six- and three-month periods ended June 30, 2004
and the six- and three-month periods ended June 30, 2003. The results for the
six- and three-month periods ended June 30, 2004 include the operations of
U.S. Peroxide that was acquired effective January 5, 2004. This discussion and
analysis should be read in conjunction with the "Management"s Discussion and
Analysis" and the annual audited consolidated financial statements contained
in our 2003 Annual Report.

OVERVIEW

As shown in Table 1, revenue in the quarter was $34.7 million, an
increase of 18% compared to $29.4 million in the second quarter of fiscal
2003. Year to date, revenue increased by 13% to $63.2 million from
$56.0 million in the comparable period last year. The Company"s stated
longer-term objective is to increase revenue by an average growth rate of
over 20% per annum. It is anticipated that approximately 15% to 20% of
annual growth can be derived organically and the balance will come through
acquisitions. Growth in the quarter was driven primarily by the acquisition of
the majority interest in U.S. Peroxide and an increase in production revenue
in the Environmental Contaminant Treatment (ECT) and Wastewater arenas.
Gross margin for the six months ended June 30, 2004 was $25.7 million
or 41% of revenue compared to $21.8 million or 39% of revenue in the
corresponding period last year. The margin increase reflects the economies
of scale based on a higher level of revenue.
Net income before tax and non-controlling interest for the six months
ended June 30, 2004 increased to $4.2 million compared to a loss of
$7.3 million for the same period last year. Last year, the Company recognized
$9.5 million of costs associated with an abandoned business combination
transaction. There continues to be a strong focus on cost management within
the Company. Total expenses, including amortization, were $21.6 million
compared to $19.7 million for the same period last year. Excluding the U.S.
Peroxide expenses, year-to-date operating expenses decreased from the same
period in the prior year.


-------------------------------------------------------------------------
TABLE 1: Summary of Quarterly Results
-------------------------------------------------------------------------
(C$ Three Three Three Three Three Three
thousands months months months months months months
except ended ended ended ended ended ended
per share June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
amounts) 2004 2004 2003 2003 2003 2003
-------------------------------------------------------------------------
Restated Restated
- see note - see note
3 to the 3 to the
financial financial
statements statements
-------------------------------------------------------------------------
Revenue 34,728 28,503 29,124 27,899 29,428 26,599
-------------------------------------------------------------------------
Gross margin
- $ 14,337 11,374 10,809 8,973 11,503 10,289
-------------------------------------------------------------------------
- % 41% 40% 37% 32% 39% 39%
-------------------------------------------------------------------------
Income (loss)
before taxes
and non-
controlling
interest 2,885 1,357 1,164 (1,422) 1,312 (8,654)
-------------------------------------------------------------------------
Net income
(loss) 1,890 1,001 919 (1,026) 845 (7,104)
-------------------------------------------------------------------------
Basic
earnings
per share 0.09 0.05 0.04 (0.05) 0.04 (0.32)
-------------------------------------------------------------------------
Fully
diluted
earnings
(loss)
per share 0.09 0.05 0.04 (0.05) 0.04 (0.32)
-------------------------------------------------------------------------


MUNICIPAL MARKETS

Financial Performance

Revenue in the municipal markets increased by 25% to $30.2 million for
the quarter ended June 30, 2004, and by 17% to $54.7 million for the six
months year-to-date. Growth was largely driven by the acquisition of U.S.
Peroxide, which is recorded as parts, supplies and service revenue, and by
increased production in the ECT business. There were two significant contracts
resulting in the increased revenue in the quarter: production on equipment
valued at approximately $4.1 million ( (euro) 2.6 million) to be installed at
PWN"s drinking water treatment plant in Andijk, the Netherlands, and on
equipment valued at approximately $2.1 million (US$1.6 million) for the West
Basin Water Recycling Facility located in El Segundo, California. The ECT
business is positioned for strong growth in 2004 as the Company completes
production later this year on a large treatment system for Orange County, and
our first project valued at approximately $1 million combining disinfection
and taste and odour treatment of drinking water for Cornwall, Ontario.
Wastewater revenue posted a 6% year-over-year increase for the six months
ended June 30, 2004. Wastewater revenues for the UV3000Plus product line
almost doubled for the quarter year-over-year, due in large part to the near
completion of equipment valued at $2.4 million (US$1.8 million) for the
wastewater reuse facility in the City of Lodi, California. Furthermore, our
efforts in globalizing our business have resulted in an increase of
$0.8 million in wastewater revenue year-to-date from Asia, more than double
the revenue in the same six-month period last year.
The revenue in 2004 for Drinking Water has decreased by $2.3 million or
50% for the quarter, and $4.2 million or 48% year-to-date from the comparable
periods last year. Last year was particularly strong with the production of
systems for delivery to Seattle, Washington, Lethbridge, Alberta and Victoria,
British Columbia. Drinking Water bidding is strong, in part driven by the
expectation of the proposed new regulations to be promulgated by the U.S.
Environmental Protection Agency in 2005. Based on orders in place for delivery
this year, we expect that the Company will show revenue growth in the second
half of the year, resulting in growth over last year"s total Drinking Water
revenue of $15.6 million.

-------------------------------------------------------------------------
TABLE 2: Municipal Markets Results
-------------------------------------------------------------------------
(C$ thousands) Six Six Three Three
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
Revenue
Wastewater systems 31,190 28,609 15,706 13,944
-------------------------------------------------------------------------
Drinking water systems 4,527 8,733 2,256 4,623
-------------------------------------------------------------------------
Environmental
contaminant systems 5,040 300 4,114 149
-------------------------------------------------------------------------
40,757 37,642 22,076 18,716
-------------------------------------------------------------------------
Parts, supplies and service 13,978 9,290 8,165 5,543
-------------------------------------------------------------------------
Total revenue 54,735 46,932 30,241 24,259
-------------------------------------------------------------------------
Net contribution 12,560 9,975 7,149 5,467
-------------------------------------------------------------------------
Order backlog 67,092 77,300
-------------------------------------------------------------------------

The total order backlog in municipal markets of $67.1 million is lower
compared to $72.1 million at March 31, 2004 and $77.3 at the end of the second
quarter last year. Of the order backlog, $45.7 million is scheduled for
production in 2004. As previously reported, the decline in the backlog is
attributable to lighter bidding activity in Q4, 2003 and Q1, 2004. Bidding has
returned to expected levels in the period ended June 30, 2004. During the
quarter ended June 30, 2004, bidding activity increased in the municipal
Drinking Water market by 74% compared to the same period last year. $3.3
million of the decrease in backlog from March 31, 2004 is due to the decline
in the U.S. dollar exchange rate from the high levels experienced prior to
2004. Backlog is recorded only for municipal project revenue and excludes
parts, supplies and service revenue. U.S. Peroxide has confirmed sales of
$9.2 million for delivery for the balance of this year, which are not included
in the reported backlog totals.


INDUSTRIAL AND CONSUMER MARKETS

Financial performance

In the Industrial and Consumer business, revenue decreased by
$0.6 million or 13% for the quarter, or by 7% on a year-to-date basis,
compared to comparable periods last year.
Contribution year-to-date decreased primarily as a result of a reduced
contribution from the Industrial sector. For the quarter, contribution
increased resulting from higher gross margins and a lower allocation of
selling costs (European costs are allocated by line of business based on
revenue).
The recovery of the Industrial market continues to be slower than
anticipated, particularly in North America. The migration of the semi-
conductor business to Asia has affected revenue, but holds promise for the
Company as Trojan builds its capacity in the southeast Asia. While the
Industrial market has been flat, we expect higher levels of activity in the
second half of the year to result in year-over-year revenue growth.

-------------------------------------------------------------------------
TABLE 3: Industrial and Consumer Market Results
-------------------------------------------------------------------------
(C$ thousands) Six Six Three Three
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
Revenue
-------------------------------------------------------------------------
Industrial 5,556 6,137 2,975 3,593
-------------------------------------------------------------------------
Consumer 2,940 2,958 1,512 1,576
-------------------------------------------------------------------------
Total revenue 8,496 9,095 4,487 5,169
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Net contribution 1,815 1,931 1,131 911
-------------------------------------------------------------------------

General slowness in the Consumer market, efforts to ensure an effective
product recall and poor weather have contributed to the lower than expected
sale of products that are somewhat seasonal in nature. On April 29, 2004, the
Company announced a limited voluntary recall of certain consumer units. Some
of the lamps supplied to the Company for use in these disinfection systems
were improperly manufactured, and can cause the units to overheat, posing a
potential fire hazard. Management was strongly focused on the execution of the
product recall during the second quarter. The estimated cost of this recall
was provided in the December 31, 2003 financial statements. No additional
provisions were required during the quarter.


FINANCIAL PERFORMANCE PRIORITIES

The Company established four priority areas in 2004 to measure
improvement in its financial performance:

1. Revenue growth and diversification
2. Operating income improvement
3. Improved cash flow
4. Balance sheet strength


1. Revenue Growth and Diversification

The long-range plan developed in 2001 identified the opportunity to
diversify the business away from its strong focus on Wastewater. By better
understanding the opportunities in other markets and focusing on what was
required to be successful in these markets, the Company has enjoyed strong
growth in the Drinking Water, ECT and Industrial markets from 2001 to 2003,
and continued strong growth in the ECT market into 2004. As previously noted,
with the growth in Drinking Water revenue in the latter half of the year,
revenue in this market is expected to represent more than 10% of the total
revenue for 2004.

-------------------------------------------------------------------------
TABLE 4: Growth in Quarterly Revenue
-------------------------------------------------------------------------
(C$ Three Three Three Three Three Three
thousands) months months months months months months
ended ended ended ended ended ended
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2004 2004 2003 2004 2004 2003
-------------------------------------------------------------------------
Wastewater 20,716 18,905 20,463 15,891 19,487 18,412
-------------------------------------------------------------------------
Drinking
water 2,290 2,292 2,765 4,117 4,623 4,110
-------------------------------------------------------------------------
Environ-
mental
contaminant 7,235 3,297 2,054 3,564 149 151
-------------------------------------------------------------------------
Industrial 2,975 2,581 2,475 2,829 3,593 2,544
-------------------------------------------------------------------------
Consumer 1,512 1,428 1,367 1,498 1,576 1,382
-------------------------------------------------------------------------



-------------------------------------------------------------------------
TABLE 5: Diversification of Revenue by Arena
-------------------------------------------------------------------------
(C$ Three Three Three Three Three Three
thousands) months months months months months months
ended ended ended ended ended ended
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2004 2004 2003 2004 2004 2003
-------------------------------------------------------------------------
Wastewater 60% 6% 0% 57% 66% 69%
-------------------------------------------------------------------------
Drinking
water 6% 8% 9% 15% 16% 15%
-------------------------------------------------------------------------
Environ-
mental
contaminant 21% 2% 7% 13% 1% 1%
-------------------------------------------------------------------------
Industrial 9% 9% 9% 10% 12% 10%
-------------------------------------------------------------------------
Consumer 4% 5% 5% 5% 5% 5%
-------------------------------------------------------------------------

As well as diversifying the business into areas of higher growth
opportunity, Trojan also has an objective to increase the percentage of
business being derived from "non-project" sources. This objective has seen us
focus on a service strategy to increase our parts, supplies and service
business as well as grow our Industrial and Consumer businesses. In addition
to the organic growth in these non-project businesses, the acquisition of U.S.
Peroxide in early 2004 is aligned with this strategy and is expected to add
approximately $15 million to revenue in 2004.

-------------------------------------------------------------------------
TABLE 6: Growth in Parts, Supplies and Service Revenues
-------------------------------------------------------------------------
(C$ thousands) Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------------------
Municipal:
-------------------------------------------------------------------------
Projects and
standard
systems $40,757 65% $37,642 67% $22,076 64% $18,716 64%
--------------------------------------------------------------------------
Parts, supplies
and service 13,978 22% 9,290 17% 8,165 23% 5,543 19%
--------------------------------------------------------------------------
Industrial and
consumer 8,496 13% 9,095 16% 4,487 13% 5,169 18%
--------------------------------------------------------------------------
22,474 35% 18,385 33% 12,652 36% 10,712 36%
--------------------------------------------------------------------------
Total Revenue $63,231 100% $56,027 100% $34,728 100% $29,428 100%
--------------------------------------------------------------------------

Industrial and Consumer revenues in the three and six months ending
June 30, 2004 include $1.2 million and $2.0 million of parts, supplies and
service revenue, respectively.


2. Operating Income Improvement

It is management"s objective to improve operating income performance
by maintaining gross margins at 40% in the aggregate and by realizing the
benefits of economies of scale by restricting the growth in expenses to less
than the growth in revenue. Operating income has improved compared to the
same period last year as operating expenses for the three and six months
ended June 30, 2004 increased by only 12% and 9%, respectively, while revenue
increased by 18% and 13%, respectively, from the comparable periods last year.
As in the first quarter, the Company continued to tightly manage operating
expenses in the quarter.
The Company enjoyed strong margins in this quarter due to economies
of scale from a higher revenue base. Furthermore, our hedging program has
protected us from the declining value of the U.S. dollar. Management
anticipates margins to remain at approximately 40% for the remainder of the
year.

-------------------------------------------------------------------------
TABLE 7: Operating Income
-------------------------------------------------------------------------
(C$ Growth Growth
thousands) in June in June
Six Six Three Three 2004 2004
months months months months over over
ended ended ended ended June June
June 30, June 30, June 30, June 30, 2003 - 2003 -
2004 2003 2004 2003 6 months 3 months
-------------------------------------------------------------------------
Restated Restated
- see note - see note
3 to the 3 to the
financial financial
statements statements
-------------------------------------------------------------------------
Gross
margin 25,711 21,792 14,337 11,503 18% 25%
-------------------------------------------------------------------------
Gross
margin
(% of
revenue) 41% 39% 41% 39%
-------------------------------------------------------------------------
Less:
-------------------------------------------------------------------------
Sales and
market-
ing 11,336 9,886 6,057 5,125 15% 18%
-------------------------------------------------------------------------
General
and
admini-
stration 5,773 5,206 3,021 2,842 11% 6%
-------------------------------------------------------------------------
Research
and
develop-
ment, net 2,103 2,953 1,103 1,398 (29%) (21%)
-------------------------------------------------------------------------
Amorti-
zation 2,386 1,702 1,311 882 40% 49%
-------------------------------------------------------------------------
Total 21,598 19,747 11,492 10,247 9% 12%
-------------------------------------------------------------------------
Income
before
other
(expenses)
income 4,113 2,045 2,845 1,256 101% 127%
-------------------------------------------------------------------------
Income
before
other
(expenses)
income
(% of revenue) 7% 4% 8% 4% 3% 4%
-------------------------------------------------------------------------


Sales commissions decreased by 34% from $1.8 million for the three
months ended June 30, 2003 to $1.2 million, and by 31% or $1.0 million to
$2.3 million year-to-date, reflecting the sales mix: there was a relative
increase in ECT revenue and non-project revenue which are either sold
directly or attract a lower percentage of commission. Other selling expenses
for the three months ended June 30, 2004 increased by 47% or $1.6 million to
$4.9 million from the comparable period last year, or by 38% to $9.0 million
year-to-date. The largest single component contributing to the increase is the
selling expenses of U.S. Peroxide which was acquired in January 2004.
Relative to the percentage growth in revenue, the percentage increase
in general and administration expenses was lower, again, benefiting from
economies of scale. For the quarter, these expenses increased by $0.2 million
or 6% to $3.0 million from $2.8 million in the three months ended June 30,
2003; year-to-date, these expenses increased $0.6 million or 11%. The increase
is related mainly to the acquisition of U.S. Peroxide in 2004 and to the
stock-based compensation expense (see notes 3 and 10(b) to these consolidated
financial statements).
The Research and Development efforts are directed at core research,
current product improvement, new product development and technology
development. Total expenses net of grants in the three months ended June 30,
2004 were $1.1 million compared to $1.4 million in the same period last year.
On a year-to-date basis, R&D expenses decreased by $0.9 million or 29% to
$2.1 million. In the first half of this year, engineering resources have
focused largely in two areas: delivery of custom solutions on the Rotterdam
and PWN projects; and, the planning phase of the initiatives on the
development of technology for large municipal Drinking Water systems and ECT
market. When staff are engaged in developing specific custom solutions, such
as Rotterdam and PWN, the costs are charged to cost of goods sold and
reflected in the calculation of gross margin. R&D expenses are reduced as a
consequence. In the last half of the year, R&D activities on the prototyping
and execution phases of product development are expected to bring annual
expenditures closer to management"s expectations.
The Company owns 49% of the issued and outstanding common shares of Abuma
Manufacturing Limited (Abuma). The investment is accounted for by the equity
method. Fair value information relating to the investment in this private
company has not been included as there has not been a recent valuation of
Abuma. Management believes that the fair value of the investment exceeds its
carrying value based on the positive operating cash flows of Abuma.
The Company subcontracts a component of its manufacturing process to
Abuma. Purchases for the quarter and year-to-date amounted to $2.0 million and
$3.7 million, respectively. At June 30, 2004, accounts payable include
approximately $1.6 million due to Abuma and inventory includes approximately
$0.4 million of components purchased from Abuma.

-------------------------------------------------------------------------
TABLE 8: Summary of Cash Flows
-------------------------------------------------------------------------
(C$ thousands) Six Six Three Three
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30
2004 2003 2004 2003
-------------------------------------------------------------------------
Restated Restated
- see note - see note
3 to the 3 to the
financial financial
statements statements
-------------------------------------------------------------------------
Cash flow from operating
activities:
-------------------------------------------------------------------------
Net income (loss) 2,891 (6,259) 1,890 845
-------------------------------------------------------------------------
Adjustment for items not
involving cash 3,473 (165) 2,244 944
-------------------------------------------------------------------------
Recognition of deferred gain
on forward foreign
exchange contracts (1,961) - (1,069) -
-------------------------------------------------------------------------
Net change in non-cash
working capital (6,244) 3,472 992 (8,476)
-------------------------------------------------------------------------
(1,841) (2,952) 4,057 (6,687)
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Cash flow from investing
activities:
-------------------------------------------------------------------------
Additions to capital assets,
patents and intangible assets (2,312) (1,309) (1,221) (775)
-------------------------------------------------------------------------
Sale of marketable
securities, net - 2,549 - 2,549
-------------------------------------------------------------------------
Acquisitions (6,975) - (1,579) -
-------------------------------------------------------------------------
(9,287) 1,240 (2,800) 1,774
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Cash flow from financing
activities:
-------------------------------------------------------------------------
Issues of common shares
(net of issue costs) 83 3,169 - 3,030
-------------------------------------------------------------------------
Repayment of debt (net) (2,586) (659) (531) (517)
-------------------------------------------------------------------------
Purchase of common
shares for cancellation - (765) - (765)
-------------------------------------------------------------------------
Other (38) 702 (21) 232
-------------------------------------------------------------------------
(2,541) 2,447 (552) 1,980
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Net change in cash (13,669) 735 705 (2,933)
-------------------------------------------------------------------------


3. Improved Cash Flow

Management has placed a high priority on maximizing cash flows through
careful management of inventories, unbilled revenue and accounts receivable.

Cash Flow from Operations

Cash flow from operations for the quarter was $4.1 million compared to an
outflow of $6.7 million in the same period last year. The four components of
cash flow from operations are net income, the adjustment for items not
involving cash, the realized gain on forward foreign exchange contracts, and
the net changes in working capital. Net income changes have been fully
discussed earlier in the MD&A.
The adjustments for items not involving cash are mainly amortization,
taxes, and income from equity investment. Amortization has increased
$0.7 million and $0.4 million, or 40% and 49%, for the six and three months
ended June 30, 2004 from the prior year comparable periods, respectively. The
increases are due mainly to the inclusion of U.S. Peroxide operations in 2004
and the amortization of the intangible assets acquired in that purchase (see
Note 4 to these consolidated financial statements).
The income taxes vary in relationship to changes in net income. Because
of losses in prior year, the Company is not currently paying cash income taxes
in Canada. Income from equity investment represents Trojan"s 49% share in the
net earnings of Abuma.
The recognition of the deferred gain on forward foreign exchange
contracts represents the realized portion of the $8.0 million deferred gain
resulting from last year"s termination and replacement of USD forward
contracts (see discussion under "Liquidity Analysis" and note 7 to these
consolidated financial statements).
Net cash flow from operations is also impacted by changes in non-cash
working capital balances. As at June 30, 2004, the Company"s investment in
working capital increased by $0.9 million to $36.9 million compared to
$36.0 million at the end of the first quarter. The increase in unbilled
revenue was mostly offset by increases in accounts payable and deferred
revenue.
Investment in working capital increased by $7.2 million to $36.9 million
compared to $29.7 million as at December 31, 2003. An increase of $6.0 million
in accounts receivable is the single largest component contributing to the
increased investment in working capital. After removing the $1.8 million
increase in accounts receivable related to the acquisition of U.S. Peroxide,
the remaining $4.2 million increase is primarily attributable to the increase
in business reflected in billing activity at the end of the quarter for both
the delivery of systems as well as progress billings on other contracts in
accordance with their terms. Subsequent to the quarter end, three large
receivables amounting to $2.3 million were collected. The $3.4 million
increase in unbilled revenue reflects the production of larger projects during
the quarter in preparation for delivery early in the third quarter.

Cash Flow from Investing Activities

The cash outflow from investing activities was $2.8 million and
$9.3 million for the three and six month periods ended June 30, 2004. In the
first quarter, the Company acquired a 51% interest in U.S. Peroxide for
$7.0 million, paying the balance of the purchase price of $1.6 million in the
second quarter.
Capital expenditures were $2.3 million for the six months ended June 30,
2004 compared to $1.3 million in the same period last year, or $1.2 million
and $0.8 million for the second quarter of 2004 and 2003, respectively. These
capital expenditures included pilot, computer and laboratory equipment,
tooling and equipment investment in U.S. Peroxide.

Cash Flow from Financing Activities

Financing activities in the six months ended June 30, 2004 generated
a net cash outflow of $2.5 million compared to a net cash inflow of
$2.4 million. The outflow was largely the repayment of $3.6 million of
long-term debt, primarily associated with the U.S. Peroxide acquisition. The
pre-acquisition debt of U.S. Peroxide was refinanced to take advantage of the
Company"s lower cost of funds.
For the quarter, financing activities generated a net cash outflow of
$0.6 million compared to a net cash inflow of $2.0 million for the same period
last year. During the quarter last year, the Company issued share capital for
proceeds of $3.0 million pursuant to the exercise of warrants.


4. Balance Sheet Strength

It is a financial priority to ensure the balance sheet has both the
strength and the liquidity to support the Company"s business plan. In recent
years equity issues have strengthened the balance sheet and debt has been
repaid. Operating credit lines are more than adequate for business needs and
appropriate levels of liquidity have been maintained.

-------------------------------------------------------------------------
TABLE 9: Selected Balance Sheet Information
-------------------------------------------------------------------------
(C$ thousands) As at As at As at As at As at
June 30, March 31, Dec. 31, June 30, March 31,
2004 2004 2003 2003 2003
-------------------------------------------------------------------------
Cash and marketable
securities 2,956 2,251 16,625 2,746 5,679
-------------------------------------------------------------------------
Bank indebtedness 1,672 1,951 - - 374
-------------------------------------------------------------------------
Current assets 66,869 60,819 70,798 67,268 68,546
-------------------------------------------------------------------------
Total assets 125,634 120,217 118,900 114,388 115,806
-------------------------------------------------------------------------
Current liabilities 33,617 30,425 31,075 25,214 29,725
-------------------------------------------------------------------------
Total long-term
financial liabilities 9,891 9,756 9,414 8,261 8,520
-------------------------------------------------------------------------
Shareholders" equity 81,744 79,654 78,411 80,671 77,561
-------------------------------------------------------------------------
Long-term financial
liabilities:
Shareholders" equity 0.12:1 0.12:1 0.12:1 0.10:1 0.11:1
-------------------------------------------------------------------------
Current assets:
current liabilities 1.99:1 2.00:1 2.28:1 2.67:1 2.31:1
-------------------------------------------------------------------------
Working capital 36,851 35,998 29,655 41,048 35,348
-------------------------------------------------------------------------


Liquidity Analysis

During the quarter, the Company"s cash position increased by $0.7 million
during the quarter as planned and reported in the Company"s First Quarter
Report to Shareholders. The net cash provided from non-cash working capital
items was $1.0 million, with the increase in accounts payable more than
offsetting the increase in unbilled revenue. This, coupled with the positive
operating results for the quarter resulted in a net cash inflow of
$4.1 million provided by operations, more than covering the use of cash in
investing and financing activities. During the quarter, working capital
increased by $0.9 million. Subsequent to the quarter end, three large
receivables amounting to $2.3 million were collected.
The Company"s cash position has declined by $13.7 million since year end.
The majority of the change from year end is attributable to the acquisition of
U.S. Peroxide ($7.0 million year-to-date and $1.6 million for the quarter) and
the refinancing of U.S. Peroxide"s pre-acquisition debt ($3.1 million).
The Company anticipates positive cash flow in the third quarter and has
$30 million of operating lines available in support of any short term
liquidity needs.
The Company is in full compliance with all of its debt covenants.
In order to protect the Company from the possibility of loss related to
the cash flows relating to future export sales in U.S. dollars should the
value of the U.S. dollar decline relative to the Canadian dollar, the Company
enters into forward foreign exchange rate contracts that oblige it to sell
specific amounts of U.S. dollars at set future dates at predetermined exchange
rates. Because of the significant decline in the relative value of the U.S.
dollar, significant "equity" had built up inside these contracts. In July,
2003, the Company terminated and replaced US$48 million of forward currency
sale contracts at various rates from 1.5361 to 1.6220 maturing through to
September 2005. At the same time, the Company entered into a series of forward
currency sale contracts, extending the risk management program from July 2003
to December 2005, aggregating US$60 million at an exchange rate of CAD$1.40.
The transaction generated a deferred gain of $8.0 million being the net
present value of the equity in the forward currency contracts that were
terminated and replaced. The gain was deferred, and has been, and will
continue to be, recognized in future income, consistent with the income
recognition had the original forward currency contracts been held to maturity.


ACCOUNTING POLICIES AND ESTIMATES

The Company"s critical accounting estimates are outlined in the 2003
Annual Report. There have been no changes in policies or methods for
determining estimates during the period ending June 30, 2004.


RISKS AND UNCERTAINTIES

Foreign Exchange

The Company"s results are reported in Canadian dollars. The majority of
the Company"s revenues and a portion of its purchases are transacted in
currencies other than the Canadian dollar, primarily in U.S. dollars.
Accordingly, any fluctuation in the value of the Canadian dollar relative to
the U.S. dollar or other foreign currencies will result in variations in the
sales and earnings of the Company. The exchange rates between Canadian dollars
and other foreign currencies have varied significantly over the last five
years. Trojan has entered into financial instruments with respect to foreign
exchange hedging in order to mitigate risks associated with exchange rate
fluctuations. The Company"s policy and use of hedge accounting is outlined in
note 6 to these consolidated financial statements.


-------------------------------------------------------------------------
TABLE 10: Forward Currency Contracts As At June 30, 2004
-------------------------------------------------------------------------
Year Amount sold forward Forward rate
-------------------------------------------------------------------------
2004 $15.0 million 1.38
-------------------------------------------------------------------------
2005 $30.0 million 1.38
-------------------------------------------------------------------------
2006 $23.5 million 1.37
-------------------------------------------------------------------------
TOTAL $68.5 million 1.38
-------------------------------------------------------------------------

Excluding foreign exchange, there are no changes to the key risks and
uncertainties facing the Company as outlined in our 2003 Annual Report.
Additional information relating to the Company including the Annual
Information Form can be found on SEDAR at www.sedar.com <http: www.sedar.com=""> .
Investors, analysts and media are invited to participate in a conference
call and web cast to be held at 2:30 pm EST on August 11, 2004. Marvin
DeVries, President & CEO, and Douglas Alexander, Executive Vice President and
Chief Financial Officer will discuss the quarter in more detail during this
conference call. The dial-in number is (416) 640-4127 or (800) 814-4861. A
taped version of the call will be available until midnight Wednesday, August
18, 2004 by calling (416) 640-1917 or (877) 289-8525 and dialing passcode
number 21080906 followed by the number sign. The live web cast and a
rebroadcast will be available at www.trojanuv.com <http: www.trojanuv.com=""> .

About Trojan Technologies

Trojan Technologies designs, manufactures and sells ultraviolet systems
for municipal wastewater, drinking water systems for residential, municipal
and commercial use, and industrial systems for food and beverage,
pharmaceutical, and semiconductor applications. With about 3,800 municipal
facilities in more than 50 countries using its technology, Trojan has the
largest installed base of UV systems in the world. Its equipment destroys
waterborne pathogens such as E.coli, Giardia and Cryptosporidium in a highly
effective, cost efficient and environmentally safe manner. The company also
provides UV treatment for the removal of certain chemicals from water.
Trojan has approximately 400 employees around the world. Headquartered in
London, Ontario, Trojan has offices in Germany, the U.K., Netherlands, Norway,
Spain, and the U.S. Its shares are listed on The Toronto Stock Exchange under
the trading symbol TUV.

This document contains certain statements that are forward-looking
relative to the Company"s future strategy and performance. They involve
known and unknown risks and uncertainties that may cause the Company"s
actual results in future periods to be materially different from any
future performance suggested in this document. Further, the Company
operates in an industry where it may be influenced by economic and other
factors beyond the Company"s control.



Trojan Technologies Inc.
Incorporated under the laws of Ontario


CONSOLIDATED BALANCE SHEETS

Unaudited - see note 1
As at As at
June 30 December 31
2004 2003
(Thousands of Canadian dollars) $ $
-------------------------------------------------------------------------

ASSETS
Current
Cash and cash equivalents 2,956 16,625
Accounts receivable - trade 31,559 25,537
Accounts receivable - other 1,384 17
Deferred foreign exchange asset (note 6) 635 1,059
Unbilled revenue 15,197 11,829
Inventory 14,261 14,435
Prepaid expenses 877 1,296
-------------------------------------------------------------------------
Total current assets 66,869 70,798

Investment 3,808 3,346
Government incentives recoverable (note 12) 5,228 4,900
Future income taxes (note 12) 4,425 5,743
Capital assets, net (note 5) 24,481 19,496
Patents and other intangible assets, net 10,476 8,694
Goodwill (note 2) 10,347 5,923
-------------------------------------------------------------------------
125,634 118,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS" EQUITY
Current
Bank indebtedness 1,672 -
Accounts payable and accrued charges 22,968 20,426
Deferred revenue 4,094 4,092
Current portion of long-term debt 997 982
Current portion of other long-term
liabilities (note 7) 3,886 5,575
-------------------------------------------------------------------------
33,617 31,075
Long-term
Long-term debt 4,426 4,866
Other long-term liabilities (note 8) 5,465 4,548
-------------------------------------------------------------------------
43,508 40,489
-------------------------------------------------------------------------


Non-controlling interest (note 4) 382 -
-------------------------------------------------------------------------

Shareholders" equity
Share capital (note 10) 86,022 85,939
Contributed surplus (note 10(b)) 852 493
Deficit (5,130) (8,021)
-------------------------------------------------------------------------
Total shareholders" equity 81,744 78,411
-------------------------------------------------------------------------
125,634 118,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes


On behalf of the Board: On behalf of the Board:

H.J. (Hank) Vander Laan George S. Taylor



Trojan Technologies Inc.

CONSOLIDATED STATEMENTS OF
RETAINED EARNINGS (DEFICIT)

Unaudited
Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
(Thousands of 2004 2003 2004 2003
Canadian dollars) $ $ $ $
-------------------------------------------------------------------------
(Restated - (Restated -
see note 3) see note 3)
Retained earnings
(deficit), beginning
of period (8,021) 60 (7,020) (7,044)
Net income (loss) 2,891 (6,259) 1,890 845
Premium on common
shares purchased
for cancellation
(note 10(c)) - (387) - (387)
-------------------------------------------------------------------------
Deficit, end of period (5,130) (6,586) (5,130) (6,586)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes



Trojan Technologies Inc.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Unaudited
Six months Six months Three months Three months
(Thousands of ended ended ended ended
Canadian dollars) June 30, June 30, June 30, June 30,
(Except for per 2004 2003 2004 2003
share data) $ $ $ $
-------------------------------------------------------------------------
(Restated - (Restated -
see note 3) see note 3)

REVENUE (note 14) 63,231 56,027 34,728 29,428
Cost of goods sold 37,520 34,235 20,391 17,925
-------------------------------------------------------------------------
Gross margin 25,711 21,792 14,337 11,503
-------------------------------------------------------------------------

EXPENSES
Administrative and
selling expenses
(note 10(b)) 17,109 15,092 9,078 7,967
Research and
development, net 2,103 2,953 1,103 1,398
Amortization 2,386 1,702 1,311 882
-------------------------------------------------------------------------
21,598 19,747 11,492 10,247
-------------------------------------------------------------------------
Income before other
(expenses) income 4,113 2,045 2,845 1,256

Other (expenses) income
Interest, net (333) (262) (172) (131)
Income from equity
investment 462 375 212 187
Abandoned transaction
costs (note 11) - (9,500) - -
-------------------------------------------------------------------------
Income (loss) before
income taxes and
non-controlling interest 4,242 (7,342) 2,885 1,312
Income tax provision
(recovery) 1,459 (1,083) 995 467
-------------------------------------------------------------------------
Income (loss) before
non-controlling interest 2,783 (6,259) 1,890 845
Non-controlling interest 108 - - -
-------------------------------------------------------------------------

Net income (loss) 2,891 (6,259) 1,890 845
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Earnings (loss) per
share (note 10(b))
Basic and fully diluted 0.13 (0.28) 0.09 0.04

Number of shares
Basic 21,815,010 21,963,871 21,820,532 22,060,495
Fully diluted 21,938,889 21,963,871 21,958,754 22,224,475

See accompanying notes



Trojan Technologies Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited
Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
(Thousands of 2004 2003 2004 2003
Canadian dollars) $ $ $ $
-------------------------------------------------------------------------
(Restated - (Restated -
see note 3) see note 3)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net income (loss) 2,891 (6,259) 1,890 845
Realized gain on forward
foreign exchange
contracts (note 6) (1,961) - (1,069) -
Add (deduct) charges
(credits) to operations
not involving cash
Amortization 2,386 1,702 1,311 882
Income from equity
investment (462) (375) (212) (187)
Future income taxes 1,322 (1,232) 919 405
Government incentives (328) (130) (165) (205)
Non-controlling
interest (note 4) (108) - - -
Interest on TPC 22 - 22 -
Interest on pension
obligation 46 44 24 21
Interest on deferred
intellectual
property payments 63 113 32 62
Stock-based compensation
(notes 3 and 10(b)) 359 242 200 242
Foreign exchange
loss (gain) 173 (529) 113 (276)
Net change in non-cash
working capital
items (note 13) (6,244) 3,472 992 (8,476)
-------------------------------------------------------------------------
(1,841) (2,952) 4,057 (6,687)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to
capital assets (2,013) (971) (1,049) (608)
Additions to patents and
other intangible assets (299) (338) (172) (167)
Sale of marketable
securities - 2,549 - 2,549
Acquisition (note 4) (6,975) - (1,579) -
-------------------------------------------------------------------------
(9,287) 1,240 (2,800) 1,774
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 1,037 (386) (279) (374)
Issuance of common shares
(note 10(a)) 83 3,169 - 3,030
Purchase of common shares
for cancellation - (765) - (765)
Repayable advances from TPC - 730 - 248
Payment on pension
obligation (38) (28) (21) (16)
Repayment of
long-term debt (3,623) (273) (252) (143)
-------------------------------------------------------------------------
(2,541) 2,447 (552) 1,980
-------------------------------------------------------------------------

Net (decrease) increase
in cash and cash
equivalents, during
the period (13,669) 735 705 (2,933)
Cash and cash
equivalents, beginning
of period 16,625 2,011 2,251 5,679
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 2,956 2,746 2,956 2,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes



Notes to Consolidated Financial Statements - Unaudited
June 30, 2004 (Thousands of Canadian Dollars, Except for Per Share Data)


1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP") on a consistent basis with prior
years. These unaudited condensed notes to the consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes included in the Company"s Annual Report to
Shareholders for the fiscal year ended December 31, 2003.


2. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of all the
Company"s subsidiaries, with intercompany transactions and balances
eliminated. At June 30, 2004, all but one of the Company"s subsidiaries
are wholly-owned. The Company owns 51% of U.S. Peroxide, LLC (note 4).


3. STOCK-BASED COMPENSATION

The Canadian Institute of Chartered Accountants (CICA) amended CICA 3870,
Stock-based Compensation and Other Stock-based Payments, recommending the
recognition of an expense for option awards using the fair value method
of accounting. As reported in its 2003 Annual Report, the Company adopted
the recommendations of CICA 3870 prospectively for new awards granted on
or after January 1, 2003. The fair value compensation expense recorded
for options granted in the year ended December 31, 2003 was $493 and was
charged to administrative and selling expenses with a corresponding
credit to contributed surplus. Of the $493 annual expense for fiscal
2003, $242, $110 and $141 related to the second, third and fourth
quarters respectively.

Accordingly, for the six months ended June 30, 2003, the administrative
and selling expenses have been increased by $242 with a corresponding
credit to contributed surplus. As a result of this change, the net
loss for the six months ended June 30, 2003 increased by $242, and
the basic and fully diluted loss per share increased by $0.01, from
($0.27) to ($0.28).

For the three months ended June 30, 2003, the administrative and selling
expenses have been increased by $242, thereby reducing the net income by
the same amount, and reducing the basic and fully diluted earnings per
share by $0.01, from $0.05 to $0.04.

Pro forma disclosure of net (loss) income and net (loss) income per share
is provided for options granted to employees and directors prior to
January 1, 2003 for which fair value compensation expense has not been
recorded (note 10(b)).


4. ACQUISITION

On January 5, 2004, the Company purchased 51% of the issued units in the
capital of U.S. Peroxide, LLC (U.S. Peroxide) for cash consideration of
US$5,231 (CA$6,707), plus related costs of CA$268, for a total purchase
price of CA$6,975. The portion of the purchase price amounting to $1,579
that was unpaid at March 31, 2004 was paid during the quarter. In 2007
and 2009, the Company will purchase a further 34% and the remaining 15%
interest, respectively, provided certain performance targets are
achieved. The valuation of these subsequent purchases will be based on
U.S. Peroxide"s performance.

U.S. Peroxide, founded in 1997 in Laguna Niguel, California, is an
environmental technology and service provider, delivering cost-saving
environmental solutions to both the municipal and industrial markets, and
is the single largest North American direct supplier of hydrogen peroxide
for environmental service applications.

The acquisition has been accounted for as a purchase transaction, and
accordingly, these consolidated financial statement include the Company"s
51% interest in the results of operations of U.S. Peroxide from the date
of acquisition.

At the date of purchase, the fair values assigned to the Company"s
interest in assets acquired and liabilities assumed were as follows:

$
-------------------------------------------------------------------------
Current assets 2,045
Capital assets 4,801
-------------------------------------------------------------------------
6,846
Liabilities other than bank indebtedness (5,210)
Bank indebtedness (635)
-------------------------------------------------------------------------
Book value of U.S. Peroxide"s net assets 1,001
Interest in net assets acquired 51%
-------------------------------------------------------------------------
Book value of net assets acquired 511
-------------------------------------------------------------------------
-------------------------------------------------------------------------


$
-------------------------------------------------------------------------
Total purchase price 6,975
Less book value of net assets acquired (511)
-------------------------------------------------------------------------
Excess of purchase price over book value of net assets acquired 6,464
Fair value assigned to intangible assets:
Patent 1,530
Supplier agreement 510
-------------------------------------------------------------------------
Goodwill 4,424
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The excess of purchase price over the fair value of the identifiable net
assets charged to goodwill is not amortized, but is subject to an annual
two-step impairment test performed at the Environmental Contaminant
Treatment reporting unit level. The patent and supplier agreement are
amortized straight-line over their estimated useful lives of 17 years and
five years, respectively.


5. CAPITAL ASSETS

Capital assets at June 30, 2004 include $4,902 of hydrogen peroxide
storage and feed systems equipment. This equipment is amortized straight-
line over its estimated useful life of ten years with a 20% salvage
value.

Amortization expense on capital assets for the six and three months ended
June 30, 2004 amounted to $1,829 and $946, respectively (2003 - $1,519
and $728).


6. DERIVATIVE FINANCIAL INSTRUMENTS

The Company has only limited involvement with derivative instruments that
are used to manage well-defined foreign exchange risk in the normal
course of business. The Company"s policy is not to utilize derivative
financial instruments for trading or speculative purposes.

The Company applies hedge accounting to forward foreign currency exchange
contracts designated as hedges. Foreign exchange contracts that are
determined to be effective hedges of the future settlement of U.S. dollar
denominated accounts receivable and unbilled revenue are recorded on the
balance sheet at the time the related revenue is recognized. The deferred
foreign exchange asset represents the difference between the monetary
asset balances that are considered to be effectively hedged at the
balance sheet date translated at the foreign exchange contract, or
"hedge" rate, and the same monetary asset balances translated at the
"spot" rate. The related revenue transactions are translated at the
hedge rate.

The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective
and strategy for undertaking various hedge transactions. This process
includes linking all derivatives to specific assets and liabilities on
the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge"s
inception and on an ongoing basis, whether the derivatives designated
as hedges are effective in offsetting changes in fair values of
hedged items.

The Company applies the fair value method to forward foreign currency
exchange contracts not designated as hedges. Gains and losses associated
with derivative financial instruments not designated as hedges are
reported in income in the current period.


7. FORWARD FOREIGN EXCHANGE CONTRACTS

During the third quarter of fiscal 2003, the Company terminated and
replaced US$48,000 of forward currency sale contracts maturing at various
rates through to September 2005. At the same time, the Company entered
into a series of forward currency sale contracts from July 2003 to
December 2005 aggregating US$60,000 at an exchange rate of $1.40. The net
effect of this transaction was an immediate cash receipt of approximately
$8,018 and an extension of the Company"s risk management program to
December 2005. The transaction generated a deferred gain of $8,018 being
the net present value of the equity in the forward currency contracts
that were terminated and replaced. The gain was deferred, to be
recognized in future periods, consistent with the income recognition had
the forward currency contracts been held to maturity. During the current
quarter and year to date, $1,069 and $1,961, respectively, was recognized
in income. During the year ended December 31, 2003, $3,376 was recognized
in income. The remaining balance of $2,681 is included in the current
portion of other long-term liabilities.


8. DEFERRED TECHNOLOGY CREDITS

In 2001 and 2004, the Company has been successful in obtaining two
contracts for government funding to advance its research and development
of innovative and efficient ultraviolet water treatment solutions. The
government funding from Technology Partnerships Canada (TPC) amounts to
approximately $12,660 relating to specific research projects having a
total estimated cost of $41,200:

(a) Contract 1

During 2001, the Company entered into its first agreement with TPC, which
provided funding for a three-year period up to a maximum of approximately
$3,300 relating to specific research projects having a total estimated
cost of $10,000. The Company is obligated under its agreement to pay TPC
by way of a royalty commencing in 2005 based upon the total revenue of
the Company. The agreement contemplates that this royalty will have both
a minimum and a maximum amount.

At December 31, 2003, $3,300 had been claimed and received under the TPC
agreement. Of this amount, $2,086, which approximates the minimum royalty
commitments, has been reflected on the consolidated balance sheets under
the caption Other long-term liabilities as at June 30, 2004 and December
31, 2003, with the remainder having been applied as a reduction of the
applicable research and development expenses.

(b) Contract 2

On March 31, 2004, the Company entered into its second agreement with
TPC, which will provide funding from TPC for a five-year period up to a
maximum of approximately $9,360 relating to specific research projects
having a total estimated cost of $31,200. The Company is obligated under
its agreement to pay TPC by way of a royalty commencing in 2009 based
upon the total revenue of the Company. The agreement contemplates that
this royalty will have both a minimum and a maximum amount. The minimum
repayment amount is $13,750.

At June 30, 2004, approximately $1,037 has been claimed in funding for
periods eligible for funding under the new agreement. This amount has
been reflected on the consolidated balance sheets under the caption Other
long-term liabilities as at June 30, 2004 and in Accounts receivable -
other. In addition, an interest charge of $22 on the claims totaling
$1,037 has been included in Interest, net.


9. CONTINGENCY AND MEASUREMENT UNCERTAINTY

(a) Contingency

The Company is engaged in patent infringement litigation against Suntec
Environmental Inc. (Suntec), an Ontario-based competitor. In July, 2003,
the Company obtained summary judgment against Suntec, who subsequently
appealed. On April 5, 2004, the Federal Court of Appeal issued a judgment
overturning the earlier summary judgment and ordering the Company to pay
Suntec"s legal costs for the appeal and the summary judgment procedure.
The Federal Court of Appeal ruling did not address any issue of patent
validity or infringement, but rather found that the overturned Order and
Judgment should not have been issued before a trial was held. In June,
2004, the Company filed an application for leave to appeal the Federal
Court of Appeal ruling to the Supreme Court of Canada. Trojan intends to
continue to assert its legal rights in this matter and seek all available
remedies. It is management"s opinion that the Company will ultimately be
successful in pursuing its claim.

(b) Measurement Uncertainty

The Company offers its customer a warranty on the performance of its
products. In addition, as part of its contractual agreement with its
municipal customers, the Company provides for the startup of its systems
subsequent to their delivery to customers. The Company has estimated
warranty and startup provisions of $5,155 ($4,769 at December 31, 2003)
for its products based on its experience with its products and within the
industry. However, given these product lines represent an innovative
application of technology, it is reasonably possible that the amounts
established as a warranty and startup provisions could change by a
material amount in the near term.


10. SHARE CAPITAL

(a) Share issuances

During the three months ended June 30, 2004, no shares were issued.

During the three months ended June 30, 2003, the Company issued 367,350
common shares for aggregate proceeds of $3,030 pursuant to the exercise
of warrants. No options were exercised during that quarter.

Outstanding shares and options are as follows:

June 30, December 31, June 30,
2004 2003 2003
No. No. No.
-------------------------------------------------------------------------
Shares 21,820,532 21,805,532 22,144,932
Options 1,405,816 1,267,816 1,391,369
Warrants - - 650,500


(b) Stock Options

A summary of the changes in options during the year to date and the
second quarter is presented below:

During During During During
the six the six the three the three
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
No. No. No. No.
-------------------------------------------------------------------------
Outstanding,
beginning of period 1,267,816 1,265,028 1,381,816 1,256,428
Granted 187,000 136,541 30,000 136,541
Exercised (15,000) (6,000) - -
Expired (34,000) (4,200) (6,000) (1,600)
-------------------------------------------------------------------------
Outstanding, end
of period 1,405,816 1,391,369 1,405,816 1,391,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Using the fair value method for stock options granted to employees and
directors after January 1, 2003, the fair value compensation expense for the
six and three months ended June 30, 2004 was $359 and $200, respectively,
($242 for the six and three months ended June 30, 2003 - see note 3). These
amounts were charged to administrative and selling expenses with corresponding
credits to contributed surplus.
The table below presents pro forma net income (loss) and basic and
diluted income (loss) per common share as if compensation expense based on the
fair value method had been recorded for all stock options granted by the
Company between September 1, 2001 and December 31, 2002 to employees and
directors.

Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
(Thousands of 2004 2003 2004 2003
Canadian dollars) $ $ $ $
-------------------------------------------------------------------------
(Restated - (Restated -
see note 3) see note 3)
-------------------------------------------------------------------------
Income (loss) for
the period 2,891 (6,259) 1,890 845
Compensation expense (127) (702) (62) (388)
-------------------------------------------------------------------------
Pro forma income (loss)
for the period 2,764 (6,961) 1,828 457
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic and diluted
income (loss)
per share:
As reported 0.13 (0.28) 0.09 0.04
Pro forma 0.13 (0.32) 0.08 0.02

The fair value of the options granted during the following periods was
estimated at the date of grant using the Black-Scholes option pricing
model with an expected dividend yield of 0%, and the following weighted
average assumptions:

-------------------------------------------------------------------------
Weighted-
Expected average
Risk free Expected weighted- fair value
interest weighted- average of options
rate average option life granted
(%) volatility (Years) $
-------------------------------------------------------------------------
Three months ended
June 30, 2004 3.75% 0.402 7.5 4.13
-------------------------------------------------------------------------
Three months ended
March 31, 2004 4.00% 0.597 3.0 3.25
-------------------------------------------------------------------------
Three months ended
June 30, 2003 5.00% 0.492 5.3 3.97
-------------------------------------------------------------------------

The Black-Scholes model, used by the company to calculate option values,
as well as other accepted option valuation models, were developed to
estimate fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company"s stock option awards. These models also require four highly
subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated values.
Accordingly, management believes that these models do not necessarily
provide a reliable single measure of the fair value of the Company"s
stock option awards.

(c) Normal Course Issuer Bid

In the second quarter of fiscal 2003, the Toronto Stock Exchange (the
"TSX") approved of Trojan"s normal course issuer bid effective June 6,
2003. The Company was authorized to purchase up to 5% of its public float
in the twelve-month period following the bid"s effective date. The
Company, in accordance with the rules and by-laws of the TSX, purchased
its common shares at the market prices of such shares. This approval
expired during the quarter.

During the six and three months ended June 30, 2004, no shares were
purchased for cancellation. During the six and three months ended June
30, 2003, the Company purchased for cancellation 96,000 of its common
shares for $765, representing an average price of $7.97. Of the $765,
$378 represents the average book value per share at the time of
repurchase and was charged to share capital. The balance of $387 was
charged to retained earnings as the premium on common share purchase for
cancellation.


11. ABANDONED TRANSACTION COSTS

On May 7, 2003, the Company announced that negotiations to acquire 100%
of the shares of a publicly traded, European-based water treatment
company had been called off after several months of negotiations. Trojan
had prepared and negotiated extensive documentation including draft
business combination and other legal agreements. Because of the
complexity of acquiring a public company under the applicable takeover
code, the Company incurred advisor fees and expenses amounting to
approximately $9,500 that was charged to income in the first quarter of
fiscal 2003.


12. INCOME TAXES

At June 30, 2004, the Company has approximately $1,927 of Federal and
$6,775 of Ontario non-capital losses that will start to expire in 2006,
as well as $14 of Ontario corporate minimum tax credits that will expire
in 2007. A future tax asset has been recorded in respect of these losses
carrying forward.

At June 30, 2004, the Company"s subsidiaries have approximately $2,857 of
net operating losses carrying forward. A future tax asset has been
recorded in respect of $1,390 of the losses carrying forward.

At June 30, 2004, unused Scientific Research and Experimental Development
(SRED) deductions of approximately $15,272 are available for carryforward
indefinitely for Federal and Ontario tax purposes. A future tax asset has
been recorded in respect of these deductions.

In addition, the Company has approximately $5,228 of investment tax
credits available to reduce future Federal taxes payable that will start
to expire in 2007 which are included on the consolidated balance sheets
under the caption Government incentives recoverable.


13. CHANGE IN NON-CASH WORKING CAPITAL BALANCES

Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
$ $ $ $
-------------------------------------------------------------------------
Accounts receivable -
trade (4,222) 3,829 (514) (5,998)
Accounts receivable -
other (188) (57) (223) 158
Deferred foreign
exchange asset 424 (2,583) 193 (1,751)
Unbilled revenue (3,368) (2,803) (4,610) 2,650
Inventory 174 (2,018) (147) 468
Prepaid expenses 522 556 223 139
Accounts payable and
accrued charges 412 4,637 5,176 (4,927)
Deferred revenue 2 1,911 894 785
-------------------------------------------------------------------------
(6,244) 3,472 992 (8,476)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


14. SEGMENT INFORMATION

Trojan operates worldwide in five strategic segments or arenas: Municipal
Wastewater, Municipal Drinking Water, Environmental Contaminant
Treatment, Industrial/Commercial and Consumer. The reportable segments
are strategic operating segments whose operating results are reviewed
regularly by management. The Municipal Wastewater arena sells and
services UV systems that serve as the final step in municipal wastewater
treatment that destroy potentially harmful bacteria and viruses prior to
discharge into the environment. The Municipal Drinking Water arena sells
UV systems for use in potable water treatment prior to release into
public water distribution networks. The Environmental Contaminant
Treatment arena sells optimized UV light treatment systems to destroy
certain chemicals in contaminated groundwater supplies and to provide an
additional barrier against organic micropollutants. The
Industrial/Commercial arena sells UV products that destroy microorganisms
in water and other liquids used in many industrial processes. The
Consumer arena sells UV products for disinfection of private water
supplies for homes, cottages, farms, rural commercial establishments and
resorts.

-------------------------------------------------------------------------
Environ-
Municipal mental Industrial
Municipal Drinking Contaminant and
Wastewater Water Treatment Commercial Consumer Total
$ $ $ $ $ $
-------------------------------------------------------------------------

Six months ended June 30, 2004
-------------------------------------------------------------------------
Revenue 39,621 4,582 10,532 5,556 2,940 63,231
-------------------------------------------------------------------------
Net
contribution 10,303 684 1,573 983 832 14,375
-------------------------------------------------------------------------

Six months ended June 30, 2003
-------------------------------------------------------------------------
Revenue 37,899 8,733 300 6,137 2,958 56,027
-------------------------------------------------------------------------
Net
contribution 8,997 1,177 (199) 1,083 848 11,906
-------------------------------------------------------------------------

Three months ended June 30, 2004
-------------------------------------------------------------------------
Revenue 20,716 2,290 7,235 2,975 1,512 34,728
-------------------------------------------------------------------------
Net
contribution 5,509 314 1,326 697 434 8,280
-------------------------------------------------------------------------

Three months ended June 30, 2003
-------------------------------------------------------------------------
Revenue 19,487 4,623 149 3,593 1,576 29,428
-------------------------------------------------------------------------
Net
contribution 5,221 316 (70) 443 468 6,378
-------------------------------------------------------------------------
Net contribution is defined as gross margin less selling expenses.

Reconciliation of net contribution to income (loss) before income taxes
and non-controlling interest:

Six months Six months Three months Three months
ended ended ended ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
$ $ $ $
-------------------------------------------------------------------------
(Restated - (Restated -
see note 3) see note 3)
-------------------------------------------------------------------------
Total net contribution 14,375 11,906 8,280 6,378
Less
Administrative
expenses 5,773 5,206 3,021 2,842
Research and
development, net 2,103 2,953 1,103 1,398
Amortization 2,386 1,702 1,311 882
Interest, net 333 262 172 131
Income from equity
investment (462) (375) (212) (187)
Abandoned transaction
costs - 9,500 - -
-------------------------------------------------------------------------
Income (loss) before
income taxes and non-
controlling interest 4,242 (7,342) 2,885 1,312


15. COMPARATIVE AMOUNTS

Certain comparative amounts have been reclassified to conform with the
current period presentation.


Contact:

Marvin DeVries, President and CEO, Douglas
Alexander, Executive Vice President and CFO, Diana Cunningham, Corporate
Communications/Investor Relations, Trojan Technologies Inc., (519) 457-3400,
www.trojanuv.com <http: www.trojanuv.com="">
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