UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Annual Report

FORM 20-F

ÿ   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

OR

ÿ   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ________

Commission file number: 333-98397number _______

LINGO MEDIA INC.

(Exact name of Registrant as specified in its charter)

Ontario, Canada

(Jurisdiction of incorporation or organization)

151 Bloor Street West, #703, Toronto, Ontario, Canada  M5S 1S4

(Address of principal executive offices)

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

None

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

Common Shares, without par value

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:                                                               None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.                                                             27,874,77332,578,170

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.            YesXXX   No ___

Indicate by check mark which financial statement item the registrant has elected to follow:                                   Item 17XXX   Item 18 ___

LINGO MEDIA INC.

FORM 20-F ANNUAL REPORT

TABLE OF CONTENTS

PART I

PART II

PART III

Forward-Looking Statements

Included in this annual report are various forward-looking statements that can be identified by the use of forward looking terminology such as "may", "will", "expect", "anticipate",  "estimate", "continue", "believe", or other similar words.  We have made forward-looking statements with respect to the following, among others:

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the Company’s goals and strategies;

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the Company’s ability to obtain licenses/permits to operate in China;

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the importance and expected growth of English language learning in China;

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the Company’s revenues;

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the Company’s potential profitability; and

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the Company’s need for external capital.

These statements are forward-looking and reflect our current expectations.  They are subject to a number of risks and uncertainties, including but not limited to, changes in the economic and political environments in China.  In light of the many risks and uncertainties surrounding China and the Internet marketplace, prospective purchasers of our shares should keep in mind that we cannot guarantee that the forward-looking statements described in this annual report will transpire.

PART I

ITEMItem 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORSIdentity of Directors, Senior Management and Advisors  3

Item 2.  Offer Statistics and Expected Timetable..............  3

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

Item 4.  Information on the Company........................... 17

Item 5.  Operating and Financial Review and Reports........... 32

Item 6.  Directors, Senior Management and Employees........... 43

Item 7.  Major Shareholders and Related Party Transactions.... 54

Item 8.  Financial Information................................ 57

Item 9.  The Offer and Listing................................ 58

Item 10. Additional Information............................... 62

Item 11. Quantitative and Qualitative Disclosures

          About Market Risk................................... 77

Item 12. Description of Securities Other Than

          Equity Securities................................... 77

Not applicable

PART II

Item 13. Default, Dividend Arrearages and Delinquencies....... 77

Item 14. Material Modifications to the Rights of

          Security Holders and Use of Proceeds................ 77

Item 15. Controls and Procedures......................... .....78

Item 16. Reserved............................................. 78

PART III

Item 17. Financial Statements................................. 78

Item 18. Financial Statements................................. 79

Item 19. Exhibits............................................. 79

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Forward-Looking Statements

Included in this annual report are various forward-looking statements that can be identified by the use of forward looking terminology such as "may", "will", "expect", "anticipate", "estimate", "continue", "believe", or other similar words.  We have made forward-looking statements with respect to the following, among others:

-

the Company’s goals and strategies;

-

the Company’s ability to obtain licenses/permits to operate in China and Canada;

-

the importance and expected growth of English language learning in China;

-

the importance and expected growth of early childhood development in Canada;

-

the Company’s revenues;

-

the Company’s potential profitability; and

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the Company’s need for external capital.

These statements are forward-looking and reflect our current expectations.  They are subject to a number of risks and uncertainties, including but not limited to, changes in the economic and political environment in China.  In light of the many risks and uncertainties surrounding China and the early childhood market in Canada prospective purchasers of our shares should keep in mind that we cannot guarantee that the forward-looking statements described in this annual report will transpire.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable

Item 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.  KEY INFORMATION

3.A.2.  Selected Financial Data

Our financial statements are reported in Canadian Dollars and presented in accordance with Canadian generally accepted accounting principles and reconciled to United StatesU.S. generally accepted accounting principles in the footnotes, for the fiscal years ended December 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002, December 31, 2001, December 31, 2000, December 31, 1999, and December 31, 1998.  The financial reports for2006, December 31, 2005, December 31, 2004, December 31, 2003 and December 31, 20022002. These financial reports have been audited by Mintz & Partners LLP whereas all the other statements have been audited by KPMG LLP.LLP.

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The selected financial data should be read in conjunction with the financial statements and other financial information included elsewhere in the Annual Report.

The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future.  The present policy of the Company is to retain any future earnings for use in its operations and the expansion of its business.

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The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future.  The present policy of the Company is to retain any future earnings for use in its operations and the expansion of its business.

Please note that the US GAAP reconciliation numbers in the following table are selected from the note 19 of the December 31, 20052006 financial statements and note 910 of the interim financial statements as of March 31, 2006.

2007.

Table No. 3

Selected Financial Data

Expressed in Canadian Dollars

($CDN$ in 000, except per share data)

(1)  Cumulative Net Loss since incorporation under US GAAP has been ($3,983,390)4,615,982).

(2)  

     a) Under US GAAP, development costs of new businesses are expensed as incurred:

        2005-2006-$nil, 2004-2005-$nil, and 2003-2004-$nil.

     b) Under US GAAP, development costs amortized under Canadian GAAP would be reversed to

        calculate Loss per Share:  2006 – 156,648, 2005 – $133,290;$133,290 and 2004 – $346,124 and 2003 - $135,353.$346,124.

     c) Under US GAAP, software development costs are expensed as incurred:

        2005-2006-$nil; 2004-2005-$nil; and 2003-2004-$nil.

    ________________________________________________________________________________

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3.A.3.  Exchange Rates

In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars ($).  The Government of Canada permits a floating exchange rate to determine the value of the Canadian Dollar against the United StatesU.S. Dollar (US$).

The table sets forth the rate of exchange for the Canadian Dollar at the end of the five most recent fiscal periods ended December 31st, the average rates for the period and the range of high and low rates for the period.  The data for each month during the previous twelve months is also provided.  

For purposes of this table, the rate of exchange means the noon   buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.  The table sets forth the number of Canadian Dollars required under that formula to buy one U.S. Dollar.  The average rate means the average of the exchange rates on the last day of each month during the period.

Table No. 4

U.S. Dollar/Canadian Dollar

3.B.  Capitalization and Indebtedness

Not applicable

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3.D.  Risk Factors

The Company is subject to a number of risks and uncertainties.

Lingo Media (the “Company”) develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+ Child Development (Canada) Ltd. (“A+”), the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Canada - Calgary, Edmonton, Toronto and Vancouver.

In 2006, through the acquisition of A+, Lingo Media extended its business to include the sale of early childhood development programs in Canada. A+ operates through its office in Calgary, Alberta, Canada. A+ is involved in the business of early childhood cognitive development, through the publishing, teaching and distribution of educational materials along with its proprietary curriculum developed by its advisory panel of psychologists.

Lingo Media operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school market in China.  

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.

The Company derives the majority of its revenue from doing business in Canada and China. The Company also obtains revenue on sales of its products to Canadian school boards. If any of the following risks occur, our business, results of operations and financial condition would likely suffer.  In any such events, the market price of our common stock could decline and you may lose all or part of your investment in our shares of common stock.

Risks associated with business of A+

Dependence on third party vendors

The Company sells programs that include third party products.  There is no certainty that the vendors of these products will continue the production of these products and the Company’s ability to source a replacement of such products. Such discontinuation of these products will significantly impact our ability to continue the sales of these programs.

Dependency on key personnel

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The Company’s future success is dependent on the success and ability of its key management.  The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors could adversely affect the Company’s business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company’s profitability.

Inability of the Company to keep pace with the new technologies may result in reduced profitability

The Company sells programs primarily consisting of printed materials.  The educational industry continues to evolve from traditional printed materials to digital products. Theinability of the Company to keep pace with the new technologies and standards in the educational industry could render its products and services non-competitive.  The Company’s future success will depend on its ability to address the increasingly sophisticated needs of its customers by producing and marketing enhancements to its products and services that respond to customer requirements. The Company may be required to invest significant capital in order to remain competitive. A failure on the part of the Company to effectively manage a product transition will directly affect the demand for the Company’s products and the future profitability of the Company’s operatio ns.

Losses may increase due to fluctuation in exchange rate

The Company’s programs include third party products that are purchased in US dollars and the Company may incur losses if the US Dollar is strengthened against the Canadian dollar.

Sales may reduce if the Company is not able to arrange consumer financing

The Company’s sales are highly dependent on its ability to arrange a third party financing for the customer.  The Company’s revenues will significantly decline if the third party financier decides to discontinue this program and we are unable to negotiate other sources of similar consumer financing program.

Limited ability to generate sales leads

Company is highly dependent on its ability to generate sales leads through its telemarketing activities.  A new technology that would block incoming telemarketing telephone calls into homes will jeopardize the Company’s ability to generate sales leads and revenues in Canada.

7

A+ derives all of its revenue from sales made in a clients home. This format requires that an appointment be made with the family in order for the sale to take place. The appointment can only be arranged from leads generated from our call centres. There are certain factors that could restrict the number of appointments that we are able to set. including:

1)

The number of families with children 3 and under in the territory which we serve, roughly 1 million households. We work off lists purchased from brokers to contact these people. Approximately 400,000 names of such families end up on such lists. The number of names we will require as we expand will exceed that figure. When this occurs the growth in the child development side of the company will plateau, as will profits.

2)

Other factors which could reduce appointments include:

a.

Increasingly more stringent privacy laws

b.

The possibility and indeed the likelihood of a “do not call” list being legislated.

c.

A perceptible increase in the reluctance of families to entertain a perceived “sales person” in their home.

These could lead to detrimental effects on the Company’s ability to make appointments with prospective customers and will affect productivity and therefore profitability.

Possible lack of trained management staff may reduce our future profitability

In order to provide as broad coverage as possible in the territory we serve, it is necessary to establish district sales offices, which serve between 100,000 and 300,000 prospective families. As expansion takes place we must of course have managers who can hire, train and continually advise and assist sales consultants. In order to do this the manager must have experience and knowledge in this highly specialized and unique field. This means that, ideally, the manager should be hired from within the sales consultant force. This does not totally rule out hiring a manager from outside operations, but should that be necessary, such person would probably require 6-12 months of training to effectively manage a district sales office. There is always the risk of under performing sales results, in district offices, which could restrict profitability.

Risks associated with doing business in China

Risk of failing to achieve market acceptance

Although the Company has contracts with People Education Press (“PEP”) in Beijing for English Language Learning materials, there can be no assurance that the State Ministry of Education in China will continue to accept the educational publications produced by the Company.

8

Our limited experience in China may impede our success

The Company has limited experience in the provision ofproviding traditional educational publishing and distribution in China.  Although the Company has retained the services of Canadian, US, British and Chinese educators to assist the Company with these endeavors, there can be no assurance that the Company will be able to attract and retain qualified personnel with relevant experience for the continued management and development of its business.

The growth of the Company’s business is dependent on government budgetary policy, particularly the allocation of funds to sustain the growth of the English language learning and training programs in China

The Company’s customers in China, excluding Renzhen Group, are directly or indirectly owned or controlled by the Chinese government.  Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the State Planning Commission of China.  As a result, the growth of our business is heavily dependent on government policies for English language learning and training.  Despite the high priority currently accorded by the government to this area, and a high level of funding allocated by the government to this sector, insufficient government allocation of funds to sustain its growth in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business.

Political and economic policies of the Chinese government could affect our industry in general and our competitive position in particular

Since the establishment of the People’s Republic of China (“PRC”) in 1949, the Communist Party has been the governing political party in China.  The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress.  The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including Ministry of Commerce of the PRC “MOFCOM”.  Since the late 1970s, the Chinese government has been reforming the Chinese economic system.  Reforms have included decollectivization of farms; legalization of interregional and international trade by individuals and businesses; legalization of markets in most goods andservices; elimination of price controls; and privatization of some state-ownedstate-ow ned productive assets.  Reforms began in the farming sector and rural industry, and were later implemented in various service industries.  In the last five years, China has also begun dismantling large state monopolies in heavy industry.

9

Although the Company believes that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised.  Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the English language learning and training sectors in China.  Such developments could reduce, perhaps significantly, the demand for our products and services.  There is no guarantee that the Chinese government will no tnot impose other economic or regulatory controls that would have a material adverse effect on our business.  Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular.  Changes in government policies might includeincreased restrictions on the nature of business activities that foreign-owned enterprises may perform or additional tax/fee/license requirements for foreign-owned enterprises; increased restrictions on the publishing industry, including restrictions on the nature of business activities that publishers may perform; additional tax/fee/license requirements; requirements to publish or not to publish certain content; and direct state supervision or control of publisher's activities; and more intensive approval requirements for educational materials.

The markets in which the Company sells its services and products are highly competitive and we may not be able to compete effectively

The educational publishing market in China is rapidly changing.   Competitors to the Company’s strategic co-publishing partners in the market mainly include provincial and municipal educational publishing companies such as Hebei Education Press and Shanghai Foreign Language Educational Press.  In addition, there are many large multinational educational publishing companies with substantial, existing publishing operations in Asian markets including China, that have significantly greater financial, technological, marketing and human resources who have entered the English language learning and training market in China, which could hurt the Company’s future prospects and erode its market share.

Most of our competitors have greater financial, technical and human resources than us, andmay be able to respond more quickly to new and emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of new products or services.  It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share.  Increased competition could result in fewer customer engagements, reduced gross margins and loss of market share, any one of which could materially and adversely affect our revenues and overall financial condition.

10

Economic risks associated with doing business in China

The Chinese economy has experienced uneven growth across geographic and economic sectors. The current economic situation may adversely affect our profitability over time as expenditures for English language training products may decrease due to the results of slowing domestic demand and deflation.  In addition, the Chinese government may implement changes in fiscal policy that could increase our costs of operating our business in China or slow demand for our products.  We cannot predict what effects changes in Chinese government policies may have on our business or results of operations.

We may suffer currency exchange losses if the Chinese Yuan Renminbi (“Yuan”) depreciates relative to the United States Dollar

Our reporting currency is the Canadian Dollar.  However, substantially all revenues from China activities are denominated in United States Dollars.  In July 2005, the Chinese government announced that the Yuan will no longer be pegged to the United States Dollar, but will float against a basket of currencies. China's currency had been pegged at 8.28 against the United States Dollar for a decade, but the adjustment allowed it to float against a number of currencies including the US dollar, the Euro, the Japanese Yen, the South Korean Won, the UK Pound, the Thai Baht and the Russian Rouble.  Since that time, the Yuan has traded below the pegged rate.

If the Yuan were no longer pegged to the basket of currencies, rate fluctuations may have a material impact on the Company’s consolidated financial reporting and make realistic revenue projections.reporting. The Company’s accounts receivable from China will decline in value if the Yuan depreciates relative to the Canadian and United States Dollar.  Any such depreciation could adversely affect the market price of our common stock.  Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.  While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all.  In ad dition,addition, our currency exchange losses may be magnified by Chinese exchange control regulations that may restrict our and our Chinese partners’ ability to convert Renminbi into United States Dollars.

Other Risk Factors

Dependence on Michael P. Kraft,Growth of multimedia products and online learning may compete with and reduce the Company’s Chief Executive Officer, as well as other executivespublishing activities

The Company’s future successtraditional media platform is dependent onbeing increasingly challenged by the successgrowing body of multimedia products and abilityonline learning.  Multimedia products serve as ancillary tools to traditional publishing mediums such as print but can also serve as stand-alone interactive tools replacing traditional publishing mediums.

11

 Although the Company is considering the use of its key managementmultimedia interactive content, the continued growth of multimedia products and product development teams.  The Company has obtained key man insurance on its senior executive inonline learning may detract from the amountviability of $1,000,000.  The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors, particularly with respect to the Company’s intended expansion into the distribution of print media products in China, could adversely affect the Company’s business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company.traditional publishing activities.

Risk of the Company’s failure to manage its growth effectively as it attempts to expand operations in China

As the Company endeavors to increase its sales and develop new lines of business, it will be subject to a number of risks associated with the management of such growth. These risks include increased responsibilities for existing personnel, the need to hire additional qualified personnel and, in general, higher levels of operating expenses.  In order to manage current operations and any future growth effectively, the Company will need to continue to implement and improve it’s operational, financial and management information systems and to hire, train, motivate, manage and retain qualified employees.  In particular, as the Company proceedswith its anticipated expansion into the distribution of print media products in China, it will need to ensure that adequate mechanisms are in place to address potential growth from the largely untapped Chinese marketplace and to ensure that the Co mpanyCompany has hired, trained and retained employees that are familiar with that marketplace.  There can be no assurance that the Company will be able to manage such growth effectively, that its management, personnel or systems will be adequate to support the Company’s operations or that the Company will be able to achieve the increased levels of revenue commensurate with the increased levels of operating expenses associated with this growth. In the event the Company is unable to manage its growth effectively due to expenses exceeding sales, the timing of expenses becoming due or other reasons, the Company may be forced to reduce or curtail operations.

The Company’s customer base is concentrated and the loss of the one customer could cause the Company’s business to suffer significantly

We have derived and believe that we will continue to derive a significant portion of our revenues from one large customer.  In 2003, 2004, 2005 and 2005,2006, one customer accounted for 97%91%, 91%98% and 98%75% of the Company’s revenues respectively. The loss, cancellation or deferral of the large contract with this large customer would have a material adverse effect on our revenues.revenues from China.  In addition, there can be no assurance that we will continue to bring in new significant customers.customers in China.

Other Risk Factors

Dependence on Michael P. Kraft, the Company’s Chief Executive Officer, as well as other executives

The Company’s future success is dependent on the success and ability of its key management and product development teams.  The Company has obtained key man insurance on its senior executive in the amount of $1,000,000.

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The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors, could adversely affect the Company’s business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company.

Technological changes may reduce the Company’s sale of its products and services

The traditional publishing industry continues to experience technological change.  The publishing industry continues to evolve from traditional mechanical format printing to full digital printing.  The inability of the Company to keep pace with the new technologies and standards in the print industry could render its products and services non-competitive.  The Company’s future success will depend on its ability to address the increasingly sophisticated needs of its customers by producing and marketing enhancements to its products and services that respond to customer requirements.  The Company may be required to invest significant capital in order to remain competitive. A failure on the part of the Company to effectively manage a product transition will directly affect the demand for the Company’s products and the future profitability of the Company’s operations.

Exchange rate fluctuations may reduce the Company’s revenues or increase the Company’s expenses

The Company does transact some business involving currencies other than the Canadian currency in both purchasing and selling goods and services.  The Company is exposed to fluctuations in foreign currency exchange rates that may have an adverse effect on the Company’s businesses.

Growth of multimedia products and online learning may compete with and reduce the Company’s publishing activities

The traditional media platform is being increasingly challenged by the growing body of multimedia products and online learning.  Multimedia products serve as ancillary tools to traditional publishing mediums such as print but can also serve as stand-alone interactive tools replacing traditional publishing mediums.  Although the Company is continuing its ownpublishing activities using multimedia interactive mediums, the continued growth of multimedia products and online learning may detract from the viability of the Company’s traditional publishing activities.

Dependence on key contractors for maintenance of high quality editorial content

A key component of the continued success of the traditional publishing activities of the Company will be the ability of the Company to maintain high quality editorial content.  The Company must continue to develop new and innovative products to sustain its educational publishing activities in order to ensure the continued viability of the traditional publishing aspects of its business.  Although the Company continues to retain experienced educators and editors to develop content for its educational publications, there can be no assurance that the Company will be able to continue hiring experienced educators and editors to maintain the current high levelsquality level of editorial content for future publications.

13

Competition is likely to have a tremendous impact on our business

The Company faces considerable competition from traditional educational publishing companies and from educational software providers in China both of which offer the same or similar services as are available from the Company’s traditional publishing operations.  In addition, it is anticipated that as China becomes more open to foreign involvement for educational programs, the level of competition will further intensify.

We may need additional capital in the future and it may not be available on acceptable terms

We believe that our current cash on hand along with our accounts receivable and recurring sales, will satisfy our working capital requirements for continued operations for at least the next twelve months.  After that, we may need to raise additional funds in order to finance our operations and our China Expansion Plan.operations.  The Company expects that corporate growth will be funded from the sale of equity and/or debt financing(s) to help generate needed capital.  Insuring that capital is available to increase production; sales and marketing capacity; and to provide support materials and training in the market place and to expand through joint ventures is essential to success.  There can be no assurance that financing will be available on terms favorable to us, or at all.  If adequate funds are not available on acceptable terms, we may be forced to curtail or cease our operations.  Even if we are able to contin uecontinue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.

Risk of history of losses

The Company has had a history of losses and there is no assurance that it can reach profitability in the future.  The Company will require significant additional funding to meet its business objectives.  Capital will need to be available to help expand not only the Company’s product line but also to improve market penetration and sales through an increasing distribution network.

Our public trading market is highly volatile

The Company's common shares trade on the TSX Venture Exchange under the symbol "LMD", and on NASD:OTCBBOTC BB under the symbol “LNGMF” and are quoted on the Berlin-Bremen Stock Exchange under the symbol LIM.BE and the German securities code is (WKN) 121226.

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The market price of our common shares could fluctuate substantially due to:

§

Quarterly fluctuations in operating results;

§

Announcements of new products or services by us or our competitors;

§

Technological innovations by us or our competitors;

§

General market conditions or market conditions specific to our or our customer’s industries; or

§

Changes in earning estimates or recommendations by analysts.

Penny stock rules

Our common shares are quoted on the OTC Electronic Bulletin Board; a NASD sponsored and operated quotation system for equity securities.  It is a more limited trading market than the NASDAQ Small Cap Market, and timely, accurate quotations of the price of our common shares may not always be available.  You may expect trading volume to be low in such a market.  Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.

Our common shares are listed on the NASD OTC Bulletin Board, and are subject to the requirements of Rule 15(g) 9, promulgated under the Securities Exchange Act as long as the price of our common shares is below $5.00 per share.  Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction.  The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trade involving a stock defined  as a penny stock.  Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQN ASDAQ that has a market price of less than $5.00 per share.  The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it.  Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

The stock market has experienced significant price and volume fluctuations, and the market prices of companies, have been highly volatile.  Investors may not be able to sell their shares at or above the then current, OTCBBOTC BB price.  In addition, our results of operations during future fiscal periods might fail to meet the expectations of stock market analysts and investors.  This failure could lead the market price of our common shares to decline.

15

There is uncertainty as to the Company’s shareholders’ ability to enforce civil liabilities both in and outside of the United States

The preponderance of our assets are located outside the United States and are held through companies incorporated under the laws of Canada, and Barbados and a representative officein China.  Our current operations are conducted in China.  In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States.  All or a substantial portion of the assets of these persons are located outside the United States.  As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons.  In addition, investors may have difficulty enforcing, both in and outside the United States, judgments based upon the civil liability provisions of the securities laws of the United States or any state thereof.

Additional Risk Factors Associated With Jintu Joint Venture in China:

Jintu JV is a development stage company and is subject to all of the uncertainties of starting a new business segment.

A print media joint venture in China requires approvals from the General Administration of Press and Publications Bureau and from the Ministry of Commerce.  While the Company anticipates getting the requisite approvals for Jintu Joint Venture (“Jintu JV”), there can be no assurance that Jintu JV will receive the requisite government approvals and that the joint venture will obtain the necessary business registration and license.

The Company relies on both its existing royalty revenues and external equity funding to support its existing and future operations and investments.  Joint ventures in China require each party to contribute its proportionate share of the Registered Capital of the joint venture.  Jintu JV requires a total of ¥5,000,000 Yuan as its Registered Capital and the Company will be required to invest its proportionate share or ¥2,550,000 Yuan ($(CDN$365,000) as its contribution to the Jintu JV.   There can be no assurance that the Company will have sufficient funds to finance its share of the Registered Capital required for the establishment of the Jintu JV.  

The key executives of the joint venture have prior experience in sales and marketing of a leading educational software company in China.  However, their experience is limited to managing a sales force and not in the establishment and managing of a joint venture. There can be no assurance that the management will be successful in operating the joint venture as they lack operational experience as it is a new entity with no operating history.  

The joint venture’s future success is dependent on success and ability of its key executive officer, YanHuiYan Hui Zhang. The loss of its key officer or the inability to attract and retain highly qualified personnel, consultants or advisors, particularly with respect to the Company’s intended expansion into the distribution of print media products in China, could adversely affect the Jintu JV’s operations.

Jintu JV may need additional capital in the future and it may not be available on acceptable terms. If adequate

16

 funds are not available on acceptable terms, we may be forced to curtail or cease Jintu JV’s operations.  Even if we are able to continue Jintu JV’s operations, the failure to obtain financing could have a substantial adverse effect on its business and financial results.

ITEM 4.  INFORMATION ON THE COMPANY

4.A. History and Development of the Company

Introduction

Lingo Media Inc. (the "Company")The Company operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, distributes and licenses book, audio, audio/video cassette, CD-based product and CD-based productssupplemental product for English language learning for the educational school and retail bookstore marketsmarket in China and educational school market in Canada.

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.

The Company’s executive office is located at:

 151 Bloor Street West

 Suite 703

 Toronto, Ontario, Canada M5S 1S4

 Telephone:  (416) 927-7000

 Facsimile:  (416) 927-1222

 E-mail:  kqureshi@lingomedia.cominvestor@lingomedia.com

 Website:www.lingomedia.com

The Company’s Beijing Representative office is located at:

 Kenzo Oriental Tower 11K  

 48 Dongzhimenwai Dajie

 Dongcheng District

 Beijing 100027 China

Following are the office of Company’s subsidiary A+:

Head Office

#341, 2116 – 27 Ave. N.E.

Calgary Alberta, Canada

T2E 7A6

Sales Offices A+

Edmonton

#1021, 5004 – 98 Ave.

Edmonton Alberta, Canada

T6A 0A1

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Vancouver

#204- 3997 Henning Drive

Burnaby British Columbia, Canada

V5L 6N5

Ontario

#301, 9040 Leslie Street

Richmond Hill, Ontario, Canada

L4B 3M4

The contact person is: Khurram QureshiImran Atique – Chief Financial Officer.Secretary and Treasurer

The Company's fiscal year ends December 31st.

The Company's common shares trade on the TSX Venture Exchange under the symbol "LMD", and on NASD:OTCBBOTC BB under the symbol “LNGMF” and are quoted on the Berlin-Bremen Stock Exchange under the symbol LIM.BE and the German securities code is (WKN) 121226.

History and Development

Incorporation and Name Changes

The Company was incorporated under the name Alpha Publishing Inc. pursuant to the Business Corporations Act (Alberta) on April 22, 1996.  The name was changed to Alpha Ventures Inc. on May 24, 1996. Pursuant to Articles of Continuance effective April 22, 1998, the Company was continued as an Ontario company under the provisions of the Business Corporations Act (Ontario) under the name, Alpha Communications Corp. The name was changed to Lingo Media Inc. on July 4, 2000.

The Company currently has threefour subsidiaries: Lingo Media Ltd. "LML", Lingo Media International Inc. "LMII" and Lingo Group Limited. "LGL". and A + Child Development (Canada) Ltd. (“A+”)

LML was incorporated pursuant to the Business Corporations Act (Ontario) on November 21, 1994 under the name Alpha Corporation.  Alpha Corporation changed its name to Lingo Media Ltd. on August 25, 2000.

LMII was incorporated pursuant to the Companies Act of Barbados on September 11, 1996 under the name International Alpha Ventures Inc.  On May 13, 1997, wholly-ownedsubsidiary's name was changed to International Alpha Media, Inc. and then was changed to Lingo Media International Inc. on September 20, 2000.

LGL was incorporated under the laws of Delaware on April 6, 1999.  On June 9, 1999, its articles were amended to increase its authorized capital and to include certain provisions with respect to the liability and indemnification of directors.

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On May 18, 2000 its name was changed from Yangtze OnLine, Inc. to EnglishLingo, Inc. In August 2002, EnglishLingo, Inc. was continued in Ontario, Canada. On October 27^th, 2004, it’s name was changed to Lingo Group Limited. LGL is 83.3% owned by the Company.

Co-Publishing Agreements

1.

Peoples Education Press (“PEP”), dated August 8, 2000.

2.

Guangzhou Renzhen English Production Group/Crazy English (“Renzhen Group”), dated October 15, 2000.

3.

Foreign Language Teaching and Research Press (“FLTRP”), dated September 3, 2000.

4.

China International Publishing Group (“CIPG”) and its subsidiary, Foreign Languages Press (FLP”), dated October 3, 2000.

5.

Phoenix Publishing and Media Group (“PPMG”) and its subsidiary, Yilin Press, dated January 19, 2006.

Financings

The Company has financed its operations through borrowings and/or private issuance of common shares:

Capital Expenditures

Divestiture – Lingo Group Limited

Lingo Group LimitedA+ was incorporated pursuant to the lawsBusiness Corporations Act of DelawareAlberta on April 6, 1999 asFebruary 12, 1999. A+ is 70.33% owned by the Company.

Acquisition of A + Child Development (Canada) Ltd.

In 2006, Lingo Media acquired a wholly-owned subsidiary62.33% controlling interest in A+ and acquired an additional 8% interest in March 2007. A+ derives revenues from publishing and distribution of educational materials aimed at the early childhood market.  A+ has developed a unique curriculum for parents to use with their children based on the latest neuroscience research. To date, A+ has focused its marketing efforts only in Canada. With Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children in China. Plans also include an expansion of A+’ markets to the United States and Latin America.

Under the terms of the Company. In August 2002,acquisition, Lingo Group Limited was continued in Canada.Media:

On December 27, 2001, Lingo Group Limited, a subsidiaryi)

acquired 50.33% of the Company, issued 1,300,000outstanding capital stock of A+ from its shareholders for the purchase price of CAD$730,000 satisfied by issuing 2,650,000 common shares at $0.0375 per shareof Lingo Media and paying CAD$200,000 cash;

ii)

invested CAD$150,000 in A+ for total cash proceedsan additional 12% interest;

iii)

invested a further CAD$100,000 in A+ for an additional 8% interest; and

iv)

issued an additional 3,000,000 common shares of $48,750 pursuantLingo Media to the distribution exemption asselling shareholders of A+ subject to meeting annual earnings milestones to be held in escrow and released over a “closely-held issuer” within the meaningthree-year period with a maximum of Rule 45-501 of the Ontario Securities Commission. As a result of this offering, the Company recorded a dilution gain of $48,750. Prior to the transaction, the Company owned 100% of Lingo Group Limited’s common shares. Subsequently, the Company’s ownership interest was 93.9%.

During January to August 2002, Lingo Group Limited, a subsidiary of the Company, issued 2,709,000 common1,000,000 shares at $0.0375released per share for total cash proceeds of $101,588. Prior to the transaction, the Company owned 93.9% of Lingo Group Limited’s common shares. Subsequently, the Company’s ownership interest was 83.3%.

Due to the Company’s loss position, no income taxes were recorded on the above dilution gains.year;

4.B.  BUSINESS OVERVIEW

Background

Lingo Media Inc. (the "Company") develops, publishes distributes and licenses book, audio, audio/video cassette, CD-based product and CD-based productssupplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+, the Company specializes in early childhood cognitive development programs, through the publishing and retail bookstore marketdistribution of educational materials along with its proprietary curriculum through its four offices in ChinaCanada - Calgary, Edmonton, Vancouver and Toronto.

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In 2006, through the acquisition of A+ Lingo Media extended its business to include the sale of early childhood development programs in Canada. A + operates through its offices in Calgary, Alberta, Canada. A+ is involved in the business of early child cognitive development, through the publishing, teaching and distribution of educational materials along with its unique curriculum developed by its advisory panel of psychologists.

Lingo Media operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school market in Canada.China.  

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.

The Company derives the majority of its revenue from doing business in Canada and China. If any of the following risks occur, our business, results of operations and financial condition would likely suffer.  In any such events, the market price of our common stock could decline and you may lose all or part of your investment in our shares of common stock.

English Language Learning

Lingo Media’s strengths and opportunities lie in its approach to the development of original language learning materials-including English as a Second/Foreign Language (ESL/EFL) and Language Arts for English speakers.  In China, the Company pre-sells its program to educational ministries through co-publishing with local publishers, while retaining full copyright ownership and distribution rights for all other markets.  In Canada, the Company has received Ontario Ministry of Education approval for one of its elementary programs.

Business Focus

China Publishing - China

Lingo Media has spent fivesix years developing English as a Foreign Language (EFL), products, programs, and relationships in the Chinese market. Learning to communicate in English is seen as a top priority for Chinese school students and young adult learners. Along with learning how to use a PC, English skills are perceived as a key determinant of their future levels of prosperity. The Company’s EFL book, audio and CD-based programs are unique in that they have a special focus on the spoken language. In addition to developing learning materials, considerable resources have been expended on the development of relationships with leading Chinese publishers, both in the education and trade sectors, as well as inextensive marketing of Lingo Media’s programs.

The Company is capitalizing on its co-development approach in the Chinese market. Lingo Media sees its relationships with leading Chinese publishers; its Canadian and Chinese author teams; and its original custom-developed content as key factors in opening up the Chinese educational market. The Company has secured long-term publishing contracts for the Kindergarten to Grade 12 (K-12) and higher educational markets, which it anticipates will generate ongoing revenue streams from the sale of its programs.

People’s Education Press “PEP”:

People's Education Press, a division of China's State Ministry of Education, publishes approximately more than approximately 60% of educational materials for the K-12 market throughout China, for all subjects, including English. PEP has a readership of more than 120 million students. Lingo Media has co-published four programs with PEP since August 2000. Three series target the elementary market of 100 million students:PEP Primary English (for grades 3 to 6);Starting Line (Grades 1-6); andBeginning English for Young Learners (Kindergarten, Grades 1& 2). TheJunior Reading Comprehension series is for junior middle school students. Initial levels of all four programs were launched in September 2001 and subsequent levels have been introduced. All series include textbooks, activity books, audiocassettes, teacher resource books, and supplementary materials.

Foreign Language Teaching and Research Press “FLTRP”:

In April 2000, Lingo Media secured a publishing agreement to co-develop, publish and sellSubject-Based English with FLTRP, China’s leading university reference and K-12 publisher. This series is required in order to meet the education curriculum mandated by the State Ministry of Education in China that all 3rd and 4th year university students take intensive English studies specifically related to their majors. The project calls for the development of multiple volumes for each of the six subject areas.

Guangzhou Renzhen English Production Group “Renzhen Group”:

Lingo Media completed a co-publishing agreement for two language-learning programs with Renzhen Group in December 2000. Renzhen Group is one of China’s leading privately owned language learning publishers of book and audiocassette packages focusing on wholesaling to bookstores and newsstands throughout China, as well as on its growing mail order business. The two programs that have been launched includeEnglish In Business Communications— a series of six self-study books and 12 audiocassettes providing specialized English training; andThe Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning— a set of student books and audiocassette packages with 3 levels.

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China International Publishing Group “CIPG”:

Foreign Languages Press is a subsidiary of China’s largest trade publishing group, China International Publishing Group. CIPG develops and distributes books to Chinese retail

bookstores, in addition to producing selected texts and supplemental books for the educational market. Lingo Media co-published with CIPG theEnglish for Hosts book and audiocassette package.

Phoenix Publishing and Media Group “PPMG”

Phoenix Publishing and Media Group (PPMG), formerly Jiangsu Publishing Group, was established in September 2001. In 2006,The Lingo Media signedApproach

Lingo Media specializes in publishing materials for language learning. Lingo Media focuses on two sectors: English as a co-operation agreementSecond Language (ESL) in English-speaking countries and English as a Foreign Language (EFL) in China.

The key to co-publish a vocationalpublishing successful EFL programs are two simple concepts: quality and relevance. Our core philosophy says that English language learning program with Yilin Press,materials should be relevant to the foreign-oriented publishing subsidiary of PPMG. The co-publishing agreement includes development, publishing and distribution of Vocational English forCollege,market we are trying to reach. In a four level program set that consists of reading & writing textbooks, reading & writing CD's, listening & speaking textbooks listening & speaking CD's, activity books and teacher's books for each level.

Publishing - Canadanutshell, our approach involves:

Researching and understanding the market

The process began with relationship building and communication.  We talk with key organizations; associations and ministries in a each country to better understand needs and concerns. We looked for the right niche for Lingo Media, adaptedThe Out Loud Program: Rhymes, Rhythms and Patterns for Language Learningand created a school editionthen seeked local partners to aid in the summermarketing and implementation of 2001our programs.  Moreover, we searched for individuals in China who manage the primary school market.   Company’s affairs.  These individuals become our links to China's community and culture.

Bilateral Relationships

With Lingo Media liaisons in place, our goal is to assure that our English language learning materials meet the highest educational standards.

Constant Monitoring of Effectiveness

Our people in the field in China are constantly monitoring the effectiveness of our programs; they ask and answer the crucial questions - Does the material serve the intended audience?

Comprehensive product development

Because we know that a language learning program needs to serve a number of different groups, we considered the requirements of all of the ultimate users: administrators, teachers and students.  Each group has its own perspective. We developed an approach that works for all.

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Collaborative partnerships

With local partners and educational organizations involved with the process of implementing programs, they are pleased with the results.  Our partners are involved in all stages of program marketing, implementation and monitoring – in effect they are strategic team members.

Bilateral Development

September 2001 marked the first official launch of a Lingo Media program entitledPEP Primary English. The Company has enteredprogram was developed by an international team of respected educational writers: Jack Booth, David Booth, Linda Booth and Larry Swartz (award winning Canadian authors of the Ontario education market.  The Ontario Ministry of Education has approvedelementary language arts seriesImpressions), together with Yuexin Wu from Wuxi Normal School and listedPEP’s English Editorial Team.

The Out Loud Program: Rhymes, RhythmsRelevant Material

We know how to listen. Our teams ensure that program material is relevant and Patterns for Language Learningculturally appropriate, as part of their early reading strategy intended to enhance the reading ability of primary school children.  The Out Loud Programwhich now includes student textbooks, teacher’s source books, poster cards and audiocassettes was launched in Ontario in November 2001.  Marketing began on a Canada-wide basis in January 2002.well as educationally sound.

China Expansion Plan

As of December 1, 2004, foreign investment in the wholesale distribution of print media has been allowed as a part of World Trade Organization (WTO) reforms.  Both Joint Ventures and Wholly Foreign Owned Enterprises (WFOE’s) are now allowed to participate in the wholesale distribution of books and periodicals.  

Lingo Media intends to acquire controlling interests in new or existing Chinese print media distribution companies.  If we are able to make such acquisitions, our ability to market and distribute finished products will provide Lingo Media with an increased presence on the supply chain and perhaps capture a larger market share and increase revenues.  

We intend to acquire companies that areor establish a new company involved in the following distribution channels:

·

Educational market:  including the sale of supplemental educational products to K-12 public schools, vocational schools, colleges, universities and other educational institutions

·

Retail market:  including the sale of educational books, newspapers and magazines through bookstores, newsstands, book clubs and direct-to-consumer

As part of the China Expansion Plan, the Company signed a definitive Joint Venture Agreement with Sanlong Cultural Enterprises (“Sanlong”) in 2005. The joint venture company will be known as Jintu Cultural Media Company (“Jintu” or the “Joint Venture”). Jintu willcontinue Sanlong’s recently launched a direct-to-consumer business of distributing educational newspapers located in Shijiazhuang, Hebei Province, China. Jintu’s first newspaper, Family EDU, was launched in 2005 and has 30,000 subscribers. An annual subscription is $7.00 (¥52 RMB or ¥1 RMB per issue). Family EDU, a weekly supplemental educational resource, is targeted to parents in Hebei Province where approximately 15 million families with children under the age of 14 reside. Under the JV

23

Agreement, Lingo Media will invest approximately CDN $365,000 (¥2,550,000 RMB) for its 51% share of Jin tu.Jintu. The Joint Venture will use the proceeds for Hebei Province, to increase the size of its sales force and for operations.In addition,

China Expansion Plan

As of December 1, 2004, foreign investment in the wholesale distribution of print media has been allowed as a part of World Trade Organization (WTO) reforms.  Both Joint Ventures and Wholly Foreign Owned Enterprises (WFOE’s) are now allowed to participate in the wholesale distribution of books and periodicals.  

Lingo Media intends to acquire controlling interests in new or existing Chinese print media distribution companies.  If we are able to make such acquisitions, our ability to market and distribute finished products will provide Lingo Media with an increased presence on the supply chain and perhaps capture a larger market share and increase revenues.  

We intend to acquire companies or establish a new company involved in the following distribution channels:

·

Educational market:  including the sale of supplemental educational products to K-12 public schools, vocational schools, colleges, universities and other educational institutions

·

Retail market:  including the sale of educational books, newspapers and magazines through bookstores, newsstands, book clubs and direct-to-consumer

As part of the China Expansion Plan, the Company is negotiatingsigned a definitive Joint Venture Agreement with one Chinese state-owned publishing distribution enterprise to establish aSanlong Cultural Enterprises (“Sanlong”) in 2005. The joint venture.  There can be no assurances that the Companyventure company will be ableknown as Jintu Cultural Media Company (“Jintu” or the “Joint Venture”). Jintu will continue Sanlong’s recently launched a direct-to-consumer business of distributing educational newspapers located in Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media will invest approximately CDN $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The Joint Venture will use the proceeds for Hebei Province, to establish additional joint ventures or, even if established,increase the size of its sales force and for operations.

Early Childhood Development

A+, markets a cognitive development program to the parents of children from newborn to age five. The program is based upon the significant knowledge

of brain development that they will be profitable.has come about since the invention of sophisticated brain scanning equipment and devices. The components of the program are designed to deliver to the child, age appropriate properly neurobiologically sequenced and developmentally valid information. It is designed with the goal of having the child in the home eventually reach his/her full intellectual potential.

Business Philosophy24

The Lingo Media Approach

Lingo Media specializesA+ has four offices in publishing materialsCanada - Toronto, Calgary, Edmonton and Vancouver. It is opening a sales office in Mississauga, Ontario. Expansion plans call for language learning. Lingo Media focuses on two sectors: English asthe opening of another sales office in Ottawa, Ontario before the end of 2007 and another sales office in London, Ontario in early 2008.

It has recently developed an Educational Assistance Program that is designed to help school aged children who are underachieving. This is a Second Language (ESL) in English-speaking countries and English as a Foreign Language (EFL) in non-English speaking countries.

The key to publishing successful EFL programs are two simple concepts: quality and relevance. Our core philosophy says that English language learning materials should be relevanthome based program which first of all brings children to the market we are tryinglevel of their peers and then proceeds on to reach. Indevelop sound study habits, research techniques and the ability to write reports and essays and carry out school projects. A+ also plans to re-launch its Education Universe website to develop both a nutshell, our approach involves:

Researchingparenting advice section and understanding the market

The process begins with relationship buildinga on-line shopping center marketing children’s books and communication.  We talk with key organizations; associations and ministries in a each country to better understand needs and concerns. We look for the right niche for Lingo Media, then seek local partners to aid in the marketing and implementation of our programs.  Moreover, we search for individuals in that country who can manage the Company’s affairs.  These individuals become our links to that country's community and culture.

Bilateral Relationships

Once we have Lingo Media liaisons in place, our goal is to assure the intended market that our English language learning materials meet the highest educational standards.

Constant Monitoring of Effectiveness

Our people in the field within the target country are constantly monitoring the effectiveness of our programs; they ask and answer the crucial questions - Does the material serve the intended audience?

Comprehensive product development

Because we know that a language learning program needs to serve a number of different groups, we consider the requirements of all of the ultimate users: administrators, teachers

and students.  Each group will have its own perspective. We develop an approach that works for all.

Collaborative partnerships

When local partners and educational organizations are involved with the process of implementing programs, they are much more likely to be pleased with the results.  Our partners are involved in all stages of program marketing, implementation and monitoring – in effect they are strategic team members.

music CD’s at discount prices.

Understanding the MarketProducts

The challenges of understanding the culture, needs and infrastructure of China are more than offset by the potential to capture the largest English language learning and training market in the world.Language Learning product description

Education is a high priority in China. Next to computer literacy, English-language proficiency is considered the key indicator of future prosperity. The Chinese government has mandated EFL instruction for all students, representing an enormous new market for new EFL materials designed to meet China's unique needs. The Chinese market is not only vast, it is diverse, encompassing EFL and ESP studies for children, adolescents and adults.

Bilateral Development

September 2001 marked the first official launch of a Lingo Media program entitledPEP Primary English. The program was developed by an international team of respected educational writers: Jack Booth, David Booth, Linda Booth and Larry Swartz (award winning Canadian authors of the elementary language arts seriesImpressions), together with Yuexin Wu from Wuxi Normal School and PEP’s English Editorial Team.

Relevant Material

We know how to listen. Our teams ensure that program material is relevant and culturally appropriate, as well as educationally sound.Starting Line, for example, was specifically created for China, and addresses the needs of primary level students beginning in grade 1.

Collaborative Partnerships

Throughout the preparation and production ofEnglish in Business Communications, we benefited from a close relationship with our local partner Renzhen Group. Local partnerships enhance the quality of our materials and ensure that the content meets local marketing needs. For example, Renzhen Group is responsible for the marketing and sales ofEnglish in Business Communications series in China, and provides Lingo Media with a pre-established distribution channel.

Products

Programs for Children:

25

26

Programs for Juveniles

27

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Early Childhood Development Product Description

The components of the A+ program are as follows:

1.

3 Steps Ahead – Employs colour cards with symbols and uses a magnetically activated light pen.  Teaches basic classification and discrimination.

2.

The Phonics Factory – Teaches the sounds of our language and the letters and words that are used to record those sounds.  Teaches basic language structure and the connection between sight and sound.

3.

The Math Factory – Teaches numerals and their values.  Teaches basic computations skills utilizing numerals.  

4.

Children’s Dictionary – Defines and in most cases provides illustrations of the 1,500 most commonly used words.

5.

Classical Music – Selection assist in developing linear thinking skills, increases attention span and provides a calming and soothing effect.

6.

Welcome to Reading – A complex kit divided into four modules that teaches reading recognition, basic reading skills and progresses through to reading comprehension and composition.

7.

A 15 Volume Set arranged thematically – Contains answers to most questions asked by pre-school children and allows them to pursue an interest.  Provides the beginning basic skills necessary to become an independent learner.  Provides numerous hands-on activities that can be done by the child with the parent.

8.

Launch Pad Library – Well illustrated series that concentrates on providing in-depth information on the “need to know” topics for the pre-school child.

9.

Young Scientist Series – Provides basic information on all of the sciences and progresses to a stage where they can be used throughout Elementary School.  Contains 180 elementary experiments that can be done with a parent.  

10.

Treasure Tree Knowledge – 16 Volume Set.  Well illustrated designed to be read by the children on their own.  Continue to develop reading and comprehension skills.  

11.

Student Discovery Library – 15 Volume Set.  Providing information on most relevant subjects laid out in an encyclopedic format.  Further develops the research skills needed to become an independent learner.  

12.

Interactive Reader Series – Well illustrated set that provides solid information and then tests the absorption and comprehension of the child by frequent question boxes throughout the set.

13.

Wise Old Owl – Provides 100 Coupons that can be used to obtain answers to questions that children have.  Provides those answers in age appropriate language and develops child’s delayed gratification attitude.  

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14.

The Parents Curriculum Guide– A step-by-step instruction manual that guides the parent through proper utilization of the entire A+ program.

United States vs. Foreign Sales/Assets

During the fiscal years ended December 31, 2006, 2005, and 2004 respectively, $685,521, $17,812, and 2003 respectively, $17,812, $54,925 and $29,884 of sales revenue were generated in Canada.

During the fiscal years ended December 31, 2006, 2005, 2004, and 2003,2004 respectively, no of sales revenue were generated in the United States.

During the fiscal years ended December 31, 2006, 2005, and 2004 respectively, $888,816, $888,545, and 2003, respectively, $888,545, $534,729 and $987,933 of sales revenue were generated in China.

At December 31, 2004,2006, and 2003,2005, substantially all of the Company’s assets were located in Canada. At December 31, 2005,2006, the majority of the Company’s identifiable assets are located in Canada, except for $182,520 that are located in China.

Dependency upon intellectual property

The Company is dependent on its intellectual property and the contracts in China with various Chinese publishers.publishers and in Canada with it’s A+ Parent’s Curriculum Guide.

Seasonality

Based on the Company's current practice of recording revenues from China, the Company does not recongnize revenues from China in the first and third quarter. In the past, the Company estimated first and third quarter revenues based on prior results, and reconciled the estimates to actual results provided by PEP in the next quarter. However this practice has been revised such that only revenues based on actual sales information provided on a semi-annual will be recongnized.

The Company may experience some seasonal trends in the sale of its publications.  For example, sales of educational published materials experience seasonal fluctuations with higher sales in the Spring (second calendar quarter) and Fall (fourth calendar quarter).

Research and Development, Trademarks, Licenses, and Etc.

Research and Development

During the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively, the Company expended $152,426, $104,106 $160,554, and $114,385$160,554 on research and development, under the categories of “development costs” and “software development costs” and “deferred costs”.  These expenditures were primarily directed at developing products for the China market.

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Trademarks and Copy rights

The Company owns the trademarks:trademarks, Lingo Media, EnglishLingo and EnglishNihao.EnglishNihao, in Canada and China. In addition, certain materials are copy righted.  

Employees

As of June 15, 2006,2007, the Company had twenty activeone hundred thirty eight employees including hundred eighteen employees of which eight were full-time, including the executives.  AsA+. Fourty three of December 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002 and December 31, 2001 there were twenty, ten, eight, five, four, and

24

six, and (including the executives), respectively.these employees are part-time. None of the Company's employees are covered by collective bargaining agreements.

4.C. Organization Structure

The Company currently has threefour active subsidiaries: Lingo Media Ltd., Lingo Media International Inc., and Lingo Group Limited and A+ Child Development (Canada) Limited. Refer to ITEM 4.  “Information on the Company, 4.A. History and Development of the Company, History and Development” for more information.

4.D.  Property, Plant and Equipment

The Company’s executive offices are located in rented premises of approximately 4,523 sq. ft. at 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada M5S 1S4.  The Company began occupying these facilities, through its subsidiary Lingo Media Ltd. in March 2006.

The Company’s Beijing representative offices are located in rented premises of approximately 1,200 sq. ft. at Kenzo Oriental Tower, 11K, 48 Dongzhimenwei Dajie, Dongcheng District, Beijing, China 100027.  

A+ has following rented premises:

The Company is outsourcing its manufacturing services.

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ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion for the fiscal years ended December 31, 20052006, and December 31, 20042005 and for the three months ended March 31, 20062007 and March 31, 20052006 should be read in conjunction with the consolidated financial statements of the Company and the notes thereto.

The following discussion contains forward-looking statements that are subject to significant risks and uncertainties.  Readers should carefully review the risk factors described herein and in other documents the Company files from time to time with the SEC.Securities and Exchange Commission.

5.A Overview

Lingo Media develops, publishes distributes and licenses book, audio, audio/video cassette, CD-based product and CD-based productssupplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+, the Company specializes in early childhood cognitive development programs, through the publishing and retail bookstore marketdistribution of educational materials along with its proprietary curriculum through its four offices in ChinaCalgary, Edmonton, Vancouver and for the educational school market in Canada.

Toronto.  

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.

In management’s opinion, revenue recognition, development costs, deferred costs, acquired publishing content software development costs and use of estimates as presented in the financial statements of the year ended December 31, 20052006 are critical accounting policies and are as follows:

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Revenue recognition:

Revenues from the sale of educational products in Canada are recognized at the time of delivery and when the risk of ownership is transferred and collectibility is reasonably assured.

Royalty revenue from sales by licensees of finished products in China is recognized based on confirmation of finished products produced by its licensees.  Royalty revenue from audiovisual product is recognized based on the confirmation of sales by its licensees, and when collectibility is reasonably assured.  Royalty revenues are not subject to right of return or product warranties. Amounts received in advance of the confirmation are

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 treated as customer deposits. Revenue from the sale of published and supplemental products is recognized upon delivery and when the risk of ownership is transferred and collectibility is reasonably assured.

Deferred costs, investment and advances:

The pre-operating costs relating to establishing a joint venture in China are recorded as deferred costs.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  Loans made in trust with a view to establishing a joint venture are recorded as investment and

advances.  The carrying value of these deferred costs and advances are assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary.

Development costs:

The Company has capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  The carrying value is assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary. Technology costs and web development costs included in deferred development costs are capitalized in accordance with Section 3062 ("goodwill and other intangible assets"), of the C.I.C.A. Handbook. Development costs are amortized on a straight-line basis over a maximum of five years.

Acquired publishing content:

The Company hascosts of obtaining the English as a Foreign Language ("EFL") program entitled "Communications: An Interactive EFL Program" and an international folktale series entitled "Stories Lost and Found: The Universe of Folktale" have been capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China.  Pre-operating costs are capitalized until the commencement of commercial operations and thenbeing amortized on a straight-line basis, over a maximum of five years.  The carrying value is assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary. Technology costs and web development costs included in deferred development costs are capitalized in accordance with Section 3062 ("goodwill and other intangible assets"), of the C.I.C.A. Handbook. Development costs are amortized on a straight-line basis over a maximum of five years.

Software development costs:

The Company has deferred software development costs incurred in connection with a computer software program to be used by children in reading and writing that promote and facilitate the development of communication skills in the English language.  Software development costs are deferred once technological feasibility for a product is established.  

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Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and

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disclosure of contingent assets and liabilities as at December 31, 20052006 and December 31, 20042005 and the reported amounts of revenue and expenses during the years then ended.  Actual results may differ from those estimates.  Significant areas requiring the use of management estimates related to the useful lives and impairment of capital assets,property and equipment, development costs and acquired publishing content and software development costs.content.

Operating Results

Three Months Ended March 31, 20062007 vs. Three Months Ended March 31, 20052006

Revenue and Margin

In keeping with the revised revenue recognition practice, royalty revenue from China for Q1 2006 and Q1 2005 were $nil. The financial statements for the second quarter will provide the sales information for both Q1 and Q2 in aggregate.

RevenuesLingo Media earned in Canada were $2,397 in Q1 2006 compared to $5,474 in Q1 2005, representing a decrease of 56% as our Canadian market sales efforts continue.

General and Administrative

General and administrative costs consist of executive compensation, consulting fees, office administration, marketing, professional fees, shareholders services, any foreign exchange losses or gains and government grants which are offset against the general and administration expenses incurred during the period.

These expenses were $178,927 during the first quarter of 2006 as compared with $171,738 for the similar period in 2005. The Company hired additional staff to implement its China Expansion Plans which resulted in increased compensation expense which was offset by a foreign exchange gain recorded during the period.

The Company receives various government grants throughout the year. The proceeds of the grants are used to develop specific programs that have specific milestones and/or criteria associated with them. The Company records these funds as a reduction of its general and administration expenses as the proceeds of the grants are used in an operating capacity. In Q1 of 2006, an amount of $35,392 was offset its Q1 expenses compared to $25,000 in Q1 2005.

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The Company had general and administrative expenses during the quarter and comparable last year’s quarterrevenues as follows:

Interest on Debt

Interest expense of $3,282 was recorded during the quarter as the Company had a bank loan and related party loans since December 31, 2005. The Company decreased its overall borrowings during the quarter by $28,937.

Amortization and Stock-Based Compensation

Amortization expense includes amortization of property and equipment, development costs, acquired publishing content and software development costs.

Amortization during the quarter was increased to $66,268 from $54,244 for the similar period in 2005 due to additional amortization of development costs.

The stock-based compensation for Q1 2006 was increased to $62,325 compared to $37,738 for Q1 2005 as additional stock options vested during the quarter.

Net Loss

The Company reported a loss before extraordinary items and taxes of ($309,640) for the three months ended March 31, 2006 as compared to a loss of ($265,630) for the same period last year. The Company reported no extra-ordinary items or taxes payable for the first quarter of 2006 and similarly for the same period last year.

Fiscal Year Ended December 31, 2005 vs. Fiscal Year Ended December 31, 2004

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Revenue and Margin

Revenues from China for the yearquarter ended DecemberMarch 31, 20052007 were $888,546$nil compared to $534,729$nil for 2004.  The increase in revenues was largely as a result of an increase in product license royalties from PEP.Q1-2006. The Company continues to enjoyadvance its rapportrelationship with PEP and is continually looking forhas developed new waysprograms to increase its product base andmaintain its royalty revenue.

The Company had no unearned revenues of $177,778 as at DecemberMarch 31, 2005.2007 as compared to $123,000 as at March 31, 2006.

Revenues from Canada for 2005 fiscal year were $17,811 compared to $54,925 for the prior year, representing a 308% decrease in revenues from 2004.  Our pilot program’s decrease in sales figures was largely the result of a difficult Canadian language arts market.   AlthoughIn July 2006, the Company experiencedentered into a decrease in overall sales from thispublishing agreement with Yilin Press to co-publish aVocational English For College program in Ontario,China.  In addition, the absolute dollar amount of sales represented less than 2% of the Company’s overall revenues.  The Company will continue to market thisdeveloped a new educational program in Canada during 2006, and source additional content for the Canadian educational–Lingo Kindergarten English – aimed at China’s vast pre-school market.

Lingo Media has expanded its in-house product development team with the appointment of Suzanne Robare as its Managing Editor in order to develop new English language learning programs.  The Company has also appointed Jenny Bao as Director of Marketing to enhance its relationships with existing customers and to secure new business.

In 2006, Lingo Media expanded into early childhood development sector through the acquisition of A+ effective October 1, 2006. A+ publishes and distributes educational materials aimed at the early childhood market.  A+ has developed a proprietary curriculum for parents to use with their children based on the latest neuroscience research. A+ has focused its efforts in Canada and with Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children across China. Future plans also include an expansion to the United States and Latin America.

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General and Administrative

General and administrative costs consist of executive compensation, consulting fees, office administration, rent, marketing, professional fees, shareholders services, any foreign exchange losses or gains and government grants which are offset against the general and administration expenses incurred during the period.

The following sets outGeneral and administrative expenses were $770,319 during the detailsfirst quarter of 2007 as compared to $178,927 for the similar period of 2006. Overall, general and administrative expenses increased due to the acquisition and consolidation of A+ operations into the financials of Lingo Media for the first quarter of 2007.  Below is the detailed analysis of general and administrative expenses for 2005 as compared to 2004:the quarter ended March 31, 2007:

General and administrative expenses were $855,118 during fiscal 2005 as compared to $651,232 for fiscal 2004.  

Advertising and promotional expenses were increased as the Company attended book fairs and participated in teacher conferences in China.  Travel expenses increased by $38,895 as more trips to China were incurred during the year compared to 2004.  The premises cost in China was in full effect during 2005 resulting in an increase of $34,368 compared to 2004.  Professional fees were reduced because of reduced legal costs as part of cost rationalization initiatives taken during 2005.

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Government Grants

The Company makes applications to the Canadian government for various types of grants to support its publishing and international marketing activities.   Each year, the amount of any grant may vary depending on certain eligibility criteria (including prior year revenues) and the monies available to the pool of eligible candidates.  

These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The companyCompany records a liability for the repayment of the grants in the period in which conditions arise that will cause the government grant to be repayable.  Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the year,quarter, the conditions for the

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repayment of grants did not arise and no liability was recorded. Included as a reduction of general and administrative expenses, are government grants of $219,772$28,750 for fiscal 2005 (2004the first quarter of 2007 (Q1-2006 – $261,269)$35,392), relating to the Company's publishing projects in China and Canada.China.  While the Company will continue to apply for various government grants to fund its ongoing development needs,and market expansion, there can be no assurance the Company wil lwill be successful in obtaining these grants in the future, that the Company will meet the eligibility requirements for the grants or that the programs will still be offered for qualifying companies.

Foreign Exchange

Included in general and administrative expenses is a foreign exchange loss of approximately $18,373 (2004 - $37,186),$9,768 as compared to a gain of $39,057 during the first quarter of 2006, relating to the Company's currency risk through its activities denominated in foreign currencies as the Company is exposed to foreign exchange risk as a substantial portion of its revenue is denominated in US dollars and Chinese Renminbi.

Interest on Debt

During the yearquarter, the companyCompany had loans payable bearing interest at 12 % (2003(Q1-2006 - 12%) per annum.  Interest expense related to these loans for the yearfirst quarter of 2007 is $11,767 (2004$11,366 (Q1-2006 - $7,609)$1,479).  At DecemberMarch 31, 2005, $101,929 (20042007, $394,771 (Q1-2006 - $77,762)$52,992) was due to those corporations.

lenders.

In addition, the company had a bank loan payableCompany has revolving lines of credit bearing interest at prime plus 2.5 percent.   This loan is secured2% and 2.5% per annum. These bank facilities are supported by general security agreements, a short term investment and a charge against the Company’s accounts receivable from Peoples Education Press, which in turn is insured by the Export Development Corporation.and inventory.  Interest expense paid on the loan for the yearquarter is $9,573.$18,646 (Q1-2006: $1,802). The outstanding balance of the loanthese loans at year endquarter-end was $110,000. Premiums paid on the insurance policy were $21,494 for the year.$485,000.

Amortization

The following is a summary amortization schedule:

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Amortization expense includes amortization of property and equipment, development costs and acquired publishing content and software development costs.content. The amortization charge for 2005Q1-2007 was $267,819 (2004$20,718 (Q1-2006 - $459,060)$66,268). This represents a significant decrease over 2004, as the Company wrote-off2006 due to reduced carrying values of development costs relating to its 2002 on-line learning project that hascosts.

been postponed during 2004.   The Company believes that at some point in the future, as financial resources permit and as the market is more robust for an online presence in China, the Company will devote the requisite time and resources to continue this project.  

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Stock-Based Compensation

According to the new accounting pronouncements implemented in January 2004 and retroactively applied for stock options granted on or after January 1, 2002. The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During 2005,the first quarter of 2007, the Company expensed $214,337$17,154 compared to $52,176$62,325 during 2004.Q1-2006.

Net Loss

The Company reported a net loss of ($725,732)309,674) for fiscal 2005the first quarter of 2007 as compared to a net loss of ($795,377)309,640) for fiscal 2004.Q1-2006. The Company reported taxes paid of $128,839$nil for the fiscal yearfirst quarter  ended DecemberMarch 31, 20052007 compared to taxes paid of $77,926 for fiscal 2004.  Taxes relate to$nil during the applicable withholding taxes due in China.  The decrease in net loss is mainly due to the increased royalty revenue from China and a corresponding increase in general and administrative costs and stock-based compensation.first quarter of 2006.  

5.B Liquidity and Capital Resources

Three Months Ended March 31, 2007

As at March 31, 2007, the Company had bank indebtedness  of $16,701 (Q1-2006 - $14,779), short term investment of $150,000 and accounts and grants receivable of $251,805 (Q1-2006 - $533,511). The Company’s total current assets amounted to $933,049 (Q1-2006 - $705,613) with current liabilities of $1,333,852 (Q1-2006 - $677,786) resulting in a working capital deficiency of $400,802 (Q1-2006 - working capital of $27,827).   

During the course of Q1-2007, the Company received $5,000 through the exercise of stock options. The Company secured additional loans in the amount of $47,230.  As at March 31, 2007, the company had two lines of credit with a balance outstanding of $485,000. First bank facility is secured by the accounts receivable from China, which in turn are insured by the Export Development Corporation. Second bank facility is secured by a General Security Agreement and the short-term investment of $150,000.

The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the quarter from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements.  The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of obtaining these grants in the future.   

Government grants received during Q1-2007 were $28,750 compared to $35,392 in Q1-2006.  

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The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans in addition to finance ongoing working capital needs resulting therefrom.  The Company has been successful in raising sufficient working capital in the past.

Fiscal Year Ended December 31, 2006

As of Marchat December 31, 2006, the Company had cash on hand of $14,779$73,169 (2005 - $144,337), short term investment of $150,000 and accounts and grants receivable of $533,511.$304,924 (2005 - $488,303). The Company’s total current assets amounted to $705,613 and$812,942 (2005 - $801,072) with current liabilities of $677,786$1,160,069 (2005 - $523,320) resulting in a working capital surplusdeficiency of $27,827.$347,127 (2005 -  working capital of $277,752).   

During the course of 2006, the Company received $66,679 through the exercise of stock options. The trade receivablesCompany secured loans  in the amount of $711,500 and it repaid $465,887 of these loans in 2006, $340,000 of the loan proceeds were used to fund the cash portion of the A+ acquisition. As at December 31, 2006, the company had two lines of credit with a balance outstanding of $485,000. First bank facility is secured by the accounts receivable from China, which in turn are insured by the Export Development Corporation (EDC)Corporation. Second bank facility is secured by a General Security Agreement and the short-term investment of Canada. The Company utilized its $150,000 line of credit that has been previously arranged with its financial institution and had an outstanding balance of $130,000 on the credit line at quarter end. The Company decreased its shareholder loans during the period by 50% to $52,992.$150,000.

The Company believes that current cashreceives government grants based on hand along withcertain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the year from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements.  The Company has relied on obtaining these grants for its accounts receivableoperations and recurring sales will satisfyhas been successful at securing them in the past but it cannot be assured of obtaining these grants in the future.   

Government grants received during 2006 were $182,300 compared to $219,772 in 2005.  This represents a significant portion of the Company’s sources of funds.

The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans in addition to finance ongoing working capital requirements forneeds resulting therefrom.  The Company has been successful in raising sufficient working capital in the next 12 months.past.

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Fiscal Year Ended December 31, 2005

As at December 31, 2005, the Company had cash on hand of $144,337 (2004 - $29,791) and accounts receivable of $488,303 (2004 - $562,558). The Company’s total current assets amounted to $801,072 (2004 - $749,473) with current liabilities of $523,320 (2004 - $478,488) resulting in a working capital surplus of $277,752 (2004 - $270,985).   

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During the year, the Company was successful in raising $735,000 via a non-brokered private placement.  The funds were used to advance working capital to Sanlong in China, for investigation and due diligence of joint ventures opportunities in China and Mexico and forgeneral working capital.  During the course of the year, the Company was able to source $10,800 in funds by the exercise of stock options. It secured an additional third party loan in the amount of $50,279 and it drew down another $20,000 from its $150,000 available line of credit (bringing the total drawdown to $110,000).  The shareholder’s loan was partially repaid by an amount of $26,113 with $51,649 still outstanding.  The line of credit is secured by the accounts receivable from China, which are in turn insured by the Export Development Corporation.

The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the year from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements or by the Company achieving specific milestones to continue ongoing support for the specific project, the proceeds of which are used to develop new or ongoing English learning programs for its markets.  The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of its future success in obtaining these grants in the fut ure.future.   

Government grants received during 2005 were $219,772 compared to $261,269 in 2004.  This represents a significant portion of the Company’s sources of funds.

During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting its sales from Finished Product Sales to Licensing Sales.  As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales.  This shift in product mix had a significant impact on the overall revenues and a decrease in cash flows from operations from China during 2004.    

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Although revenues from China during 2004 were significantly reduced compared to 2003, the Company’s 2005 Chinese revenues steadily increased back to its 2003 levels as the MOE’s mandate is in full force.   The Company has instituted budgetary measures aimed at ensuring that its core operation has sufficient funds to sustain itself for the next 12 months.  Nonetheless, the Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans as well as to finance ongoing working capital needs resulting therefrom.  The Company has been successful in raising sufficient working capital.

Fiscal Year Ended December 31, 2004

As at December 31, 2004, the Company had cash on hand of $29,791 (2003 - $232,502) and accounts receivables of $562,558 (2003 - $528,092). The Company’s total current assets amounted to $749,473 (2003 - $823,685) with current liabilities of $478,488 (2003 - $177,245) resulting in a working capital surplus of $270,985 (2003 - $646,440).   

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During the course of the year, the Company raised $105,034 through the exercise of stock options, secured a related party loan in the amount of $77,762 and utilized $90,000 of its $150,000 available line of credit.  The shareholder loan was repaid subsequent to the yearend.  The line of credit is secured by the accounts receivable from China, which are in turn are insured by the Export Development Corporation.

Government grants received during 2004 were $261,269 compared to $283,985 in 2003.  The Company relies on grants to offset its expenses.

Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):

Development Costs

Under Canadian GAAP, the Company defers the incremental costs relating to the development of and the pre-operating phases of new businesses and established business and amortizes these costs on a straight-line basis over periods up to five years.  Under United States GAAP, incremental costs related to development of and the pre-operating plan of a new business are expensed as incurred but the incremental costs incurred for established businesses are capitalized and amortized over on a straight line basis over periods up to five years.

Under United States GAAP, the amounts shown on the consolidated balance sheets for development costs would be $306,009 (2004$222,303 (2005 - $253,410)$306,009).

Software development costs:

Under United States GAAP, the software development costs would be expensed as incurred.

Statement of comprehensive income

Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for the reporting and disclosure of comprehensive income and its components in financial statements.  Components of comprehensive income or loss include net income or loss and all other changes in other non-owner changes in equity, such as the change in the cumulative translation adjustment and the unrealized gain or loss for the year on "available-for-sale" securities.  For all periods presented, comprehensive loss is the same as loss for the year under US GAAP.

Options to consultants

Starting January 1, 2004 under United States and Canadian GAAP, the Company records compensation expense based on the fair value for stock or stock options granted in exchange for services from consultants and employees. Before January 1, 2003, for the options issued and vested to employees the Company did not recognize a compensation expense under Canadian GAAP but recorded a compensation expense under US GAAP and Canadian GAAP for the options issued to consultants.  

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Calculation of Loss for the Year

The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") as applied in Canada.  In the following respects, GAAP as applied in the United States differs from that applied in Canada.

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If United States GAAP were employed, the loss in each year would be adjusted as follows:

Expressed in Canadian Dollars

The consolidated interim financial statements for the three months ended March 31, 20062007 and 20052006 are prepared in accordance with GAAP as applied in Canada.  In the following respects, GAAP as applied in the United States differs from that applied in Canada:

Expressed in Canadian Dollars

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Calculation of earnings per share:

Under both US and Canadian GAAP, basic earnings per share are computed by dividing the net income for the year available to common shareholders, as measured by the respective accounting principles (numerator), by the weighted average number of common shares outstanding during that year (denominator).  Basic earnings per share exclude the dilutive effect of potential common shares.

Diluted earnings per share under Canadian GAAP and US GAAP give effect to all potential common shares outstanding during the year. Potential common shares consist of theincremental common shares issuable upon the exercise of stock options using the treasury stock method.

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The following table reconciles the numerators and denominators of the basic and diluted earnings per share under U.S. GAAP as required by SFAS 128:

Expressed in Canadian Dollars

5.E Research and Development Trademarks, Licenses, and Etc.

Research and Development

During the years ended December 31, 2005 and 2004, respectively, the Company expended $104,106$131,641 and $160,554$104,106 on research and development, under the categories of “development costs” and “deferred costs” .  These expenditures were primarily directed at developing products for the China market.

Trademarks

The Company owns the trademarks: Lingo Media, EnglishLingo and EnglishNihao.

Licenses

The Company holds no Licenses.

5.F Trend Information

Lingo Media believes that the trend in English language learning in China is still strong.are strong and growing.  The State Ministry of Education in China (MOE)(“MOE”) is mandating and encouragingexpanding its mandate for the teaching of English learning programs to its students.  During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting from Finished Product Sales to Licensing Sales.  As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales.  

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The impact of this new policy stance resulted in significantly lower revenues from Finished Product Sales and only a marginal increase in Licensing Sales revenues in 2004. Lingo Media expects this shift from Finished Product Sales to Licensing Sales to continue in future periods as long as the MOE stance remains in effect and expects future Licensing Sales to increaseand future Finished Products Sales to decrease which will result in an overall revenue reduction from these sources.    Although the outlook for learning English in China remains positive,there can be no assurance that this trend will continue or that the Company will benefit from this trend.

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In Canada, pre-school supplemental education market remains strong, there can be no assurance that this trend will continue or that the Company will benefit from this trend.

5.F Tabular disclosure of contractual obligations

Our obligations as of March 31, 2006,2007, were as follows:

Expressed in Canadian Dollars

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

6.A.  Directors and Senior Management

Table No. 6

Directors and Senior Management

June 15, 20062007

Michael P. Kraft is the President & Chief Executive Officer of the Company since its inception in 1996. Mr. Kraft has beenis also the President & co-founder of Lingo Media Ltd. (formerly Alpha Corporation)Buckingham Group Limited, a private merchant banking corporation and President of MPK Inc., a subsidiaryprivate business consulting corporation to both private and public corporations since 1994. He is also a director of the Company,JM Capital Corp. since 1994.June 2006, Pioneering Technology Inc. since July 2006 and Grenville Gold Corporation since April 2007, TSX Venture listed companies.  Mr. Kraft received a Bachelor of Arts in Economics from York University in 1985.

Khurram R. Qureshi is the Chief Financial Officer of the Company since 1997.  Mr. Qureshi is also the Chief Financial Officer of Canadian Shield Resources Inc. since 1997 and a director since June 2004.  Mr. Qureshi received a Bachelor of Administrative Studies from York University in 1987 and received the Chartered Accountant designation in 1990.1990.Mr. Qureshi is also a partner at Chaba Qureshi and Associate, Chartered Accountants.

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Richard J.G. Boxer is the President of Buckingham Capital Corporation, a private merchant banking corporation, that provides capital and financial advice to both private and public corporations.  Mr. Boxer is on the board of a number of public corporations including AlarmForce Industries Inc., Manitou Capital Corporation, Initial Capital Corporation and Water Capital Inc.  Mr. Boxer received a M.B.A. from York University in 1976 and received the Chartered Accountant designation in 1973.

Scott Remborg is an independent consultant in the Information Technology and eCommerce sector.eCommerce.  From 2001 to 2003,  Mr. Remborghe was General Manager, eBusiness, at Air Canada. Mr.From 1994 to 1999, Mr Remborg has alsostarted up and led Sympatico, the largest Internet service and web portal  in Canada.  Earlier in his career he held senior management positions at Reuters and I.P. Sharp Associates.  From 1994 to 1999, Mr. Remborg initiated and led the development of the Sympatico Internet service for Bell Canada and twelve other leading telecommunications companies across Canada.  Mr Remborg has aan MBA fromand was educated at the BI Norwegian School of Management  in Oslo and the University of Alberta.Alberta, Canada. 

John P. Schram is the President & Chief Executive Officer of We Care Health Services Inc., Canada’s largest national home health services company since 1999.  Mr. Schram has held the position of President & Chief Executive Officer in a number of Canadian and US educational publishing companies including Simon & Schuster from 1992 to 1996 and Prentice Hall Canada Limited from 1991 to 1992.  Mr. Schram received an Honours BA in Business Administration from Wilfred Laurier University in 1966.

Bailing Xia is a business consultant with a focus on China. Mr Xia is the Chief Representative in North America for China Central Television (CCTV) for education, science, technology, culture and health programs.  Mr. Xia sits on a number of boards on Canadian and Chinese private corporations. Mr. Xia also serves as an advisor to Chinese Medical Association and to the Chairman of Beijing Concord College of Sino-Canada.  Mr. Xia was an Assistant Professor and Deputy Head of Scientific Management and Business Administration Department and Director of Graduate Student Affairs, Faculty of Graduate Studies at the, University of Science and Technology of China from 1981 to 1988.  Mr. Xia graduated from Anhui University (economics major) in 1979 and graduated from Sino-American Scientific Technology, Industry, and Business Administration Program (the first M.B.A. Program in China) in 1981.

Nereida Flannery is a Partner and Managing Director at The Balloch Group  with over 12 years experience  in China.  Ms. Flannery  was the General Manager of the Canada China Business Counsel in China (CCBC) where she worked closely with member companies to design, execute and monitor their China market entry strategies.  She also helped members identify joint venture partners and led many negotiations between government parties, member firms and joint-venture partners.  Ms. Flannery has a degree in Political Science from Queen’s University and speaks Chinese, Greek and French.

Imran Atique has served as Secretary and Treasurer of the Company from September 2001 to March 2006 and re-joined again in October 2006. He brings eight years accounting experience to Lingo Media. Mr. Atique received his Bachelor’s of Commerce (Honours) from St. Mary’s University (Halifax) in 1999 and received Certified Management Accountant (CMA) designation in 2005.

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The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.

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The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.

Despite the Company’s Executive Officers spending material portions of their time on businesses other than the Company, the Company believes that they devote sufficient time to the Company to properly carry out their duties.

No Director and/or Executive Officer has been the subject of any order, judgment, or decree of any governmental agency or administrator or of any court or competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation of which he is a Director and/or Executive Officer, to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining or enjoining any such person or any corporation of which he is an officer or director from engaging in or continuing any conduct, practice, or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security or any aspect of the securities business or of theft or of any felony.

There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he was selected as a Director or Executive Officer.  There are no family relationships between any two or more Directors or Executive Officers.

6.B.  Compensation

The table below sets forth information concerning the compensation paid, during each of the last three fiscal years (as applicable), to the Company’s chief executive officer and other executive officers of the Company and its subsidiaries who received total remuneration, determined on the basis of base salary and bonuses in excess of $100,000 during the last three fiscal years ended December 31 (the “Named Executive Officers”).

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38

Summary Compensation Table

Expressed in Canadian Dollars

(1)

Paid by Lingo Media Ltd., a wholly-owned subsidiary of the Company.

(2)

These amounts include automobile allowance.  

(3)

Stock appreciation rights.

(4)

Long term incentive plans.

(5)

Mr. Kraft’s salary was paid by Lingo Media Ltd. to his holding company, MPK Inc.

(6)

Represents success fees.

Management Agreement. Lingo Media Ltd. (formerly Alpha Corporation), a wholly-owned subsidiary of the Company, entered into a management agreement (“Management Agreement”) dated as of May 1, 1998 with Michael P. Kraft & Associates Inc. (“MPK Inc.”) pursuant to which Lingo Media Ltd. engaged MPK Inc. to provide management

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services.  The Management Agreement provides for an initial term of 8 months and automatic annual renewals until it is terminated.  The Management Agreement provides that Lingo Media Ltd. is to pay MPK Inc. $3,000 per month plus certain sales commissions. The Management Agreement was renewed on December 3, 1998 for fiscal year 1999 and again on November 22, 1999 for fiscal year 2000.  The Management Agreement was amended on June 30, 2000, whereby Lingo Media Ltd. is to pay MPK Inc. $ 10,000 per month beginning July 2000 in addition to providing an allowance for a he althhealth plan and life insurance policy.  MPK Inc. is also to be reimbursed for all travel, entertainment and other expenses incurred.  The Management Agreement also provides for a reasonable automobile allowance and performance bonus based upon his contribution to the ongoing success of the Company. &nb sp;MPK Inc. is a corporation controlled by Michael P. Kraft, the President & Chief Executive Officer of the Company.   

Stock Options.  The Company grants stock options to Directors, Senior Management and employees; refer to ITEM #6.E., "Share Ownership, Stock Options”.

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Director Compensation.  The non-management directors of the Company are entitled to receive a fee of $250 for each board meeting and for each committee meeting attended. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors.  The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director.  Other than indicated below no Director received any compensation for his services as a Director, including committee participation and/or special assignments.

Change of Control Remuneration.  The Company has no plans or arrangements in respect of remuneration received or that may be received by Executive Officers of the Company in Fiscal 20052006 to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds US$60,000 per Executive Officer.

Other Compensation.  No Executive Officer/Director received “other compensation” in excess of the lesser of US$25,000 or 10% of such officer's cash compensation, and all Executive Officers/Directors as a group did not receive other compensation which exceeded US$25,000 times the number of persons in the group or 10% of the compensation.

Bonus/Profit Sharing/Non-Cash Compensation.  Except for the stock option program discussed in ITEM #6.E., the Company has no material bonus or profit sharing plans pursuant

to which cash or non-cash compensation is or may be paid to the Company's Directors or Executive Officers.

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Pension/Retirement Benefits.  No funds were set aside or accrued by the Company during Fiscal 20052006 to provide pension, retirement or similar benefits for Directors or Executive Officers.

6.C.  Board Practices

6.C.1.  Terms of Office.

The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.

The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.

6.C.2. Termination benefits

Not applicable

6.C.3.  Board of Director Committees.

The Company has two committees: Audit Committee and Compensation Committee.

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The Audit Committee recommends to the Board of Directors the engagement of the independent auditors of the Company and reviews with the independent auditors the scope and results of the Company’s audits, the Company’s internal accounting controls, and the professional services furnished by the independent auditors to the Company.  The current members of the Audit Committee are: Richard J.G. Boxer, Scott Remborg and Michael P. Kraft.

The Compensation Committee establishes and modifies compensation and incentive plans and programs, and reviews and approves compensation and awards under compensation and incentive plans and programs for elected officers of the Company. The current members of the Compensation Committee are: Khurram R. Qureshi, Nereida Flannery and John Schram.

6.E.  Share Ownership

Table No. 7 lists, as of June 15, 2006, Directors and Executive Officers who beneficially own the Company's voting securities and the amount of the Company's voting securities owned by the Directors and Executive Officers as a group.  Table No. 7 includes all persons/companies where the Company is aware that they have 5% or greater beneficial interest in the Company’s securities.

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Table No. 7

Shareholdings of Directors and Executive Officers

Shareholdings of 5% Shareholders

*  Less than 1%.

(1)

Includes 247,500 warrants and 1,180,000536,667 options to purchase shares exercisable within 60 days.  1,713,1043,064,000 shares are held indirectly by Buckingham Group Ltd. (Formerly Kraft Investments Corp.), a private company controlled by Mr. Kraft.  Includes 287,554 shares held in the registered retirement savings plan.  Includes 415,4602,120,208 shares owned by members of his family.

(2)

Include 1,426,082Includes options to purchase 150,000 shares held by 1077431 Ontario Limited, a private company controlled by Mr. Sherman. Includes 120,365 shares owned by members of his family.exercisable within 60 days.

(3)

Includes options to purchase 162,50097,333 shares exercisable within 60 days and 34,500 shares are held indirectly by Buckingham Capital Corp., a private company controlled by Mr. Boxer.days.

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(4)

Includes 150,000 options to purchase 162,500 shares exercisable within 60 days.

(5)

Includes 87,500 warrants and 375,000options to purchase 150,000 shares exercisable within 60 days.

(6)

Includes 75,000 options to purchase shares exercisable within 60 days.

(6)

Includes options to purchase 112,500 shares exercisable within 60 days.

(7)

Includes 25,000 warrants and 112,500101,167 options to purchase shares exercisable within 60 days.

(8)

Includes 37,500 options to purchase shares exercisable within 60 days.

#Based on 27,910,27335,628,170 shares outstanding as of June 15, 20062007 and stock options and warrants held by each beneficial holder exercisable within sixty days.

________________________________________________________________________ ________________________

Stock Options

TSX Venture Exchange Rules and Policies

The terms and conditions of incentive options granted by the Company are done in accordance with the rules and policies of the TSX Venture Exchange ("TSX VEN"), including the number of common shares under option, the exercise price and expiration date of such options, and any amendments thereto.

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Such “terms and conditions”, including the pricing of the options, expiration and the eligibility of personnel for such stock options; are described below.

The TSX VEN policy in respect of incentive stock options provides that shareholder approval is not required if the aggregate number of common shares that may be reserved for issuance pursuant to incentive stock options does not exceed 10% of the issued common shares of the Company, 5% to any one individual and 2% to any consultant at the time of granting.

Shareholder approval of the grant of incentive stock options is required pursuant to the rules of the TSX VEN where the grant will result in the Company having options outstanding which, in aggregate, are exercisable to acquire over 10% (to a maximum of 20%) of the outstanding common shares of the Company.

In addition, disinterested shareholders (all shareholders excluding insiders and associates of insiders) approval is required pursuant to the rules of the TSX VEN where:

(a) grant of incentive stock options could result at any time in:

(i)   the Company having options outstanding to insiders which,

      in aggregate, are exercisable to acquire over 20% of the

      outstanding common shares of the Company; or

(ii)  the issuance to insiders, within a one year period, of

      common shares which, in aggregate, exceed 10% of the

      outstanding common shares of the Company; or

(iii) the issuance to any one insider and such insider's

      associates, within a one year period, of common shares

      which, in aggregate, exceed 5% of the outstanding common

      shares of the Company; or

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(iv)  the issuance to any consultant of common shares which, in

      aggregate, exceed 2% of the outstanding common shares of

      the Company; or

(b) the Company is proposing to decrease the exercise price of

    stock options held by any insiders.

Company Stock Option Plans

1996 Plan

Effective November 13, 1996, a stock option plan (the “1996 Plan”) was adopted by the board of directors of the Company to encourage ownership of common shares by directors, senior officers, employees and consultants of the Company and its subsidiaries.  Options could be granted under the 1996 Plan only to directors, senior officers, employees, consultants and personal holding corporations controlled by a director or senior officer of the Company and its subsidiaries as designated from time to time by the board of directors.  The number of shares which may be reserved for issuance under the 1996 Plan is limited to 1,078,000 common shares.  The maximum number of common shares that could be reserved for issuance to any one person under the 1996 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  Any shares subject to an option granted under the 1996 Plan which for any reason were cancelled or terminated prior to exercise will be available for a subsequent grant under the 1996 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted.  Options granted under the 1996 Plan were exercisable during a period not exceeding five years, subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, senior officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  The options are non-transferable.  The 1996 Plan contains provisions for adjustment in the number of shares issuable thereunder in the even t of a subdivision, consolidation, reclassification or change of the common shares, a merger or other relevant changes in the Company’s capitalization.  The board of directors may from time to time amend or revise the terms of the 1996 Plan or may terminate the 1996 Plan at any time.  

The 1996 Plan provides that the Company may provide financial assistance in respect of options granted under the 1996 Plan by means of loans to optionees.  No loans were granted by the Company pursuant to the 1996 Plan.

As of the date hereof, there are no shares reserved for issuance pursuant to options granted under the 1996 Plan.  No further options will be granted under the 1996 Plan.

2000 Plan

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A subsequent stock option plan (the “2000 Plan”) was adopted by the board of directors of the Company on May 30, 2000, with 2,384,074 common shares reserved for issuance under the plan, to encourage ownership of common shares by directors, officers, employees and consultants of the Company.  On June 28, 2002 the shareholders of the Company approved an amendment to the 2000 Plan to increase the number of options to purchase common shares that may be granted under the 2000 Plan to 4,416,765 less the number of

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shares reserved for issuance pursuant to options granted under the 1996 Plan, provided the number of shares reserved for issuance under stock options granted at any time do not exceed 10% of the Company’s then issued and outstanding shares.  The TSX Venture Exchange accepted for filing the Company’s amended and restated 2000 Plan for a rolling stock option plan reserving 10% of the issued and outstanding common shares of the Company at the time of a stock option grant, up to a maximum of 4,416,765 common shares, for issuance thereunder.

On July 3, 2003 the Shareholders of the Company approved a further amendment to the 2000 Plan to fix the maximum number of shares that may be issued under the 2000 Plan at 4,176,765 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at July 3, 2003.  The 2000 Plan was subsequently amended and restated as of June 30, 2004 to increase the maximum number of shares that may be issued under the 2000 Plan to 4,791,954 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at June 30, 2004.

Options may be granted under the 2000 Plan only to directors, officers, employees, consultants of the Company and its subsidiaries and personal holding corporations controlled by a director of officer of the Company and its subsidiaries as designated from time to time by the board of directors.  The number of shares which may be reserved for issuance under the 2000 Plan is currently limited to 4,791,954 common shares less the number of shares reserved for issuance pursuant to options granted under the 1996 Plan (currently 50,000 shares), provided that the board has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common shares which may be reserved for issuance to any one person under the 2000 Plan is 5% of the common shares outstanding at the time of t hethe grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  Any shares subject to an option granted under the 2000 Plan that for any reason is cancelled or terminated prior to exercise will be available for a subsequent grant under the 2000 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.  Options granted under the 2000 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  Options granted to optionees ve stvest over an 18 month period with no greater than 16.67% of any options granted to an optionee vesting in any threethre e month period or such longer period as the board may determine.  The options under the 2000 Plan are non-transferable.  The 2000 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of

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the common shares, a merger of other relevant changes in the Company’s capitalization.  The board of directors may from time to time amend or revise the terms of the 2000 Plan or may terminate it at any time

.time.

The 2000 Plan provides that the Company may provide financial assistance in respect of options granted under the 2000 Plan by means of loans to optionees.  Under the terms of the 2000 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option.  The 2000 Plan provides that any such loan will be for a term not exceeding 10 years and will be non-interest bearing.  Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances.  Any loans made under the 2000 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes.  In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as security for the loan.  &nb sp;Loans made under the 2000

Plan are made on a full recourse basis.  The 2000 Plan provides that any shares acquired pursuant to loans made under the 2000 Plan may be sold by the optionee from time to time provided that an amount equal to the aggregate option exercise price or the balance of the loan is applied in repayment of the loan.  Any financial assistance so provided under the 2000 Plan will be subject to and made in accordance with all applicable laws and regulatory policies at the time of making the loan.

As of the date hereof,June 15, 2007, options to purchase an aggregate of 3,172,8341,374,767 common shares are outstanding under the 2000 Plan.

2005 Plan

A new stock option plan (the “2005 Plan”) was adopted by the board of directors in May 30, 2005 and approved by the shareholders of the Company at the annual and special meeting of shareholders on June 30, 2005 to encourage ownership of common shares by directors, officers, employees and consultants of the Company.

Options may be granted under the 2005 Plan only to directors, officers, employees, consultants of the Company and its subsidiaries and personal holding corporations controlled by a director or officer of the Company and its subsidiaries as designated from time to time by the board of directors of the Company.  The number of shares which may be reserved for issuance under the 2005 Plan is limited to 4,821,955 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at June 30, 2005, less the number of shares reserved for issuance pursuant to options granted under the 2000 Plan (currently 3,172,834 shares), provided that the board has the right, from time to time, to increase such number subject to the approval of the relevant stock exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common shares wh ichwhich may

52

be reserved for issuance to any one person under the 2005 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  Any shares subject to an option granted under the 2005 Plan that for any reason is cancelled or terminated prior to exercise will be available for a subsequent grant under the 2005 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.  Options granted under the 2005 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or an of its subsidiarie s,subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  Options granted

45

to optionees vest over an 18 month period with no greater than 16.67% of any options granted to an optionee vesting in any three month period or such longer period as the board may determine.  The options under the 2005 Plan are non-transferable.  The 2005 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger or other relevant changes in the Company’s capitalization.  The board of directors may from time to time amend or revise the terms of the 2005 Plan or may terminate it at any time.

The 2005 Plan provides that the Company may provide financial assistance in respect of options granted under the 2005 Plan by means of loans to optionees.  Under the terms of the 2005 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option.  The 2005 Plan provides that any such loan will be for a term not exceeding 10 years and will be non-interest bearing.  Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances.  Any loans made under the 2005 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes.  In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as secur itysecurity for the loan.  Loans made under the 2005 Plan are made on a full recourse basis.  The 2005 Plan provides that any shares acquired pursuant to loans made under the 2005 Plan may be sold by the optionee from time to time provided that an amount equal to the aggregate option exercise price or the balance of the loan is applied in repayment of the loan.  Any financial assistance so provided under the 2005 Plan will be subject to and made in accordance with all applicable laws and regulatory policies at the time of making the loan.

As of the date hereof,June 15, 2007, options to purchase an aggregate of 475,0002,346,336 common shares are outstanding under the 2005 Plan.

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The names and titles of the Directors/Executive Officers of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options are set forth in the Table below as of June 15, 2006,2007, as well as the number of options granted to Directors and officers as a group.

Stock Options Outstanding

Expressed in Canadian Dollars