UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.  20549
 Annual Report
 FORM 20-F
  oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934








xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





OR




oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from __________ to ________





Commission file number _______





LINGO MEDIA CORPORATION


(FORMERLY 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.


12,465,857





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.


Yes XXX   No ___





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




1




LINGO MEDIA CORPORATION


FORM 20-F ANNUAL REPORT


TABLE OF CONTENTS





PART IItem 1.
Identity of Directors, Senior Management and Advisors
3Item 2.
Offer Statistics and Expected Timetable
3Item 3.
Key Information
3Item 4.
Information on the Company
14Item 5.
Operating and Financial Review and Reports
22Item 6.
Directors, Senior Management and Employees
41Item 7.
Major Shareholders and Related Party Transactions
51Item 8.
Financial Information
52Item 9.
The Offer and Listing
53Item 10.
Additional Information
56Item 11.
Quantitative and Qualitative Disclosures About Market Risk
68Item 12.
Description of Securities Other Than Equity Securities
68PART IIItem 13.
Default, Dividend Arrearages and Delinquencies
68Item 14.
Material Modifications to the Rights of  Security Holders and Use of Proceeds
68Item 15.
Controls and Procedures
69Item 16.
Reserved
70PART IIIItem 17.
Financial Statements
70Item 18.
Financial Statements
71Item 19.
Exhibits
71





2





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


-
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 U.S. generally accepted accounting principles (“GAAP”) in the footnotes, for the fiscal years ended December 31, 2009, December 31, 2008, December 31, 2007, December 31, 2006, and December 31, 2005. The financial statements for the fiscal years ended December 31, 2005 and December 31, 2006 have been audited by Mintz & Partners LLP. Meyers, Norris, Penny LLP audited December 31, 2007 financial statements and Collins Barrow Toronto LLP audited December 31, 2008 and December 31, 2009 financial statements.





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





Lingo Media Corporation (the “Company” or “Lingo Media”) 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.




3





Table No. 3


Selected Financial Data


Expressed in Canadian Dollars


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




Year


Year


Year


Year


YearEnded


Ended


Ended


Ended


Ended12/31/09


12/31/08


12/31/07


12/31/06


12/31/05Revenue from continuing operati

$
1,467


$
969



880



894



906Gross Profit from continuing operations

$
1,322


$
843



766



761



783Net Loss from continuing operations

$
(2,959
)


(2,311
)


(632
)


(691
)


(726
)Revenue from discontinued operations

$
Nil



2,576



3125



680



-Net Loss from discontinuing operations

$
367



(1,571
)


(293
)


(58
)


-(Loss) per Share from continuing operations

$
(0.24
)

$
(0.22
)


(0.11
)


(0.17
)


(0.03
)(Loss) per Share from discontinuing operations

$
0.03


$
(0.15
)


(0.05
)


(0.01
)


-Dividends per Share

$
0.00


$
0.00


$
0.00


$
0.00


$
0.00Weighted Avg. Shares


12,461



10,427



5,656



4,060



3,530Period-end Sharesoutstanding


12,466



12,458



9,582



4,694



4,125Working Capital

$
125


$
1,796



208



(347
)

$
278Long-Term Debt/Loans Payable

$
Nil



-



203



348



-Shareholders’ Equity

$
4,415


$
6,640



5,886



1,376



1,088Total Assets

$
5,703



8,527



8,162



2,884



1,611US GAAP income (Loss)

$
( 2,029
)

$
(4,697
)

$
(5,178
)

$
(633
)

$
(710
)US GAAP Basic Loss per Share

$
(0.16
)

$
(0.45
)

$
(0.92
)

$
(0.16
)

$
(0.17
)US GAAP Equity (Deficit)

$
(367
)

$
1,296


$
1,355


$
1,098


$
625US GAAP Total Assets

$
921


$
3,182


$
3,631


$
2,606


$
1,391





(1)
Cumulative Net Loss since incorporation under US GAAP has been ($16,402,211).
 (2)
a) Under US GAAP, development costs of new businesses are expensed as incurred: 2009-$nil, 2008-($218,795), 2007-$nil, 2006-$nil, and 2005-$nil.
 b) Under US GAAP, development costs amortized under Canadian GAAP would be reversed to calculate Loss per Share: 2009-$89,375, 2008 – $128,478, 2007 – $99,805, 2006 – $156,648, and 2005 – $133,290.
 c) Under US GAAP, software and web development costs are expensed as incurred: 2009-$922,232, 2008-$880,846, 2007-$4,352,341, 2006-$nil, and 2005-$nil.




3.A.3.  Exchange Rates





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




4





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




Average


High


Low


CloseMarch 2010
1.02


1.06


1.01


1.03February 2010
1.05


1.06


1.04


1.06January 2010
1.05


1.07


1.02


1.07December 2009
1.05


1.07


1.04


1.05November 2009
1.06


1.09


1.04


1.06October 2009
1.07


1.10


1.02


1.08September 2009
1.08


1.11


1.06


1.07August 2009
1.09


1.11


1.06


1.10July 2009
1.11


1.17


1.08


1.08June 2009
1.13


1.16


1.08


1.16May 2009
1.13


1.20


1.09


1.09Fiscal Year Ended Dec. 31, 2009
1.14


1.31


1.02


1.05Fiscal Year Ended Dec. 31, 2008
1.07


1.30


0.97


1.22Fiscal Year Ended Dec. 31, 2007
1.07


1.19


0.91


0.98Fiscal Year Ended Dec. 31, 2006
1.13


1.16


1.11


1.12Fiscal Year Ended Dec. 31, 2005
1.21


1.27


1.15


1.17


3.B.  Capitalization and Indebtedness





Not applicable





3.D.  Risk Factors




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




5





Lingo Media is a diversified online and print-based education products and services corporation focused on English language learning (“ELL”) on an international scale through Lingo Learning Inc., a print-based publisher of ELL programs in China, Speak2Me Inc. (“Speak2Me”), a free-to-consumer online ELL community and Parlo Corporation (“Parlo”), a fee-based language training and assessment platform.  Lingo Media has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market of 300 million students.  The Company continues to broaden its presence in China as well as other major English language learning markets, to provide access to world-class English learning and training solutions on a global scale.




As of December 31, 2009, the Company operated two distinct business segments as follows:





Online English Language Learning




The Company offers an online English language learning platform that will be offered across a number of verticals.




Through its free-to-consumer www.speak2me.cn website, the Company operates the largest online English language learning community in China that includes a unique social-networking infrastructure. This website incorporates its proven pedagogy with fun, interactive lesson modules to address the rapidly growing need for spoken English in China and abroad. Speak2Me's platform uses speech recognition technology to teach spoken English online through more than 350 targeted lessons that engage users in interactive conversations with a virtual instructor. The www.speak2me.cn website generates its revenue from traditional digital advertising, as well as, its patent-pending Conversational AdvertisingTM platform. Conversational AdvertisingTM allows an advertiser to embed its brand and message inside a lesson that engages a user for 2-3 minutes. In addition, Speak2Me earns royalty income from its distributor through the selling of its stand-alone English language learning CD-ROM products in China.




To further leverage its lesson library and technology platform, the Company is expanding its online offerings to include fee-based training solutions for corporations, governments, educational institutions, and consumers.  These fee-based training services will be available under the brand Parlo.  Lingo Media is planning to introduce an off-the-shelf product, Parlo Business English that incorporates a reporting platform, Learning Management System (LMS), as part of the training solution by April 2010. The Company will also offer customized solutions to tailor to client’s needs, as well as, a consumer website that will target individuals internationally. Parlo will earn its revenues from subscription and licensing fees.




Print-Based English Language Learning


The Company continues to expand its business via its subsidiary Lingo Learning Inc. (“Lingo Learning”), a print-based publisher of English language learning programs in China since 2001. Lingo Learning has an established presence in China’s education market of 300 million students.  To date, it has co-published more than 325 million units from its library of more than 340 program titles in China.




Discontinued Operations




In Canada, Lingo Media through its 70.33% subsidiary A+ Child Development (Canada) Ltd. ("A+") distributed early childhood cognitive development programs.  In December 2008, A+ filed a Notice of Intent to Make a Proposal under the Bankruptcy and Insolvency Act(“Proposal”) which was later approved by A+’s creditors and by the Superior Court of Justice in April 2009. Upon final payment, the Company received the Certificate of Full Performance of Proposal.   A+ is currently inactive and its operating results are disclosed under discontinued operations.




6




The Company derives its revenue from doing business in 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.




Foreign Currency Risk
  The Company is subject to currency risk through its activities outside of Canada.  Unfavourable changes in the exchange rate may affect the operating results of the Company.  The Company is also exposed to currency risk as a substantial amount of its revenue is denominated in United States dollars ("USD") and Chinese Renminbi ("RMB").
  Risk Factors Associated With Print-based English Language Learning


Business




We have not generated significant revenue to date in China, nor can we be assured of generating significant future revenues.




If we are unable to protect our intellectual property rights in China, our competitors may develop and market products with similar features that may reduce demand for our products.  It is nonetheless, difficult at best to protect intellectual property rights in China.




If our major customer and distributors of our products in China fail to devote sufficient time and resources to our business, or if their performance is substandard, our revenues will be adversely affected.




We currently have two key customers in China that represents 100% (2007: 100%) of the Company’s overall revenues.




We have no experience in directly distributing our products in China and no internal capability to do so yet.




Competition in the educational publishing industry in China is intense, and if we fail to compete effectively our financial results will suffer.




We have and will continue to establish collaborative relationships, and those relationships may expose us to a number of other unidentifiable risks.




If we are unable to retain key personnel and hire additional qualified sales and marketing, and other personnel, we may not be able to successfully achieve our goals.




We have international operations that expose us to additional business risks.




We may incur losses associated with foreign currency fluctuations.




Our share price may be volatile, and an investment in our common shares could suffer a decline in value.




7




Future sales of common shares by us or our existing shareholders may cause our stock price to fall.




We have never paid dividends on our common shares, and we do not anticipate paying any cash dividends in the foreseeable future.




Risk Factors Associated With Online English Language Learning Business




Competitive Markets




We operate in competitive and evolving markets locally, nationally and globally. These markets are subject to rapid technological change and changes in customer preferences and demand. There can be no assurance that we will be able to obtain market acceptance or compete for market share. We must be able to keep current with the rapidly changing technologies, to adapt its services to evolving industry standards and to improve the performance and reliability of its services. New technologies could enable competitive product offerings and adversely affect us and our failure to adapt to such changes could seriously harm its business.




Economic Conditions




Unfavourable economic and market conditions could increase our financing costs, reduce demand for its products and services, limit access to capital markets and negatively impact any access to future credit facilities.  Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns.




Dependence on Key Personnel




We are dependent upon the efforts, performance and commitment of senior officers and directors, who are responsible for the future development of this business. Shareholders and investors will be relying upon the business judgment, expertise and integrity of the Company’s management and directors. To the extent that the services of any senior officers or directors would be unavailable for any reason, a disruption to the operations could result, and other persons would be required to manage and operate the business. Our future success will also depend in large part upon its ability to attract and retain highly skilled personnel. There can be no assurance that we will be successful in attracting and retaining such personnel.




Acceptance of Corporate Advertising in an Educational Context




Speak2Me’s market research indicates that potential advertisers and its target demographic is receptive to the placement of corporate advertising in the context of a website devoted to education. However, Speak2Me is aware of the risk of political change in any country in which it is operating which may mean the local government regulators may no longer be willing to accept corporate advertising within its student network.




Parents and Students are Unwilling to Pay for Online Services




Offline English language learning instruction is a growing industry, but attempts to attract large numbers of paying students to subscription based online English language learning services have largely failed. Given that online consumption patterns in China are largely following trends already established in the West, and given that few industries and companies in the international markets have been able to establish thriving subscription-supported online services, a pure subscription model is unlikely to succeed in China.




8




Growth of Internet Advertising




Speak2Me is aware that the level of Internet advertising is currently low, especially in Asia and Latin American countries compared to the West. Speak2Me's forecast profitability is highly dependent on the assumption that Internet advertising will grow rapidly. The market for Internet advertising, content and services is intensely competitive and rapidly evolving. Speak2Me expects that competition will continue to increase, including in its target market in China. It is not difficult to enter this market, and current and new competitors, including companies in traditional media, can launch Internet sites rapidly.




Speak2Me Must Generate Online Advertising/Sponsorship Revenue




Speak2Me’s future success depends in part on its ability to establish, increase and sustain online advertising/sponsorship revenue, and therefore market and advertiser acceptance of Speak2Me's services will be important to the success of Speak2Me’s business. Speak2Me’s ability to generate advertising revenue will be directly affected by the number of users of its service. Speak2Me’s ability to generate advertising revenue will also depend on several other factors, including the level and type of market penetration of Speak2Me’s service, broadening its relationships with advertisers, its user base being attractive to advertisers, its ability to derive better demographic and other information from users, competition for advertising funds from other media and changes in the advertising industry and economy generally. Speak2Me’s expense levels are based in part on expectations of future revenue. Speak2Me may be unable to adjust spending quickly enough to compensate for any unexpected revenue shortfall. Speak2Me anticipates that some of its advertising customers will not allow Speak2Me to place their advertisements next to other advertisements. Speak2Me may not always be successful at accommodating these orders. In such situations, inability to fulfill competing orders might cause Speak2Me to lose a potentially significant amount of revenue, particularly if the customer that cannot be accommodated chooses not to advertise with Speak2Me.




Maintenance of User Relationships




The ability of Speak2Me to attract and maintain users requires that it provide a competitive offering of products and services that meet the needs and expectations of its users. Speak2Me's ability to satisfy the needs or demands of its users may be adversely affected by factors such as the inability or failure to identify changing client needs or expectations or the inability to adapt in a timely and cost-effective manner to innovative products and services offered by competitors. In addition, Speak2Me must continue to attract and retain users to compete successfully for advertising revenue. Speak2Me cannot be sure that it will compete successfully with current or future competitors in sustaining or growing Speak2Me’s web site traffic levels and user levels. If Speak2Me fails to attract and retain more users, Speak2Me’s market share, brand acceptance and revenue would not scale, which would have a material adverse effect on Speak2Me’s business, financial condition and results of operations.




Create Content and Services Accepted by Users




Success is dependent upon the ability to deliver original and compelling content and services for the online English language instruction software that attract and retain users in its target market. The ability to successfully develop and produce content and services is subject to numerous uncertainties, including the ability to:




· Anticipate and successfully respond to rapidly changing consumer tastes and preferences;


· Fund new content development;


· Attract and retain qualified editors, writers, producers, and technical personnel;
  9


· Build brand loyalty among users; and


· Build a sense of community among users and encourage use of the interactive features on Speak2Me’s website.





Failure Of Delivery Infrastructure to Perform Consistently




Our success as a business depends, in part, on its ability to provide consistently high quality online services to users via the Delivery Infrastructure. There is no guarantee that Parlo and/or Speak2Me’s Delivery Infrastructure and/or their software will not experience problems or other performance issues. If the Delivery Infrastructure or software fails or suffers performance problems, then it would likely affect the quality and interrupt the continuation of our services and significantly harm the business.




The Company’s Delivery Infrastructure is susceptible to natural or man-made disasters such as earthquakes, floods, fires, power loss and sabotage, as well as interruptions from technology malfunctions, computer viruses and hacker attacks. Other potential service interruptions may result from unanticipated demands on network infrastructure, increased traffic or problems in customer service. Significant disruptions in the Delivery Infrastructure could harm the Company’s goodwill and the Parlo and Speak2Me brands and ultimately could significantly and negatively impact the amount of revenue it may earn from its service.  Like all Internet transmissions, our services may be subject to interception and malicious attack. Pirates may be able to obtain or copy our products without paying fees. The Delivery Infrastructure is exposed to spam, viruses, worms, spyware, denial of service or other attacks by hackers and other acts of malice. The Company uses security measures intended to make theft of its software more difficult. However, if the Company is required to upgrade or replace existing security technology, the cost of such security upgrades or replacements could have a material adverse effect on our financial condition, profitability and cash flows.




Limited Intellectual Property Protection




Parlo and Speak2Me rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. In addition, our success may depend, in part, on its ability to obtain patent protection and operate without infringing the rights of third parties. There can be no assurance that, once filed, the Company’s patent applications will be successful, that we will develop future proprietary products that are patentable, that any issued patents will provide us with any competitive advantages or will not be successfully challenged by any third parties or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, there can be no assurance that others will not independently develop similar products, duplicate some or all of our products or, if patents are issued to Parlo and/or Speak2Me, design their products so as to circumvent the patent protection held by the Company. We will seek to protect its product documentation and other written materials under trade secret and copyright laws which afford only limited protection. Despite precautions taken by the Company, it may be possible for unauthorized third parties to copy aspects of our business and marketing plans or future strategic documents or to obtain and use information that we regard as proprietary. There can be no assurance that the Company’s means of protecting its proprietary rights will be adequate or that our competitors will not independently develop similar or superior technology. Litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets or to determine the validity and scope of the propriety rights of others. Such litigation could result in substantial costs and diversion of resources.




10




Government Regulation and Licensing




The operations may be subject to Canadian and foreign provincial and/or state and federal regulations and licensing. There can be no assurance that we will be able to comply with the regulations or secure and maintain the required licensing for its operations. Government regulation and licensing could seriously impact our ability to achieve its financial and operational objectives. The Company is subject to local, provincial and/or state, federal, and international laws affecting companies conducting business on the Internet, including user privacy laws, laws giving special protection to children, regulations prohibiting unfair and deceptive trade practices and laws addressing issues such as freedom of expression, pricing and access charges, quality of products and services, taxation, advertising, intellectual property rights and information security. The restrictions imposed by and the costs of complying with, current and possible future laws and regulations related to its business could limit our growth and reduce client base and revenue.




Operating in Foreign Jurisdictions




The Company’s current and future development opportunities relate to geographical areas outside of Canada. There are a number of risks inherent in international business activities, including government policies concerning the import and export of goods and services, costs of localizing products and subcontractors in foreign countries, costs associated with the use of foreign agents, potentially adverse tax consequences, limits on repatriation of earnings, the burdens of complying with a wide variety of foreign laws, nationalization and possible social, labour, political and economic instability. There can be no assurance that such risks will not adversely affect the business, financial condition and results of operations. Furthermore, a portion of expenditures and revenues will be in currencies other than the Canadian dollar. Foreign exchange exposure may change over time with changes in the geographic mix of its business activities. Foreign currencies may be unfavourably impacted by global developments, country-specific events and many other factors. As a result, future results may be adversely affected by significant foreign exchange fluctuations.




Other Risk Factors





Dependence on Michael P. Kraft, the Company’s Chief Executive Officer





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.  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.




11





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.





Dependence on Key Contractors for Maintenance of High Quality 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 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 quality level of content for future publications.





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 may need to raise additional funds in order to finance our operations.  The Company expects that corporate growth will be funded from 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 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 continue 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.




12





Our Public Trading Market is Highly Volatile





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


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 FINRA sponsored and operated quotation system for equity securities.  It is a more limited trading market than the NASDAQ Capital 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 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 NASDAQ 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, OTC 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.




13





There is Uncertainty as to the Company’s Shareholders’ Ability to Enforce Civil Liabilities Both Within 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, Barbados, and Hong Kong and Representative Offices in China and Taiwan.  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.





ITEM 4.  INFORMATION ON THE COMPANY





4.A. History and Development of the Company





Introduction





Lingo Media is a diversified online and print-based education products and services corporation focused on English language learning (“ELL”) on an international scale through Lingo Learning Inc., a print-based publisher of ELL programs in China, Speak2Me Inc. (“Speak2Me”), a free-to-consumer online ELL community and Parlo Corporation (“Parlo”), a fee-based language training and assessment platform.  Lingo Media has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market of 300 million students.  The Company continues to broaden its presence in China as well as other major English language learning markets, to provide access to world-class English learning and training solutions on a global scale.




As of December 31, 2009, the Company operated two distinct business segments as follows:





Online English Language Learning




The Company offers an online English language learning platform that will be offered across a number of verticals.




Through its free-to-consumer www.speak2me.cn website, the Company operates the largest online English language learning community in China that includes a unique social-networking infrastructure. This website incorporates its proven pedagogy with fun, interactive lesson modules to address the rapidly growing need for spoken English in China and abroad. Speak2Me's platform uses speech recognition technology to teach spoken English online through more than 350 targeted lessons that engage users in interactive conversations with a virtual instructor. The www.speak2me.cn website generates its revenue from traditional digital advertising, as well as, its patent-pending Conversational AdvertisingTM platform. Conversational AdvertisingTM allows an advertiser to embed its brand and message inside a lesson that engages a user for 2-3 minutes. In addition, Speak2Me earns royalty income from its distributor through the selling of its stand-alone English language learning CD-ROM products in China.




14




To further leverage its lesson library and technology platform, the Company is expanding its online offerings to include fee-based training solutions for corporations, governments, educational institutions, and consumers.  These fee-based training services will be available under the brand Parlo.  Lingo Media is planning to introduce an off-the-shelf product, Parlo Business English that incorporates a reporting platform, Learning Management System (LMS), as part of the training solution by April 2010. The Company will also offer customized solutions to tailor to client’s needs, as well as, a consumer website that will target individuals internationally. Parlo will earn its revenues from subscription and licensing fees.




Print-Based English Language Learning


The Company continues to expand its business via its subsidiary Lingo Learning Inc. (“Lingo Learning”), a print-based publisher of English language learning programs in China since 2001. Lingo Learning has an established presence in China’s education market of 300 million students.  To date, it has co-published more than 325 million units from its library of more than 340 program titles in China.




Discontinued Operations




In Canada, Lingo Media through its 70.33% subsidiary A+ Child Development (Canada) Ltd. ("A+") distributed early childhood cognitive development programs.  In December 2008, A+ filed a Notice of Intent to Make a Proposal under the Bankruptcy and Insolvency Act(“Proposal”) which was later approved by A+’s creditors and by the Superior Court of Justice in April 2009. Upon final payment, the Company received the Certificate of Full Performance of Proposal.   A+ is currently inactive and its operating results are disclosed under discontinued operations.




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:  investor@lingomedia.com


Website: www.lingomedia.com





The Company’s Beijing Representative Office is located at:





Jianwai SOHO


Building 17, Suite 601


39 East 3rd Ring Road,


Dong San Huan Zhong Lu


Beijing, 100022, China


Telephone: +86 10 5900 0152


Facsimile:  +86 10 5900 1800




15





The Speak2Me office is located at:





3F, 13, Lane 284,


Section 3, Roosevelt Road,


Taipei 100


Taiwan


Telephone: (+886) 2-2365-0662


Facsimile: (+886) 2-2365-0662





The Company's fiscal year ends on December 31st.





The Company's common shares trade on the TSX Venture Exchange under the symbol "LM", and on the OTC BB under the symbol “LMDCF” 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, and changed to Lingo Media Corporation on October 16, 2007.





The Company currently has seven active subsidiaries: Lingo Learning Inc. "LLI", Lingo Media International Inc. "LMII", Speak2Me Inc. “S2M”,  Speak2Me International Inc. “S2MII”, Speak2Me (Hong Kong) Limited “S2MHK”,, Speak2Me (Beijing) “S2MBJ” and Parlo Corporation “Parlo”.





LLI 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 and again on March 6, 2008 to Lingo Learning Inc..





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-owned subsidiary's name was changed to International Alpha Media, Inc. and then was changed to Lingo Media International Inc. on September 20, 2000.





S2M was incorporated pursuant to the Business Corporations Act (Ontario) on February 22, 2007.





S2MII was incorporated pursuant to the Companies Act of Barbados on October 15, 1996 under the name Consolidated Sino Ventures Ltd.  On March 20, 2008, wholly-owned subsidiary’s name was changed to Speak2Me International Inc. under the Companies Act of Barbados.




16





S2MHK was incorporated pursuant to the Companies Ordinance, Hong Kong on March 12, 2008.





S2MBJ was incorporated under the laws of the People’s Republic of China on May 22, 2008.





Parlo was incorporated pursuant to the Business Corporations Act (Ontario) on September 24, 2009.





4.B.  BUSINESS OVERVIEW




Background





Lingo Media is a diversified online and print-based education products and services corporation focused on English language learning (“ELL”) on an international scale through Lingo Learning Inc., a print-based publisher of ELL programs in China, Speak2Me Inc. (“Speak2Me”), a free-to-consumer online ELL community and Parlo Corporation (“Parlo”), a fee-based language training and assessment platform.  Lingo Media has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market of 300 million students.  The Company continues to broaden its presence in China as well as other major English language learning markets, to provide access to world-class English learning and training solutions on a global scale.




As of December 31, 2009, the Company operated two distinct business segments as follows:





Online English Language Learning




The Company offers an online English language learning platform that will be offered across a number of verticals.




Through its free-to-consumer www.speak2me.cn website, the Company operates the largest online English language learning community in China that includes a unique social-networking infrastructure. This website incorporates its proven pedagogy with fun, interactive lesson modules to address the rapidly growing need for spoken English in China and abroad. Speak2Me's platform uses speech recognition technology to teach spoken English online through more than 350 targeted lessons that engage users in interactive conversations with a virtual instructor. The www.speak2me.cn website generates its revenue from traditional digital advertising, as well as, its patent-pending Conversational AdvertisingTM platform. Conversational AdvertisingTM allows an advertiser to embed its brand and message inside a lesson that engages a user for 2-3 minutes. In addition, Speak2Me earns royalty income from its distributor through the selling of its stand-alone English language learning CD-ROM products in China.




To further leverage its lesson library and technology platform, the Company is expanding its online offerings to include fee-based training solutions for corporations, governments, educational institutions, and consumers.  These fee-based training services will be available under the brand Parlo.  Lingo Media is planning to introduce an off-the-shelf product, Parlo Business English that incorporates a reporting platform, Learning Management System (LMS), as part of the training solution by April 2010. The Company will also offer customized solutions to tailor to client’s needs, as well as, a consumer website that will target individuals internationally. Parlo will earn its revenues from subscription and licensing fees.




17




Print-Based English Language Learning


The Company continues to expand its business via its subsidiary Lingo Learning Inc. (“Lingo Learning”), a print-based publisher of English language learning programs in China since 2001. Lingo Learning has an established presence in China’s education market of 300 million students.  To date, it has co-published more than 325 million units from its library of more than 340 program titles in China.




Discontinued Operations




In Canada, Lingo Media through its 70.33% subsidiary A+ Child Development (Canada) Ltd. ("A+") distributed early childhood cognitive development programs.  In December 2008, A+ filed a Notice of Intent to Make a Proposal under the Bankruptcy and Insolvency Act(“Proposal”) which was later approved by A+’s creditors and by the Superior Court of Justice in April 2009. Upon final payment, the Company received the Certificate of Full Performance of Proposal.   A+ is currently inactive and its operating results are disclosed under discontinued operations.




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 English for Special Purposes (ESP).  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.





China Publishing





Lingo Media has spent 10 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 in extensive 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.





Co-Publishing Partners in China





People's Education Press





People's Education Press (“PEP”) a division of China's State Ministry of Education, publishes more than 60% of educational materials for the Kindergarten to Grade 12 (“K-12”) market throughout China, for all subjects, including English Language Learning.  PEP has a readership of more than 120 million students. Lingo Learning has four programs with PEP. Three series target the elementary market of 100 million students: PEP Primary English (for Grades 3-6; Chinese students now begin learning English in Grade 3); Starting Line (Grades 1-6); and Beginning English for Young Learners (Grades 1 and 2). The Reading Practiceseries is for junior middle school students. All series include the core textbooks in addition to supplemental activity books, audiocassettes, teacher resource books, and other materials.




18





Phoenix Publishing & Media Group





Phoenix Publishing and Media Group (PPMG), formerly Jiangsu Publishing Group, was established in September 2001. It is one of the largest provincial publishing houses in China with a registered capital of 720 million RMB, revenue of more than 8 billion RMB and total assets of 7.4 billion RMB.  PPMG’s subsidiaries include 8 publishing houses, 1 audio visual publishing house, 1 printing house and an import-export trading corporation.  Lingo Learning has co-published and launched Lingo College English with Yilin Press.




China International Publishing Group





Foreign Language Press (“FLP”) is a subsidiary of China's largest trade publishing group, China International Publishing Group (“CIPG”). CIPG develops and distributes books to Chinese retail bookstores, in addition to producing selected texts and supplemental books for the educational market. Lingo Learning co-published with CIPG theEnglish for Hosts book and audiocassette package.




The Lingo Media Approach




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




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 relevant to the market we are trying to reach. 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 each country to better understand their needs and concerns. We looked for the right niche for Lingo Media, and then sought out local partners to aid in the marketing and implementation of our programs.  Moreover, we searched for individuals in China who manage the 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.




19




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.




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 entitled PEP 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 series Impressions), 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.





Products





Online English Language Learning





Speak2Me (www.speak2me.com/advertising) is an online English language learning community that incorporates Lingo Media’s proven pedagogy with fun, interactive lesson modules to address the rapidly growing need for spoken English worldwide.  Speak2Me’s groundbreaking service uses proprietary speech recognition technology to teach spoken English online through more than 350 targeted lessons that engage users in interactive conversations with a virtual teacher.  A unique social-networking infrastructure that allows students to form study groups and offers contests, prizes and other incentives, creates a learning environment that engenders cooperation and competition, just as in a conventional classroom.  Speak2Me’s patent-pending Conversational AdvertisingTM platform and premium content development services allow Speak2Me to provide its innovative offering to end-users at no cost.





Parlo is a training and assessment business whose on-line offerings provide targeted lesson modules to help employees, civil servants & professionals develop their spoken, as well as, listening and comprehension English skills needed to remain competitive in the workplace and global economy.  Parlo’s first product, Parlo Business English (www.parlobusiness.com) consists of eight learning stages of varying degrees of difficulty.  Each learning stage has five levels, totalling 40 levels of proficiency.  Parlo will earn revenues through the sale of licenses per seat with a graduating pricing schedule based on the number of users and the length of the course.




20





English Language Learning





Lingo Learning’s publishing specialization is in educational products and programs that are mandated by the public educational system that include the adoption and sales into the school system. This is done in partnership with local Chinese educational agencies and publishers that co-develop the product components and programs.  To date, it has co-published more than 325 million units from its library of more than 340 program titles in China.





United States vs. Foreign Sales/Assets





During the fiscal years ended December 31, 2009, 2008, and 2007 respectively, $Nil, $1,220, and $1,920, of sales revenue were generated in Canada.  In 2008, the Company discontinued the line of business that generates all sales in Canada.





During the fiscal years ended December 31, 2009, 2008, and 2007 respectively, no sales revenue was generated in the United States.





During the fiscal years ended December 31, 2009, 2008, and 2007 respectively, $1,466,696, $967,908, and $877,706, of sales revenue were generated in China.





At December 31, 2009 and 2008 respectively, $18,368 and $227,827 of the Company’s identifiable assets are located in Canada, and, as a result of the acquisitions of Speak2Me and Parlo, $5,684,784 and $8,298,965 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.




Seasonality





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, 2009, 2008, and 2007, respectively, the Company expended $4,781,825, $5,344,704, and $4,352,341 on research and development, under the categories of “development costs”, “software and web development costs” and “deferred costs”.  These expenditures were primarily directed at developing products for the China market.




21




Trademarks and Copyrights





The Company owns the trademarks, Lingo Media and English Lingo in Canada and China. The Company also owns certain trademarks for Speak2Me and Parlo in China and has pending trademark applications in other jurisdictions.  In addition, certain materials are copyrighted.





Employees





As of April 30, 2010, the Company has forty-one employees. None of the Company's employees are covered by collective bargaining agreements.





4.C. Organization Structure





The Company currently has seven active subsidiaries: Lingo Learning Inc. (previously Lingo Media Ltd.), Lingo Media International Inc., Speak2Me Inc., Speak2Me (Hong Kong) Limited, Speak2Me International Inc., Speak2Me Beijing and Parlo Corporation 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 4,270 sq. ft. at 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada M5S 1S4.  The Company began occupying these facilities, through its subsidiary Lingo Learning Inc. in March 2006.





The Company’s Beijing representative offices are located in rented premises of approximately 2,174 sq. ft. at Jianwai SOHO, Building 17, Suite 601, 39 East 3rd Ring Road, Dong San Huan Zhong Lu, Beijing, 100022, China




The Company’s Taiwan representative offices are located in rented premises of approximately 721 sq. ft. at 3F, 13, Lane 284, Section 3, Roosevelt Road,, Taipei 100, Taiwan





The Company has office equipment, furniture and computer equipments located in these offices and for the fiscal years ended December 31, 2009, 2008, 2007 and 2006 they have a net carrying value of $73,351, $64,839, $73,144 and $58,716 respectively.








ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS





The following discussion for the fiscal years ended December 31, 2009, and December 31, 2008 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 Securities and Exchange Commission.




22





5.A Overview





Lingo Media is a diversified online and print-based education products and services corporation focused on English language learning (“ELL”) on an international scale through Lingo Learning Inc., a print-based publisher of ELL programs in China, Speak2Me Inc. (“Speak2Me”), a free-to-consumer online ELL community and Parlo Corporation (“Parlo”), a fee-based language training and assessment platform.  Lingo Media has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market of 300 million students.  The Company continues to broaden its presence in China as well as other major English language learning markets, to provide access to world-class English learning and training solutions on a global scale. In Canada, Lingo Media through its 70.33% subsidiary A+ Child Development (Canada) Ltd. ("A+") specialized in distributing early childhood cognitive development programs.  In December 2008, A+ filed a Notice of Intent to Make a Proposal under the Bankruptcy and Insolvency Act(“Proposal”) which was later approved by A+’s creditors and by the Superior Court of Justice in April 2009.  Upon final payment, the Company received the Certificate of Full Performance of Proposal A+ is currently inactive and its operating results are disclosed under discontinued operations.




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 and use of estimates as presented in the financial statements of the year ended December 31, 2009 are critical accounting policies and are as follows:





Revenue recognition:





Lingo Media earns advertising revenue through Speak2Me, a new media company focused on interactive English language learning in China.  Speak2Me develops targeted Conversational AdvertisingTM lessons which are available to users of www.speak2me.cn free of charge.  Revenues earned from Conversational AdvertisingTM are recognized as these lessons are featured on www.speak2me.cn and when collectability is reasonably assured.





Speak2Me has English language learning CD-ROM products which generate royalty revenue from its Shanghai-based distributor.  Revenue is recognized upon the confirmation of sales from the distributor and when collectability is reasonably assured.





Parlo earns training revenue by developing and hosting online English language learning lessons for its customers of which some are industry specific and tailored to the client’s needs.  Revenue is recognized evenly over the term of the agreement upon the lessons becoming accessible by the customer and when collectability is reasonably assured.




23





Lingo Media earns royalty revenues from its key customer, People’s Education Press (“PEP”), who is China’s State Ministry of Education publisher, on the following basis:




·
Finished Product Sales – PEP prints and sells Lingo Media’s English language learning programs to provincial distributors in China; and
  ·
Licensing Sales – PEP licenses Lingo Media’s English language learning programs to provincial publishers who then print and sell the programs to provincial distributors in China.





Lingo Media earns a significantly higher royalty rate from Finished Product Sales compared to Licensing Sales.





In accordance with the co-publishing agreement between PEP and Lingo Media, PEP pays to Lingo Media a royalty on print runs of Finished Product Sales and a royalty on actual revenues from Licensing Sales.  PEP provides Lingo Media with print run reconciliations on a semi-annual basis (June 30th and December 31st), as their reporting systems are unable to provide quarterly sales information.  Revenue is recognized upon the confirmation of such sales and when collectability is reasonably assured.





Royalty revenues from audiovisual products are recognized upon the confirmation of sales, and when collectability is reasonably assured.  Royalty revenues are not subject to right of return or product warranties.





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.




In June 2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”) with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture company will be known as Hebei Jintu Education Book Co. Ltd. (“Jintu”).  The Company has incurred and advanced a total of $339,939 to the joint venture.  The Company intended to utilize the sales channel of Jintu to localize and distribute product of A+.  Since A+ has filed a Proposal the Company has written-off its investment in the joint venture.




24




Development costs:





Under Canadian GAAP, the Company capitalized costs related to English Language Learning products and programs and amortizes these costs on a straight-line basis over periods of up to five years. Under United States GAAP, these costs are expensed as incurred per Statement of Financial Accounting Standards (“SFAS”) No. 2, Research and Development Costs.  The Company failed to expense the development costs for US GAAP purposes in its 2007 financial statement reconciliation of Canadian to US GAAP disclosure and has now restated the reconciliation to reflect the expense.





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 disclosure of contingent assets and liabilities as at December 31, 2009 and December 31, 2008 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 property and equipment, development costs and acquired publishing content.





Operating Results





Fiscal Year Ended December 31, 2009 vs. Fiscal Year Ended December 31, 2008





Revenue and Margin




Lingo Media earned print-based English language learning revenues in China as follows:




2009


2008


2007Revenue

$
1,095,994


$
969,128


$
879,626Cost of sales


74,565



126,329



113,317Margin

$
1,021,429


$
842,799


$
766,308Margin (%)


93
%


87
%


87
%





Revenues from China for the year ended December 31, 2009 are $1,095,994 compared to $969,128 for fiscal 2008, and $877,806 for fiscal 2007. Direct costs associated to revenue from PEP are kept to a minimum and has been consistent throughout the years. The Company continues to maintain its relationship with PEP and is investing in the development of new programs to maintain and increase its royalty revenues.




Publishing revenue from China for the year ended December 31, 2009 increased by 13% compared to fiscal 2008.  This increase is mainly attributed to the increased royalty through licensing sales to local publishers rather than direct sales made by PEP.  Since the State Ministry of Education has mandated the increase of licensing sales vs. direct sales to local publishers, PEP had increased its licensing sales revenues.  The Company expects this trend to continue but it does not have any control over PEP’s attempt to enter into licensing sales vs. direct sales with additional local publishers.




In 2009, Lingo Media started earning advertising and sponsorship revenue, as well as training revenue.  Its results are as follows:




2009


2008


2007Revenue

$
370,702



Nil



NilCost of sales


70,429



Nil



NilMargin

$
300,273



Nil



NilMargin (%)


81
%


Nil



Nil





25




Lingo Media revenue from the sale of early childhood development program through its 70.33% owned subsidiary, A+ and results from operations are as follows:




2009


2008


2007Revenue

Nil


$
2,575,559


$
3,124,731Cost of sales

Nil



581,555



645,510Margin

Nil


$
1,994,004


$
2,481,141Margin (%)






77
%


79
%




As part of its restructuring, A+ discontinued its operations in Canada and these revenues and related expenses are reported as discontinued operations.




Selling, General and Administrative




Selling, general and administrative expenses increased to $2,231,971 for the year ended December 31, 2009 compare to $2,127,726 for fiscal year 2008 and $946,307 for fiscal year 2007.  This increase was largely due to the expanded operations of Online English language learning services.  As the product development process advanced, the Company began to establish a sales team in China.   Selling, general and administrative expenses for the two segments are segregated below:




Online English Language Learning


As Speak2Me launched their products, selling general and administrative expenses directly related to online English language learning increased to $556,284 for the fiscal year 2009 compared to $490,160 for fiscal year 2008 and $358,948 for fiscal year 2007.  Expenditures in areas such as sales and marketing, travel and administration began to increase.  Administration expenses increased as a result of the increase in the number of employees.  Professional fees also increased as legal fees related to contracts and agreements increased.  Selling general and administrative expenses directly related to online English language learning are as follows:




Online ELL

2009


2008


2007Sales and marketing

$
273,675


$
39,737


$
4,281Consulting fees and salaries


101,115



234,357



251,164Travel


39,126



45,844



26,689Administration


60,583



82,453



29,698Premises


26,100



25,467



10,000Professional fees


50,106



51,111



41,185Foreign exchange


5,579



11,190



(4,068
)$
556,284


$
490,160


$
358,948





26




Print-Based English Language Learning




Selling general and administrative expenses for fiscal year 2009 was $1,678,089 compared to $1,637,567 in fiscal year 2008 and $587,359 for fiscal year 2007.  Consulting fees for the publishing segment consists of contracted writers and editors to update and make revisions to its existing print and audio-based product components to maintain and secure additional sales from its customers.  It also includes personnel expenses on the development of new business within China.  Consulting fees increased to $981,204 from $953,541 in fiscal year 2009 as a result of added staff in the Toronto Head Office and Beijing offices.  Currently, overhead including salaries and executive compensation from the corporate head office are combined as part of the expenses in the print-based publishing business.  The overall activity level within the Company has increased significantly, leading to additional spending  on public relations, legal fees, and higher audit fees. Below is the breakdown of the print-based ELL general and administration fees:




Print-Based ELL

2009


2008


2007Advertising and promotion

$
-


$
-


$
13,516Consulting fees and salaries


981,204



953,541



355,784Travel


144,750



72,483



64,975Administration


123,209



172,083



170,971Premises


47,451



91,113



108,145Foreign exchange


150,351



149,033



(99,436
)Shareholder services


135,288



54,877



45,406Professional fees


191,595



209,866



92,5421,773,848



1,702,997



751,904Grants


(95,759
)


(65,430
)


(164,545
)$
1,678,089


$
1,637,567


$
587,359





For 2008 and 2007, selling, general and administrative expenses related to A+ have been reallocated and reported as discontinued operations.





Government Grants




Lingo Media 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. During the year, the Company recorded $95,759 of such grants.  Certain government grants are repayable in the event the Company's annual net income for each of the previous two years exceeds 15% of revenue and at such time a liability would be recorded. During the year, the conditions for the repayment of government grants were not met and no liability was recorded.




During 2008, Lingo Media was audited by a government grant agency and was assessed with a repayment of $115,075.  The Company believes this claim is unjust and is vigorously disputing the assessment.  At the end of the year, a provision of $45,000 has been recorded in general and administrative expenses.  While the Company is in contact with the government agency, the dispute is ongoing and there are no further updates at this time.




While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the Company will 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.




Foreign Exchange




Included in general and administrative expenses is a foreign exchange loss of approximately $158,546 as compared to a loss of approximately $160,223 in fiscal 2008, 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 significant portion of its revenue and expenses are denominated in US Dollars, New Taiwanese Dollars and Chinese Renminbi.




27




Discontinued Operations




On December 23, 2008, A+ filed a Notice of Intent to file a Proposal.  In 2008, the Company wrote-down the carrying value of A+, resulting in a gain of $367,293 (2008 - $1,571,369, 2007 - $292,848) to earnings, included in the write-down was $NIL (2008 - $274,852, 2007 - $NIL) in future income tax assets related to it’s A+ subsidiary.




All comparative figures have been adjusted to exclude results from the discontinued operations.  The net assets of A+ were presented as assets and liabilities of the discontinued operations at their carrying value.




Net Loss from Continuing Operations




Net loss from continuing operations for the Company was $(2,959,145) for the year ended December 31, 2009 as compared to $(2,311,474) in 2008 and $(632,192) in 2007.  These losses can be attributed to the two operating segments as shown below:




2009


2008


2007Online ELLRevenue

$
370,702


$
-


$
-Direct costs


70,429



-



-Margin


300,273



-



-Expenses:General and administrative


556,284



490,160



358,948Amortization of property and equipment


6,684



12,485



2,976Amortization of software & web development


1,395,736



-



-Income taxes and other taxes


12,852



-



-1,971,556



502,645



361,924Segment loss – Online ELL


(1,671,283
)

$
(502,645
)

$
(361,924
)Print-Based ELLRevenue


1,095,994



969,128



879,626Direct costs


74,565



126,329



113,317Margin


1,021,429



842,799



766,309Expenses:General and administrative


1,678,089



1,637,567



587,359Inventory write-off


-



15,618



-Development cost write-down


-



27,915



28,184Amortization of property and equipment


1,357



3,236



4,025Amortization of publishing development costs


87,346



128,478



99,805Income taxes and other taxes


164,399



145,018



127,2671,931,191



1,957,832



846,640Other:Amortization of property and equipment


8,432



5,522



6,464Interest and other financial expenses


10,564



95,544



27,077Stock-based compensation


359,004



252,792



156,395Deferred cost, investment write-off


-



339,939



-378,000



693,797



189,936Segment loss – Print-Based ELL


(1,287,762
)


(1,808,829
)


(270,267
)Net loss from continuing operations

$
(2,959,145
)

$
(2,311,474
)

$
(632,191
)





28




During the year, the Company continued to invest in its product development and prepared for the launch of its fee-based online training and assessment service.  Majority of its expense consist of selling, general and administrative expenses detailed in the selling, general and administrative section above. The costs of software and content development were capitalized as software and web development costs on the Balance Sheet and began amortization in the second quarter of 2009.




Print-Based English language learning has been operating with significant gross margin.  Its expenses include selling, general and administrative, amortization expenses and income taxes and other taxes.  The significant increase in general and administration is due to the increase in spending from the corporate office in respect to Speak2Me and Parlo.  Currently, corporate overhead, salaries and executive compensation are included as part of print-based English language learning expense.




Stock-Based Compensation




The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During 2009, the Company recorded an expense of $359,004 compared to $252,792 during 2008. The increase in this expense is primarily due to additional stock option issued and vested in the year.




Deferred Costs, Investment Write-off




In June 2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”) with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture company was known as Hebei Jintu Education Book Co. Ltd. (“Jintu”). The Company has incurred and advanced a total of $339,939 to the joint venture. The Company intended to utilize the sales channel of Jintu to localize and distribute product of A+. Since A+ has filed a Proposal (Note 10), the Company has written-off its investment in the joint venture.




Net Loss




The Company reported a net loss of ($2,591,852) for the year ended December 31, 2009, as compared to a net loss of ($3,882,843) in 2008.   The loss for 2009 is comprised of the following:




2009


2008


2007Operating loss

$
(2,959,145
)

$
(2,311,474
)

$
(632,192
)Gain/(Loss) from the operations of A+


367,293



(1,571,369
)


(632,192
)Write off of goodwill from the acquisition of A+


-



(1,121,131
)


-Net Loss

$
(2,591,852
)

$
(3,882,843
)

$
(925,040
)





The Company incurred taxes of $179,751 for the year ended December 31, 2009 compared to $145,018 in 2008.




29




Fiscal Year Ended December 31, 2008 vs. Fiscal Year Ended December 31, 2007





Revenue and Margin





Lingo Media earned revenues in China as follows:




Online

English

Language

Learning


Print-Based

English

Language

Learning


TotalRevenue

$
-


$
969,128


$
969,128Cost of sales


-



126,329



126,329Margin

$
-


$
842,799


$
842,799




Revenues from China for the year ended December 31, 2008 were $969,128 compared to $879,626 for fiscal year 2007. The Company continues to advance its relationship with PEP and is developing new programs to maintain and increase its royalty revenues.




In Canada, revenues from A+ for the year ended December 31, 2008 were $2,575,559 compared to $3,124,731 for fiscal year 2007. As part of its restructuring, A+ discontinued its operations in Canada and these revenues and related expenses are reported as discontinued operations.




Lingo Media earned revenues at December 31, 2007 in China as follows:





Online

English

Language

Learning


Print-Based

English

Language

Learning


TotalRevenue

$
-


$
879,626


$
879,626Cost of Sales


-



113,317



113,317Margin

$
-


$
766,309


$
766,309





Revenues from China for the year ended December 31, 2008 were $969,128 compared to $879,626 for 2007. The Company continues to advance its relationship with PEP and has developed new programs to maintain and increase its royalty revenue.




30





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





The Company had no unearned revenues as at December 31, 2008.





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.




Overall, general and administrative expenses increased due to the acquisition and consolidation of Speak2Me operations into the financial results of Lingo Media. Below is the detailed analysis of general and administrative expenses for the year ended December 31, 2008.




2008


2007Administration


191,290



183,777Advertising and promotion


39,737



17,797Consulting fees and employee compensation


829,057



405,715Equipment leases


17,931



16,891Executive compensation


358,841



201,233Foreign exchange


160,223



(103,505
)Premises


161,895



118,145Professional fees


260,977



129,395Shareholder services


54,877



49,740Travel


118,328



91,6642,193,156



1,110,852Less Grants


(65,430
)


(164,545
)Total


2,127,726



946,307





Selling general and administrative expenses related to A+ have been reallocated and reported as discontinued operations.




Government Grants




Lingo Media 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, during the year the Company recorded $110,430 of such grant.  Certain government grants are repayable in the event the Company's annual net income for each of the previous two years exceeds 15% of revenue, at such time a liability would be recorded. During the year, the conditions for the repayment of grants were not met and no liability was recorded.




31




During 2008, Lingo Media was audited by a government grant agency and was assessed with a repayment amount of $115,075.  The Company believes their claim is unjust and is vigorously disputing the assessment.  At the end of the year, a provision of $45,000 has been recorded in general and administrative expenses.





While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the Company will 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.




Foreign Exchange




Included in general and administrative expenses is a foreign exchange loss of approximately $160,223 as compared to a gain of approximately $103,505 in fiscal 2007, 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 significant portion of its revenue and expenses is denominated in US Dollars, New Taiwanese Dollars and Chinese Renminbi.




Interest and Other Financial Expenses




In 2008, the Company had loans payable bearing interest at 12% (2007 - 12%) per annum.  Interest expense related to these loans for the year ended December 31, 2008 is $95,544.




Stock-Based Compensation




The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During 2008, the Company recorded an expense of $252,792 compared to $156,395 during 2007. This increase is primarily due to the issuance of new options in 2008 and it also has a full year effect of the option granted in 2007.




Discontinued Operations




On December 23, 2008, A+ filed a Notice of Intent to file a Proposal.  The Company wrote-down the carrying value A+, resulting in a charge of $1,571,369 (2007 - $292,848, 2006 - $57,906) to net loss, included in the write-down was $274,852 of future income tax assets.




All comparative figures have been adjusted to exclude results from the discontinued operations.  The net assets of A+ were presented as assets and liabilities of the discontinued operations at their carrying value.




32




Net Loss




The Company reported a net loss of ($3,882,843) for the year ended December 31, 2008 as compared to a net loss of ($925,040) in 2007 in accordance with Canadian GAAP.   The loss for 2008 is comprised of the following:




2008


2007Operating loss

$
(2,311,474
)

$
(632,192
)Loss from the operations of A+


(450,238
)


(292,848
)Write off of goodwill from the acquisition of A+


(1,121,131
)


-Net Loss

$
(3,882,843
)

$
(925,040
)





Fiscal Year Ended December 31, 2007 vs. Fiscal Year Ended December 31, 2006





Revenue and Margin





Lingo Media earned Print-Based English Language Learning revenues at December 31, 2007 and December 31, 2006 in China as follows:





2007


2006Revenue

$
879,626


$
894,073Cost of Sales


113,318



132,968Margin

$
766,308


$
761,105





Revenues from China for the year ended December 31, 2007 were $879,626 compared to $894,073 for 2006. The Company continues to advance its relationship with PEP and has developed new programs to maintain and increase its royalty revenue.





In July 2006, the Company entered into a publishing agreement with Yilin Press to co-publish a Vocational English For College program in China.  In addition, the Company developed a new educational program – Lingo Kindergarten English – aimed at China’s vast pre-school market.





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





Lingo Media earned revenue from its Early Childhood Development segment in the year ended December 31, 2007 and December 31, 2006.  In December 2008, the Company filed a Notice of Intent to File a Proposal under the Bankruptcy and Insolvency Act; all results from this operation are included in discontinued operations.





2007


2006Revenue

$
3,124,731


$
680,264Cost of Sales


644,758



186,309Margin

$
2,479,973


$
493,955





33





In 2006, Lingo Media expanded into early childhood development sector through the acquisition of A+ effective October 1, 2006.  Revenues and expenses of A+ for the period from October 1, 2006 to December 31, 2006 were included in the consolidated statements of operations of the Company.   A+ had reported revenues of $3.1 million in 2006, of which $680,264 had been recognized as revenue and included in the operations of Lingo Media for the period from October 1, 2006 to December 31, 2006. A+ derives revenues from publishing and distribution of educational materials aimed at the early childhood market.  A+ has developed a successful and proprietary curriculum for parents to use with their children based on the latest neuroscience research.   As of December 23, 2008, A+ filed a Notice of Intent to File a Proposal under the Bankruptcy and Insolvency Act.  All results from this operation are included in discontinued operations.





The Company had no unearned revenues as at December 31, 2007.





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 out the details for the general and administrative expenses for 2007 as compared to 2006:





General and administrative expenses were $946,307 during fiscal 2007 as compared to $809,260 for fiscal 2006. Overall, general and administrative expenses increased due to the acquisition of Speak2Me operations into the financials of Lingo Media.  Below is the detailed analysis of general and administrative expenses for the year ended December 31, 2007 and 2006:





2007


2006Administration


183,777



76,622Advertising and promotion


17,797



42,127Consulting fees and employee compensation


405,715



442,669Equipment leases


16,891



12,197Executive compensation


201,233



147,291Foreign exchange


(103,505
)


6,690Premises


118,145



109,663Professional fees


129,395



56,843Shareholder services


49,740



45,984Travel


91,664



51,4731,110,852



991,560Less Grants


(164,545
)


(182,300
)Total


946,307



809,260




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.




34





These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The Company 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, the conditions for the repayment of grants did not arise and no liability was recorded. Included as a reduction of general and administrative expenses, are government grants of $164,545 for fiscal 2007 (2006 – $182,300), relating to the Company's publishing projects in China and Canada.  While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the Company will 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 $103,505 (2006 - $7,968), relating to currency translation rates in respect of the Company’s activities denominated in foreign currencies.





Interest on Debt




In 2007, the Company had loans payable bearing interest at 12% (2006 - 12%) per annum.  Interest expense related to these loans for the year ended December 31, 2007 is $27,077.  At December 31, 2007, the outstanding loans were in the aggregate sum of $431,705 plus accrued interest of $14,705.





Amortization





The following is a summary amortization schedule:





2007


2006Property Plant and Equipment

13,465


64,402Development Costs

99,805


156,648Acquired Publishing Content

nil


53,003113,270


274,053




Amortization expense includes amortization of property and equipment, development costs and acquired publishing content. The amortization charge for 2007 was $113,270 (2006 - $274,053). This represents a significant decrease over 2006 due to reduced carrying values of these assets.




35





Stock-Based Compensation





The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During 2007, the Company expensed $156,395 compared to $193,819 during 2006.





Net Loss





The Company reported a net loss of ($925,040) for fiscal 2007 as compared to a net loss of ($748,924) for fiscal 2006. The Company reported taxes paid of $127,267 for the fiscal year ended December 31, 2007 compared to taxes paid of $160,465 for fiscal 2006.





5.B Liquidity and Capital Resources





Fiscal Year Ended December 31, 2009






Liquidity and Capital Resources




As at December 31, 2009, the Company had cash and cash equivalents of $201,451 compared to $2,279,937 at the end of 2008.  This decrease resulted from the loss of $2.5 million and an investment of $920,000 for the development of our software and web products.  Accounts and grants receivable of $569,571 were outstanding at the end of 2009 compared to $642,543 at the end of 2008 as the Company collected its receivables faster than in 2008.  93% of the receivables are from PEP, their collection cycle is normally 180 days, and the Company is aware of the collection cycle and as such it does not anticipate an effect on its liquidity.  Total current assets amounted to $847,976 (2008 - $3,117,249) with current liabilities of $723,113 (2008 - $1,321,411) resulting in a working capital of $124,863 (2008 - working capital of $1,795,836).





Cash used for discontinued operation was ($332,700) at the end of 2009 compared to cash provided by discontinued operations was $10,657 for the year ended 2008; this decrease was a result of the payments made to facilitate the Proposal.  This Proposal was filed and approved by creditors of A+ on March 27, 2009 which significantly reduced the liability from the operation.




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 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 the year were $95,759 compared to $110,430 during 2008, this amount includes a one-time reduction of $45,000 based on anticipated adjustment for a prior period grant.  During 2008, the Company was audited by a government grant agency and was assessed with a repayment amount of $115,075.  The Company believes their claim is unjust and is vigorously disputing the assessment.  At the end of the year, a provision of $45,000 has been recorded in general and administrative expense.




36




The Company plans on raising additional equity through private placement financings, as the capital markets permit, in an effort to finance its growth plans for the China market in addition to financing expansion into international markets.  The Company has been successful in raising sufficient working capital in the past.




The Company has incurred significant losses over the years.  This raises significant doubt about the Company’s ability to continue as a going concern.  The ability of the Company to continue as a going concern is dependent upon raising additional financing through the issuance of equity, debt financing, sales contracts and distribution agreements.  The outcome of these matters is partially dependent on factors outside of the Company’s control.




Fiscal Year Ended December 31, 2008





As at December 31, 2008, the Company had cash and cash equivalents of $2,279,937 (2007 $377,127), and accounts and grants receivable of $642,543 (2007 - $958,179). The Company’s total current assets amounted to $3,117,249 (2007 - $1,716,903) with current liabilities of $1,321,411 (2007 - $1,508,696) resulting in a working capital surplus of $1,795,838 (2007 - working capital surplus of $208,207).




In October 2008, the Company successfully completed a private placement with Orascom Telecom of $5 million by issuing 2,857,143 units at a price of $1.75 per unit (“Unit”), with each Unit consisting of one common share (“Common Share”) and three-quarters (0.75) of one share purchase warrant (“Warrant”).  Each whole Warrant is exercisable to acquire one further Common Share for a period of 24 months from September 15, 2008 (the “Closing Date“): (i) at a price of $4.00 for a period of 12-months from the Closing Date; (ii) at a price of $6.00 per Common Share if exercised between 12-18 months from the Closing Date; and (iii) at a price of $8.00 per Common Share if exercised between 18-24 months from the Closing Date. The Warrants are callable, 120 days after the Closing Date, at the option of Lingo Media, in the event the Common Shares of the Company trade at or over 50% above the strike price of the Warrant for 10 consecutive trading days.




During 2008, the Company repaid loans in the amount of $783,620.  As at December 31, 2008, A+ had a revolving line of credit outstanding in the amount of $80,986 (2007 - $230,000) bearing interest at prime plus 4% per annum.  This bank facility is secured by a general security agreement and a short-term investment of $150,000.  The term of the revolving line of credit requires that certain measurable covenants be met. As at December 31, 2008, the Company was in violation of certain covenants and the Company subsequently paid down and closed the line of credit. The line of credit outstanding at year end is presented as part of current liabilities of discontinued operations.




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 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.




37




Government grants received during the year were $110,430 compared to $164,545 during 2007, this amount includes a one time reduction of $45,000 based on anticipated adjustment for a prior period grant.  During 2008, the Company was audited by a government grant agency and was assessed with a repayment amount of $115,075.  The Company believes their claim is unjust and is vigorously disputing the assessment.  At the end of the year, a provision of $45,000 has been recorded in general and administrative expense.




The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans into international markets in addition to financing growth capital for the China market.  The Company has been successful in raising sufficient working capital in the past.







Fiscal Year Ended December 31, 2007





As at December 31, 2007, the Company had cash on hand of $377,127 (2006 - $94,896), and accounts and grants receivable of $958,179 (2006 - $278,803). The Company’s total current assets amounted to $1,716,903 (2006 - $812,942) with current liabilities of $1,508,698 (2006 - $1,160,069) resulting in a working capital surplus of $208,206 (2006 - working capital deficiency of $347,127).





During the course of 2007, the Company received $775,000 through the exercise of stock options. The Company secured loans in the amount of $84,164 and it repaid $nil of these loans in 2007, $340,000 of the loan proceeds were used to fund the cash portion of the A+ acquisition. As at December 31, 2007, the Company had one line of credit with a balance outstanding of $230,000. The bank facility is secured by a General Security Agreement and the short-term investment of $150,000.





The terms of the revolving lines of credit require the Company to maintain certain measurable covenants such as current ratio, debt to equity ratio and tangible net worth.  As at December 31, 2007, the Company was in violation of all these covenants. Financial statements reflect these facilities as current liability. The Company plans to partially repay and reduce the facilities to an acceptable amount funded through an equity financing.





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.  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.




38





Government grants received during 2007 were $164,545 compared to $182,300 in 2006.  This represents a significant portion of the Company’s sources of funds.





The terms of the $230,000 revolving line of credit require that certain measurable covenants be met.  As at December 31, 2007, the Company was in violation of certain covenants, for which the lender subsequently provided a written waiver stating that it will not demand repayment until April 30, 2008.  As the lines of credit are currently presented as a current liability no additional adjustment is required.





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.





Reconciliation of Canadian and United States Generally Accepted Accounting Principles ("GAAP"):





Development Costs




Under Canadian GAAP, the Company capitalized costs related to English Language Learning products and programs and amortizes these costs on a straight-line basis over periods of up to five years. Under United States GAAP, these costs are expensed as incurred per SFAS No. 2, Research and Development Costs.




Statement of Comprehensive Income




SFAS 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.





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.





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




Expressed in Canadian Dollars
  2009


2008


2007Loss for the year - Canadian GAAP

$
(1,466,184
)

$
(3,882,843
)

$
(925,040
)Impact of US GAAP and adjustments:Amortization of development costs(a)


89,375



128,478



99,805Amortization of software and web development costs


1,395,736Development cost write-off (a)


-



(218,795
)


-Deferred cost write-off (b)


-



157,419



-Deferred cost expense (b)


-



-



-Software and web development cost (c)


(922,322
)


(880,846
)


(4,352,341
)Loss for the year - United States GAAP

$
(2,028,973
)

$
(4,696,587
)

$
(5,177,576
)




39





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 the incremental common shares issuable upon the exercise of stock options using the treasury stock method.





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


2009


2008


2007Numerator for basic and diluted income (loss) per share:Income (loss) – US GAAP


(2,028,973
)


(4,696,587
)


(5,177,576
)Denominator for basic and diluted (loss) per share:Weighted average common shares


12,460,930



10,426,861



5,655,792Basic and diluted loss per share – US GAAP

$
(0.16
)

$
(0.45
)

$
(0.92
)




5.E Research and Development





During the years ended December 31, 2009 and 2008, respectively, the Company expended $4,757,807 and $5,344,704 on research and development, under the categories of “development costs”, “software and web development costs” and “deferred costs”.  These expenditures in 2009 and 2008 were primarily directed at developing the Speak2Me and Parlo products for the China market.





5.F Trend Information





Lingo Media believes that the trend in English language learning in China is strong and growing.  The State Ministry of Education in China (“MOE”) is expanding its mandate for the teaching of English learning programs to students.    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.




40





5.F Tabular disclosure of contractual obligations





Our obligations as of December 31, 2009, were as follows:




Expressed in Canadian Dollars





Obligation
Expiring
BalanceEquipment Lease
July 31, 2012
$   37,861Rent in Canada
February 28, 2011
$ 208,482








ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





6.A.  Directors and Senior Management





Table No. 6


Directors and Senior Management


April 30, 2010




Name

Position

Age

Date of

First

Election or

AppointmentMichael P. Kraft

President/CEO/Director

46

November 1996Khurram R. Qureshi

CFO/Secretary/Treasurer

47

April 1997Scott Remborg

Director

60

July 2000Ashraf Halim

Director

44

October 2008Nereida Flannery

Director

38

June 2005Ashesh Shah

Director

41

October 2008Sanjay Joshi

Director

37

October 2007Anthony Lacavera

Director

35

April 2008Michael O’Connor

Director

43

March 2010




Michael P. Kraft is the President & Chief Executive Officer of the Company since its inception in 1996. Mr. Kraft is also the Chairman of Buckingham Group Limited, a private merchant banking corporation and President of MPK Inc., a private business consulting corporation to both private and public corporations since 1994. He is also a director of Pioneering Technology Inc. since July, a TSX Venture listed company.  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 Ltd. since 1997.  Mr. Qureshi received a Bachelor of Administrative Studies from York University in 1987 and received the Chartered Accountant designation in 1990.Mr. Qureshi is also a partner at CQK, Chartered Accountants.




41





Scott Remborg is an independent consultant in Information Technology and eCommerce.  From 2001 to 2003, hewas General Manager, eBusiness, at Air Canada. From 1994 to 1999,Mr. Remborg started 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. Mr. Remborg has an MBA and was educated at the BI Norwegian School of Management in Oslo and the University of Alberta, Canada.





Ashraf Halim has 20 years of commercial and management experience of which 17 are in the telecom industry.  He is currently responsible for Strategic Marketing for Orascom Telecom Holding S.A.E., a role which encompasses market strategy, commercial budget, pricing, products and services roadmap and research. In this capacity, Ashraf spearheaded various successful key strategic commercial initiatives for OTH.  Prior to joining Orascom Telecom Holding S.A.E., Ashraf held the position of Marketing Deputy Director with the Egyptian Company for Mobile Services, and several commercial positions with Lucent Technologies in both Egypt and the UK where he was in charge of the GSM business development for Lucent in the Middle East and Africa. Ashraf holds a BSc. in Engineering from Cairo University.





Nereida Flannery is a Partner and was co-founder of Beijing based The Balloch Group, one of China's premier Investment Banks.  The firm today has 60 employees and is involved with financing through public and private investments and M&A advisory.  She focused on the firm's M&A business in particular in natural resources and was responsible for heading teams that advised on some of China's most important overseas acquisitions of late.   With over 13 years experience in China, Ms. Flannery previously was VP of business development at Alibaba.com in Shanghai and was the General Manager of the Canada China Business Counsel in China (CCBC).  Ms. Flannery has a degree in Political Science from Queen's University and speaks Chinese, Greek and French.





Ashesh Shah is an entrepreneur and corporate advisor who enjoys the dynamic process of taking concepts from “ideation” to commercialization. Mr. Shah co-founded InterMedia Interactive Software in 1991, a firm specializing in consumer-focused education CD-ROM titles. From 1998 to 2004, Mr. Shah built several internet-focused firms targeting healthcare and “clicks and mortar” clients. From 2004-2007, Mr. Shah served as a General Partner with the DCP Group, a boutique consulting firm specializing in cross-border advisory services designed to assist education-market clients in evaluating market opportunities, and building relationship networks to accelerate their success in international markets. Currently, Ashesh is actively pursuing several entrepreneurial activities that leverage his cross-cultural and technology expertise. He serves as the CEO of Maxx Medical.




42





Sanjay Joshi is a partner with Ogilvy Renault LLP in Toronto and practices corporate and securities law, with an emphasis on financing transactions. He obtained his LL.B. degree from Queen's University in 1999. Mr. Joshi represents agents and issuers active in the Canadian and US public markets. He advises Canadian investment dealers, limited market dealers and merchant banks as well as listed issuers in the natural resource, new-media and telecommunications sectors. Mr. Joshi sits on the board, and is Chair of the Audit Committee, for numerous companies, both public and private. He is called to the Bar in Ontario and British Columbia.




Anthony Lacavera co-founded Globalive Communications Corp. in 1998, becoming President and Chief Executive Officer in 1999. Mr. Lacavera also serves as co-founder and Chairman of several of Globalive’s present and past portfolio companies, including Enunciate Conferencing, OneConnect Services, Cohere Conferencing, Cellwand Communications, and most recently as the initial director and principal executive officer of Yak Communications (NASDAQ: YAKC) acquired by Globalive in November 2006. Mr. Lacavera received a B.A.Sc. (Honours) in Computer Engineering from the University of Toronto in 1997.




Michael O’Connorhas twenty years experience in economics, finance and mergers and acquisitions in telecommunications and transportation. He began his career at the Economic Council of Canada/School of Policy Studies Queens University conducting studies of Government’s Impact on Competitiveness in these two sectors.  In 2008 as Orascom Telecom’s representative in Canada, Mr. O’Connor led the efforts in the auction for nationwide AWS spectrum. These efforts culminated in the largest and most expansive award of spectrum across Canada following payment of $442 million. The operation launched in late 2009 across two major urban centers in Canada.





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.





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.




43





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”).





Summary Compensation Table


Expressed in Canadian Dollars




ANNUAL COMPENSATION

LONG-TERM COMPENSATIONAwards

Payouts(NEO)

Name and

Principal

Position

Year

Salary

($)

Bonus

($)

Other

Annual

Compen-sation(1)

($)

Securities

Under

Options/

SARs

Granted(2)

(#)

Restricted

Shares or

Restricted

Share

Units

($)

LTIP(3)

Payouts

($)

All Other

Compen-

sation

($)Michael P. Kraft (4)

President & CEO

2009

2008

2007

180,000

180,000

120,000

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

142,857

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

NilKhurram R. Qureshi

Chief Financial Officer

2009

2008

2007

72,000

101,750

42,942

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

71,429

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil





Notes:


(1)
Perquisites and other personal benefits, securities or property that do not in the aggregate exceed the lesser of $50,000 and 10% of the total of the annual salary and bonus for any NEO for the financial year, if any, are not disclosed.




(2)
"SAR" or "stock appreciation right" means a right granted by the Company, as compensation for services rendered, to receive a payment of cash or an issue or transfer of securities based wholly or in part on changes in the trading price of publicly traded securities of the Company.




(3)
"LTIP" or "long term incentive plan" means any plan which provides compensation intended to serve as incentive for performance to occur over a period longer than one financial year, but does not include option or stock appreciation right plans or plans for compensation through restricted shares or restricted share units.




(4)
Paid, to MPK Inc., a company controlled by Mr. Kraft.  See “Management Agreement".




44





Management AgreementThe Company entered into a consulting agreement ("Consulting Agreement") dated as of October 18, 2007 with MPK Inc. pursuant to which the Company engaged MPK Inc. to provide the services of Michael P. Kraft (the "Consultant") to be the President & Chief Executive Officer of the Company.





The Consulting Agreement provides for an initial term of twenty-four (24) months to begin on January 1, 2008 and renewals for a further two (2) years unless terminated pursuant to the terms thereof.  The Consulting Agreement provides that the Company pay MPK Inc. $15,000 per month plus reimbursement for certain expenses properly incurred in connection with the Company.  In addition to providing an allowance for a health plan and life insurance policy, the Consulting Agreement also provides for an automobile allowance of $1,500 per month.





The Consultant may terminate the Consulting Agreement upon ninety (90) days written notice to the Company and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination. The Consultant may also terminate the Consulting Agreement for the following reasons: (i) a material change in the position, duties and responsibilities of the Consultant; (ii) the Consultant ceases to be the most senior officer of the Company; (iii) any material reduction in the compensation payable to the Consultant in accordance with the terms of the Consulting Agreement; and (iv) the Company's head office being located more than 50 kilometres from its current location and the Consultant's current residence ("Good Cause"). If the Consultant terminates the Consulting Agreement for Good Cause the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination




The Consulting Agreement may be terminated by the Company by giving written notice to the Consultant and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.




In the event of a change of control, the Consultant may, for a period of six (6) months after the effective date of any such change of control, elect to terminate the Consulting Agreement with the Company upon eight weeks notice and the Company shall pay to the Consultant, all amounts due and owing up to the effective date of termination and a settlement amount equal to eighteen (18) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination by voluntary resignation.  In the event of a change of control and if the Company terminates the Consultant without cause, the settlement amount shall be equal to twenty four (24) months of compensation at the rate of compensation payable to the Consultant immediately prior to the effective date of termination.




The Consultant is subject to an 18 month non-complete period following the termination of the Consulting Agreement. 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”.




45





Director Compensation.  The non-management directors of the Company 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 2009 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.





Pension/Retirement Benefits.  No funds were set aside or accrued by the Company during Fiscal 2009 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 three committees: Audit Committee, Compensation Committee and Corporate Governance Committee.




46





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 Scott Remborg, Michael P. Kraft and Sanjay Joshi.





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 Anthony Lacavera and Ashesh Shah.





The Corporate Governance Committee was established to assist the Board by (i) developing, reviewing and planning the Company's approach to corporate governance issues, including developing a set of corporate governance principles and guidelines specifically applicable to the Company; (ii) identifying and recommending to the Board potential new nominees to the Board; (iii) monitoring management's succession plan for the Chief Executive Officer (the "CEO") and other senior management; and (iv) overseeing enforcement of and compliance with the Company's Code of Conduct.  The current members of the Corporate Governance Committee are Sanjay Joshi and Michael P. Kraft.








6.E.  Share Ownership





Table No. 7 lists, as of April 30, 2010, 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.




Table No. 7


Shareholdings of Directors and Executive Officers


Shareholdings of 5% Shareholders




TitleofClass

Name ofBeneficialOwner

Amount

and Nature

of Beneficial

Ownership(1)

Percent

of

ClassCommon

Michael P. Kraft(2)(4)

867,654
(5)

6.96
%Common

Scott Remborg(2)

154,372
(6)

1.24
%Common

Khurram Qureshi

129,490
(9)

1.04
%Common

Ashraf Halim

[nil]Common

Nereida Flannery

[nil]
(7)

*Common

Ashesh Shah(3)

3,000
(8)

*Common

Sanjay Joshi(2)(4)

[nil]
(11)

*Common

Anthony Lacavera(3)

410,260
(10)

3.29
%Common

Gali Bar-Ziv

5,000Common

Michael O’Connor

[nil]


*Common

Orascom Telecom Holding SAE

2,857,143


22.92
%As a group (11 parties)



4,426,919


35.51
%





*  Less than 1%.





(1)
The information as to voting securities beneficially owned, controlled or directed, not being within the knowledge of the Company, has been furnished by the respective individuals.




47




(2)
Member of the Audit Committee.




(3)
Member of the Compensation Committee.




(4)
Member of the Corporate Governance Committee.




(5)
Of such shares, 71,636 are held in Mr. Kraft's RRSP, and 725,304 are held by Buckingham Group Limited, a company controlled by Mr. Kraft.  Mr. Kraft also holds options to purchase up to an additional 142,857 common shares of the Company.




(6)
Of such shares, 3,428 are held in Mr. Remborg's RRSP account. Mr. Remborg also holds options to purchase up to an additional 62,893 common shares of the Company.




(7)
Ms. Flannery also holds options to purchase up to an additional 62,893 common shares of the Company.




(8)
Ashesh Shah also holds options to purchase up to an additional 22,500 common shares of the Company.




(9)
Of such shares, 38,606 shares are held in his wife’s RRSP, 9,819 in his wife’s name and 7,750 are held in Mr. Qureshi’s RRSP.  Mr. Qureshi also holds options to purchase up to an additional 52,486 common shares of the Company.




(10)
Of such shares, 27,040 are held in Mr. Lacavera’s RRSP, 274,820 shares are held in 425243Ontario Inc. and 108,400 in AAL Telecom Holdings Inc., both wholly owned holding companies of Mr. Lacavera.  Mr. Lacavera also holds options to purchase up to an additional 30,000 common shares of the Company.




(11)
Sanjay Joshi also holds options to purchase up to an additional 33,250 common shares of the Company.




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.





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.




48





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
 (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 ofstock options held by any insiders.





Company Stock Option 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. The number of shares which may be reserved for issuance under the 2005 Plan is limited to 5,421,342 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 previously granted.





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 maximum number of common shares which may 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 subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  Options granted 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.




49





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 security 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.





On July 5, 2006 and October 5, 2007, the Company's shareholders ratified and approved an increase in the number of common shares eligible to be issued under the Company's 2005 Plan to approximately 20% of the issued and outstanding common shares as at the date of the respective shareholders meetings.  Currently the 2005 Plan provides that the maximum aggregate number of shares reserved for issuance and which could be purchased upon the exercise of all options granted thereunder could not exceed 6,558,820, which number represented approximately 20% of the 32,794,102 issued and outstanding as at the Company’s last Annual and Special Meeting held on October 5, 2007 (“2007 Shareholder’s Meeting”).





At the 2007 Shareholder’s Meeting, the Company's shareholders also approved a consolidation of the Company's issued share capital on the basis of one (1) new for seven (7) old common shares (the "Consolidation"). As a result, the number of common shares eligible to be issued under the Company's 2005 Plan was also reduced on a one (1) for seven (7) basis.





Currently, the 2005 Plan provides that the maximum aggregate number of shares reserved for issuance and which could be purchased upon the exercise of all options granted thereunder could not exceed 2,491,520, which number represents approximately 20% of the issued and outstanding common shares of the Company as at the Company’s last Annual and Special Meeting held on August 18, 2009.





As of the date hereof, options to purchase an aggregate of 981,962 common shares are outstanding under the 2005 Plan.





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 April 30, 2010, as well as the number of options granted to Directors and officers as a group.




50





Stock Options Outstanding


Expressed in Canadian Dollars




Name

Common

Stock


Exercise

Price

Grant

Date

Expiration

DateKhurram Qureshi

52,486


$
0.70

2/14/07

2/14/12Michael Kraft

142,857


$
0.70

2/14/07

2/14/12Nereida Flannery

10,714


$
1.47

10/17/05

10/17/10Nereida Flannery

21,429


$
0.84

5/22/07

5/22/12Nereida Flannery

30,750


$
1.75

05/01/09

05/01/14Scott Remborg

10,714


$
1.47

10/17/05

10/17/10Scott Remborg

21,429


$
0.84

5/22/07

5/22/12Scott Remborg

30,750


$
1.75

05/01/09

05/01/14Sanjay Joshi

33,250


$
1.75

05/01/09

05/01/14Anthony Lacavera

30,000


$
1.75

05/01/09

05/01/14Ashesh Shah

22,500


$
1.75

05/01/09

05/01/14Total Officers/Directors 406,879





ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





7.A.  Major Shareholders.





7.A.1.a.  Holdings By Major Shareholders.





Refer to ITEM #6.E. and Table No. 7. Other than those shareholders set forth in Table No.7, there are no shareholders who hold more than 5% of the Company's shares.





7.A.1.b.  Significant Changes in Major Shareholders’ Holdings.





There were no significant changes in major shareholders’ holdings.





7.A.2.  Canadian Share Ownership. On March 31, 2010, the Company’s registered shareholders’ list showed 12,465,857 common shares outstanding with 30 registered shareholders, with 8,912,275 owned by 20 shareholders residing in Canada, 156,424 shares owned by 4 registered shareholders in US and 3,397,158 shares owned by 6 foreign registered shareholders.





7.A.3.  Control of Company.  The Company is a publicly owned Canadian corporation, the shares of which are owned by U.S. residents, Canadian residents and other foreign residents.  The Company is not controlled by any foreign government or other person(s) except as described in ITEM #4.A., “History and Development of the Company”, and ITEM #6.E., “Share Ownership”.





7.B.  Related Party Transactions





Michael P. Kraft, President/CEO/Director


Mr. Kraft is compensated indirectly through MPK Inc., as discussed in ITEM #6.B.




51





Funds Owed to Officers/Directors


Officers/Directors have lent the Company funds during the last several years to alleviate the corporate need for working capital.





Interest Payable to Officers/Directors





Officers/Directors have lent the Company funds during the last several years to alleviate the corporate need for working capital.  Officer/Director loans bear interest at 12% per annum interest payable totaled:





From January 2008 through October 2008, LMK Inc., a company controlled by the wife of Michael P. Kraft, loaned the Company an aggregate of $60,000. These loans bore interest at 12% per annum.  These loans were repaid in full in the first quarter of 2009.





Other than as disclosed above, there have been no transactions since December 31, 2009, or proposed transactions, which have materially affected or will materially affect the Company in which any director, executive officer, or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates has had or will have any direct or material indirect interest.  Management believes the transactions referenced above were on terms at least as favorable to the Company as the Company could have obtained from unaffiliated parties.





ITEM 8.  FINANCIAL INFORMATION





8.A.  Consolidated Statements and Other Financial Information


The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP, except as discussed in footnotes to the financial statements.





The financial statements as required under ITEM #17 are attached hereto and found immediately following the text of this Annual Report.  The audit reports of Collins Barrow Toronto LLP, Chartered Accountants, Meyers, Norris Penny, LLP and Mintz & Partners LLP are included herein immediately preceding the financial statements and schedules.





Audited Financial Statements


for Fiscal 2009 and Fiscal 2008




8.A.7.  Legal/Arbitration Proceedings





The Directors and the management of the Company do not know of any material, active or pending, legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation.





The Directors and the management of the Company know of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company.





8.A.8 Company Policy on Dividend Distribution




52





The Company does not intend to pay dividends in cash or in kind in the foreseeable future. The Company expects to retain any earnings to finance the further growth of the Company. The directors of the Company will determine if and when dividends should be declared and paid in the future based upon the earnings and financial conditions of the Company at the relevant time and such other factors as the directors may deem relevant. All of the Common Shares of the Company are entitled to an equal share in any dividends declared and paid.





8.B.  Significant Changes





No significant change has occurred since the date of the annual financial statements.





ITEM 9.  THE OFFER AND LISTING





9.A.4.  Common Share Trading Information





The Company's common shares began trading on the Alberta Stock Exchange in Calgary, Alberta, Canada under its former name Alpha Ventures Inc. in November 1996.  The Alberta Stock Exchange was absorbed by the Canadian Venture Exchange, which was absorbed by the TSX Venture Exchange (“Exchange”).  The Company’s listing was automatically transferred from the Alberta Stock Exchange to the Exchange as a Tier 2 company.  The current stock symbol on the Exchange is “LM”. The CUSIP number is 5357441065.





The Exchange currently classifies Issuers into different tiers based on standards, including historical financial performance, stage of development and financial resources of the Issuer at the time of listing.  Specific Minimum Listing Requirements for each industry segment in each of Tier 1, Tier 2 and Tier 3 have been established by the Exchange.





Policy 2.1 of the Exchange outlines the Minimum Listing Requirements for each industry segment in Tier 1 and Tier 2.  Under this policy, Lingo Media Corporation is a Tier 2 Issuer in the industry segment category of Junior Industrial.  Each industry segment is further divided into categories.  Quantitative minimum requirements for listing for the industry segment Junior Industrial and Tier 2 are provided in Section 4.3 of Exchange Policy 2.1.





Similarly, Policy 2.5 of the Exchange sets out the minimum standards to be met by Issuers to continue to qualify for listing in each Tier, referred to as Tier Maintenance Requirements (“TMR”).  A Tier 2 Issuer which fails to meet one of the Tier 2 TMR will not automatically be suspended or designated as “Inactive”.  The Exchange will provide notice of failure to meet one of the Tier 2 TMR and will allow the Issuer 6 months from the date of notice to meet the requirement, failing which the Exchange may designate the Issuer as Inactive.  If a Tier 2 Issuer fails to meet more than one Tier 2 TMR, notice will be given to the Issuer by the Exchange and if the requirements are not met within 90 days of the notice, the Exchange will designate the Issuer as Inactive and apply the restrictions on Inactive Issuers retroactively.  An Inactive Issuer may continue to trade on Tier 2 of the Exchange for 18 months from the date it is designated as Inactive.  If the Issuer does not meet all of the applicable Tier 2 TMR within that 18 month period, its listed shares may be suspended from trading by the Exchange.





To maintain a listing as an active Tier 2 Issuer, an Issuer must meet all Tier 2 TMR for its industry segment as set out in Section 4 of the Exchange Policy 2.5.




53





The table No.9 lists the volume of trading and high, low and closing sales prices on the TSX Venture Exchange for the Company's common shares for: the last 12 months, the last twelve fiscal quarters; and the last five fiscal years.





Table No. 9


TSX Venture Exchange


Common Shares Trading Activity




Period

Sales -- Canadian DollarsEnded

Volume


High


Low


CloseMonthlyApril 2010


452,600



0.75



0.50



0.68March 2010


511,506



0.98



0.59



0.75February 2010


465,148



1.15



0.90



0.99January 2010


918,248



1.58



1.00



1.07December 2009


526,435



1.04



0.80



1.04November 2009


58,636



0.99



0.75



0.96October 2009


148,087



1.05



0.81



0.95September 2009


62,872



1.10



0.85



1.05August 2009


48,954



1.18



0.90



1.10July 2009


43,361



1.20



0.90



1.15June 2009


59,529



1.19



0.99



1.20May 2009


113,835



1.43



0.91



1.05





Quarterly


03/31/2010


1,894,902



1.24



0.83



0.7512/31/2009


733,158



1.05



0.75



1.0409/31/2009


155,187



1.20



0.85



1.0506/30/2009


323,870



1.43



0.66



1.2003/31/2009


245,300



1.05



0.62



0.9012/31/2008


361,125



1.71



0.55



1.1909/30/2008


447,358



1.92



1.36



1.7006/30/2008


542,301



2.20



1.62



1.853/31/2008


463,600



1.83



0.85



1.8112/31/2007


161,557



1.39



1.19



1.199/30/2007


401,886



1.40



1.05



1.196/30/2007


294,400



1.19



0.84



1.053/31/2007


72,291



1.155



0.63



0.87512/31/2006


128,088



1.365



0.70



1.1559/30/2006


123,945



1.47



0.84



1.3656/30/2006


187,668



1.12



0.49



1.053/31/2006


226,664



1.33



0.77



1.05





Yearly


12/31/2009


1,457,515



1.43



0.62



1.0412/31/2008


1,494,984



2.20



0.55



1.1912/31/2007


930,134



1.50



0.63



1.1912/31/2006


666,365



1.47



0.49



1.15512/31/2005


697,765



2.275



0.77



1.1912/31/2004


1,497,789



2.03



1.89



1.96


54





The Company's shares became quoted for trading on the OTC Bulletin Board on January 22, 2004.





The table No.10 lists the volume of trading and high, low and closing sales prices on the OTC Bulletin Board for the Company's common shares for the last 12 months, the last twelve fiscal quarters; and since commencement of trading.





Table No. 10


OTC Bulletin Board


Common Shares Trading Activity




Period

Sales -- US DollarsEnded

Volume


High


Low


CloseMonthlyApril 2010


11,300



0.74



0.59



0.59March 2010


68,900



0.94



0.67



0.68February 2010


94,600



1.00



0.85



0.85January 2010


254,800



1.52



0.92



0.96December 2009


341,700



1.0



0.81



1.00November 2009


1,500



0.96



0.70



0.93October 2009


11,800



0.99



0.82



0.96September 2009


7,900



1.15



0.70



0.99August 2009


2,500



1.09



0.70



0.70July 2009


3,800



1.10



0.75



1.09June 2009


33,300



1.05



0.85



1.05May 2009


20,300



1.01



0.55



1.02




Quarterly


03/31/2010


418,300



1.52



0.67



0.6812/31/2009


355,000



1.00



0.70



1.0009/30/2009


14,200



1.15



0.70



0.9906/30/2009


64,100



1.05



0.51



1.0503/31/2009


20,600



1.24



0.60



0.9012/31/2008


67,041



1.58



0.61



1.2409/30/2008


278,741



1.85



1.30



1.8506/30/2008


58,200



2.00



1.00



1.853/31/2008


144,200



1.79



0.71



1.7912/31/2007


37,089



1.40



0.77



1.229/30/2007


62,944



1.40



0.77



1.336/30/2007


78,952



1.19



0.70



0.913/31/2007


47689



2.10



0.35



0.8412/31/2006


76626



4.06



0.63



1.1769/30/2006


128421



2.66



0.63



1.2886/30/2006


143740



1.19



0.41



1.013/31/2006


144133



1.33



0.7



0.91





Yearly


12/31/2009


453,900



1.24



0.51



1.0012/31/2008


867,582



2.00



0.61



1.2412/31/2007


245,718



1.40



0.21



1.2212/31/2006


492,923



5.80



0.406



1.17612/31/2005


219,321



1.89



0.525



0.80512/31/2004


778,080



3.57



0.84



1.61




55





The Company's common shares became quoted for trading on the Berlin-Bremen Stock Exchange on August 20, 2003.  No trades of the Company's common shares have taken place on the Berlin-Bremen Stock Exchange to this date.





9.A.5.  Common Share Description





Not Applicable





9.C.  Stock Exchanges Identified





The common shares trade on the TSX Venture Exchange, OTCBB and are quoted for trading on the Berlin-Bremen Stock Exchange. Refer to ITEM #9.A.4.





ITEM 10.  ADDITIONAL INFORMATION





10.A.  Share Capital





Not Applicable





10.B.  Memorandum and Articles of Association





Objects and Purposes





The Company’s corporation number as assigned by the Ontario Ministry of Consumer and Commercial Relations is 4020-1165.  The Company’s Articles of Incorporation do not contain the Company’s purpose or its objectives, as neither is required under the laws of Ontario.





Disclosure of Interest of Directors





No director of the Company is permitted to vote on any resolution to approve a material contract or transaction in which such director has a material interest.





Subject to the Articles of Incorporation and any unanimous shareholder agreement, the board may fix their remuneration.





Borrowing Powers of Directors, ByLaws - Section 3.10





The board of directors may from time to time:
 
 (i)
borrow money upon the credit of the Corporation;
 (ii)
issue, reissue, sell or pledge debt obligations of the Corporation;
 (iii)
subject to the Business Corporations Act (Ontario), give a guarantee on behalf of the Corporation to secure performance of an obligation of any person; and
 (iv)
mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Corporation, owned or subsequently acquired, to secure any debt obligations of the Corporation.
  56





Delegation of Power to Borrow, Bylaws – Section 3.11





The board may by resolution delegate all or any of the powers conferred on them by paragraphs (i) and (iii) of section 3.10 hereof, to any one or more of the directors, the Managing Director, the executive committee, the Chairman of the Board (if any), the President, any Vice-President, the Secretary, the Treasurer, any Assistant Secretary, any Assistant Treasurer or the General Manager.





Director Qualification and Retirement





Neither the Articles of Incorporation nor the Bylaws of the Company discuss the retirement or non-retirement of directors under an age limit requirement, and there is no number of shares required for director qualification.





Description of Rights, Preferences and Restrictions Attaching to Each Class of Shares





a) Class/Number of Shares.  The Company’s Articles of Incorporation provide that: the Corporation is authorized to issue two classes of shares, namely an unlimited number of Preferred Shares without nominal or par value (“Preferred Shares”) and an unlimited number of Common Shares (“Common Shares”).





b) Common Shares. The holders of Common Shares shall be entitled:




1)
to vote at all meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote, and on every poll taken at every such meeting, or adjourned meeting, every holder of Common Shares shall be entitled to one vote in respect of each Common Share held; and





2)
subject to the rights of the holders of Preferred Shares, to receive the remaining property of the Corporation upon a dissolution; and





3)
subject to the rights of the holders of Preferred Shares, to receive all other dividends declared by the Corporation.





c) Preferred Shares.  The Preferred Shares as a class shall carry and be subject to the following rights, privileges, restrictions and conditions:





1)
Directors’ Rights to Issue in One or More Series.


The Preferred Shares may at any time or from time to time be issued in one or more series, each series to consist of such number of shares as may before the issue thereof be determined by the Directors by resolution; the Directors of the Company may (subject as hereinafter provided) by resolution fix, from time to time before the issued thereof, the designation, rights, privileges, restrictions and conditions attaching to the shares of such series including, without limiting the generality of the foregoing (1) the issue price, (2) the rate, amount or method of calculation of dividends and whether the same are subject to change of dividends and whether the same are subject to change or adjustment, (3) whether such dividends shall be cumulative, non-cumulative or partly cumulative, (4) the dates, manner and currencies of payments of dividends and the dates from which dividends shall accrue, (5) the redemption and/or purchase prices and terms and conditions of redemption and/or purchase, with or without provision for sinking or similar funds, (6) conversion and/or exchange and/or classification rights, (7) the voting rights if any, and/or (8) other provisions, the whole subject to the following provisions, and to the issue of Certificate(s) of Amendment setting forth such designations, rights, privileges, restrictions and conditions attaching to the shares of each series.





57




2)
Ranking of Preferred Shares.


The Preferred Shares shall be entitled to preference over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares with respect to payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs and may also be given such other preferences not inconsistent with paragraphs (1) and (2) hereof over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares as may be determined in the case of each series of Preferred Shares authorized to be issued.





3)
Amendment with Approval of Holders of Preferred Shares.


The rights, privileges, restrictions and conditions attaching to the Preferred Shares as a class may be repealed, altered, modified, amended or amplified by Certificate(s) of Amendment, but in each case with the approval of the holders of Preferred Shares (only as a class but not as individual series) given as hereinafter specified.





4)
Approval of Holders of Preferred Shares.


Subject to the Provisions of the Business Corporations Act, any consent or approval given by the holders of Preferred Shares as a class shall be deemed to have been sufficiently given if it shall have been given in writing by the holders of at least sixty-six and two-thirds percent (662/3%) of the outstanding Preferred Shares or by a resolution passed at a meeting of holders of Preferred Shares duly called and held upon not less than fifteen days’ notice at which the holders of at least a majority of the outstanding Preferred Shares are present or are represented by proxy and carried by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meetings, in addition to any other consent or approval required by the Business Corporation Act.  If at any such meeting the holders of a majority of the outstanding Preferred Shares are not present or represented by proxy within one-half hour after the time appointed for such meeting, then the meeting shall be adjourned to such date not less than fifteen days thereafter and to such time and place as may be designated by the Chairman, and not less than ten days’ written notice shall be given of such adjourned meeting.  At such adjourned meeting the holders of the Preferred Shares present or represented by proxy may transact the business for which the meeting was originally convened and a resolution passed by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meeting shall constitute the consent or approval of the holders of Preferred Shares.  On every poll taken at every meeting, every holder of Preferred Shares shall be entitled to one vote in respect of each share held.  Subject to the foregoing, the formalities to be observed in respect of the giving or waiving of notice of any such meeting and the conduct thereof shall be those from time to time prescribed in the Bylaws of the Corporation with respect to meetings of shareholders.  Any consent or approval given by the holders of Preferred Shares or a series as a class shall be deemed to have been sufficiently given if in the same manner as provided herein regarding holders of Preferred Shares as a class.





58





d) Dividend Rights.  The Company’s Bylaws provide that holders of common shares shall be entitled to receive dividends and the Company shall pay dividends thereon, as and when declared by the board of directors of the Company out of moneys properly applicable to the payment of dividends, in such amount and in such form as the board of directors may from time to time determine and all dividends which the directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding, subject to the prior rights of any shares ranking senior to the common shares with respect to priority in the payment of dividends.




e) Voting Rights.  Neither the Company’s Bylaws nor its Articles of Incorporation provide for the election or re-election of directors at staggered intervals.




f) Redemption Provisions.  The Company may purchase any of its issued common shares subject to the provisions of the Ontario Business Corporations Act.




g)Sinking Fund Provisions.  Neither the Company’s Articles of Incorporation nor its Bylaws contain sinking fund provisions.




h) Liability to Further Capital Calls by the Company.  Neither the Company’s Articles of Incorporation nor its Bylaws contain provisions allowing the Company to make further capital calls with respect to any shareholder of the Company.




i) Discriminatory Provisions Based on Substantial Ownership.  Neither the Company’s Articles of Incorporation nor its Bylaws contain provisions that discriminate against any existing or prospective holders of securities as a result of such shareholder owning a substantial number of shares.




j) Miscellaneous Provisions.  Neither the Articles of Incorporation nor the Bylaws of the Company address the process by which the rights of holders of stock may be changed.  The general provisions of the Ontario Business Corporations Act apply to this process, and require shareholder meetings and independent voting for such changes.





A meeting of shareholders may be called at any time by resolution or by the Chairman of the Board or by the President and the Secretary shall cause notice of a meeting of shareholders to be given when directed so to do by resolution of the board or by the Chairman or the Board or the President.





The board shall call an annual meeting of the shareholders not later than eighteen (18) months after the Corporation comes into existence and subsequently not later than fifteen (15) months after holding the last preceding annual meeting.




59





A special meeting of shareholders may be called at any time and may be held in conjunction with an annual meeting of shareholders.





Meeting of shareholders shall be held at the place within Canada determined by the board from time to time.  Notwithstanding the above subsection, a meeting of shareholders may be held outside Canada if all the shareholders entitled to vote at that meeting so agree, and a shareholder who attends a meeting of shareholders held outside Canada is deemed to have so agreed except when he attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held.





Neither the Articles of Incorporation nor the Bylaws of the Company discuss limitations on the rights to own securities or exercise voting rights thereon.





Although not expressly enumerated in the Articles, pursuant to Canadian regulations, shareholder ownership must be disclosed by any shareholder who owns more than 10% of the Company’s common stock.





There is no provision of the Company’s Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control of the Company, and that would operate only with respect to a merger, acquisition, or corporate restructuring involving the Company (or any of its subsidiaries).  The Company’s Bylaws do not contain a provision indicating the ownership threshold above which shareholder ownership must be disclosed.  With respect to the matters discussed in this Item 10B, the law applicable to the Company is not significantly different from United States law.  Neither the Articles of Incorporation nor Bylaws contain provisions governing changes in capital that are more stringent than the conditions required by law.





The Ontario Business Corporations Act contains provisions that require a "special resolution" for effecting certain corporate actions.  Such a "special resolution" requires a three-quarters vote of shareholders rather than a simple majority for passage.  The principle corporate actions for which the Company would require a "special resolution" include:




a.  Changing its name;


b.  Changing the place where its registered office is situated;


c.  Adding, changing or removing any restriction on the business or businesses that the corporation may carry on;


d.  Certain reorganizations of the corporation and alterations of share capital;e.  Increasing or decreasing the number of directors or the minimum or maximum number of directors;f.  Any amendment to its articles regarding constraining the issue or transfer of shares to persons who are not resident Canadians; and


g.  Dissolution of the corporation.





10.C.  Material Contracts





Not Applicable




60





10.D.  Exchange Controls





Except as discussed in ITEM #10.E., the Company is unaware of any Canadian federal or provincial laws, decrees, or regulations that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-Canadian holders of the common shares.  The Company is unaware of any limitations on the right of non-Canadian owners to hold or vote the common shares imposed by Canadian federal or provincial law or by the charter or other constituent documents of the Company.





10.E.  Taxation





A brief description of provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of certain taxes, including withholding provisions, to which United States security holders are subject under existing laws and regulations of Canada.  The consequences, if any, of provincial, state and local taxes are not considered.





Security holders should seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any provincial, state or local taxes.





Material Canadian Federal Income Tax Consequences





The discussion under this heading relates to the principal Canadian federal income tax consequences of acquiring, holding and disposing of shares of common stock of the Company for a shareholder of the Company who is not a resident of Canada but is a resident of the United States and who will acquire and hold shares of common stock of the Company as capital property for the purposes of the Income Tax Act(Canada) (the “Canadian Tax Act”).  This summary does not apply to a shareholder who carries on business in Canada through a “permanent establishment” situated in Canada or performs independent personal services in Canada through a fixed base in Canada if the shareholder’s holding in the Company is effectively connected with such permanent establishment or fixed base.  This information is based on the provisions of the Canadian Tax Act and the regulations thereunder and on an understanding of the administrative practices of Canada Customs and Revenue Agency, and takes into account all specific proposals to amend the Canadian Tax Act or regulations made by the Minister of Finance of Canada as of the date hereof.  This discussion is not a substitute for independent advice from a shareholder’s own Canadian and U.S. tax advisors.





The provisions of the Canadian Tax Act are subject to income tax treaties to which Canada is a party, including the Canada-United States Income Tax Convention (1980), as amended (the “Convention”).





Dividends on Common Shares and Other Income.Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian withholding tax at the rate of 25 percent on dividends paid or deemed to have been paid to him or her by a corporation resident in Canada.  The Convention limits the rate to 15 percent if the shareholder is a resident of the United States and the dividends are beneficially owned by and paid to such shareholder, and to 5 percent if the shareholder is also a corporation that beneficially owns at least 10 percent of the voting stock of the payor-corporation.





The amount of a stock dividend (for tax purposes) would be equal to the amount by which the paid up or stated capital of the Company had increased because of the payment of such dividend.  The Company will furnish additional tax information to shareholders in the event of such a dividend.  Interest paid or deemed to be paid on the Company’s debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty.




61





The Convention exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization constituted and operated exclusively to administer a pension, retirement or employee benefit fund or plan, if the organization is a resident of the United States and is exempt from income tax under the laws of the United States.





Dispositions of Common Shares.Under the Canadian Tax Act, a taxpayer’s capital gain or capital loss from a disposition of a share of common stock of the Company is the amount, if any, by which his or her proceeds of disposition exceed (or are exceeded by, respectively) the aggregate of his or her adjusted cost base of the share and reasonable expenses of disposition.  One-half of a capital gain (the “taxable capital gain”) is included in income, and one-half of a capital loss in a year (the “allowable capital loss”) is deductible from taxable capital gains realized in the same year.  The amount by which a shareholder’s allowable capital loss exceeds the taxable capital gain in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to adjustment when the capital gains inclusion rate in the year of disposition differs from the inclusion rate in the year the deduction is claimed.





If a share of common stock of the Company is disposed of to the Company other than in the open market in the manner in which shares would normally be purchased by the public, the proceeds of disposition will, in general terms, be considered as limited to the paid-up capital of the share and the balance of the price paid will be deemed to be a dividend.  In the case of a shareholder that is a corporation, the amount of any capital loss otherwise determined may be reduced by the amount of dividends previously received in respect of the shares disposed of, unless the corporation owned the shares for at least 365 days prior to sustaining the loss and (together with corporations, persons and other entities, with whom the corporation was not dealing at arm’s length) did not own more than five percent of the shares of any class of the corporation from which the dividend was received. These loss limitation rules may also apply where a corporation is a member of a partnership or a beneficiary of a trust that owned the shares disposed of.





Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian tax on taxable capital gains, and may deduct allowable capital losses, realized on a disposition of “taxable Canadian property.”  Shares of common stock of the Company will constitute taxable Canadian property of a shareholder at a particular time if the shareholder used the shares in carrying on business in Canada, or if at any time in the five years immediately preceding the disposition 25 percent or more of the issued shares of any class or series in the capital stock of the Company belonged to one or more persons in a group comprising the shareholder and persons with whom the shareholder did not deal at arm’s length.





The Convention relieves United States residents from liability for Canadian tax on capital gains derived on a disposition of shares unless (a) the value of the shares is derived principally from “real property” in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production, (b) the shareholder was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he or she ceased to be resident in Canada, or (c) the shares formed part of the business property of a “permanent establishment” that the holder has or had in Canada within the 12 months preceding the disposition.




62





Material United States Federal Income Tax Considerations





The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable.  This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at any time.  Holders and prospective holders of shares of the Company should consult their own tax advisors about the Federal; state, local and foreign tax consequences of purchasing, owning and disposing of shares of the Company.





U.S. Holders.  As used herein, a "U.S. Holder" includes a holder of shares of the Company who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity that is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of shares of the Company is effectively connected with the conduct of a trade or business in the United States.  A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, nonresident alien individuals or foreign corporations whose ownership of shares of the Company is not effectively connected with conduct of trade or business in the United States, shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation and shareholders who hold their stock as ordinary assets and not as capital assets.





Distributions on Shares of the Company.  U.S. Holders receiving dividend distributions (including constructive dividends) with respect to shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits as defined under U.S. Federal tax law, without reduction for any Canadian income tax withheld from such distributions.  Such Canadian tax withheld may be credited against the U.S. Holder's United States Federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States Federal taxable income by those who itemize deductions.  (See discussion that is more detailed at "Foreign Tax Credit" below).  To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the shares and thereafter as gain from the sale or exchange of the shares.  Preferential tax rates for net capital gains are applicable to a U.S. Holder that is an individual, estate or trust.  There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation.





Dividends paid on the shares of the Company are not expected to be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations.  A U.S. Holder that is a corporation may be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualifies as a "foreign personal holding company" or a "passive foreign investment company", as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Company.




63





In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. Dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S.Dollar value on the date of receipt.  Any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. Dollars, will be ordinary income or loss.  However, for tax years after 1997, an individual whose realized foreign exchange gain does not exceed U.S. $200 will not recognize that gain, to the extent that there are not expenses associated with the transaction that meet the requirement for deductibility as a trade or business expense (other than travel expenses in connection with a business trip or as an expense for the production of income).





Foreign Tax Credit.A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of shares of the Company may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld.  It will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax.  This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year.  There are significant and complex limitations that apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States Federal income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income.  In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources.  Complex rules govern this classification process.  There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", and "shipping income". The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of shares of the Company should consult their own tax advisors regarding their individual circumstances.





In the case of certain U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), owning 10% or more of the Company's Common Shares, a portion of the qualifying Canadian income tax paid by the Company will also be available as a foreign tax credit for U.S. federal income tax purposes, at the election of the U.S. Holder.





Disposition of Shares of the Company.A U.S. Holder will recognize a gain or loss upon the sale of shares of the Company equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder's tax basis in the shares of the Company.  This gain or loss will be a capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder.  Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year.  Deductions for net capital losses are subject to significant limitations.  Corporate capital losses (other than losses of corporations electing under Subchapter S or the Code) are deductible to the extent of capital gains.  Non-corporate taxpayers may deduct net capital losses, whether short-term or long-term, up to U.S. $3,000 a year (U.S. $1,500 in the case of a married individual filing separately).  For U.S. Holders that are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted.  For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.




64





Other Considerations





In the following circumstances, the above sections of this discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of shares of the Company:





Foreign Personal Holding Company.If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Company's outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the United States and 60% (50% in subsequent years) or more of the Company's gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), the Company would be treated as a "foreign personal holding company".  In that event, U.S. Holders that hold shares of the Company (on the earlier of the last day of the Company's tax year or the last date on which the Company was a foreign personal holding company) would be required to include in gross income for such year their allowable portions of such passive income to the extent the Company does not actually distribute such income.





Foreign Investment Company.If 50% or more of the combined voting power or total value of the Company's outstanding shares are held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701 (a)(31)), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest, it is possible that the Company might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging shares of the Company to be treated as ordinary income rather than capital gain.





Passive Foreign Investment Company.As a foreign corporation with U.S. Holders, the Company will be treated as a passive foreign investment company ("PFIC"), as defined in Section 1297 of the Code, if 75% or more of its gross income in a taxable year is passive income, or the average percentage of the Company’s assets (by value) during the taxable year which produce passive income or which are held for production of same is at least 50%.  Passive income is defined to include gross income in the nature of dividends, interest, royalties, rents and annuities; excess of gains over losses from certain transactions in any commodities not arising inter alia from a PFIC whose business is actively involved in such commodities; certain foreign currency gains; and other similar types of income.  Foreign mining companies that are in the exploration stage may have little or no income from operations and/or may hold substantial cash and short-term securities that pay interest and dividends while awaiting expenditure in connection with the business.  Given the complexities of determining what expenditures may be deductible and of how assets held for production of active income should be valued, the Company, based on advice from its professional advisers, cannot conclude whether it is a PFIC.




65





It is not the intention of the Company to be considered a PFIC and the Company does not consider this to be a material risk.  In the event that it were to become classified as a PFIC, the following should be taken into consideration.  U.S. Holders owning shares of a PFIC are subject to a special tax and to an interest charge based on the value of deferral of U.S. tax attributable to undistributed earnings of a PFIC for the period during which the shares of the PFIC are owned.  This special tax would apply to any gain realized on the disposition of shares of a PFIC.  In addition, the gain is subject to U.S. federal income tax as ordinary income, taxed at top marginal rates, rather than as capital gain income.  The special tax would also be payable on receipt of excess distributions (any distributions received in the current year that are in excess of 125% of the average distributions received during the 3 preceding years or, if shorter, the shareholder's holding period).  If, however, the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund ("QEF") with respect to such shareholder's interest and the Company provides an annual information statement, the above-described rules will not apply.  The Company will provide such an information statement upon request from a U.S. Holder for current and prior taxable years.  Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFIC's ordinary earnings and any net capital gain regardless of whether such income or gain was actually distributed.  A U.S. Holder of a PFIC treated as a QEF can, however, further elect to defer the payment of United States Federal income tax on such income and gain inclusions, with tax payments ultimately requiring payment of an interest factor.  In addition, with a timely QEF election, the electing U.S. Holder will obtain capital gain treatment on the gain realized on disposition of such U.S. Holder’s interest in the PFIC.  Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or persons.





Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold, actually or constructively, marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market (a “mark-to-market election”).  If such an election is made, such U.S. Holder will not be subject to the special taxation rules of PFIC described above for the taxable years for which the mark-to-market election is made.  A U.S. Holder who makes such an election will include in income for the taxable year an amount equal to the excess, if any, of the fair market value of the shares of the Company as of the close of such tax year over such U.S. Holder's adjusted basis in such shares.  In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any of (A) the mark-to-market gains for the shares in the Company included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior year but for Section 1291 interest on tax deferral rules discussed above with respect to a U.S. Holder, who has not made a timely QEF election during the year in which he holds (or is deemed to have held) shares in the Company and the Company is a PFIC (“Non-Electing U.S. Holder”), over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years.  A U.S. Holder's adjusted tax basis in the shares of the Company will be increased or decreased to reflect the amount included or deducted as a result of mark-to-market election.  A mark-to-market election will apply to the tax year for which the election is made and to all later tax years, unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election.




66





The IRS has issued proposed regulations that would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S. Holder that are not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  In such cases, the basis of the Company's shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized.  A U.S. Holder who has made a timely QEF election (as discussed herein) will not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  The transferee's basis in this case will depend on the manner of the transfer.  The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the shares of the Company are transferred.  Each U.S. Holder should consult a tax advisor with respect to how the PFIC rules affect their tax situation.





The PFIC and QEF election rules are complex.  U.S. Holders should consult a tax advisor regarding the availability and procedure for making the QEF election as well as the applicable method for recognizing gains or earnings and profits under the foregoing rules.





Controlled Foreign Corporation.If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes of stock of the Company ("United States shareholder"), the Company could be treated as a "controlled foreign corporation" under Subpart F of the Code. This classification would effect many complex results including the required inclusion by such United States shareholders in income of their pro rata share of "Subpart F income" (as specially defined by the Code) of the Company.  Subpart F requires current inclusions in the income of United States shareholders to the extent of a controlled foreign corporation's accumulated earnings invested in "excess passive" assets (as defined by the Code).  In addition, under Section 1248 of the Code, a gain from the sale or exchange of shares by a U.S. Holder who is or was a United States shareholder at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged.  Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to the U.S. Holders of shares of the Company, a more detailed review of these rules is outside of the scope of this discussion.





If the Company is both a PFIC and controlled foreign corporation, the company will not be treated as a PFIC with respect to United States shareholders of the controlled foreign corporation.  This rule will be effective for taxable years of the Company ending with or within such taxable years of United States shareholders.






Summary





Management believes this discussion covers all material tax consequences.  Nevertheless, this is not intended to be, nor should it be construed to be, legal or tax advice to any holder of common shares of the Company Holders and prospective holders are encouraged to consult their own tax advisers with respect to their particular circumstances.




67





10.F.  Dividends and Paying Agents





Not Applicable





Item 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Foreign Currency Risk





The Company operates one segment of its business in China, and a substantial portion of our operating expenses are in Canadian dollars, whereas our revenue from co-publishing agreements are primarily in Renminbi which is first converted to US dollars then to Canadian dollars.  A significant adverse change in foreign currency exchange rates between the Canadian dollars relative to US dollars or Renminbi to US dollars could have a material effect on our consolidated results of operations, financial position or cash flows. We have not hedged exposures denominated in foreign currencies, as they are not material at this time.





RMB


USD


USD


USD


USDAt 12/31/09



- 5%



- 10%



- 15%Year-end exchange rate for 1 RMB to USD





0.1533



0.1456



0.1380



0.1303Annual co-publishing revenue from China


6,566,387



1,006,621



956,289



905,958



855,627Accounts receivable


3,438,957



527,189



500,829



474,470



448,110USD


CAD


CAD


CAD


CADYear 2009



+ 5%



- 5%



- 10%Average annual exchange rate for 1 USD to CAD






1.1400



1.1970



1.0830



1.0260Annual co-publishing revenue from China


961,398



1,095,994



1,150,793



1,041,194



986,394USD


CAD


CAD


CAD


CADAt 12/31/09



+ 5%



- 5%



- 10%Year-end exchange rate for 1 USD to CAD






1.0510



1.1036



0.9985



0.9459Cash


72,204



75,886



79,681



72,092



68,298Accounts receivable


527,189



554,075



581,779



526,372



498,668Accounts payable


53,963



56,715



59,551



53,879



51,044





Item 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not Applicable





PART II





Item 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





Not Applicable





Item 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS





Not Applicable




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ITEM 15. CONTROLS AND PROCEDURES





15.A.   Within the 90-day period prior to the filing of this report ("Date of Evaluation"), an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.





Changes in Accounting Policies Including Initial Adoption




Effective January 1, 2009, the Company has adopted the following Sections issued or amended by the CICA:





Section 3064, Goodwill and Intangible Assets


EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities


Section 3862 to provide improvements to fair value and liquidity risk disclosures





Adoption of these new accounting standards has no material impact on the amounts reported in the Company’s financial statements as most of them relate primarily to disclosure.




Adoption of International Financial Reporting Standards




The Canadian Accounting Standards Board has confirmed January 1, 2011 as the changeover date for Canadian publicly accountable enterprises to start using International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosures.




As a result, the Corporation has developed a plan to convert its consolidated financial statements to IFRS.  Updates regarding the progress of the conversion plan are provided to the Corporation’s Audit Committee on a timely basis.  The plan addresses the impact of IFRS on accounting policies and implementation decisions, infrastructure, business activities and control activities. A summary status of the key elements of the changeover plan includes identification of differences in Canadian GAAP and IFRS accounting policies; selection of the Corporation’s ongoing IFRS policies; development of financial statement format and quantification of effects of change in initial IFRS disclosures and 2010 financial statements.




Policies and Procedures




The Company did not maintain a complete set of policies and procedures governing decision and authorization processes. As such, reliance was placed on management’s substantive review of period end balances, transactions recorded in each period, scrutiny of business activity and centralized cash management to detect errors and ensure the financial statements do not contain material misstatements. The Company assigned dedicated staff to formulate a plan, using a generally recognized framework, to document key processes and controls, and initiated the creation of a comprehensive set of policies and procedures. The completion of documentation and implementation of the initiative will continue in 2010.




69




Segregation of Duties




Due to resource constraints, the Company is reliant on the performance of compensating procedures during its financial period-end closing process in order to ensure that the financial statements are presented fairly and accurately, in all material respects. Additional compensating control procedures have been performed in the preparation of our financial statements to ensure their reliability.




These Compensating Controls Include:




·
Review of all balances and reconciliations;


·
Review of bank registers and disbursement details in risk locations; and


·
Analytical review and analysis of performance against expectations.





During 2009, the Company enhanced internal controls over financial reporting by introducing the following additional changes:




·
Improved budgetary controls; and


·
Strengthened technical expertise in the accounting and finance areas of the organization





15.B.   There have been no significant changes in the Company's internal controls or the occurrence of events or other factors that could significantly affect these controls, subsequent to the Date of Evaluation.





ITEM 16.  RESERVED








PART III





ITEM 17.  FINANCIAL STATEMENTS





The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP, except as discussed in footnotes to the financial statements.




70





The financial statements as required under ITEM #17 are attached hereto as exhibits.  The audit reports of Collins Barrow Toronto LLP are included herein immediately preceding the financial statements and schedules.




Audited Financial Statements


Auditor's Report, dated April 26, 2010


Consolidated Balance Sheets at December 31, 2009 and December 31, 2008


Consolidated Statements of Operations and Deficit for the years ended December 31, 2009, December 31, 2008 and December 31, 2007


Consolidated Statements of Cash Flows for the years ended December 31, 2009, December 31, 2008 and December 31, 2007


Notes to Financial Statements




ITEM 18.  FINANCIAL STATEMENTS





The Company has elected to provide financial statements pursuant to ITEM #17.





ITEM 19.  EXHIBITS





12.1. Certificate of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


12.2. Certificate of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


13.1  Certificate of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


13.2  Certificate of the CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




71





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




LINGO MEDIA CORPORATIONBy: /s/ “Michael P. Kraft”Michael P. Kraft

President and Chief Executive OfficerBy: /s/ “Khurram R. Qureshi”Khurram R. Qureshi

Chief Financial OfficerMay 4, 2010