UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Annual Report

FORM 20-F



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

OF THE SECURITIES EXCHANGE ACT OF 1934



OR

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

THE SECURITIES EXCHANGE ACT OF 1934



OR

ÿTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from __________ to ________



Commission file number: 333-98397



LINGO MEDIA INC.

(Exact name of Registrant as specified in its charter)



Ontario, Canada

(Jurisdiction of incorporation or organization)



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

(Address of principal executive offices)



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

None



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

Common Shares, without par value

(Title of Class)



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



Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 27,874,773



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 ___

---







LINGO MEDIA INC.

FORM 20-F ANNUAL REPORT

TABLE OF CONTENTS



PART I





|         |                                                            |   
|-------- | ---------------------------------------------------------- | --
|Item 1.  | Identity of Directors, Senior Management and Advisors      | 3 
|Item 2.  | Offer Statistics and Expected Timetable                    | 3 
|Item 3.  | Key Information                                            | 3 
|Item 4.  | Information on the Company                                 | 13
|Item 5.  | Operating and Financial Review and Reports                 | 26
|Item 6.  | Directors, Senior Management and Employees                 | 36
|Item 7.  | Major Shareholders and Related Party Transactions          | 47
|Item 8.  | Financial Information                                      | 48
|Item 9.  | The Offer and Listing                                      | 49
|Item 10. | Additional Information                                     | 54
|Item 11. | Quantitative and Qualitative Disclosures About Market Risk | 66
|Item 12. | Description of Securities Other Than Equity Securities     | 66





PART II





|         |                                                                              |   
|-------- | ---------------------------------------------------------------------------- | --
|Item 13. | Default, Dividend Arrearages and Delinquencies                               | 66
|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 66
|Item 15. | Controls and Procedures                                                      | 66
|Item 16. | Reserved                                                                     | 66









PART III



|         |                      |   
|-------- | -------------------- | --
|Item 17. | Financial Statements | 66
|Item 18. | Financial Statements | 67
|Item 19. | Exhibits             | 67



---

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;

-

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

-

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 environments in China.  In light of the many risks and uncertainties surrounding China and the Internet marketplace, prospective purchasers of our shares should keep in mind that we cannot guarantee that the forward-looking statements described in this annual report will transpire.



PART I



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS



Not applicable



Item 2.  OFFER STATISTICS AND EXPECTED TIMETABLE



Not applicable.



ITEM 3.  KEY INFORMATION



3.A.2.  Selected Financial Data



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



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



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



3

---

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



Please note that the US GAAP reconciliation numbers in the following table are selected from the note 19 of the December 31, 2005 financial statements and note 9 of the interim financial statements as of March 31, 2006.



Table No. 3

Selected Financial Data

Expressed in Canadian Dollars

($ in 000, except per share data)



|                                               |              |         |          |          |          |          |         
|---------------------------------------------- | ------------ | ------- | -------- | -------- | -------- | -------- | --------
|                                               | Unaudited    | Audited
|                                               | Three Months | Year    | Year     | Year     | Year     | Year    
|                                               | Ended        | Ended   | Ended    | Ended    | Ended    | Ended    | Ended   
|                                               | 3/31/06      | 3/31/05 | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01
|                                               |              |         |          |          |          |          |         
|Revenue                                        | $  2         | $  5    | $  906   | $  590   | $  1018  | $  1329  | $  334  
|Gross Profit                                   | 1            | 3       | 783      | 495      | 846      | 885      | 292     
|Net Loss before Discontinued                   |              |         |          |          |          |          | (253)   
|Net Loss after Discontinued                    | (310)        | (266)   | (726)    | (795)    | (257)    | 68       | (146)   
|                                               |              |         |          |          |          |          |         
|(Loss) per Share                               | ($0.01)      | ($0.01) | ($0.03)  | ($0.04)  | ($0.01)  | ($0.00)  | ($0.01) 
|Dividends per Share                            | $0.00        | $0.00   | $0.00    | $0.00    | $0.00    | $0.00    | $0.00   
|                                               |              |         |          |          |          |          |         
|Weighted Avg. Shares                     (000) | 26070        | 23992   | 22627    | 22627    | 18728    | 16023    | 13234   
|Period-end Shares outstanding       (000)      | 27890        | 24109   | 28875    | 24109    | 23545    | 20734    | 17033   
|                                               |              |         |          |          |          |          |         
|Working Capital                                | $28          | $89     | $278     | $271     | $646     | ($516)   | ($85)   
|Long-Term Debt/Loans Payable                   | 53           | -       | -        | -        | -        | 106      | 54      
|Shareholders Equity                           | 843          | 711     | 1088     | 938      | 1620     | 1627     | 1211    
|Total Assets                                   | 1521         | 1267    | 1611     | 1417     | 1798     | 1931     | 1883    
|                                               |              |         |          |          |          |          |         
|US GAAP income (Loss)                          | ($299)       | ($232)  | ($710)   | ($427)   | ($126)   | ($60)    | ($218)  
|US GAAP Basic Loss per Share                   | ($0.01)      | ($0.01) | ($0.03)  | ($0.02)  | ($0.01)  | ($0.00)  | ($0.01) 
|                                               |              |         |          |          |          |          |         
|US GAAP Equity                                 | $398         | $297    | $625     | $482     | $764     | ($531)   | ($123)  
|US GAAP Total Assets                           | $1088        | $1097   | $1391    | $1212    | $990     | $876     | $583    





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

(2)

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

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

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

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

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

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

________________________________________________________________________________







4

---



3.A.3.  Exchange Rates



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



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



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



Table No. 4

U.S. Dollar/Canadian Dollar



|                               |         |      |      |      
|------------------------------ | ------- | ---- | ---- | -----
|                               | Average | High | Low  | Close
|May 2006                       | 1.10    | 1.12 | 1.09 | 1.10 
|April 2006                     | 1.14    | 1.17 | 1.13 | 1.11 
|March 2006                     | 1.15    | 1.17 | 1.13 | 1.17 
|February 2006                  | 1.14    | 1.17 | 1.12 | 1.12 
|January 2006                   | 1.16    | 1.17 | 1.14 | 1.14 
|December 2005                  | 1.16    | 1.17 | 1.15 | 1.17 
|November 2005                  | 1.18    | 1.19 | 1.17 | 1.17 
|October 2005                   | 1.19    | 1.17 | 1.16 | 1.18 
|September 2005                 | 1.18    | 1.19 | 1.16 | 1.16 
|August 2005                    | 1.20    | 1.22 | 1.19 | 1.19 
|July 2005                      | 1.22    | 1.24 | 1.21 | 1.23 
|June 2005                      | 1.23    | 1.25 | 1.22 | 1.22 
|                               |         |      |      |      
|Fiscal Year Ended Dec. 31,2005 | 1.21    | 1.27 | 1.15 | 1.17 
|Fiscal Year Ended Dec. 31,2004 | 1.30    | 1.39 | 1.17 | 1.21 
|Fiscal Year Ended Dec. 31,2003 | 1.40    | 1.57 | 1.29 | 1.29 
|Fiscal Year Ended Dec. 31,2002 | 1.57    | 1.61 | 1.51 | 1.58 
|Fiscal Year Ended Dec. 31,2001 | 1.55    | 1.60 | 1.49 | 1.59 







3.B.  Capitalization and Indebtedness



Not applicable





5

---



3.D.  Risk Factors



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





Risks associated with doing business in China



Risk of failing to achieve market acceptance




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



Our limited experience in China may impede our success



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



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



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





6

---



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



Since the establishment of the Peoples Republic of China (PRC) in 1949, the Communist Party has been the governing political party in China.  The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress.  The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including Ministry of Commerce of the PRC MOFCOM.  Since the late 1970s, the Chinese government has been reforming the Chinese economic system.  Reforms have included decollectivization of farms; legalization of interregional and international trade by individuals and businesses; legalization of markets in most goods and services; elimination of price controls; and privatization of some state-owned productive assets.  Reforms began in the farming sector and rural industry, and were later implemented in various service industries.  In the last five years, China has also begun dismantling large state monopolies in heavy industry. Although the Company believes that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised.  Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the English language learning and training sectors in China.Such developments could reduce, perhaps significantly, the demand for our products and services.  There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business.  Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular.  Changes in government policies might include
  
increased restrictions on the nature of business activities that foreign-owned enterprises may perform or additional tax/fee/license requirements for foreign-owned enterprises; increased restrictions on the publishing industry, including restrictions on the nature of business activities that publishers may perform; additional tax/fee/license requirements; requirements to publish or not to publish certain content; and direct state supervision or control of publisher's activities; and more intensive approval requirements for educational materials.



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



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





7

---







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



Economic risks associated with doing business in China



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



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

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



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







8

---





Other Risk Factors



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



The Companys future success is dependent on the success and ability of its key management and product development teams.  The Company has obtained key man insurance on its senior executive in the amount of $1,000,000.  The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors, particularly with respect to the Companys intended expansion into the distribution of print media products in China, could adversely affect the Companys business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company.





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



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



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



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

9

---



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



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



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



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



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



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



Dependence on key contractors for maintenance of high quality editorial content



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













10

---



Competition is likely to have a tremendous impact on our business



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



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



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



Our public trading market is highly volatile

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



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;





11

---



§

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

§

Changes in earning estimates or recommendations by analysts.



Penny stock rules



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



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



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



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

12

---



Additional Risk Factors Associated With Jintu Joint Venture in China:



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



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



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



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



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



ITEM 4.  INFORMATION ON THE COMPANY



4.A. History and Development of the Company



Introduction



Lingo Media Inc. (the "Company") develops, publishes, distributes and licenses book, audio, video and CD-based products for English language learning for the educational school and retail bookstore markets in China and educational school market in Canada.



13

---





The Companys executive office is located at:

151 Bloor Street West

Suite 703

Toronto, Ontario, Canada M5S 1S4

Telephone:  (416) 927-7000

Facsimile:  (416) 927-1222

E-mail:  kqureshi@lingomedia.com

Website: www.lingomedia.com





The Companys Beijing office is located at:

Kenzo Oriental Tower 11K

48 Dongzhimenwai Dajie

Dongcheng District

Beijing 100027 China



The contact person is: Khurram Qureshi  Chief Financial Officer.



The Company's fiscal year ends December 31st.



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

History and Development



Incorporation and Name Changes



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



The Company currently has three subsidiaries: Lingo Media Ltd. "LML", Lingo Media International Inc. "LMII" and Lingo Group Limited. "LGL".



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



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



14

---



LGL was incorporated under the laws of Delaware on April 6, 1999.  On June 9, 1999, its articles were amended to increase its authorized capital and to include certain provisions with respect to the liability and indemnification of directors. On May 18, 2000 its name was changed from Yangtze OnLine, Inc. to EnglishLingo, Inc. In August 2002, EnglishLingo, Inc. was continued in Ontario, Canada. On October 27th, 2004, its name was changed to Lingo Group Limited. LGL is 83.3% owned by the Company.



Co-Publishing Agreements



1.

Peoples Education Press (PEP), dated August 8, 2000.

2.

Guangzhou Renzhen English Production Group/Crazy English (Renzhen Group), dated October 15, 2000.

3.

Foreign Language Teaching and Research Press (FLTRP), dated September 3, 2000.

4.

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

5.

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



Financings



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



|             |                        |                  |         
|------------ | ---------------------- | ---------------- | --------
|Fiscal 2002: | Private placement,     | 3,700,000 shares | $370,000
|Fiscal 2003: | Warrants exercise,     | 2,751,780 shares | $327,213
|             | Stock option exercise, | 59,000 shares    | $5,900  
|Fiscal 2004: | Stock option exercise, | 565,166 shares   | $93,517 
|Fiscal 2005: | Private placement,     | 3,675,000 shares | $735,000
|             | Stock option exercise, | 90,000 shares    | $10,800 
|Fiscal 2006: | Stock option exercise, | 35,500 shares    | $4,945  



Capital Expenditures



|     |          |                                                                            
|---- | -------- | ---------------------------------------------------------------------------
|2002 | $15,183  | primarily for development costs & property and equipment                   
|2003 | $120.520 | primarily for development costs & property and equipment                   
|2004 | $182,279 | primarily for development costs & property and equipment                   
|2005 | $227,765 | primarily for development costs, deferred costs and property and equipment.
|2006 | $71,822  | primarily for development costs, deferred costs and property and equipment.



Divestiture  Lingo Group Limited



Lingo Group Limited was incorporated pursuant to the laws of Delaware on April 6, 1999 as a wholly-owned subsidiary of the Company. In August 2002, Lingo Group Limited was continued in Canada.

15

---



On December 27, 2001, Lingo Group Limited, a subsidiary of the Company, issued 1,300,000 common shares at $0.0375 per share for total cash proceeds of $48,750 pursuant to the distribution exemption as a closely-held issuer within the meaning of Rule 45-501 of the Ontario Securities Commission. As a result of this offering, the Company recorded a dilution gain of $48,750. Prior to the transaction, the Company owned 100% of Lingo Group Limiteds common shares. Subsequently, the Companys ownership interest was 93.9%.





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



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



4.B.  BUSINESS OVERVIEW



Background



Lingo Media Inc. (the "Company") develops, publishes, distributes and licenses book, audio, video and CD-based products for English language learning for the educational school and retail bookstore market in China and for the educational school market in Canada.



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



Business Focus



Publishing - China



Lingo Media has spent five 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.



16

---



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



Peoples Education Press PEP:



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



Foreign Language Teaching and Research Press FLTRP:



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



Guangzhou Renzhen English Production Group Renzhen Group:



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



China International Publishing Group CIPG:

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



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



17

---



Phoenix Publishing and Media Group PPMG

Phoenix Publishing and Media Group (PPMG), formerly Jiangsu Publishing Group, was established in September 2001. In 2006, Lingo Media signed a co-operation agreement to co-publish a vocational English language learning program with Yilin Press, the foreign-oriented publishing subsidiary of PPMG. The co-publishing agreement includes development, publishing and distribution of Vocational English forCollege, a four level program set that consists of reading & writing textbooks, reading & writing CD's, listening & speaking textbooks listening & speaking CD's, activity books and teacher's books for each level.

Publishing - Canada



Lingo Media adapted The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learningand created a school edition in the summer of 2001 for the primary school market.



The Company has entered the Ontario education market.  The Ontario Ministry of Education has approved and listed The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning as part of their early reading strategy intended to enhance the reading ability of primary school children.  The Out Loud Programwhich now includes student textbooks, teachers source books, poster cards and audiocassettes was launched in Ontario in November 2001.  Marketing began on a Canada-wide basis in January 2002.

China Expansion Plan



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



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



We intend to acquire companies that are involved in the following distribution channels:



·

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





·

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



18

---



As part of the China Expansion Plan, the Company signed a definitive Joint Venture Agreement with Sanlong Cultural Enterprises (Sanlong) in 2005. The joint venture company will be known as Jintu Cultural Media Company (Jintu or the Joint Venture). Jintu will continue Sanlongs recently launched a direct-to-consumer business of distributing educational newspapers located in Shijiazhuang, Hebei Province, China. Jintus first newspaper, Family EDU, was launched in 2005 and has 30,000 subscribers. An annual subscription is  $7.00 (¥52 RMB or ¥1 RMB per issue). Family EDU, a weekly supplemental educational resource, is targeted to parents in Hebei Province where approximately 15 million families with children under the age of 14 reside. Under the JV Agreement, Lingo Media will invest approximately $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The Joint Venture will use the proceeds for Hebei Province, to increase the size of its sales force and for operations.In addition, the Company is negotiating with one Chinese state-owned publishing distribution enterprise to establish a joint venture.  There can be no assurances that the Company will be able to establish additional joint ventures or, even if established, that they will be profitable.



Business Philosophy



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 non-English speaking countries.

The key to publishing successful EFL programs are two simple concepts: quality and relevance. Our core philosophy says that English language learning materials should be relevant to the market we are trying to reach. In a nutshell, our approach involves:





Researching and understanding the market

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



Bilateral Relationships

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



Constant Monitoring of Effectiveness

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

19

---



Comprehensive product development

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

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



Collaborative partnerships

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





Understanding the Market



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

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

Bilateral Development

September 2001 marked the first official launch of a Lingo Media program entitledPEP Primary English. The program was developed by an international team of respected educational writers: Jack Booth, David Booth, Linda Booth and Larry Swartz (award winning Canadian authors of the elementary language arts 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.Starting Line, for example, was specifically created for China, and addresses the needs of primary level students beginning in grade 1. Collaborative Partnerships

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

20

---



Products



Programs for Children:

|        |                                     
|------- | ------------------------------------
|Series: | Beginning English For Young Learners

|                 |                                                                                                                                                                                                                                                                                                           
|---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Program: | English as a Foreign Language (EFL)
      English as a Second Language (EFL)                                                                                                                                                                                                                              
|Description:     | A series of student books, audiocassettes, teacher resource books and ancillary materials. The program promotes oral language use through partner-based activities suited for both large and small groups. It enhances listening, speaking and emerging literacy skills, using an activity-based approach.
|Components:      | Student Books:4
      Audiocassettes:8
      Teacher Resource Books:2                                                                                                                                                                                                                                     
|Target Audience: | Elementary Schools: JK, SK, Grades 1-2                                                                                                                                                                                                                                                                    



|                 |                                                                                                                                                                                                                                                             
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Series:          | PEP Primary English                                                                                                                                                                                                                                         
|Type of Program: | English as a Foreign Language (EFL)
      English as a Second Language (ESL)                                                                                                                                                                                
|Description:     | A series of student books, audiocassettes, teacher resource books and ancillary materials. The program employs a variety of learning strategies to promote interactive, two-way communication as students explore the content through task-based activities.
|Components:      | Student Books:8
      Audiocassettes:16
      Teacher Resource Books:8
      Ancillary Materials:56                                                                                                                                                         
|Target Audience: | Elementary Schools: Grade 3-6                                                                                                                                                                                                                               













21

---



|                 |                                                                                                                                                                                                                                                                                                                                           
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Series:          | Starting Line                                                                                                                                                                                                                                                                                                                             
|Type of Program: | English as a Foreign Language (EFL) 
      English as a Second Language (EFL)                                                                                                                                                                                                                                                             
|Description:     | A series of student books, audiocassettes, teacher resource books and ancillary materials. The program employs interactive, two-way communication to help and encourage students to build word power in listening, speaking, reading, and writing as they participate in task-based activities designed for use in multi-level classrooms.
|Components:      | Student Books:12
      Teacher Resource Books:6
      Ancillary Materials:72                                                                                                                                                                                                                                                              
|Target Audience: | Elementary Schools: Grade     1-6                                                                                                                                                                                                                                                                                                         



|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Series:          | The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Type of Program: | Language Arts
      English as a Second Language (EFL)
      English as a Foreign Language (EFL)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Description:     | A series of student books, audiocassettes, Teacher's Source Books and ancillary materials. The program is based on the principle that becoming fluent in a language depends largely on the participants being involved in authentic, interactive discourse using the language. As young learners experience the sounds of the English language found in these fascinating and inviting materials, they are immediately working with the language, participating in its structures and vocabulary from the inside out. This program presents teachers with hundreds of helpful models of the English language to explore with students.
|Components:      | Student Books:3
      CDs/Audiocassettes:3
      Teacher's Source Books:3
      Poster Card Sets:3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Target Audience: | Elementary Schools: JK, SK, Grades 12                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



22

---



Programs for Juveniles



|                 |                                                                                                                                                                                                                                                             
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Series:          | Reading Practice                                                                                                                                                                                                                                            
|Type of Program: | English as a Foreign Language (ESP)
      English as a Second Language (EFL)                                                                                                                                                                                
|Description:     | A series of student books to supplement the widely used PEP textbooks for grades 7-9. These supplemental books provide a wide range of reading selections and follow-up activities, language games, puzzles, and other sources for developing comprehension.
|Components:      | Student Books:5 
      Ancillary Materials:  Audiocassettes:5                                                                                                                                                                                               
|Target Audience: | Junior Middle Schools: Grades 7-9                                                                                                                                                                                                                           
|Series:          | Subject-Based English                                                                                                                                                                                                                                       
|Type of Program: | English for Special Purposes (ESP)                                                                                                                                                                                                                          
|Description:     | A series of student textbooks, audiocassettes, and teacher resource books.                                                                                                                                                                                  

|                 |                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 | Components: he first set of six subjects includes Law, Mathematics, Physics, Geological Prospecting and Mining, Biology, and Transportation.
This program is required in order to meet the new curriculum mandated by the Chinese State Ministry of Education stating that all third and fourth year students not majoring in English must take English courses related to their subject area.         
|Components:      | Student textbooks:6 
Audiocassettes:12 
Teacher Resource Books: 6                                                                                                                                                                                                                                                                                                                                      
|Target Audience: | Third and fourth year university students majoring in subjects other than English                                                                                                                                                                                                                                                                                                                      
|Series:          | English in Business Communications                                                                                                                                                                                                                                                                                                                                                                     
|Type of Progam:  | English for Special Purposes (ESP)                                                                                                                                                                                                                                                                                                                                                                     
|Descripition:    | A series of self-study books and audiocassettes for adult English learners focused on specific English language needs for a variety of professions and occupations.  The series is designed to develop and enhance listening comprehension, vocabulary development and pronunciation. Subject areas include Insurance, Marketing, Meetings, Negotiations, Banking, Presentations and English for Hosts.
|Components:      | Self-Study Books: 6 
Audiocassettes:12                                                                                                                                                                                                                                                                                                                                                                 
|Target Audience: | Self-Study Adult Market                                                                                                                                                                                                                                                                                                                                                                                

23

---



United States vs. Foreign Sales/Assets



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



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



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



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



Dependency upon intellectual property



The Company is dependent on its intellectual property and the contracts in China with various Chinese publishers.



Seasonality



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



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



Research and Development, Trademarks, Licenses, and Etc.



Research and Development



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

Trademarks



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



Employees



As of June 15, 2006, the Company had twenty active employees of which eight were full-time, including the executives.  As of December 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002 and December 31, 2001 there were twenty, ten, eight, five, four, and

24

---



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



4.C. Organization Structure



The Company currently has three active subsidiaries: Lingo Media Ltd., Lingo Media International Inc., and Lingo Group Limited. Refer to ITEM 4.  Information on the Company, 4.A. History and Development of the Company, History and Development for more information.



4.D.  Property, Plant and Equipment



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



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



The Company is outsourcing its manufacturing services.





ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS



The following discussion for the fiscal years ended December 31, 2005 and December 31, 2004 and for the three months ended March 31, 2006 and March 31, 2005 should be read in conjunction with the consolidated financial statements of the Company and the notes thereto.



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



5.A Overview



Lingo Media develops, publishes, distributes and licenses book, audio, video and CD-based products for English language learning for the educational school and retail bookstore market in China and for the educational school market in Canada.





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, acquired publishing content, software development costs and use of estimates as presented in the financial statements of the year ended December 31, 2005 are critical accounting policies and are as follows:



25

---



Revenue recognition:



Royalty revenue from sales by licensees of finished products is recognized based on confirmation of finished products produced by its licensees.  Royalty revenue from audiovisual product is recognized based on the confirmation of sales by its licensees, and when collectibility is reasonably assured.  Royalty revenues are not subject to right of return or product warranties. Amounts received in advance of the confirmation are treated as customer deposits. Revenue from the sale of published and supplemental products is recognized upon delivery and when the risk of ownership is transferred and collectibility is reasonably assured.



Deferred costs, investment and advances:



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



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



Development costs:



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



Acquired publishing content:



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



Software development costs:



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

26

---





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, 2005 and December 31, 2004 and the reported amounts of revenue and expenses during the years then ended.  Actual results may differ from those estimates.  Significant areas requiring the use of management estimates related to the useful lives and impairment of capital assets, development costs, acquired publishing content and software development costs.



Operating Results



Three Months Ended March 31, 2006 vs. Three Months Ended March 31, 2005



Revenue and Margin



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



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



General and Administrative



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



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



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



27

---



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



[f20f002.gif]

Interest on Debt



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



Amortization and Stock-Based Compensation



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



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



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



Net Loss



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



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







28

---



Revenue and Margin



Revenues from China for the year ended December 31, 2005 were $888,546 compared to $534,729 for 2004.  The increase in revenues was largely as a result of an increase in product license royalties from PEP.  The Company continues to enjoy its rapport with PEP and is continually looking for new ways to increase its product base and its royalty revenue.

The Company had no unearned revenues at December 31, 2005.



Revenues from Canada for 2005 fiscal year were $17,811 compared to $54,925 for the prior year, representing a 308% decrease in revenues from 2004.  Our pilot programs decrease in sales figures was largely the result of a difficult Canadian language arts market.   Although the Company experienced a decrease in overall sales from this program in Ontario, the absolute dollar amount of sales represented less than 2% of the Companys overall revenues.  The Company will continue to market this program in Canada during 2006, and source additional content for the Canadian educational market.



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 2005 as compared to 2004:



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



[f20f004.gif]



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



29

---



Government Grants



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



These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The 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 $219,772 for fiscal 2005 (2004  $261,269), 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 needs, 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 $18,373 (2004 - $37,186), relating to the Company's currency risk through its activities denominated in foreign currencies as the Company is exposed to foreign exchange risk as a substantial of its revenue is denominated in US dollars and Chinese Renminbi.



Interest on Debt



During the year the company had loans payable bearing interest at 12 % (2003 - 12%) per annum.  Interest expense related to these loans for the year is $11,767 (2004 - $7,609).  At December 31, 2005, $101,929 (2004 - $77,762) was due to those corporations.



In addition, the company had a bank loan payable bearing interest at prime plus 2.5 percent.   This loan is secured against the Companys accounts receivable from Peoples Education Press, which in turn is insured by the Export Development Corporation.  Interest expense paid on the loan for the year is $9,573. The outstanding balance of the loan at year end was $110,000. Premiums paid on the insurance policy were $21,494 for the year.



Amortization



The following is a summary amortization schedule:



|                                     |         |        
|------------------------------------ | ------- | -------
|                                     | 2005    | 2004   
|Property plant and equipment         | 12,279  | 9,078  
|Development costs                    | 184,870 | 377,903
|Acquired publishing content          | 70,670  | 70,670 
|Software development costs and other | -       | 31,125 
|                                     | 267,819 | 488,776

30

---





Amortization expense includes amortization of property and equipment, development costs, acquired publishing content and software development costs.  The amortization charge for 2005 was $267,819 (2004 - $459,060). This represents a significant decrease over 2004, as the Company wrote-off development costs relating to its 2002 on-line learning project that has

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



Stock-Based Compensation



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



Net Loss



The Company reported a net loss of ($725,732) for fiscal 2005 as compared to a net loss of ($795,377) for fiscal 2004. The Company reported taxes of $128,839 for the fiscal year ended December 31, 2005 compared to taxes of $77,926 for fiscal 2004.  Taxes relate to the applicable withholding taxes due in China.  The decrease in net loss is mainly due to the increased royalty revenue from China and a corresponding increase in general and administrative costs and stock-based compensation.



5.B Liquidity and Capital Resources



Three Months Ended March 31, 2006



As of March 31, 2006, the Company had cash on hand of $14,779 and accounts and grants receivable of $533,511. The Companys current assets amounted to $705,613 and current liabilities of $677,786 resulting in a working capital surplus of $27,827.



The trade receivables from China are insured by the Export Development Corporation (EDC) of Canada. The Company utilized its $150,000 line of credit that has been previously arranged with its financial institution and had an outstanding balance of $130,000 on the credit line at quarter end. The Company decreased its shareholder loans during the period by 50% to $52,992.



The Company believes that current cash on hand along with its accounts receivable and recurring sales will satisfy its working capital requirements for the next 12 months.





Fiscal Year Ended December 31, 2005



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



31

---



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



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



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



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



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



Fiscal Year Ended December 31, 2004



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



32

---



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



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



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



Development Costs



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

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



Software development costs:



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



Statement of comprehensive income

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



Options to consultants

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



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.







33

---



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

Expressed in Canadian Dollars



|                                           |            |            |           
|------------------------------------------ | ---------- | ---------- | ----------
|                                           | 2005       | 2004       | 2003      
|Income (loss) for the year, Canadian GAAP  | ($725,732) | ($795,377) | ($257,082)
|Impact of US GAAP and adjustments:         |            |            |           
|Amortization of development costs          | 133,290    | 346,124    | 135,353   
|Amortization of software development costs | -          | 31,046     | 41,395    
|                                           |            |            |           
|Share issue costs                          | -          | (32,191)   | (45,629)  
|Effect of change in accounting policy      | -          | (8,842)    | -         
|Deferred Costs                             | (117,102)  | -          | -         
|Income (loss) for the year, US GAAP        | ($709,544) | ($459,240) | (125,963) 



The consolidated interim financial statements for the three months ended March 31, 2006 and 2005 are prepared in accordance with GAAP as applied in Canada.  In the following respects, GAAP as applied in the United States differs from that applied in Canada:



Expressed in Canadian Dollars



|                                          |            |           
|----------------------------------------- | ---------- | ----------
|                                          | March 2006 | March 2005
|Income (loss) for the year, Canadian GAAP | ($309,640) | ($265,630)
|Impact of US GAAP and adjustments:        |            |           
|Amortization of development costs         | 26,310     | 33,838    
|Deferred Costs                            | (15,620)   | -         
|Income (loss) for the year, US GAAP       | ($298,950) | ($231,792)





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.

34

---



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



|                                                         |            |            |           
|-------------------------------------------------------- | ---------- | ---------- | ----------
|                                                         | 2005       | 2004       | 2003      
|numerator for basic and diluted income (loss) per share: |            |            |           
|Income (loss)  US GAAP                                  | ($709,544) | ($459,240) | ($125,963)
|Denominator for basic and diluted (loss) per share:      |            |            |           
|Weighted average common shares                           | 24,711,619 | 22,626,746 | 18,727,636
|Basic and diluted loss per share  US GAAP               | ($0.03)    | ($0.04)    | ($0.01)   



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



Research and Development



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



Trademarks



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



Licenses



The Company holds no Licenses.



5.F Trend Information



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

35

---



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



5.F Tabular disclosure of contractual obligations



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

Expressed in Canadian Dollars



|                |                   |         
|--------------- | ----------------- | --------
|Obligation      | Expiring          | Balance 
|Equipment Lease | April 29, 2009    | $37,161 
|Rent in China   | October 31, 2007  | $68,172 
|Rent in Canada  | February 28, 2011 | $618,140



ITEM 6.  DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES



6.A.  Directors and Senior Management



Table No. 6

Directors and Senior Management

June 15, 2006



|                   |                        |     |                                      
|------------------ | ---------------------- | --- | -------------------------------------
|Name               | Position               | Age | Date of First Election or Appointment
|Michael P. Kraft   | President/CEO/Director | 42  | November 1996                        
|Khurram R. Qureshi | CFO/ Director          | 43  | April 1997                           
|Richard J.G. Boxer | Director               | 57  | November 1996                        
|Scott Remborg      | Director               | 57  | July 2000                            
|John P. Schram     | Director               | 63  | June 2004                            
|Bailing Xia        | Director               | 51  | June 2004                            
|Nereida Flannery   | Director               | 35  | June 2005                            





Michael P. Kraft is the President & Chief Executive Officer of the Company since its inception in 1996.  Mr. Kraft has been the President & co-founder of Lingo Media Ltd. (formerly Alpha Corporation), a subsidiary of the Company, since 1994.  Mr. Kraft received a Bachelor of Arts in Economics from York University in 1985.



Khurram R. Qureshi is the Chief Financial Officer of the Company since 1997.  Mr. Qureshi is also the Chief Financial Officer of Canadian Shield Resources Inc. since 1997 and a director since June 2004.  Mr. Qureshi received a Bachelor of Administrative Studies from York University in 1987 and received the Chartered Accountant designation in 1990.



36

---



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



Scott Remborg is an independent consultant in the Information Technology and eCommerce sector.  From 2001 to 2003, Mr. Remborg was General Manager, eBusiness, at Air Canada. Mr. Remborg has also held senior management positions at Reuters and I.P. Sharp Associates.  From 1994 to 1999, Mr. Remborg initiated and led the development of the Sympatico Internet service for Bell Canada and twelve other leading telecommunications companies across Canada.  Mr Remborg has a MBA from BI Norwegian School of Management and the University of Alberta.



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



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



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



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.





37

---











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



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



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



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



6.B.  Compensation



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













38

---



Summary Compensation Table

Expressed in Canadian Dollars

|                                    |                     |                         |            |                                         |                                                |                                                  |                     |                               |  |  | 
|----------------------------------- | ------------------- | ----------------------- | ---------- | --------------------------------------- | ---------------------------------------------- | ------------------------------------------------ | ------------------- | ----------------------------- |  |  | 
|                                    | ANNUAL COMPENSATION | LONG-TERM COMPENSATION  |           
|                                    |                     |                         |            |                                         | Awards                                         | Payouts                                          |                    
|Name and
Principal
Position         | Year                | Salary(1)

($)          | Bonus

($) | Other
Annual
Compen-
sation(1) (2)

($) | Securities
Under
Options/
SARs(3)
Granted

(#) | Restricted
Shares or
Restricted
Share
Units

($) | TIP(4)
Payouts

($) | All Other
Compen-
sation

($)
|Michael P. Kraft(5)
President & CEO | 2005
2004
2003      | 123,489
138,987
124,389 | -
-
-      | 16,144
17,647
16,228                    | 295,000
75,000
-                               | -
-
-                                            | -
-
-               | 36,750(6)-
-                 
|Khurram R. Qureshi
CFO              | 2005
2004
2003      | 96,000
96,000
41,480    | -
-
-      | -
-
-                                   | 300,000
75,000
-                               | -
-
-                                            | -
-
-               | -
-
-                        



(1)

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

(2)

These amounts include automobile allowance.

(3)

Stock appreciation rights.

(4)

Long term incentive plans.

(5)

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

(6)

Represents success fees.



Management Agreement. Lingo Media Ltd. (formerly Alpha Corporation), a wholly-owned subsidiary of the Company, entered into a management agreement (Management Agreement) dated as of May 1, 1998 with Michael P. Kraft & Associates Inc. (MPK Inc.) pursuant to which Lingo Media Ltd. engaged MPK Inc. to provide management services.  The Management Agreement provides for an initial term of 8 months and automatic annual renewals until it is terminated.  The Management Agreement provides that Lingo Media Ltd. is to pay MPK Inc. $3,000 per month plus certain sales commissions. The Management Agreement was renewed on December 3, 1998 for fiscal year 1999 and again on November 22, 1999 for fiscal year 2000.  The Management Agreement was amended on June 30, 2000, whereby Lingo Media Ltd. is to pay MPK Inc. $ 10,000 per month beginning July 2000 in addition to providing an allowance for a health plan and life insurance policy.  MPK Inc. is also to be reimbursed for all travel, entertainment and other expenses incurred.  The Management Agreement also provides for a reasonable automobile allowance and performance bonus based upon his contribution to the ongoing success of the Company.  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.



39

---



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



Change of Control Remuneration.  The Company has no plans or arrangements in respect of remuneration received or that may be received by Executive Officers of the Company in Fiscal 2005 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 2005 to provide pension, retirement or similar benefits for Directors or Executive Officers.



6.C.  Board Practices



6.C.1.  Terms of Office.



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



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



6.C.2. Termination benefits



Not applicable



6.C.3.  Board of Director Committees.



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



40

---



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

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



6.E.  Share Ownership



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



Table No. 7

Shareholdings of Directors and Executive Officers

Shareholdings of 5% Shareholders



|                                          |                             |                                           |                 
|----------------------------------------- | --------------------------- | ----------------------------------------- | ----------------
|Title of Class                            | Name of Beneficial Owner    | Amount and Nature of Beneficial Ownership | Percent of Class
|Common                                    | Michael P. Kraft (1)        | 4,338,618                                 | 14.24%          
|Common                                    | Buckingham Group Ltd. (1)   | 1,713,104                                 | 5.62%           
|Common                                    | Richard A. Sherman (2       | 1,643,437                                 | 5.39%           
|Common                                    | 1077431 Ontario Limited (2) | 1,426,082                                 | 4.68%           
|Common                                    | Richard J. G. Boxer (3)     | 958,000                                   | 3.14%           
|Common                                    | Scott Remborg (4)           | 179,500                                   | *               
|Common                                    | Khurram Qureshi(5)          | 795,280                                   | 2.61%           
|Common                                    | John Schram (6)             | 137,500                                   | *               
|Common                                    | Bailing Xia (7)             | 212,500                                   | *               
|Common                                    | Nereida Flannery (8)        | 37,500                                    | *               
|Directors/Officers as a group (7 persons) | 6,658,898                   | 21.86%                                   



*  Less than 1%.



(1)

Includes 247,500 warrants and 1,180,000 options to purchase shares exercisable within 60 days.  1,713,104 shares are held indirectly by Buckingham Group Ltd. (Formerly Kraft Investments Corp.), a private company controlled by Mr. Kraft.  Includes 287,554 shares held in the registered retirement savings plan.  Includes 415,460 shares owned by members of his family.



(2)

Include 1,426,082 shares held by 1077431 Ontario Limited, a private company controlled by Mr. Sherman. Includes 120,365 shares owned by members of his family.



(3)

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







41

---







(4)

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



(5)

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



(6)

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





(7)

Includes 25,000 warrants and 112,500 options to purchase shares exercisable within 60 days.



(8)

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





#Based on 27,910,273 shares outstanding as of June 15, 2006 and stock options and warrants held by each beneficial holder exercisable within sixty days.

________________________________________________________________________ ________________________



Stock Options



TSX Venture Exchange Rules and Policies



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



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



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



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



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



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

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

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

outstanding common shares of the Company; or

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

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

outstanding common shares of the Company; or

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

associates, within a one year period, of common shares

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

shares of the Company; or

42

---





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

aggregate, exceed 2% of the outstanding common shares of

the Company; or



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

stock options held by any insiders.



Company Stock Option Plans

1996 Plan



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



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



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



2000 Plan

43

---





A subsequent stock option plan (the 2000 Plan) was adopted by the board of directors of the Company on May 30, 2000, with 2,384,074 common shares reserved for issuance under the plan, to encourage ownership of common shares by directors, officers, employees and consultants of the Company.  On June 28, 2002 the shareholders of the Company approved an amendment to the 2000 Plan to increase the number of options to purchase common shares that may be granted under the 2000 Plan to 4,416,765 less the number of shares reserved for issuance pursuant to options granted under the 1996 Plan, provided the number of shares reserved for issuance under stock options granted at any time do not exceed 10% of the Companys then issued and outstanding shares.  The TSX Venture Exchange accepted for filing the Companys amended and restated 2000 Plan for a rolling stock option plan reserving 10% of the issued and outstanding common shares of the Company at the time of a stock option grant, up to a maximum of 4,416,765 common shares, for issuance thereunder.



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



Options may be granted under the 2000 Plan only to directors, officers, employees, consultants of the Company and its subsidiaries and personal holding corporations controlled by a director of officer of the Company and its subsidiaries as designated from time to time by the board of directors.  The number of shares which may be reserved for issuance under the 2000 Plan is currently limited to 4,791,954 common shares less the number of shares reserved for issuance pursuant to options granted under the 1996 Plan (currently 50,000 shares), provided that the board has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common shares which may be reserved for issuance to any one person under the 2000 Plan is 5% of the common shares outstanding at the time of 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 2000 Plan that for any reason is cancelled or terminated prior to exercise will be available for a subsequent grant under the 2000 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.  Options granted under the 2000 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionees employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying. Options granted to optionees 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 2000 Plan are non-transferable.  The 2000 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger of other relevant changes in the Companys capitalization.  The board of directors may from time to time amend or revise the terms of the 2000 Plan or may terminate it at any time

44

---



.



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



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



As of the date hereof, options to purchase an aggregate of 3,172,834 common shares are outstanding under the 2000 Plan.



2005 Plan



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



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

45

---

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



The 2005 Plan provides that the Company may provide financial assistance in respect of options granted under the 2005 Plan by means of loans to optionees.  Under the terms of the 2005 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option.  The 2005 Plan provides that any such loan will be for a term not exceeding 10 years and will be non-interest bearing.  Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances.  Any loans made under the 2005 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes.  In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as 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.



As of the date hereof, options to purchase an aggregate of 475,000 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 June 15, 2006, as well as the number of options granted to Directors and officers as a group.



Stock Options Outstanding

Expressed in Canadian Dollars

|                      |              |             |            |             
|--------------------- | ------------ | ----------- | ---------- | ------------
|Name                  | Common Stock | Exer. Price | Grant Date | Expirn Date
|Richard J.G. Boxer    | 50,000       | $0.10       | 11/01/01   | 11/01/06    
|Richard J.G. Boxer    | 75,000       | $0.19       | 10/05/04   | 10/05/09    
|Richard J.G. Boxer    | 75,000       | $0.21       | 10/17/05   | 10/05/10    
|Nereida Flannery      | 75,000       | $0.21       | 10/17/05   | 10/05/10    
|Michael P. Kraft      | 400,000      | $0.10       | 10/9/02    | 10/9/07     
|Michael P. Kraft      | 410,000      | $0.12       | 6/07/01    | 6/07/06     
|Michael P. Kraft      | 75,000       | $0.19       | 10/05/04   | 10/05/09    
|Michael P. Kraftchram | 295,000      | $0.19       | 1/14/05    | 1/14/10     
|Khurram Qureshi       | 75,000       | $0.19       | 10/05/04   | 10/05/09    
|Khurram Qureshi       | 300,000      | $0.19       | 1/14/05    | 1/14/10     
|Scott Remborg         | 50,000       | $0.10       | 11/01/01   | 11/01/06    
|Scott Remborg         | 75,000       | $0.19       | 10/05/04   | 10/05/09    
|Scott Remborg         | 75,000       | $0.21       | 10/17/05   | 10/05/10    
|John S                | 75,000       | $0.19       | 10/05/04   | 10/05/09    

46

---



|                                  
|----------------------------------
|John Schram                       
|Bailing Xia                       
|Bailing Xia                       
|Total Officers/Directors 2,380,000



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.



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



The participation in private placements of equity by the Company and exercise of stock options/share purchase warrants has lead over the last several year to some significant changes in the holdings of major shareholders; table reflects direct/indirect holdings of common shares, refer to Table No. 7 for additional information.



|                   |            |            |            |           
|------------------ | ---------- | ---------- | ---------- | ----------
|                   | Shares     | Shares     | Shares     | Shares    
|                   | Owned      | Owned      | Owned      | Owned     
|                   | 12/31/2005 | 12/31/2004 | 12/31/2003 | 12/31/2002
|Michael P. Kraft   | 2,495,658  | 2,090,658  | 2,090,658  | 1,940,658 
|Richard A. Sherman | 1,523,072  | 1,523,072  | 1,523,072  | 1,701,695 





7.A.2.  Canadian Share Ownership. On June 6, 2006, the Companys registered shareholders list showed 27,910,273 common shares outstanding with 39 registered shareholders, with 27,562,074 owned by 27 shareholders resident in Canada, 197,199 shares owned by 9 registered shareholders in US and 151,000 shares owned by 3 foreign registered shareholders.  The Company has researched the indirect holding by depository institutions and other financial institutions estimates that there are 671 "holders of record" resident in Canada and 12 in US.



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.



47

---



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.  Principal owed totaled:

Expressed in Canadian Dollars



|                   |             |             |         
|------------------ | ----------- | ----------- | --------
|Name               | 12/31/05    | 12/31/04    | 12/31/03
|Richard J.G. Boxer | $51,649 (1) | $77,762 (1) | $nil    



(1)

867214 Ontario Ltd. a company controlled by Richard J.G. Boxer loaned funds to the Company.



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 June 2004 through November 2004, LMK Inc., a company controlled by the wife of Michael P. Kraft, MPK Inc., a company controlled by Michael P. Kraft, and 867214 Ontario Ltd., a company controlled by Richard J.G. Boxer, loaned the Company an aggregate of $265,000. These loans bore interest at 12% per annum.  At December 31, 2004, $ 77,762 was due to 867214 Ontario Ltd.  This loan was repaid in full during 2005.



From January 2005 through February 2005, LMK Inc., a company controlled by the wife of Michael P. Kraft, MPK Inc., a company controlled by Michael P. Kraft, and 867214 Ontario Ltd., a company controlled by Richard J.G. Boxer, loaned the Company an aggregate of $223,500. These loans bore interest at 12% per annum.  At March 31, 2006, $52,992 was due to 867214 Ontario Ltd.



On September 22, 2005 the TSX Venture Exchange approved a private placement of 3,675,000 units at a price of $0.20 per unit (the Units).  Each Unit consisted of one (1) common share and one-half of a share purchase warrant, each whole warrant entitled the holder to purchase an additional common share of the Company, at an exercise price of $0.40 per warrant share until September 20, 2006.  The only insiders who participated in this private placement were Michael P. Kraft, as to 495,000 Units; Khurram R. Qureshi, as to 175,000 Units; Daniel Wiseman, as to 150,000 Units; Imran Atique, as to 50,000 Units; John Booth, as to 250,000 Units; Jing Zhang, as to 50,000 Units; Nicolas Chapman, as to 185,000 Units; and Bailing Xia, as to 50,000 Units.



Other than as disclosed above, there have been no transactions since December 31, 2003, 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



48

---

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 Mintz & Partners LLP, Chartered Accountants, are included herein immediately preceding the financial statements and schedules

Audited Financial Statements

for Fiscal 2005 and Fiscal 2004



Unaudited Financial Statements

For three months ended March 31, 2006 and March 31, 2005



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



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, and/or since the date of the most recent interim financial statement.



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.  The Companys listing was automatically transferred from the Alberta Stock Exchange to the TSX Venture Exchange TSX VEN as a Tier 2 company.  The current stock symbol on the TSX VEN is LMD. The CUSIP number is 535745-10-3.



49

---

The TSX Venture Exchange (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 Inc. 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.



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



|               |                          |       |      |      
|-------------- | ------------------------ | ----- | ---- | -----
|               | Sales  Canadian Dollars
|Period Ended   | Volume                   | High  | Low  | Close
|Monthly        |                          |       |      |      
|May 2006       | 411,954                  | 0.155 | 0.10 | 0.105
|April 2006     | 586,658                  | 0.16  | 0.13 | 0.13 
|March 2006     | 1,197,250                | 0.175 | 0.11 | 0.15 
|February 2006  | 206,800                  | 0.19  | 0.14 | 0.14 
|January 2006   | 182,600                  | 0.17  | 0.11 | 0.14 
|December 2005  | 285,600                  | 0.18  | 0.11 | 0.17 
|November 2005  | 77,320                   | 0.19  | 0.12 | 0.15 
|October 2005   | 221,640                  | 0.22  | 0.16 | 0.185
|September 2005 | 543,352                  | 0.265 | 0.20 | 0.225
|August 2005    | 611,562                  | 0.23  | 0.11 | 0.21 
|July 2005      | 359,800                  | 0.205 | 0.12 | 0.145
|June 2005      | 522,700                  | 0.21  | 0.12 | 0.19 

50

---



|           |            |       |      |      
|---------- | ---------- | ----- | ---- | -----
|Quarterly  |            |       |      |      
|03/31/2006 | 1,586,650  | 0.19  | 0.11 | 0.15 
|12/31/2005 | 584,560    | 0.22  | 0.11 | 0.17 
|09/30/2005 | 1,514,714  | 0.265 | 0.11 | 0.225
|06/30/2005 | 996,010    | 0.225 | 0.12 | 0.19 
|03/31/2005 | 1,798,072  | 0.325 | 0.18 | 0.18 
|12/31/2005 | 1,035,710  | 0.32  | 0.17 | 0.28 
|9/30/2004  | 901,575    | 0.25  | 0.16 | 0.19 
|6/30/2004  | 2,225,398  | 0.42  | 0.20 | 0.23 
|3/31/2004  | 6,321,843  | 0.66  | 0.20 | 0.42 
|12/31/2004 | 2,361,350  | 0.32  | 0.15 | 0.29 
|9/30/2003  | 1,037,650  | 0.29  | 0.10 | 0.22 
|6/30/2003  | 364,920    | 0.16  | 0.10 | 0.14 
|           |            |       |      |      
|Yearly     |            |       |      |      
|12/31/2005 | 4,884,356  | 0.325 | 0.11 | 0.17 
|12/31/2004 | 10,484,526 | 0.29  | 0.27 | 0.28 
|12/31/2003 | 4,048,806  | 0.32  | 0.08 | 0.29 
|12/31/2002 | 832,800    | 0.15  | 0.04 | 0.10 
|12/31/2001 | 2,118,312  | 0.35  | 0.04 | 0.12 







The Company's shares became quoted for trading on the NASD 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 NASD OTC Bulletin Board for the Company's common shares for the last 12 months, the last twelve fiscal quarters; and since commencement of trading.



51

---



Table No. 10

NASD OTC Bulletin Board

Common Shares Trading Activity



|               |                          |       |       |      
|-------------- | ------------------------ | ----- | ----- | -----
|               | Sales  Canadian Dollars
|Period Ended   | Volume                   | High  | Low   | Close
|Monthly        |                          |       |       |      
|May 2006       | 301,825                  | 0.17  | 0.09  | 0.135
|April 2006     | 503,710                  | 0.14  | 0.11  | 0.135
|March 2006     | 667,030                  | 0.155 | 0.10  | 0.13 
|February 2006  | 209,307                  | 0.19  | 0.12  | 0.13 
|January 2006   | 132,600                  | 0.15  | 0.10  | 0.13 
|December 2005  | 260,282,                 | 0.15  | 0.08  | 0.115
|November 2005  | 67,960                   | 0.199 | 0.11  | 0.13 
|October 2005   | 56,500                   | 0.189 | 0.15  | 0.15 
|September 2005 | 145,689                  | 0.23  | 0.13  | 0.18 
|August 2005    | 292,453                  | 0.24  | 0.08  | 0.185
|July 2005      | 84,100                   | 0.18  | 0.075 | 0.12 
|June 2005      | 79,800                   | 0.145 | 0.11  | 0.14 
|May 2005       | 228,985                  | 0.18  | 0.106 | 0.135
|               |                          |       |       |      
|Quarterly      |                          |       |       |      
|03/31/2006     | 1,008,937                | 0.19  | 0.11  | 0.13 
|12/31/2005     | 384,742                  | 0.199 | 0.08  | 0.115
|09/30/2005     | 252,322                  | 0.24  | 0.075 | 0.18 
|06/30/2005     | 457,285                  | 0.182 | 0.105 | 0.14 
|03/31/2005     | 440,900                  | 0.27  | 0.14  | 0.18 
|12/31/2004     | 379,622                  | 0.36  | 0.125 | 0.23 
|9/30/2004      | 265,106                  | 0.21  | 0.12  | 0.16 
|06/30/2004     | 1,165,962                | 0.35  | 0.13  | 0.18 
|3/31/2004      | 2,312,682                | 0.51  | 0.205 | 0.30 
|               |                          |       |       |      
|Yearly         |                          |       |       |      
|12/31/2005     | 1,535,249                | 0.27  | 0.075 | 0.115
|12/31/2004     | 5,446,562                | 0.51  | 0.12  | 0.23 





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



Registrar/Common Shares Outstanding/Shareholders

52

---



The Company's common shares are issued in registered form and the following information is taken from the records of Computershare Trust Company of Canada (located in Calgary, Alberta, Canada), the registrar and transfer agent for the common shares.



On June 6, 2006, the registered shareholders' list for the Company's common shares showed 31 registered shareholders and 27,910,273 shares issued and outstanding. Nine of these registered shareholders were U.S. residents owning 197,199 shares representing less than one percent of the issued and outstanding common shares.



Common Share Description



All of the authorized common shares of the Company are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets.  Holders of common shares are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders.  Holders of common shares are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available therefore.



Upon liquidation, dissolution or winding up of the Company, holders of common stock are entitled to receive pro rata the assets of Company, if any, remaining after payments of all debts and liabilities.  No shares have been issued subject to call or assessment.  There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.



Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the Business Corporations Act (Ontario).  Unless the Business Corporations Act or the Company's Articles or Memorandum otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution or by a vote of a majority or more of the shares represented at the shareholders' meeting.



There are no restrictions on the repurchase or redemption of common shares of the Company while there is any arrearage in the payment of dividends or sinking fund installments.



Preference Share Description



The Company has not issued any preference shares.  The unlimited number of no-par preference shares designated in the Company's certificate of incorporation is "blank check" preference shares, which authorizes the board of directors to authorize and issue one or more series of preference shares with the designations, rights and preferences as determined, from time to time, by the board of directors.  The board of directors is authorized to make such designations without shareholder approval.



Share Purchase Warrants/Convertible Debenture>



As of June 15, 2006, there were 1,956,150 warrants outstanding to purchase common shares of the Company.



9.C.  Stock Exchanges Identified



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



53

---



ITEM 10.  ADDITIONAL INFORMATION



10.A.  Share Capital



10.A.1.  Authorized/Issued Capital.  As of December 31, 2005, December 31, 2004, and December 31, 2003, the authorized capital of the Company was an unlimited number of common shares without par value and there were 27,874,773, 24,109,773, and 23,544,607 common shares issued and outstanding, respectively.



10.A.4.  Stock Options/Share Purchase Warrants



10.A.5.  Stock Options/Share Purchase Warrants



--- Refer to ITEM #6.E. and Table No. 11. ---





10.A.6.  History of Share Capital





|                                       |                  |           
|-------------------------------------- | ---------------- | ----------
|May 1997; reverse takeover of AC,      | 6,978,828 shares | ---       
|April 1997; stock option exercise,     | 70,000 shares    | $14,000   
|March 1998; acquisition of CSVL,       | 960,000 shares   | $307,200  
|March 2000; stock option exercise,     | 150,000 shares   | $30,000   
|April 2000; private placement,         | 5,000,000 units  | $1,811,872
|November 2000; stock option exercise,  | 40,000 shares    | $8,000    
|May 2001; stock option exercise,       | 100,000 shares   | $20,000   
|November 2001; private placement,      | 1,000,000 shares | $100,000  
|March 2002; private placement,         | 3,700,000 shares | $370,000  
|March 2003; warrants exercise,         | 150,000 shares   | $15,000   
|September 2003; warrants exercise,     | 18,750 shares    | $2,250    
|September 2003; stock option exercise, | 49,000 shares    | $4,900    
|October 2003; stock option exercise,   | 10,000 shares    | $1,000    
|December 2003; warrants exercise,      | 2,583,030 shares | $309,964  
|March 2004; stock option exercise,     | 377,666 shares   | $59,766   
|May 2004; stock option exercise,       | 37,500 shares    | $3,750    
|December 2004; stock option exercise,  | 150,000 shares   | $37,500   
|September 2005; Private Placement,     | 3,675,000 shares | $735,000  
|December 2005; Stock option exercise,  | 90,000 shares    | $10,800   
|
|March 2006; stock option exercise,     | 15,500 shares    | $2,945    
|April 2006; stock option exercise,     | 20,000 shares    | $2,000    



54

---







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.



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



55

---



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.



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.



56

---



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.



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.



57

---

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.



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;



58

---



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



a.  Acquisition Agreements with Alpha Corporation, dated May 7, 1997b.  Acquisition Agreements for CSVL, dated March 5, 1998

c.  Management Agreement with MPK Inc., dated May 1, 1997 and renewed on December 14, 1998 and November 26, 1999 and the      renewal of November 26, 1999 amended dated July 3, 2000, July 1, 2001, July 1, 2002 and July 1, 2003

d.  Performance Shares Escrow Agreement,

dated April 30, 1997 and May 7, 1997



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



59

---

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.



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.



60

---

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.

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.



61

---



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.



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.







62

---



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.



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.

63

---



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.

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



64

---



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.



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.

65

---

10.F.  Dividends and Paying Agents



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

Notwithstanding the aforementioned: the Company is unaware of any dividend restrictions; has no specific procedure for the setting of the date of dividend entitlement; but might expect to set a record date for stock ownership to determine entitlement; has no specific procedures for non-resident holders to claim dividends, but might expect to mail their dividends in the same manner as resident holders.  The Company has not nominated any financial institutions to be the potential paying agents for dividends in the United States.



Item 11 and 12



Not applicable



PART II



Item 13 and 14



Not applicable





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.



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.



The financial statements as required under ITEM #17 are attached hereto as exhibits.  The audit reports of Mintz & Partners LLP, Chartered Accountants, are included herein immediately preceding the financial statements and schedules.

66

---



Audited Financial Statements



Auditor's Report, dated May 1, 2006



Consolidated Balance Sheets at December 31, 2005 and December 31, 2004



Consolidated Statements of Operations and Deficit

for the years ended December 31, 2005 and December 31, 2004



Consolidated Statements of Cash Flows

for the years ended December 31, 2005 and December 31, 2004



Notes to Financial Statements



Unaudited Interim Financial Statements



Consolidated Interim Balance Sheets at March 31, 2006 and December 31, 2005



Consolidated Interim Statements of Operations and Deficit

for the Three Months Ended March 31, 2006 and March 31, 2005



Consolidated Interim Statements of Cash Flows

for the Three Months Ended March 31, 2006 and March 31, 2005



Notes to Consolidated Interim Financial Statements



ITEM 18.  FINANCIAL STATEMENTS



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



ITEM 19.  EXHIBITS



1.  Certificates of Incorporation and Name Changes, By-Laws/Articles, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002.



2.  Instruments defining the rights of holders of equity or debt securities being registered incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002.

4.  Material Contracts:

a.  Acquisition Agreements with Alpha Corporation,(now Lingo Media Ltd.) dated May 7, 1997, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002



b.  Acquisition Agreements for CSVL, dated March 5, 1998, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002



67

---



c.  Management Agreement with MPK Inc., dated May 1, 1997, renewed on December 14, 1998 and November 26, 1999, and the renewal of November 26, 1999 amended July 3, 2000, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002
d. Performance Shares Escrow Agreement, dated April 30, 1997 and May 7, 1997, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002



10. Additional Exhibits:



a. Notice/Information Circular re: Annual General Meeting of Shareholders, July 4, 2001, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002



b.  Stock Option Plan, dated May 22, 2001, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002



















68

---



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 INC.





By: /s/ Michael P. Kraft___________



Michael P. Kraft

President and Chief Executive Officer





By: /s/ Khurram R. Qureshi________



Khurram R. Qureshi

Chief Financial Officer





June 15, 2005





69