Exhibit
2














Consolidated
Financial Statements
 (Expressed
in Canadian dollars)
 LINGO
MEDIA CORPORATION
 December
31, 2007 and 2006
        1
  LINGO
MEDIA CORPORATION
 December
31, 2007 and 2006
 (Expressed
in Canadian dollars)
   CONTENTS
  PageStatement
      of Management’s Responsibility
                3Auditors’
      Report
                4Consolidated
      Balance Sheets
                6Consolidated
      Statements of Deficit
                7Consolidated
      Statements of Operations
                7Consolidated
      Statements of Cash Flows
                8Notes
      to Consolidated Financial Statements
                9
      to 36
 2
  Management’s
Responsibility
   To the
Shareholders of Lingo Media Corporation:
   Management
is responsible for the preparation and presentation of the accompanying
consolidated financial statements, including responsibility for significant
accountingjudgments and estimates
in accordance with Canadian generally accepted accounting principles and
ensuring that all information in the Management Discussion & Analysis is
consistent with the statements. This responsibility includes selecting
appropriate accounting principles and methods, and making decisions affecting
the measurement of transactions in which objective judgment is
required.
  In
discharging its responsibilities for the integrity and fairness of the
consolidated financial statements, management designs and maintains the
necessary accounting systems and related internal controls to provide reasonable
assurance that transactions are authorized, assets are safeguarded and financial
records are properly maintained to provide reliable information for the
preparation of financial statements.
  The Board
of Directors and the Audit Committee include some Directors who are neither
management nor employees of the Company. The Board is responsible for overseeing
management in the performance of its financial reporting responsibilities, and
for approving the financial information included in the annual report. The Audit
Committee has the responsibility of meeting with management and external
auditors to discuss -the internal controls over the financial reporting process,
auditing matters and financial reporting issues. The Committee is also
responsible for recommending the appointment of the Company’s external
auditors.
  Meyers
Norris Penny LLP, an independent firm of Chartered Accountants, is appointed by
the shareholders to audit the consolidated financial statements and report
directly to them; their report follows. The external auditors have full and free
access to, and meet periodically and separately with, both the Audit Committee
and management to discuss their audit findings.
   April 20,
2008
  /s/ “Michael Kraft”
Signed
   /s/
“Khurram Qureshi” Signed
 Chief
Financial Officer
  3
  To the
Shareholders of Lingo Media Corporation:
   We have
audited the consolidated balance sheet of Lingo Media Corporation as at December
31, 2007, and the consolidated statements of operations, deficit and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
  We
conducted our audit in accordance with the Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.
  In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2007, and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
  The
consolidated financial statements as at and for the years ended December 31,
2006 and 2005 were audited by other auditors who expressed an opinion without
reservation on those consolidated financial statements in their report dated May
4, 2007.
  MEYERS NORRIS
PENNY LLP
  /s/
      Meyers Norris Penny LLP.Calgary,
      AlbertaApril
      20, 2008
  4
  April 20,
2008
  Independent
Registered Chartered Accountants
   Comments
by Independent Registered Chartered Accountants on Canada – United States of
America Reporting Differences:
  The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of explanatory paragraphs (following the opinion paragraph)
when the financial statements are affected by conditions and events that cast
substantial doubt on the Company’s ability to continue as a going concern, such
as those described in Note 1 to the financial statements. Our report to the
shareholders dated April 20, 2008 is expressed in accordance with Canadian
reporting standards, which do not require a reference to such conditions and
events in the report of the independent registered chartered accountants when
these are properly accounted for and adequately disclosed in the financial
statements.
   MEYERS NORRIS
PENNY LLP
  /s/
      Meyers Norris Penny LLP.Calgary,
      AlbertaApril
      20, 2008
 5
  LINGO
MEDIA CORPORATION
 Consolidated
Balance Sheets
 (Expressed
in Canadian dollars)
  As
      at December 31
              
              2007
              
              
              2006AssetsCurrent
      assets:Cash
              
              $
              343,338
              
              
              $
              73,169Short
      term investment
              
              
              150,000
              
              
              
              150,000Accounts
      and grants receivable (note 3)
              
              
              1,110,151
              
              
              
              304,924Inventory
              
              
              121,323
              
              
              
              154,276Prepaid
      and sundry assets
              
              
              131,869
              
              
              
              130,5731,856,681
              
              
              
              812,942Investment
      and advances (note 4)
              
              
              182,520
              
              
              
              182,520Deferred
      costs (note 4)
              
              
              157,419
              
              
              
              157,419Property
      and equipment, net (note 5)
              
              
              89,325
              
              
              
              77,304Development
      costs, net (note 6)
              
              
              267,910
              
              
              
              343,308Software
      and web development costs, net (note 7)
              
              
              4,212,564
              
              
              
              -Future
      income taxes (note 12)
              
              
              -
              
              
              
              189,534Goodwill
      (note 8)
              
              
              1,121,131
              
              
              
              1,121,131$
              7,887,550
              
              
              $
              2,884,158Liabilities
      and Shareholders' EquityCurrent
      liabilities:Bank
      loans (note 9)
              
              $
              230,000
              
              
              $
              485,000Accounts
      payable (note 15)
              
              
              822,818
              
              
              
              526,491Accrued
      liabilities
              
              
              227,206
              
              
              
              148,578Less
      current portion of long term debt (note 10)
              
              
              228,674
              
              
              
              -1,508,698
              
              
              
              1,160,069Loans
      payable (note 10)
              
              
              203,031
              
              
              
              347,541Future
      income taxes (note 12)
              
              
              290,145
              
              
              
              -2,001,873
              
              
              
              1,507,610Shareholders'
      equity:Capital
      stock (note 11)
              
              
              10,335,707
              
              
              
              5,028,656Contributed
      surplus (note 11)
              
              
              452,411
              
              
              
              325,293Warrants
      (note 11)
              
              
              -
              
              
              
              -Deficit
              
              
              (4,902,441
              )
              
              
              (3,977,401
              )5,885,677
              
              
              
              1,376,548Commitments
      (note 19)$
              7,887,550
              
              
              $
              2,884,158
  See
accompanying notes to consolidated financial statements.
  Approved
on behalf of the Board:
  “signed” Michael
Kraft
 Director
  “signed” Sanjay
Joshi
 Director
  6
  LINGO
MEDIA CORPORATION
 Consolidated
Statements of Deficit
 (Expressed
in Canadian dollars)
  For
      the years ended December 31
              
              2007
              
              
              2006Deficit,
      beginning of year
              
              $
              (3,977,401
              )
              
              $
              (3,228,477
              )Net
      loss for the year
              
              
              (925,040
              )
              
              
              (748,924
              )Deficit,
      end of year
              
              
              (4,902,441
              )
              
              
              (3,977,401
              )
  See
accompanying notes to consolidated financial statements.
  For
      the years ended December 31
              
              2007
              
              
              2006
              
              
              2005Revenue
      (note 17)
              
              $
              4,004,357
              
              
              $
              1,574,337
              
              
              $
              906,357Direct
      costs
              
              
              758,076
              
              
              
              319,277
              
              
              
              123,107Margin
              
              
              3,246,281
              
              
              
              1,255,060
              
              
              
              783,250Expenses:General
      and administrative (note 13)
              
              
              3,745,276
              
              
              
              1,417,867
              
              
              
              855,118Amortization
      of property and equipment
              
              
              117,386
              
              
              
              222,306
              
              
              
              267,819Interest
      and other financial expenses
              
              
              113,369
              
              
              
              57,097
              
              
              
              42,869Stock-based
      compensation
              
              
              156,395
              
              
              
              193,819
              
              
              
              42,8694,132,426
              
              
              
              1,891,089
              
              
              
              1,380,143Loss
      before income taxes and other taxes
              
              
              (886,145
              )
              
              
              (636,030
              )
              
              
              (596,893
              )Income
      taxes and other taxes (note 12)
              
              
              38,895
              
              
              
              112,895
              
              
              
              128,839Net
      loss for the year
              
              $
              (925,040
              )
              
              
              (748,924
              )
              
              
              (725,732
              )Loss
      per share (note 11 (g))
              
              $
              (0.16
              )
              
              $
              (0.18
              )
              
              $
              (0.21
              )Weighted
      average number ofcommon
      shares outstanding (note 11 (g))
              
              
              5,655,792
              
              
              
              4,060,331
              
              
              
              3,530,231
  See
accompanying notes to consolidated financial statements.
  7
  LINGO
MEDIA CORPORATION
 Consolidated
Statements of Cash Flows
 (Expressed
in Canadian dollars)
  For
      the years ended December 31
              
              2007
              
              
              2006
              
              
              2005Cash
      flows provided by (used in):Operations:Net
      loss for the year
              
              $
              (925,040
              )
              
              $
              (748,924
              )
              
              $
              (725,732
              )Items
      not affecting cash:Amortization
      of property and equipment
              
              
              17,581
              
              
              
              12,655
              
              
              
              12,278Amortization
      of development costs
              
              
              99,805
              
              
              
              156,648
              
              
              
              184,797Amortization
      of acquired publishing content
              
              
              -
              
              
              
              53,003
              
              
              
              70,670Stock-based
      compensation
              
              
              156,395
              
              
              
              193,819
              
              
              
              214,337Income
      taxes
              
              
              -
              
              
              
              (17,426
              )
              
              
              -Inventory
      write down
              
              
              -
              
              
              
              36,279
              
              
              
              -Change
      in non-cash balances related to operations:Accounts
      and grants receivable
              
              
              (555,316
              )
              
              
              223,154
              
              
              
              74,255Inventory
              
              
              32,953
              
              
              
              (11,187
              )
              
              
              (10,793
              )Prepaid
      and sundry assets
              
              
              (1,296
              )
              
              
              16,749
              
              
              
              (1,347
              )Accounts
      payable
              
              
              (111,870
              )
              
              
              285,534
              
              
              
              (5,181
              )Accrued
      liabilities
              
              
              78,628
              
              
              
              84,733
              
              
              
              5,845Cash
      provided by (used in) operating activities
              
              
              (1,208,160
              )
              
              
              285,037
              
              
              
              (180,871
              )Financing:Increase
      in bank loans
              
              
              (255,000
              )
              
              
              45,000
              
              
              
              20,000Advances
      of loans payable
              
              
              84,164
              
              
              
              245.613
              
              
              
              25,000Issuance
      of capital stock
              
              
              775,000
              
              
              
              66,679
              
              
              
              745,800Advances
      from shareholders
              
              
              (319,836
              )
              
              
              -
              
              
              
              -Share
      issue costs
              
              
              (63,750
              )
              
              
              -
              
              
              
              (85,099
              )Cash
      provided by financing activities
              
              
              220,578
              
              
              
              357,292
              
              
              
              705,701Investing:Short
      term investment
              
              
              -
              
              
              
              (150,000
              )
              
              
              -Investment
      and advances
              
              
              -
              
              
              
              -
              
              
              
              (182,520
              )A
      Plus acquisition (note 8)
              
              
              -
              
              
              
              (344,814
              )
              
              
              -Cash
      acquired on acquisition of Speak2Me
              
              
              1,508,521
              
              
              
              -
              
              
              
              -Expenditures
      on software & web development costs
              
              
              (249,352
              )
              
              
              -
              
              
              
              -Purchase
      of property and equipment
              
              
              (29,602
              )
              
              
              (20,785
              )
              
              
              (6,556
              )Deferred
      costs incurred
              
              
              -
              
              
              
              (40,316
              )
              
              
              (117,102
              )Development
      costs
              
              
              28,184
              
              
              
              (91,325
              )
              
              
              (104,106
              )Cash
      used in investing activities
              
              
              1,257,751
              
              
              
              (647,240
              )
              
              
              (410,284
              )Increase
      / (decrease) in cash
              
              
              270,169
              
              
              
              (4,893
              )
              
              
              114,546Cash,
      beginning of year
              
              
              73,169
              
              
              
              144,337
              
              
              
              29,791Bank
      indebtedness assumed on acquisition
              
              
              -
              
              
              
              (66,257
              )
              
              
              -Cash,
      end of year
              
              $
              343,338
              
              
              $
              73,169
              
              
              $
              144,337Supplemental
      cash flow information (note 21)
  See
accompanying notes to consolidated financial statements.
  8
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   Lingo
Media is a diversified print and online education product and services
corporation. Speak2Me Inc. (“Speak2Me”), its new subsidiary acquired during the
year, is a new media company focused on interactive advertising in China through
its Internet-based English Language Learning portal. In China, Lingo Media is a
print-based publisher of English language learning programs through its
subsidiary Lingo Media Ltd. In Canada, Lingo Media through its subsidiary A+
Child Development (Canada) Ltd., specializes in early childhood cognitive
development programs which publishes and distributes educational materials along
with its proprietary curriculum through its four offices in Calgary, Edmonton,
Vancouver and Toronto.
  1. Significant
accounting policies:
  (a) Basis of
presentation:
  These
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles applicable to a going concern, on the
basis that the Company will continue to generate sufficient capital to fund its
operations and commitments. The Company has a plan to improve its operations and
its cash flow from operations. Significant differences between Canadian
generally accepted accounting principles and United States generally accepted
accounting principles, as they relate to these consolidated financial
statements, are explained in note 20.
  These
consolidated financial statements include the accounts of the Company and its
subsidiaries, Lingo Media Ltd. (100%), Lingo Media International Inc. (100%) and
Lingo Group Limited (100%), A+ Child Development (Canada) Ltd. (70.33%) and
Speak2Me Inc. (100%). All inter-company transactions and balances have been
eliminated.
  (b) Revenue
recognition:
  Revenues
from the sale of educational products in Canada are recognized at the time of
delivery and when the risk of ownership is transferred and collectibility is
reasonably assured.
  Royalty
revenue from sales by licensees of finished products in China is recognized
based on confirmation of finished products produced by its licensees. Royalty
revenue from audiovisual product is recognized based on the confirmation of
sales by its licensees, and when collectibility is reasonably assured. Royalty
revenues are not subject to right of return or product warranties. Amounts
received in advance of the confirmation are 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.
  (c) Short
Term Investments
  Short-term
investments include investments that have a duration of longer than 90 days.
Short-term investments are accounted for at the lower of cost and net realizable
value.
  9
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   1. Significant
accounting policies (continued):
  (d) Inventory:
  Inventory
is recorded at the lower of cost and net realizable value and expensed based on
the average cost.
  (e) Property
and equipment:
  Property
and equipment are initially recorded at cost. Amortization is provided using
methods outlined below at rates intended to amortize the cost of assets over
their estimated useful lives.
  Method
              RateComputer
      and office equipment
              declining
      balance 20 %Leasehold
      improvements
              straight-line
      5 years
  The
Company’s policy is to record an impairment loss in the period when it is
determined that the carrying amount of the asset may not be
recoverable.
  (f) 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.
  (g) Development
costs:
  The
Company has capitalized costs related to English Language Learning products and
programs. 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.
  10
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   1. Significant
accounting policies (continued):
  (h) Software
& web development costs:
  The
Company capitalizes all costs related to the development of its Speak2Me online
service.. The Company regularly reviews the carrying values of its software
& web development costs. The Company evaluates the carrying value of these
assets based on the undiscounted value of expected future cash flows. If the
carrying value exceeds the amount recoverable, a write-down of the asset to its
estimated fair value would be charged to operations in the year such a
write-down is determined to be necessary.
  (i) Goodwill:
  Goodwill
represents the excess of the purchase price of acquired companies over the
estimated fair value of the tangible and intangible net assets acquired. In
accordance with CICA 3062 Goodwill and Other Intangible Assets, goodwill is not
amortized but is subject to an impairment test annually, or more frequently if
events or changes in circumstances indicate that the asset may be impaired. The
impairment test consists of a comparison of the carrying value of the Company’s
reporting units with their fair value, and any excess is recorded as a charge to
net earnings. Fair value of goodwill is determined through discounted cash flow
analysis.
  (j) Government
grants:
  The
Company receives government grants based on certain eligibility criteria for
book 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 records a liability for the repayment of
the grants and a charge to operations in the period in which conditions arise
that will cause the government grants to be repayable.
  (k) Future
income taxes:
  The
Company follows the asset and liability method of accounting for income taxes.
Under this method, future income tax assets and liabilities are determined based
on temporary differences between the financial reporting and tax bases of assets
and liabilities, as well as for the benefit of losses available to be carried
forward to future years for income tax purposes. Future income tax assets and
liabilities are measured using substantively enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Future income
tax assets are recorded in the financial statements if realization is considered
more likely than not.
  11
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   1. Significant
accounting policies (continued):
  (l) Foreign
currency translation:
  Monetary
assets and liabilities denominated in foreign currencies are translated into
Canadian dollars at the exchange rates prevailing at the consolidated balance
sheet dates. Non-monetary assets and liabilities are translated at historical
rates. Transactions in foreign currencies are translated into Canadian dollars
at the approximate rates prevailing at the dates of the transactions. Foreign
exchange gains and losses are included in loss or gain for the
year.
  The
Company's integrated foreign operations are translated into Canadian dollars at
exchange rates prevailing at the consolidated balance sheet dates for monetary
items and at exchange rates prevailing at the transaction dates for non-monetary
items. Revenue and expenses are translated at exchange rates prevailing during
the year. Exchange gains and losses are included in loss or gain for the
year.
  (m) 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, 2007 and December 31, 2006
and the reported amounts of revenue and expenses during the years then ended.
Actual results may differ from those estimates.
  The
Company has products in various phases of development at any time during the
year. Each product’s economic viability is determined by management, after
appropriate testing has been completed. When a product is deemed viable, its
accumulated development costs are recorded and amortized over the estimated
period of economic viability. The accumulated development costs of any product
not considered to be economically viable are considered unrecoverable and
included in the current year's earnings.
  Accounts
receivable are stated after evaluation as to their collectibility and an
appropriate allowance for doubtful accounts is provided where considered
necessary. Provisions are made for slow moving and obsolete inventory.
Amortization is based on the estimated useful lives of Property, Plant and
Equipment.
  The
amounts disclosed relating to fair values of stock options issued are based on
management’s estimates of expected stock price volatility, expected lives of the
options, risk-free interest rates and certain other assumptions. By their
nature, these estimates are subject to measurement uncertainty, and the effect
on the consolidated financial statements from changes in such estimates in
future years could be significant.
  12
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   1. Significant accounting policies
(continued):
  The
calculation of future income tax is based on assumptions, which are subject to
uncertainty as to timing and which tax rates are expected to apply when
temporary differences reverse. Future income tax recorded is also subject to
uncertainty regarding the magnitude of non-capital losses available for carry
forward and of the balances in various tax pools as the corporate tax returns
have not been prepared as of the date of financial statement preparation. By
their nature, these estimates are subject to measurement uncertainty, and the
effect on the consolidated financial statements from changes in such estimates
in future years could be significant.
  (n) Earnings
(loss) per share:
  Earnings
(loss) per share is computed using the weighted average number of common shares
that are outstanding during the year. Diluted earnings per share is computed
using the weighted average number of common and 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. Convertible instruments that are anti-dilutive are not included in
the calculation of diluted earnings per share.
  (o) Stock-based
compensation plan:
  The
Company applies the fair value based method of accounting to all stock-based
compensation. The fair value of the options issued in the year is determined
using the Black-Scholes option pricing model. The estimated fair value of the
options is expensed to income over the vesting period. For stock-based
compensation issued to employees and non-employees, the Company recognizes an
expense based on the fair value of the equity instrument issued.
  (p)
Recent accounting pronouncements:
  Financial
instruments
  In
January 2005, the Canadian Institute of Chartered Accountants issued new
recommendations for the recognition and measurement of financial instruments,
and amendments to the existing presentation and disclosure standards, effective
for interim and annual financial statements with fiscal years beginning on or
after October 1, 2006. Section 3855 Financial Instruments – Recognition and
Measurement establishes standards for recognizing and measuring financial
assets, financial liabilities and non-financial derivatives. Section 3861
Financial Instruments – Disclosure and Presentation discusses the presentation
and disclosure of these items. The application of hedge accounting is covered in
Section 3865 Hedges. Section 1530 Comprehensive Income establishes standards for
reporting and displaying certain gains and losses, such as unrealized gains and
losses related to hedges or other derivative instruments, outside of net income,
in a statement of comprehensive income. Section 3251 Equity establishes
standards for the presentation of equity and changes in equity, including
changes arising from those items recorded in comprehensive income. There have
also been numerous consequential amendments made to other Sections.
  13
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
 1. Significant accounting policies
(continued):
  In
December 2006, the Canadian Institute of Chartered Accountants issued Section
3862 Financial Instruments – Disclosures and Section 3863 Financial Instruments
– Presentation to replace Section 3861 Financial Instruments – Disclosure and
Presentation. These new Sections are effective for interim and annual financial
statements with fiscal years beginning on or after October 1, 2007, but may be
adopted in place of Section 3861, before that date.
  General
standards of financial statement presentation
  CICA
Handbook Section 1400 General Standards of Financial Statement Presentation has
been amended to include requirements to assess and disclose an entity’s ability
to continue as a going concern. This amendment is effective for interim and
annual financial statements relating to fiscal years beginning on or after
January 1, 2008. The Company does not expect the adoption of these changes to
have a material impact on its consolidated financial statements.
  Inventories
  CICA
Handbook Section 3031 Inventories replaces corresponding Section 3030 and
establishes new standards for the measurement and disclosure of inventories. The
new Section prescribes that inventories should be measured at the lower of cost
and net realizable value and provides guidance on the determination of cost.
This standard is effective for interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2008. The Company has not yet
determined the impact of the adoption of this new standard on its consolidated
financial statements.
  2. Changes
in accounting policies:
  On
January 1, 2007, the Company adopted the new Canadian accounting standards for
financial instruments – recognition and measurement, financial instruments –
disclosure and presentation, hedging and comprehensive income. Prior periods
have not been restated. Additional disclosure requirements for financial
instruments and accounting changes have been approved by the Canadian Institute
of Chartered Accountants (“CICA”) and will be required disclosure beginning
January 1, 2008. These new standards have no material impact on the Company’s
financial statements.
  (a)
Financial Instruments – Recognition and Measurement:
  This new
standard requires all financial instruments within its scope, including all
derivatives, to be recognized on the balance sheet initially at fair value.
Subsequent measurement of all financial assets and liabilities except those
classified as held-for-trading or available-for-sale are measured at amortized
cost determined using the effective interest rate method. Held-for-trading
financial assets are measured at fair value with changes in fair value
recognized in earnings. Available-for-sale financial assets are measured at fair
value with changes in fair value recognized in other comprehensive income and
reclassified to earnings when derecognized or impaired. There were no changes to
the measurement of existing financial assets and liabilities at the date of
adoption.
  14
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
 2. Changes
in accounting policies (continued):
  Cash and
short term investments are designated as “held-for-trading” and are measured at
carrying value, which approximates fair value due to the short-term nature of
these instruments. Accounts receivable and investment and advances are
designated as “loans and receivables” and accounts payable, accrued liabilities
and bank loans are designated as “other liabilities”, all of which are measured
at carrying value, which approximates fair value due to the short-term nature of
these instruments.
  (b) Other
Comprehensive Income:
  The new
standards establish a new statement of comprehensive income, which is comprised
of net earning and other comprehensive income. The Company currently has no
other comprehensive income items and therefore a separate statement of
comprehensive income is not presented.
  Future
Accounting Changes:
  In 2006,
the CICA issued new accounting standards: “Capital Disclosures,” “Financial
Instruments – Disclosures” and “Financial Instruments – Presentation”. These
standards are anticipated to be adopted for the Company’s interim and annual
reporting effective periods commencing January 1, 2008.
  The
capital disclosures standard establishes guidelines for the disclosure of
information concerning the Company’s capital and how it is managed. The standard
requires disclosure of an entity’s objectives, policies and processes for
managing capital, including the description of what the Company considers
capital and to indicate if the Company has complied with any capital
requirements and the ramifications of non-compliance, if
applicable.
  “Financial
Instruments – Disclosures” and “Financial Instruments – Presentation” replace
“Financial Instruments – Disclosure and Presentation;” revising and enhancing
its disclosure requirements to provide additional information regarding the
risks associated with both recognized and unrecognized financial instruments the
Company is exposed to and how those risks are managed.
  In
January 2006, the CICA Accounting Standards Board (“AcSB”) adopted a strategic
plan for the direction of accounting standards in Canada. As part of that plan,
accounting standards in Canada for public companies are expected to converge
with International Financial Reporting Standards (“IFRS”) by the start of
2011.
  15
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
 3. Accounts
and grants receivable:
  Accounts
and grants receivable consist of:
  2007
              
              
              2006Trade
      receivables
              
              $
              853,384
              
              
              $
              285,141Cash
      advance
              
              
              241,059
              
              
              
              -Grants
      receivable (note 13)
              
              
              15,078
              
              
              
              19,783$
              1,110,151
              
              
              $
              304,924
  4. Deferred
costs, investment and advances:
  In June
2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”)
with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture
company will be known as Hebei Jintu Education Book Co. Ltd. (“Jintu”). Jintu
will continue Sanlong’s recently launched direct-to-consumer business of
distributing educational newspapers and product extensions located in
Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media
invested approximately $365,000 (¥2,550,000 RMB) for its 51% share of
Jintu.
  Pursuant
to the June 2005 agreement, the Company has advanced funds for working capital
to Sanlong through a trust of $182,520, with a view to establishing Jintu and
incurred $157,419 in expenditures related to pre-operating costs to date. These
expenses are included in deferred costs. Upon commencement of the joint venture,
the advances will be converted into Lingo Media’s investment in registered
capital of the joint venture. These advances are non-interest bearing, and are
non-refundable.
  5. Property
and equipment:
  Property
and equipment consists of the following:
  2007
              
              Cost
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying ValueComputer
      and office equipment
              
              $
              279,607
              
              
              $
              190,282
              
              
              $
              89,3252006
              
              Cost
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying ValueComputer
      and office equipment
              
              $
              176,409
              
              
              $
              99,105
              
              
              $
              77,304
  16
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   6. Development
costs:
  Development
costs consist of the following:
  2007
              
              
              2006Cost
              
              $
              1,552,572
              
              
              $
              1,646,446Less
      accumulated amortization
              
              
              (1,284,662
              )
              
              
              (1,303,138
              )$
              267,910
              
              
              $
              343,308
  Subsequent
to the December 31, 2007 year-end, one of the Company's branches was no longer
operational. The resulting impairment provision of $28,738 is included in the
Statement of Operations in General and administrative.
  7. Software
and web development costs:
  In
October 2007, the Company acquired Speak2Me Inc. (“Speak2Me”), a new media
company that has developed software combining speech recognition and animation
technology for the teaching and practice of spoken English. All costs associated
with development of the Speak2Me software and its contents are capitalized as
Software and web development:
  2007
              
              
              2006Cost
              
              $
              4,212,564
              
              
              $
              -
  8. Acquisitions:
  A
+ Child Development (Canada) Ltd.
  In 2006,
the Company acquired 62.33% of the issued and outstanding shares of A + Child
Development (Canada) Ltd. (“A Plus”) for cash and shares plus 3,000,000
additional shares common of Lingo Media to the selling shareholders of A Plus
subject to meeting annual earnings milestones to be held in escrow and released
over a three-year period with a maximum of 1,000,000 shares released per year.
The results of operations of A Plus are included in the consolidated results of
the Company commencing October 1, 2006.
  17
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
 8. Acquisitions
(continued):
  A
+ Child Development (Canada) Ltd.
  Under the
terms of the acquisition, Lingo Media:
  i) acquired
50.33% of the outstanding capital stock of A Plus from its shareholders for the
purchase price of CAD$730,000 satisfied by issuing 378,571 common shares of
Lingo Media and paying CAD$200,000 cash;
  ii) invested
CAD$150,000 in A Plus for an additional 12% interest; and
  iii) issued an
additional 428,871 common shares of Lingo Media to the selling shareholders of A
Plus subject to meeting annual earnings milestones to be held in escrow and
released over a three-year period with a maximum of 142,857 shares released per
year; In 2007, the previously established milestones were not achieved and
consequently 142,857 shares were not earned and will be cancelled.
  The
Company issued 28,500 shares as consulting fees related to this
acquisition.
  During
2007, a further CAD$100,000 was invested in A Plus for an additional 8% interest
resulting in an increase primarily in net current assets on
consolidation.
  8. Acquisitions
(continued):
  The
allocation of the purchase price for the acquisitions are as
follows:
  2006
                A
      + Child Development
                (Canada)
      Ltd.Net
      current assets
              
              $
              186,697Property
      and equipment, net
              
              
              19,844Future
      income taxes
              
              
              172,108Deposits
              
              
              11,336Goodwill
              
              
              1,121,131Current
      liabilities
              
              
              (596,402
              )$
              914,714Share
      consideration
              
              
              569,900$
              914,714
  18
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   Speak2Me
Inc.
  On
October 18, 2007, the Company acquired 100% of the outstanding common shares of
Speak2Me Inc. (“Speak2Me”). The results of Speak2Me’s operations have been
included in these consolidated financial statements since that date. Speak2Me is
a new media company that has developed software combining speech recognition and
avatar technologies for the teaching and practice of spoken
English.
  The
aggregate purchase price was $4,585,087. The acquisition was completed by way of
a share exchange agreement entered into between Lingo Media, Speak2Me and the
shareholders of Speak2Me on the basis of a share exchange ratio of one
post-consolidated common share of Lingo Media for each 3.975 common shares of
Speak2Me. Under the terms of the acquisition, Lingo Media acquired all the
issued and outstanding common shares of Speak2Me in exchange for 4,500,366
post-consolidated common shares of Lingo Media. The common shares were valued at
$4,536,351 based on the average market price of the Company’s shares over a
two-day period before and after the terms of the acquisition were agreed to and
announced. The acquisition has been accounted for using the purchase method,
whereby the total cost of the acquisition has been allocated to the assets
acquired and to the liabilities assumed based upon their respective fair values
at the measurement date.
  As part
of the acquisition, the shareholders of Lingo Media also approved the
consolidation of all its common shares on a one-for-seven basis, and the change
of the Company’s name to Lingo Media Corporation by way of a special resolution
of the shareholders at the Company’s Annual and Special Meeting held on October
5, 2007.
  The
following table summarizes the estimated fair value of the assets acquired and
liabilities assumed on the date of acquisition.
  8. Acquisitions
(continued):
  Speak2Me
      Inc.Current
      assets
              
              $
              1,789,301Property
      and equipment, net
              
              
              17,903Software
      and web development costs
              
              
              3,963,212Current
      liabilities
              
              
              (588,457
              )Future
      income tax liability
              
              
              (564,997
              )$
              4,616,962Cash
      consideration
              
              
              -Share
      consideration
              
              
              4,536,351Business
      acquisition costs
              
              
              80,611$
              4,616,962
  19
 
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   8. Acquisitions
(continued):
  Prior to
the business combination described in above, the Company and some of the
previous shareholders of Speak2Me were related by virtue of common control, by
companies owned by a director, by management, and by immediate family members of
management. The transaction was measured at the exchange amount, which is the
amount of consideration paid or received as established and agreed to by related
parties.
  9.
Bank loans:
  2007
              
              
              2006Revolving
      line of credit of $150,000 bore interest at prime plus 2.5% per annum, was
      due on demand and was secured by the Company’s accounts receivable from
      customers in China, which in turn were secured by the Export Development
      Corporation. This loan was repaid in full during 2007.
              
              $
              -
              
              
              $
              135,000Revolving
      line of credit of $500,000 bearing interest at prime plus 4.0% per annum
      and secured by a $150,000 GIC, bearing interest at 3.5% maturing on
      December 10, 2008, and a charge on all assets including inventory and
      accounts receivables.
              
              
              230,000
              
              
              
              350,000$
              30,000
              
              
              $
              485,000
  The terms
of the $230,000 revolving line of credit require that certain measurable
covenants be met. As at December 31, 2007, the Company was in violation of
certain covenants, for which the lender subsequently provided a written waiver
stating that it will not demand repayment until April 30, 2008. As the lines of
credit are currently presented as a current liability no additional adjustment
is required.
  20
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   10.
Loans payable:
  Loans
payable consists of the following:
  2007
              
              
              2006Loan
      payable, due to a non-related party, interest
                bearing
      at 12% per annum payable monthly,
                unsecured
      and due on demand.
              
              $
              228,674
              
              
              $
              -Loan
      payable, due to a shareholder, interest bearing
                at
      12% per annum, due January 31, 2008.
              
              
              -
              
              
              
              7,541Loan
      payable, due to a non-related party, interest
                bearing
      at 12% per annum with monthly interest payments, secured by a general
      security agreement and due on April 30, 2009.
              
              $
              203,031
              
              
              $
              340,000431,705
              
              
              
              347,541Less:
      Current portion
              
              
              228,674
              
              
              
              -203,031
              
              
              
              347,541The
      principal repayments required are:2008
              
              
              
              
              
              
              228,6742009
              
              
              
              
              
              
              203,031$
              431,705
  21
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   11.
Capital stock, warrants and stock options:
  (a) Authorized:
  Unlimited
preference shares, no par value
  Unlimited
common shares, no par value
   The
following details the changes in issued and outstanding common
shares:
  Common
      SharesNumber
              
              
              AmountBalance,
      January 1, 2006
              
              
              24,109,773
              
              
              $
              3,367,119Issued:Private
      placement (ii)
              
              
              3,675,000
              
              
              
              735,000Options
      exercised
              
              
              90,000
              
              
              
              10,800Less:
      Share issue costs
              
              
              -
              
              
              
              115,948Balance,
      December 31, 2005
              
              
              27,874,773
              
              
              $
              3,996,971Issued:Common
      shares issued for the acquisition ofA +
      Child Development (Canada) Ltd.
              
              
              2,849,500
              
              
              
              735,000Options
      exercised (iii) (note 11 (b))
              
              
              1,853,897
              
              
              
              461,785Balance,
      December 31, 2006
              
              
              32,578,170
              
              
              $
              5,028,656Issued:Options
      exercised
              
              
              282,600
              
              
              
              59,45032,860,770
              
              
              $
              5,088,106Share
      Consolidation (1 new for 7 old)
              
              
              4,694,396
              
              
              
              5,088,106Issued:Private
      Placement (iv)
              
              
              387,500
              
              
              
              775,000Common
      shares issued for the acquisition of Speak2Me Inc.
              
              
              4,500,366
              
              
              
              4,536,351Less:
      Share issue costs
              
              
              -
              
              
              
              (63,750
              )Balance,
      December 31, 2007
              
              
              9,582,262
              
              
              $
              10,335,707
  (i) Escrowed
Shares:
  On April
30, 1997, the Company entered into a performance escrow agreement in Form C of
the TSX Venture Exchange (formerly Canadian Venture Exchange) (the “Exchange”)
with ComputerShare Investor Services Inc. (formerly “Montreal Trust Company of
Canada”) and certain security holders (the “Escrow Agreement”). The Escrow
Agreement related to the escrow of certain common shares of the Company issued
upon completion of the reverse take over transaction between Lingo Media Ltd.
(formerly “Alpha Corporation”) and Lingo Media Inc. (formerly “Alpha Ventures
Inc.”) in 1997. At the time of the transaction, 2,860,528 pre-consolidated
common shares (the “Escrowed Shares”) were subject to a performance escrow
agreement.
  These
shares were subject to a new escrow agreement (“Time Release Escrow Agreement”)
made as of December 10, 2002 whereby the Escrowed Shares would be released on a
timed-release basis rather than the performance based release provisions of the
performance Escrow Agreement. Up to December 2005, 2,432,948 shares have been
released. The balance of the shares, 427,580 were released during
2006.
  22
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   11.
Capital stock, warrants and stock options (continued):
  (ii) In
September 2005, the Company completed an exempt private placement of 3,675,000
Units of its securities at $0.20 per Unit, for gross proceeds of $735,000. Each
Unit was comprised of one common share and one-half of one non-transferable
common share purchase warrant (“Warrant”). Each whole Warrant entitles the
holder to purchase one additional common share for $0.40 for a term of 12 months
expiring on September 20, 2006. These warrants expired during 2006 without
exercise. The Warrants are subject to accelerated expiration, at the option of
the Company, at any time after January 20, 2006 in the event that the price of
the Company’s common shares on the TSX Venture Exchange (“Exchange”) is $0.60 or
more for 10 consecutive trading days. In such event, the Company has three
business days to give notice of the acceleration of the term to the holders of
the Warrant and the Warrant term will be reduced to ten business days from the
date of such notice. A fee of 7% was paid to the agent and sub-agents with
respect to the sale of 3,675,000 Units. In addition, a total of 118,650
Compensation Warrants were issued to the agent and the sub-agents. Each
Compensation Warrant entitles the holder to purchase one common share for $0.40
for a term of 12 months expiring on September 20, 2006. The Compensation
Warrants are subject to accelerated expiration on the same terms as the Warrant.
These Warrants expired during 2006 without exercise.
  (iii) During
2006, 835,901 options were exercised for cash consideration of $66,679 at an
average price of $0.13 per share. In addition, 1,341,004 options were exercised
for $207,294 in settlement of accounts payable. Fair value of $187,812 related
to options exercised for cash and accounts payable settlement has been
reallocated to capital stock from contributed surplus.
  (iv) On
October 17, 2007, the Company closed a private placement offering of
subscription receipts. The gross proceeds of the offering totaled $775,000 with
an aggregate of 387,500 subscription receipts issued at a price of $2.00 per
subscription receipt. Each subscription receipt entitles the holder to receive
one common share and one common share purchase warrant of Lingo Media upon the
closing of the acquisition of Speak2Me. Each Warrant entitles the holder to
purchase one (1) additional common share of Lingo Media at a purchase price of
$6.00 per share and is exercisable for a period of twelve (12) months from the
closing date of the Offering.
  (b)
Contributed Surplus:
  Balance,
      January 1, 2006
              
              $
              131,474Stock-based
      compensation
              
              
              193,819Balance,
      December 31, 2006
              
              $
              325,293Stock-based
      compensation
              
              
              156,395Options
      exercised
              
              
              (29,277
              )Balance,
      December 31, 2007
              
              $
              452,411
  23
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   11.
Capital stock warrants and stock options (continued):
  (c) Stock
option plan
  In
November 1996, the Company adopted a stock option plan (the “1996 Plan”). The
1996 Plan was established to encourage ownership of common shares by directors,
senior officers, employees and consultants of the Company. The maximum number of
shares which may be reserved for issuance under the 1996 Plan is limited to
1,078,000 common shares, provided that the Board has the right, from time to
time, to increase such number subject to shareholder and regulatory
approvals.
  The
maximum number of common shares that may 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. The exercise price of each option
cannot be less than the market price of the shares on the day immediately
proceeding the day of the grant, less any discount specifically permitted by the
TSX Venture Exchange. The exercise period of the options granted can not exceed
five years. The directors of the Company may from time to time amend or revise
the terms of the 1996 Plan or may terminate it at any time.
  During
May 2000, the Company adopted another stock option plan (the “2000 Plan”) for
the benefit of the directors, officers, employees and consultants of the
Company.
  In June
2005, the Company adopted a new stock option plan (the “2005 Plan “). The 2005
Plan was established to provide an incentive to employees, officers, directors
and consultants of the Company and its subsidiaries. The maximum number of
shares which may be reserved for issuance under the 2005 Plan is limited to
4,821,955 common shares less the number of shares reserved for issuance pursuant
to options granted under the 1996 Plan and the 2000 Plan, provided that the
Board of Directors of the Company 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 that 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 of the
Company granted as a compensation or incentive mechanism. The exercise price of
each option can not be less than the market price of the shares on the day
immediately preceding the day of the grant less any permitted discount. The
exercise period of the options granted can not exceed 5 years. Options granted
under the 2005 Plan vest over an 18 month period with no greater than 16.67% of
any options granted to an optionee vesting in any 3 month period or such longer
period as the Board may determine. The Board of Directors of the Company may,
from time to time, amend or revise the terms of the 2005 Plan or may terminate
it at any time.
  24
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   11.
Capital stock warrants and stock options (continued):
  Changes
for the stock option plans during the years ended December 31, 2007 and 2006 are
as follows (post consolidation equivalents):
  2007
              
              
              2006Number
                of
      shares
              
              
              Weighted
      average
                exercise
      price
              
              
              Number
                of
      shares
              
              
              Weighted
      average
                exercise
      priceOptions
      outstanding, beginning of year
              
              
              275,634
              
              
              $
              1.33
              
              
              
              526,191
              
              
              $
              1.19Options
      granted
              
              
              300,000
              
              
              
              0.68
              
              
              
              14,286
              
              
              
              1.40Options
      exercised
              
              
              40,372
              
              
              
              0.84
              
              
              
              (264,842
              )
              
              
              0.84Options
      expired/canceled
              
              
              (68,524
              )
              
              
              -
              
              
              
              -
              
              
              
              -Options
      outstanding, end of year
              
              
              516,738
              
              
              
              0.98
              
              
              
              275,634
              
              
              
              1.33Options
      exercisable, end of year
              
              
              338,509
              
              
              $
              1.10
              
              
              
              248,181
              
              
              $
              1.33
  The
following table summarizes information about stock options outstanding at
December 31, 2007:
  
  Options
      outstanding
              
              
              Options
      exercisableRange
                of
      exercise
                prices
              
              
              Number
                outstanding
              
              
              Weighted
                average
                remaining
                contractual
      life
              
              
              Weighted
                average
                exercise
                price
              
              
              Number
                outstanding
              
              Weighted

                average
                exercise
                price$
              0.70
      - $1.00
              
              
              
              317,368
              
              
              
              4.21
              
              
              $
              0.75
              
              
              
              139,140
              
              
              $
              0.75$
              1.01
      - $1.33
              
              
              
              138,656
              
              
              
              1.98
              
              
              
              1.30
              
              
              
              138,656
              
              
              
              1.30$
              1.34
      - $1.54
              
              
              
              60,713
              
              
              
              2.44
              
              
              
              1.46
              
              
              
              60,713
              
              
              
              1.46Total
              
              
              
              516,738
              
              
              
              3.40
              
              
              
              0.98
              
              
              
              338,509
              
              
              
              1.10
  All
vested options are exercisable as of December 31, 2007.
  (d) Fair
value of options:
  The
weighted average grant-date fair value of options granted to employees,
consultants and directors during 2007 has been estimated at $0.89 (2006 - $0.12)
using the Black-Scholes option-pricing model. The estimated fair value of the
options granted is expensed over the options vesting periods. The pricing model
assumes the weighted average risk free interest rates of 2.46% (2006 – 2.53%)
weighted average expected dividend yields of nil (2006 – nil), the weighted
average expected common stock price volatility of 105.0% (2006 – 157.9%) and a
weighted average expected life of 5 years.
  25
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   11. Capital
stock warrants and stock options (continued):
  (e)
Warrants:
  The
following summarizes the Class E warrants outstanding (post consolidation
equivalents):
  Weighted
      Number of
              
              average
      warrants
              
              
              exercise
      priceBalance,
      January 1, 2006
              
              
              262,500
              
              
              $
              2.80Expired
              
              
              (262,500
              )
              
              
              2.80Balance,
      December 31, 2006 Issued
              
              
              -
              
              
              
              -Balance,
      December 31, 2006
              
              
              387,500
              
              
              
              6.00Balance,
      December 31, 2007
              
              
              387,500
              
              
              $
              6.00
  The
387,500 warrants have a fair value of $161,254 as calculated by a Black Scholes
pricing model. The warrants have been classified within share
capital.
  (f)
Compensation Warrants:
  The
following summarizes the compensation warrants outstanding (post consolidation
equivalents):
  Weighted
      Number of
              
              average
      warrants
              
              
              exercise
      priceBalance,
      January 1, 2006
              
              
              16,950
              
              
              $
              2.80Expired
      (note 11 (a)ii)
              
              
              (16,950
              )
              
              
              2.80Balance,
      December 31, 2006 and 2007
              
              
              -
              
              
              
              -
  Fair
value of Compensation Warrants:
  During
2005, the Company issued 16,950 Compensation Warrants to agents in connection
with private placements (see note 11(a)(ii)). The fair value of these warrants
granted to agents was estimated at $1.82 using the Black-Scholes option-pricing
model. The pricing model assumed weighted average risk free interest rates of
2.70%, weighted average expected dividend yields of nil, weighted average
expected common stock price volatility of 133% and a weighted average expected
life of one year. No Compensation Warrants were issued during 2006 and
2007.
  11.
Capital stock warrants and stock options (continued):
  (g) Loss
per share:
  2007
              
              
              2006Numerator:Loss
      for the year
              
              $
              (925,040
              )
              
              $
              (748,924
              )Denominator:Average
      number of common shares outstanding
              
              
              9,582,262
              
              
              
              4,060,331Escrowed
      shares (note 11(a)(i))
              
              
              -
              
              
              
              -Weighted
      average number of common shares
              
              
              5,655,792
              
              
              
              4,060,331Loss
      per share, basic and diluted
              
              $
              (0.16
              )
              
              $
              (0.18
              )
  Average
number of common shares have been adjusted to reflect a 1 for 7 share
consolidation that took effect during 2007.
  26
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   12.
Income taxes:
  The
provision for income taxes reflects an effective income tax rate, which differs
from the Canadian corporate income tax rate as follows:
  2007
              
              
              2006Combined
      basic Canadian federal and provincial income tax rate
              
              
              36.12
              %
              
              
              36.12
              %Effective
      income tax recovery on loss before income taxes
              
              $
              (320,076
              )
              
              $
              (229,734
              )Increase
      (decrease) resulting from:Change
      in the valuation allowance
              
              
              (555,893
              )
              
              
              359,663Effect
      of reduced income taxes in foreign jurisdiction andsubsidiary
      with lower tax rate
              
              
              (220,387
              )
              
              
              (172,100
              )Withholding
      tax on sales to China
              
              
              127,267
              
              
              
              130,322Stock
      based compensation
              
              
              56,490
              
              
              
              70,007Change
      in enacted rates
              
              
              561,996
              
              
              
              -Change
      in prior year estimates
              
              
              413,603
              
              
              
              -Other
              
              
              (24,105
              )
              
              
              85,059$
              38,895
              
              
              $
              112,895
  The tax
effect of temporary differences representing future tax assets is as
follows:
  2007
              
              
              2006Future
      tax assets (liabilities):Operating
      loss carry forwards
              
              $
              2,564,846
              
              
              $
              2,158,000Share
      issue costs
              
              
              92,559
              
              
              
              33,0002,657,405
              
              
              
              2,191,000Valuation
      allowance
              
              
              (1,411,945
              )
              
              
              1,967,838
              )Future
      tax assets recognized
              
              
              1,245,460
              
              
              
              223,162Software
      & web development costs
              
              
              (932,362
              )
              
              
              -Property
      and equipment
              
              
              (22,953
              )
              
              
              (33,628
              )Net
      future tax assets (liabilities)
              
              $
              (290,145
              )
              
              $
              189,534
  Future
tax assets and liabilities will be impacted by changes in future tax laws and
rates. The effects of these changes are not currently determinable. In assessing
the realizability of future tax assets, management considers whether it is more
likely than not that some portion or all of the future tax assets will not be
realized. The ultimate realization of future tax assets is dependent upon the
generation of future taxable income during the years in which those temporary
differences become deductible. Management considers projected future taxable
income, uncertainties related to the industry in which the Company operates and
tax planning strategies in making this assessment. The Company has not
recognized any benefit for these losses.
  27
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   12.
Income taxes (continued):
  At
December 31, 2007, the Company has non-capital losses available for carry
forward for Canadian income tax purposes amounting to $7,143,343. These losses
expire in the following fiscal years:
  2008
              
              
              493,0002009
              
              
              291,0002010
              
              
              954,0002014
              
              
              1,113,0002015
              
              
              1,288,0002026
              
              
              1,297,0002027
              
              
              1,707,343$
              7,143,343
  13.
Government grants:
  Included
as a reduction of general and administrative expenses are government grants of
$164,545 (2006 – $182,300), relating to the Company's publishing projects in
China and Canada.
  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.
  14.
Foreign exchange gain or loss:
  Included
in general and administrative expenses is a foreign exchange gain of
approximately $103,505 (2006 – $7,968) relating to the changes in currency
translation rates in respect of Company's activities denominated in foreign
currencies.
  15. Related
party balances and transactions:
  During
the year, the Company had the following transactions with related parties, made
in the normal course of operations, and accounted for at an amount of
consideration established and agreed to by the Company and related parties.
These transactions have not been disclosed elsewhere in the financial
statements:
  During
the year, the Company had loans payable due to corporations controlled by two
directors bearing interest at 12% (2006 - 12%) per annum. During 2007, the
Company received $387,000 (2006 - $ nil) and repaid $310,000 (2006 - $50,000) of
these loans. Interest expense related to these loans for the year is $62,137
(2006 - $5,878). At December 31, 2007 $nil (2006 - $ nil) was due to those
corporations.
  During
the year, the Company was reimbursed $68,900 (2006 - $58,000) from a corporation
with one director in common for rent, administration, office charges and
telecommunications.
  28
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   15. Related
party balances and transactions (continued):
  Speak2Me
Inc. Acquisition:
  The
acquisition of Speak2Me constituted as a "related party transaction" as the CEO
of the Company was also a director of Speak2Me and partially owned common shares
of Speak2Me prior to its acquisition by Lingo Media.
  The
President & CEO of Lingo Media beneficially owns, indirectly, 1,583,333
common shares representing 10.63% of the issued and outstanding common shares of
Speak2Me prior to its acquisition by Lingo Media. Due to the conflict of
interest, he abstained from voting on matters relating to the
acquisition.
  The Board
of Directors of Lingo Media appointed a special committee, consisting of two
independent directors, to review the proposed acquisition of Speak2Me. In
reaching its conclusions and formulating its recommendations, the special
committee considered among other factors: (i) audited financial statements of
Speak2Me for the period ended August 24, 2007, (ii) information in respect of
its assets and operations, and (iii) an independent valuation.
  16. Financial
instruments and risk management:
  The
Company as part of its operations carries a number of financial instruments. It
is management's opinion that the Company is not exposed to significant interest,
currency or credit risks arising from these financial instruments except as
otherwise disclosed.
  (a) Currency
risk:
  The
Company is subject to currency risk through its activities outside of Canada.
Unfavourable changes in the exchange rate may affect the operating results of
the Company. The Company is also exposed to currency risk as a substantial
amount of its revenue is denominated in U.S. dollars and Chinese Renminbi
("RMB").
  There
were no derivative instruments outstanding at December 31, 2007 and
2006.
  (b) Financial
Instruments:
  The
significant financial instruments of the Company, their carrying values and the
exposure to foreign dollar denominated monetary assets and liabilities, as of
December 31, 2007 are as follows:
  US
                Denominated
              
              
              Chinese
                DenominatedCAD
              
              
              USD
              
              
              CAD
              
              
              RMBCash
              
              
              105,635
              
              
              
              107,571
              
              
              
              16,056
              
              
              
              835,675Accounts
      and grants receivable
              
              
              275,155
              
              
              
              236,184
              
              
              
              813,068
              
              
              
              6,061,418Accounts
      payable
              
              
              108,828
              
              
              
              93,415
              
              
              
              100,733
              
              
              
              102,579
  US
dollars and Chinese Renmimbi are converted on the prevailing year-end exchange
rates
  Fair
market values:
  The
carrying values of cash, short-term investment, accounts and grants receivable,
accounts payable, accrued liabilities, bank loans and loans payable approximate
their fair values due to the relatively short periods to maturity.
  29
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   16. Financial
instruments and risk management (continued):
  (d) Concentration
of risk:
  Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and accounts receivable. Cash and short-term
investment consist of deposits with major financial institutions. With respect
to accounts receivable, the Company performs periodic credit evaluations of the
financial condition of its customers and typically does not require collateral
from them. Management assesses the need for allowances for potential credit
losses by considering the credit risk of specific customers, historical trends
and other information. The Jintu loan receivable (note 4) is secured by a
personal guarantee from a non – related party.
  (e) Interest
rate risk:
  The
Company manages its exposure to interest rate risk through floating rate
borrowings. The floating rate debt is subject to interest rate cash flow risk,
as the required cash flows to service the debt will fluctuate as a result of
changes in market rates.
  17. Economic
dependence
  The
Company has sales to a major customer in 2007 and 2006, a government agency of
the People’s Republic of China. The accounts receivable due from this customer
are insured up to 90% by the Export Development Corporation. The total
percentage of sales to this customer during the year was 22% (2006 – 56%), and
the total percentage of accounts receivable at December 31, 2007 was 93% (2006 –
75%).
  18. Segmented
information:
  The
Company operates two distinct reportable business segments as follows. These
business segments are differentiated by English language learning products have
separate methodology, ELL is Lingo’s products / IP, ECD Lingo combines third
party products.
  English
Language Learning: The Company develops, publishes, distributes and licenses
book, audio/video cassette, CD-based product and supplemental product for
English language learning for the educational school markets in China and in
Canada.
  Early
Childhood Development: The Company specializes in early childhood cognitive
development programs, through the publishing and distribution of educational
materials along with its proprietary curriculum through its four offices in
Calgary, Edmonton, Vancouver and Toronto.
  English
                Language
      Learning
              
              
              Early
                Childhood
      Development
              
              
              TotalRevenue
              
              $
              879,626
              
              
              $
              3,124,731
              
              
              $
              4,004,357Cost
      of sales
              
              
              113,317
              
              
              
              644,759
              
              
              
              758,076Margin
              
              $
              766,309
              
              
              $
              2,479,972
              
              
              $
              3,246,281Acquisition
      of property and equipment
              
              
              26,276
              
              
              
              1,712
              
              
              
              27,988Segment
      Assets
              
              
              6,635,015
              
              
              
              672,246
              
              
              
              7,857,551Segment
      loss
              
              
              (579,421
              )
              
              
              (345,619
              )
              
              
              (925,040
              )
  30
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   18. Segmented
information (continued):
  The
Company's revenue by geographic region based on the region in which the
customers are located is as follows:
  2007
              
              
              2006Canada
              
              $
              3,126,651
              
              
              $
              685,521China
              
              
              877,706
              
              
              
              888,816$
              4,004,357
              
              
              $
              1,574,337
  The
majority of the Company’s identifiable assets as at December 31, 2007 are
located as follows:
  2007
              
              
              2006Canada
              
              $
              3,327,303
              
              
              $
              2,701,638China
              
              
              4,560,247
              
              
              
              182,520$
              7,887,550
              
              
              $
              2,884,158
  19. Commitments:
  In
addition to the commitments described in note 3, the Company has future minimum
lease payments under operating leases for premises and equipment are as
follows:
  2008
              $
      271,8832009
              209,8302010
              167,3032011
              34,8162012
              5,094
  31
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   20. Reconciliation
of Canadian and United States generally accepted accounting principles
("GAAP"):
  These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") in Canada. Except as set out
below, these financial statements also comply, in all material aspects, with the
United States generally accepted accounting principles.
  The
following tables reconcile results as reported under Canadian GAAP with those
that would have been reported under United States GAAP.
  Statements
of Operations:
  2007
              
              
              2006Loss
      for the year - Canadian GAAP
              
              $
              (925,040
              )
              
              $
              (748,924
              )Impact
      of United States GAAP and adjustments:Amortization
      of development costs (a)
              
              
              99,805
              
              
              
              156,648Deferred
      costs (d)
              
              
              -
              
              
              
              (40,316
              )Software
      and web development costs
              
              
              (452,709
              )
              
              
              -Loss
      for the year - United States GAAP
              
              $
              (1,277,944
              )
              
              $
              (632,592
              )Statements
      of cash flows:2007
              
              
              2006Cash
      (used in) provided by investing activities – Canadian GAAP
              
              $
              1,257,751
              
              
              $
              (647,240
              )Impact
      of United States GAAP and adjustments:Write-off
      of Software & web development costs
              
              
              452,709
              
              
              
              -Cash
      used in investing activities - United States GAAP
              
              $
              1,710,460
              
              
              $
              (647,240
              )2007
              
              
              2006Cash
      (used in) provided by operating activities – Canadian GAAP
              
              $
              (1,208,160
              )
              
              $
              285,037Impact
      of United States GAAP and adjustments:Write-off
      of Software & web development costs
              
              
              (452,709
              )
              
              
              (40,316
              )Cash
      used in operating activities - United States GAAP
              
              $
              (1,660,869
              )
              
              $
              244,721
  The
cumulative effect of these adjustments on the consolidated shareholders' equity
of the Company is as follows:
  2007
              
              
              2006Shareholders'
      equity - Canadian GAAP
              
              $
              5,845,677
              
              
              $
              1,376,548Development
      costs (a)
              
              
              (91,522
              )
              
              
              (121,005
              )Compensation
      expense (b)
              
              
              (243,250
              )
              
              
              (243,250
              )Deferred
      costs (d)
              
              
              (157,419
              )
              
              
              (157,419
              )Software
      & web development costs (a)
              
              
              (452,709
              )
              
              
              -Shareholders'
      equity - United States GAAP
              
              
              4,940,777
              
              
              
              854,874
  32
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   20. Reconciliation
of Canadian and United States generally accepted accounting principles
("GAAP"):
  (a) 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 $222,303.
  (b) Options
to consultants:
  Starting
January 1, 2004 under United States, the Company records compensation expense
based on the fair value for stock or stock options granted in exchange for
services from consultants and employees.
  (c) 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.
  (d) Deferred
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.
  (e) Recent
Accounting Pronouncements:
  (i) In
February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
Instruments an amendment to FASB 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. FASB 155, provides the
framework for fair value remeasurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation as well
as establishes a requirement to evaluate interests in securitized financial
assets to identify interests. FASB 155 further amends FASB 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. The FASB 155 guidance also clarifies which
interest-only strips and principal-only strips are not subject to the
requirement of FASB 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company does not
believe SFAS No. 155 will have a significant impact on its consolidated
financial position or results of operations.
  33
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   20. Reconciliation
of Canadian and United States generally accepted accounting principles ("GAAP")
(continued):
  (e) Recent
Accounting Pronouncements:
  (ii) In March
2006, FASB issued FASB 156, Accounting for Servicing of Financial Assets--an
amendment of FASB Statement No. 140. FASB 156 requires the recognition of a
servicing asset or servicing liability under certain circumstances when an
obligation to service a financial asset by entering into a servicing contract.
FASB 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value utilizing the amortization
method or fair market value method. FASB 156 is effective the beginning of the
first fiscal year that begins after September 15, 2006. The Company does not
believe SFAS No. 156 will have a significant impact on its consolidated
financial position or results of operations.
  (iii) FASB
issued statement of Financial Accounting No. 157 Fair Value Measurement, this
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
Early adoption is permitted. The standard provides enhanced guidance for using
fair value to measure assets and liabilities, the information used to measure
fair value, and the effect of fair value measurement on earnings. The standard
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value. It does not expand the use of fair value in any new
circumstances. The Company does not expect there to be any material impact on
the Consolidated Financial Statements upon adoption of the
standard.
  (iv) In
January 2003, the FASB issued Financial Interpretation 46 “Accounting for
Variable Interest Entities” (“FIN 46”) that requires the consolidation of
Variable Interest Equities (“VIEs”). VIEs are entities that have insufficient
equity or their equity investors lack one or more of the specified elements that
a controlling entity would have. The VIEs are controlled through financial
interests that indicate control (referred to as “variable interests”). Variable
interests are the rights or obligations that expose the holder of the variable
interest to expected losses or expected residual gains of the entity. The holder
of the majority of an entity’s variable interests is considered the primary
beneficiary of the VIE and is required to consolidate the VIE. In December 2003
the FASB issued FIN 46R which superseded FIN 46 and restricts the scope of the
definition of entities that would be considered VIEs that require consolidation.
The Company does not believe FIN 46R results in the consolidation of any
additional entities.
  (v) Effective
January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109.” This interpretation
requires that an entity recognize in the financial statements, the impact of a
tax position, if that position is more likely than not to be sustained on
examination by the taxing authorities, based on technical merits of the
position. Tax benefits resulting from such a position should be measured as the
amount that is more likely than not on a cumulative basis to be sustained on
examination. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties on income taxes and accounting in interim periods. The
adoption of this interpretation did not impact the Company’s Financial
Statements.
  (vi) On 1
January 2006, the Company adopted the provisions of SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3. This statement applies to all voluntary changes in accounting
principle and changes the requirements for accounting for and reporting of a
change in accounting principle. The statement requires retrospective application
to prior periods’ Financial Statements of a voluntary change in accounting
principle versus including the cumulative effect of changing to the new
accounting principle in net income. SFAS No. 154 carries forward many provisions
of APB Opinion No. 20 without change, including the provisions related to the
reporting of a change in accounting estimate, a change in the reporting entity,
and the correction of an error. The adoption of this standard did not impact the
Company’s Financial Statements.
  34
  LINGO
MEDIA CORPORATION
 Notes to
Consolidated Financial Statements
 (Expressed
in Canadian dollars)
 December
31, 2007 and 2006
   20. Reconciliation
of Canadian and United States generally accepted accounting principles ("GAAP")
(continued):
  (e) Recent
Accounting Pronouncements:
  (vii) In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (SFAS No. 159). This statement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective on January 1, 2008. The Company is
currently evaluating the impact of this standard on its Financial
Statements.
  21. Supplemental
cash flow information:
  Income
      taxes and other taxes paid
              
              $
              127,267
              
              
              $
              200,491
              
              
              $
              151,121Interest
      paid
              
              $
              113,369
              
              
              $
              23,654
              
              
              $
              9,838
  Non-cash
transactions:
  (i) In 2007,
4,500,366 common shares were issued as consideration for the acquisition of
Speak2Me Inc. in the amount of $4,536,351. As at December 31, 2007, this amount
is included in capital stock.
  (ii) In 2006,
2,849,500 common shares (407,071 after reorganization) were issued as
consideration for the acquisition of A + Child Development (Canada) Ltd. in the
amount of $569,900. As at December 31, 2006, this amount is included in capital
stock.
  (iii) Included
in the capital stock is $29,277 (2006 - $ 187,812) representing the fair value
of stock options exercised (note 11 (b)).
  (iv) In 2005,
warrants issued to agents in connection with a private placement (see note
11(a)(ii)) are valued at $30,849. This amount has been recorded as an increase
in warrants amount with a corresponding increase in share issue costs which is
charged against share capital.
  (v) In 2005,
the Company issued 150,000 common shares in exchange for services with a fair
value of $30,000.
  22. Comparative
figures:
  Certain
comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
  35
  SIGNATURE
   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 hereunder
duly authorized.
  LINGO
      MEDIA INC.May
      16, 2008
                By:
                /s/ Khurram
      QureshiKhurram
      QureshiPresident
      and Chief Executive Officer
    36