CARMANAH TECHNOLOGIES CORPORATION





Consolidated Financial Statements





Years ended December 31, 2006 and 2005







---



[financials001.jpg]







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Balance Sheets

(Expressed in Canadian dollars)



December 31, 2006 and 2005



|                                                                 |   | 2006       |   | 2005      
|---------------------------------------------------------------- | - | ---------- | - | ----------
|Assets                                                           |   |            |   |           
|Current assets:                                                  |   |            |   |           
|Cash and cash equivalents                                        | $ | 2,750,404  | $ | 1,882,214 
|Short-term investments                                           |   | 1,500,000  |   | 9,780,000 
|Accounts receivable, net                                         |   | 11,881,757 |   | 8,950,496 
|Inventories (note 3)                                             |   | 20,737,841 |   | 11,012,640
|Prepaid expenses and deposits                                    |   | 1,091,331  |   | 705,073   
|                                                                 |   | 37,961,333 |   | 32,330,423
|Equipment and leasehold improvements, net (note 4)               |   | 3,138,982  |   | 2,096,254 
|Intangible assets, net (note 5)                                  |   | 1,106,803  |   | 1,325,055 
|Goodwill                                                         |   | 12,368,019 |   | 12,330,543
|Future income taxes (note 6)                                     |   | 1,473,484  |   | 985,500   
|                                                                 | $ | 56,048,621 | $ | 49,067,775
|Liabilities and Shareholders Equity                             |   |            |   |           
|Current liabilities:                                             |   |            |   |           
|Bank demand debt (note 7)                                        | $ | 1,915,000  | $ | -         
|Accounts payable and accrued liabilities                         |   | 7,963,883  |   | 5,268,246 
|Deferred revenue                                                 |   | 369,259    |   | 275,226   
|Income taxes payable                                             |   | 389,097    |   | 434,636   
|Current portion of obligations under capital leases              |   | 8,757      |   | 19,990    
|                                                                 |   | 10,645,996 |   | 5,998,098 
|Obligations under capital leases                                 |   | 4,097      |   | 14,991    
|Obligation to former shareholders of SPS to be settled in shares |   | -          |   | 2,631,580 
|                                                                 |   | 10,650,093 |   | 8,644,669 
|Shareholders equity:                                            |   |            |   |           
|Share capital (note 8)                                           |   | 42,881,857 |   | 38,772,138
|Contributed surplus (note 8(e))                                  |   | 2,023,607  |   | 1,292,390 
|Retained earnings                                                |   | 493,064    |   | 358,578   
|                                                                 |   | 45,398,528 |   | 40,423,106
|                                                                 | $ | 56,048,621 | $ | 49,067,775



Commitments (note 13)

Subsequent event (note 16)



See accompanying notes to consolidated financial statements.



On Behalf of the Board:



Art Aylesworth

Director



Praveen Varshney

Director







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Statements of Operations and Retained Earnings (Deficit)

(Expressed in Canadian dollars)



For the years ended December 31, 2006, 2005 and 2004



|                                                        |   | 2006       |   |   | 2005       |   |   | 2004       |  
|------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Sales                                                   | $ | 62,445,860 |   | $ | 38,729,885 |   | $ | 15,895,041 |  
|Cost of sales                                           |   | 41,147,512 |   |   | 24,311,146 |   |   | 7,655,700  |  
|                                                        |   | 21,298,348 |   |   | 14,418,739 |   |   | 8,239,341  |  
|Operating expenses:                                     |   |            |   |   |            |   |   |            |  
|Wages and benefits                                      |   | 9,995,551  |   |   | 6,843,164  |   |   | 3,509,101  |  
|Office and administration                               |   | 4,136,498  |   |   | 2,786,675  |   |   | 1,423,744  |  
|Sales and marketing                                     |   | 2,365,080  |   |   | 1,775,099  |   |   | 1,341,112  |  
|Research and development (note 10)                      |   | 2,163,667  |   |   | 903,723    |   |   | 959,842    |  
|Bank charges and interest                               |   | 338,770    |   |   | 286,273    |   |   | 97,531     |  
|Amortization of:                                        |   |            |   |   |            |   |   |            |  
|Equipment and leasehold improvements                    |   | 876,931    |   |   | 575,355    |   |   | 400,439    |  
|Intangible assets                                       |   | 267,275    |   |   | 149,610    |   |   | 41,063     |  
|                                                        |   | 20,143,772 |   |   | 13,319,899 |   |   | 7,772,832  |  
|Operating income                                        |   | 1,154,576  |   |   | 1,098,840  |   |   | 466,509    |  
|Other income:                                           |   |            |   |   |            |   |   |            |  
|Interest and other income                               |   | 183,927    |   |   | 157,768    |   |   | 126,428    |  
|Earnings before income taxes                            |   | 1,338,503  |   |   | 1,256,608  |   |   | 592,937    |  
|Income tax expense (recovery) (note 6):                 |   |            |   |   |            |   |   |            |  
|Current                                                 |   | 1,720,150  |   |   | 1,021,372  |   |   | 316,000    |  
|Future                                                  |   | (516,133   | ) |   | (445,726   | ) |   | (315,886   | )
|                                                        |   | 1,204,017  |   |   | 575,646    |   |   | 114        |  
|Net earnings                                            |   | 134,486    |   |   | 680,962    |   |   | 592,823    |  
|Retained earnings (deficit), beginning of year          |   | 358,578    |   |   | (322,384   | ) |   | (915,207   | )
|Retained earnings (deficit), end of year                | $ | 493,064    |   | $ | 358,578    |   | $ | (322,384   | )
|Earnings per share:                                     |   |            |   |   |            |   |   |            |  
|Basic                                                   | $ | 0.003      |   | $ | 0.020      |   | $ | 0.020      |  
|Diluted                                                 |   | 0.003      |   |   | 0.019      |   |   | 0.018      |  
|Weighted average number of shares outstanding (note 9): |   |            |   |   |            |   |   |            |  
|Basic                                                   |   | 41,696,874 |   |   | 34,187,205 |   |   | 30,116,949 |  
|Diluted                                                 |   | 42,399,564 |   |   | 35,598,555 |   |   | 32,055,307 |  





See accompanying notes to consolidated financial statements.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)



For the years ended December 31, 2006, 2005 and 2004



|                                                       |   | 2006        |   |   | 2005       |   |   | 2004       |  
|------------------------------------------------------ | - | ----------- | - | - | ---------- | - | - | ---------- | -
|Cash provided by (used in):                            |   |             |   |   |            |   |   |            |  
|Operations:                                            |   |             |   |   |            |   |   |            |  
|Net earnings                                           | $ | 134,486     |   | $ | 680,962    |   | $ | 592,823    |  
|Items not involving cash:                              |   |             |   |   |            |   |   |            |  
|Amortization                                           |   | 1,144,206   |   |   | 724,965    |   |   | 441,502    |  
|Loss on disposal of capital assets                     |   | -           |   |   | -          |   |   | 2,727      |  
|Reclassification of previously recorded share issuance |   |             |   |   |            |   |   |            |  
|costs                                                  |   | 117,000     |   |   | -          |   |   | -          |  
|Stock-based compensation (note 8(c))                   |   | 970,439     |   |   | 435,757    |   |   | 319,035    |  
|Future income taxes (recovery)                         |   | (516,133    | ) |   | (445,726   | ) |   | (315,886   | )
|Net changes in non-cash working capital (note 14)      |   | (10,298,589 | ) |   | (5,147,253 | ) |   | (1,137,010 | )
|                                                       |   | (8,448,591  | ) |   | (3,751,295 | ) |   | (96,809    | )
|Investing:                                             |   |             |   |   |            |   |   |            |  
|Short-term investments                                 |   | 8,280,000   |   |   | (2,930,000 | ) |   | (6,850,000 | )
|Purchase of Soltek, net of cash acquired               |   | -           |   |   | (5,559,897 | ) |   | -          |  
|Purchase of equipment and leasehold                    |   |             |   |   |            |   |   |            |  
|improvements                                           |   | (1,919,659  | ) |   | (1,389,941 | ) |   | (603,917   | )
|Purchase of intangible assets                          |   | (86,500     | ) |   | (42,995    | ) |   | (21,227    | )
|                                                       |   | 6,273,841   |   |   | (9,922,833 | ) |   | (7,475,144 | )
|Financing:                                             |   |             |   |   |            |   |   |            |  
|Proceeds on share issuance                             |   | 1,185,017   |   |   | 19,125,082 |   |   | 7,813,684  |  
|Share issuance costs                                   |   | (34,950     | ) |   | (1,200,651 | ) |   | (503,153   | )
|Repayment of assumed bank indebtedness and loans on    |   |             |   |   |            |   |   |            |  
|acquisition of SPS (note 2)                            |   | -           |   |   | (3,239,794 | ) |   | (383,332   | )
|Repayment of long-term debt                            |   | -           |   |   | -          |   |   | (55,139    | )
|Issuance of bank demand debt                           |   | 1,915,000   |   |   | -          |   |   | -          |  
|Principal payments of obligations under capital leases |   | (22,127     | ) |   | (29,706    | ) |   | (91,765    | )
|                                                       |   | 3,042,940   |   |   | 14,654,931 |   |   | 6,780,295  |  
|Increase (decrease) in cash and cash equivalents       |   | 868,190     |   |   | 980,803    |   |   | (791,658   | )
|Cash and cash equivalents, beginning of year           |   | 1,882,214   |   |   | 901,411    |   |   | 1,693,069  |  
|Cash and cash equivalents, end of year                 | $ | 2,750,404   |   | $ | 1,882,214  |   | $ | 901,411    |  
|Supplemental cash flow information:                    |   |             |   |   |            |   |   |            |  
|Cash during the year for:                              |   |             |   |   |            |   |   |            |  
|Bank charges and interest paid                         | $ | 338,770     |   | $ | 286,276    |   | $ | 97,531     |  
|Income taxes paid                                      |   | 829,016     |   |   | 390,430    |   |   | -          |  
|Non-cash investing and financing activities:           |   |             |   |   |            |   |   |            |  
|Shares/stock options issued for services:              |   |             |   |   |            |   |   |            |  
|Share issue costs                                      | $ | -           |   | $ | -          |   | $ | 138,200    |  
|Acquisition of SPS (note 2):                           |   |             |   |   |            |   |   |            |  
|Shares issued                                          |   | -           |   |   | 4,090,224  |   |   | -          |  
|Obligation to issue shares                             |   | 2,631,580   |   |   | 2,631,580  |   |   | -          |  
|Warrants issued                                        |   | -           |   |   | 301,606    |   |   | -          |  



See accompanying notes to consolidated financial statements.







---

CARMANAH TECHNOLOGIES CORPORATION

Notes to the Consolidated Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





Carmanah Technologies Corporation (the Company or CTC) was incorporated pursuant to the provisions of the Business Corporations Act (Alberta) on March 26, 1996.  On June 21, 2002, the Company acquired all the issued and outstanding share capital of Carmanah Technologies Inc. (CTI).  CTI is in the business of developing and manufacturing solar-powered LED (light emitting diode) lighting solutions and the sale of related products.

On October 1, 2003, the Company acquired all the issued and outstanding share capital, stock options and warrants of AVVA Technologies Inc. (AVVA). AVVAs operating subsidiary, Carmanah Signs Inc. (CSI) (formerly AVVA Light Corporation), is in the business of designing, manufacturing and distributing energy efficient, illuminated sign products for corporate identity, point-of-purchase sales, and architectural and signage applications.

On July 1, 2005, the Company acquired all the issued and outstanding share capital of Soltek Powersource Ltd. (SPS), a leading designer, manufacturer and supplier of renewable energy solutions.

1.

Significant accounting policies:

The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles.  Material measurement differences to U.S. generally accepted accounting principles are set out in note 17.  The following is a summary of the significant accounting policies used in the preparation of the consolidated financial statements.

(a)

Basis of presentation:

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All significant inter-company transactions and balances have been eliminated.

(b)

Cash and cash equivalents:

Cash and cash equivalents include highly liquid investments, consisting primarily of term deposits, with terms to maturity of three months or less at the date of purchase.

(c)

Short-term investments:

Short-term investments are marketable securities that will be realized beyond three months but are recorded at the lower of cost and market.

(d)

Inventories:

Inventories are valued at standard cost which approximates the lower of average cost and replacement cost for raw materials and the lower of cost and net realizable value for work in progress and finished goods.  Inventories are recorded net of any obsolescence provisions.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





1.

Significant accounting policies (continued):

(e)

Equipment and leasehold improvements:

Equipment and leasehold improvements are carried at cost less accumulated amortization.  Amortization is determined at rates which will reduce original cost to estimated residual value over the useful life of each asset.  The annual rates used to compute amortization are as follows:



Asset
	Basis
	RateComputer hardware
	declining balance
	30
	%Computer software
	declining balance
	100
	%Leasehold improvements
	straight-line
	term of leaseOffice, production and research equipment
	declining balance
	20
	%Tradeshow equipment
	declining balance
	20
	%Vehicles
	declining balance
	30
	%




The cost of repairs and maintenance is expensed as incurred.

(f)

Intangible assets:

Intangible assets are amortized over their estimated useful lives, which vary from three months to six and a half years.

(g)

Goodwill:

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired less liabilities assumed, based on their fair values.  Goodwill is allocated as of the date of the business combination to the Company's reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.  The impairment test is carried out in two steps.  In the first step, the carrying amount of the reporting unit is compared with its fair value.  When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary.  The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any.  The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described in the preceding paragraph, using the fair value of the reporting unit as if it was the purchase price.  When the carrying amount of reporting unit goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statements of operations and retained earnings (deficit) before extraordinary items and discontinued operations.

All goodwill is assigned to the solar power systems and LED signs segments.  The Company completed its annual impairment test on December 31, 2006 and determined that no impairment charge was required.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





1.

Significant accounting policies (continued):

(h)

Revenue recognition:

Revenue from the sale of products is recognized based on the terms of the contract, either when the product is shipped and title passes or when related installation is complete, persuasive evidence exists of a sales arrangement, collection is probable and the price is fixed or determinable.  If there is a requirement for customer acceptance of any products shipped, revenue is recognized only after customer acceptance has been received.  Payments received in advance of the satisfaction of the Companys revenue recognition policies are recorded as deferred revenue.

Provisions are established for estimated product returns and warranty costs at the time revenue is recognized based on historical experience for the product.  If the historical data the Company used to estimate product returns does not properly reflect actual future returns, these estimates will be revised.  Future returns, if they were higher than estimated, would result in a reduction of revenues.

(i)

Research and development:

Research costs are expensed as incurred.  Development costs are expensed as incurred unless certain stringent criteria for deferral, as specified by the Canadian Institute of Chartered Accountants, have been met.  These criteria primarily relate to the establishment of technical feasibility, identification of specified markets, and availability of adequate resources to complete the project under development.  Costs of product development are capitalized until project completion or commencement of commercial sales of the product.  Costs are then amortized over the estimated period of future benefit.

Investment tax credits (ITCs) are accounted for as a reduction in the related expenditure when there is reasonable assurance that such credits will be realized.  These ITCs are used to reduce current and future income taxes payable.

(j)

Earnings per share:

The Company calculates basic earnings per share using the weighted average number of common shares outstanding during the period.  Diluted net earnings per share are calculated by the treasury stock method.  Under the treasury stock method, the weighted average number of common shares outstanding assumes that the proceeds to be received on the exercise of dilutive stock options and warrants are applied to repurchase common shares at the average market price for the period in calculating the net dilution impact.  Stock options and warrants are dilutive when the Company has income from continuing operations and the average market price of the common shares during the period exceeds the exercise price of the options and warrants.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





1.

Significant accounting policies (continued):

(k)

Stock-based compensation:

The Company has a stock-based compensation plan which is described in note 8(c).  The Company accounts for all stock-based payments and awards under the fair value method.

Under the fair value based method, stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically re-measured until counterparty performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments.  The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date.

Under the fair value based method, compensation cost attributable to awards to employees is measured at fair value at the grant date and recognized over the vesting period.  Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at intrinsic value and recognized over the vesting period.  Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost.  Compensation cost is generally recognized on a straight-line basis over the vesting period.  The Company accounts for the value attributable to the granted options on the consolidated statements of operations and retained earnings (deficit) and is included in the determination of income.

During the period, the Company granted stock options to directors, officers and employees as set out in note 8(c).

(l)

Future income taxes:

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on future tax assets and liabilities of future changes in tax rates is recognized in income in the period that included the date of substantive enactment. To the extent that it is not more likely than not that a future tax asset will be realized, a valuation allowance is provided.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





1.

Significant accounting policies (continued):

(m)

Foreign currency transactions:

The Companys functional currency is the Canadian dollar.  Monetary assets and liabilities denominated in foreign currency are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date.  Non-monetary items are translated at rates of exchange in effect when the amounts were acquired or obligations incurred.  Revenues and expenses are translated at rates in effect at the time of the transaction.  Foreign exchange gains and losses are recognized in the determination of net earnings in the year in which they arise.

(n)

Derivative financial instruments:

The Company uses certain derivative financial instruments, principally forward foreign exchange contracts, to manage foreign currency exposures on export sales.  Derivative financial instruments are not accounted for as hedges.  The realized and unrealized gains and losses are recognized in the operating income of the Company.  Fair values are determined using current market rates for the settlement of the derivative instruments.

(o)

Measurement uncertainty:

The presentation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period.  Significant areas requiring the use of estimates include the estimation of warranty provisions, amortization periods of intangible assets, valuation of stock compensation, and the estimation of future income tax asset valuation allowances.  Actual results could differ from those estimates.

(p)

Impairment of long-lived assets:

The Company monitors the recoverability of long-lived assets, including equipment and leasehold improvements, and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company reviews factors such as current market value, future asset utilization and business climate and compares the carrying value of the assets to the future undiscounted cash flows expected to result from the use of the related asset.  If such cash flows are less than the carrying value, the impairment charge to be recognized equals the excess.

(q)

Comparative figures:

Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





2.

Acquisition of Soltek Powersource Ltd:

On July 1, 2005, the Company acquired all the issued and outstanding share capital of Soltek Powersource Ltd. (SPS), a leading designer, manufacturer and supplier of renewable energy solutions.  The acquisition has been accounted for using the purchase method and the results of SPSs operations have been included in the consolidated financial statements since that date.  SPS also offers a range of proprietary solar power and alternative energy systems used by commercial, government and private customers worldwide. The aggregate purchase price including contingent consideration was $13,224,272, comprised initially of $6,000,000 paid in cash from existing funds, $4,090,224 equivalent in common shares and $200,862 in acquisition costs. Additional contingent consideration to the principal vendors of 751,876 common shares valued at $2,631,580 and 300,000 warrants valued at $301,606 was paid since SPS attained specified revenue targets and had earnings before interest, taxes and amortization in excess of 5.5% of revenue for the six month period ending December 31, 2005. The warrants have an exercise price of $2.79 (being the weighted average trading price on June 30, 2005). The shares issued to the principal vendors will be held in a pooling agreement providing for the pro rata release of the shares over a two year period after closing.

The following table summarizes the fair value of the assets acquired and the liabilities assumed at the date of acquisition.

Assets:Cash
	$
	640,965Accounts receivable
	
	4,978,646Inventories
	
	4,142,308Prepaid expenses
	
	42,279Equipment and leasehold improvements
	
	210,855Intangible assets (customer relationships)
	
	1,261,363Goodwill
	
	9,258,37020,534,786Liabilities:Bank indebtedness
	
	243,341Accounts payable and accrued liabilities
	
	3,091,879Capital lease obligation
	
	29,359Deferred revenue
	
	177,129Demand loan
	
	2,996,453Future income tax liability
	
	347,724Income taxes payable
	
	424,6297,310,514Total consideration
	$
	13,224,272




Goodwill is not deductible for tax purposes.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





3.

Inventories:



2006
	
	2005Raw materials
	$
	9,934,410
	$
	3,469,729Work-in-process
	
	117,239
	
	41,145Finished goods
	
	10,686,192
	
	7,501,766$
	20,737,841
	$
	11,012,640






4.

Equipment and leasehold improvements:



Accumulated
	
	Net book2006
	
	Cost
	
	amortization
	
	valueComputer hardware
	$
	1,054,142
	$
	456,145
	$
	597,997Computer software
	
	796,249
	
	662,671
	
	133,578Leasehold improvements
	
	1,899,091
	
	580,942
	
	1,318,149Office equipment
	
	392,089
	
	102,239
	
	289,850Production equipment
	
	901,275
	
	326,848
	
	574,427Research equipment
	
	238,000
	
	106,368
	
	131,632Vehicles
	
	103,825
	
	80,648
	
	23,177Tradeshow equipment
	
	87,715
	
	17,543
	
	70,172$
	5,472,386
	$
	2,333,404
	$
	3,138,982Accumulated
	
	Net book2005
	
	Cost
	
	amortization
	
	valueComputer hardware
	$
	685,415
	$
	282,104
	$
	403,311Computer software
	
	579,564
	
	445,776
	
	133,788Leasehold improvements
	
	928,134
	
	341,698
	
	586,436Office equipment
	
	364,253
	
	66,666
	
	297,587Production equipment
	
	629,239
	
	170,334
	
	458,905Research equipment
	
	223,117
	
	75,320
	
	147,797Vehicles
	
	103,825
	
	70,715
	
	33,110Tradeshow equipment
	
	39,180
	
	3,860
	
	35,320$
	3,552,727
	$
	1,456,473
	$
	2,096,254




Equipment and leasehold improvements include $64,821 (December 31, 2005 - $223,369) of equipment acquired under capital leases.  During the year ended December 31, 2006, amortization of equipment under capital lease of $6,766 (2005 - $20,047; 2004 - $110,555) is included in amortization expense.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





5.

Intangible assets:

Accumulated
	
	Net book2006
	
	Cost
	
	amortization
	
	valueCustomer relationships
	$
	1,427,262
	$
	421,771
	$
	1,005,491Patents and trademarks and other
	
	196,182
	
	94,870
	
	101,312$
	1,623,444
	$
	516,641
	$
	1,106,803Accumulated
	
	Net book2005
	
	Cost
	
	amortization
	
	valueCustomer relationships
	$
	1,411,363
	$
	164,528
	$
	1,246,835Patents and trademarks and other
	
	157,561
	
	79,341
	
	78,220$
	1,568,924
	$
	243,869
	$
	1,325,055




6.

Income taxes:

Income tax expense differs from the amounts computed by applying the combined federal and provincial tax rates of 34.12% (2005 - 34.87%; 2004 - 35.62%) to pre-tax income from continuing operations as a result of the following:

2006
	
	2005
	
	
	2004Earnings before income taxes
	$
	1,338,503
	$
	1,256,608
	
	$
	592,937Computed expected tax expense
	$
	456,697
	$
	438,179
	
	$
	211,200Non-deductible expenses
	
	351,851
	
	181,702
	
	
	112,000Expiry of loss carryforwards
	
	
	
	39,620Change in tax rate
	
	209,893
	
	56,251Other
	
	185,576
	
	192,894
	
	
	42,914Increase (decrease) in income tax valuationallowance
	
	
	
	(333,000
	)
	
	(366,000
	)$
	1,204,017
	$
	575,646
	
	$
	114




Income tax expense for the year ended December 31, 2006 was $1,204,017 comprised of current income tax expense of $1,720,150 less future income tax recovery of $516,133.

Investment tax credits of $1,255,083 arising from eligible research and development expenditures are applied against current taxes payable.

Non-deductible expenses consist primarily of stock-based compensation.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





6.

Income taxes (continued):

Temporary differences give rise to the following future tax assets and liabilities at December 31:

2006
	
	
	2005Future tax assets:Warranty reserve
	$
	92,070
	
	$
	62,000Share issue costs
	
	313,117
	
	
	452,000Losses available for future periods
	
	392,742
	
	
	555,500Scientific research and experimental development
	
	1,174,879
	
	
	405,000Equipment
	
	579,602
	
	
	475,000Other
	
	23,497
	
	
	62,0002,575,907
	
	
	2,011,500Future tax liabilities:Investment tax credits
	
	(275,293
	)
	
	(136,000
	)Intangible assets
	
	(330,130
	)
	
	(393,000
	)(605,423
	)
	
	(529,000
	)Less valuation allowance
	
	(497,000
	)
	
	(497,000
	)Net future tax assets
	$
	1,473,484
	
	$
	985,5002006
	
	
	2005Future income tax assets
	$
	1,473,484
	
	$
	985,500Future income tax liabilitiesNet future tax assets
	$
	1,473,484
	
	$
	985,500




The valuation allowance for future tax assets as at December 31, 2006 and December 31, 2005 was $497,000.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences and unused tax losses are available for deduction.

As at December 31, 2006, the Company has non-capital loss carryforwards of $1,200,000 available to reduce taxable income otherwise calculated in future years.  These losses will expire as follows:



Non-capital losses2007
	$
	200,0002008
	
	200,0002009
	
	200,0002010
	
	400,0002014
	
	200,000$
	1,200,000








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





7.

Credit facilities:

The Company has credit facilities with the Royal Bank of Canada, which include demand operating loans and revolving term loans to a combined maximum of $12,500,000 (2005 - $9,800,000).  Interest on operating and term loan facilities is at prime plus 0.125%.  These credit facilities are secured by general security agreements.  At December 31, 2006, the Company had drawn $1,915,000 on these facilities.

8.

Share capital:

(a)

Authorized:

Unlimited number of common shares without par value

(b)

Issued and outstanding:

Number ofcommon shares
	
	AmountBalance, December 31, 2003
	26,483,734
	$
	8,924,722Private placement
	3,484,848
	
	5,749,999Exercise of brokers warrants
	267,646
	
	681,580Exercise of warrants
	185,827
	
	341,836Exercise of options
	1,493,254
	
	1,265,335Less share issuance costs
	
	
	(641,353
	)Balance, December 31, 2004
	31,915,309
	
	16,322,119Exercise of brokers warrants
	80,838
	
	185,074Exercise of warrants
	1,604,674
	
	3,470,835Exercise of options
	680,975
	
	524,537Shares issued on acquisition of Soltek Powersource Ltd.
	1,503,756
	
	4,090,224Shares issued pursuant to private placement
	4,687,500
	
	15,000,000Less share issuance costs, net of tax benefits
	
	
	(820,651
	)Balance, December 31, 2005
	40,473,052
	
	38,772,138Exercise of options
	1,306,664
	
	1,424,239Share issuance costs, net of tax benefits
	
	
	(23,100
	)Adjustment to share issuance costs, net of tax benefits
	
	
	77,000Shares issued pursuant to a share purchase agreement
	751,876
	
	2,631,580Balance, December 31, 2006
	42,531,592
	$
	42,881,857








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





8.

Share capital (continued):

(b)

Issued and outstanding (continued):

During fiscal 2006, an aggregate of 1,306,664 options were exercised for gross proceeds of $1,185,017. In addition, a reallocation of $239,222 from contributed surplus to share capital was recorded related to the exercise of these options.  The Company has also reclassified certain share issuance costs totaling $117,000 related to its TSX listing to general and administration costs.

During fiscal 2006, the Company issued final payment to the vendors of Soltek Powersource Ltd. (SPS) of 751,876 common shares valued at $2,631,580 (see note 2).

During fiscal 2005, the Company entered into an agreement with a syndicate of underwriters, led by GMP Securities Ltd. and including Canaccord Capital Corporation and Sprott Securities Inc., for a bought-deal private placement financing of 4,687,500 common shares at $3.20 per share gross proceeds of $15,000,000.  The underwriters cash commission of 6% of the gross proceeds of the financing and other related share issuance costs totaled $1,200,651, less related tax benefits of $380,000 for net share issuance costs of $820,651.

During fiscal 2005, 1,604,674 warrants were exercised at a price of $2.15 per common share and 1,604,674 common shares were issued for gross proceeds of $3,450,049.  In addition, a reallocation of $20,786 from contributed surplus to share capital was recorded on the exercise of these warrants.

During fiscal 2005, 80,838 brokers warrants were exercised at a price of $2.15 per common share and 80,838 common shares were issued for gross proceeds of $173,802.  In addition, a reallocation of $11,272 from contributed surplus to share capital was recorded on the exercise of these warrants.

During fiscal 2005, 680,975 common shares were issued for gross proceeds of $500,932 on exercise of options.  In addition, a reallocation of $23,605 from contributed surplus to share capital was recorded on the exercise of these options.

During fiscal 2005, the Company issued 1,503,756 shares at a deemed price of $2.72 per share in connection with the acquisition of Soltek Powersource Ltd. (note 2).

During fiscal 2004, the Company completed a brokered private placement of 3,484,848 units at $1.65 per unit for gross proceeds of $5,749,999.  Each unit consists of one common share and one half (1/2) of one common share purchase warrant.  Each whole share purchase warrant entitles the holder to acquire one additional common share at an exercise price of $2.15 per common share for a period of 18 months expiring August 19, 2005.

The agent received a cash commission of 7% of the gross proceeds of the financing and 348,484 agents warrants exercisable at a price of $2.15 per share for a period of 18 months expiring August 19, 2005.

During fiscal 2004, 267,646 brokers warrants were exercised at a price of $2.15 per common share and 267,646 common shares were issued for gross proceeds of $575,439.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





8.

Share capital (continued):

(b)

Issued and outstanding (continued):

During fiscal 2004, 48,077 warrants and 137,750 warrants were exercised at a price of $0.95 per common share and $2.15 per common share respectively, and an aggregate of 185,827 common shares were issued for gross proceeds of $341,836.

During fiscal 2004, 1,493,254 common shares were issued for gross proceeds of $1,146,410 on exercise of options.

(c)

Stock options:

The Company maintains a fixed stock option plan that enables it to grant options to its directors, officers, employees and other service providers.  Each option agreement with the grantee sets forth, among other things, the number of options granted, the exercise price and the vesting conditions of the options.

The Company has reserved 4,927,856 common shares under the plan.  The options vest between 18 and 36 months from the date of grant and have a maximum term of five years.

A summary of the status of the options outstanding and exercisable follows:



Number of
	
	
	Weighted averageoptions
	
	
	exercise priceBalance, December 31, 2003
	3,508,975
	
	$
	0.77Granted
	830,000
	
	
	1.45Cancelled
	(129,499
	)
	
	1.24Exercised
	(1,493,254
	)
	
	0.77Balance, December 31, 2004
	2,716,222
	
	
	0.96Granted
	1,467,500
	
	
	3.07Cancelled
	(54,250
	)
	
	2.35Exercised
	(680,976
	)
	
	0.74Balance, December 31, 2005
	3,448,496
	
	
	1.88Granted
	1,564,000
	
	
	3.18Cancelled
	(222,750
	)
	
	3.23Expired
	(30,000
	)
	
	0.95Exercised
	(1,306,664
	)
	
	0.91Balance, December 31, 2006
	3,453,082
	
	$
	2.76








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





8.

Share capital (continued):

(c)

Stock options (continued):

The following table summarizes the stock options outstanding and exercisable at December 31, 2006:

Options outstanding
	Options exercisableWeightedNumber
	average
	
	Weighted
	Number
	Weightedoutstanding at
	remaining
	
	average
	exercisable at
	
	averageDecember 31,
	contractual
	
	exercise
	December 31,
	
	exerciseRange of exercise prices
	2006
	life
	
	price
	2006
	
	price(years)$0.75 to $1.99
	551,832
	1.56
	$
	1.03
	527,769
	$
	1.03$2.00 to $2.99
	1,200,250
	3.71
	
	2.81
	783,163
	
	2.78$3.00 to $3.80
	1,701,000
	3.28
	
	4.09
	515,673
	
	3.263,453,082
	3.55
	$
	2.76
	1,826,605
	$
	2.41




During the year ended December 31, 2006, under the fair value based method, $970,439 (2005 - $435,757; 2004 - $319,035) in compensation expense was recorded in the consolidated statements of operations for options granted to employees.

The compensation costs reflected in the consolidated statements of operations and retained earnings (deficit) were calculated using the Black-Scholes option pricing model using the following weighted average assumptions:



2006
	
	2005
	
	2004Risk-free interest rate
	3.52
	%
	2.99
	%
	2.78
	%Expected dividend yield
	0
	%
	0
	%
	0
	%Stock price volatility
	44
	%
	52
	%
	59
	%Expected life of options
	2 years
	
	2.5 years
	
	2 years




The weighted average fair value of an option granted during the year ended December 31, 2006 is $0.80 (2005 - $0.75; 2004 - $0.51) per share.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





8.

Share capital (continued):

(d)

Warrants:

During 2005, the Company issued 300,000 warrants as contingent consideration to the principal vendors of SPS.  These warrants have an exercise price of $2.79 and each warrant entitles the holder to purchase one common share of the Company.



Number of
	
	Weighted averagewarrants
	
	exercise priceBalance, December 31, 2004
	1,685,512
	
	$
	2.15Granted
	300,000
	
	
	2.79Exercised
	(1,685,512
	)
	
	2.15Balance, December 31, 2005 and 2006
	300,000
	
	$
	2.79




These warrants expire on June 30, 2010.

(e)

Contributed surplus:

2006
	
	
	2005Balance, beginning of year
	$
	1,292,390
	
	$
	610,690Stock compensation
	
	970,439
	
	
	435,757Warrants issued on acquisition of SPS (note 2)
	
	
	
	
	301,606Transfer to share capital on exercise of options
	
	(239,222
	)
	
	(55,663
	)Balance, end of year
	$
	2,023,607
	
	$
	1,292,390


9.

Earnings per share:

The weighted average number of common shares used in the computation of earnings per share is as follows:



2006
	2005
	2004Weighted average common shares used inin the computation of basic earnings per share
	41,696,874
	34,187,205
	30,116,949Weighted average common shares fromassumed conversion of dilutive stock options
	652,541
	1,385,722
	1,685,959Weighted average common shares fromassumed conversion of dilutive warrants
	50,149
	25,628
	252,39942,399,564
	35,598,555
	32,055,307








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





9.

Earnings per share (continued):

Share options to purchase 884,000 common shares at $3.42 to $3.96 per share were outstanding in 2006 (2005 -- 551,500 common shares at $3.42 to $3.55; 2004 - 50,000 common shares at $2.75 per share) but were not included in the computation of diluted earnings per share because their effect is anti-dilutive.

10.

Research and development costs:



2006
	
	
	2005
	
	
	2004Research and developments costs
	$
	3,418,750
	
	$
	1,524,658
	
	$
	1,347,065Investment tax credits
	
	(1,255,083
	)
	
	(620,935
	)
	
	(316,000
	)Government assistance
	
	-
	
	
	-
	
	
	(71,223
	)$
	2,163,667
	
	$
	903,723
	
	$
	959,842




The Company has entered into a Contribution Agreement (the Agreement) with Sustainable Development Technology Canada.  Under the terms of the Agreement, the Company is to be reimbursed for certain research and development costs incurred to develop and commercialize specific projects to a maximum contribution of $500,000.  The contribution limit was reached in 2004.

11.

Related party transactions:

During the year ended December 31, 2006, the Company paid $69,673 (2005 - $64,735; 2004 - $83,000) for research and development services to a director of the Company.  In addition, the Company paid $29,944 (2005 - $24,312; 2004 - $nil) for rent to a company controlled by an officer ofthe Company.

The Company had an advisory agreement with a company controlled by a director and officer of the Company in the amount of $10,000 per month, which expired July 2005.  The advisory agreement has been renewed on a month-to-month basis.  During the year ended December 31, 2006, the Company paid management fees of $120,000 (2005 - $120,000; 2004 - $120,000) under this agreement.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





12.

Financial instruments:

(a)

Fair value:

For certain of the Companys financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, bank indebtedness, and accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their immediate or short-term maturity.  The fair value of obligations under capital leases, calculated at the present value of future payments and discounted at the current market rates of interest available to the Company for debt instruments with similar terms and maturity, approximate their carrying values.

(b)

Currency risk:

The Company enters into forward foreign exchange contracts to manage its foreign currency exposure.  The contracts oblige the Company to sell U.S. dollars in the future at pre-determined exchange rates. The contracts are matched with anticipated future sales in foreign currencies.

As at December 31, 2006 and 2005, there were no forward foreign exchange contracts outstanding.

Foreign exchange gains recognized in the determination of net earnings for the year were $262,536 (2005 - $122,462); (2004 - $30,850).

(c)

Concentrations of credit risk:

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, short-term investments and trade accounts receivable.  To reduce credit risk, cash equivalents are only held at major financial institutions and management performs ongoing credit evaluations of its customers financial condition.  The Company maintains reserves for potential credit losses.

13.

Commitments:

The Company has operating lease agreements for the rental of premises and equipment.  The minimum future annual rental payments under the leases are as follows:



Years ending December 31:2007
	$
	1,036,4772008
	
	960,2092009
	
	773,2152010
	
	493,0622011
	
	246,986








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





14.

Changes in non-cash operating working capital:



2006
	
	
	2005
	
	
	2004Accounts receivable
	$
	(2,931,261
	)
	$
	(1,310,896
	)
	$
	312,333Inventories
	
	(9,725,201
	)
	
	(4,112,082
	)
	
	(853,378
	)Prepaid expenses and deposits
	
	(386,258
	)
	
	(391,456
	)
	
	(217,961
	)Accounts payable and accrued liabilities
	
	2,695,637
	
	
	848,674
	
	
	(321,147
	)Income tax payable
	
	(45,539
	)
	
	10,007Forward exchange contracts
	
	
	
	
	31,050
	
	
	(31,050
	)Deferred revenue
	
	94,033
	
	
	(222,550
	)
	
	(25,807
	)$
	(10,298,589
	)
	$
	(5,147,253
	)
	$
	(1,137,010
	)




15.

Segmented information:

The Company is currently focused within three technology groups:  solar powered LED lighting; solar power systems and equipment; and LED illuminated signage.  Management evaluates segment performance based on gross profit as other expenses are not generally allocated to individual groups.  The groups share certain inventory, equipment and leasehold improvements; therefore management does not classify asset information on a segmented basis.  The Company has presented the segment information for the years ended December 31, 2005 and 2004 on the same basis as adopted for the year ended December 31, 2006.



(thousands of dollars)
	
	Solar LED
	
	Solar power2006
	
	lighting
	
	systems
	
	LED signs
	
	TotalSales
	$
	26,951
	$
	31,053
	$
	4,442
	$
	62,446Cost of sales
	
	15,157
	
	23,124
	
	2,867
	
	41,148Gross profit
	$
	11,794
	$
	7,929
	$
	1,575
	
	21,298Expenses
	
	
	
	
	
	
	
	20,144Operating income
	
	
	
	
	
	
	
	1,154Other income
	
	
	
	
	
	
	
	184Earnings before income taxes
	
	
	
	
	
	
	$
	1,338






---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





15.

Segmented information (continued):



(thousands of dollars)
	
	Solar LED
	
	Solar power2005
	
	lighting
	
	systems
	
	LED signs
	
	TotalSales
	$
	18,413
	$
	15,580
	$
	4,736
	$
	38,729Cost of sales
	
	9,813
	
	11,651
	
	2,846
	
	24,310Gross profit
	$
	8,600
	$
	3,929
	$
	1,890
	
	14,419Expenses
	
	
	
	
	
	
	
	13,320Operating income
	
	
	
	
	
	
	
	1,099Other income
	
	
	
	
	
	
	
	158Earnings before income taxes
	
	
	
	
	
	
	$
	1,257




(thousands of dollars)
	
	Solar LED
	
	Solar power2004
	
	lighting
	
	systems
	
	LED signs
	
	TotalSales
	$
	13,306
	$
	
	$
	2,589
	$
	15,895Cost of sales
	
	6,209
	
	
	
	1,447
	
	7,656Gross profit
	$
	7,097
	$
	
	$
	1,142
	
	8,239Expenses
	
	
	
	
	
	
	
	7,772Operating income
	
	
	
	
	
	
	
	467Other income
	
	
	
	
	
	
	
	126Earnings before income taxes
	
	
	
	
	
	
	$
	593




Sales in each group includes a portion of total freight revenue.  Cost of sales in each group also includes a portion of total freight expense.  The accounting policies of each segment are the same as those described in note 11.

As at December 31, 2006 and 2005, substantially all of the assets related to the Companys operations were located in Canada except for inventory on hand in the United States of America of $3,041,037 (2005 - $1,441,264) and inventory on hand in the United Kingdom of $381,927 (2005 - $343,210).

For geographical reporting, revenues are attributed to the geographic location in which the customer is located as follows:



(thousands of dollars)
	
	2006
	
	2005
	
	2004North America
	$
	51,905
	$
	32,456
	$
	11,898South America
	
	1,011
	
	324
	
	326Europe
	
	6,084
	
	2,746
	
	2,058Middle East
	
	1,770
	
	2,321
	
	1,006Asia
	
	1,018
	
	530
	
	462South Pacific
	
	658
	
	353
	
	145$
	62,446
	$
	38,730
	$
	15,895








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





16.

Subsequent event:

In January 2007, the Company acquired a business relating to the distribution of certain lighting products.  The purchase consideration consisted of cash proceeds of $70,750 plus contingent consideration of up to $930,000 based primarily on the net profit of the acquired business through to December 31, 2010.

17.

Reconciliation to United States generally accepted accounting principles:

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP) which differ in certain respects from those measurement principles and practices that the Company would have followed had its consolidated financial statements been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and the requirements of the Securities and Exchange Commission (SEC).  The material measurement differences to the consolidated financial statements are as follows:

(a)

Income taxes:

Under U.S. GAAP, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Under Canadian GAAP, the effect of a change in tax rates is recognized in the period of substantive enactment.  The application of this difference under U.S. GAAP does not result in a material difference to the income taxes balances recorded under Canadian GAAP.

(b)

Stock-based compensation:

Under Canadian GAAP, prior to January 1, 2002, the Company did not recognize any compensation for options granted to employees or directors.  Subsequent to January 1, 2002, the Company applied the fair value method described in note 1(k) to employee stock option grants.

Under U.S. GAAP, the Company had elected under Statement of Financial Accounting Standard (FAS) No. 123, Accounting for Stock Based Compensation, to continue to apply the provisions of Accounting Principles Board (APB) No. 25 and its related interpretations to its accounting for stock options granted to employees prior to January 1, 2006.  Under APB 25, compensation is measured using the intrinsic value method.   Under the intrinsic value method, employee stock option compensation is determined as the excess, if any, of the quoted market value of the stock at the date of the grant over the amount an optionee must pay to acquire the stock.  The excess is recognized by a charge to operations over the vesting period.

Stock options granted to non-employees for services rendered to the Company are required to be accounted for based on the fair value of the services provided or the stock options granted as the services are performed and the options earned.  The Company applies a similar accounting policy under Canadian GAAP for non-employee awards made on or after January 1, 2002.  The stock-based compensation expense in respect of options granted to non-employees prior to January 1, 2002, under U.S. GAAP, based on the fair value of the options using an option pricing model, would be $nil for the year ended December 31, 2006 (2005 - $nil, 2004 - $23,191).







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





17.

Reconciliation to United States generally accepted accounting principles (continued):

(b)

Stock-based compensation (continued):

Under U.S. GAAP, effective January 1, 2006, the Company adopted FAS No. 123(R) entitled Share-Based Payment (FAS 123R).  FAS 123R addresses accounting for stock-based compensation and requires that the fair value of all stock-based compensation arrangements, including options be recognized in a companys financial statements, as opposed to the presentation of supplemental pro forma disclosure in the notes to financial statements.  FAS 123R eliminates the ability to account for stock-based compensation transactions using APB Opinion No. 25.

The Company adopted FAS 123R using the modified prospective transition method.  Under that method, compensation cost recognized in 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, as adjusted to reflect estimated forfeitures and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R.  FAS 123R requires the effect of forfeitures to be estimated and recorded at the grant date rather than when forfeitures occur which is the Companys practice under Canadian GAAP.

Escrowed shares

With respect to escrowed shares, U.S. GAAP considers shares held in and releasable from escrow based on performance to be a compensatory arrangement between the Company and the holder of the shares.  Accordingly, the difference between the fair value of escrowed shares at the time the shares are eligible for release from escrow and the issue price of the shares is recognized and charged to operations as compensation expense in the period in which the escrowed shares are eligible for release from escrow.  No such recognition is given under Canadian GAAP.  As at December 31, 2006, the Company held 100,000 (2005 - 220,000, 2004 - 340,000) common shares in escrow.  The additional compensation expense under U.S. GAAP from the escrowed shares for the year ended December 13, 2006 was a recovery of $16,206 (2005 expense of $313,659; 2004 expense of $697,428).

(c)

Research equipment:

The cost of research equipment that has been capitalized for Canadian GAAP purposes but does not have an alternative future use separate from the research project is required to be expensed in the period incurred under U.S. GAAP.  Accordingly, the amortization of such equipment recognized under Canadian GAAP would not be recognized under U.S. GAAP.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





17.

Reconciliation to United States generally accepted accounting principles (continued):

(d)

Product warranties:

Product warranties included in accounts payable and accrued liabilities are as follows:



2006
	
	
	2005Balance, beginning of year
	$
	179,868
	
	$
	75,117Warranty accruals
	
	211,649
	
	
	203,001Warranty charges
	
	(121,677
	)
	
	(98,250
	)Balance, end of year
	$
	269,840
	
	$
	179,868




(e)

Recent accounting pronouncements:

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.  SFAS 154 requires retrospective application to prior periods financial statements of any change in accounting principle unless it is impracticable to do so.  This is a change from the existing practice that requires most accounting changes to be accounted for by including in net income in the period of the change, the cumulative effect of changing to the new accounting principle.  SFAS 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The adoption of this standard had no significant effect on the Companys results of operations or financial position.

In June 2006, FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS Statement No. 109.  This interpretation provides guidance on recognition and measurement of uncertainties in income taxes and is effective for the Companys 2007 fiscal year end.  The Company does not expect the adoption of this Interpretation to have a significant effect on the Companys results of operations or financial position.

In September 2006, FASB issued SFAS No. 157, Fair Value Measurement to define fair value, establish a framework for measuring fair value and to expand disclosures about fair value measurements.  The statement only applies to fair value and is effective for fiscal years beginning after November 15, 2007.  The Company does not expect the adoption of this Interpretation to have a significant effect on the Companys results of operations or financial position.

In September 2006, the US Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 which provides guidance on the consideration of the effects of prior year misstatements in quantifying misstatements in current year financial statements.  This guidance is applicable for annual statements ending after November 15, 2006.  The adoption of this guidance had no impact to the Companys results of operations or financial position.







---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





17.

Reconciliation to United States generally accepted accounting principles (continued):

(f)

Reconciliation:

The effect of the differences between Canadian and U.S. GAAP (including practices prescribed by the SEC) on the consolidated balance sheets, statements of operations and retained earnings (deficit) and cash flows is summarized as follows:

(i)

Assets:

2006
	
	
	2005Assets, under Canadian GAAP
	$
	56,048,621
	
	$
	48,792,549Adjustment for research equipment expensedunder U.S. GAAP (note 17(c))
	
	(131,632
	)
	
	(147,797
	)Assets, under U.S. GAAP
	$
	55,916,989
	
	$
	48,644,752




(ii)

Liabilities:

2006
	
	2005Liabilities, under Canadian and U.S. GAAP
	$
	10,650,093
	$
	8,644,669




(iii)

Share capital and contributed surplus:



2006
	
	
	2005Share capital and contributed surplus, underCanadian GAAP
	$
	44,905,464
	
	$
	40,064,528Adjustment for stock-based compensation relatingto stock options issued to non-employees (note 17(b))
	
	417,437
	
	
	417,437Adjustment for stock-based compensation relatingto stock options and escrowed shares allotted toemployees and directors (note 17(b))
	
	2,802,306
	
	
	2,818,512Adjustment to reverse stock compensation underCanadian GAAP
	
	(989,603
	)
	
	(910,208
	)Share capital and contributed surplus, under U.S. GAAP
	$
	47,135,604
	
	$
	42,390,269








---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





17.

Reconciliation to United States generally accepted accounting principles (continued):

(f)

Reconciliation (continued):

(iv)

Retained earnings (deficit):

2006
	
	
	2005Retained earnings (deficit), under Canadian GAAP
	$
	493,064
	
	$
	358,578Expense for stock-based compensation relating tostock options issued to non-employees (note 17(b))
	
	(412,437
	)
	
	(417,437
	)Expense for stock-based compensation relatingto stock options and escrowed shares allotted toemployees and directors (note 17(b))
	
	(2,802,306
	)
	
	(2,818,512
	)Adjustment to reverse stock compensation underCanadian GAAP
	
	989,603
	
	
	910,208Adjustment for research equipment expensedunder U.S. GAAP (note 17(c))
	
	(132,632
	)
	
	(147,797
	)Deficit, determined under U.S. GAAP
	$
	(1,868,708
	)
	$
	(2,114,960
	)




---

CARMANAH TECHNOLOGIES CORPORATION

Consolidated Notes to Financial Statements

(Expressed in Canadian dollars)



Years ended December 31, 2006, 2005 and 2004





17.

Reconciliation to United States generally accepted accounting principles (continued):

(f)

Reconciliation (continued):

(v)

Earnings and earnings per share for the year:



2006
	
	2005
	
	
	2004Net earnings, under Canadian GAAP
	$
	134,486
	$
	680,962
	
	$
	592,823Expense for stock-based compensationrelating to stock options issued tonon-employees (note 17(b))
	
	
	
	
	
	
	(23,191
	)Recovery (expense) for stock-basedcompensation relating to stock optionsand escrowed shares allocated toemployees and directors (note 17(b))
	
	16,206
	
	(313,659
	)
	
	(697,428
	)Adjustment to reverse stockcompensation under CanadianGAAP for employee grants
	
	
	
	417,471
	
	
	319,035Adjustment to adjust stock compensationfor the treatment of forfeitures underU.S. GAAP (note 17(b)
	
	79,395Adjustment for research equipmentexpensed under U.S. GAAP (note 17(c))
	
	16,165
	
	(26,710
	)
	
	(43,518
	)Net earnings, determined underU.S. GAAP
	$
	246,252
	$
	758,064
	
	$
	147,721Weighted average number of commonshares outstanding under CanadianGAAP and U.S. GAAP:Basic
	
	41,696,874
	
	34,187,205
	
	
	30,116,949Diluted
	
	42,399,564
	
	35,598,555
	
	
	32,055,307Earnings per share, basic anddiluted - U.S. GAAP
	$
	0.01
	$
	0.02
	
	$
	0.00