---



Consolidated

Balance sheets

December 31, 2006 and 2005

(Expressed in United States dollars)

|                                     |                                               |           |              |           |              | 
|------------------------------------ | --------------------------------------------- | --------- | ------------ | --------- | ------------ | 
|                                     |                                               |           | 2006         |           | 2005        
|ASSETS                               |                                               |           |              |          
|Current assets                       |                                               |           |              |          
|                                     | Cash and cash equivalents                     | $         | 2,316,476    | $         | 1,222,729   
|                                     | Accounts receivable (net) and accrued revenue |           | 316,298      |           | 401,524     
|                                     | Note receivable                               |           | 6,000        |           | 82,648      
|                                     | Inventory                                     |           | 19,422       |           | 40,438      
|                                     | Deposits and prepaid expenses                 |           | 60,933       |           | 76,146      
|                                     |                                               |           | 2,719,129    |           | 1,823,485   
|                                     |                                               |           |              |           |             
|Note receivable                      |                                               | 55,325    |              |         
|Property and equipment (note 3)      |                                               | 348,280   |              | 670,635  
|Deferred development costs (note 4)  |                                               | 313,800   |              | 352,750  
|Intangible assets (note 5)           |                                               | 98,351    |              | 155,445  
|                                     |                                               | $         | 3,534,885    | $         | 3,002,315   
|                                     |                                               |           |              |           |             
|LIABILITIES AND SHAREHOLDERS EQUITY |                                               |           |              |          
|Current liabilities                  |                                               |           |              |          
|                                     | Accounts payable and accrued liabilities      | $         | 268,439      | $         | 285,786     
|                                     | Deferred revenue                              |           | 45,572       |           | 45,011      
|                                     |                                               |           | 314,011      |           | 330,797     
|                                     |                                               |           |              |           |             
|Convertible notes (note 6)           |                                               | 389,862   |              |         
|                                     |                                               |           |              |          
|Shareholders equity                 |                                               |           |              |          
|                                     | Share capital (note 7)                        |           | 47,208,942   |           | 45,979,055  
|                                     | Warrants (note 8)                             |           | 1,027,114    |           | 903,738     
|                                     | Contributed surplus (note 9)                  |           | 2,581,456    |           | 2,041,001   
|                                     | Deficit                                       |           | (47,986,500) |           | (46,252,276)
|                                     |                                               |           | 2,831,012    |           | 2,671,518   
|                                     |                                               |           |              |           |             
|                                     | $                                             | 3,534,885 | $            | 3,002,315

See accompanying notes to consolidated financial statements.







Approved by the Board:

David Gallagher: Director                                                      Patty Chakour: Director







---

Consolidated

Statements of Operations and Deficit

Years ended December 31, 2006, 2005 and 2004

(Expressed in United States dollars)



|                                          |                                               |              |           |              |           |              |          
|----------------------------------------- | --------------------------------------------- | ------------ | --------- | ------------ | --------- | ------------ | ---------
|                                          |                                               |              | 2006      |              | 2005      |              | 2004     
|REVENUE                                   |                                               |              |           |              |           |             
|                                          | Royalties, license and engineering fees       | $            | 1,692,669 | $            | 1,056,509 | $            | 1,162,303
|                                          | Product sales                                 |              | 296,361   |              | 486,731   |              | 1,050,875
|                                          |                                               |              | 1,989,030 |              | 1,543,240 |              | 2,213,178
|                                          | Cost of product sales                         |              | 40,088    |              | 179,781   |              | 419,290  
|                                          |                                               |              | 1,948,942 |              | 1,363,459 |              | 1,793,888
|EXPENSES                                  |                                               |              |           |              |           |             
|                                          | Marketing                                     |              | 1,157,573 |              | 999,875   |              | 1,251,695
|                                          | Operations                                    |              | 136,386   |              | 216,409   |              | 242,531  
|                                          | Product engineering                           |              | 819,277   |              | 952,050   |              | 964,380  
|                                          | Administration                                |              | 971,571   |              | 882,722   |              | 800,611  
|                                          | Foreign exchange loss                         |              | 25,912    |              | 2,832     |              | 41,955   
|                                          | Amortization                                  |              | 331,419   |              | 360,898   |              | 457,572  
|                                          | Impairment of property and equipment (note 3) |              | 167,809   |              | 89,754    |              |         
|                                          | Impairment of intangible assets (note 5)      |              |          |              | 428,453   |              |         
|                                          |                                               |              | 3,609,947 |              | 3,932,993 |              | 3,758,744
|                                          |                                               |              |           |              |           |              |          
|Loss before other items                   |                                               | (1,661,005)  |           | (2,569,534)  |           | (1,964,856) 
|                                          |                                               |              |           |              |           |              |          
|OTHER ITEMS                               |                                               |              |           |              |           |             
|                                          | Interest income                               |              | 85,686    |              | 56,700    |              | 78,727   
|                                          | Interest on convertible notes                 |              | (61,336)  |              |          |              |         
|                                          | Accretion expense                             |              | (45,083)  |              |          |              |         
|                                          | Loss on sale of property and equipment        |              |          |              |          |              | (15,616) 
|                                          | Other                                         |              | (1,637)   |              | (163)     |              | (1,697)  
|                                          |                                               |              | (22,370)  |              | 56,537    |              | 61,414   
|                                          |                                               |              |           |              |           |              |          
|Loss before taxes                         |                                               | (1,683,375)  |           | (2,512,997)  |           | (1,903,442) 
|Foreign withholding tax                   |                                               | (50,849)     |           | (37,711)     |           | (22,504)    
|Net loss                                  |                                               | (1,734,224)  |           | (2,550,708)  |           | (1,925,946) 
|                                          |                                               |              |           |              |           |              |          
|Deficit, beginning of year                |                                               | (46,252,276) |           | (43,701,568) |           | (41,775,622)
|                                          |                                               |              |           |              |           |              |          
|Deficit, end of year                      | $                                             | (47,986,500) | $         | (46,252,276) | $         | (43,701,568)
|                                          |                                               |              |           |              |           |              |          
|Loss per common share (basic and diluted) | $                                             | (0.19)       | $         | (0.30)       | $         | (0.25)      

See accompanying notes to consolidated financial statements







---

Consolidated

Statements of Cash Flows

Years ended December 31, 2006, 2005 and 2004

(Expressed in United States dollars)

|                                                 |                                                        |                                        |             |             |             |           |             |        
|------------------------------------------------ | ------------------------------------------------------ | -------------------------------------- | ----------- | ----------- | ----------- | --------- | ----------- | -------
|                                                 |                                                        |                                        | 2006        |             | 2005        |           | 2004       
|Cash provided by (used in):                      |                                                        |                                        |             |             |             |          
|                                                 |                                                        |                                        |             |             |             |           |            
|OPERATIONS                                       |                                                        |                                        |             |             |             |          
|                                                 | Loss for the year                                      | $                                      | (1,734,224) | $           | (2,550,708) | $         | (1,925,946)
|                                                 |                                                        |                                        |             |             |             |           |            
|                                                 | Items not requiring (providing) cash:                  |                                        |             |             |             |           |            
|                                                 |                                                        | Amortization                           |             | 331,419     |             | 360,898   |             | 457,572
|                                                 |                                                        | Stock based compensation               |             | 380,614     |             | 134,793   |             | 320,432
|                                                 |                                                        | Accretion expense                      |             | 45,083      |             |          |             |       
|                                                 |                                                        | Loss on sale of property and equipment |             |            |             |          |             | 15,616 
|                                                 |                                                        | Impairment of property and equipment   |             | 167,809     |             | 89,754    |             |       
|                                                 |                                                        | Impairment of intangible assets        |             |            |             | 428,453   |             |       
|                                                 |                                                        | Other                                  |             | (4,022)     |             |          |             |       
|                                                 | Changes in non-cash working capital balances (note 12) |                                        | 104,669     |             | (57,747)    |           | (47,817)   
|                                                 |                                                        |                                        | (708,652)   |             | (1,594,557) |           | (1,180,143)
|                                                 |                                                        |                                        |             |             |             |           |            
|FINANCING                                        |                                                        |                                        |             |             |             |          
|                                                 | Issuance of common shares, net                         |                                        | 857,883     |             | 165,008     |           | 2,120,657  
|                                                 | Issuance of warrants                                   |                                        |            |             |            |           | 904,019    
|                                                 | Proceeds on issuance of convertible notes              |                                        | 1,000,000   |             |            |           |           
|                                                 |                                                        |                                        | 1,857,883   |             | 165,008     |           | 3,024,676  
|                                                 |                                                        |                                        |             |             |             |           |            
|INVESTMENTS                                      |                                                        |                                        |             |             |             |          
|                                                 | Note receivable                                        |                                        | 26,442      |             | (82,648)    |           |           
|                                                 | Purchase of property and equipment                     |                                        | (42,426)    |             | (188,890)   |           | (164,457)  
|                                                 | Deferred development costs                             |                                        | (39,500)    |             | (352,750)   |           |           
|                                                 | Purchase of intangible assets                          |                                        |            |             | (50,977)    |           | (418,056)  
|                                                 | Proceeds from sale of property and equipment           |                                        |            |             |            |           | 4,430      
|                                                 |                                                        |                                        | (55,484)    |             | (675,265)   |           | (578,083)  
|                                                 |                                                        |                                        |             |             |             |           |            
|Increase (decrease) in cash and cash equivalents |                                                        | 1,093,747                              |             | (2,104,814) |             | 1,266,450
|Cash and cash equivalents, beginning of year     |                                                        | 1,222,729                              |             | 3,327,543   |             | 2,061,093
|                                                 |                                                        |                                        |             |             |             |           |            
|Cash and cash equivalents, end of year           | $                                                      | 2,316,476                              | $           | 1,222,729   | $           | 3,327,543

Supplementary information (note 12)









---

Notes

to Consolidated Financial Statements

Years Ended December 31, 2006, 2005, and 2004

(Expressed in United States dollars)



1.

Financial statement presentation



The consolidated financial statements include the accounts of QSound Labs, Inc., a company organized under the laws of the Province of Alberta, and its subsidiaries (collectively QSound or the Company) and are presented in accordance with Canadian generally accepted accounting principles. These accounting principles, in the case of the Company, conform in all material respects with those in the United States, except as outlined in note 17. All amounts are expressed in United States Dollars



QSound Labs, Inc. is an audio technology company which develops proprietary audio solutions, including virtual surround sound, positional audio and stereo enhancement for mobile devices, consumer electronics, PC/multimedia and Internet markets. Its subsidiaries QCommerce Inc. and QTelNet Inc. provide e-commerce solutions for small and medium sized businesses and Voice Over IP solutions respectively.



2.

Significant accounting policies:



Cash and cash equivalents:

Cash and cash equivalents include short term deposits with initial maturities of three months or less at the date of acquisition.



Inventory:

Inventory is stated at the lower of cost, being determined by the first-in, first-out method, and net realizable value.



Foreign currency translation:

The Companys functional currency is United States Dollars. The Company translates its foreign denominated monetary assets and liabilities at the exchange rate prevailing at the year end. Non-monetary assets, liabilities and depreciation are translated at historic rates. Revenues and expenses are translated at the average rate of exchange for the year and any resulting foreign exchange gains or losses are included in determination of net income or loss for the year.



Property and equipment:

Property and equipment is recorded at cost and is depreciated over the expected useful life of the assets as follows:



|                                   |                   |     
|---------------------------------- | ----------------- | ----
|Assets                             | Basis             | Rate
|Sound source and control equipment | Declining balance | 20% 
|Real time systems                  | Declining balance | 30% 
|Furniture and fixtures             | Declining balance | 20% 
|Computer equipment                 | Declining balance | 30% 
|Software and production tooling    | Declining balance | 30% 



The carrying value of property and equipment is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.



Research and development costs:

Research costs are expensed as incurred.  Development costs are expensed as incurred except if they relate to a specific product or process that meet certain criteria and are fully recoverable, in which case these costs are deferred.



Amortization of deferred development costs commences with commercial production or use of the process, and are amortized at an annual rate of 20% over its estimated useful economic life.







---



The Company assesses impairment of deferred development costs by determining whether their recoverable amounts are less than their unamortized balance.  When a potential impairment is identified, the amount of impairment is calculated by reference to the related net expected future cash flows and charged to period earnings.



Intangible assets:

Patents and trademarks and purchased customer lists are recorded at cost and are amortized over the expected useful life of the assets, which has been estimated to be 5 years.  Their carrying value is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.



Revenue recognition:

The Company generates revenue from sale of licenses for software products, royalties, and engineering fees.  The Company recognizes revenue, when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery of the software product has occurred or the services have been performed, the price is fixed or determinable, customer acceptance has been received, and collection is reasonably assured. When software sales arrangements contain multiple elements, the Company allocates revenue to each element of accounting based on vendor specific objective evidence of fair value. In the absence of fair value for a delivered element, the Company allocates revenue to the undelivered items based on their fair value with the residual amount allocated to the delivered elements. Where the fair value of an undelivered element cannot be determined, the Company would defer revenue for the delivered elements until the undelivered elements are delivered.



Software license fees, royalties, and engineering fees collected on projects in advance of revenue being recognized are recorded as deferred revenue.



The Company also generates revenue from the sale of other products.  Revenue from other product sales is recognized when products are shipped pursuant to sales arrangements with customers (which is when title passes), collectibility is reasonably assured, and the Company has no further obligations relating to the product.



Income taxes:

The Company uses the asset and liability method of accounting for income taxes under which future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on future income tax assets and liabilities as a result of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the substantive enactment date.



To the extent that future income tax assets are not considered to be more likely than not to be realized, a valuation allowance is provided.



Per share amounts:

Basic per share amounts are calculated using the weighted average number of common shares outstanding for the year. The Company applies the treasury stock method to calculate diluted per share amounts. The treasury stock method assumes that any proceeds from the exercise of in-the-money stock options and other dilutive instruments would be used to purchase common shares at the average market price during the period.



Stock based compensation:

The fair value of each option granted is estimated on date of grant using the Black Scholes option pricing model. The amount is credited to contributed surplus and expensed over the vesting period. Upon exercise of the options, the exercise proceeds together with amounts credited to contributed surplus are credited to share capital.



Measurement uncertainty:

The timely preparation of the consolidated financial statements in conformity with Canadian generally accepted accounting principles requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Such estimates primarily relate to unsettled transactions and







---

events as of the date of the consolidated financial statements. Accordingly, actual results may differ from estimated amounts as future confirming events occur. Amounts recorded for depreciation, accretion of debt discount and income taxes (which are subject to re-assessment by tax authorities) are based on management estimates and assumptions.



3.

Property and equipment:



|                                   |   |           |                          |           |                |        
|---------------------------------- | - | --------- | ------------------------ | --------- | -------------- | -------
|2006                               |   | Cost      | Accumulated amortization |           | Net book value
|Sound source and control equipment | $ | 550,664   | $                        | 536,591   | $              | 14,073 
|Real time systems                  |   | 905,534   |                          | 902,608   |                | 2,926  
|Furniture and fixtures             |   | 230,853   |                          | 211,714   |                | 19,139 
|Computer equipment                 |   | 1,132,745 |                          | 891,337   |                | 241,408
|Software and production tooling    |   | 1,632,281 |                          | 1,561,547 |                | 70,734 
|                                   | $ | 4,452,077 | $                        | 4,103,797 | $              | 348,280



|                                   |   |           |                          |           |                |        
|---------------------------------- | - | --------- | ------------------------ | --------- | -------------- | -------
|2005                               |   | Cost      | Accumulated amortization |           | Net book value
|Sound source and control equipment | $ | 545,463   | $                        | 529,346   | $              | 16,117 
|Real time systems                  |   | 905,534   |                          | 901,354   |                | 4,180  
|Furniture and fixtures             |   | 230,668   |                          | 207,750   |                | 22,918 
|Computer equipment                 |   | 1,095,705 |                          | 809,061   |                | 286,644
|Software and production tooling    |   | 1,632,281 |                          | 1,291,505 |                | 340,776
|                                   | $ | 4,409,651 | $                        | 3,739,016 | $              | 670,635



In accordance with the Companys accounting policy, an analysis of property and equipment was completed in 2006 on the telephony assets, as changes in this market indicated that the carrying amount may not be recoverable. Included in accumulated amortization above are asset impairment charges of $167,809 (2005: $88,392) relating to software and production tooling and of $nil (2005: $1,362) relating to computer equipment



4.

Deferred development costs:



|                           |   |         |   |        
|-------------------------- | - | ------- | - | -------
|                           |   | 2006    |   | 2005   
|Software development costs | $ | 844,064 | $ | 804,564
|Accumulated amortization   |   | 530,264 |   | 451,814
|Net book value             | $ | 313,800 | $ | 352,750



In 2006, amortization of $78,450 (2005: $64,974; 2004: $112,711) was recorded and included in amortization expense.



5.

Intangible assets:



|                        |   |           |                          |           |                |       
|----------------------- | - | --------- | ------------------------ | --------- | -------------- | ------
|2006                    |   | Cost      | Accumulated amortization |           | Net book value
|Patents and trademarks  | $ | 927,811   | $                        | 829,460   | $              | 98,351
|Purchased customer list |   | 34,418    |                          | 34,418    |                |      
|Licensing rights        |   | 428,453   |                          | 428,453   |                |      
|                        | $ | 1,390,682 | $                        | 1,292,331 | $              | 98,351



|                        |   |           |                          |           |                |        
|----------------------- | - | --------- | ------------------------ | --------- | -------------- | -------
|2005                    |   | Cost      | Accumulated amortization |           | Net book value
|Patents and trademarks  | $ | 928,906   | $                        | 780,344   | $              | 148,562
|Purchased customer list |   | 34,418    |                          | 27,535    |                | 6,883  
|Licensing rights        |   | 428,453   |                          | 428,453   |                |       
|                        | $ | 1,391,777 | $                        | 1,236,332 | $              | 155,445







---



| |  |  |  |  |  | 
| |  |  |  |  |  | 



In accordance with its accounting policy the Company has determined that there were no events or circumstances in the current year that indicate possible impairment of these assets. An analysis of intangible assets was completed in 2005 resulting in an impairment charge of $428,453 relating to licensing rights. This charge is included in accumulated amortization.



6.

Convertible notes:



On March 27, 2006, the Company issued $1,000,000 in convertible notes and 400,000 related share purchase warrants. The notes are due in five years and bear interest at the US prime rate payable quarterly in arrears.

The notes are convertible at the option of the holders at any time and from time to time into common stock of the Company at a conversion price of $3.25 per share. Additionally, in the event that the Company issues securities convertible into common stock at a price less than this conversion price, the conversion price shall be immediately adjusted to the price at which such securities were issued.

The warrants issued are each exercisable into one common share at an exercise price of $4.50 per share until March 27, 2011.

The warrants also provide for an adjustment to the exercise price in the event that the Company issues securities convertible into shares at a price less than the then applicable exercise price, in which case the exercise price shall be reduced to the same exercise price as that of the convertible securities subsequently issued.

The convertible notes are a financial instrument comprising both an equity component and a liability component, which together with the warrants have been fair valued on initial recognition. Fair value of the equity component and the warrants were calculated using the Black Scholes pricing model, and the fair value of the liability component was calculated as the present value of the principal and interest payments. The total cash proceeds have been allocated to these components on a pro-rata basis using these calculated fair values resulting in $344,778, $314,396 and $340,826 being allocated to the liability component, equity component and warrants respectively. The fair value of the warrants and equity component of the convertible notes were calculated with the assumptions stated below:



|                        |        
|----------------------- | -------
|Risk free interest rate | 4.83%  
|Volatility              | 71%    
|Life of the warrant     | 3 years
|Dividend yield          | 0%     



The present value of the principal and interest payments have been calculated using a discount factor of 15% and a US prime rate of 7.75%. The proceeds allocated to the debt component of the convertible note, $344,778, will be accreted to the face value of the note of $1,000,000 over its term of five years. During the year, $45,083 has been charged as accretion expense relating to these items.



At December 31, 2006

|                                                     |   |          
|---------------------------------------------------- | - | ---------
|Face value of loan                                   | $ | 1,000,000
|Accretion expense to be recognized in future periods |   | 610,138  
|                                                     | $ | 389,862  



7.

Share capital:



Authorized:

The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of first and second preferred shares.  No preferred shares are outstanding.



Common shares issued and outstanding:







---





|                                             |                  |               |           
|-------------------------------------------- | ---------------- | ------------- | ----------
|                                             | Number of Shares | Consideration
|Balance December 31, 2003                    | 7,199,244        | $             | 43,801,245
|                                             |                  |               |           
|Issued upon exercise of options              | 857,015          |               | 1,425,703 
|Issued for cash by private placement         | 347,826          |               | 2,000,000 
|Assigned value of warrants issued as part of |                  |               |           
|private placement costs (note 8)             |                 |               | (380,862) 
|Deemed allocation to warrants                |                 |               | (904,019) 
|Share issue costs                            |                 |               | (149,541) 
|Balance December 31, 2004                    | 8,404,085        |               | 45,792,526
|                                             |                  |               |           
|Issued upon exercise of options              | 257,900          |               | 222,521   
|Share issue costs                            |                 |               | (35,992)  
|Balance December 31, 2005                    | 8,661,985        |               | 45,979,055
|                                             |                  |               |           
|Issued upon exercise of options              | 213,600          |               | 508,155   
|Issued upon exercise of warrants             | 500,000          |               | 737,450   
|Share issue costs                            |                 |               | (15,718)  
|Balance December 31, 2006                    | 9,375,585        | $             | 47,208,942



8.

Warrants:



|                          |                    |               |          
|------------------------- | ------------------ | ------------- | ---------
|                          | Number of Warrants | Consideration
|Balance December 31, 2003 | 500,000            | $             | 217,450  
|                          |                    |               |          
|Issued                    | 735,869            |               | 1,284,881
|Balance December 31, 2004 | 1,235,869          |               | 1,502,331
|                          |                    |               |          
|Expired                   | (521,739)          |               | (598,593)
|Balance December 31, 2005 | 714,130            |               | 903,738  
|                          |                    |               |          
|Exercised                 | (500,000)          |               | (217,450)
|Issued                    | 400,000            |               | 340,826  
|Balance December 31, 2006 | 614,130            | $             | 1,027,114



The balance at December 31, 2005 has been adjusted to reflect the expiration of warrants in 2005 and the transfer within shareholders equity from warrants to contributed surplus.



The amount of $340,826 allocated to the warrants issued was calculated taking the total cash proceeds of the convertible note (note 6) on a pro-rata basis using the estimated fair value of the warrants issued and the fair value of the convertible note.



Each warrant outstanding at December 31, 2006 is exercisable into one common share of the Company as follows:



|                                     |                |   |                        |  |    
|------------------------------------ | -------------- | - | ---------------------- |  | ---
|Warrants Outstanding and Exercisable | Exercise Price |   | Remaining Term (years)
|75,000                               |                | $ | 7.77                   |  | 3.0
|139,130                              |                |   | 9.12                   |  | 3.0
|400,000                              |                |   | 4.50                   |  | 4.2
|614,130                              |                | $ | 5.95                   |  | 3.8









---

9.

Contributed surplus:



|                                                        |   |          
|------------------------------------------------------- | - | ---------
|Balance December 31, 2003                               | $ | 1,203,760
|                                                        |   |          
|Stock - based compensation                              |   | 376,861  
|Options exercised                                       |   | (251,485)
|Balance December 31, 2004                               |   | 1,329,136
|                                                        |   |          
|Stock - based compensation                              |   | 134,793  
|Options exercised                                       |   | (21,521) 
|Expired warrants                                        |   | 598,593  
|Balance December 31, 2005                               |   | 2,041,001
|                                                        |   |          
|Stock - based compensation                              |   | 380,614  
|Options exercised                                       |   | (154,555)
|Value of equity component of convertible notes (note 6) |   | 314,396  
|Balance December 31, 2006                               | $ | 2,581,456



The balance at December 31, 2005 has been adjusted to reflect the expiration of warrants in 2005 and the transfer within shareholders equity from warrants to contributed surplus.



10.

Stock option plan:



A summary of the Companys outstanding stock options at December 31, 2006, 2005 and 2004 and changes during those years is presented below



|                          |                  |                                 |     
|------------------------- | ---------------- | ------------------------------- | ----
|                          | Number of Shares | Weighted average exercise price
|Balance December 31, 2003 | 1,738,765        | $                               | 0.87
|                          |                  |                                 |     
|Granted                   | 630,720          |                                 | 2.58
|Exercised                 | (857,015)        |                                 | 1.37
|Cancelled or expired      | (354,970)        |                                 | 1.36
|Balance December 31, 2004 | 1,157,500        |                                 | 1.29
|                          |                  |                                 |     
|Granted                   | 180,933          |                                 | 2.59
|Exercised                 | (257,900)        |                                 | 0.78
|Cancelled or expired      | (53,000)         |                                 | 4.56
|Balance December 31, 2005 | 1,027,533        |                                 | 1.48
|                          |                  |                                 |     
|Granted                   | 170,000          |                                 | 4.69
|Exercised                 | (213,600)        |                                 | 1.66
|Cancelled or expired      | (2,233)          |                                 | 2.40
|                          |                  |                                 |     
|Balance December 31, 2006 | 981,700          | $                               | 1.99



All stock options granted have expiry dates between 2007 and 2015. Of the 170,000 stock options granted in 2006, 63,500 stock options vested in 2006, 84,000 stock options vest in 2007 and 22,500 stock options vest in 2008. No options were granted to non-employees in 2006 (2005: Nil, 2004: 60,000) in connection with services to be performed. The non employee options granted in 2004 have either vested or been cancelled. The table below summarizes unexercised stock options:







---





|                         |              |                     |                                          |                                  |      |                    |                                 |         |   |     
|------------------------ | ------------ | ------------------- | ---------------------------------------- | -------------------------------- | ---- | ------------------ | ------------------------------- | ------- | - | ----
|                         |              | Options Outstanding |                                          | Options Exercisable             
|Range of
Exercise Prices |              | Number
Outstanding  | Weighted-
Average
Remaining
Term (Years) | Weighted-
Average
Exercise Price |      | Number
Exercisable | Weighted Average
Exercise Price
|$                        | 0.47 to 1.65 |                     | 551,500                                  | 4.0                              | $    | 0.97               |                                 | 551,500 | $ | 0.97
|                         | 2.05 to 2.40 |                     | 229,200                                  | 4.8                              | 2.22 |                    | 139,200                         | 2.10   
|                         | 3.50 to 3.57 |                     | 45,000                                   | 2.7                              | 3.55 |                    | 45,000                          | 3.55   
|                         | 3.57 to 5.33 |                     | 156,000                                  | 4.4                              | 4.81 |                    | 52,500                          | 4.47   
|                         |              |                     | 981,700                                  | 4.1                              | $    | 1.99               |                                 | 788,200 | $ | 1.55



In 2006, a non cash expense of $380,614 (2005: $134,793; 2004: $320,432) was recorded reflecting the fair value of employee and directors stock options granted and vesting during the year.  Of the $380,614 expense, $45,848 related to modification of 485,500 existing stock options. These fully vested stock options had their expiry date extended through to 2011. In 2006, no compensation cost (2005: $nil; 2004: $56,429) has been recognized as compensation cost related to options issued to non-employees.



No compensation cost was recorded in the Companys statement of operations and deficit for options granted in 2002 to employees, directors and officers.  Had compensation cost for stock options granted in 2002 been determined based on the fair value method, the Companys net loss for the current year would not have changed while the net loss for 2005 would have been increased by $21,982 to $2,572,690, and the pro-forma net loss for 2004 would have increased by $81,620 to $2,007,566. Net loss per common share (basic and diluted) would not have changed for 2006 and 2005 while 2004 would have increased by $0.01 to $0.26.



The fair value of the options granted during 2006, 2005 and 2004 is estimated on the day of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |         |           |           
|----------------------- | ------- | --------- | ----------
|                        | 2006    | 2005      | 2004      
|Risk free interest rate | 4.8%    | 4.5%      | 4.5%      
|Volatility              | 64%     | 66%       | 94%       
|Expected life           | 2 years | 3.4 years | 3. 5 years
|Dividend yield          | 0%      | 0%        | 0%        
|Forfeitures             | 10%     | 28%       | 0%        



11.

Defined benefit pension plan:



The Company has established an individual pension plan for the President to resolve an outstanding compensation contingency.  The Company does not have a pension plan for other employees.



Under the terms of the plan, the Company makes yearly contributions to the plan up to the date of retirement of the individual.  All contributions to the plan are expected to return 7.5% per annum.  Should the plan not achieve the 7.5% expected return, the Company will be responsible for any shortfall.



Information regarding the individual pension plan is outlined below:







---





|                           |                                             |           |          |           |         |           |          | 
|-------------------------- | ------------------------------------------- | --------- | -------- | --------- | ------- | --------- | -------- | 
|                           |                                             | 2006      |          | 2005      |         | 2004     
|                           |                                             |           |          |           |         |          
|Fair value of plan assets  | $                                           | 352,507   | $        | 302,827   | $       | 255,628  
|Accrued benefit obligation |                                             | (322,372) |          | (283,799) |         | (236,744)
|                           |                                             |           |          |           |         |          
|Funded Status:             |                                             |           |          |           |         |          
|                           | Plan assets in excess of benefit obligation |           | 30,135   |           | 19,028  |           | 18,884  
|                           | Unamortized net actuarial gain              |           | (12,465) |           | (8,124) |           | (14,403)
|Accrued benefit asset      | $                                           | 17,670    | $        | 10,904    | $       | 4,481    



The financial statements presented do not reflect the accrued benefit asset shown above, since it is considered insignificant. The economic assumptions used to determine benefit obligation and periodic expense were:



|                                                     |  |      |  |      |  |      
|---------------------------------------------------- |  | ---- |  | ---- |  | -----
|                                                     |  | 2006 |  | 2005 |  | 2004 
|                                                     |  |      |  |      |  |      
|Discount rate                                        |  | 5.5% |  | 5.5% |  | 5.75%
|Expected rate of return on assets                    |  | 7.5% |  | 7.5% |  | 7.5% 
|Rate of compensation increase                        |  | 5.5% |  | 5.5% |  | 5.5% 
|Average remaining service period of covered employee |  | 11   |  | 12   |  | 13   



Actuarial evaluations are required every three years, the next evaluation being January 1, 2009.



Pension expense, included in marketing expense, is as follows:



|                                       |   |          |   |          |   |         
|-------------------------------------- | - | -------- | - | -------- | - | --------
|                                       |   | 2006     |   | 2005     |   | 2004    
|                                       |   |          |   |          |   |         
|Current service cost                   | $ | 21,001   | $ | 18,551   | $ | 16,063  
|Interest on accrued benefit obligation |   | 24,329   |   | 20,743   |   | 15,667  
|Expected return on plan assets         |   | (24,079) |   | (19,734) |   | (15,560)
|Pension expense                        | $ | 21,251   | $ | 19,560   | $ | 16,170  



The Company expects to contribute $21,980 to the plan in 2007.



12.

Supplementary information:



(a)

Per share amounts

The following table summarizes the common shares used in per share calculations



|                                                               |  |           |  |           |  |          
|-------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                               |  | 2006      |  | 2005      |  | 2004     
|Weighted average common shares outstanding (basic and diluted) |  | 9,156,085 |  | 8,497,201 |  | 7,628,238



(b) Net change in non-cash working capital



|                                         |   |          |   |           |   |         
|---------------------------------------- | - | -------- | - | --------- | - | --------
|                                         |   | 2006     |   | 2005      |   | 2004    
|Accounts receivable                      | $ | 85,226   | $ | (190,557) | $ | 10,227  
|Inventory                                |   | 21,016   |   | 122,130   |   | (55,191)
|Deposits and prepaid expenses            |   | 15,213   |   | (14,708)  |   | 21,483  
|Accounts payable and accrued liabilities |   | (17,347) |   | 40,122    |   | 12,466  
|Deferred revenue                         |   | 561      |   | (14,734)  |   | (36,802)
|                                         | $ | 104,669  | $ | (57,747)  | $ | (47,817)









---

(c)

Supplementary cash flow information



|                          |   |        |   |        |   |       
|------------------------- | - | ------ | - | ------ | - | ------
|Interest received in cash | $ | 75,291 | $ | 55,981 | $ | 85,546
|                          |   |        |   |        |   |       
|Interest paid in cash     | $ | 19,747 | $ |       | $ |      
|                          |   |        |   |        |   |       
|Taxes paid in cash        | $ | 50,849 | $ | 37,711 | $ | 22,504



13.

Income taxes:



Income tax expense differs from the amount that would be computed by applying the basic combined Canadian federal and provincial statutory income tax rate to the loss for the year.  The reasons for the differences are as follows:



|                                                        |                                                                                   |             |           |             |           |             |          
|------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------- | --------- | ----------- | --------- | ----------- | ---------
|                                                        |                                                                                   | 2006        |           | 2005        |           | 2004       
|Loss before taxes                                       | $                                                                                 | (1,683,375) | $         | (2,512,997) | $         | (1,903,442)
|Combined Canadian Federal and Provincial statutory rate |                                                                                   | 32.49%      |           | 33.62%      |           | 33.87%     
|Computed tax (recovery)                                 |                                                                                   | (546,926)   |           | (844,870)   |           | (644,696)  
|Increase  (decrease) resulting from:                    |                                                                                   |             |           |             |           |            
|                                                        | Change in valuation allowance                                                     |             | (968,000) |             | 172,000   |             | (53,000) 
|                                                        | Reduction of unrealized future tax assets for enacted changes in income tax rates |             | 561,386   |             | 34,467    |             | 331,584  
|                                                        | Stock based compensation                                                          |             | 140,307   |             | 45,317    |             | 108,530  
|                                                        | Reduction due to expired Canadian tax losses                                      |             | 296,148   |             | 424,220   |             | 218,582  
|                                                        | Reduction due to expired US tax losses                                            |             | 876,607   |             | 514,500   |             | 549,548  
|                                                        | Impact of strengthening exchange rate                                             |             | (322,557) |             | (321,878) |             | (302,505)
|                                                        | Other permanent differences                                                       |             | 13,884    |             | 13,955    |             | (185,539)
|Actual expense                                          | $                                                                                 | 50,849      | $         | 37,711      | $         | 22,504     



The tax effects of temporary differences that give rise to significant portions of future income tax assets are as follows:



|                             |   |             |               |             |      |             |      |            
|---------------------------- | - | ----------- | ------------- | ----------- | ---- | ----------- | ---- | -----------
|                             |   | Canada      | United States |             | 2006 |             | 2005
|Future income tax assets:    |   |             |               |             |      |             |      |            
|Property and equipment       | $ | 1,436,000   | $             |            | $    | 1,436,000   | $    | 1,361,000  
|Share issue costs            |   | 27,000      |               |            |      | 27,000      |      | 35,000     
|Loss and SRED carry-forwards |   | 3,083,000   |               | 2,756,000   |      | 5,839,000   |      | 6,702,000  
|Intangible assets            |   | 173,000     |               | 77,000      |      | 250,000     |      | 264,000    
|Investments                  |   |            |               |            |      |            |      | 158,000    
|                             |   | 4,719,000   |               | 2,833,000   |      | 7,552,000   |      | 8,520,000  
|Less: valuation allowance    |   | (4,719,000) |               | (2,833,000) |      | (7,552,000) |      | (8,520,000)
|Net future tax assets        | $ |            | $             |            | $    |            | $    |           



The Company has Canadian Scientific Research and Experimental Development (SRED) expenditure carry-forwards in the amount of $5,101,000 which have no expiry.  The Company also has Canadian non-capital loss carry-forwards and United States net operating loss carry-forwards which expire in the following years:







---





|     |   |           |               |          
|---- | - | --------- | ------------- | ---------
|     |   | Canada    | United States
|2007 | $ | 88        | $             |         
|2008 |   | 88        |               | 776,287  
|2009 |   |          |               | 373,177  
|2010 |   | 1,471,256 |               | 412,789  
|2011 |   |          |               | 107,980  
|2012 |   |          |               | 59,918   
|2014 |   | 1,216,947 |               |         
|2015 |   | 1,452,096 |               |         
|2018 |   |          |               | 1,966,743
|2019 |   |          |               | 164,364  
|2020 |   |          |               | 1,295,294
|2021 |   |          |               | 1,422,885
|2022 |   |          |               | 188,145  
|2023 |   |          |               | 716,280  
|2024 |   |          |               | 149,172  
|2025 |   |          |               | 241,877  
|2026 |   | 1,036,054 |               | 84       
|     | $ | 5,176,529 | $             | 7,874,995



14.

Segmented information:



The Company has three operating segments consisting of Audio Products (Audio), E-Commerce Products (E-Commerce), and Voice Over Internet Protocol Products (Telephony).  Audio involves the development and marketing of sound enhancement technology for use in various industries. E-Commerce involves the development and marketing of internet business services. Telephony involves the development and marketing of telecommunication over internet equipment and software.







---





|                                        |   |             |            |           |   |           |   |            
|--------------------------------------- | - | ----------- | ---------- | --------- | - | --------- | - | -----------
|2006                                    |   | Audio       | E-Commerce | Telephony |   | Total    
|                                        |   |             |            |           |   |          
|Revenue                                 | $ | 1,799,395   | $          | 158,269   | $ | 31,366    | $ | 1,989,030  
|Amortization                            |   | 217,004     |            | 28,554    |   | 85,861    |   | 331,419    
|Impairment of property and equipment    |   |            |            |          |   | 167,809   |   | 167,809    
|Loss before other items                 |   | (1,260,215) |            | (97,991)  |   | (302,799) |   | (1,661,005)
|Interest income                         |   | 81,329      |            | 19        |   | 4,338     |   | 85,686     
|Segment assets                          |   | 3,294,716   |            | 75,977    |   | 164,192   |   | 3,534,885  
|Expenditures for property and equipment |   | 42,111      |            | 315       |   |          |   | 42,426     



|                                        |   |             |            |           |   |             |   |            
|--------------------------------------- | - | ----------- | ---------- | --------- | - | ----------- | - | -----------
|2005                                    |   | Audio       | E-Commerce | Telephony |   | Total      
|                                        |   |             |            |           |   |            
|Revenue                                 | $ | 1,304,832   | $          | 182,940   | $ | 55,468      | $ | 1,543,240  
|Amortization                            |   | 211,464     |            | 27,045    |   | 122,389     |   | 360,898    
|Impairment of property and equipment    |   | 1,362       |            |          |   | 88,392      |   | 89,754     
|Impairment of intangible assets         |   |            |            |          |   | 428,453     |   | 428,453    
|Loss before other items                 |   | (1,281,763) |            | (234,456) |   | (1,053,315) |   | (2,569,534)
|Interest income                         |   | 54,470      |            | 12        |   | 2,218       |   | 56,700     
|Segment assets                          |   | 2,495,997   |            | 84,574    |   | 421,744     |   | 3,002,315  
|Expenditures for property and equipment |   | 73,881      |            | 25,201    |   | 89,808      |   | 188,890    
|Expenditures for intangible assets      |   | 50,563      |            | 414       |   |            |   | 50,977     



|                                        |   |           |            |           |   |             |   |            
|--------------------------------------- | - | --------- | ---------- | --------- | - | ----------- | - | -----------
|2004                                    |   | Audio     | E-Commerce | Telephony |   | Total      
|                                        |   |           |            |           |   |            
|Revenue                                 | $ | 1,820,028 | $          | 245,238   | $ | 147,912     | $ | 2,213,178  
|Amortization                            |   | 251,362   |            | 35,273    |   | 170,937     |   | 457,572    
|Loss before other items                 |   | (655,750) |            | (140,209) |   | (1,168,897) |   | (1,964,856)
|Interest income                         |   | 78,254    |            | 12        |   | 461         |   | 78,727     
|Segment assets                          |   | 4,037,007 |            | 109,600   |   | 1,081,227   |   | 5,227,834  
|Expenditures for property and equipment |   | 154,884   |            | 811       |   | 8,762       |   | 164,457    
|Expenditures for intangible assets      |   | 46,032    |            |          |   | 372,024     |   | 418,056    



|                       |              |              |              |           |   |          
|---------------------- | ------------ | ------------ | ------------ | --------- | - | ---------
|Geographic information | 2006 Revenue | 2005 Revenue | 2004 Revenue
|Canada                 | $            | 13,769       | $            | 10,472    | $ | 73,294   
|United States          |              | 938,586      |              | 966,980   |   | 1,418,029
|Asia                   |              | 1,027,959    |              | 489,625   |   | 644,503  
|Europe                 |              |             |              | 49,026    |   | 72,102   
|Other                  |              | 8,716        |              | 27,137    |   | 5,250    
|                       | $            | 1,989,030    | $            | 1,543,240 | $ | 2,213,178



As at December 31, 2005 and 2004, substantially all of the Companys product assets and employees were located in Canada.



15.

Financial instruments and risk management:



The fair values of financial assets and liabilities approximate their carrying values at December 31, 2006 due to their short term to maturity.



The Company is exposed to foreign currency fluctuations on its Canadian dollar denominated cash, receivables and payables.  Foreign currency risk arising from a decline in the relative value of the Canadian dollar is managed to the extent that Canadian dollar denominated cash and receivables are equal to or exceed Canadian dollar payables.  The







---

Company has not, at December 31, 2006, entered into foreign currency derivatives to hedge its exposure to foreign exchange risk.



The Company is exposed to credit risk on its accounts receivable, royalties receivable and accrued revenue.  As at December 31, 2006, there were outstanding accounts receivable, royalties receivable and accrued revenue balances from five entities which comprised 66% of the total balance.  These entities are located in the United States and Asia.  Since the year end two entities have fully paid the outstanding amounts, whilst management believes that the remainder are fully collectable.



As at December 31, 2005, there were outstanding accounts receivable balances from two entities which comprised 49% of the total balance.  These entities are located in the United States and Asia.  These amounts have been collected subsequent to the 2005 year end.



During 2006, three customers, within the Audio segment, contributed 52% of the total revenues, each providing greater than 10% of the total revenues.  For 2005, two customers within the audio segment contributed 23% of the total revenues, each providing greater than 10% of the total revenues whilst in 2004 no one individual customer provided greater than 10% of total revenues.



16.

Commitments and contingencies:



Under the terms of its lease agreements for office space and equipment, the Company is obligated at December 31, 2006 to make the following minimum lease payments over the next five years and in total:



|     |   |        
|---- | - | -------
|2007 | $ | 96,847 
|2008 |   | 83,142 
|2009 |   | 14,616 
|2010 |   | 8,526  
|2011 |   |       
|     | $ | 203,131



Minimum lease payments of $98,872 (2005: $92,756; 2004: $88,458) are included in the calculation of the loss for the year.



17.

United States accounting principles:



The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP).  Any differences in United States generally accepted accounting principles (US GAAP) as they pertain to the Companys financial statements are not material except as follows:



(a)

The Company follows Statement of Financial Accounting Standards (SFAS) 130 regarding comprehensive income for purposes of reconciliation to US GAAP.  Under US GAAP, items defined as other comprehensive income are separately classified in the financial statements and the accumulated balance of other comprehensive income (loss) is reported separately in shareholders equity on the balance sheet.    For all periods presented, comprehensive income (loss) equals net income (loss).



(b)

From 2003 through 2005, the Company accounted for its stock based awards in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", which required the use of a fair value-based method of accounting for stock-based compensation plans. Prior to 2003, under US GAAP, $202,058 of stock based compensation costs for stock options issued to third parties were expensed.  No entry was made under Canadian GAAP.



Effective January 1, 2006, the Company has adopted SFAS 123(R), Stock Based Payment. As the Company previously applied the fair value based method prescribed by SFAS 123 for US GAAP purposes, the impact of the adoption on the Companys financial statements is limited. Under SFAS 123(R), the Company now estimates forfeitures at the date of grant as opposed to accounting for forfeitures as they occur. In applying the modified prospective approach on adoption, there is no impact on the current year relating to previously granted stock







---

options as all have vested or been forfeited before December 31, 2006. This is consistent with the accounting under Canadian GAAP.



(c)

The Company has applied SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed in accounting for its production costs of software. Accordingly, $80,871 was expensed to product engineering until May 17, 2005 when technological feasibility was established. Costs subsequent to this date were capitalized as they related to the production of product masters. In 2006 amortization of these costs commenced on a straight line basis over the remaining estimated useful economic life of the product which is 5 years. Resultant from $80,871 of the costs being expensed rather than capitalized during 2005, the amortization recorded for 2006 is $20,218 lower under US GAAP.



(d)

The Company has also determined that the conversion feature of the convertible notes meet the embedded derivative scope exemption requirements of SFAS 133. As such, the conversion option has not been separated under US GAAP. However, the Company has separated the beneficial conversion feature associated with the conversion price being less than the market price at the transaction date. The Company determined that the intrinsic value of the beneficial conversion feature was $586,978, which reduces the initial carrying value of the notes to $72,196, for US GAAP purposes, with a corresponding entry made to equity.



The effect on the loss for each of the years in the three year period ended December 31, 2006 of the differences between Canadian and United States generally accepted accounting principles is summarized as follows:







---





|                                                                   |   |             |   |             |   |            
|------------------------------------------------------------------ | - | ----------- | - | ----------- | - | -----------
|Years ended December 31,                                           |   | 2006        |   | 2005        |   | 2004       
|Net loss for the year as reported in accordance with Canadian GAAP | $ | (1,734,224) | $ | (2,550,708) | $ | (1,925,946)
|Development expense                                                |   |            |   | (80,871)    |   |           
|Amortization of deferred development costs                         |   | 20,218      |   |            |   |           
|Accretion of debt discount                                         |   | 32,331      |   |            |   |           
|Net loss under US GAAP                                             | $ | (1,681,675) | $ | (2,631,579) | $ | (1,925,946)
|                                                                   |   |             |   |             |   |            
|Net loss per share (basic and diluted) under US GAAP               | $ | (0.18)      | $ | (0.31)      | $ | (0.25)     



The effect on the consolidated balance sheets of the difference between Canadian and United States generally accepted accounting principles is as follows:



|                           |                                              |              |   |               |   |             
|-------------------------- | -------------------------------------------- | ------------ | - | ------------- | - | ------------
|December 31, 2006          | As reported
in accordance with
Canadian GAAP | Differences  |   | Under
US GAAP
|Current assets             | $                                            | 2,719,129    | $ |              | $ | 2,719,129   
|Note Receivable            |                                              | 55,325       |   |              |   | 55,325      
|Property and equipment     |                                              | 348,280      |   |              |   | 348,280     
|Deferred development costs |                                              | 313,800      |   | (60,653)      |   | 253,147     
|Intangible assets          |                                              | 98,351       |   |              |   | 98,351      
|                           | $                                            | 3,534,885    | $ | (60,553)      | $ | 3,474,232   
|                           |                                              |              |   |               |   |             
|                           |                                              |              |   |               |   |             
|Current liabilities        | $                                            | 314,011      | $ |              | $ | 314,011     
|Convertible notes          |                                              | 389,862      |   | (304,913)     |   | 84,949      
|Shareholders equity:      |                                              |              |   |               |   |             
|Common shares              |                                              | 47,208,942   |   | 202,058       |   | 47,411,000  
|Warrants                   |                                              | 1,027,114    |   |              |   | 1,027,114   
|Contributed Surplus        |                                              | 2,581,456    |   | 272,582       |   | 2,854,038   
|Deficit                    |                                              | (47,986,500) |   | (230,380)     |   | (48,216,880)
|                           | $                                            | 3,534,885    | $ | (60,653)      | $ | 3,474,232   



|                           |                                              |              |   |               |   |             
|-------------------------- | -------------------------------------------- | ------------ | - | ------------- | - | ------------
|December 31, 2005          | As reported
in accordance with
Canadian GAAP | Differences  |   | Under
US GAAP
|Current assets             | $                                            | 1,823,485    | $ |              | $ | 1,823,485   
|Property and equipment     |                                              | 670,635      |   |              |   | 670,635     
|Deferred development costs |                                              | 352,750      |   | (80,871)      |   | 271,879     
|Intangible assets          |                                              | 155,445      |   |              |   | 155,445     
|                           | $                                            | 3,002,315    | $ | (80,871)      | $ | 2,921,444   
|                           |                                              |              |   |               |   |             
|                           |                                              |              |   |               |   |             
|Current liabilities        | $                                            | 330,797      | $ |              | $ | 330,797     
|Shareholders equity:      |                                              |              |   |               |   |             
|Common shares              |                                              | 45,979,055   |   | 202,058       |   | 46,181,113  
|Warrants                   |                                              | 903,738      |   |              |   | 903,738     
|Contributed Surplus        |                                              | 2,041,001    |   |              |   | 2,041,001   
|Deficit                    |                                              | (46,252,276) |   | (282,929)     |   | (46,535,205)
|                           | $                                            | 3,002,315    | $ | (80,871)      | $ | 2,921,444   



Included in the current liabilities above are accrued liabilities of $144,645 in 2006 and $138,731 in 2005.