change monitoring. - lorex technology

ANNUAL REPORT 2006

CHANGEMONITORING.

CONTENTS

1 FINANCIAL HIGHLIGHTS

2 CHAIRMAN AND CEO’S MESSAGE

8 MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

20 FINANCIAL STATEMENTS RESPONSIBILITY

21 AUDITORS’ REPORT TO THE SHAREHOLDERS

22 CONSOLIDATED BALANCE SHEETS

23 CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)AND RETAINED EARNINGS (DEFICIT)

24 CONSOLIDATED STATEMENTS OF CASH FLOWS

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOREX TECHNOLOGY INC. 1

LOREX Technology Inc. (“LOREX”) (TSX:LOX) global brands empower consumers and professionals with leading-edge security video

solutions delivering advanced technology and innovative performance. The LOREX brand is a leader in the North American retail market. The

Company’s professional brand (Digimerge) is gaining recognition in security distribution, shipping to over 200 stocking distributors in

North America and expanding its presence in Europe. Traditional security systems include analog cameras systems (wired and wireless),

packaged observation systems and a new generation of digital security products including digital video recorders and cameras. New

advances in lower-cost network/computer integration are fueling the introduction of an entirely new range of video security products to

consumers for the first time. LOREX IP Camera systems, USB Camera systems, networkable DVRs and networkable surveillance systems

offer a new level of control, virtually limitless video storage and the ability to remotely view surveillance video anywhere in the world.

FINANCIAL HIGHLIGHTS

REVENUE(in millions of U.S. dollars)

2006 2005 2004 2003 2002

$ $ $ $ $

44.7 43.0 24.0 30.1 18.8

EBITDA*

(in thousands of U.S. dollars)

* Defined as earnings (loss) before income taxes, interest expense, amortization of capital assets and amortization of deferred charges. 2006 2005 2004 2003 2002

$ $ $ $ $

* Includes pre-tax loss from discontinued operations of $547. (2,470)* 3,142 (2,958) 3,250 1,971

NET EARNINGS(in thousands of U.S. dollars)

2006 2005 2004 2003 2002

* Includes after-tax loss from discontinued operations of $589. $ $ $ $ $

** Includes after-tax write-down of deferred development costs of $1,787. (4,835)* 1,401 (2,593)** 1,787 824

TOTAL ASSETS(in thousands of U.S. dollars)

2006 2005 2004 2003 2002

$ $ $ $ $

22,888 28,784 19,704 20,531 10,407

SHAREHOLDERS’ EQUITY(in thousands of U.S. dollars)

2006 2005 2004 2003 2002

$ $ $ $ $

6,999 11,426 9,689 7,995 4,982

2 LOREX TECHNOLOGY INC.

A CHANGE IN DIRECTION.CHAIRMAN AND CEO’S MESSAGE

LOREX AIMS TO BRING INNOVATIVETECHNOLOGY TO THE MARKET.


The Company in the latter part of 2006 committed to anextensive restructuring plan that included sku and productrationalization, closure of its Chinese joint venture,reducing its presence in Hong Kong, consolidating itsbrand names from four to one and offering severancepackages in order to reduce its overhead costs.

Our LOREX division will continue its efforts to capitalizeon the hard work and benefit from the opportunities ofits restructuring plan. The product lines for 2007 havebeen identified, new designs are in place, new vendors aremanufacturing product and the company is entertainingnew avenues to sell its product. We continue to pursueopportunities that enhance our position in the industry,enabling us to leverage our sales, marketing andoperational potential.

Our Digimerge professional division has been bolstered by hiring senior operational personnel, allowing for theimplementation of changes to accommodate present and future growth. To that end, we are in the process ofdelivering increased efficiencies from our operations, todrive and improve margins and customer support. We are also expanding our product assortment to allow ourmarketing and sales group to offer a greater range ofchoice to our distribution network.

The security industry is growing worldwide, and theoperating demographics of the marketplace have changeddramatically in recent years. The global security industryis in the middle of a technology shift from anolog-basedvideo systems to digital or a hybrid of both. The combinationof these factors has presented the Company with significantopportunities. We will spend considerable time and effortin fiscal 2007 in these areas and will be seeking productpartners to leverage our revenue growth.

The integration of our new executive staff and supportpersonnel is almost complete. Cost efficiency and excellentcustomer service remain our goals, and we are confidentthat we have the right people and strategies in place tocontinue our long record of growth, enabling LOREX toonce again deliver solid results.

Our Board of Directors, the executive management team andLOREX employees remain dedicated to LOREX’s success.

On behalf of the Board, I would like to extend sincere thanksto all members of the LOREX team and I look forward tocontinued growth for LOREX and all stockholders.

Henry SchnurbachChairman & CEO

The year 2006 was one of transition for LOREX. I joined the Company as Chairman andCEO, bringing forward a new mandate that led to the hiring of a new executive group, thereorganization and realignment of the Company’s marketing strategy and the expansionof our product lines, which lays the foundation for future growth.


LOREX PRODUCT OVERVIEW

LOREX OFFERS A WIDE SELECTION OF CCTV PRODUCTS INCLUDINGCAMERAS, MONITORS AND OBSERVATION SYSTEMS. IN ADDITION,DIGITAL VIDEO RECORDERS, MULTIPLEXERS AND SOHO ALARMSYSTEMS FILL THE VOID IN BOTH THE RETAIL AND PROFESSIONALMARKETS WITH PRODUCTS THAT ARE EASY TO INSTALL AND USE.


SG19LD804-161

Professional 19" LCD Observation System With Built-In DigitalVideo Recorder and Four Night-Vision Cameras

SG17L7584

17" Color LCD Dual Quad Surveillance System

L400 SERIES

4/8/16 Channel Pentaplex Network DVR

L154-81C4

Component Surveillance System With Four Color Cameras

SG8840

2.4 GHz Wireless Color Video System

SG6163

Weatherproof Color Mini Camera With Night Vision

DMC2030

Color PC Camera With Night Vision & Audio

CVC6995HR

High Resolution Color Bullet Camera With Night Vision


DIGIMERGE PRODUCT OVERVIEW

DCBHR1037

The DCBHR1037 is a high-resolution color camera with 480 TVlines, 23 high-intensity IR LEDs and vandal-resistant design.The camera is ideal for large-area monitoring applications.

DCS100033

The DCS100033 is an ultra-high-resolution color professionalcamera with 540 TV lines and an extensive set of features,including OSD, motion detection, DNR and white balance control.

ACCKBD SERIES

The ACCKBD Series of DVR/Camera controllers offer advancedcontrol capability of multiple DVRs and multiple cameras.

DCD210533

The DCD210533 is a high-resolution, color, variable-focal-length-lensdome camera with a rugged, vandal-resistant metal housing.

DIGIMERGE TECHNOLOGIES INC. IS DEDICATED TO SERVING THENEEDS OF INSTALLERS AND SYSTEM INTEGRATORS IN THE RAPIDLYEXPANDING SECURITY AND SURVEILLANCE INDUSTRY. DIGIMERGEPROVIDES A FAMILY OF PRODUCTS FOCUSED ON THE EMERGINGTREND FOR INTEGRATION OF DIGITAL VIDEO SURVEILLANCE SOLUTIONSWITH THE INTERNET. DIGIMERGE PROVIDES FULL SOLUTIONS FORSMALL TO MEDIUM-SIZE COMMERCIAL AND INDUSTRIAL APPLICATIONS,AS WELL AS PRODUCTS THAT CAN BE READILY INTEGRATED INTOEXISTING SECURITY SYSTEMS.

LOREX TECHNOLOGY INC. 7LOREX TECHNOLOGY INC. 7

VCE300 SERIES

The VCE300 Series offers the features and flexibility that make itideal for a wide range of CCTV projects. It comes pre-programmedwith factory default settings that makes setup easy.

VCE400 SERIES

The VCE400 Series delivers real-time (480 fps) viewing andrecording, MPEG4 compression and a range of data storageoptions (up to 3 TB internal, 19.5 external, CD-RW/DVD-RWand true USB) for the most demanding project.

DHU500 SERIES

The DHU500 Series offers a new benchmark for performanceand economy with a full range of advanced features includingMPEG4 video compression, USB, optical drive and high-capacitydisk storage.

DHX300 SERIES

The DHX300 Series brings advanced performance and a mouse-driven user interface together in one packagefeaturing MPEG4 video compression, 240 fps recording,built-in optical drive and up to 2 TB of data storage.


CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

Certain information contained in this report may contain statements that are forward-looking, such as statements relating to anticipatedfuture revenues of the Company and the success of product offerings. Such forward-looking information involves important risks anduncertainties that could significantly affect anticipated results in the future, and, accordingly, such results may differ materially from thoseexpressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, without limitation,changes in competition, changes in technologies that impact products being developed and sold by the Company, changes in customerdemand and the availability of raw materials required to manufacture the Company’s products. Any of these risks and uncertainties couldcause actual results to vary materially from current results or the Company’s currently anticipated future results. The Company wishes tocaution readers not to place undue reliance on such forward-looking statements that speak only as of the date made.

OVERVIEW OF THE COMPANY

LOREX Technology Inc. (“LOREX”) (TSX: LOX) global brands empower consumers and professionals with leading-edge security videosolutions delivering advanced technology and innovative performance. The LOREX brand is a leader in the North American retailmarket. The Company’s professional brand (Digimerge) is gaining recognition in security distribution, shipping to over 200 stockingdistributors in North America and expanding its presence in Europe. Traditional security systems include analog camera systems(wired and wireless), packaged observation systems and a new generation of digital security products including digital video recordersand cameras. New advances in lower-cost network/computer integration are fueling the introduction of an entirely new range of videosecurity products to consumers for the first time. LOREX IP Camera systems, USB Camera systems, networkable DVRs and networkablesurveillance systems offer a new level of control, virtually limitless video storage and the ability to remotely view surveillance videoanywhere in the world.

LOREX subsidiaries include LOREX Canada Inc., Digimerge Technologies Inc., LOREX Corporation and Strategic Vista CorporationLimited, Hong Kong.

REPORTING CURRENCY

The Company uses the U.S. dollar as its reporting currency.

The Company and its subsidiaries that use the Canadian dollar as the functional currency translate all assets and liabilities at the period-end exchange rate, and all revenue and expense items are translated at an average rate of exchange for the period. Exchange rate differencesarising on translation are deferred as a separate component of shareholders’ equity. Effective October 1, 2004, the U.S. dollar became thefunctional currency of certain of the Company’s subsidiaries – Digimerge Technologies Inc., LOREX Corporation and Strategic VistaCorporation Limited. For other U.S. subsidiaries that are considered fully integrated foreign operations, non-Canadian-dollar monetaryassets and liabilities are translated into Canadian dollars at the rate of exchange prevailing as at the consolidated balance sheet dates,while non-monetary assets and liabilities are translated at historical rates of exchange. Revenues and expenses are translated into Canadiandollars at the rate in effect at the date of transaction. Realized and unrealized foreign exchange gains and losses are included in netearnings for the period in which they occur.

The following is Management’s Discussion and Analysis (MD&A) of thefinancial position of LOREX Technology Inc. (“LOREX” or “the Company”) andthe financial review for the years ended September 30, 2006, 2005 and 2004.This discussion should be read in conjunction with the Audited ConsolidatedFinancial Statements and related notes. All amounts are in U.S. dollars unlessotherwise stated. As a result of rounding differences, certain figures in thisMD&A may not total.

MD&A


BUSINESS & FINANCIAL DEVELOPMENTS

During the past year, the following significant developments impacted the Company’s operations and financial results:

• The Company changed its name to LOREX Technology Inc. in the second quarter of 2006 to take advantage of the name recognitionpreviously established by LOREX.

• Henry Schnurbach was appointed CEO in the third quarter, replacing Chairman and CEO Bernie Klein due to illness, with a mandateto enhance relationships with customers and suppliers, improve operational effectiveness and return the Company to profitability.

• The Company restructured its operations in recognition of the need to focus on more profitable core operations and to improve the procurement, purchasing and inventory management processes. Highlights of these efforts include restructuring LOREX’sexecutive group, closing its manufacturing venture in Hong Kong and making changes to several key staff in the organization.

• In the third and fourth quarters, Management conducted a thorough assessment of inventory and concluded that given theCompany’s plans to discontinue certain product lines, the anticipated changes in product mix and changing dynamics of theindustry, certain inventory skus required markdowns to reduce cost to its net realizable value.

• In the fourth quarter the Company introduced a new line-up of high-performance digital video recorders with broad feature sets and enhanced storage capacities under the Digimerge brand.

• At the end of the fourth quarter, the Company terminated its contract with Sylvania. The contract previously allowed LOREX to sellproducts under the Sylvania brand. Termination of this contract is consistent with the Company’s efforts to focus its retail businessusing the LOREX brand. All expenses related to royalty payments and termination of the contract have been included in the 2006results.

• Following a detailed assessment of the Company’s warranty service cost, Management determined that certain of the Company’srepair service arrangements with its suppliers required an increase in its repair costs for the year. The Company is currently increasing its quality control review of products prior to acceptance from suppliers in an effort to reduce repair costs in the future.

SUMMARY OF KEY INDICATORS

The Company’s revenue for fiscal 2006 was $44.7 million as compared to $43.0 million in fiscal 2005. The sales increases were attributableto the growth of the Digimerge professional product line and direct Internet sales activities. This increase was partially offset by the lossof a large club customer in the third quarter. International sales were affected by a change in Management early in 2006 and subsequentlack of local leadership. In 2007, the LOREX sales team plans to broaden its customer base to reduce customer concentration andincrease revenue through the addition of new products. In order to support expansion plans and realize LOREX’s full potential in theinternational marketplace in 2007, Management has contracted with a European sales and logistics partner.

During 2006, given changes in product mix, discontinuation of certain product lines and changing dynamics in the industry, the Companymade provisions to inventory value to reflect Management’s best estimates of the realizable value of its inventory. As a result of theincreased provision allowance, gross profit was 32.9% as compared to 35.1% in fiscal 2005. Management has made adjustments to itsproduct development, purchasing and sales processes to increase inventory turns and reduce the risk of obsolescence.

In 2006, the Company experienced a net loss from continuing operations of $(4.2) million as compared to net income from continuingoperations of $1.6 million in fiscal 2005. The net loss in 2006 resulted from the decreased margin discussed above and an increase in fixedcosts to $18 million from $13 million in fiscal 2005. The increase in fixed expenses was partially a result of higher freight, warehousing and repair costs in 2006 as compared to fiscal 2005. Management has focused on improving the quality of product procured by workingwith existing suppliers and developing relationships with new suppliers that meet stringent manufacturing and quality control practices.In 2006, Management has further made efforts to provide technology and installation assistance to end customers in order to simplifyinstallation to reduce product returns. In addition to the increased expenses listed above, increases were due to the development of a fixedcost infrastructure to support prior Management’s anticipation of higher revenues in 2006. In order to manage costs effectively in relation to revenue expectations, Management made changes to staffing in the third quarter, which resulted in restructuring costs of $495,000.

In addition, given the cumulative loss position of certain of the Company’s subsidiaries, Management recorded a provision of $2.3 millionin the third and fourth quarters against certain of the Company’s future tax assets as the asset no longer met the accounting criteria ofbeing more likely than not to be recognized. The Company continues to carry forward tax losses in excess of two million dollars, the taxbenefit of which has not been realized.

The Company projects increased revenues in 2007 by expanding its LOREX customer base and increasing and altering its assortment of products at the retail and professional level. In addition, Management expects to introduce several new products to change both itsproduct and sales mix. The Company will introduce inventory management programs to attain higher gross margin dollars. Theinventory management programs should lower obsolescence cost and reduce carrying costs and warehouse expense. Expenses in 2007are projected to be in line with 2006 with the exception of certain variable components related to the direct cost of sales.

Further explanation of changes in revenue, gross margins and expenses are provided below in the comments on Consolidated Resultsof Operations.


The following table shows the Company’s results from operations for the past three years.

Year End Sept. 30 Increase (Decrease)

2006 2005

($000s except per share amounts) 2006 2005 2004 vs. 2005 vs. 2004

$ $ $ $ % $ %

REVENUE 44,737 42,967 23,987 1,770 4% 18,980 79%

Cost of sales 30,035 27,891 15,640 2,144 8% 12,251 78%

Gross margin 14,701 15,076 8,347 (375) (2%) 6,729 81%

Expenses:

Marketing and selling 11,238 7,798 5,349 3,440 44% 2,449 46%

Administration 3,185 2,457 2,351 728 30% 106 5%

R&D 1,825 1,733 1,138 92 5% 595 52%

Interest 454 393 147 62 16% 245 167%

Amortization 233 259 234 (26) (10%) 25 11%

Loss (gain) on foreign exchange 128 212 397 (84) (40%) (185) (47%)

Write-down of deferred

development costs & investment – – 2,484 – – (2,484) (100%)

Restructuring 745 – – 745 N/A – –

Operating expenses 17,808 12,852 12,009 4,956 39% 843 7%

Income taxes (recovery) 1,140 624 (1,160) 516 83% 1,784 154%

Net earnings (loss)

from continuing operations (4,246) 1,600 (2,593) (5,846) (365%) 4,193 (162%)

Discontinued operations – net of tax (589) (199) – (390) (196%) (199) N/A

Net earnings (loss) (4,835) 1,401 (2,593) (6,236) (445%) 3,994 154%

Earnings (loss)

from continuing operations per share

Basic and diluted (0.16) 0.06 (0.10)

Earnings (loss) per share

Basic and diluted (0.18) 0.05 (0.10)

Gross margin % 32.9% 35.1% 34.8% (2.2%) 0.3%

Marketing & selling as % of sales 25.1% 18.2% 22.3% 6.9% (4.1%)

Administration as % of sales 7.1% 5.7% 9.8% 1.4% (4.1%)

R&D as % of sales 4.1% 4.0% 4.7% 0.1% (0.7%)

Total assets 22,888 28,784 19,704 (5,896) (20%) 9,080 46%

CONSOLIDATED RESULTS OF OPERATIONS

RevenueYear ended September 30

($000) 2006 2005 2004

Revenue 44,737 42,967 23,987

Increase (decrease) over prior year 4% 79% (20%)

Proportion of revenue from:

United States 86% 82% 84%

Canada 11% 13% 14%

Other 3% 5% 2%

Proportion of revenue from top five customers 67% 62% 45%


2006 compared to 2005Revenue increased in 2006 compared to 2005 as a result of increased sales of digital-based products including digital video recorders andexpansion of sales through the Internet. The Company expects to continue to expand its customer base in fiscal 2007 and increase salesto key customers by extending its assortment of surveillance equipment and enhancing the product mix. Management projects salesgrowth in excess of 10% in fiscal 2007.

Sales of the Company’s professional products under the Digimerge brand to security distributors in the commercial market increased to$6.8 million in fiscal 2006 from $5.1 million in fiscal 2005, an increase of 34%. Management projects sales of Digimerge products tocontinue to experience double-digit growth in 2007 as a result of the continuing introduction of several next-generation digital videorecorders and observation cameras.

2005 compared to 2004Revenue increased in 2005 compared to 2004 as the result of the Company adding several new customers and introducing a number ofnew digital-based products, including IP (Internet protocol) based observations systems and IP cameras and new lines of digital videorecorders. The Company experienced revenue growth of 79% in fiscal 2005 compared to 2004. The addition of a major warehouse clubduring the third quarter had a significant impact on the Company’s revenue in the second half of the year.

Sales of the Company’s professional products under the Digimerge brand to security distributors in the commercial market increased to approximately $5.1 million in fiscal 2005 from $2.3 million in fiscal 2004, an increase of 122%. This increase in revenue resulted from the addition of several new customers in the United States and the commencement of shipping of Digimerge products to a majorcustomer in Europe.

Gross ProfitYear ended September 30

2006 2005 2004

Gross profit 32.9% 35.1% 34.8%

Cost of sales includes the cost of manufactured products based on FOB factory prices, freight, duty and provisions to record inventory to its net realizable value.

The Company outsources its manufacturing to third parties in Korea, Taiwan, Hong Kong and China.

Gross margins in 2006 were lower than 2005 as the result of the inventory write-downs recorded as a result of plans to discontinuecertain product lines, anticipated changes in product mix and the changing dynamics of the industry. The Company anticipates anincrease in gross margin in 2007 as a result of change in customer and product mix. Management recognizes the risk that this increase in gross profit may be negatively affected by older inventory being sold at lower margins.

Gross margins in 2005 were lower than 2004 as the result of increased international sales that are completed at lower overall grossmargins. The Company negotiates lower prices on these international sales as it does not incur costs similar to those for sales in North America. In addition, the Company recorded higher amounts for product rationalization expenses in 2005 as a result intransitioning certain products from analog to digital.

Marketing and Selling ExpensesYear ended September 30

($000) 2006 2005 2004

Marketing and selling expense 11,238 7,798 5,349

As a percentage of sales 25.1% 18.2% 22.3%

The principal components of marketing and selling expenses are freight and distribution costs associated with product shipments,warranty/repair service costs and salary and commission expenses for both internal and external sales and support personnel. Othercosts include sales display and detailing costs to ensure the Company’s products are displayed to LOREX’s sales standards.

The increase in marketing and selling expenses in 2006 compared to 2005 resulted primarily from an increase in warranty/repair servicecosts as compared to prior periods. Management expects that the return rates in most products should decrease due to changes inproduct development and quality assurance programs. In addition, prior Management’s expectation of increased volume did notmaterialize and therefore the revenue base was not realized.

The increase in marketing and selling expenses in 2005 compared to 2004 resulted primarily from higher freight costs and salescommissions related to increased sales. Also, the addition of a major warehouse club customer in the third quarter resulted in increasedsales display and detailing expenses.

For fiscal 2007, the Company expects to maintain its marketing and selling expense structure in anticipation of increased revenue.


Administration ExpensesYear ended September 30

($000) 2006 2005 2004

Administration expenses 3,185 2,457 2,351


The main components of administrative expenses are wages and benefits, professional fees, general and office expenses and costsassociated with the public company reporting requirements.

The increase in 2006 is due in part to an overlap in executive salaries for a portion of the year. In addition, the increase in administrationcost as a percentage of sales was due to the incurrence of fixed costs in anticipation of sales that did not materialize.

For fiscal 2007, the Company expects its administration expense to be similar to those of 2006.

The increase in 2005 versus 2004 was due to higher salaries, including the addition of a new President and COO hired in the second quarter.

Restructuring ExpensesYear ended September 30

($000) 2006 2005 2004

$ $ $

Restructuring expenses 745 – –

Fiscal 2006 included a restructuring expense of $745,000, which includes severance paid to executive and support staff and thetermination of the Sylvania license agreement.

Research and DevelopmentYear ended September 30

($000) 2006 2005 2004

Research and development 1,825 1,733 1,138


Research and development expenses include the wages and benefits paid to individuals in the Company’s product development group,subcontractors and the amortization costs associated with capitalized tooling and product design costs.

The increase in 2006 related to new product development, the benefit of which is expected to be realized in 2007.

The Company increased its expenditures in research and development during fiscal 2005, as it continues to invest in product developmentto support future sales growth. Several new products were introduced in fiscal 2005, including the introduction of new IP-based productsand digital video recorders. In 2004, the Company introduced its Digital Video Monitoring line for Internet-based remote monitoring.

The Company expects to introduce several new products in fiscal 2007, including an expanded range of network cameras, digital videorecorders that support high-resolution real-time video recording, an expanded range of LCD monitor-based observation systems and IP cameras. While it is difficult to predict what the impact of revenue from these new products will be in fiscal 2007, the Companyexpects these products should have a positive long-term contribution to its revenue.

Interest ExpenseYear ended September 30

($000) 2006 2005 2004

Interest expense 454 393 147

The Company has a credit agreement with a Canadian chartered bank with a maximum credit facility of Cdn. $15,000,000. The revolvingcredit loans bear interest at the bank’s prime rate plus 0.45% for Canadian-dollar-denominated advances and the bank’s U.S. dollar baserate plus 0.45% for U.S.-dollar-denominated advances. Interest is paid monthly. During the year the weighted average interest rate onthe Company’s borrowings was 7.7%.

The increase in interest expense in 2005 compared to 2004 resulted from higher bank borrowings during 2005. These bank borrowingswere used to finance the Company’s working capital growth requirements to support the higher revenue levels.


Amortization of Capital AssetsYear ended September 30

($000) 2006 2005 2004

Amortization of capital assets 233 259 234

The primary capital assets of the Company subject to amortization are tooling and equipment, product and packaging design costs,patents and trademarks, and computer hardware. The amortization expense pertaining to tooling and product design costs is included in research and development expense and amounted to $538,000 in 2006, $507,000 in 2005 and $415,000 in 2004.

During 2006 the Company purchased $691,000 of capital assets while $810,000 was purchased in 2005 and $759,000 was purchased in 2004.

Loss (Gain) on Foreign ExchangeYear ended September 30

($000) 2006 2005 2004

Loss (gain) on foreign exchange 128 212 397

In 2006, the Company recognized a foreign exchange loss due to the impact of the weakening of the U.S. dollar relative to the Canadiandollar on its U.S.-denominated liabilities recorded in its Canadian subsidiaries.

Discontinued OperationsYear ended September 30

($000) 2006 2005 2004

Discontinued operations – net of tax (589) (199) –

As part of the Management’s goal to focus on its more profitable activities, the Company terminated its manufacturing joint venturearrangement in Hong Kong. LOREX owned 50% of this venture, which was entered into in 2004.

Income TaxesYear ended September 30

2006 2005 2004

Income tax rate (32.4%) 29.4% 30.9%

In fiscal 2006, a valuation allowance was provided against the benefit of certain tax loss carry-forward balances previously recordedthat no longer met the accounting criteria for recognition. As at September 30, 2006 a valuation allowance of $2.6 million has beenprovided against certain of the Company’s future income tax assets.

In 2005, the primary factor causing the income tax rate to be less than the Canadian statutory tax rate of 36.12% was the impact of the Company’s foreign operations being subject to different tax rates. This resulted in a reduction of approximately 10% fromCanadian statutory tax rates. The tax rate was increased as a result of certain permanent tax differences, primarily the non-deductibilityof stock option expenses.

In 2004, the primary factor causing the income tax rate to be less than the Canadian statutory tax rate of 36.25% was the tax impact of the non-deductible portion of the write-down of the deferred development costs and investment that reduced the rate by 4%.


QUARTERLY FINANCIAL RESULTS(in thousands of dollars, except per share amounts)

2006 2005

For the quarters ending Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30

Revenue 11,117 13,006 12,513 8,102 9,216 8,173 13,537 12,040

Net income (loss)

from continuing

operations 362 182 (2,715) (2,075) 184 208 647 561

Discontinued operations (59) (18) (333) (179) (43) (60) (85) (11)

Net income (loss) 303 164 (3,048) (2,254) 141 148 561 550

Per share basis 0.01 0.01 (0.11) (0.09) 0.01 0.01 0.02 0.02

Reduced sales and the resulting loss in the fourth quarter of 2006 compared to 2005 were primarily the result of a major club customerremoving the Company’s products from its current listings. Further to sales returns for credit, expenses were higher than average in thequarter and the company recorded non-recurring expenses relating to discontinued operations, restructuring expenses and the terminationof the Sylvania contract of approximately $380,000.

LIQUIDITY AND CAPITAL RESOURCES

In 2006, cash decreased by $106,000 due to a combination of positive cash flow from operations offset by negative cash flow fromfinancing and investment activities. Cash flow from operations increased primarily due to decreased accounts receivable and inventory.Cash flow from financing activities decreased primarily as a result of decreased bank borrowings. Cash flow from investing activitiesdecreased primarily as a result of purchases of capital assets during the year.

At September 30, 2006, the Company had a Cdn. $15,000,000 credit facility for revolving credit loans that bore interest at the bank’s primerate plus 0.45% for Canadian-dollar-denominated advances and the bank’s US dollar base rate plus 0.45% for U.S.-dollar-denominatedadvances. The credit line is secured by the accounts receivable and inventory of two of the Company’s subsidiaries. At September 30, 2006,the amount of borrowings under this facility was U.S. $4,307,000 and Cdn. $2,878,000.

In addition, a separate credit facility of Cdn. $750,000 has been established for Digimerge Technologies Inc. At September 30, 2006,borrowings outstanding under this facility was U.S. $79,000 and Cdn. $106,000.

At September 30, 2006, the available credit under these facilities based on security pledged was $9,276,000, leaving an unused credit balanceof $2,050,000.

As at September 30, 2006, the Company’s principal sources of liquidity included unrestricted cash of $874,000, trade accounts receivableof $5.2 million and unutilized borrowing availability of $2.0 million under the Company’s bank credit facilities. The Company believesthat working capital requirements for expected growth may require additional financing, and the Company is actively pursuing varioussources of additional capital for this planned growth.

As of September 30, 2006, the Company was in violation of its debt to tangible net worth covenant under its $15,000,000 facility. Thebank has not waived its rights under this facility. The future ability of the Company to operate in the normal course is dependent on its current lender not demanding payment as a result of the covenant default, meeting its financial covenants in the future and obtainingadditional financing through its current or a new lender combined with other financing initiatives.

Management is in discussion with its current lenders and has requested that the covenants be amended to reflect the Company’s budgetfor fiscal 2007. Concurrently, Management believes that subordinated debt or equity financing is available and has commenced discussionswith third-party lenders/investors. Management is confident that the financing will be sufficient through 2007 to meet the Company’sfinancial requirements. Notwithstanding, there is no certainty that the current lender will amend its covenants or that other financingwill be available. The Company in its review of projections may require support for letters of credit in the second quarter to support salesgrowth. The Company’s cash flow projections indicate that the current loan facility would provide sufficient working capital throughfiscal 2007 and that if the Company’s earnings projections are realized the Company would be in compliance with the current loan facilitycovenants by the third quarter of 2007.


WORKING CAPITAL

Accounts ReceivableThe Company’s accounts receivable balance decreased from $7.8 million at September 30, 2005, to $5.2 million at September 30, 2006,due to the decrease in comparable fourth quarter revenue. Days sales outstanding were 53 days at September 30, 2006, versus 55 days atSeptember 30, 2005. The decrease in days sales outstanding was due to improved collection efforts and a change in customer mix wherecertain new customers have trade terms that promote faster payments.

InventoryThe Company’s inventory balance decreased during the year from $15.3 million at September 30, 2005, to $13.5 million at September30, 2006. The decrease was a result of markdowns taken on certain skus to reduce cost to net realizable value and as a result of the salesforce focusing on the sale of existing inventory.

Accounts Payable and Accrued LiabilitiesThe Company’s accounts payable and accrued liabilities decreased by $482,000 from $8.8 million at September 30, 2005, to $8.3 millionat September 30, 2006.

CAPITAL ASSETS AND EXPENDITURES

Capital assets, net of accumulated amortization, decreased by $80,000 to $1.4 million at September 30, 2006. Additions to capital assetswere $691,000.

For fiscal 2007, the Company anticipates similar spending on capital asset purchases. This investment should be funded from cash flow from operations.

CAPITAL STOCK AND DIVIDENDS

As at September 30, 2006, the Company had 26,954,083 common shares outstanding. During 2006, the Company issued 317,166 commonshares as a result of the exercise of stock options realizing proceeds of $90,000. In addition, the Company issued 52,850 common sharesunder its Employee Stock Purchase Plan. The Company has not declared any dividends on its common shares over the past three fiscalyears and does not plan to declare or pay any dividends on its common shares in the next 12 months.

CONTRACTUAL OBLIGATIONS

The Company has entered into operating leases for office premises and equipment. The future minimum operating lease commitmentsfor the next five years are as follows:

Fiscal year ending September 30

($000) 2007 2008 2009 2010 2011

$ $ $ $ $

169 165 141 – –

RELATED-PARTY TRANSACTIONS

In 2006, the Company had an agreement in place with a video-streaming development company (Core Video Inc.) in which the Company’sformer Chief Executive Officer had a 40% equity interest. The agreement calls for equally sharing the development costs of new productsbased on Core Video’s technology and sharing the profit or paying royalties on the Company’s sales of products utilizing the technology.

Product development, design and support service fees of $378,093 were paid or accrued to Core Video Inc.

The Company shares premises with a company in which the former Chief Executive Officer has a 33% equity interest. The Company hassigned a sublease for the portion of space it occupies at a rate per square foot equal to the rate paid by the company related to the landlord.Payments made to the related company for shared resource costs were $40,000.

Related-party transactions have been recorded at the exchange amount, which is the amount of consideration established and agreed by the related parties.

Management expects this relationship with Core Video Inc. to be reduced as future development expertise is being brought in-house.In addition, due to the change in executive officers, Core Video and the lease payments will not be considered related-party in 2007.


FOURTH QUARTER RESULTS

Revenue for the fourth quarter decreased by $3.9 million compared to the same period last year. This decline was primarily a result of the Company not receiving orders from a major club customer in the fourth quarter of 2006.

Gross margin was 35.6% compared to 33.2% in the prior year fourth quarter. The increase was due to the change in customer and productmix that LOREX is working to maintain as the Company starts the 2007 fiscal year.

Operating expenses were $4.9 million or 60% of revenue compared to $3.2 million or 26.9% in the prior year quarter. The increase inoperating expenses resulted primarily from the increased warranty service costs accrued and the cost of the termination of the Sylvaniacontract in the fourth quarter of 2006. Management expects warranty service costs to decrease as a percentage of sales in 2007 as a result of improvements in product quality, quality control and improved efficiencies in inventory management.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company prepares its financial statements in accordance with generally accepted accounting principles (GAAP) in Canada.Significant accounting policies and methods used in the preparation of the financial statements are described in note 1 to the Company’s2006 Audited Consolidated Financial Statements. Certain of the policies are more significant than others and are therefore consideredcritical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment in their applicationor if they result from a choice between accounting alternatives and that choice has a material impact on reported results or financialposition. The policies identified as critical to the Company are discussed below.

Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles requires Management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The Companyevaluates its estimates and assumptions on a regular basis, based on historical experience and other relevant factors. Significant estimatesare used in, but not limited to, determining the allowance for doubtful accounts, the provision for returns, the provision for inventoryobsolescence, the provision for warranty accrual, the income tax valuation allowances, the useful lives and valuation of intangible assetsand the fair values of reporting units for purposes of goodwill impairment tests. Actual results could differ materially from thoseestimates and assumptions.

Revenue RecognitionThe Company derives its revenue from direct sales to retail customers and end-users as well as through distributors and system integrators.Customers typically issue standard purchase orders to the Company. The Company recognizes product revenue when goods are receivedby the customer as performance has occurred, all specified acceptance criteria have been met, and the earnings process is consideredcomplete. Product returns from customers are deducted from revenue along with a provision for anticipated returns pertaining to priorproduct sales. The provision for returns is based on historical results.

Inventory ValuationThe Company values its inventory at the lower of cost or net realizable value. The Company performs a quarterly assessment of itsinventory value taking into consideration factors such as inventory aging, future demand for the inventory, expected new productintroductions, competitive pressures and numerous other factors. A change to these assumptions could have an impact on the valuation of inventory and have a resulting impact on margins.

Income TaxesThe Company records a valuation against future income tax assets when Management believes it more likely than not that some portionor all of the future income tax assets will not be realized. Management considers factors such as the projected future taxable income ineach jurisdiction, the nature of income tax assets, the carry-forward periods of use and tax planning strategies. Management discretionis utilized in this determination unless accounting or tax rules prevail. A change in these factors could have an impact on the estimatedvaluation allowance and income tax expense.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Comprehensive Income:The CICA issued section 1530 of the CICA Handbook, Comprehensive Income. The section is effective for fiscal years beginning on orafter October 1, 2006. It describes how to report and disclose comprehensive income and its components.

Comprehensive income is the change in a company’s net assets that results from transactions, events and circumstances from sourcesother than the company’s shareholders. It includes items that would not normally be included in net earnings, such as:

• Changes in the currency translation adjustment relating to self-sustaining foreign operations;• Unrealized gains or losses on available-for-sale investments; or• Gains or losses on derivatives designated as cash flow hedges.

The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section 3251, Equity. The section is alsoeffective for fiscal years beginning on or after October 1, 2006. The changes regarding the reporting and disclosure of equity and changesin equity are consistent with the new requirements of section 1530, Comprehensive Income.

When the Company adopts these sections it will report the following additional items in the audited consolidated financial statements:

• Comprehensive income and its components; and• Accumulated other comprehensive income and its components.

The Company has not yet quantified the impact of the implementation of this new accounting pronouncement on its financial results.

RISK FACTORS

The risks and uncertainties described below are not the only risk factors affecting the Company. Additional risks and uncertainties notpresently known to the Company or that are currently deemed immaterial also may impair the Company’s business operations. If any of the following risks actually occur, the business, results of operations and financial condition of the Company could be materially andadversely affected.

Business RisksAlthough the market for the Company’s products appears to be expanding, its ability to remain competitive is dependent upon assessingchanging markets and providing new products and functionality. The Company believes that its future success depends upon its abilityto enhance current products and develop and introduce new product offerings with enhanced performance and functionality at competitiveprices. While there can be no assurances that the Company will be able to develop new products to meet changes in the marketplace orthat the sale of such new products will be profitable, the Company pays close attention to and anticipates changes in the market.Management also meets regularly with its customers to identify current and anticipated end-user requirements.

Supplier RisksThe Company currently purchases the majority of its products from a number of select manufacturers in the Far East in U.S. dollars.The Company depends on these sources to meet its needs and on their quality and reliability. If a supplier discontinued or restrictedsupplying a product, which the Company could not replace in a timely manner, the Company’s business may be harmed by the resultingproduct manufacturing and delivery delays. In addition, the failure of the Company’s products to perform to customer/consumerexpectations could give rise to warranty claims or returns. To minimize this production risk, the Company contracts with a number ofsources to perform its manufacturing requirements and performs quality assurance testing in the Far East and in North America.

Competitive and Industry RisksThe Company expects that additional competition may develop from existing companies in the security monitoring business and fromnew entrants as demand for similar products expands and the market for these products becomes more established. Certain of theCompany’s competitors have greater financial resources than the Company and may be able to sustain recurring losses to establish marketshare at the Company’s expense. Competition could result in price reductions, fewer customer orders and reduced gross margins.

There can be no assurances that the market for the Company’s existing products will continue to grow. If the markets in which theCompany’s products compete fail to grow, or grow more slowly than the Company currently anticipates, the Company’s revenue and netincome growth may be lower than expected.

Customer Concentration RisksThe Company is dependent on a few customers for the majority of its products. In the current year, two customers accounted forapproximately 40% of sales, and 10 customers accounted for approximately 78% of sales. If any significant customer discontinues itsrelationship with the Company for any reason or significantly reduces expected purchase commitments for the Company’s products,the business prospects and corresponding financial condition could be materially adversely affected. During the past year the Companyhas added to its customer base in order to reduce its customer concentration risk and plans to continue this expansion in 2007.


Foreign Exchange RisksThe Company generates approximately 90% of its revenues in U.S. dollars and most product purchases are transacted in U.S. dollars.As a result, beginning in fiscal 2004, the Company began to report its financial results in U.S. dollars. The Company is exposed to theimpact of foreign currency fluctuation of U.S. dollar transactions in the Canadian companies. Changes in the value of the Canadiandollar versus the U.S. dollar impact the financial results reported by the Company. The Company does not currently enter into anyforeign exchange contracts to hedge against currency risk.

Reliance on Key Employees and Third-Party RelationshipsThe Company’s ability to develop its products will depend, to a great extent, on its ability to attract and retain highly qualifiedpersonnel and to develop and maintain third-party relationships for assistance in the conduct of research efforts, product developmentand manufacturing. The Company is highly dependent on the principal members of its management staff as well as its third-partyrelationships, the loss of whose services might impede the achievement of development objectives. The people working with theCompany are affected by a number of influences outside of the control of the Company. The loss of key employees may affect the speedand success of product development. Although the Company believes that its partners will have an economic motivation to commercializethe Company’s product included in any collaborative agreement, the amount and timing of resources diverted to these activities generallyis expected to be controlled by the third party. During the past year the Company replaced its Chief Executive Officer, Chief OperatingOfficer and CFO to strengthen its management team.

Patents and Proprietary TechnologyThe Company believes it has minimal risk related to its ability to obtain patents, maintain trade secret protection and operate withoutinfringing the rights of third parties. The Company has filed applications for patents in certain jurisdictions. There can be no assurancethat the Company’s existing patent applications will be allowed, that the Company will develop future proprietary products that arepatentable, that any issued patents will provide the Company with any competitive advantages or will not be successfully challenged byany third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition,there can be no assurance that others will not independently develop similar products, duplicating some or all of the patent protectionheld by the Company. Furthermore, there can be no assurance that the confidentiality of the Company’s trade secrets can be maintainedor that such trade secrets will not or have already been independently discovered by others.

In addition, the Company may be required to obtain licenses under patents or other proprietary rights of third parties. No assurance canbe given that any licenses required under such patents or proprietary rights will be available on terms acceptable to the Company. If theCompany does not obtain such licenses, it could encounter delays in introducing one or more of its products to the market while it attemptsto design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could beforeclosed. In addition, the Company could incur substantial costs in defending itself in suits brought against the Company on such patentsor in suits in which the Company attempts to enforce its own patents against other parties.

DERIVATIVE INSTRUMENTS AND OFF-BALANCE-SHEET ARRANGEMENTS

The Company has not used off-balance-sheet arrangements and does not expect to do so in the future. Management reviews its exposureto foreign exchange risk on an ongoing basis. While the Company purchases substantially all of its products from its third-partymanufacturers in U.S. dollars and sells the majority of its products in U.S. dollars, the Company can be exposed to foreign currencyrisk from assets and liabilities denominated in U.S. dollars in its Canadian companies and from Canadian-denominated asset andliabilities in its self-sustaining subsidiaries that use the U.S. dollar as their functional currency. The Company has not entered intoexternal hedging instruments, but may use such instruments in the future if Management determines such instruments are the mosteffective manner to minimize its foreign currency exposure.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Company’sdisclosure controls and procedures and internal control over financial reporting for the issuer. They are assisted in this responsibility by the senior Management team.

The Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls andprocedures and the design of internal controls at September 30, 2006, have concluded that the Company’s disclosure controls andprocedures were adequate and effective to ensure that material information relating to the Company and its subsidiaries would havebeen known to them.

Through the evaluation of the design of its internal controls the Company has identified certain pre-existing internal control weaknessesin the financial reporting close process, specifically a lack of segregation of duties in the consolidation process. While this deficiency insegregation of duties could have led to a material misstatement in the financial statements, no such misstatement occurred. Managementbelieves it has remediated this control weakness by enhancing the consolidation review process.

Beginning in the third quarter and throughout the fourth quarter, the Company made changes to certain of its inventory managementprocesses that assisted in strengthening the controls for the existence, accuracy and valuation of inventory.


OUTLOOK

Management projects that the Company should achieve revenue growth in fiscal 2007 as a result of broadening its customer base and the anticipated growth in shipping Digimerge products in North America and internationally. The Company expects to be profitable as a result of increased revenues due to new product offerings, change in customer and product mix and the delivery of superior offeringsof quality product.

The Company continues to invest in product development and is committed to bring innovative products to market.

The Company believes that in fiscal 2007, LOREX could grow at a pace at least equal to market growth by having available market competitivequality products. The Company’s long-term outlook is to take advantage of its market presence and to introduce leading-edge productto its extensive customer base.

ADDITIONAL INFORMATION

Further information on the Company, including its Annual Information Form, is available on SEDAR at www.sedar.com.

Henry Schnurbach Jordan SchwartzChief Executive Officer Chief Financial Officer

December 18, 2006


Management is responsible for the preparation of the accompanying consolidated financial statements and all other information contained in the Annual Report. The financial statements have been prepared in conformity with Canadian generally accepted accounting principles, which involve Management’s bestestimates and judgments based on available information.

Management maintains a system of internal accounting controls designed to provide reasonable assurancethat transactions are authorized, assets are safeguarded and financial records are reliable for preparingfinancial statements.

The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financialreporting and internal controls. The Board is assisted in exercising its responsibilities through the AuditCommittee of the Board. The Committee meets periodically with Management and the independent auditorsto satisfy itself that Management’s responsibilities are properly discharged and to recommend approval ofthe consolidated financial statements to the Board.

KPMG, LLP were appointed as the Company’s auditors in 2003. Their report on the accompanyingconsolidated financial statements follows. Their report outlines the extent of their examination, as well as an opinion on the financial statements.

Henry Schnurbach Jordan SchwartzChief Executive Officer Chief Financial Officer

FINANCIAL STATEMENTSRESPONSIBILITY


We have audited the consolidated balance sheets of Lorex Technology Inc. (formerly Strategic VistaInternational Inc.) as at September 30, 2006 and 2005, and the consolidated statements of earnings (loss)and retained earnings (deficit) and cash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Thosestandards require that we plan and perform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financialposition of the Company as at September 30, 2006 and 2005, and the results of its operations and its cashflows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants

Toronto, CanadaDecember 1, 2006

AUDITORS’ REPORT TO THE SHAREHOLDERS


CONSOLIDATED BALANCE SHEETS(Expressed in U.S. dollars)

As at September 30, 2006 and 2005

2006 2005

$ $

ASSETS

Current assets:

Cash and cash equivalents 874,095 979,773

Restricted cash (note 5) 400,000 400,000

Accounts receivable 5,170,950 7,826,018

Inventory (note 2) 13,546,788 15,292,908

Prepaid expenses and deposits 609,324 602,243

Future income taxes (note 9) 49,972 358,306

20,651,129 25,459,248

Capital assets (note 3) 1,122,626 1,167,150

Intangible assets (note 4) 230,134 265,481

Future income taxes (note 9) 201,398 1,237,249

Goodwill 682,813 654,913

22,888,100 28,784,041

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Bank indebtedness (note 5) 7,062,773 7,882,356

Accounts payable and accrued liabilities 8,331,041 8,812,636

Income taxes payable 464,224 457,485

15,858,038 17,152,477

Future income taxes (note 9) 30,828 205,459

Shareholders’ equity:

Capital stock (note 6) 9,746,310 9,608,363

Contributed surplus 326,217 143,117

Currency translation account 1,417,714 1,330,607

Retained earnings (deficit) (4,491,007) 344,018

6,999,234 11,426,105

Commitments and contingencies (note 15)

22,888,100 28,784,041

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Director Director


CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS (DEFICIT)(Expressed in U.S. dollars)

Years ended September 30, 2006 and 2005

2006 2005

$ $

Revenue 44,736,658 42,966,785

Cost of sales 30,035,307 27,890,539

Gross profit 14,701,351 15,076,246

Expenses:

Marketing and selling 11,238,484 7,798,494

Administration 3,184,707 2,456,683

Research and development (note 8) 1,824,785 1,732,738

Interest 453,675 392,895

Amortization 233,089 259,260

Loss (gain) on foreign exchange 128,051 212,156

Restructuring (note 16) 745,000 –

17,807,791 12,852,226

Earnings (loss) before income taxes and discontinued operations (3,106,440) 2,224,020

Income taxes (note 9):

Current – 257,276

Future 1,139,812 367,091

1,139,812 624,367

Net earnings (loss) from continuing operations (4,246,252) 1,599,653

Discontinued operations (note 12) (588,773) (199,048)

Net earnings (loss) (4,835,025) 1,400,605

Retained earnings (deficit), beginning of year 344,018 (1,056,587)

Retained earnings (deficit), end of year (4,491,007) 344,018

Earnings (loss) per share from continuing operations (note 10):

Basic and diluted (0.16) 0.06

Earnings (loss) per share (note 10):

Basic and diluted (0.18) 0.05



CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in U.S. dollars)

Years ended September 30, 2006 and 2005

2006 2005

$ $

Cash provided by (used in):

Operating activities:


Items not involving cash:

Write-off of capital assets 31,092

Amortization of capital assets and intangible assets 769,934 759,135

Amortization of deferred charges – 6,735

Stock option expense 197,278 127,007

Future income taxes 1,188,037 324,869

Change in non-cash operating working capital:

Accounts receivable 2,699,186 (2,058,307)

Inventory 1,803,468 (5,587,163)

Prepaid expenses and deposits (2,664) (111,215)

Accounts payable and accrued liabilities (752,705) 3,252,851

Income taxes payable 7,220 (140,491)

1,694,594 (1,826,926)

Cash flows applied to discontinued operations (337,542) (199,048)

1,357,052 (2,025,974)

Financing activities:

Issue of share capital on exercise of stock options 89,680 175,432

Increase (decrease) in bank indebtedness (852,811) 2,935,788

(763,131) 3,111,220

Investing activities:

Purchase of capital assets (691,047) (810,089)

(691,047) (810,089)

Effect of foreign currency translation on cash balances (8,552) 188,693

Increase (decrease) in cash and cash equivalents (105,678) 463,850

Cash and cash equivalents, beginning of year 979,773 515,923

Cash and cash equivalents, end of year 874,095 979,773

Supplemental cash flow information:

Interest paid 453,675 392,895

Income taxes paid 13,884 386,136

Supplemental disclosures relating to non-cash financing and operating activities:

Employee stock purchase plan 48,267 –

Accrued liabilities relating to discontinued operations 229,000 –



1. SIGNIFICANT ACCOUNTING POLICIES:

(a) Basis of Consolidation:The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: LOREX Canada Inc.(formerly Strategic Vista Technologies Inc.), LOREX Corporation (formerly Strategic Vista (USA), Inc.), Strategic Vista CorporationLimited (a Hong Kong corporation), Digimerge Technologies Inc., XBL Solutions Inc. and Strategic Vista Direct, Inc. (a U.S.corporation). Intercompany transactions and balances are eliminated on consolidation.

In fiscal 2004, Strategic Vista Corporation Limited entered into a joint venture to construct and operate a manufacturing facility in China. In fiscal 2006 the operations of the joint venture seized. The Company is accounting for the joint venture as adiscontinued operation (see note 12).

As of September 30, 2006, the Company was in violation of its debt to tangible net worth covenant under its $15,000,000 facility.The bank has not waived its rights under this facility. The future ability of the Company to operate in the normal course isdependent on its current lender not demanding payment as a result of the covenant default, meeting its financial covenants in thefuture and obtaining additional financing through its current or a new lender combined with other financing initiatives.

(b) Foreign Currency Translation:Effective October 1, 2004, the U.S. dollar became the functional currency of certain of the Company’s subsidiaries – DigimergeTechnologies Inc., LOREX Corporation and Strategic Vista Corporation Limited. For other U.S. subsidiaries that are consideredfully integrated foreign operations and foreign currency transactions, non-Canadian-dollar monetary assets and liabilities aretranslated into Canadian dollars at the rate of exchange prevailing as at the consolidated balance sheet dates, while non-monetaryassets and liabilities are translated at historical rates of exchange. Revenues and expenses are translated into Canadian dollars at therate in effect at the date of transaction. Realized and unrealized foreign exchange gains and losses are included in net earnings forthe year in which they occur.

The Company uses the U.S. dollar as its reporting currency for preparation of its consolidated financial statements. Under thismethod, the Company and its subsidiaries that use the Canadian dollar as the functional currency translate all assets and liabilitiesat the year-end exchange rate and all revenue and expense items are translated at an average rate of exchange for the year for U.S.dollar reporting. Exchange rate differences arising on translation are deferred as a separate component of shareholders’ equity.

(c) Cash and Cash Equivalents:Cash and cash equivalents include bank balances and highly liquid short-term investments with terms to maturity of less than 90 days at the time of acquisition.

(d) Inventory:Inventory is stated at the lower of cost and net realizable value. Cost is determined on a weighted average basis.

(e) Capital and Intangible Assets:Capital and intangible assets are stated at cost. Amortization is calculated on a straight-line basis over the following terms:

Property, plant and equipment: Product development: Intangibles:Furnishings and Tooling 3 years Patents, trademarks and licenses 3 years

equipment 3 years Product design 3 years Purchased trademarks 5 yearsComputer hardware

and software 3 yearsWebsite 3 yearsLeasehold improvements 3 yearsDisplays 2 years

(f) Impairment of Long-Lived Assets:The Company conducts its impairment test on long-lived assets, including intangible assets, when events or changes in circumstancesindicate that the carrying amount may not be recoverable. An impairment is recognized when the carrying amount of an asset to be held and used exceeds the undiscounted future net cash flows expected from its use and disposal. If there is an impairment, theimpairment amount is measured as the amount by which the carrying amount of the asset exceeds its fair value, calculated usingthe discounted cash flows when quoted market prices are not available.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in U.S. dollars)Years ended September 30, 2006 and 2005


(g) Research and Development Costs:Research costs are expensed as incurred. Development costs are expensed as incurred unless the development project is for atechnically feasible product that management intends to produce and market and for which the intended market is clearly definedand adequate resources exist to complete the project. Deferred development costs are amortized on a straight-line basis over athree-year period commencing with commercial production or use of the products under development.

(h) Employee Stock Purchase Plan:The Company has an employee stock purchase plan for employees, directors and consultants that are accounted for using the fairmarket value-based method. The Company expenses at a rate of 25% per year, straight-line, compensation cost on the date of grantwith a corresponding amount recognized in accounts payable and accrued liabilities. When the shares vest, the share certificates arereleased to the employee at which time the accrual is reversed to common shares. See note 6(b).

(i) Stock-Based Compensation:The Company accounts for stock option payments using the fair value method. Under the fair value method, stock-based paymentsare measured at the fair value of equity instruments determined using the Black-Scholes option pricing model and are amortizedover the vesting period. The offset to the recorded cost is contributed surplus.

(j) Revenue Recognition:The Company earns substantially all of its revenue from the sale of products to its customers. Revenue is recognized when titlepasses to customers, which is generally at the time goods are received by the customer, and when there is reasonable assurance ofthe consideration that will be received, taking into account the extent to which goods may be returned. Cash discounts, volumediscounts and certain marketing programs provided to customers are deducted from revenue when earned.

(k) Income Taxes:The Company provides for income taxes using the asset and liability method of accounting for income taxes. Under this method,future income tax assets and liabilities are determined based on temporary differences between financial statement values and taxvalues of assets and liabilities and are measured using substantively enacted income tax rates and laws expected to be in effect whenthe differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if it cannotdemonstrate through the use of objectively verifiable available information that it is more likely than not that the future income taxasset will be realized.

(l) Earnings per Share:Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. Thecomputation of diluted earnings per share assumes the basic weighted average number of shares outstanding during the year isincreased to include the number of additional common shares that would have been outstanding if the potentially dilutive commonshares had been issued. The dilutive effect of warrants and stock options is determined using the treasury stock method.

(m) Goodwill:Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amountsallocated to the assets acquired, less liabilities assumed, based on their fair values. The amount of goodwill disclosed on the balancesheets has changed during the year due to the change in the foreign exchange rate.

Goodwill is not amortized and is tested for impairment annually, or more frequently, if events or changes in circumstances indicatethat the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reportingunit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reportingunit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out whenthe carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of a reporting unit’s goodwill iscompared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill isdetermined in the same manner as the value of goodwill is determined in a business combination, using the fair value of the reportingunit as if it was the purchase price. When the carrying amount of reporting unit goodwill exceeds the implied fair value of thegoodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line in the statement ofearnings. The Company conducted its annual goodwill assessment in the fourth quarter of fiscal 2006 and fiscal 2005 andconcluded there was no impairment in the recorded value of the goodwill.

(n) Use of Estimates:The preparation of financial statements requires Management to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reportedamounts of revenue and expenses during the year. Significant estimates are used in determining, but are not limited to, the allowancefor doubtful accounts, provision for returns, inventory valuation, income tax valuation allowances, the useful lives and valuation of intangible assets, and the fair value of the reporting units for purposes of goodwill impairment costs. Actual results could differfrom those estimates.


2. INVENTORY:

2006 2005

$ $

Goods on hand 11,714,984 11,814,851

Goods in transit 1,331,646 2,949,272

Other inventory 500,158 528,785

13,546,788 15,292,908

3. CAPITAL ASSETS:

Accumulated Net

2006 Cost amortization book value

$ $ $

Property, plant and equipment:

Furnishings and equipment 279,046 136,302 142,744

Computer hardware and software 483,942 282,757 201,185

Website 107,540 33,887 73,653

Leasehold improvements 86,553 37,886 48,667

Displays 47,361 47,361 –

1,004,442 538,193 466,249

Product development:

Tooling 2,040,657 1,429,852 610,805

Product design 411,714 366,142 45,572

2,452,371 1,795,994 656,377

3,456,813 2,334,187 1,122,626

Accumulated Net


$ $ $

Property, plant and equipment:

Furnishings and equipment 180,709 89,403 91,306

Computer hardware and software 353,618 148,535 205,083

Website 34,968 6,277 28,691

Leasehold improvements 74,414 13,229 61,185

Displays 48,523 38,752 9,771

692,232 296,196 396,036

Product development:

Tooling 1,638,444 968,461 669,983

Product design 389,552 288,421 101,131

2,027,996 1,256,882 771,114

2,720,228 1,553,078 1,167,150


4. INTANGIBLE ASSETS:

Accumulated Net


$ $ $

Patents, trademarks and licenses 235,028 100,703 134,325

Purchased trademarks 234,524 138,715 95,809

469,552 239,418 230,134

Accumulated Net


$ $ $

Patents, trademarks and licenses 247,138 41,872 205,266

Purchased trademarks 180,645 120,430 60,215

427,783 162,302 265,481

5. BANK INDEBTEDNESS:

On October 22, 2004, the Company entered into a credit agreement with a Canadian chartered bank providing the Company with a maximum facility of Cdn. $15,000,000. The amount available under the facility is subject to certain financial ratios, as defined inthe agreement. Revolving credit loans bear interest at the bank’s prime rate plus 0.45% for Canadian-dollar-denominated advancesand the bank’s U.S. dollar base rate plus 0.45% for U.S.-dollar-denominated advances. Interest is payable monthly. The facility issecured by an assignment of book debts, inventory, certain other assets and proceeds from insurance. At September 30, 2006,borrowings outstanding under this facility were U.S. $4,307,304 and Cdn. $2,878,036 (2005 – U.S. $3,285,000 and Cdn. $4,976,000).

The Company also has a Cdn. $750,000 credit facility to provide for borrowings by its subsidiary, Digimerge Technologies Inc. Thefacility is secured by an assignment of book debts, inventory and insurance proceeds and bears interest at the bank’s prime rate plus1% for Canadian dollar amounts and the bank’s U.S. base rate plus 1% for U.S. dollar amounts. At September 30, 2006, borrowingsoutstanding under this facility were U.S. $79,349 and Cdn. $105,838 (2005 – U.S. $446,000 and Cdn. $nil).

As at September 30, 2006, the weighted average interest rate on the Company’s borrowings was 7.7% (2005 – 5.6%).

The Company has a credit line with another financial institution providing for the issuance of letters of credit up to $2,000,000.To support this facility, the Company has placed on deposit the equivalent of $400,000 with the financial institution. This deposit is reflected in the consolidated balance sheets as restricted cash. As of September 30, 2006, the Company had outstanding letters ofcredit in the amount of $495,000 (2005 – $537,000). Subsequent to September 30, 2006, the Company decided to consolidate thiscredit line with its primary facility and will be releasing the $400,000 from this financial institution.


6. CAPITAL STOCK:

2006 2005

$ $

Authorized:

200,000 Class A preferred shares with an 8% cumulative

dividend accruing from January 1, 1998, redeemable at

the option of the Company at $1 per share

150,000 Class B preferred shares with an 8% cumulative

dividend accruing from January 1, 1998, redeemable at

the option of the Company at $1 per share

Unlimited common shares

Issued:

150,000 Class B special shares 104,895 104,895

26,954,083 common shares (2005 – 26,584,067)(a) 9,641,415 9,503,468

9,746,310 9,608,363

No dividends have been declared or paid on the common shares and Class B preferred shares. At September 30, 2006, there were$94,000 (Cdn. $105,000) (2005 – $80,000 (Cdn. $93,000)) in unpaid cumulative dividends on the Class B preferred shares.

(a) Changes in common shares during the current and prior years are as follows:

Number Amount

$ $

Balance, September 30, 2004 25,830,900 9,328,036

Issued on exercise of stock options 751,167 174,456

Issued under employee stock purchase plan (b) 2,000 976


Issued on exercise of stock options 317,166 89,680

Issued under employee stock purchase plan (b) 52,850 48,267


(b) Employee Stock Purchase Plan:In January 2004, the Company adopted an Employee Stock Purchase Plan (“the Plan”), allowing for the issuance of up to3,125,000 common shares. The maximum number of shares that may be allocated in any particular year will not exceed 2.5% of the issued and outstanding shares of the Company. The shares issued under the Plan vest equally, on an annual basis,at a rate of 25% per year.

In January 2005, the Company granted 8,000 common shares to one of its employees. A total of 4,000 (2005 – 2,000) shareshave been issued directly to the employee, while 4,000 (2005 – 6,000) shares remain in trust. The employee will be entitled toreceive these remaining shares over two years, at a rate of 2,000 shares per year.

In January 2006, the Company granted 215,400 common shares to certain of its employees; 50,850 shares have been issueddirectly to these employees, 34,125 were cancelled and 130,425 shares remain in trust. Should the employees continue theiremployment with the Company, they will be entitled to receive these shares over three years at a rate of 43,475 per year.


7. STOCK-BASED COMPENSATION:

The Company’s 1999 and 2005 stock option plans have been established for the benefit of the members of the Board of Directors,officers, full-time employees and consultants of the Company and its subsidiaries. The Company has set aside an aggregate of6,500,000 common shares for the issuance of common shares arising from the exercise of options under these plans. The exerciseprice of each option is determined by the Board of Directors but shall not be less than the closing market price on the last tradingday prior to the grant date. New options issued under the current plan vest over a period determined by the Board of Directors but shall not exceed 10 years.

A summary of the status of the Company’s stock option plans as at September 30, 2006 and 2005, and changes during the yearsended on those dates is presented below:

2006 2005

Weighted Weighted

average average

exercise exercise

Shares price (Cdn.) Shares price (Cdn.)

$ $

Outstanding, beginning of year 1,672,500 0.97 2,149,667 0.76

Granted 1,080,000 1.01 470,000 0.96

Exercised (317,166) 0.32 (751,167) 0.29

Forfeited (73,334) 0.97 (196,000) 1.27

Expired (3,000) 0.30 – –

Outstanding, end of year 2,359,000 1.08 1,672,500 0.97

Options exercisable, end of year 1,102,333 1.13 982,833 0.88

The following table summarizes information about stock options outstanding as at September 30, 2006:

Options outstanding Options exercisable

Weighted

average Weighted Weighted

remaining average average

Range of Number contractual exercise Number exercise

exercise prices outstanding life (years) price (Cdn.) exercisable price (Cdn.)

$ $

$0.75–0.99 1,380,000 4.32 0.96 353,333 0.92

$1.00–1.24 515,500 1.70 1.08 415,500 1.09

$1.25–1.49 313,500 2.58 1.31 233,500 1.28

$1.50–1.74 150,000 2.10 1.68 100,000 1.68

Total 2,359,000 1.08 1,102,333 1.13


The weighted average fair value of a stock option granted during the year with an exercise price equal to the estimated market priceof a common share on the date of grant was Cdn. $0.53 (2005 – Cdn. $0.35). The fair value of the stock options was determinedusing the Black-Scholes option pricing model, based on the following assumptions:

2006 2005

Risk-free interest rate 4.25% 3.5%

Expected life 4 years 4 years

Expected volatility 75% 40%

Expected dividends – –

8. RESEARCH AND DEVELOPMENT:

2006 2005

$ $

Expenses attributable to employees 808,215 708,348

Materials 119,551 78,591

Subcontractor’s costs 446,407 439,189

Amortization of tooling costs 411,220 339,346

Amortization of product design costs 126,805 167,264

Investment tax credit (87,413) –

1,824,785 1,732,738

9. INCOME TAXES:

The Company’s provision for income taxes is made up as follows:

2006 2005

$ $

Income tax expense (recovery) based on statutory

Canadian corporate tax rates (1,122,046) 803,316

Effect on provision (recovery) attributable

to the following items:

Foreign operations subject to different tax rates 64,192 (237,258)

Other (79,253) 44,204

Change in valuation allowance 2,276,919 14,105

1,139,812 624,367

Future income taxes are recognized for future tax consequences attributable to differences between the financial statement carryingamounts of existing assets and liabilities and their tax basis.


Future income tax assets and liabilities comprise the following as at September 30, 2006 and 2005:

2006 2005

$ $

Future income tax assets:

Current:

Provision for returns 125,863 124,532

Provision for unpaid severance 143,791 –

Income tax effect of net operating

losses carried forward – 132,109

Government grant 64,789 62,142

Deferred finance charges 5,896 26,632

Other 7,452 12,891

347,791 358,306

Less valuation allowance 297,819 –

49,972 358,306

Long-term:

Income tax effect of net operating

losses carried forward 2,030,463 1,272,539

Share issue costs 44,799 71,603

Capital assets 125,733 –

Loss on write-down of investment 102,856 83,966

Other 179,220 111,714

2,483,071 1,539,822

Less valuation allowance 2,281,673 302,573

201,398 1,237,249

251,370 1,595,555

Future income tax liabilities:

Capital assets 30,828 205,459

Net future income tax assets 220,542 1,390,096

At September 30, 2006, the Company has operating loss carry-forwards for federal income tax purposes of approximately Cdn. $938,371 in Canada and U.S. $4,653,119 in the U.S. expiring as follows:

Canadian losses: $

2009 125,059

2010 2,312

2014 806,488

2026 4,512

Cdn. 938,371

U.S. losses: $

2022 32,429

2024 337,852

2025 115,769

2026 4,167,069

U.S. 4,653,119


10. EARNINGS (LOSS) PER SHARE:

The computation of basic and diluted earnings per share from continuing operations is as follows:

2006 2005

$ $

Basic:


Less preferred shares dividends 10,503 9,809

Earnings (loss) from continuing operations attributable to

common shareholders (4,256,755) 1,589,844

Weighted average common shares outstanding 26,772,668 26,225,234

Basic earnings (loss) from continuing operations per share (0.16) 0.06

Diluted earnings (loss) from continuing operations available to



Assumed exercise of stock options, net of common shares

assumed repurchased with the proceeds – 225,847

Weighted average potential common shares outstanding 26,772,668 26,451,081

Diluted earnings (loss) from continuing operations per share* (0.16) 0.06

*Excludes the effect of 2,359,000 (2005 – 536,000) options to purchase common shares that are anti-dilutive (note 7).


The computation of basic and diluted earnings per share is as follows:

2006 2005

$ $

Basic:

Net earnings (loss) (4,835,025) 1,400,605

Less preferred shares dividends 10,503 9,809

Earnings (loss) attributable to



Basic earnings (loss) per share (0.18) 0.05

Diluted earnings (loss) available to



Assumed exercise of stock options, net of common shares

assumed repurchased with the proceeds – 225,847

Weighted average potential

common shares outstanding 26,772,668 26,451,081

Diluted earnings (loss) per share* (0.18) 0.05

*Excludes the effect of 2,359,000 (2005 – 536,000) options to purchase common shares that are anti-dilutive (note 7).


11. RELATED-PARTY TRANSACTIONS AND BALANCES:

The following transactions are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

(a) The following expense transactions took place with a related company, in which a director and officer of the Company had an equity interest:

2006 2005

$ $

Utilities and general expenses paid in respect of

shared facility 40,223 107,489

Accounts payable and accrued liabilities at September 30, 2006, include $100,000 (2005 – $7,000) payable to this related party inrespect of amounts paid by the related party on behalf of the Company to exit a royalty agreement, and accounts receivable include$53,000 (2005 – $116,000) due from this related party in respect of amounts paid by the Company on behalf of the related party forrent and severance costs. Leasehold improvements include $nil (2005 – $19,000) of reimbursed costs paid to this related party inrespect of shared resources.

(b) Product development, design and support service fees of $378,093 (2005 – $212,000) were paid or accrued to a company in which oneof the directors has an equity interest. Accounts payable to this company as at September 30, 2006, were $47,000 (2005 – $20,901).

12. DISCONTINUED OPERATIONS:

During the year, the Company closed its joint venture manufacturing facility in China and adopted a formal plan to dispose of theremaining assets, meeting the criteria to report as discontinued operations. Accordingly, the operating results of the joint venturehave been classified as a discontinued operation and comparative figures have been restated. During 2006 the Company recordedoperating losses of $(588,773) (2005 – $(199,048)) net of income taxes of $42,222 (2005 – $(42,222)). Net revenues applicable to the joint venture were $394,020 (2005 – $1,442,947), which were all to a related party. Amortization was $22,231 (2005 – $3,388).

Assets, other than cash, and liabilities of the joint venture were as follows:

Current assets: $126,904 (2005 – $680,114)Long-term assets: $106,681 (2005 – $47,572)Current liabilities: $280,135 (2005 – $413,912)Long-term liabilities: nil (2005 – nil)

13. FINANCIAL INSTRUMENTS:

(a) Credit Risk:Credit risk arises from the possibility that certain parties will be unable to discharge their obligations. The Company routinely assessesthe financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited.

(b) Foreign Exchange Risk:A substantial portion of the Company’s Canadian subsidiaries’ purchases and borrowings is denominated in U.S. dollars. Thisresults in cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and bank indebtedness balancesbeing denominated in U.S. dollars.

Included in the undernoted accounts are the following balances denominated in U.S. dollars:

2006 2005

Cash and cash equivalents 31,852 65,203

Accounts receivable 80,153 15,284

Accounts payable and accrued liabilities (338,067) (57,906)

Bank indebtedness (3,758,909) (1,065,131)

Net U.S. dollar monetary position (3,984,971) (1,042,550)


(c) Fair Values:The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued liabilitiesapproximate their fair values due to the relatively short-term maturity of these instruments. The carrying value of bank indebtednessapproximates its fair value as the interest rate applied to the debt fluctuates with the bank’s prime rate.

14. SEGMENTED INFORMATION:

The Company derives over 90% of its revenue from the sale of its products in the North American market. On a geographic basis,the Company’s revenue was from the following regions:

Revenue Capital assets Goodwill

2006 2005 2006 2005 2006 2005

$ $ $ $ $ $

United States 38,599,053 34,843,532 18,841 4,932 – –

Canada 4,934,158 5,804,654 1,196,655 1,329,790 682,813 654,913

Other 1,203,447 2,318,599 137,264 97,909 – –

44,736,658 42,966,785 1,352,760 1,432,631 682,813 654,913

At September 30, 2006, five customers account for approximately 57% of consolidated accounts receivable (2005 – five customersaccount for approximately 64% of accounts receivable).

For the year ended September 30, 2006, the Company had two customers (2005 – three customers) each contributing greater than 10% of the consolidated revenue. These customers accounted for approximately 40% of consolidated revenue (2005 – 49%).

15. COMMITMENTS AND CONTINGENCIES:

The Company is obligated under operating leases for office premises and equipment. The future minimum operating leasecommitments for the next five years are as follows:

$

2007 169,082

2008 165,477

2009 141,361

2010 –

2011 –

One of the Company’s subsidiaries is eligible to receive financial assistance of Cdn. $300,000 from the Canada-Israel IndustrialResearch and Development Foundation (“the Foundation”) related to development activities. As at September 30, 2006, Cdn.$200,000 has been received. These amounts are repayable based on gross sales of the Company’s IntegrAlarm product, at a rate of 2.5%of annual sales, until fully repaid. Accordingly, accounts payable and accrued liabilities include $179,000 (2005 – $172,000) relating tothe first two payments received from the Foundation. No amounts have been repaid in 2006, as no products have beenmanufactured for sale.

16. RESTRUCTURING:

During the year, the Company initiated restructuring initiatives to assist its return to profitability. The Company reduced itsheadcount and recorded severance-related costs of $495,000. In addition, the Company incurred a cost of $250,000 to exit a royaltyagreement for a discontinued brand. As at September 30, 2006, the Company had $433,436 (2005 – $nil) in restructuring costincluded in its accrued liabilities.

DIRECTORS

Henry SchnurbachChairman & C.E.OLOREX Technology Inc.

Dennis Bennie*

PresidentXDL Capital Corp.

Jordan Levy*

Managing PartnerSeed Capital Partners

Gerald A. Slan*

PresidentSlan Advisors Inc.

CORPORATE OFFICERS

Henry SchnurbachChairman & C.E.O

Jordan SchwartzChief Financial Officer

Steve GoldPresidentLOREX Corporation

Alan BassPresidentDigimerge Technologies Inc.

Chris AtwoodVice President OperationsLOREX Corporation

Godfrey D’CruzVice President Logistics & Inventory ManagementLOREX Technology Inc.

Wayne HurdVice President SalesDigimerge Technologies Inc.

Martin WorndlVice President Marketing& Product DevelopmentLOREX Technology Inc.

STOCK LISTING

LOREX Technology Inc. is listed on the TSX.The trading symbol is “LOX”.

TRANSFER AGENT

Equity Transfer Services Inc.Toronto, Ontario

AUDITORS

KPMG, LLPToronto, Ontario

LEGAL COUNSEL

Michael Singer Toronto, Ontario

Goodman Weiss Miller LLPCleveland, Ohio

* Member of the Audit Committee,

Compensation Committee and

Corporate Governance Committee.

ANNUAL MEETING OF SHAREHOLDERS

LOREX’s Annual Meeting will be held on Thursday, February 15, 2007,

at 4:00 p.m. at the head office at 300 Alden Road, Markham, Ontario.

LOREX TECHNOLOGY INC.

Head Office300 Alden RoadMarkham, OntarioCanada L3R 4C1

TEL: 905 946-8589FAX: 905 947-0138EMAIL: [email protected]

U.S. Office3700 Koppers Street, Suite 504Baltimore, MarylandUSA 21227

TEL: 410 525-1902FAX: 410 525-1908

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