OMT Inc.
TSX VENTURE : OMT

OMT Inc.

April 29, 2009 13:40 ET

OMT Reports Annual Results for 2008

WINNIPEG, MANITOBA--(Marketwire - April 29, 2009) - OMT Inc. (TSX VENTURE:OMT) announced today the Company's consolidated results for the year ended December 31, 2008.

2008 Highlights:

- OMT Inc. and its debt holders have agreed to extend the current debt facilities from July 15, 2009 to July 15, 2011. In parallel, OMT has negotiated a further extension of the interest deferral arrangement, representing $3,000,000 of its total debt until as late as July 15, 2011.

- While year on year total sales dropped slightly (2.2%), gross profit was 2.7% higher with both EBITDA and net loss improved significantly by approximately 86% and 32% respectively.

- The Company's iMediaTouch radio broadcast automation solutions continue to be employed in well recognized ownership groups such as Saga Communications, Mid-West Family Broadcasting station clusters, an initial radio group deployment in India and others.

- OMT announced new product enhancements such as WebSecure and a new product architecture for mass storage and playback of content, with successful initial deployments.

Description of Business

OMT Inc. (TSX VENTURE:OMT) is a digital media content and technology solution provider to radio broadcasters and retailers with two business units, OMT Technologies Inc. and Intertain Media Inc. The OMT Technologies division delivers radio automation systems to radio stations internationally and the Intertain Media digital entertainment division, offers commercial music, messaging and digital signage services to major retailers. OMT's broadcasting, multi-media technology, and content are heard daily by over 50 million people worldwide through radio, satellite, television and Internet delivered broadcasts. To learn more about the Company, its products and services, visit its website at www.omt.net.

Management's Discussion and Analysis

Certain statements made in the following Management's Discussion and Analysis contain forward-looking statements including, but not limited to, statements concerning possible or assumed future results of operations of the Company. Forward-looking statements represent the Company's intentions, plans, expectations and beliefs, and are not guarantees of future performance. Such forward-looking statements represent our current views based on information as at the date of this report. They involve risks, uncertainties and assumptions and the Company's actual results could differ, which in some cases may be material, from those anticipated in these forward-looking statements. Unless otherwise required by applicable securities law, we disclaim any intention or obligation to publicly update or revise this information, whether as a result of new information, future events or otherwise. The Company cautions investors not to place undue reliance upon forward-looking statements.

Results of Operations

This review contains Management's discussion of the Company's operational results and financial condition, and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 and the associated notes, which were prepared in accordance with Canadian generally accepted accounting principles (GAAP). All amounts are in Canadian dollars unless otherwise indicated.

The audited consolidated financial statements provide a comparison of the year ended December 31, 2008 to the years ended December 31, 2007 and 2006.



Annual Review (numbers shown in '000s)
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December 31 December 31 December 31
2008 2007 2006
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Sales $3,148 $3,220 $3,038
Gross profit $1,983 $1,934 $2,024
Gross profit % 63.0% 60.1% 66.6%
Operating expenses $2,014 $2,162 $2,351
EBITDA ($31) ($228) ($322)
Other expenses $601 $703 $794
Net loss ($632) ($931) ($1,116)
Net loss per share (basic & diluted) ($0.022) ($0.032) ($0.039)
Discontinued operations - gross profit - $178 $468
Discontinued operations - gain on
disposal - $181 -
Dividends declared Nil Nil Nil

Total assets $583 $519 $1,357
Total long-term liabilities $4,072 $3,571 $3,476
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Results for the years ended December 31, 2008, 2007 and 2006 reflect the total business of the OMT Technologies and the Intertain Media divisions. Sales and cost of sales for Intertain's discontinued Retail Preview System (RPS), which was sold in May 2007 have been eliminated and are shown separately as gross profit and gain on disposal. Expenses of the discontinued operation have not been segregated and remain in the normal operating expenses. OMT Technologies (iMT) includes our iMediaTouch radio automation and related products. Intertain Media now includes our commercial background music, messaging and digital signage services.

Total sales in 2008, as compared to 2007, decreased $72,000 (2.2%). In 2007, Intertain had a unique large installation which included significant hardware and installation services. In 2008, a similar custom project did not reoccur contributing to the hardware and installation services sales within the Intertain division being $280,000 less than in 2007. Intertain recurring revenue, however, continued to grow and finished the year $41,000 (30.3%) greater than the previous year. iMT had a significant hardware sale in 2008. As a result, hardware sales were $211,000 (27.6%) higher than the previous year and overall sales were $155,000 higher than in 2007. The weakening US economy continues to negatively impact the financial performance of the radio industry, causing an increased focus on capital expenditure reduction. Some clients have decided to postpone annual technical maintenance contract renewals. As a consequence, recurring revenue in the commercial segment has been negatively affected and is $49,000 (7.6%) lower than last year.

Gross profit of $1,983,000 in 2008 was $49,000 (2.5%) higher than 2007 and $41,000 (2.0%) less than in 2006. This year's gross profit level is considered more typical. Gross profit margins fluctuate when the mix of sales between hardware, software and services changes in any specific period. Last year, the gross profit was abnormally low as a result of the large audio installation in the retail sector and the technical delays experienced in the large custom project in the commercial sector.

The Company continues to operate with tight controls on expenses, and as a result operating expenses in 2008 of $2,014,000 were $148,000 (6.8%) less than in 2007. Operating expenses in 2007 decreased by $189,000 (8.0%) in 2007 over 2006.

In 2008, sales and marketing expenses were down from $704,000 in 2007 to $580,000 in 2008, a decrease of $124,000 (17.6%). This significant reduction in costs was achieved by minor staff adjustments, a streamlined marketing plan, and savings in bad debts write downs through tighter control over credit granting procedures and collections.

Administrative expenses of $1,271,000 in 2006 decreased $30,000 (2.4%) to $1,241,000 in 2007 and decreased an additional $75,000 (6.0%) to $1,166,000 in 2008. Some of the decrease in 2008 is attributed to ongoing cost savings as well as the sale of the RPS products business in May of 2007.

Research and development expenses with an average annual cost of $217,000 for the last three years have been relatively stable. OMT has continued to prudently invest in the further development of both the OMT Technologies and Intertain products to ensure OMT continues to be well positioned in the marketplace.

EBITDA is defined as Earnings Before Interest, Tax, Depreciation and Amortization and is a measure that has no standardized meaning under Canadian GAAP and is considered a non-GAAP earnings measure. Therefore this measure may not be comparable to similar measures reported by other companies. EBITDA can be used to compare the Company's operating performance on a consistent basis. It is presented in this MD&A to provide the reader with additional information regarding the Company's liquidity and ability to generate funds to finance its operations.



Other expenses that reduce EBITDA to arrive at
net loss include: 2008 2007 2006
------ ------ ------
Interest, bank charges, non-cash interest accretion $585 $672 $658
Amortization 16 31 136
------ ------ ------
Total $601 $703 $794


The net loss in 2008 of $632,000 before discontinued operations is an improvement of $299,000 (32.1%) over 2007. The net loss in 2007 of $931,000 before discontinued operations was an improvement of $185,000 (16.6%) over 2006 when the loss was $1,116,000. The 2008 and 2007 improvements were primarily a result of continued expense reductions.

Loss per share of $0.022 in 2008 and $0.032 in 2007 is calculated on an average of 28,922,090 shares issued in both years.



Eight Quarter Review (numbers shown in '000s)
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2008 2007
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Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
----- ----- ----- ----- ----- ----- ------ ------
Sales $796 $665 $871 $816 $794 $637 $1,008 $781
Gross profit $521 $443 $532 $487 $492 $446 $463 $533
Gross profit % 65% 67% 61% 60% 62% 70% 46% 68%
Operating
expenses $452 $453 $608 $501 $461 $500 $605 $596
EBITDA $69 ($10) ($76) ($14) $31 ($54) ($142) ($63)
Other expenses $155 $155 $148 $143 $171 $187 $169 $176
Net loss ($86) ($165) ($224) ($157) ($140) ($241) ($311) ($239)

Net loss
per share
(basic &
diluted) ($0.003)($0.006)($0.008)($0.006)($0.005)($0.008)($0.011)($0.008)
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Total sales by quarter are consistent when compared to last year with the exception of the second quarter. In the second quarter of 2007, total sales included a large Intertain equipment implementation and a significant progress billing on a large OMT Technologies custom contract.

The large OMT Technologies custom project subsequently developed project delays, which resulted in a $47,000 net decrease in gross profit in the second quarter of 2007. The second quarter of 2007 was also impacted by the large, but lower margin, Intertain equipment order.

Operating expenses, this year and last year continue to decline on a running quarter to quarter. The exception is Q2 in both years which is when the Company attends a large annual industry sales trade show. Sale of the RPS business in May of 2007 has also helped to reduce costs over the long term.

Fourth Quarter 2008

Fourth quarter revenue at $796,000 was $2,000 (0.3%) higher than the same quarter last year and $131,000 (19.7%) higher than the third quarter this year. The increase in sales in the fourth quarter as compared to the third quarter this year was general in nature and not due to any particular product or service.

Gross margins in the fourth quarters this year and last year were typical at 65% and 62% respectively. Gross margins in the third quarters this year and last year were 67% and 70% respectively. The higher margin percentage achieved in the third quarter both this year and last year resulted from higher software revenue as a ratio to hardware revenue.

Operating expenses at $452,000 in the fourth quarter were similar to the third quarter ($453,000) this year and the fourth quarter ($461,000) last year. This level of expense represents a significant saving over previous years. A number of initiatives, including a reduction in marketing and travel costs were undertaken to control expenses.

Cash flow in the fourth quarter of 2008 was negative $51,000. This compares to a negative cash flow in the fourth quarter of 2007 of $155,000. The chart below shows the contributing components of these amounts.



Description 2008 2007
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Net income (loss) ($ 86,000) ($140,000)
Increase in bank operating loan 75,000 -
Interest accretion 129,000 94,000
Amortization 4,000 5,000
Accounts receivable increase (decrease) 11,000 (6,000)
Inventory increase (51,000) (31,000)
Accounts payable decrease (55,000) (32,000)
Unearned revenue decrease (67,000) (34,000)
Other (11,000) (11,000)
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($51,000) ($155,000)
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Liquidity

Working capital at December 31, 2008 was $30,000 as compared to $150,000 last year, a decrease of $120,000. The decrease is the result of operating losses. The Company made no capital investments in 2008 and has not made any significant commitments for capital expenditures as at December 31, 2008. The Company anticipates that its current working capital, combined with available credit facilities will be sufficient to meet the ongoing cash requirements in 2009.

Long Term Debt and Interest Payments

The long-term debt of $3,995,000 was originally scheduled to mature on December 20, 2008. In separate agreements with the debt and the debenture holders, the date of maturity was extended to July 15, 2009. A subsequent amending agreement signed on April 28, 2009 with the principal debt holders further extended the date of maturity of all of the debt to July 15, 2011. No principal payments would be required until that date.

In a separate agreement signed April 11, 2008, the principal debt holders, who together hold $3,000,000 of OMT's long-term debt, provided OMT with a signed waiver to defer the monthly interest payments, representing approximately $20,000 per month, until such time that OMT's cash reserves grow to $500,000. A subsequent amending agreement signed on April 28, 2009 with the principal debt holders changed the date for interest deferrals to July 15, 2011, or until such time when cash reserves grow to $500,000. Interest continues to be paid monthly on the remaining debt of $995,000 represented by CIBC Mellon Trust Company.

Management anticipates that the Company will not be able to generate enough cash from normal business operations and that additional financing will likely be required to retire this debt. Management continues to explore several options to address this issue within the context of strategic and operational planning.

On April 15, 2009 the Company had borrowings on its operating line of credit of $230,000 (2007-nil).

Related Party Transactions

In October 2005, a major shareholder provided a guarantee for $400,000 to the Bank of Nova Scotia in support of the Company's line of credit. This guarantee is ongoing and requires payments of a monthly administration fee of $1,000 as well as a monthly standby fee of $1,000. If the Company actually draws down on the guarantee, then the interest rate would be 20% of the amount received. The Company consummated this related party transaction to support the operating Line of Credit with the Bank.

During the year, the Company made no interest payments to its three major shareholders on the long-term debt (2007 - $240,000). In an agreement effective January 1, 2008 and renewed on April 28, 2009, the three major shareholders, who together hold $3,000,000 of the Company's long-term debt, provided the company with a signed waiver to defer the monthly interest payments. The effect of the waiver was to defer monthly interest payments of approximately $20,000 per month, until June 15, 2011 or until such time that the Company's cash reserves grow to $500,000. Interest of $240,000 was accrued on long-term debt held by the three major shareholders during 2008.

The Company has contracted to supply radio automation software and services to a company of which one of OMT's directors is also an officer and director. The project, which is valued at approximately $536,000, began in 2005 and at December 31, 2008 the revenue for the work completed and recognized was $454,000.

Changes in Accounting Policies

Section 1535 - Capital Disclosures

Effective January 1, 2008, the company adopted CICA Handbook Section 1535 which established standards for disclosing information regarding an entity's capital and its management. The information provided by an entity should focus in particular on its objectives, policies and processes for managing capital, and disclose whether it complies with capital requirements to which it is subject and also what the consequences are in case of non-compliance. This new standard did not have any significant impact on the consolidated financial statements of the company.

Sections 3862 and 3863 - Financial Instruments, Disclosures and Financial Instruments, Presentation

Effective January 1, 2008, the company adopted CICA Handbook Sections 3862 and 3863 which replace section 3861, "Financial Instruments - Disclosure and Presentation". The new sections require the disclosure of additional detail of financial asset and liability categories as well as detailed discussion on the risks associated with the company's financial instruments, including how it manages these risks. These standards harmonize disclosures with International Financial Reporting Standards ("IFRS").

Section 3031 - Inventories

Effective January 1, 2008, the company adopted CICA Handbook Section 3031 which replaces section 3030 with the same title and harmonizes accounting for inventories under Canadian GAAP with IFRS. This standard requires that inventories should be measured at the lower of cost and net realizable value, and includes guidance on the determination of cost, including allocation of overheads and other costs. The section also requires that similar inventories within a consolidated group be measured using the same method. It also requires the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. This new standard does not have any significant impact on the consolidated financial statements of the company.

Recent Accounting Pronouncements

Internal Controls

During fiscal 2008, the Company made changes to its systems of internal controls over financial reporting that did not materially affect internal control over financial reporting.

OMT has implemented a system of internal controls. New legislation does not require certification over internal controls; rather the President and Chief Financial Officer will be signing the bare certificate. There may be additional risks to quality, reliability and transparency of interim and annual filings and other reports provided under this new securities legislation.

Risks and Uncertainties

The risks and uncertainties discussed below must be taken into account, as they may affect the Company's ability to achieve our strategic goals. Investors are therefore advised to consider the following items in assessing the Company's future prospects as an investment.

Capital requirements

OMT Inc. has now renegotiated the terms of repayment on the subordinated debt which will mature on July 15, 2011. It is anticipated that future cash flow from operations will not be sufficient to repay the subordinated debt at maturity. As such, the ability of the Company to continue operating as a going concern will be dependent on continued cash management within the Company's line of credit facility and obtaining new financing and/or renegotiating the repayment terms of the subordinated debt prior to the newly extended July 15, 2011 maturity date. Readers should refer to notes 1(a) and 5 in the consolidated financial statements.

Current External Economic and Financial Crisis

The economic and financial crisis which is global in nature may have potential negative impact on the revenues of the Company in 2009. Generally, prices are under pressure and capital investment and maintenance contracts may be postponed. In this environment, it may be difficult to achieve revenue projections for 2009. As the revenues of our customers are negatively impacted, we see additional focus on their part to reduce or postpone costs. The Company uses generic products and is therefore not at risk because it is not dependant on specific vendors.

Custom Contract in progress

The Company has contracted to supply Radio Automation Software and Services to a company of which one of OMT's directors is also an officer and director. The project which is valued at approximately $536,000 began in 2005 and at December 31, 2008 the revenue for the work completed amounted to $454,000. The project has been delayed due to technical matters and the ongoing customer acceptance process. Revenue has been recorded on this contract under the percentage of completion method based upon management's best estimate of costs still to be incurred. Management estimates that costs still to be incurred to complete the project will be approximately $67,000.

Competition and technological obsolescence

Our products' markets experience ongoing technological changes and apart from the fact that OMT Inc. must compete with existing technology and service providers, new companies and advancing technologies remain a competitive fact. In order to remain fully competitive in our target markets, OMT must continue to innovate and respond with advanced generations of software, products and services. The inability to react in a timely fashion to technological and competitive changes could have an impact on the value of the Company's intangible assets and our ability to attract and retain our customers. Moreover, the highly competitive market in which we operate could cause the Company to reduce its prices and offer other favorable terms in order to compete successfully with its rivals. These practices could, over time, limit the prices that OMT can charge for its products. If OMT was unable to offset such potential price reductions by a corresponding increase in sales or to lower expenses, such a decline in revenues from software sales and related products could negatively impact our profit margins and operating results.

Additional Information

Additional information related to the Company, including all public filings, is available on SEDAR (www.sedar.com).



Consolidated Financial Statements of

OMT INC.

Years ended December 31, 2008 and 2007



AUDITORS' REPORT

To the Shareholders of
OMT Inc.

We have audited the consolidated balance sheets of OMT Inc. as at December
31, 2008 and 2007 and the consolidated statements of operations,
comprehensive loss and deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 2008 and 2007 and the results of its operations and its cash flows for
the years then ended in accordance with Canadian generally accepted
accounting principles.


Ernst & Young LLP

Winnipeg, Canada,
March 13, 2009 (except as to notes 5 and 16,
which are as of April 28, 2009) Chartered Accountants



OMT INC.
Consolidated Balance Sheets

December 31, 2008 and December 31, 2007

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2008 2007
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Assets (notes 4, 5 and 12b)

Current assets:
Cash $ 31,815 $ 42,047
Accounts receivable 260,057 257,514
Contracts in progress (note 12a) 141,581 60,132
Inventory 88,413 72,467
Prepaid expenses 52,421 48,556
Current portion of lease receivable - 7,000
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Total current assets 574,287 487,716

Long-term receivable - 8,637
Property and equipment (note 2) 6,796 17,671
Software and other intangible assets (note 3) 1,455 4,518
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Total assets $ 582,538 $ 518,542
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Liabilities and Shareholders' Deficiency

Current liabilities:
Bank demand loan (note 4) $ 220,000 $ -
Accounts payable and accrued liabilities 351,263 337,759
Deferred revenue 276,173 313,830
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Total current liabilities 847,436 651,589

Long-term debt (notes 5 and 16) 4,071,940 3,571,430
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Total liabilities 4,919,376 4,223,019
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Commitments and contingencies (notes 6, 12 and 14)

Shareholders' deficiency:
Capital stock (note 8) 1,278,458 1,278,458
Other paid-in capital (note 9) 693,579 693,579
Contributed surplus (note 8) 216,427 216,427
Deficit (6,525,302) (5,892,941)
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Total shareholders' deficiency (4,336,838) (3,704,477)
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Total liabilities and shareholders' deficiency $ 582,538 $ 518,542
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See accompanying notes to consolidated financial statements.

On behalf of the Board:

"Bill Baines" Director "Murray Bamforth" Director



OMT INC.
Consolidated Statements of Operations, Comprehensive Loss and Deficit

Years Ended December 31, 2008 and 2007

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2008 2007 (note 7)
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Sales (note 10) $ 3,148,216 $ 3,219,941

Cost of sales 1,165,603 1,285,854
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Gross profit 1,982,613 1,934,087

Selling and administrative 1,746,458 1,931,145
Research and development 207,813 216,825
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1,954,271 2,147,970

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Income (loss) before the undernoted 28,342 (213,883)
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Other expenses:
Amortization 16,416 31,358
Interest on long-term debt (note 5) 580,110 671,385
Interest on short-term debt 5,028 473
Foreign exchange loss 59,149 13,921
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660,703 717,137

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Loss for the year, before discontinued
operations (632,361) (931,020)

Discontinued operations, net of tax of
nil (2007- nil) (note 7) - 359,498
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Net loss and comprehensive loss for
the year (632,361) (571,522)

Deficit, beginning of year (5,892,941) (5,444,345)

Transitional amount (note 1c) - 122,926
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Deficit, end of year $ (6,525,302) $ (5,892,941)
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Loss per share before discontinued
operations (note 8f) $ (0.022) $ (0.032)
Earnings per share from discontinued
operations (note 8f) $ - $ 0.012
Total loss per share (notes 1n and 8f) $ (0.022) $ (0.020)
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See accompanying notes to consolidated financial statements.



OMT INC.
Consolidated Statements of Cash Flows

December 31, 2008 and 2007

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2008 2007
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Cash provided by (used in):

Operations:
Net loss and comprehensive loss for the year $ (632,361) $ (571,522)
Items not involving cash:
Amortization 16,416 31,358
Non-cash interest accretion (note 5) 260,510 351,796
Deferred interest on long-term debt (note 5) 240,000 -
Gain on sale of discontinued operations (note 7) - (181,412)
Stock-based compensation (note 8) - 19,101
Change in non-cash operating working capital (112,319) (165,647)
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(227,754) (516,326)
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Financing:
Increase in bank demand loan 220,000 -
Principal payments on capital lease - (3,560)
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220,000 (3,560)
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Investments:
Proceeds on sale of discontinued operations
(note 7) - 210,415
Additions to capital property and equipment (1,986) (12,870)
Additions to software and intangible assets (490) (2,559)
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(2,476) 194,986

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Decrease in cash (10,232) (324,900)

Cash, beginning of year 42,047 366,947

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Cash, end of year $ 31,815 $ 42,047
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Supplementary information:
Interest paid $ 84,628 $ 320,062

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See accompanying notes to consolidated financial statements.



OMT INC.
Notes to Consolidated Financial Statements

Years ended December 31, 2008 and 2007

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General:

OMT Inc. "the Company", through its subsidiaries, OMT Technologies Inc. "OMT" and Intertain Media Inc., provides media delivery systems and technology and solutions to the retail and broadcast industries.

1. Significant accounting policies

(a) Basis of presentation and financial restructuring:

These consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles "GAAP". The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is significant doubt about the appropriateness of the use of the going concern assumption because the Company has experienced significant losses in the last six years.

The ability of the Company to carry on as a going concern is dependant upon achieving profitable operations which cannot be predicted at this time and the ability of the Company to obtain additional financing from other sources when its existing financing becomes due. The consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumptions were not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.

(b) Basis of consolidation:

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

(c) The Company has made the following classifications:

- Cash is classified as "assets held for trading" and is measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net loss.

- Accounts receivable, lease receivable and long-term receivable are classified as "loans and receivables" and are recorded at cost, which upon their initial measurement is equal to fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Accounts payable and accrued liabilities are classified as "other financial liabilities" and are initially measured at their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Long-term debt is classified as an "other financial liability" and is initially measured at fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method. Deferred financing costs, previously reported on a separate line item on the consolidated balance sheet, are now netted against the carrying value of the related debt and amortized into interest expense using the effective interest rate method. Prior to the adoption of the new standards, the amortization of deferred financing costs was reported as a separate line item on the consolidated statement of operations.

Fair value is based on quoted market prices when available. However, when financial instruments lack an available trading market, fair value is determined using management's estimates and is calculated using market factors with similar characteristics and risk profiles. When CICA Handbook Section Financial Instruments - Disclosure and Presentation was adopted in 2007, the opening deficit was decreased by $122,926 as a transitional adjustment to revalue long-term debt at its amortized cost.

For financial assets and liabilities classified as other than held for trading, transaction costs directly attributable to issuance or acquisition, are added to their fair value on initial measurement.

(d) Property and equipment:

Assets included in property and equipment are stated at cost less accumulated amortization. Amortization is provided for over the estimated useful lives of the assets on a straight line basis.



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Asset Basis
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Computer hardware Straight-line 3 years
Furniture and equipment Straight-line 5 years
Assets under capital lease Straight-line 3 years

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(e) Software and other intangible assets:

Software and other intangible assets are stated at cost less accumulated amortization and are amortized on a straight-line basis over their estimated useful lives as follows:



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Asset Term
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Purchased intellectual properties 4 - 5 years
Other software 2 years
Other intangibles 5 years

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(f) Impairment of property and equipment and finite life intangible assets:

Impairment of property and equipment and finite life intangible assets is recognized when an event or change in circumstances causes the asset's carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the estimated fair value of the asset from its carrying value.

(g) Income taxes:

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

(h) Revenue recognition:

The Company recognizes revenue when there is evidence a sales arrangement exists, the sales price is fixed and determinable, collectability is reasonably assured and title has passed. For software, computer hardware and other product sales, these criteria are usually met upon delivery or shipment of the product. Provision is made at the time revenue is recognized for estimated product returns and warranties based on historical experience.

A system sale often includes four elements: hardware, software, training and future support fees. Hardware and software revenue are normally recognized after delivery. Training revenue is recognized when completed. Support fees are deferred and recognized over the term of the contract.

Custom contracts, which could include both hardware and software sales, are recognized pursuant to the contract terms and on a percentage-of-completion basis. Revenue recognized but not billed is treated as inventory and shown as "Contracts in progress" on the consolidated balance sheets. Service revenues are recognized over the contract life on a straight-line basis.

Revenue billed in advance of its recognition is reflected as deferred revenue.

(i) Government assistance:

Government assistance in connection with research activities is recognized as an expense reduction in the year that the related expenditure is incurred. Government assistance in connection with capital expenditures is treated as a reduction of the cost of the applicable asset.

(j) Stock-based compensation plan:

The Company has a stock option plan as described in note 8(d). Under the fair value-based method, compensation cost is measured at fair value at the date of grant using the Black-Scholes option pricing model with assumptions as described in note 8(d). Compensation cost is expensed over the award's vesting period. Any consideration paid by option holders upon exercise of stock options is recorded as an increase in capital stock.

(k) Foreign currency translation:

Monetary items denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the consolidated balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in loss.

(l) Use of estimates:

The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(m) Research and development expenses:

Research expenses are charged to income in the year they are incurred, net of related tax credits. Development costs are charged to income in the period of the expenditure, unless a development project meets the criteria under Canadian generally accepted accounting principles for deferral and amortization. As at December 31, 2008 and 2007, no development costs have been deferred.

(n) Earnings (loss) per share:

The calculation of earnings (loss) per share is based on net income (loss) divided by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the assumed conversion of all dilutive securities using the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding is calculated assuming that the proceeds from the exercise of options and warrants are used to repurchase common shares at the average price during the year. For the year ended December 31, 2008, 2,419,500 options (2007 - 2,542,500) were excluded from the calculation of diluted earnings per share because the price of the options makes this very unlikely and the effect of including these shares would be to reduce the loss per share in 2008.

(o) Leases:

Leases are classified as either capital or operating. Leases which transfer substantially all the benefits and risks of ownership of the asset to the Company are accounted for as capital leases. Capital lease obligations reflect the present value of future lease payments, discounted at the appropriate interest rate. All other leases are accounted for as operating leases whereby rental payments are expensed as incurred.

(p) Changes in accounting policies:

Effective January 1, 2008 the Company adopted CICA Handbook Section 3031 - Inventories, Sections 3862 and 3863 - Financial Instruments - Presentation, Financial Instruments - Disclosure and Section 1535 - Capital Disclosures. The impact of adopting these standards in the 2008 consolidated financial statements is described below.

Section 3031 - Inventories

Section 3031 replaces Section 3030 with the same title and harmonizes accounting for inventories under Canadian GAAP with International Financial Reporting Standards ("IFRS"). This standard requires that inventories should be measured at the lower of cost and net realizable value, and includes guidance on the determination of cost, including allocation of overheads and other costs. The section also requires that similar inventories within a consolidated group be measured using the same method. It also requires the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. Adopting this new standard did not have a significant impact on the consolidated financial statements of the Company.

Sections 3862 and 3863 - Financial Instruments - Disclosure and Financial Instruments - Presentation

Sections 3862 and 3863 which replace section 3861, "Financial Instruments - Disclosure and Presentation", require the disclosure of additional detail of financial asset and liability categories as well as detailed discussion on the risks associated with the Company's financial instruments, including how it manages these risks. These standards, effective January 1, 2008, harmonize disclosures with IFRS. Additional disclosure is provided in notes 5 and 13.

Section 1535 - Capital Disclosures - Adoption and Impact

This section establishes standards for disclosing information regarding an entity's capital and its management. The information provided by an entity should focus in particular on its objectives, policies and processes for managing capital, and disclose whether it complies with capital requirements to which it is subject and also what the consequences are in case of non-compliance. Adoption of this section has not had any significant impact on the consolidated financial statements of the Company. Additional disclosure is provided in note 8(c).

(q) International Financial Reporting Standards (IFRS)

Beginning January 1, 2011, IFRS will replace Canadian GAAP. IFRS will be required for publicly traded companies for interim and annual financial statements with comparatives for 2010 also reported under IFRS. The objective of this move to IFRS is to improve the financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis.

The Company has commenced its IFRS conversion project in 2009. The project consists of three phases: scoping and diagnostic; evaluation and design; and implementation and review. The Company is in the scoping and diagnostic phase which involves a high level preliminary assessment of the differences between Canadian GAAP and IFRS and the potential affects of IFRS to accounting and reporting processes, information systems, business processes and external disclosures. This assessment is providing insight as to the most significant areas of difference to the Company and includes stock based compensation, property and equipment and goodwill as well as the more extensive presentation and disclosure requirements under IFRS.

The next phase is the evaluation and design phase of the project where each area identified from the scoping and diagnostic phase will be analyzed, commencing with the highest priority areas. This phase involves the identification of changes required to existing accounting policies, information systems and business processes, and will include an analysis of policy alternatives allowed under IFRS and the development of draft IFRS-compliant financial statements.

The final phase is the implementation and review phase and includes execution of changes to information systems and business processes, completing formal authorization processes to approve recommended accounting policy changes and training programs for the Company's finance and other staff as necessary. It will culminate in the collection of financial information necessary to compile IFRS compliant financial statements, embedding IFRS into business processes, elimination of any unnecessary data collection processes and Audit and Corporate Governance Committee (the Audit Committee) and Board of Directors' approval of IFRS financial statements.

The Company continues to monitor standards development as issued by the International Accounting Standards Board and The Canadian Institute of Chartered Accountants Accounting Standards Board, as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of the Company's adoption of IFRS. The transition to IFRS is a significant change that will affect the Company's reported financial position and results of operations. As the Company is still in the evaluation and design phase and has not yet selected accounting policy choices and IFRS exemptions, the Company is unable to quantify the impact of IFRS on its consolidated financial statements.

(r) Future accounting changes

Section 3064 - Goodwill and Intangible Assets:

This section establishes guidance for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Adoption is slated for January 1, 2009 and will have no significant impact on the earnings or financial position of the Company.



2. Property and equipment:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
2008 Cost amortization value
----------------------------------------------------------------------------

Computer hardware $ 601,982 $ 595,345 $ 6,637
Furniture and equipment 154,449 154,290 159

----------------------------------------------------------------------------
$ 756,431 $ 749,635 $ 6,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
2007 Cost amortization value
----------------------------------------------------------------------------

Computer hardware $ 600,702 $ 589,161 $ 11,541
Furniture and equipment 154,449 148,319 6,130

----------------------------------------------------------------------------
$ 755,151 $ 737,480 $ 17,671
----------------------------------------------------------------------------
----------------------------------------------------------------------------



3. Software and other intangible assets:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
2008 Cost amortization value
----------------------------------------------------------------------------

Purchased intellectual properties $ 1,255,570 $ 1,255,569 $ 1
Other software 73,665 72,212 1,453
Other intangibles 58,696 58,695 1

----------------------------------------------------------------------------
$ 1,387,931 $ 1,386,476 $ 1,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net book
2007 Cost amortization value
----------------------------------------------------------------------------

Purchased intellectual properties $ 1,255,570 $ 1,255,569 $ 1
Other software 73,891 69,375 4,516
Other intangibles 58,696 58,695 1

----------------------------------------------------------------------------
$ 1,388,157 $ 1,383,639 $ 4,518
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the year, software and other intangible assets amortization of $ 3,554 (2007 - $3,157) was Included in amortization expense.

4. Bank demand loan:

The bank line of credit, which bears interest at a floating rate of prime plus 1%, is limited to a maximum of $400,000 against which a general security agreement covering all present and future assets as well as an assignment of book debts and inventory is pledged as collateral. Security on the loan is also provided through a guarantee by a major shareholder. With the establishment of the guarantee, the bank no longer holds any financial covenants should the Company draw funds against the line which is now available to the full amount of $400,000 of which $220,000 (2007 - Nil) has been drawn as at December 31, 2008. If the bank should exercise the guarantee and receive funds from the guarantor, then the major shareholder would have first rank under its guarantor general security agreement (note 12b).



5. Long-term debt:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Long-term loans (face value at maturity of $3,000,000,
plus deferred interest of $850,000 for a total of
$3,850,000, due July 15, 2011) $ 3,102,452 $ 2,678,574

Long-term debentures (face value at maturity of
$995,000), interest only at 8%, payable monthly,
due July 15, 2011 969,488 892,856
----------------------------------------------------------------------------
4,071,940 3,571,430
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Long-term loans and long-term debentures are convertible into common shares at a price equal to $0.12 per share.

The long-term debt was originally recorded on the consolidated balance sheet at its combined discounted values of $2,960,430 and was to be accreted equally over the four year term of the loan for effective interest, and at maturity was to be equal to the face value of the debentures and loans. In 2008, imputed interest on the long-term debt amounted to $260,510 (2007 - $351,796). These amounts are shown separately on the Consolidated Statements of Cash Flows as "Non-cash interest accretion". Monthly interest payments equating to 8% per annum are payable on the long-term debt. When interest postponed is combined with interest accretion and deferred finance charges, the effective interest rates are 15.7% for the loans and 16.9% for the debentures (2007 - 19.9% for both). No principal repayments are required until maturity.

The long-term debt of $3,995,000 was scheduled to mature on December 20, 2008. In separate agreements signed April 11, 2008 with the debt and the debenture holders, the date of maturity was extended to July 15, 2009. A subsequent amending agreement signed on April 28, 2009 with the principal debt holders further extended the date of maturity of all of the debt to July 15, 2011. No principal payments are required until that date.

In a separate agreement signed April 11, 2008, the principal debt holders, who together hold $3,000,000 of the Company's long-term debt, provided the Company with a signed waiver to defer the monthly interest payments, representing approximately $20,000 per month until such time that the Company's cash reserves grow to $500,000. A subsequent amending agreement signed on April 28, 2009 with the principal debt holders changed the date for interest deferrals to July 15, 2011, or until such time when cash reserves grow to $500,000. Interest continues to be paid monthly on the remaining debt of $995,000 represented by CIBC Mellon Trust Company.

The long-term debt is collaterized by a general security agreement covering all assets and by an assignment of all the book debts of the Company, subordinate to the bank line-of-credit (see note 4).

6. Commitments:

The Company has entered into a lease for premises which calls for monthly lease payments of $21,000 in 2009. The lease expires on May 31, 2009.

The Company has also entered into a lease on office equipment which requires lease payments of $2,256 per year from 2009 to 2011. The total commitment remaining is $6,768.

7. Discontinued Operations - Sale of the Retail Preview Business:

On May 28, 2007 the Company executed a sale of its Retail Preview operations. The total carrying value of equipment and software included in the sale amounted to $29,003. Of this total, $24,315 represented compact music discs. In addition to the equipment carrying value, the transaction resulted in an initial gain of $181,412, for a total of $210,415, which was recorded and realized in the second financial quarter of 2007. Operational details from discontinued operations are as follows:



2008 2007
---------- ----------

Sales - $ 215,533

Cost of sales - 37,447
----------

Gross profit - 178,086

Gain on sale of discontinued operations - 181,412
----------

Total - $ 359,498
----------

Cash proceeds on sale of discontinued operations was $ 210,415.


8. Capital stock:

(a) Authorized:

Authorized share capital consists of an unlimited number of common voting shares with no par value and an unlimited number of retractable, redeemable, cumulative, convertible 81/2% preferred voting shares issuable in series. There were no preferred shares issued at December 31, 2008 or 2007. Preferred shares are retractable at the option of the holder and redeemable at the option of the Company. The retraction price is calculated by dividing the stated capital of the preferred shares by the number issued plus a sum calculated on the basis of an annual compounded return on stated capital of 15%, inclusive of paid dividends to the date of retraction. The redemption price is calculated by dividing the stated capital of the preferred shares by the number issued plus a sum calculated on the basis of an annual compounded return on stated capital of 20%, inclusive of paid dividends to the date of redemption. Conversion privileges of preferred shares are specified at the date of any new issue.



(b) Issued common shares are summarized below:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of shares Amount
----------------------------------------------------------------------------

Balance at December 31, 2008 and 2007 28,922,090 $1,278,458
----------------------------------------------------------------------------


(c) Capital management:

The Company defines capital as cash and other current financial assets. The objective in managing capital is to ensure sufficient liquidity to finance its research and development activities, general and administrative expenses, working capital and growth opportunities.

Initially the company had funded its activities through public offerings of common shares and preferred shares. Subsequently, the preferred shares and accrued dividends on the preferred shares were replaced by the issuance of common shares and subordinated long-term debt.

Presently, the Company follows no formal written policy or process concerning capital management. Rather, management and the Board of Directors are addressing the need to secure new financing or renegotiate the terms of repayment on the long-term debt which will mature on July 15, 2011, as it is anticipated that cash flow from operations will not be sufficient to repay the debt. As such, the ability of the Company to continue operating as a going concern is dependant on obtaining new financing and/or renegotiating the repayment terms of the debt.

(d) Options:

At the 2005 annual general meeting of shareholders a new stock option plan was ratified. Under the new plan 4,330,813 options for purchase of common shares are reserved. Terms of the options will be determined by the Board of Directors, but in any case, the options must expire no more than 5 years from the date of the grant. Normal vesting is one third upon issue and one third in each of the following two years.

The Company has stock options outstanding to directors and officers to purchase up to 1,990,000 common shares and to employees to purchase up to 429,500 common shares.

Information related to the stock options outstanding at December 31, is presented below:



2008 2007
-------------------------- -------------------------
Number Weighted- Number Weighted-
of average of average
shares exercise price shares exercise price
$ $
----------------------------------------------------------------------------

Outstanding at
beginning of year 2,542,500 0.12 2,012,000 0.12
Granted - 550,000 0.12
Exercised - -
Cancelled (123,000) 0.12 (19,500) 0.12
----------------------------------------------------------------------------
Outstanding at end
of year 2,419,500 0.12 2,542,500 0.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Options exercisable
at end of year 2,236,167 0.12 2,175,833 0.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------



The following table summarizes information about share options outstanding
at December 31, 2008:

Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted-
average Weighted- Weighted-
Year remaining average average
Exercise of Number contractual exercise Number exercise
price grant outstanding life price outstanding price
$ (years) $ $

0.12 2004 21,000 0.5 0.12 21,000 0.12
0.12 2005 448,500 1.1 0.12 448,500 0.12
0.12 2005 1,400,000 1.8 0.12 1,400,000 0.12
0.12 2007 550,000 3.9 0.12 366,667 0.12
----------------------------------------------------------------------------
2,419,500 1.8 0.12 2,236,167 0.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(e) Stock based compensation:

No options were issued in 2008 and no stock based compensation expense was recognized in respect of options vested in 2008 because the fair value of options vested was nil. Stock based compensation recognized in past years was credited to contributed surplus.

(f) Per share amounts

The weighted average number of common shares outstanding for the years ended December 31, 2008 and 2007 was 28,922,090.



9. Other paid-in capital:

Balance at December 31, 2007 and December 31, 2008 $ 693,579


$435,000 of the balance in other paid-in capital arose prior to January 1, 2003. The remaining amount arose upon a refinancing transaction that occurred during the year ended December 31, 2004 which resulted in the issuance of the debt identified in note 5.

10. Segment Information:

The Company manages its business and evaluates performance based on two operating segments. The commercial segment is primarily intended for automation of commercial radio stations. The retail segment is primarily intended to enhance the shopping experience of customers in retail businesses. Discontinued operations were formerly included in the retail segment. The accounting policies of the Company's operating segments are the same as those described in note 1. There are no significant inter-segment transactions. The following presents identifiable assets at December 31, 2008 and December 31, 2007 and segment operating results for the years then ended.



2008
--------------------------------------
Commercial Retail Common Total
$ $ $ $
----------------------------------------------------------------------------
(000's)
----------------------------------------------------------------------------

Revenues 2,781 367 - 3,148
----------------------------------------------------------------------------
Expenses
Cost of sales 989 177 - 1,166
Selling, general and administrative 754 285 766 1,805
Research & development 130 78 - 208
Amortization 3 13 - 16
Interest 5 - 580 585
----------------------------------------------------------------------------
1,881 553 1,346 3,780
----------------------------------------------------------------------------
Net income (loss) before discontinued
operations 900 (186) (1,346) (632)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net book value:
Tangible assets 1 6 - 7
Intangible assets 1 1 - 2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions (disposals) of:
Tangible assets (1) 2 - 1
Intangible assets - - - 0
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2007
--------------------------------------
Commercial Retail Common Total
$ $ $ $
----------------------------------------------------------------------------
(000's)
----------------------------------------------------------------------------

Revenues 2,626 594 - 3,220
Expenses
Cost of sales 888 398 - 1,286
Selling, general and administrative 893 360 692 1,945
Research & development 141 76 - 217
Amortization 9 22 - 31
Interest - - 672 672
----------------------------------------------------------------------------
1,931 856 1,364 4,151
----------------------------------------------------------------------------
Net income (loss) before discontinued
operations 695 (262) (1,364) (931)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net book value:
Tangible assets 4 14 - 18
Intangible assets 1 4 - 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions (disposals) of:
Tangible assets 4 9 - 13
Intangible assets 1 2 - 3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Geographic information about the Company's revenues is based on the product shipment destination or the location of the contracting organization. Assets are based on their physical location as at December 31, 2008.



2008 2007
-------------------------- --------------------------
Property Property
Revenue and equipment Revenue and equipment
$ (000's) $ $ (000's) $
----------------------------------------------------------------------------

Canada 1,007 8 1,122 23
United States 2,141 - 2,098 -
----------------------------------------------------------------------------
3,148 8 3,220 23
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Sales to one significant customer in 2008 represents 17% (2007 - nil) of the total revenue.

11. Income taxes:

Income tax expense differs from the amount that would be computed by applying the federal and provincial statutory income tax rates of 33.0% (2007 - 36.12%) to income before income taxes. The reasons for the differences are as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Computed income tax recovery $ (178,000) $ (206,000)

Increase (decrease) resulting from:
Interest accretion 165,000 127,000
Non-taxable portion of gains - 38,000
Valuation allowance - (145,000)
Reduction in enacted tax rates - 231,000
Other 13,000 31,000

----------------------------------------------------------------------------
$ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------



The tax effects of temporary differences that give rise to significant
portions of the future tax asset are presented below:




----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------

Future tax assets:
Property and equipment - differences in net
book value and unamortized capital cost $ 403,000 $ 413,000
Financing costs 46,000 14,000
Losses carried forward 936,000 931,000
Investment tax credits - 27,000
----------------------------------------------------------------------------
1,385,000 1,385,000

Less valuation allowance (1,385,000) (1,385,000)

----------------------------------------------------------------------------
Net future tax asset $ - $ -
----------------------------------------------------------------------------


In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The amount of the future tax asset considered realizable could change materially in the near term, based on future taxable income during the carry-forward period.

The Company has non-capital tax losses available for carry forward to reduce future years' taxable income totaling approximately $3,467,000 expiring as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------

2009 $ 79,000
2010 316,000
2014 671,000
2025 438,000
2026 608,000
2017 487,000
2018 696,000


12. Related party transactions and measurement uncertainty:

(a) Custom Contract in progress:

The Company has contracted to supply Radio Automation Software and Services to a company of which one of the Company's directors is also an officer and director. The project which is valued at approximately $536,000 began in 2005 and as at December 31, 2008 the cumulative revenue for the work completed and recognized to date amounted to $454,000. At December 31, 2008, revenue recognized but not billed amounted to $141,581.

The project has been delayed due to technical matters and the ongoing customer acceptance process. Revenue has been recorded on this contract under the percentage of completion method based upon management's best estimate of costs still to be incurred. Management estimates that costs still to be incurred to complete the project will be approximately $67,000.

The Company is providing additional services to this same related party customer outside of the scope of the contract. At December 31, 2008 accounts receivable for this work amounted to $61,021 and $53,000 is included in revenue for 2008 (2007 - nil) related to these additional services.

(b) Bank line guarantee:

In October 2005 a major shareholder of the Company, with representation on its Board of Directors, provided a guarantee for $400,000 to the Bank of Nova Scotia to support the Company's line of credit at the bank. This guarantee is ongoing and requires payments of a monthly administration fee of $1,000, as well as a monthly standby fee of $1,000. In the event that the Company actually draws down on the guarantee, then the interest rate would be 20% of the amount received. The guarantee is secured by a charge on any current and after-acquired assets and ranks ahead of the long-term debt.

Related party transactions are recorded at the exchange amount which is the rate agreed upon by the related parties.

13. Financial instruments:

(a) Credit, liquidity and foreign exchange risk:

The Company's contracts for projects denominated in foreign currencies as well as accounts receivable in foreign currencies potentially subjects the Company to credit and foreign exchange risk, as collateral is generally not required and exchange rates to US funds can change significantly. The project nature of the business also leads to a concentration of credit risk. As at December 31, 2008 five customers accounted for 62% (2007 five customers - 54%) of the total accounts receivable. However, the risk of loss is partially mitigated due to the Company's policy of collecting a deposit before any project is commenced. The Company also bills in advance for service and support contracts. At December 31, 2008 the overdue accounts receivable from customers amounted to $105,000 (2007 - $104,500) and the allowance for doubtful accounts was set at $10,400(2007 - $23,900). The allowance for losses on uncollectible accounts is based on specific customer history and write-offs are solely based on specific customer defaults. In 2008, write offs related to four specific customers and amounted to $2,500. Accounts receivable as well as accounts payable are kept relatively current, and there is minimal risk of delayed collections affecting the Company's ability to pay its creditors.

(b) Fair value:

The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximates their fair values because of the short term maturity of these instruments. The fair value of the long-term debt can not be reliably measured because there is no market for this financial instrument. The carrying value of the long-term debt is as described in note 5.

(c) Market risk:

The current weak economic climate has led to reduced advertising revenue in the broadcast area and may affect the ability of the Company to achieve targeted sales revenues in 2009.

14. Contingencies:

(a) A financing transaction was concluded by the Company in December 2004 involving the outstanding preferred shares, and was initially described as a redemption of preferred shares. The intent of all parties was to repurchase the preferred shares on a tax neutral basis. Unfortunately, the wording used did not support the original intent and could result in a possible tax liability. Correcting this required a rectification order (the "Order"), with the proper wording, to be issued by the Manitoba Court of Queen's Bench. The rectification order with the proper wording has been issued in our favor. It is possible that Canada Revenue Agency (CRA) might appeal the Order, but management does not expect this to happen because the original intent was for the transaction to be tax neutral. If CRA were to appeal the order or the revised transaction and, if such appeals were successful, the Company could face a potential income tax liability of approximately $600,000. If such appeals were filed by CRA, the Company would vigorously defend its position.

(b) Payments received on a project contracted with a company of which one of the Company's directors is also an officer and director as defined in note 12(a) are guaranteed up to a maximum amount of US $263,000. Progress payments received to date on the project total US $263,021 (Cdn.$320,000). The contracting company has the right to demand repayment of these funds based on a "Performance Security Guarantee". The Company has purchased "Performance Security Insurance" (PSI) for up to 95% of the money advanced to date, from the Export Development Corporation to protect itself against this possibility. The PSI is valid until December 31, 2009 or completion of the project, whichever comes sooner, but the Company expects to request an extension should the project be incomplete at that time. At December 31, 2008 there is a contingent liability for the 5% PSI deductible or US $13,151. It is unlikely that repayment will be required and therefore this amount has not been recorded in the consolidated financial statements.

15. Comparative figures:

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

16. Subsequent Events:

(a) Long-term debt date of maturity:

The long-term debt which was originally due on December 20, 2008 and had been extended to July 15, 2009, has been further extended to July 15, 2011 as described in note 5. All other terms and conditions remain unchanged, except as noted below.

The existing debt will be extinguished and the difference between the carrying value of the existing debt of $995,000, represented by CIBC Mellon Trust Company, and the fair value of this portion of the newly issued debt will be recognized as a gain in the Company's second quarter financial statements. An estimate of the fair value of this portion of the new debt cannot be made at this time. The financial impact of the transaction is not known.

(b) Long-term debt interest payments:

The holders of $3,000,000 of the long-term debt provided the Company with a signed waiver to defer the monthly interest payments, beginning January 1, 2008 and ending on July 15, 2009, the date of maturity, representing approximately $20,000 per month, until such time that OMT's cash reserves grow to $500,000. A subsequent amending agreement signed on April 28, 2009 with the principal debt holders changed the date for interest deferrals to July 15, 2011. Interest will continue to be paid monthly on the remaining debt of $995,000 represented by CIBC Mellon Trust Company.

Contact Information