UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
      20-Fo
            
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
              SECURITIES
      EXCHANGE ACT OF 1934OR





x
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE
              ACT
      OF 1934
              for
      the fiscal year ended December 31, 2008ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE
      ACT OF 1934ORo
            
            SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934Date
      of event requiring this shell company report
      ____________________For the transition period
      from                                                                                                
      toCommission
      file number 0-17164COPERNIC
      INC.(Exact
      name of registrant as specified in its charter)
              (formerly
      MAMMA.COM)(Translation
      of Registrant’s name into English)PROVINCE
      OF ONTARIO (CANADA)(Jurisdiction
      of incorporation or organization)360
      Franquet Street, Suite 60Sainte-Foy,
      QuebecCanada,
      G1P 4N3(Address
      of principal executive offices)Marc
      FerlandTelephone:
      (418) 527-0528, E-mail address: mferland@copernic.com, Facsimile: (418)
      527-1751, Address: 360 Franquet Street, Suite 60, Sainte-Foy, Quebec, G1P
      4N3





Securities
registered or to be registered pursuant to Section 12(b) of the
Act.


None





Securities
registered or to be registered pursuant to Section 12(g) of the
Act.


Common
Shares, no par value





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.


None


1




Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.





14,637,531
      Common Shares





Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Act.





oYes                                     x       No





If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.





oYes                                      x      No


Note-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1932 from
their obligations under those Sections.





Indicate
by a check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





xYes                                          o  No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b of the Exchange Act
(Check one):





Large
      Accelerated Filer  o
            
            Accelerated
      Filer  o
            
            Non-Accelerated
      Filer  x





Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:





U.S.
      GAAP o
            
            International
      Financial Reporting Standards as issued by the International Accounting
      Standards Board  o
            
            Other  x





If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.


x  Item
      17
            
            oItem
      18





If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).


oYes
            
            xNo





(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.





oYes
            
            o No








EXPLANATORYNOTES





On June
14, 2007, the Company changed its name from Mamma.com Inc. to Copernic
Inc.





In this
Annual Report on Form 20-F, unless otherwise indicated or the context otherwise
requires, all monetary amounts are expressed in United States
dollars.


2


TABLE
OF CONTENTS





SPECIAL NOTE ON FORWARD-LOOKING
      STATEMENTS
              4PART I
              5IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
      ADVISERS
              5OFFER STATISTICS AND EXPECTED
      TIMETABLE
              5KEY INFORMATION
              5INFORMATION ON THE COMPANY
              17OPERATING AND FINANCIAL REVIEW AND
      PROSPECTS
              25DIRECTORS, SENIOR MANAGEMENT AND
      EMPLOYEES
              51MAJOR SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS
              63FINANCIAL INFORMATION
              64THE OFFER AND LISTING
              66ADDITIONAL INFORMATION
              70QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
              74DESCRIPTION OF SECURITIES OTHER THAN EQUITY
      SECURITIES
              75PART II
              75DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES
              75MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
      HOLDERS AND USE OF PROCEEDS
              76CONTROLS AND PROCEDURES
              76AUDIT COMMITTEE FINANCIAL
      EXPERT
              76CODE OF ETHICS
              77PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
              77EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES
              82PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
      AFFILIATED PURCHASERS
              83FINANCIAL STATEMENTS
              83EXHIBITS
              114SIGNATURES
              114  3




SPECIALNOTE ONFORWARD-LOOKINGSTATEMENTS





INFORMATION
CONTAINED IN THIS ANNUAL REPORT ON FORM 20-F INCLUDES FORWARD-LOOKING
STATEMENTS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS “BELIEVES,” “EXPECTS,” “MAY,” “DESIRES,” “WILL,” “SHOULD,” “PROJECTS,”
“ESTIMATES,” “CONTEMPLATES,” “ANTICIPATES,” “INTENDS,” OR ANY NEGATIVE SUCH AS
“DOES NOT BELIEVE” OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY. NO
ASSURANCE CAN BE GIVEN THAT POTENTIAL FUTURE RESULTS OR CIRCUMSTANCES DESCRIBED
IN THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED OR OCCUR. SUCH INFORMATION
MAY ALSO INCLUDE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
PROJECTIONS AND OTHER EXPECTATIONS DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS.
PROSPECTIVE INVESTORS, CUSTOMERS, VENDORS AND ALL OTHER PERSONS ARE CAUTIONED
THAT FORWARD-LOOKING STATEMENTS ARE NOT ASSURANCES, FORECASTS OR GUARANTEES OF
FUTURE PERFORMANCE DUE TO RELATED RISKS AND UNCERTAINTIES, AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. FACTORS WHICH COULD CAUSE
RESULTS OR EVENTS TO DIFFER FROM CURRENT EXPECTATIONS INCLUDE, AMONG OTHER
THINGS: THE SEVERITY AND DURATION OF THE ADJUSTMENTS IN OUR BUSINESS SEGMENTS;
THE EFFECTIVENESS OF OUR RESTRUCTURING ACTIVITIES, INCLUDING THE VALIDITY OF THE
ASSUMPTIONS UNDERLYING OUR RESTRUCTURING EFFORTS; FLUCTUATIONS IN OPERATING
RESULTS; THE IMPACT OF GENERAL ECONOMIC, INDUSTRY AND MARKET CONDITIONS; THE
ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES; FLUCTUATIONS IN CASH FLOW;
INCREASED LEVELS OF OUTSTANDING DEBT; EXPECTATIONS REGARDING MARKET DEMAND FOR
PARTICULAR PRODUCTS AND SERVICES AND THE DEPENDENCE ON NEW PRODUCT/SERVICE
DEVELOPMENT; DELAYS IN MARKET ACCEPTANCE OF NEW PRODUCTS; THE ABILITY TO MAKE
ACQUISITIONS AND/OR INTEGRATE THE OPERATIONS AND TECHNOLOGIES OF ACQUIRED
BUSINESSES IN AN EFFECTIVE MANNER; THE IMPACT OF RAPID TECHNOLOGICAL AND MARKET
CHANGE; THE IMPACT OF PRICE AND PRODUCT COMPETITION; THE UNCERTAINTIES IN THE
MARKET FOR INTERNET-BASED PRODUCTS AND SERVICES; STOCK MARKET VOLATILITY; THE
TRADING VOLUME OF OUR STOCK; THE POSSIBILITY THAT OUR STOCK MAY NOT SATISFY OUR
REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ CAPITAL MARKET INCLUDING
WHETHER THE MINIMUM BID PRICE FOR THE STOCK FALLS BELOW $1; AND THE ADVERSE
RESOLUTION OF LITIGATION OR RELATED EVENTS COULD HAVE A NEGATIVE IMPACT ON THE
COMPANY, INCREASE COMPANY EXPENSES OR CAUSE EVENTS OR RESULTS TO DIFFER FROM
CURRENT EXPECTATIONS. FOR ADDITIONAL INFORMATION WITH RESPECT TO THESE AND
CERTAIN OTHER FACTORS THAT MAY AFFECT ACTUAL RESULTS, SEE THE REPORTS AND OTHER
INFORMATION FILED OR FURNISHED BY THE COMPANY WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION (“SEC”) AND/OR THE ONTARIO SECURITIES COMMISSION (“OSC”)
RESPECTIVELY ACCESSIBLE ON THE INTERNET AT WWW.SEC.GOV AND WWW.SEDAR.COM, OR THE
COMPANY’S WEB SITE AT WWW.COPERNIC-INC.COM. ALL INFORMATION CONTAINED IN THIS
ANNUAL REPORT ON FORM 20-F IS QUALIFIED IN ITS ENTIRETY BY THE FOREGOING AND
REFERENCE TO THE OTHER INFORMATION THE COMPANY FILES WITH THE OSC AND SEC.
UNLESS OTHERWISE REQUIRED BY APPLICABLE SECURITIES LAWS, THE COMPANY DISCLAIMS
ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.







PERIOD-TO-PERIODCOMPARISONS





A VARIETY
OF FACTORS MAY CAUSE PERIOD-TO-PERIOD FLUCTUATIONS IN THE COMPANY’S OPERATING
RESULTS, INCLUDING BUSINESS ACQUISITIONS, REVENUES AND EXPENSES RELATED TO THE
INTRODUCTION OF NEW PRODUCTS AND SERVICES OR NEW VERSIONS OF EXISTING PRODUCTS,
NEW OR STRONGER COMPETITORS IN THE MARKETPLACE AS WELL AS CURRENCY FLUCTUATIONS,
ECONOMIC RECESSIONS AND RECOVERIES. HISTORICAL OPERATING RESULTS ARE NOT
INDICATIVE OF FUTURE RESULTS AND PERFORMANCE.





4


PART
I





ITEM 1.
            
            IDENTITY OF DIRECTORS, SENIOR
      MANAGEMENT AND ADVISERSNot ApplicableITEM 2.
            
            OFFER STATISTICS AND EXPECTED
      TIMETABLENot
      ApplicableITEM 3.
            
            KEY
      INFORMATION





SELECTED
FINANCIAL DATA





The
following consolidated statements of operations data for the years ended
December 31, 2008, 2007 and 2006, and consolidated balance sheets data as at
December 31, 2008 and 2007 is derived from the audited consolidated financial
statements included in Item 17. All other financial information below is
unaudited and derived from sources not included in Item 17.  The
selected consolidated financial data in the following tables should be read in
conjunction with our audited consolidated financial statements, including the
notes thereto, and “Item 5 – Operating and Financial Review and Prospects”,
included elsewhere in this Form 20-F.





5





CANADIAN
      GAAP
              YEAR ENDED DECEMBER 31st





2008
            
            2007
            
            2006
            
            2005
            
            2004$
            
            $
            
            $
            
            $
            
            $Consolidated Statements
      ofOperations
      DataRevenues
            
            7,011,631
            
            8,116,408
            
            9,596,402
            
            9,443,975
            
            14,636,318Earnings (loss) from
      continuingoperations
            
            (6,490,704)
            
            (14,430,826)
            
            (4,358,708)
            
            (3,342,983)
            
            370,753Results of
      discontinuedoperations,
      net of income taxes
            
            -
            
            -
            
            89,328
            
            (2,315,335)
            
            733,654Net earnings (loss) for the
      year
            
            (6,490,704)
            
            (14,430,826)
            
            (4,269,380)
            
            (5,658,318)
            
            1,104,407Basic and diluted earnings
      (loss)per share from
      continuingoperations
            
            (0.44)
            
            (0.99)
            
            (0.31)
            
            (0.27)
            
            0.03Basic and diluted earnings
      (loss)per share from
      discontinuedoperations
            
            -
            
            -
            
            0.01
            
            (0.19)
            
            0.07Basic and diluted net
      earnings(loss) per
      share
            
            (0.44)
            
            (0.99)
            
            (0.30)
            
            (0.46)
            
            0.10Weighted average number
      ofshares –
      basic
            
            14,637,531
            
            14,564,894
            
            14,340,864
            
            12,168,117
            
            10,758,604Weighted average number
      ofshares –
      diluted
            
            14,637,531
            
            14,564,894
            
            14,340,864
            
            12,168,117
            
            11,209,906Consolidated Balance
      Sheets
            
            2008
            
            2007
            
            2006
            
            2005
            
            2004Data
            
            $
            
            $
            
            $
            
            $
            
            $Total
    assets
            
            10,782,059
            
            18,357,856
            
            33,339,488
            
            38,327,198
            
            35,166,098Total
      liabilities
            
            1,509,843
            
            2,557,462
            
            4,444,838
            
            5,810,217
            
            3,130,526Net
    assets
            
            9,272,216
            
            15,800,394
            
            28,894,650
            
            32,516,981
            
            32,035,572Working
      capital
            
            5,051,474
            
            6,413,044
            
            8,533,546
            
            8,944,985
            
            27,528,003Capital
      stock
            
            96,556,485
            
            96,556,485
            
            95,298,234
            
            95,298,234
            
            90,496,088Additional paid-in
      capital
            
            5,747,028
            
            5,784,502
            
            5,706,183
            
            5,249,902
            
            3,921,806Accumulated
      othercomprehensive
      gain
            
            561,137
            
            561,137
            
            561,137
            
            370,369
            
            360,884Accumulated
      deficit
            
            (93,592,434)
            
            (87,101,730)
            
            (72,670,904)
            
            (68,401,524)
            
            (62,743,206)Shareholders’
      equity
            
            9,272,216
            
            15,800,394
            
            28,894,650
            
            32,516,981
            
            32,035,572OtherCash
      dividends
            
            None
            
            None
            
            None
            
            None
            
            None





6








U.S.
      GAAP
              YEAR
      ENDED DECEMBER
      31st





2008
            
            2007
            
            2006
            
            2005
            
            2004$
            
            $
            
            $
            
            $
            
            $Consolidated
      Statements
      ofOperations
      DataRevenues
            
            7,011,631
            
            8,116,408
            
            9,596,402
            
            9,443,975
            
            14,636,318Earnings (loss) from
      continuingoperations
            
            (6,490,704)
            
            (14,430,826)
            
            (4,358,708)
            
            (3,342,983)
            
            370,753Results of
      discontinuedoperations, net of income
      taxes
            
            -
            
            -
            
            89,328
            
            (2,315,335)
            
            733,654Net earnings (loss) for the
      year
            
            (6,490,704)
            
            (14,430,826)
            
            (4,269,380)
            
            (5,658,318)
            
            1,104,407Basic and diluted earnings
      (loss)per share from
      continuingoperations
            
            (0.44)
            
            (0.99)
            
            (0.31)
            
            (0.27)
            
            0.03Basic and diluted earnings
      (loss)per share from
      discontinuedoperations
            
            -
            
            -
            
            0.01
            
            (0.19)
            
            0.07Basic and diluted net
      earnings(loss) per
      share
            
            (0.44)
            
            (0.99)
            
            (0.30)
            
            (0.46)
            
            0.10Weighted average number
      ofshares –
      basic
            
            14,637,531
            
            14,564,894
            
            14,340,864
            
            12,168,117
            
            10,758,604Weighted average number
      ofshares –
      diluted
            
            14,637,531
            
            14,564,894
            
            14,340,864
            
            12,168,117
            
            11,209,906Consolidated
      Balance
      Sheets
            
            2008
            
            2007
            
            2006
            
            2005
            
            2004Data
            
            $
            
            $
            
            $
            
            $
            
            $Total
    assets
            
            10,782,059
            
            18,357,856
            
            33,339,488
            
            38,327,198
            
            35,166,098Total
      liabilities
            
            1,509,843
            
            2,557,462
            
            4,444,838
            
            5,810,217
            
            3,130,526Net
    assets
            
            9,272,216
            
            15,800,394
            
            28,894,650
            
            32,516,981
            
            32,035,572Working
      capital
            
            5,051,474
            
            6,413,044
            
            8,533,546
            
            8,944,985
            
            27,528,003Capital
      stock
            
            113,326,055
            
            113,326,055
            
            112,067,804
            
            112,067,804
            
            107,265,658Additional paid-in
      capital
            
            6,784,718
            
            6,822,192
            
            6,743,873
            
            6,287,592
            
            4,959,496Accumulated
      othercomprehensive
      gain
            
            561,137
            
            561,137
            
            561,137
            
            370,369
            
            360,884Accumulated
      deficit
            
            (111,399,694)
            
            (104,908,990)
            
            (90,478,164)
            
            (86,208,784)
            
            (80,550,466)Shareholders’
      equity
            
            9,272,216
            
            15,800,394
            
            28,894,650
            
            32,516,981
            
            32,035,572OtherCash
      dividends
            
            None
            
            None
            
            None
            
            None
            
            None





7




CAPITALIZATION
      AND INDEBTEDNESS


The
following tables set forth the consolidated cash and consolidated capitalization
of the Company as at December 31, 2008 prepared in accordance with Canadian GAAP
and United States GAAP, respectively.





(Prepared
      in accordance with Canadian GAAP)
            
            As
      at December 31,
              2008
              $Cash
      and cash equivalents
            
            
            2,067,705Temporary
      investments
            
            
            3,005,227IndebtednessCurrent
      liabilities
            
            
            1,210,003Obligations
      under capital leases
            
            
            39,992Future
      income taxes
            
            
            259,848Shareholders’
      EquityCapital
      stock
            
            
            96,556,485Additional
      paid-in capital
            
            
            5,747,028Cumulative
      translation adjustment
            
            
            561,137Accumulated
      deficit
            
            
            (93,592,434
            )Total
      shareholders’ equity
            
            
            9,272,216Total
      capitalization
            
            
            10,782,059(Prepared
      in accordance with US GAAP)
            
            As
      at December 31,
              2008
              $Cash
      and cash equivalents
            
            
            2,067,705Temporary
      investments
            
            
            3,005,227IndebtednessCurrent
      liabilities
            
            
            1,210,003Obligations
      under capital leases
            
            
            39,992Future
      income taxes
            
            
            259,848Shareholders’
      EquityCapital
      stock
            
            
            113,326,055Additional
      paid-in capital
            
            
            6,784,718Cumulative
      translation adjustment
            
            
            561,137Accumulated
      deficit
            
            
            (111,399,694
            )Total
      shareholders’ equity
            
            
            9,272,216Total
      capitalization
            
            
            10,782,059Reasons for
      the Offer and Use of ProceedsNot
      Applicable.





8




RISK
      FACTORS


Our
revenues depend to some degree on our relationship with one customer, the loss
of which would adversely affect our business and results of
operations.





For the
year ended December 31, 2008, approximately 13% of our revenues were derived
from an agreement with our largest customer. Revenues from this customer
represented 14% of our revenues in 2007 and11% of our revenues in
2006. Although we monitor our accounts receivable for credit risk deterioration
and this customer has been paying its payables to Copernic Inc. in accordance
with the terms of its agreement with the Company, there can be no assurance that
it will continue to do so or that it will continue to do so at the volume of
business it has done historically. Our loss of this customer’s business would
adversely affect our business and results of operations.





Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.





Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions.  Our
quarterly and annual expenses as a percentage of our revenues may be
significantly different from our historical or projected rates. Our operating
results in future quarters may fall below expectations. Any of these events
could cause our stock price to fall. Each of the risk factors listed in this
“Risk Factors” section, and the following factors, may affect our operating
results:





·
            Our
      ability to continue to attract users to our Web
  sites.


·
            Our
      ability to monetize (or generate revenue from) traffic on our Web sites
      and our network of advertisers’ Web
sites.


·
            Our
      ability to attract advertisers.


·
            The
      amount and timing of operating costs and capital expenditures related to
      the maintenance and expansion of our businesses, operations and
      infrastructure.


·
            Our
      focus on long term goals over short term
  results.


·
            The
      results of any investments in risky
projects.


·
            Payments
      that may be made in connection with the resolution of litigation
      matters.


·
            General
      economic conditions and those economic conditions specific to the Internet
      and Internet advertising.


·
            Our
      ability to keep our Web sites operational at a reasonable cost and without
      service interruptions.


·
            Geopolitical
      events such as war, threat of war or terrorist
  actions.


·
            Our
      ability to generate CDS revenues through licensing and revenue
      share.





Because
our business is changing and evolving, our historical operating results may not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also, user
traffic tends to be seasonal.





We
rely on our Web site partners for a significant portion of our net revenues, and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our business.





We
provide advertising, Web search and other services to members of our partner Web
sites. We consider this network to be critical in the future growth of our
revenues. However, some of the participants in this network may compete with us
in one or more areas. Therefore, they may decide in the future to terminate
their agreements with us. If our Web site partners decide to use a competitor’s
or their own Web search or advertising services, our revenues would
decline.





We
face significant competition from Microsoft, Yahoo, Google and
Ask.com.





We face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com. Microsoft, Yahoo, Google
and Ask.com have a variety of Internet products, services and content that
directly competes with our products, services, content and advertising
solutions.  We expect that Microsoft will increasingly use its
financial and engineering resources to compete with us.





Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing


9


more
aggressively for advertisers and Web sites. Microsoft and Yahoo also may have a
greater ability to attract and retain users than we do because they operate
Internet portals with a broad range of products and services. If Microsoft,
Yahoo, Google or Ask.com are successful in providing similar or better Web
search results compared to ours or leverage their platforms to make their Web
search services easier to access than ours, we could experience a significant
decline in user traffic. Any such decline in user traffic could negatively
affect our net revenues.





We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.





In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search for
information about products and services.  Barriers to entry in our
business are generally low and products, once developed, can be distributed
quickly and to a wide range of customers at a reasonably low cost.





We also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours, the
user may find it more convenient to use the services of the access provider or
manufacturer. In addition, the access provider or manufacturer may make it hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.





There has
been a trend toward industry consolidation among our competitors, and so smaller
competitors today may become larger competitors in the future. If our
competitors are more successful than we are at generating traffic and
advertising, our revenues may decline.





We
face competition from traditional media companies, and we may not be included in
the advertising budgets of large advertisers, which could harm our operating
results.





In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our operating
results would be harmed.





Our
revenues declined in 2008 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the future.





We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin on
revenues we generate from our partner Web sites is generally significantly less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the margin we earn on revenues generated from our partner Web
sites could decrease in the future if our partners require a greater portion of
the advertising fees.





If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive, and our revenues and operating results
could suffer.





Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences or
industry changes, or if we are unable to modify our products and services on a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received in
the market place.  As search technology continues to develop, our
competitors may be able to offer search results that are, or that are perceived
to be, substantially similar or better than those generated by our search
services. This may force us to compete on bases in addition to quality of search
results and to expend significant resources in order to remain
competitive.


10


Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers will
be impaired and our business and operating results will be harmed.





We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining and
enhancing the Company’s brands are critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.





We
generated a significant portion of our revenues in 2008 from our advertisers.
Our advertisers can generally terminate their contracts with us at any time.
Advertisers will not continue to do business with us if their investment in
advertising with us does not generate sales leads, and ultimately customers, or
if we do not deliver their advertisements in an appropriate and effective
manner.





New
technologies could block our ads, which would harm our business.





Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.





We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.





If we are
unable to remain competitive and provide value to our advertisers, they may stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.





We
make investments in new products and services that may not be
profitable.





We have
made and will continue to make investments in research, development and
marketing for new products, services and technologies.  Our success in
this area depends on many factors including our innovativeness, development
support, marketing and distribution.  We may not achieve significant
revenue from a new product for a number of years, if at all.  For the
years 2007 and 2008, we did not generate significant revenues from licensing
Copernic® software and we cannot assure you that we will generate significant
revenue from the licensing of Copernic® software going forward. In addition, our
competitors are constantly improving their competing software, and if we fail to
innovate and remain competitive our revenues from software licensing will
decline.





Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.





Our
Common Shares are subject to significant price and volume fluctuations, some of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular, have
experienced volatility that often has been unrelated to the operating
performance of such companies.  These broad market and industry
fluctuations have adversely affected the price of our stock, regardless of our
operating performance.





On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company.  The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”).  Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance.  If, at anytime before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement.  If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted.  At that


11


time, the
Company may appeal NASDAQ Staff’s determination to delist its securities to a
Listing Qualifications Panel (the “Panel”). These circumstances may adversely
impact trading in our Common Shares and may also adversely affect our ability to
access capital.





On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.





The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.





Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it
will, upon reinstatement of the rules, still have this number of days, or until
March 19, 2009, to regain compliance. The company can regain compliance, either
during the suspension or during the compliance period resuming after the
suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive
trading days”.





On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.





As at
December 31, 2008, the Company’s closing stock price was at $0.13.





Infringement
and liability claims could damage our business.





Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services for
these members.





With
respect to any intellectual property rights claim, to resolve these claims, we
may enter into royalty and licensing agreements on less favorable terms, pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating
results.





In
addition, we may be liable to third-parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.





Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology or
business. For example, we understand that Overture Services, Inc. (acquired by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement.  While it is our understanding that the lawsuits
against MIVA and Google have been settled, there is no guarantee Overture (owned
by Ask.com) will not pursue its alleged patent rights against


12


other
companies. In addition, X1 has won a patent to provide search results as you
type a function utilised by other companies including Copernic Inc.





An
inability to protect our intellectual property rights could damage our
business.





We rely
upon a combination of trade secret, copyright, trademark, patents and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights.  Additionally, the
absence of harmonized patent laws between the United States and Canada makes it
more difficult to ensure consistent respect for patent
rights.  Although senior management believes that our services and
products do not infringe on the intellectual property rights of others, we
nevertheless are subject to the risk that such a claim may be asserted in the
future. Any such claims could damage our business.





Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2008. Working
capital may be inadequate.





For the
years ended December 31, 1999 through the year ended December 31, 2003 and for
the years ended December 31, 2005 to December 31, 2008, we have reported net
losses and net losses per share. We have been financing operations mainly from
funds obtained in several private placements, and from exercised warrants and
options. Management considers that liquidities as at December 31, 2008 will be
sufficient to meet normal operating requirements throughout 2009. In the long
term, we may require additional liquidity to fund growth, which could include
additional equity offerings or debt finance. No assurance can be given that we
will be successful in getting required financing in the future.





Goodwill
may be written-down in the future.





Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $3.0M as at
December 31, 2008, may be written-down in the future which could adversely
affect our financial position.





Long-lived
assets may be written-down in the future.





The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amount to
approximately $1.2M as at December 31, 2008, may be written-down in the
future.





Reduced
Internet use may adversely affect our results.





Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of our Common Shares may decline. The success of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.





Our
business depends on the continued growth and maintenance of the Internet
infrastructure.





The
success and availability of our Internet based products and services depend on
the continued growth, maintenance and use of the Internet.  Spam,
viruses, worms, spyware, denial of service attacks, phishing and other acts of
malice may affect not only the Internet’s speed and reliability but also its
desirability for use by customers.  If the Internet is unable to meet
these threats placed upon it, our business, advertiser relationships, and
revenues could be adversely affected.





13


Our
long-term success may be materially adversely affected if the market for
e-commerce does not grow or grows slower than expected.





Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of


e-commerce,
including the following:





·
            the
      network infrastructure necessary for substantial growth in Internet usage
      may not develop adequately or our performance and reliability may
      decline;


·
            insufficient
      availability of telecommunication services or changes in telecommunication
      services could result in inconsistent quality of service or slower
      response times on the Internet;


·
            negative
      publicity and consumer concern surrounding the security of e-commerce
      could impede our growth; and


·
            financial
      instability of e-commerce
customers.





Security
breaches and privacy concerns may negatively impact our business.





Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business to a
risk of loss or litigation and possible liability. We cannot assure you that the
measures in place are adequate to prevent security breaches.





If
we fail to detect click fraud or other malicious applications or activity of
others, we could lose the confidence of our advertisers as well as face
potential litigation, government regulation or legislation, thereby causing our
business to suffer.





We are
exposed to the risk of fraudulent clicks on our ads and other clicks that
advertisers may perceive as undesirable. Click fraud occurs when a person clicks
on an ad displayed on a Web site for a reason other than to view the underlying
content. These types of fraudulent activities could hurt our brands. If
fraudulent clicks are not detected, the affected advertisers may experience a
reduced return on their investment in our advertising programs because the
fraudulent clicks will not lead to potential revenue for the
advertisers.  Advertiser dissatisfaction with click fraud and other
traffic quality related claims has lead to litigation and possible governmental
regulation of advertising. Any increase in costs due to any such litigation,
government regulation, or refund could negatively impact our
profitability.





Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.





There is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers, which can result in our
search engine pages producing poor results. We take this problem very seriously
because providing relevant information to users is critical to our success. If
our efforts to combat these and other types of manipulation are unsuccessful,
our reputation for delivering relevant information could be diminished. This
could result in a decline in user traffic, which would damage our
business.





Our
business is subject to a variety of U.S. and foreign laws that could subject us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.





The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our
business.





The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.





Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply


14


with the
statutory requirements of this act. The Children’s Online Protection Act and the
Children’s Online Privacy Protection Act restrict the distribution of materials
considered harmful to children and impose additional restrictions on the ability
of online services to collect information from minors. In addition, the
Protection of Children from Sexual Predators Act of 1998 requires online service
providers to report evidence of violations of federal child pornography laws
under certain circumstances. Any failure on our part to comply with these
regulations may subject us to additional liabilities.





If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.





Web sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by any
reduction or limitation in the use of cookies. If the use or effectiveness of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies designed to collect Internet usage information may subject us to
litigation or investigations in the future. Any litigation or government action
against us could be costly and time-consuming, could require us to change our
business practices and could divert management’s attention.





Increased
regulation of the Internet may adversely affect our business.





If the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.





Changes
in key personnel, labour availability and employee relations could disrupt our
business.





Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be no
assurance that we will be able to retain our existing personnel or that we will
be able to recruit new personnel to support our business objectives and plans.
Currently, none of our employees are unionized. There can be no assurance,
however, that a collective bargaining unit will not be organized and certified
in the future. If certified in the future, a work stoppage by a collective
bargaining unit could be disruptive and have a material adverse effect on us
until normal operations resume.





Possible
future exercise of warrants and options could dilute existing and future
shareholders.





As at
March 25, 2009, we had 646,392 warrants at a weighted average exercise price of
$15.60 expiring from April to July 2009 and 693,993 stock options at a weighted
average exercise price of $1.54 outstanding. As at March 25, 2009, the exercise
prices of all outstanding warrants and options, were higher than the market
price of our Common Shares. When the market value of the Common Shares is above
the respective exercise prices of all options and warrants, their exercise could
result in the issuance of up to an additional 1,320,385 Common Shares. To the
extent such shares are issued, the percentage of our Common Shares held by our
existing stockholders will be reduced. Under certain circumstances the
conversion or exercise of any or all of the warrants or stock options might
result in dilution of the net tangible book value of the shares held by existing
Company stockholders. For the life of the warrants and stock options, the
holders are given, at prices that may be less than fair market value, the
opportunity to profit from a rise in the market price of the shares of Common
Shares, if any. The holders of the warrants and stock options may be expected to
exercise them at a time when the Company may be able to obtain needed capital on
more favourable terms. In addition, we reserve the right to issue additional
shares of Common Shares or securities convertible into or exercisable for shares
of Common Shares, at prices, or subject to conversion and exercise terms,
resulting in reduction of the percentage of outstanding Common Shares held by
existing stockholders and, under certain circumstances, a reduction in the net
tangible book value of existing stockholders’ Common Shares.


15


Strategic
acquisitions and market expansion present special risks.





A future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of our currently outstanding
securities, any one of which would reduce the benefits expected from such
acquisition and/or might negatively affect our results of operations. We may not
be able to successfully address these problems. We also face competition
from other acquirers, which may prevent us from realizing certain desirable
strategic opportunities.





We
do not plan to pay dividends on the Common Shares.





The
Company has never declared or paid dividends on its shares of Common Shares. The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.





Rapidly
evolving marketplace and competition may adversely impact our
business.





The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce our
revenues.





To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some of
the economic value in U.S. dollar terms.





Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations, more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs are
inherently risky and we could lose money as a result of poor
trades.  In 2008, revenues were decreased by approximately $101,000
and total expenses were increased by $50,000 resulting in a net loss $151,000
due to the fluctuation of foreign currencies.





Higher
inflation could adversely affect our results of operations and financial
condition.





We do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.





Our future growth significantly
depends to a high degree on our ability to successfully commercialize the
Copernic Desktop Search®product, and any failure or delays
in that commercialization would adversely affect our business and results of
operations.





On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications and
as a multi-channel online marketing services provider.  Although we
have high expectations for the


16


Copernic
Desktop Search® (CDS) award-winning product, to date our program to
commercialize that product through licensing to large ISP’s and Internet Portals
has not generated significant revenue and we cannot guarantee we will obtain
such significant licensing revenue in the future. However in 2008, we have
generated subscription sales of $636,893 through new products and sales channel
expansion which appears to have reversed the previous trend.





ITEM
4.   INFORMATION ON THE COMPANY





GENERAL
      INFORMATION


The legal
name of the Company is Copernic Inc. and the Company operates under the
commercial names Mamma.com and Copernic.  The Company was incorporated
on July 5, 1985, pursuant to the Business Corporations Act(Ontario), promulgated under the laws of the Province of Ontario, Canada.
The Company’s principal executive officers are located at 360 Franquet Street,
Suite 60, Sainte-Foy, Quebec, Canada G1P 4N3.





The
Company maintains its registered office c/o Fasken Martineau DuMoulin LLP,
Toronto Dominion Bank Tower, P.O. Box 20, Suite 4200, 66 Wellington Street West,
Toronto-Dominion Centre, Toronto, Ontario, M5K 1N6, Canada.





RECENT
      EVENTS


Write-down
of intangible assets and goodwill





In Q4
2008, the Company concluded that its software unit was still facing delays in
execution and changes of market conditions of its commercial deployment
solutions.  Based on the Company’s assessment of the fair value of its
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were less than their carrying value.  Therefore, write-downs of
$140,000 for trade names, $192,000 for technology and goodwill of $3,995,000
were recorded in 2008.





Normal
course issuer bid





On
November 11, 2008 the Company announced a normal course issuer bid under which
it may purchase up to a maximum of 700,000 of its common shares, representing
approximately 5% of the issued and outstanding common shares of the Company as
of the date hereof.  Purchases under the normal course issuer bid may
take place over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of
November, 2009.  The Company reserves the right to discontinue its
normal course issuer bid at any time.  As of March 2009, no shares
have been acquired by the Company.





Cost
reduction plan





In Q4
2008, the Company continued to execute its cost reduction plan announced at the
end of Q1 2008.  Total costs in 2008 excluding write-downs,
termination costs and restructuring costs were at $6,678,774 compared to
$10,318,889 in 2007.





In
addition, the Company has decided to close its Montreal office in Q1 2009 and
concentrate all its activity in Quebec City.





The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company has recorded $101,012 of restructuring
costs.





Resignation
and departure of officers





Éric
Bouchard, Vice President Marketing and Officer of the Company, for personal
reasons, did not renew his employment contract which expired on December 31,
2008, with the Company. In relation with this departure, 51,999 stock options
were cancelled, resulting in a reversal of employee stock-based compensation
expense of $40,878 that was recorded in Q4 2008.





The
Company accepted the resignation of Mr. Daniel Bertrand, Executive Vice
President and Chief Financial Officer, effective September 8, 2008. Furthermore
Ms. Claire Castonguay, the Company’s Controller for the past three years was
appointed Vice President, Finance and Controller while Mr. Ferland, President
and CEO assumed the additional responsibilities of Chief Financial Officer on an
interim basis. In relation with this resignation, the Company recorded and paid
termination costs of $149,420 in Q3 2008. Furthermore, 121,791 non
vested  stock options held by Mr. Bertrand were cancelled, resulting
in a reversal of employee stock-based compensation expense of $104,741 that was
recorded in Q3 2008. In Q4 2008, an additional 52,709 vested stock options held
by Mr. Bertrand were cancelled.





On
February 11, 2008, the Company announced the departure of Patrick Hopf,
Executive Vice President of Business Development.  117,134 options
held by Mr. Hopf were cancelled, resulting in a reversal of employee stock-based
compensation expense of $48,542 which was recorded in Q1 2008.


17


On
February 8, 2008, the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. 155,000 options held by Mr. Bouchard were cancelled,
resulting in a reversal of employee stock-based compensation expense of $49,320
which was recorded in Q1 2008.  Mr. Marc Ferland, a director of the
Company, was appointed President and CEO commencing on March 3,
2008.





Notice
from NASDAQ





On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company.  The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”).  Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance.  If, at any time before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement.  If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted.  At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.





On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.





The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.





Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it will, upon reinstatement of the rules, still have this number
of days, or until March 19, 2009, to regain compliance. The company can regain
compliance, either during the suspension or during the compliance period
resuming after the suspension, by achieving a $1 closing bid price for a minimum
of 10 consecutive trading days”.





On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.





As at
December 31, 2008, the Company’s closing stock price was at $0.13.





Granting,
exercising and cancellation of stock options





On April
2, 2008, the Company granted 100,000 stock options to an officer, at an exercise
price of $1.00 expiring in five years.





On June
17, 2008, the Company granted 125,000 stock options to directors and a new
officer, at an exercise price of $0.62 expiring in five years.





On
November 11, 2008, the Company granted 125,000 stock options to two officers and
employees at an exercise price of $0.22 expiring in five years.





As at
December 31, 2008, 785,819 stock options were forfeited.





RECENT
      FINANCINGS


On June
30, 2004, the Company sold under a securities purchase agreement an aggregate of
1,515,980 common shares and 606,392


18


warrants
to certain accredited investors for an aggregate price of $16,599,981. Net
proceeds from the offering amounted to $15,541,162, net of issue cost of
$1,058,819, $996,000 of which was paid to Merriman Curhan Ford & Co.
(“MCF”). For this specific transaction, MCF waived their entitlement to a
warrant component of the financing completion fee. Each warrant entitles the
accredited investors to purchase one additional common share at an exercise
price equal to $15.82 per share. The warrants are exercisable beginning six
months after the closing date, and have a term of five years from the closing
date.





On
December 12, 2002, the Company entered into subscription agreements to sell
1,893,939 Units, for a purchase price of $1.32 per Unit or total proceeds of
$2.5 million. Each Unit consisted of one share of Common Shares plus one
nontransferable “A Warrant” that entitled the holder to purchase one additional
Common Share at a price of $1.40 on or before November 30, 2004. Only in the
event and upon the exercise of each respective A Warrant, the holder thereof was
entitled to be issued one “B Warrant” that would entitle such holder to purchase
one additional Common Share at a price of $1.50 on or before November 30, 2006.
A placement fee of 142,045 Units was paid to a placement agent for arranging
this financing and the A and B warrants attached were exercised in September
2004 and November 2004, respectively. A sum of $5,904,354 accrued to the
treasury of the Company and a further 4,071,968 common shares of the Company
were issued.





RECENT
      AGREEMENT
              
              ThomasLloyd
      Capital LLC





On June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor.  In consideration for these
services, the Company committed to pay ThomasLloyd Capital a monthly fee of
$5,000 for seven  months beginning June 1, 2007, plus a success fee of
the greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.  This agreement has been terminated in
2008.





OTHER
AGREEMENTS





Merriman
Curhan Ford & Co.





On March
16, 2004, the Company retained Merriman Curhan Ford & Co. (“MCF”) as a
financial advisor and as an investment banking advisor. The Company then signed
two separate agreements. In consideration for financial services, the Company
had committed to pay MCF a monthly fee of $5,000 for a minimum obligation of
$30,000 and 10,000 warrants per month with a minimum issuance of 60,000
warrants; each warrant gives the rights to purchase one common share of the
Company. Warrants are issuable at an exercise price equal to the average closing
bid for the last five trading days at the end of the month of issue, for the
duration of the agreement upon the same terms and conditions. The warrants have
a life of five years from the issuance date. For the investment banking
services, the Company had committed to pay a cash financing completion fee equal
to 6% of the total amount of capital received by the Company from the sale of
its equity securities and warrants to purchase common shares of the Company in
an amount equal to 6% of the number of common shares purchased by investors in
capital raising transactions. The warrants are immediately exercisable at the
higher of the price per share at which the investor can acquire common shares or
the closing price of the Company’s common shares at the date of the capital
raising transaction. For mergers and acquisitions, the Company had committed to
pay a success fee upon closing equal to the sum of 4% of up to $10,000,000
transaction value, 3% of $10,000,000 to $15,000,000 transaction value and 2% of
greater than $15,000,000 transaction value, provided that MCF either introduces
and/or performs specific services for the transaction. The minimum success fee
for a transaction is $200,000. For a sale transaction, the Company had committed
to pay a success fee with the same parameters of an acquisition except for the
minimum fee which is $500,000.





For the
period ended December 31, 2004, 40,000 warrants were issued to MCF at an average
price of $12.31, the fair value of which was $260,301 estimated as of the grant
date using the Black-Sholes pricing model, and charged to expense with a
corresponding credit to additional paid-in capital. The following weighted
average assumptions were used:





Expected
      option life
            
            3.5
      yearsVolatility
            
            86%Risk-free
      interest rate
            
            3.99%Dividend
      yield
            
            nil





On July
16, 2004, the agreement for financial services, dated March 16, 2004 was
amended. The Company committed to pay MCF a monthly fee of $5,000 for eight
months from July 16, 2004. The agreement for investment banking services was
amended on July 16, 2004, on September 8, 2004 and subsequently on October 12,
2005. The Company then was committed to pay a success fee upon closing equal to
the sum of 3% of up to $20,000,000 transaction value, 1.5% of the excess of
$20,000,000. If an acquisition transaction is less than 50% interest in the
Company or the Target, a fee shall be payable in cash for 7% of the transaction
value. If transaction is not consummated and the Company is entitled to receive
break-up fee and other form of compensation, the Company then will pay to MCF
30% of Company’s entire entitlement. In the event that the Board deems it
necessary or appropriate for a fairness opinion to be rendered


19


in
connection with an acquisition transaction, MCF will receive a Fairness Opinion
Fee of $200,000 for rendering its opinion, payable upon delivery of the Fairness
Opinion and will be credited against the M&A Completion Fee due to
MCF.





At the
completion of the Copernic Technologies Inc. acquisition, total fees paid to MCF
were $618,468 including the fairness opinion fee of $200,000.





Maxim
      Group, LLC


On
January 29, 2003, the Company retained Maxim Group LLC (“Maxim”), on a
non-exclusive basis, as its investment banker, strategic advisor and financial
advisor. In consideration for these services, the Company paid a retainer of
$25,000 for the first month and a monthly fee of $5,000 for the duration of the
agreement. Upon execution of the agreement, the Company issued a warrant to
purchase 25,000 of the Company’s Common Shares at an exercise price of $2.15
expiring on June 30, 2006. Under the agreement, on a monthly basis, commencing
30 days after execution of the agreement, the Company was obligated to issue
additional warrants, each to purchase 8,000 Common Shares, at an exercise price
equal to the market price, for the duration of the agreement upon the same terms
and conditions. For any Transaction completed by the Company with Maxim Group
LLC, the Company agreed to pay a success fee upon closing equal to the sum of
21⁄2% of the aggregate transaction value, provided that Maxim either introduced
and/or performed specific services for the Transaction. The minimum success fee
for any transaction was $200,000. On May 5, 2003, an amendment was made to the
agreement to increase the success fee for a specific Transaction from 21⁄2% to
31⁄2%.





The term
of this agreement was indefinite. However, the Company or Maxim could terminate
it upon 30 days written notice. If such a notice was sent by the Company, the
monetary consideration was payable by the Company for the ensuing five months;
however, the warrant consideration would cease after the 30 days written notice.
If Maxim sent such a notice, both the monetary and warrant consideration
will cease immediately. The preceding statements notwithstanding, the agreement
could also be terminated upon 30 days written notice by either party any time
after the 6th 
month anniversary of the agreement. On October 30, 2003 the Company advised
Maxim of termination of this agreement effective November 30, 2003. In 2003, the
Company granted a total of 105,000 warrants at an average price of $2.50 to
Maxim Group LLC for financial advisory fees.





Maxim
Group was paid a $200,000 success fee related to the acquisition of Digital
Arrow in June 2004.





As at
March 30, 2005, Maxim Group, LLC had exercised all its warrants.





ACQUISITIONS,
DIVESTITURES AND DISCONTINUED OPERATIONS





Acquisition
of Copernic Technologies Inc.





On
December 22, 2005, the Company acquired 100% of the issued and outstanding
securities of Copernic Technologies Inc. including an amount to settle Copernic
Technologies Inc.’s outstanding stock appreciation right
obligations.





The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $15,851,922 in cash including $3,297,007 paid to
settle Copernic Technologies Inc.’s stock appreciation right and severance
obligations net of cash acquired. The Company also issued 2,380,000 common
shares as part of the consideration paid. The fair value of the Company’s common
shares issued to owners of Copernic Technologies Inc. has been determined to be
$2.958 per share. This value has been determined using the average closing price
of the Company’s common shares for the two days before and after August 17,
2005, the date the significant terms and conditions of the transaction were
agreed to and publicly announced.





This
acquisition has been accounted for using the purchase method and the results of
operations have been included in the Company’s statement of operations from the
date of acquisition. The purchase price allocation was finalized upon receipt of
a valuation report.





On May
31, 2006, Copernic Technologies Inc. was wound up into the
Company.  The wind-up allows the Company to use carry forward tax
losses where needed.





In 2006,
the purchase price allocation was adjusted to reflect additional assets and
liabilities assumed by the Company. These adjustments resulted by
increasing accounts receivable by $480,091, liabilities by $22,286 and
consequently decreasing original goodwill by $457,805. The increase in accounts
receivable, which was not accounted for in the audited closing balance sheet of
Copernic Technologies Inc. at the date of acquisition, was due to revenue
recognition adjustment related to a specific contract that existed prior to the
date of the transaction.





In 2006,
$379,382 was received by the Company from the sellers of Copernic Technologies
Inc. to compensate for a reduction of research and development tax credits prior
to the acquisition date, the purchase price and goodwill were then reduced
accordingly.





Discontinued
Digital Arrow LLC and High Performance Broadcasting Inc. (“Digital Arrow”)
Operations





In
September 2005, following the poor performance of Digital Arrow LLC and High
Performance Broadcasting, Inc. (“Digital Arrow”)


20


located
in Florida, management decided to discontinue its subsidiary’s
operations.  The Company has therefore not renewed the lease in
Florida and recorded closing costs.





Consequently,
the results of the operations of Digital Arrow were recorded as discontinued
operations and the results of the Company for the years ended December 31, 2005
and 2004 were reclassified to account for the closure of the subsidiary’s
operations.





Digital
Arrow, which the Company acquired on June 10, 2004, was a privately held
marketing company that was engaged in the distribution of online, opt-in e-mail
marketing solutions via the Internet. In that acquisition, the Company’s
wholly-owned subsidiary, Mamma.com USA, Inc., entered into a Securities Purchase
Agreement with Digital Arrow and their equity holders, pursuant to which
Mamma.com USA, Inc. acquired all equity interests in Digital Arrow. The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $1,264,210 in cash, net of cash acquired, and 90,000
of the Company’s common shares.  The fair value of the Company shares
issued to owners of Digital Arrow was determined to be $8.23 per
share.  The operations of the business have been included in the
Company’s consolidated financial statements since June 1, 2004.





This
acquisition has been accounted for using the purchase method.  The
fair value of the net assets acquired was $1,535,744, which with goodwill of
$556,196, resulted in a total purchase price of $2,091,940. From this purchase
price, $740,782 was paid by issuance of the Company’s common shares, $86,948 for
cash acquired at the transaction for a cash paid net of cash acquired of
$1,264,210. Digital Arrow LLC and High Performance Broadcasting, Inc. have since
been liquidated.





INCUBATOR
ACTIVITIES





Prior to
February 2001, when the Company announced a moratorium on new incubator
activities, the Company had engaged in incubator management services and held
positions in companies in the analog circuit, new media and telecommunications
sectors. These companies included LTRIM Technologies Inc., (“LTRIM”), interWAVE
communications International, Ltd. Tri-Link Technologies Inc., TEC Technology
Evaluation.com Corporation, uPath.com Inc. and ESP Media Inc. The Company had
written down completely or disposed of its interest in all of these companies,
except for LTRIM.





LTRIM is
engaged in the design and development of high-performance analog integrated
circuit products. LTRIM’s proprietary core technology consists of a laser-based
fine-tuning system designed to set the electrical characteristics of
high-performance analog integrated circuits by precisely adjusting the
resistance of silicon-embedded resistive elements that are fabricated through
standard semiconductor manufacturing processes. It is expected that this
technology will have advantages over conventional circuit fine-tuning
techniques, in terms of manufacturing cost, integration, and time-to-market,
when applied to the production of high-performance analog semiconductor
products.





On May 4,
2000, the Company initiated a series of transactions pursuant to which it
subscribed to a CDN $850,000 secured debenture convertible into 12.75% of the
equity of LTRIM. On February 23, 2001, the Company started acquiring preferred
shares by step purchase and by May 2001, a total of 207,323 preferred shares
were subscribed to and entirely paid. These shares were subsequently split 10
for 1, resulting in 2,073,230 shares.





On
December 13, 2002, LTRIM closed the first round of an intended two-round
financing transaction with new investors. As part of the transaction, the
Company converted all preference shares and the secured debenture into 4,891,686
Class A Common Shares. Accrued interest on the debenture in the amount of CDN
$137,014 (US $80,038) was converted into 359,281 Class A preference shares. On
February 11, 2004, LTRIM closed the second round of financing.





In 2006,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline and therefore recorded a write-down of
$570,000.





As at
December 31, 2006, the investment in LTRIM was carried at a value of $150,000
for approximately 4% of LTRIM.





In 2007,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline due to significant corporate restructuring and
therefore recorded a write-down of $150,000 to bring its investment value to
nil.





21





BUSINESS
      OVERVIEW




Copernic
Inc. is a leading provider of award winning search technology for both the web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.




Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, calendar, emails, and email attachments stored
anywhere on a PC hard drive. The desktop search application won the CNET
Editors’ Choice Award, as well as the PC World World Class award in 2005.
 In 2007, PC Pro, the UK’s most respected IT magazine for professionals,
and Micro Hebdo, one of France’s most read IT magazines, each selected Copernic
Desktop Search® 2.0 software search engine as the top desktop search tool. At
the CTIA Wireless 2008® Copernic’s Desktop Search won first prize for innovation
in the enterprise solutions category.  Also in 2008, Copernic Desktop
Search® 3.0 received the prestigious “Gizmo’s Top Pick” award in the “Best Free
Desktop Search Utility” category at Gizmo’s popular Best-ever Freeware
site.




In Q3
2008, the Company launched version 3.0 of its business-oriented desktop search
product. The upgraded Copernic Desktop Search (“CDS”) Corporate Edition further
increases its competitive edge by adding Intranet integration features and
expanding its MS Outlook® search capabilities. CDS Professional Edition also
specifically targets knowledge workers with features such as the indexing of
Microsoft Outlook’s calendar, tasks and notes. Some advanced search functions
are now exclusive to the Professional and Corporate products: network drive
indexing, “as you type” display of results, and saving of queries for frequently
used searches. CDS Home Edition offers a unique competitive advantage with the
new “One Search” feature which simultaneous searches the desktop and the
Internet. Although the Home Edition is free to consumers, it does provide for
contextual advertised sponsored banner ads based on search queries.




Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic’s search division handles over 1 billion search requests per month and
has media placement partnerships established not only in North America, but in
Europe and elsewhere.  The revenue models of the Company are based
on:




Pay-Per-Click
search listing placement – advertisers bid or pay a fixed price for position on
search listing advertisements on www.mamma.com and within the Copernic Media
SolutionsTM Publisher Network.




Graphic
Ad Units – priced on a CPM (Cost-Per-Thousand) basis and are distributed through
the Copernic Media SolutionsTM Publisher Network.




Copernic
Media SolutionsTM Publisher Network has over 98 active publishers (combined
search and graphic ad publishers).




Copernic
Agent® and Copernic Desktop Search® users generate Web searches and clicks from
pay-per-click advertising listings.




Copernic
Desktop Search® licensing to ISPs, portals, enterprise search providers and
e-commerce sites generates license, maintenance and customization
revenues.




Copernic
Agent® Personal Pro, Copernic Summarizer® and Copernic Tracker® software are
sold from our e-commerce store.




22





PRINCIPAL
      MARKETS


Although
we operate in the global on-line market, and now engage in the development and
sale of information management and search solution products, the majority of our
users and customers are concentrated in the U.S., Europe and Canada. Our total
revenues in 2008 can be divided into several categories: search and graphic
advertising, software licensing, customized development and maintenance support
revenues. The following table gives a breakdown of the total revenues by
category for the last five financial years. The operations of Copernic
Technologies Inc. have been included since December 23, 2005.





search
      and graphic
            
            Software
            
            Customized
              Development
      andyear
            
            advertising
            
            Licensing
            
            Maintenance
      SupportUS
      $
            
            US
      $
            
            US
      $2008
            
            5,606,383
            
            951,022
            
            454,2262007
            
            7,354,709
            
            415,263
            
            346,4362006
            
            8,024,972
            
            957,488
            
            613,9422005
            
            9,426,772
            
            6,671
            
            10,5322004
            
            14,624,222
            
            -
            
            12,096





SEASONALITY
      AND FLUCTUATION IN REVENUES


The
Company is subject to seasonal fluctuations affecting its operations and
results. Historically, the first and third quarters have shown significant
decreases in search and graphic revenues, which the Company believes are
respectively attributable to decreased advertising and Internet use during the
post-Christmas lull and the Summer holiday season.





Although
not seasonal, our software licensing revenues fluctuate from quarter to quarter
based upon the quarters in which we obtain new agreements or existing agreements
terminate.





MARKETING
CHANNELS AND SALES METHODS





The
Company maintains its own sales and marketing staff and has its own experienced
direct sales force to address the new and evolving requirements of its target
markets. Although the Company itself does not expend significant resources on
public relations, the Company markets itself through on-line advertising, press
releases, internally sponsored events and trade shows.





The
Company solicits revenues by direct sales force, e-mail directly to the end
client, or through specialized search engines through advertising agencies or
network distribution business associates who mainly specialize in the online
advertising market. Search listings are solicited either directly or through
on-line marketing campaigns from the end client.





DEPENDENCE
ON INTELLECTUAL PROPERTY AND OTHER MATTERS MATERIAL TO
PROFITABILITY





We rely
upon a combination of trade secret, copyright, trademark, patent and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and


23


distribution
of, these assets and other proprietary information. However, the steps we take
to protect our intellectual property assets may not be adequate to deter or
prevent misappropriation. We may be unable to detect unauthorized uses of and
take appropriate steps to enforce and protect our intellectual property rights.
Although senior management believes that our services and products do not
infringe on the intellectual property rights of others, we nevertheless are
subject to the risk that such a claim may be asserted in the future. Any such
claims could damage our business.





GOVERNMENT
      REGULATION


The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
users of other services similar to ours. Increased attention focused on these
issues and legislative proposals could harm our reputation or otherwise affect
the growth of our business.





The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, online gambling, alcohol or
firearms, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.





Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on our
part to comply with these and similar regulations in other jurisdictions may
subject us to additional liabilities.





COMPETITION


The
Company primarily competes in the areas of on-line advertising and software
licensing which includes sales of licenses, customization and maintenance
support. The
market for these services is in a constant state of flux and competition is
intense.





The
Company faces intense competition expects this competition will continue to
intensify. The Company’s markets are subject to rapid changes in technology and
marketing strategies and the Company is significantly affected by new product
introductions and other market activities of its existing and potential
competitors. The Company believes the principal competitive factors in this
market are name recognition, product performance and functionality, ease of use,
size of the Web index, user traffic, the speed with which search results return
and the relevance of results, pricing and quality of customer support. Many of
the Company’s current and potential competitors in on-line advertising and
software licensing, includes Google, Ask.com, Miva, Looksmart, Findwhat,
Microsoft, Yahoo!, Value Click, FastClick, Burst Media, Tribal Fusion and X1
have significant operating histories, larger customer bases, greater brand name
recognition, greater access to proprietary content and significantly greater
financial, marketing and other resources which give them a competitive
advantage.





The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce our
revenues.





24





ORGANIZATIONAL
      STRUCTURE


On May
31, 2004, the wholly owned subsidiary, Mamma.com Enterprises Inc. was wound up
into the Company. The transaction has allowed the Company to use carry forward
tax losses.  On May 31, 2006, the wholly owned subsidiary, Copernic
Technologies Inc. which was acquired on December 22, 2005, was wound up into the
Company.  During 2007 and 2008, a few non-active companies were wound
up into the Company.  As at March 27, 2009 the Company had an active
wholly-owned subsidiary, Mamma.com USA, Inc.





The
Company leases two office locations. They are in Quebec City, Canada with 13,000
square feet and Montreal, Canada with 3,400 square feet. The Montreal office
will be closed March 31, 2009.





ITEM
5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion and analysis of the consolidated financial condition and
results of operations of Copernic Inc. for the three years ended December 31,
2008, 2007 and 2006 should be read in conjunction with its consolidated
financial statements and the related notes.  All statements in the
following discussion, which are not reports of historical information or
descriptions of current accounting policy, are forward-looking
statements.  Please consider our forward-looking statements in light
of the risks referred to in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations cautionary note.  The
Company’s consolidated financial statements are reported in US dollars and have
been prepared in accordance with generally accepted accounting principles as
applied in Canada (“Canadian GAAP”).  As a registrant with the
Securities and Exchange Commission in the United States, the Company is required
to reconcile its financial results for significant measurement differences
between Canadian GAAP and generally accepted accounting principles as applied in
the United States (“U.S. GAAP”) as they specifically relate to the Company as
described in note 27 to its consolidated financial statements. This Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
dated March 27, 2009.





Business
overview




Copernic
Inc. is a leading provider of award winning search technology for both the web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.




Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, calendar, emails, and email attachments stored
anywhere on a PC hard drive. The desktop search application won the CNET
Editors’ Choice Award, as well as the PC World World Class award in 2005.
 In 2007, PC Pro, the UK’s most respected IT magazine for professionals,
and Micro Hebdo, one of France’s most read IT magazines, each selected Copernic
Desktop Search® 2.0 software search engine as the top desktop search tool. At
the CTIA Wireless 2008® Copernic’s Desktop Search won first prize for innovation
in the enterprise solutions category.  Also in 2008, Copernic Desktop
Search® 3.0 received the prestigious “Gizmo’s Top Pick” award in the “Best Free
Desktop Search Utility” category at Gizmo’s popular Best-ever Freeware
site.




In Q3
2008, the Company launched version 3.0 of its business-oriented desktop search
product. The upgraded Copernic Desktop Search (“CDS”) Corporate Edition further
increases its competitive edge by adding Intranet integration features and
expanding its MS Outlook® search capabilities. CDS Professional Edition also
specifically targets knowledge workers with features such as the indexing of
Microsoft Outlook’s calendar, tasks and notes. Some advanced search functions
are now exclusive to the Professional and Corporate products: network drive
indexing, “as you type” display of results, and saving of queries for frequently
used searches. CDS Home Edition offers a unique competitive advantage with the
new “One Search” feature which simultaneous searches the desktop and the
Internet. Although the Home Edition is free to consumers, it does provide for
contextual advertised sponsored banner ads based on search queries.




Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic’s search division handles over 1 billion search requests per month and
has media placement partnerships established not only in North America, but in
Europe and elsewhere.  The revenue models of the Company are based
on:




Pay-Per-Click
search listing placement – advertisers bid or pay a fixed price for position on
search listing advertisements on www.mamma.com and within the Copernic Media
SolutionsTM Publisher Network.




Graphic
Ad Units – priced on a CPM (Cost-Per-Thousand) basis and are distributed through
the Copernic Media SolutionsTM Publisher Network.




Copernic
Media SolutionsTM Publisher Network has over 98 active publishers (combined
search and graphic ad publishers).




Copernic
Agent® and Copernic Desktop Search® users generate Web searches and clicks from
pay-per-click advertising listings.




25




Copernic
Desktop Search® licensing to ISPs, portals, enterprise search providers and
e-commerce sites generates license, maintenance and customization
revenues.




Copernic
Agent® Personal Pro, Copernic Summarizer® and Copernic Tracker® software are
sold from our e-commerce store.




Search
and graphic advertising





Approximately
80% of our revenues come from our search based businesses which
are:  search property Mamma.com, “The Mother of All Search Engines®”
and its search publisher network of approximately 98 partners representing 68%
of these revenues and Copernic Agent® and Copernic Desktop Search® for 12% of
these revenues respectively.  The revenue model in this sector is
simply a pay-per-click fee that is charged to the advertiser when a user clicks
on a sponsored link. The business model consists of advertisers buying keywords.
When these keywords are searched by a user, the advertiser’s Web site will be
listed in a premium position in the search results, identified as a sponsored
result. The Company aggregates advertisers from other search-based businesses
and from its own direct sales efforts (through direct sales and automated
online marketing initiatives). Advertising revenues generated through third
party search properties have associated payout costs; these payout costs
represent a percentage of the revenues generated from the distribution of search
advertisements onto third party search property.  Higher margins are
obtained through our own properties as there are no payout costs associated with
these revenues.





The other
revenue model is CPM based (cost per one thousand impressions published).
The business model is based on advertisers buying impressions for ad campaigns
(these are creative based campaigns: different size banners, pop-ups, rich media
advertising) and targeting them through our network of publishers. Campaigns can
be targeted in several ways: geo-targeting (by region), or by site category
(e.g.: travel, entertainment, finance).





Software
licensing





Approximately
14% of our revenues came from software licensing. The business model is based on
selling licenses of Copernic Desktop Search® to ISPs, portals, enterprises,
international distributors and resellers as well as Copernic Agent®
Personal/Pro, Copernic Summarizer® and Copernic Tracker® through our e-commerce
store.





Customized
development and maintenance support





Approximately
6% of our revenues were the result of customized development and maintenance
support.  The business model is based on billing our technical team
for software customization and maintenance support.





Recent
events





Write-down
of intangible assets and goodwill





In Q4
2008, the Company concluded that its software unit was still facing delays in
execution and changes of market conditions of its commercial deployment
solutions.  Based on the Company’s assessment of the fair value of its
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were less than their carrying value.  Therefore, write-downs of
$140,000 for trade names, $192,000 for technology and goodwill of $3,995,000
were recorded in 2008.





Normal
course issuer bid





On
November 11, 2008 the Company announced a normal course issuer bid under which
it may purchase up to a maximum of 700,000 of its common shares, representing
approximately 5% of the issued and outstanding common shares of the Company as
of the date hereof.  Purchases under the normal course issuer bid may
take place over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of
November, 2009.  The Company reserves the right to discontinue its
normal course issuer bid at any time.As of March 2009, no shares have been
acquired by the Company.





Cost
reduction plan





In Q4
2008, the Company continued to execute its cost reduction plan announced at the
end of Q1 2008.  Total costs in 2008 excluding write-downs,
termination costs and restructuring costs were at $6,678,774 compared to
$10,318,889 in 2007.





In
addition, the Company has decided to close its Montreal office in Q1 2009 and
concentrate all its activity in Quebec City.





The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company has recorded $101,012 of restructuring
costs.


26





Resignation
and departure of officers





Éric
Bouchard, Vice President Marketing and Officer of the Company, for personal
reasons, did not renew his employment contract which expired on December 31,
2008, with the Company. In relation with this departure, 51,999 stock options
were cancelled, resulting in a reversal of employee stock-based compensation
expense of $40,878 that was recorded in Q4 2008.





The
Company accepted the resignation of Mr. Daniel Bertrand, Executive Vice
President and Chief Financial Officer, effective September 8, 2008. Furthermore
Ms. Claire Castonguay, the Company’s Controller for the past three years was
appointed Vice-President Finance and Controller while Mr. Ferland, President and
CEO assumed the additional responsibilities of Chief Financial Officer on an
interim basis. In relation with this resignation, the Company recorded and paid
termination costs of $149,420 in Q3 2008. Furthermore, 121,791 non
vested  stock options held by Mr. Bertrand were cancelled, resulting
in a reversal of employee stock-based compensation expense of $104,741 that was
recorded in Q3 2008. In Q4 2008, an additional 52,709 vested stock options held
by Mr. Bertrand were cancelled.





On
February 11, 2008, the Company announced the departure of Patrick Hopf,
Executive Vice President of Business Development.  117,134 options
held by Mr. Hopf were cancelled, resulting in a reversal of employee stock-based
compensation expense of $48,542 which was recorded in Q1 2008.





On
February 8, 2008, the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. 155,000 options held by Mr. Bouchard were cancelled,
resulting in a reversal of employee stock-based compensation expense of $49,320
which was recorded in Q1 2008.  Mr. Marc Ferland, a director of the
Company, was appointed President and CEO commencing on March 3,
2008.





Notice
from NASDAQ





On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company.  The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”).  Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance.  If, at anytime before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement.  If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted.  At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.





On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.





The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.





Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it
will, upon reinstatement of the rules, still have this number of days, or until
March 19, 2009, to regain compliance. The company can regain compliance, either
during the suspension or during the compliance period resuming after the
suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive
trading days”.





On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating, “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.


27





As at
December 31, 2008, the Company’s closing stock price was at $0.13.





Granting,
exercising and cancellation of stock options





On April
2, 2008, the Company granted 100,000 stock options to an officer, at an exercise
price of $1.00 expiring in five years.





On June
17, 2008, the Company granted 125,000 stock options to directors and a new
officer, at an exercise price of $0.62 expiring in five years.





On
November 11, 2008, the Company granted 125,000 stock options to two officers and
employees at an exercise price of $0.22 expiring in five years.





As at
December 31, 2008, 785,819 stock options were forfeited.





Critical
Accounting Policies and Estimates





The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. In doing so, management has
to make estimates and assumptions that affect reported amounts of assets,
liabilities, revenues and expenses, as well as related disclosure of contingent
assets and liabilities.  In many cases, management reasonably has used
different accounting policies and estimates.  In some cases, changes
in the accounting estimates are reasonably likely to occur from period to
period.  Accordingly, actual results could differ materially from our
estimates. To the extent that there are material differences between these
estimates and actual results, our financial condition or results of operations
will be affected.  Management bases its estimates on past experience
and other assumptions that it believes are reasonable under the circumstances,
and it evaluates these estimates on an ongoing basis. Management refers to
accounting estimates of this type as critical accounting policies and estimates,
which are discussed further below. Management has reviewed its critical
accounting policies and estimates with its Board of Directors.





Use of
estimates





Significant
estimates in these financial statements include the allowance for doubtful
accounts, recovery of future income taxes, goodwill and annual goodwill
impairment test, useful lives and impairment of long-lived assets, stock-based
compensation costs and determination of the fair value of the intangible assets
on acquisitions.  Each of these critical accounting policies is
described in more detail below.





Allowance
for doubtful accounts





Judgments
are made in the ability to collect outstanding receivables and provide
allowances for the portion of receivables when collection becomes doubtful.
Provisions are made based upon a specific review of all significant outstanding
invoices.  The allowance provided for doubtful accounts does not
reflect the future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and our future results of
operations could be adversely impacted.




For this
item, actual results could differ from those estimates.





Recovery
of future income taxes





Significant
judgment is used in determining our consolidated recovery of future income
taxes. Uncertainties may arise with respect to the tax treatment of certain
transactions. Although it is believed that estimates are reasonable, there is no
certainty that the final tax outcome of these matters will not be different than
that which is reflected in our financial statements. Such differences could have
a material effect on our future income taxes in the period in which such
determination is made.





For this
item, actual results could differ from those estimates.





Goodwill
and annual goodwill impairment test





Goodwill
is evaluated for impairment annually on December 31st of each
year or when events or changed circumstances indicate impairment may have
occurred.  In connection with the goodwill impairment test, if the
carrying value of the Company’s reporting unit to which goodwill relates exceeds
its estimated fair value, the goodwill related to that reporting unit is tested
for impairment.  We have determined that in our case, the reporting
units is the operating segment or a business one level below that operating
segment if discrete financial information is prepared and regularly reviewed by
management at that level. If the carrying value of such goodwill is determined
to be in excess of its fair value, an impairment loss is recognized in the
amount of the excess of the carrying value over the fair value. Management’s
determination of the fair value of each reporting unit incorporates multiple
inputs including discounted cash flow calculations, peer company price to
earnings multiples, the level of the Company’s share price and assumptions that
market participants would make in valuing the reporting unit. Other assumptions
include levels of economic capital, future business growth,
earnings


28


projections
and weighted average cost of capital used for purpose of discounting. Decreases
in the amount of economic capital allocated to a reporting unit, decreases in
business growth, decreases in earnings projections and increases in the weighted
average cost of capital will all cause the reporting unit’s fair value to
decrease. The Company completed its annual goodwill assessment for the
individual units as of December 31, 2008. Future adverse changes in these
factors could result in losses or inability to recover the carrying value of the
goodwill, thereby possibly requiring an impairment charge in the
future.




For this
item, actual results could differ from those estimates.





Useful
lives and impairment of long-lived assets





The
Company assesses the carrying value of its long-lived assets which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Useful lives of long-lived assets are regularly reviewed for their
appropriateness. An impairment loss is recognized if the carrying value of a
long-lived asset exceeds the sum of its estimated undiscounted future cash flows
expected from its use.  The amount of impairment loss, if any, is
determined as the excess of the carrying value of the assets over their fair
value.  Management assesses long-lived assets for impairment using
estimates including discount rate, future growth rates, general economic,
industry conditions and competition.  Future adverse changes in these
factors could result in losses or inability to recover the carrying value of the
long-lived assets, thereby possibly requiring an impairment charge in the
future.





For this
item, actual results could differ from those estimates.





Stock-based
compensation costs





In
determining the fair value of stock options and warrants issued to employees and
service providers, using the Black-Scholes option pricing model, the Company
must make estimates of the forfeiture rate, the period in which the holders of
the options and warrants will exercise the options and warrants and the
volatility of the Company’s stock over that same period. Different estimates
would result in different amounts of compensation being recorded in the
financial statements.





Revenue
recognition




Search
advertising, graphic advertising, software licensing, customized development and
maintenance support revenues are recognized when services are rendered, provided
there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is considered probable, and fees are not subject to
forfeiture, refund or other concessions.





With
respect to search advertising and graphic advertising revenues, insertion orders
or signed contracts are generally used as evidence of an arrangement. Revenues
are recognized in accordance with EIC-123, Reporting Revenue Gross as a
Principal Versus Net as an Agent.





Software
licensing agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable and vendor-specific evidence of an arrangement exists to allocate
the total fee to the different elements of an arrangement. Vendor-specific
objective evidence is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by management, if it is probable that the price, once
established, will not change before market introduction.




Revenues
from maintenance support for licenses previously sold and implemented are
recognized ratably over the term of the contract.





Revenues
from customized development, not considered as part of the implementation of
software licenses, are recognized as the services are provided.





Amounts
received in advance of the delivery of products or performance of services are
classified as deferred revenue.





Estimates
of collection likelihood are based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
If it is determined that collection of a fee is not probable, management defers
the fee and recognizes revenues at the time collection becomes probable, which
is generally upon receipt of cash.


29




Recent
accounting changes




a)  For
changes affecting 2007





Initial
application of primary source of GAAP





On
January 1, 2007, in accordance with the applicable transitional provisions, the
Company applied the recommendations of new Section 1506, “Accounting Changes”,
of the CICA’s Handbook.  This new section, effective for the years
beginning on or after January 1, 2007, prescribes the criteria for changing
accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies, changes in accounting estimates and corrections
of errors.  Furthermore, the new standard requires the communication
of the new primary sources of GAAP that are issued but not yet effective or not
yet adopted by the Company.  The new standard had a negligible effect
on the Company’s financial statements.





Effective
in January 2007, the Company adopted three new accounting standards issued by
the CICA: Section 1530, Comprehensive Income; Section 3855, Financial
Instruments – Recognition and Measurement; and Section 3865, Hedges. These new
accounting standards establish standards for recognizing and measuring financial
instruments, namely financial assets, financial liabilities and derivatives.
Certain changes in the value of these financial instruments are presented under
Comprehensive Income in the Consolidated Statements of Shareholders’ Equity. The
application of these new standards had a negligible effect on the Company’s
financial statements and financial position.





Accounting
policy choice for transaction costs (“EIC-166”)





Issued in
June 2007, EIC-166 addresses whether the entity must make one accounting policy
choice that applies to all financial assets and financial liabilities classified
other than held for trading. This Abstract mentions that the same accounting
policy choice should be made for all similar financial instruments classified as
other than held for trading but that a different accounting policy choice might
be made for financial instruments that are not similar. This accounting
treatment should be applied retrospectively to transaction costs accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after September 30, 2007.  The adoption of
this Abstract had no impact on the Company’s financial statements.





Convertible
and other debt instruments with embedded derivatives (“EIC-164”)





EIC-164
addresses the situation where a company issues a debt instrument that is
convertible at any time at the holder’s option into a fixed number of common
shares. Upon conversion, the issuer is either required or has the option to
satisfy all or part of the obligation in cash. The instrument may also permit
the issuer to redeem the instrument prior to maturity, and/or permit the holder
to force the issuer to redeem the instrument prior to maturity. This Abstract
provides guidance on various issues related to such debt
instruments.





The
accounting treatment in this Abstract should be applied retrospectively to
financial instruments accounted for in accordance with Section 3855 in financial
statements issued for interim and annual periods ending on or after June 30,
2007. The adoption of this Abstract had no impact on the financial
statements.





Accounting
by an investor upon a loss of significant influence (“EIC-165”)





Issued in
April 2007, EIC-165 addresses the situation of how an investor that loses
significant influence in an investee should account for the amount the investor
has in its accumulated other comprehensive income (OCI) for its proportionate
share of the investee’s equity adjustment for OCI.  The amount
recorded by the investor in accumulated OCI for the investor’s proportionate
share of an investee’s equity adjustments for OCI should be deducted from or
added to the carrying value of the investment at the time significant influence
is lost. To the extent that the adjustment results in a carrying value of the
investment that is less than zero, an investor should reduce the carrying value
of the investment to zero and record the remaining balance in net
income.





The
accounting treatment in this Abstract should be applied retrospectively, with
restatement of prior periods, to all financial statements for interim and annual
reporting periods ending June 30, 2007.  The adoption of this Abstract
had no impact on the Company’s financial statements.





b)  For
changes affecting 2008





CICA
Section 1535 - Capital Disclosures





In
December 2006, the CICA issued Handbook Section 1535 – Capital
Disclosures.  The new accounting standard requires disclosure of
information about an entity’s objectives, policies, and processes for managing
capital, as well as quantitative data about capital and whether the entity has
complied with any capital requirements.  This Handbook Section is
effective for interim and annual periods beginning on or after October 1,
2007.  The Company has adopted this new Section in its first
quarter.


30





CICA
Section 3862 – Financial Instruments – Disclosures


CICA
Section 3863 – Financial Instruments – Presentation





In
December 2006, the CICA issued Handbook Section 3862 and 3863 that provide
additional guidance regarding disclosure of the risks associated with both
recognized and unrecognized financial instruments and how those risks are
managed.  These Handbook Sections are also effective for interim and
annual periods beginning on or after October 1, 2007. The Company has adopted
these new Sections in its first quarter.





EIC-169,
Determining Whether a Contract is Routinely Denominated in a Single
Currency





Issued
January 8, 2008, EIC-169 provides guidance on how to define or apply the term
“routinely denominated in commercial transactions around the world” as discussed
in Section 3855 when assessing contracts for embedded foreign currency
derivatives.  It also determines the factors that can be used to
determine whether a contract for the purchase or sale of a non-financial item
such as a commodity is routinely denominated in a particular currency in
commercial transactions around the world.  The accounting treatment of
this Abstract should be applied retrospectively to embedded foreign currency
derivatives in host contracts that are not financial instruments accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after March 15, 2008. The adoption of this Abstract
did not have any impact on the Company’s financial statements.





c)  Future
accounting changes





Goodwill
and Intangible Assets - Section 3064





In
January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets.  The
objectives of Section 3064 are to reinforce the principle-based approach to the
recognition of assets only in accordance with the definition of an asset and the
criteria for asset recognition; and clarify the application of the concept of
matching revenues and expenses such that the current practice of recognizing
asset items that do not meet the definition and recognition criteria is
eliminated.  This standard also provides guidance for the recognition
of internally developed intangible assets (including research and development
activities), ensuring consistent treatment of all intangible assets, whether
separately acquired or internally developed.  This Section applies to
interim and annual periods beginning on or after October 1, 2008, with early
adoption encouraged.  The adoption of this new standard will not have
any impact on the Company’s financial statements.





Transition
to International Financial Reporting Standards (“IFRS”)





In
February 2008, the Canadian Accounting Standards Board confirmed that publicly
accountable enterprises will be required to transition from Canadian GAAP to
IFRS for interim and annual financial reporting purposes for fiscal years
beginning on or after January 1, 2011 with comparative information. In May 2008,
the Canadian Securities Administrators issued Staff Notice 52-320, which
provides guidance on the disclosure of changes expected in accounting policies
related to the change over IFRS. In accordance with the notice, the Company is
required to provide an update of the Company’s IFRS conversion plan in each
financial reporting period prior to conversion on January 1, 2011.





The
Company started working on the conversion plan in Q4 2008 with the help of an
external advisor. The project consists of three phases to be completed in order
to change over to IFRS: the diagnostic, development and
implementation.





The first
phase includes the identification of significant differences between existing
Canadian GAAP and IFRS that are relevant to the Company and a review of the
alternatives available upon adoption.  In Q4 2008, the Company
performed a diagnostic review and established that the most significant
differences for the Company between Canadian GAAP and IFRS relate to revenue
recognition, property and equipment, leases, provisions, reporting currency,
presentation and additional disclosure requirements under IFRS. Additional
differences might be identified in the future as changes to IFRS standards are
released.





The
second phase includes identification, evaluation and selection of accounting
policies necessary for the Company to change over to IFRS as well as potential
first-time adoption exemptions. During this phase, the Company will assess the
impact of the transition on the data system and internal control over financial
reporting, the further training required for the financial team and the impact
on business activities such as foreign currency, capital requirements, banking
agreements or compensation arrangements. The Company began this phase in Q1
2009.





The
implementation phase will integrate all the solutions into the Company’s
financial system and processes that are necessary for the Company to convert to
IFRS.


31





Results
of Operations





Revenues





2008
as compared to 2007





Revenues
for 2008 were $7,011,631 compared to $8,116,408 in 2007, a decrease of
14%.





In 2008
search and graphic advertising revenues decreased by $1,748,326 or 24% to
$5,606,383 from $7,354,709 last year. The variance is explained by a decrease in
search advertising revenues due to a change in client mix and reduced
traffic.  In 2008, the revenues decrease was offset by the reversal of
old prepayments totalling $80,000.





Software
licensing went from $415,263 in 2007 to $951,022 in 2008, an increase of
$535,759. The increase is explained by the sales of a new product “CDS Corporate
Edition” in 2008. Also, the launch of the new CDS Pro version in late Q3 2008
started having an impact on  Q4 2008 results.





In 2008,
customized development and maintenance support amounted to $454,226 compared to
$346,436 in 2007 an increase of $107,790.


The
difference is explained by the maintenance fees included in the sales of “CDS
Corporate Edition” launched in 2008.





2007
as compared to 2006





In 2007,
the Company generated revenues of $8,116,408 compared to $9,596,402 for the
previous year, a decrease of 15%.





Search
and graphic advertising revenues totalled $7,354,709 in 2007 compared to
$8,024,972 for the same period in 2006, a decrease of $670,263 or 8%. The
decrease is due to the decline in pop-up campaigns and a decrease in demand for
all other graphic ad units.





Software
licensing stood at $415,263 in 2007 compared to $957,488 in 2006, a decrease of
$542,225 or 57%.  The decrease is explained by the sale of one major
CDS license in 2006 compared to two smaller CDS licenses in 2007.





Customized
development and maintenance support revenues generated $346,436 in 2007 compared
to $613,942 for the same period the previous year, a decrease of $267,506 or
44%. The decrease is explained by maintenance support contracts that were not
renewed in 2007.





Expenses





Cost
of revenues





Cost of
revenues is comprised of partners’ payouts and bandwidth costs to deliver our
services.





2008
as compared to 2007





For the
fiscal year ended December 31, 2008, cost of revenues represented $2,530,908 or
45% of search and graphic advertising revenues, compared to $2,636,410 or 36% of
search and graphic revenues for the same period last year, due to the loss of a
high margin account in 2007.





In 2008,
search and graphic payouts totalled $2,169,916 compared to $2,262,356 for the
same period last year and represented respectively 39% and 31% over search and
graphic revenues. The increase in percentage in 2008 is explained by higher
payouts to retain partners which deliver better quality traffic.





The
bandwidth costs were $360,992 for the twelve-month period ended December 31,
2008, compared to $374,054 for the same period in 2007.





2007
as compared to 2006





In 2007,
cost of revenues represented $2,636,410 or 36% over search and graphic
advertising revenues, compared to $2,704,101 or 34% over search and graphic
advertising revenues for the same period in 2006.





Search
and graphic payouts totalled $2,262,356 in 2007 compared to $2,309,435 for the
same period in 2006 and represented respectively 31% and 29% over search
revenues.  The increase in percentage in 2007 is explained by
gradually increasing payouts to partners which deliver better quality
traffic.





In 2007,
bandwidth costs decreased by $20,612 or 5% to $374,054 from $394,666 in
2006.


32





Marketing,
sales and services





Marketing,
sales and services consist primarily of salaries, commissions and related
personnel expenses for our sales force, advertising and promotional expenses, as
well as the provision for doubtful accounts.





2008
as compared to 2007





For the
year ended December 31, 2008, marketing, sales and services expenses stood at
$938,611 from $1,897,822 in 2007, a decrease of $959,211 or 51%. The variance
for the year is explained by the decrease in salaries and related employment
costs of $540,000, decrease in stock options compensation of $206,000 in
relation with the termination of employees and employee departures, decrease in
training and recruiting costs and purchase of algorithmic contents of
respectively $121,000 and $77,000.





2007
as compared to 2006





For the
fiscal year ended December 31, 2007, marketing, sales and services increased by
$47,646 or 3% from $1,850,176 in 2006 to $1,897,822. The variance for the
twelve-month period reflected an increase in salaries due to reorganization of
the department, professional services due to new sales consultants for CDS and
stock-based compensation of respectively $127,000, $93,000 and $67,000. The
increases were offset by a decrease in purchase of algorithmic contents and
publicity and promotion of respectively $137,000 and $117,000 due to reduced
revenue.





General
and administration





General
and administrative expenses include salaries, stock-based compensation and
associated costs of employment of executive management and finance personnel.
These costs also include facility charges, investor relations, as well as legal,
tax and accounting, consulting and professional service fees associated with
operating our business and corporate compliance requirements.





2008
as compared to 2007





In 2008,
general and administrative expenses amounted to $2,907,964 compared to
$4,691,572 in 2007, a decrease of $1,783,608. Salaries and stock-based
compensation expenses decreased by respectively $338,000 and $428,000. In 2008,
salaries included termination costs of $149,000 related to the resignation of
the former CFO offset by a decrease in salaries of $53,000 due to employee
departures. In 2007, salaries included termination costs of $434,000 related to
the departure of the former President and CEO. The decrease in stock-based
compensation expenses is mainly explained by the reversal of expenses in 2008 of
$154,000 due to the departure of two officers compared to an additional expense
of $261,000 in 2007 related to the departure of the former CEO. In 2008,
professional fees decreased by $650,000 explained mainly by the reduction of
legal fees,  the investor relation expenses decreased by $147,000 due
to decrease expenses related to the annual reporting and the insurance expenses
decreased by $142,000 due to lower premium for D&O insurance.





2007
as compared to 2006





For the
year ended December 31, 2007, general and administrative expenses increased by
$695,245 to $4,691,572 from $3,996,327 in 2006. The increase is mainly explained
by the termination costs of approximately $695,000, which included a non-cash
item for accelerated vesting options of $253,236, related to the departure of
the former President and CEO of the Company in January 2007.





Product
development and technical support





Product
development and technical support costs include the salaries and associated
costs of employment of our team’s software developers and maintenance of our
metasearch engine and other IT systems. These charges also include the costs of
technical support and license maintenance. Research and development (R&D)
tax credits are also recorded against product development and technical support
expenses.





2008
as compared to 2007





In 2008,
product development and technical support expenses amounted to $1,938,724
compared to $2,416,410 last year, a decrease of $477,686 and mainly explained by
a decrease in salaries and related employment costs of $313,000, lower
stock-based compensation expenses of $63,000 and lower technical fees of
$60,000.





2007
as compared to 2006





For the
fiscal year ended December 31, 2007, product development and technical support
decreased to $2,416,410 from $2,538,867 in 2006, representing a decrease of
$122,457. The decrease is explained by a reduction in salaries due to a
reorganization of our R&D team.


33


Amortization
of property and equipment





2008
as compared to 2007





In 2008,
amortization of property and equipment stood at $211,056 compared to $302,509 in
2007 explained by the decrease of the asset’s net book value at the beginning of
2008.





2007
as compared to 2006





Amortization
of property and equipment totalled $302,509 for the year ended December 31,
2007, compared to $178,192 in 2006. The increase is explained by acquisitions of
equipment during the year of approximately $150,000 and the change in the
amortization rates, from 30% in 2006 to 50% in 2007 and from 20% to 33% for
computer equipment and for furniture respectively.





Amortization
of intangible assets





2008
as compared to 2007





Amortization
of intangible assets stood at $1,019,159 in 2008 compared to $1,991,286 in 2007.
The decrease is explained by the write-downs of intangible assets of $1,985,470
recorded in Q4 2007.





2007
as compared to 2006





For the
fiscal year ended December 31, 2007, amortization of intangible assets decreased
to $1,991,286 from $2,067,009 in 2006. The decrease is explained by the
write-down of intangible assets recorded in Q3 2006 of $413,238.





Write-downs
and settlement costs





2008
as compared to 2007





For the
twelve-month period ended December 31, 2008, write-down and settlement costs
totalled $4,432,264 compared to $10,146,311 in 2007.





The
variance is mainly explained by the write-downs of goodwill and intangible
assets related to the acquisition of Copernic Technologies Inc. of $4,327,000 in
2008 compared to $9,200,000 in 2007.  Also, in 2007 the Company
recorded a write-down of goodwill of $846,310 in relation to the acquisition of
FocusIN.





In 2008,
faced with improved competitive offerings the underlying core technology in
Copernic desktop search needed to be significantly enhanced and therefore, the
Company concluded, based on the assessment of the fair value of the Company’s
assets related to the software unit that the assets had suffered a loss in value
and the fair values of goodwill and intangible assets were less than the
carrying value for these assets.





2007
as compared to 2006





In 2007,
write-downs and settlement costs amounted to $10,146,311 compared to $1,683,238
for the same period last year.





In Q4
2007, the Company recorded write-downs of goodwill and intangible assets related
to Copernic Technologies Inc.’s acquisition of respectively $7,214,531 and
$1,985,470. The Company’s software unit was facing delays in execution and
changes of market conditions of its commercial deployment
solutions.  Based on the assessment of the fair value of the Company’s
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of goodwill and intangible assets
were significantly less than the carrying value for these assets.





In Q4
2007, the Company reported decreased revenues due to industry pressures on
advertising rates, slow down in sponsored clicks and a general decrease for all
graphic ads.  Based on the Company assessment of the fair value of its
assets related to search / media unit, the Company concluded that the goodwill
had suffered a loss in value and the fair value of the related goodwill was
significantly less then its carrying value.  Therefore, a write-down
of goodwill of $846,310 for search / media unit was recorded in 2007 to bring it
to nil.





Also in
Q4 2007, based on its assessment of the fair value of the Company’s investment
in LTRIM, the Company concluded that its investment had suffered a loss in value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.





These
expenses were offset by the reversal of $50,000 of class action settlement
costs.


34


In 2006,
the Company recorded class action settlement and closure costs of $700,000,
write-downs of property and equipment and intangible assets related to graphic
advertising for a total of $413,238 and a write-down of LTRIM’s investment of
$570,000.





Restructuring
charges





2008
as compared to 2007





In order
to reduce its costs, the Company has decided to close its Montreal office in Q1
2009 and concentrate all its activity in Quebec City.





The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company recorded $101,012 as restructuring
costs.





Interest
and other income





2008
as compared to 2007





Interest
income and other income decreased to $162,880 in 2008 from $401,183 in 2007. The
decrease reflected lower liquidities and lower interest rates in
2008.





2007
as compared to 2006





Interest
and other income stood at $401,183 in 2007 compared to $415,950 in
2006.





Loss
(gain) on foreign exchange





Gain on
foreign exchange totalled $24,440 for the year ended December 31, 2008 compared
to a loss of $115,071 in 2007 and $82,203 in 2006.





The gain
in foreign exchange is mainly due to the depreciation of the Canadian dollar in
2008.





Recovery
of income taxes





For the
fiscal year 2008, the recovery for current and future income taxes amounted to
$390,043 compared to $1,248,974 in 2007 and $729,053 in 2006.





In 2008,
the recovery of income taxes is explained by current income taxes paid of $522
and the reversal of $390,565 of future income taxes due to current amortization
and write-downs of Copernic Technologies Inc.’s intangible assets.





In 2007,
the recovery of income taxes is explained by current income tax paid of $1,479
and the reversal of $1,250,453 of future income tax liability due to the current
amortization and write-downs of Copernic Technologies Inc.’s intangible
assets.





In 2006,
the recovery of future income taxes is explained by a recovery of previous
year’s income tax for $4,876 and the reversal of $724,177 of future income tax
liability related to the amortization of Copernic Technologies Inc.’s intangible
assets.





Loss
from continuing operations and loss per share from continuing
operations





The
Company reported a loss from continuing operations of $6,490,704 ($0.44 per
share) in 2008, compared to a loss of $14,430,826   ($0.99 per
share) in 2007 and a loss of $4,358,708 ($0.31 per share) in 2006.





Results
of discontinued operations and loss per share from discontinued
operations





Results
from discontinued operations for Digital Arrow are nil in 2008 and 2007 compared
to contribution to earnings of $89,328 ($0.01 per share) in 2006.





In 2006,
the contribution of Digital Arrow was due to a reversal of a reserve for salary
expenses after a settlement with two former employees and a reversal of the
provision for remaining restructuring costs.





35


Loss
for the year





The loss
for the year totalled $6,490,704 ($0.44 per share) in 2008 compared to a loss of
$14,430,826 ($0.99 per share) in 2007 and a loss of $4,269,380 ($0.30 per share)
in 2006. For 2008, 2007 and 2006, there is no difference between net loss under
US GAAP as compared to Canadian GAAP.





Liquidity
and capital resources





As at
December 31, 2008, the Company had liquidities of $5,072,932 which were composed
of $2,067,705 in cash and cash equivalents and $3,005,227 in temporary
investments compared to $6,872,412 in 2007 which consisted of $2,099,560 in cash
and cash equivalents, restricted cash of $807,468 and $3,965,384 in temporary
investments. For the year ended December 31, 2008, working capital was
$5,051,474 compared to $6,413,044 for the previous year.





Operating
activities





In 2008,
the cash used for operating activities of $1,720,571 is explained by the loss
from continuing operations net of non-cash items of $1,281,463 and net change in
non-cash working capital items of $439,108.





In 2007,
the cash used for operating activities of $1,527,890 is mainly due to the loss
from continuing operations net of non-cash items of $2,518,048 offset by net
change in non-cash working capital items of $990,158. The cash used for
discontinued operations in 2007 totalled $6,253.





In 2006,
the cash used is explained by the loss from continuing operations net of
non-cash items of $1,343,253 offset by net change in non-cash working capital
items of $515,619. The cash used for discontinued operations in 2006 stood at
$83,948.





Investing
activities





In 2008,
investing activities provided cash of $939,224 explained by the decrease of
temporary investments of $960,157 offset by the purchases of property and
equipment and intangible assets of $20,933.





In 2007,
investing activities provided cash of $1,408,367 mainly explained by the
decrease of temporary investments of $1,626,458 offset by the purchases of
property and equipment and intangible assets of $218,091.





In 2006,
investing activities used cash of $1,326,652 mainly explained by the purchase of
temporary investments of $1,578,530 offset by a reimbursement related to
Copernic Technologies Inc.’s business acquisition of $379,382 and purchases of
intangible assets and property and equipment of $127,504.





Financing
activities





In 2008,
financing activities used cash of $57,976 for the repayment of obligations under
capital leases.





In 2007,
financing activities provided cash totalling $676,258 from issuance of capital
stock upon exercise of options offset by repayment of obligations under capital
leases of $23,071.





In 2006,
no cash was provided by, nor used in the financing activities of the
Company.





Liquidity
and capital resources





The
Company considers that its liquidities will be sufficient to meet normal
operating requirements until the end of 2009. It has no plans for a significant
capital expenditures program nor does it view its Notice of Intention to
purchase up to 700,000 common shares as material in the light of its current
cash position. Furthermore, the company intends to fund its growth through
internal cash generation and has no plans to enter into debt or equity financing
at this time. In the long term, the Company may take advantage of favourable
market conditions to gain additional liquidity to fund growth, which could
include additional equity offerings or debt financing.





Concentration
of credit risk with customers





As at
December 31, 2008, four customers represented 52% of our accounts receivable
compared to 54% from four customers for the previous year resulting in a
significant concentration of credit risk. Management monitors the evolution of
these customers closely in order to rapidly identify any potential problems.
These customers, which represented more than 10% of the Company’s net accounts
receivable, have paid accounts receivable as per their commercial agreements.
The Company also monitors the other accounts receivable


36


and there
is no indication of credit risk deterioration. Nevertheless we cannot assure
that we can retain the business of these customers or that their business will
not decline generally in the future.





Q4
2008 Results





Revenues





Revenues
for the three-month period ended December 31, 2008 (“Q4”) totalled $1,909,648
compared to $1,654,352 for the same period in 2007, an increase of $255,296 or
15%. The increase is mainly explained by software licensing.





Search
and graphic advertising revenues went from $1,446,167 in Q4 2007 to $1,435,148
in Q4 2008, a decrease of $11,019. In Q4 2008, the revenues decrease was offset
partially by the reversal of old prepayments of $80,000.





Software
licensing stood at $325,025 in Q4 2008 compared to $85,751 in Q4 2007, an
increase of $239,274. The increase is mainly due to the launch of new products
“CDS Corporate Edition” and “CDS Pro”.





Customized
development and maintenance support revenues generated $149,475 in Q4 2008
compared to $122,434 for the same period last year, an increase of
$22,041.





Expenses





Cost
of revenues





In Q4
2008, cost of revenues represented $601,519 or 42% over search and graphic
advertising revenues, compared to $543,763 or 38% over search and graphic
advertising revenues for the same period in 2007.





In Q4
2008, search and graphic advertising payouts totalled $552,605 compared to
$433,514 for the same period last year, representing 39% and 30% of search and
graphic revenues respectively.  In 2007, payouts were reduced by the
reversal of old inactive payables of $79,342. Excluding the adjustment, the
percentage of payouts over revenue would have been 35%. In 2008, the percentage
of payouts was increased to retain partners with good quality
traffic.





The
bandwidth costs were $48,914 in Q4 2008 compared to $110,249 for the same period
in 2007.  In Q4 2007, two new data centers were opened in Canada and
were run in parallel with the ones located in the US. The data centers located
in the US were shut down in Q2 2008.





Marketing,
sales and services





In Q4
2008, marketing, sales and services expenses decreased to $160,802 from $480,531
in Q4 2007, a decrease of $319,729. The variance is mainly explained by the
decrease in salaries and fringe benefits and stock-based compensation of
respectively $173,000 and $47,000, a decrease in purchase of algorithmic
contents and professional services by respectively $25,000 and $21,000. Other
expenses also decreased by $54,000 in Q4 2008.





General
and administration





General
and administrative expenses in Q4 2008 totalled $525,309 as compared to
$1,020,709 for the same period last year, a decrease of $495,400 or 49%. The
variance is explained by a decrease in professional fees of $258,000 a decrease
in salaries, stock-based compensation, investor relation and other expenses of
respectively $79,000, $60,000, $34,000 and $64,000.





Product
development and technical support





Product
development and technical support expenses amounted to $332,145 in Q4 2008,
compared to $651,830 for the same period last year, a decrease of $319,685 or
49%. The decrease is explained by the decrease in salaries and other employment
costs of $220,000 and a decrease in stock-based compensation of $75,000 due
lower headcount.





Amortization
of property and equipment





Amortization
of property and equipment totalled $55,353 in Q4 2008, compared to $119,220 for
the same period last year. The decrease is explained by lower net book value at
the beginning of the year.





37


Amortization
of intangible assets





Amortization
of intangible assets decreased to $254,746 in Q4 2008, compared to $511,384 for
the same period last year.  The decrease is explained by the
write-downs of intangible assets at the end of Q4 2007.





Write-downs,
settlement and other costs





In Q4
2008, write-downs and settlement costs amounted to $ 4,410,733 compared to
$10,146,311 in Q4 2007.





The
variance is mainly explained by the write-downs of goodwill and intangible
assets related to the acquisition of Copernic Technologies Inc. of $4,327,000 in
2008 compared to $9,200,000.  Also, in 2007 the Company recorded a
write-down of goodwill of $846,310 in relation to the acquisition of
FocusIN.





In 2008,
still facing delays in execution and changes of market conditions of its
commercial deployment solutions, the Company concluded, based on the assessment
of the fair value of the Company’s assets related to the software unit that the
assets had suffered a loss in value and the fair values of goodwill and
intangible assets were less than the carrying value for these
assets.





Restructuring
charges





In Q4
2008, $69,621 was recorded as restructuring charges in relation with the
Company’s decision to close its Montreal office in Q1 2009.





Interest
and other income





Interest
income and other income decreased to $40,762 in Q4 2008 from $74,078 in Q4 2007.
The decrease is explained by lower liquidities during Q4 2008 compared to the
same period last year.





Loss
(gain) on foreign exchange





Gain on
foreign exchange totalled $18,218 for Q4 2008, compared to a loss of $41,164 for
the same period last year mainly due to the depreciation of the Canadian dollar
in Q4 2008.





Income
taxes





The
recovery of future income taxes relates to the amortization of intangible assets
which does not have the same asset base for accounting and tax
purposes.  Recovery of future income taxes totalled $181,163 in Q4
2008, compared to $796,401 for the same period last year.  In 2007,
the recovery for income taxes included a more significant reversal of future
income taxes liability in relation with the write-downs of intangible assets in
Q4 2007 compared to Q4 2008.





Loss
and loss per share





Loss for
the three-month period ended December 31, 2008, totalled $4,260,437 ($0.29 per
share), compared to a loss of $10,990,081 ($0.75) per share for the same period
last year.





Off-balance
sheet arrangements





As at
December 31, 2008 and 2007, the Company has no off-balance sheet
arrangements.





Contractual
obligations, contingent liabilities and commitments





The
following table summarizes our contractual obligations as at December 31, 2008,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods:





Operating
      leasesYears:
            $2009
            249,0002010
            46,0002011
            27,0002012
            18,0002013
            -





38


The
Company maintains director and officer insurance, which may cover certain
liabilities arising from its obligation to indemnify its directors, and officers
and former directors, officers and employees of acquired companies, in certain
circumstances. It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each
particular agreement. Such indemnification agreements may not be subject to
maximum loss clauses. Historically, the Company has not incurred material costs
as a result of obligations under these agreements and it has not accrued any
liabilities related to such indemnification obligations in its financial
statements.





As at
December 31, 2008, the Company has change of control agreements with certain
executive officers and a few employees.  If there is a change of
control of the Company and their employments are not required, the Company will
have to pay lump sums up to a maximum of $614,181 for these specific
people.





Subsequent
Events





On
January 28, 2009, the Board of Director’s unanimously approved an adjustment to
Mr. David Goldman’s consultancy agreement, to which David Goldman concurred,
that the change of control clause is amended to an entitlement to the lesser of
$300,000 or 3% of the transaction triggering a change of control. The Board
further specified that the resulting payment would be made in the same currency
as the transaction itself. The previous agreement stipulated that in the case of
change of control, David Goldman was entitled to receive a lump sum payment
equal to the greater of the past 24 months consulting payments or
CDN$300,000.





On
February 2, 2009, the Company sold 5,200,000 shares of TECE Inc. for CDN
$208,000.  The Company’s investment in TECE Inc. was completely
written off in 2001.





On
February 3, 2009, a lawsuit was filed against the Company by one former officer.
The plaintiff alleges an unlawful dismissal by the Company and seeks damages
amounting to CDN $256,775. The Company denies the allegations against it,
believes that the claim is without merit, and intends to defend
itself.





On March
4, 2009 the Company announced thatClaire
Castonguay, Vice President, Finance and Controller will terminate her employment
with the Company at the end of the quarter consistent with the closure of the
Montreal office at that time. Jean-Rock Fournier, Vice President Finance since
the beginning of the quarter and also located in Quebec City will assume the
duties of Chief Financial Officer, effective March 31st. Mr.
Fournier is a  Chartered Accountant since 2000, practiced public
accounting with KPMG, and has been Vice President Finance with Axion
Technologies and PGI, both companies in the Information Technology
sector.




Risks
and uncertainties







Copernic
Inc.’s Management considers that these following factors, among others, should
be considered in evaluating its future results of operations.





Our
revenues depend to some degree on our relationship with one customer, the loss
of which would adversely affect our business and results of
operations.





For the
year ended December 31, 2008, approximately 13% of our revenues were derived
from an agreement with our largest customer. Revenues from this customer
represented 14% of our revenues in 2007 and 11% of our revenues in 2006.
Although we monitor our accounts receivable for credit risk deterioration and
this customer has been paying its payables to Copernic Inc. in accordance with
the terms of its agreement with the Company, there can be no assurance that it
will continue to do so or that it will continue to do so at the volume of
business it has done historically. Our loss of this customer’s business would
adversely affect our business and results of operations.





Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.





Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions.  Our
quarterly and annual expenses as a percentage of our revenues may be
significantly different from our historical or projected rates. Our operating
results in future quarters may fall below expectations. Any of these events
could cause our stock price to fall. Each of the risk factors listed in this
“Risk Factors” section, and the following factors, may affect our operating
results:




·
              Our
      ability to continue to attract users to our Web sites.·
              Our
      ability to monetize (or generate revenue from) traffic on our Web sites
      and our network of advertisers’ Web
sites.
 ·
              Our
      ability to attract advertisers.


39






·
            The
      amount and timing of operating costs and capital expenditures related to
      the maintenance and expansion of our businesses, operations and
      infrastructure.


·
            Our
      focus on long term goals over short term
  results.


·
            The
      results of any investments in risky
projects.


·
            Payments
      that may be made in connection with the resolution of litigation
      matters.


·
            General
      economic conditions and those economic conditions specific to the Internet
      and Internet advertising.


·
            Our
      ability to keep our Web sites operational at a reasonable cost and without
      service interruptions.


·
            Geopolitical
      events such as war, threat of war or terrorist
  actions.


·
            Our
      ability to generate CDS revenues through licensing and revenue
      share.





Because
our business is changing and evolving, our historical operating results may not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also, user
traffic tends to be seasonal.





We
rely on our Web site partners for a significant portion of our net revenues, and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our business.





We
provide advertising, Web search and other services to members of our partner Web
sites. We consider this network to be critical in the future growth of our
revenues. However, some of the participants in this network may compete with us
in one or more areas. Therefore, they may decide in the future to terminate
their agreements with us. If our Web site partners decide to use a competitor’s
or their own Web search or advertising services, our revenues would
decline.





We
face significant competition from Microsoft, Yahoo, Google and
Ask.com.





We face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com. Microsoft, Yahoo, Google
and Ask.com have a variety of Internet products, services and content that
directly compete with our products, services, content and advertising
solutions.  We expect that Microsoft will increasingly use its
financial and engineering resources to compete with us.





Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing more aggressively for advertisers and Web sites. Microsoft and Yahoo
also may have a greater ability to attract and retain users than we do because
they operate Internet portals with a broad range of products and services. If
Microsoft, Yahoo, Google or Ask.com are successful in providing similar or
better Web search results compared to ours or leverage their platforms to make
their Web search services easier to access than ours, we could experience a
significant decline in user traffic. Any such decline in user traffic could
negatively affect our net revenues.





We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.





In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search for
information about products and services.  Barriers to entry in our
business are generally low and products, once developed, can be distributed
quickly and to a wide range of customers at a reasonably low cost.





We also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours, the
user may find it more convenient to use the services of the access provider or
manufacturer. In addition, the access provider or manufacturer may make it hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.









40


We
face competition from traditional media companies, and we may not be included in
the advertising budgets of large advertisers, which could harm our operating
results.





In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our operating
results would be harmed.





Our
revenues declined in 2008 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the future.





We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin on
revenues we generate from our partner Web sites is generally significantly less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the margin we earn on revenues generated from our partner Web
sites could decrease in the future if our partners require a greater portion of
the advertising fees.





If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive, and our revenues and operating results
could suffer.





Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences or
industry changes, or if we are unable to modify our products and services on a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received in
the market place.  As search technology continues to develop, our
competitors may be able to offer search results that are, or that are perceived
to be, substantially similar or better than those generated by our search
services. This may force us to compete on bases in addition to quality of search
results and to expend significant resources in order to remain
competitive.





Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers will
be impaired and our business and operating results will be harmed.





We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining and
enhancing the Company’s brands is critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.





We
generated a significant portion of our revenues in 2008 from our advertisers.
Our advertisers can generally terminate their contracts with us at any time.
Advertisers will not continue to do business with us if their investment in
advertising with us does not generate sales leads, and ultimately customers, or
if we do not deliver their advertisements in an appropriate and effective
manner.





New
technologies could block our ads, which would harm our business.





Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.





We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.


41


If we are
unable to remain competitive and provide value to our advertisers, they may stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.





We
make investments in new products and services that may not be
profitable.





We have
made and will continue to make investments in research, development and
marketing for new products, services and technologies.  Our success in
this area depends on many factors including our innovativeness, development
support, marketing and distribution.  We may not achieve significant
revenue from a new product for a number of years, if at all.  For the
years 2007 and 2008, we did not generate significant revenues from licensing
Copernic® software and we cannot assure you that we will generate significant
revenue from the licensing of Copernic® software going forward. In addition, our
competitors are constantly improving their competing software, and if we fail to
innovate and remain competitive our revenues from software licensing will
decline.





Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.





·  Our
Common Shares are subject to significant price and volume fluctuations, some of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular, have
experienced volatility that often has been unrelated to the operating
performance of such companies.  These broad market and industry
fluctuations have adversely affected the price of our stock, regardless of our
operating performance.





On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company.  The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”).  Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance.  If, at any time before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement.  If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted.  At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.





On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.





The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.





Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it will, upon reinstatement of the rules, still have this number
of days, or until March 19, 2009, to regain compliance. The company can regain
compliance, either during the suspension or during the compliance period
resuming after the suspension, by achieving a $1 closing bid price for a minimum
of 10 consecutive trading days”.





On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify


42


those
that regain compliance with these requirements during the suspension. NASDAQ
will continue to monitor closely these circumstances.” The Company had 59
calendar days remaining in its compliance period, therefore, with the new
extension, it has until June 18, 2009 to effect compliance.








As at
December 31, 2008, the Company’s closing stock price was at $0.13.





Infringement
and liability claims could damage our business.





Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services for
these members.





With
respect to any intellectual property rights claim, to resolve these claims, we
may enter into royalty and licensing agreements on less favorable terms, pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating
results.





In
addition, we may be liable to third-parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.





Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology or
business. For example, we understand that Overture Services, Inc. (acquired by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement.  While it is our understanding that the lawsuits
against MIVA and Google have been settled, there is no guarantee Overture (owned
by Ask.com) will not pursue its alleged patent rights against other companies.
In addition, X1 has won a patent to provide search results as you type a
function utilised by other companies including Copernic Inc.





An
inability to protect our intellectual property rights could damage our
business.





We rely
upon a combination of trade secret, copyright, trademark, patents and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights.  Additionally, the
absence of harmonized patent laws between the United States and Canada makes it
more difficult to ensure consistent respect for patent
rights.  Although senior management believes that our services and
products do not infringe on the intellectual property rights of others, we
nevertheless are subject to the risk that such a claim may be asserted in the
future. Any such claims could damage our business.





Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2008. Working
capital may be inadequate.





For the
years ended December 31, 1999 through the year ended December 31, 2003 and for
the years ended December 31, 2005 to December 31, 2008, we have reported net
losses and net losses per share. We have been financing operations mainly from
funds obtained in several private placements, and from exercised warrants and
options. Management considers that liquidities as at December 31, 2008 will be
sufficient to meet normal operating requirements throughout 2009. In the long
term, we may require additional liquidity to fund growth, which could include
additional equity offerings or debt finance. No assurance can be given that we
will be successful in getting required financing in the future.




43


Goodwill
may be written-down in the future.





Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $3.0M as at
December 31, 2008, may be written-down in the future which could adversely
affect our financial position.





Long-lived
assets may be written-down in the future.





The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amount to
approximately $1.2M as at December 31, 2008, may be written-down in the
future.





Reduced
Internet use may adversely affect our results.





Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of our Common Shares may decline. The success of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.





Our
business depends on the continued growth and maintenance of the Internet
infrastructure.





The
success and availability of our internet based products and services depend on
the continued growth, maintenance and use of the Internet.  Spam,
viruses, worms, spyware, denial of service attacks, phishing and other acts of
malice may affect not only the Internet’s speed and reliability but also its
desirability for use by customers.  If the Internet is unable to meet
these threats placed upon it, our business, advertiser relationships, and
revenues could be adversely affected.





Our
long-term success may be materially adversely affected if the market for
e-commerce does not grow or grows slower than expected.





Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of


e-commerce,
including the following:





·
            the
      network infrastructure necessary for substantial growth in Internet usage
      may not develop adequately or our performance and reliability may
      decline;


·
            insufficient
      availability of telecommunication services or changes in telecommunication
      services could result in inconsistent quality of service or slower
      response times on the Internet;


·
            negative
      publicity and consumer concern surrounding the security of e-commerce
      could impede our growth; and


·
            financial
      instability of e-commerce
customers.





Security
breaches and privacy concerns may negatively impact our business.





Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business to a
risk of loss or litigation and possible liability. We cannot assure you that the
measures in place are adequate to prevent security breaches.


44


If we
fail to detect click fraud or other malicious applications or activity of
others, we could lose the confidence of our advertisers as well as face
potential litigation, government regulation or legislation, thereby causing our
business to suffer.





We are
exposed to the risk of fraudulent clicks on our ads and other clicks that
advertisers may perceive as undesirable. Click fraud occurs when a person clicks
on an ad displayed on a Web site for a reason other than to view the underlying
content. These types of fraudulent activities could hurt our brands. If
fraudulent clicks are not detected, the affected advertisers may experience a
reduced return on their investment in our advertising programs because the
fraudulent clicks will not lead to potential revenue for the
advertisers.  Advertiser dissatisfaction with click fraud and other
traffic quality related claims has lead to litigation and possible governmental
regulation of advertising. Any increase in costs due to any such litigation,
government regulation, or refund could negatively impact our
profitability.





Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.





There is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers, which can result in our
search engine pages producing poor results. We take this problem very seriously
because providing relevant information to users is critical to our success. If
our efforts to combat these and other types of manipulation are unsuccessful,
our reputation for delivering relevant information could be diminished. This
could result in a decline in user traffic, which would damage our
business.





Our
business is subject to a variety of U.S. and foreign laws that could subject us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.





The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our
business.





The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.





Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on our
part to comply with these regulations may subject us to additional
liabilities.





If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.





Web sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by any
reduction or limitation in the use of cookies. If the use or effectiveness of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies


45


designed
to collect Internet usage information may subject us to litigation or
investigations in the future. Any litigation or government action against us
could be costly and time-consuming, could require us to change our business
practices and could divert management’s attention.





Increased
regulation of the Internet may adversely affect our business.





If the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.





Changes
in key personnel, labour availability and employee relations could disrupt our
business.





Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be no
assurance that we will be able to retain our existing personnel or that we will
be able to recruit new personnel to support our business objectives and plans.
Currently, none of our employees are unionized. There can be no assurance,
however, that a collective bargaining unit will not be organized and certified
in the future. If certified in the future, a work stoppage by a collective
bargaining unit could be disruptive and have a material adverse effect on us
until normal operations resume.





Possible
future exercise of warrants and options could dilute existing and future
shareholders.





As at
March 25, 2009, we had 646,392 warrants at a weighted average exercise price of
$15.60 expiring from April to July 2009 and 693,993 stock options at a weighted
average exercise price of $1.54 outstanding. As at March 25, 2009, the exercise
prices of all outstanding warrants and options, were higher than the market
price of our Common Shares. When the market value of the Common Shares is above
the respective exercise prices of all options and warrants, their exercise could
result in the issuance of up to an additional 1,320,385 Common Shares. To the
extent such shares are issued, the percentage of our Common Shares held by our
existing stockholders will be reduced. Under certain circumstances the
conversion or exercise of any or all of the warrants or stock options might
result in dilution of the net tangible book value of the shares held by existing
Company stockholders. For the life of the warrants and stock options, the
holders are given, at prices that may be less than fair market value, the
opportunity to profit from a rise in the market price of the shares of Common
Shares, if any. The holders of the warrants and stock options may be expected to
exercise them at a time when the Company may be able to obtain needed capital on
more favourable terms. In addition, we reserve the right to issue additional
shares of Common Shares or securities convertible into or exercisable for shares
of Common Shares, at prices, or subject to conversion and exercise terms,
resulting in reduction of the percentage of outstanding Common Shares held by
existing stockholders and, under certain circumstances, a reduction in the net
tangible book value of existing stockholders’ Common Shares.





Strategic
acquisitions and market expansion present special risks.





A future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of our currently outstanding
securities, any one of which would reduce the benefits expected from such
acquisition and/or might negatively affect our results of operations. We may not
be able to successfully address these problems. We also face competition
from other acquirers, which may prevent us from realizing certain desirable
strategic opportunities.





We
do not plan to pay dividends on the Common Shares.





The
Company has never declared or paid dividends on its shares of Common Shares. The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.





Rapidly
evolving marketplace and competition may adversely impact our
business.





The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the


46


Company
will depend on its ability to adapt to its rapidly evolving marketplaces. There
can be no assurance that the introduction of new products and services by others
will not render our products and services less competitive or obsolete. We
expect to continue spending funds in an effort to enhance already
technologically complex products and services and develop or acquire new
products and services. Failure to develop and introduce new or enhanced products
and services on a timely basis might have an adverse impact on our results of
operations, financial condition and cash flows. Unexpected costs and delays are
often associated with the process of designing, developing and marketing
enhanced versions of existing products and services and new products and
services. The market for our products and services is highly competitive,
particularly the market for Internet products and services which lacks
significant barriers to entry, enabling new businesses to enter this market
relatively easily. Competition in our markets may intensify in the future.
Numerous well-established companies and smaller entrepreneurial companies are
focusing significant resources on developing and marketing products and services
that will compete with the Company’s products and services. Many of our current
and potential competitors have greater financial, technical, operational and
marketing resources. We may not be able to compete successfully against these
competitors. Competitive pressures may also force prices for products and
services down and such price reductions may reduce our revenues.





To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some of
the economic value in U.S. dollar terms.





Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations, more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs are
inherently risky and we could lose money as a result of poor
trades.  In 2008, revenues were decreased by approximately $101,000
and total expenses were increased by $50,000 resulting in a net loss $151,000
due to the fluctuation of foreign currencies.





Higher
inflation could adversely affect our results of operations and financial
condition.





We do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.





Our future growth significantly
depends to a high degree on our ability to successfully commercialize the
Copernic Desktop Search®product, and any failure or delays
in that commercialization would adversely affect our business and results of
operations.





On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications and
as a multi-channel online marketing services provider.  Although we
have high expectations for the Copernic Desktop Search® (CDS) award-winning
product, to date our program to commercialize that product through licensing to
large ISP’s and Internet Portals has not generated significant revenue and we
cannot guarantee we will obtain such significant licensing revenue in the
future. However in 2008, we have generated subscription sales of $636,893
through new products and sales channel expansion which appears to have reversed
the previous trend.





Controls
and Procedures





Disclosure
Controls and Procedures





We are
responsible for establishing and maintaining a system of disclosure controls and
procedures, as defined in Rule 13a-15 (e) under the Securities Exchange Act of
1934, (the “Exchange Act”) designed to ensure that information we are required
to disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





We
carried out an evaluation, under the supervision of and with the participation
of our management, including our Chief Executive Officer and Vice President
Finance, as to the effectiveness of our disclosure controls and procedures as of
December 31, 2008.





Based
upon that evaluation, our Chief Executive Officer and Vice President Finance
concluded that our disclosure controls and procedures were effective as of
December 31, 2008.


47





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) of the Exchange Act as a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Projections of any assessment of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.  Our
management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this evaluation, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control — Integrated
Framework.”





Based on
our evaluation under the framework in Internal Control-Integrated Framework,
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.





It should
be noted that while management believes that current disclosure and internal
controls and procedures provide a reasonable level of assurance, it cannot be
expected that existing disclosure controls and procedures or internal financial
controls will prevent all human error and circumvention or overriding of the
controls and procedures.  A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.





Capital
Stock Information





The
following table discloses the Company’s outstanding share data:





Number
      of issued and
              outstanding
      common
              shares
      as at March 25,
              2009
            Book
      value as at
              December
      31, 2008
              under
      Canadian
              GAAP
            Book
      value as at
              December
      31, 2008
              under
      US GAAP14,637,531
            $96,556,485
            $113,326,055




As at
March 25, 2009, the Company also had 646,392 warrants and 693,993 stock options
outstanding.






48




Forward-Looking
Statements




Information
contained in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements, which can be
identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “desires,” “will,” “should,” “projects,” “estimates,”
“contemplates,” “anticipates,” “intends,” or any negative such as “does not
believe” or other variations thereof or comparable terminology.  No
assurance can be given that potential future results or circumstances described
in the forward-looking statements will be achieved or occur.  Such
information may also include cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the
projections and other expectations described in such forward-looking
statements.  Prospective investors, customers, vendors and all other
persons are cautioned that forward-looking statements are not assurances,
forecasts or guarantees of future performance due to related risks and
uncertainties, and that actual results may differ materially from those
projected. Factors which could cause results or events to differ from current
expectations include, among other things:  the severity and duration
of the adjustments in our business segments; the effectiveness of our
restructuring activities, including the validity of the assumptions underlying
our restructuring efforts; fluctuations in operating results; the impact of
general economic, industry and market conditions; the ability to recruit and
retain qualified employees; fluctuations in cash flow; increased levels of
outstanding debt; expectations regarding market demand for particular products
and services and the dependence on new product/service development; the ability
to make acquisitions and/or integrate the operations and technologies of
acquired businesses in an effective manner; the impact of rapid technological
and market change; the impact of price and product competition; the
uncertainties in the market for Internet-based products and services; stock
market volatility; the trading volume of our stock; the possibility of delisting
our stock since the Company may not satisfy the requirements for continued
listing on the NASDAQ Capital Market including whether the minimum bid price for
the stock falls below $1; and the adverse resolution of
litigation.  For additional information with respect to these and
certain other factors that may affect actual results, see the reports and other
information filed or furnished by the Company with the United States Securities
and Exchange Commission (“SEC”) and/or the Ontario Securities Commission (“OSC”)
respectively accessible on the Internet at www.sec.gov and www.sedar.com, or the
Company’s Web site at www.copernic-inc.com.  All
information contained in these audited financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
qualified in its entirety by the foregoing and reference to the other
information the Company files with the OSC and SEC. Unless otherwise required by
applicable securities laws, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.





Period-to-Period
Comparisons





A
variety of factors may cause period-to-period fluctuations in the Company’s
operating results, including business acquisitions, revenues and expenses
related to the introduction of new products and services or new versions of
existing products, new or stronger competitors in the marketplace as well as
currency fluctuations. Historical operating results are not indicative of future
results and performance.


49


Selected
Annual Information





(In
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)








For
      the years ended December 31,
            
            
            2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $
            
            
            
            2005
              $
            
            
            
            2004
              $Revenues
            
            
            7,012
            
            
            
            8,116
            
            
            
            9,596
            
            
            
            9,444
            
            
            
            14,636Earnings
      (loss) from continuing operations
            
            
            (6,491
            )
            
            
            (14,431
            )
            
            
            (4,358
            )
            
            
            (3,343
            )
            
            
            371Results
      of discontinued operations, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            89
            
            
            
            (2,315
            )
            
            
            734Earnings
      (loss) for the year
            
            
            (6,491
            )
            
            
            (14,431
            )
            
            
            (4,269
            )
            
            
            (5,658
            )
            
            
            1,104Earnings
      (loss) per share from continuing operationsBasic
      and diluted
            
            
            (0.44
            )
            
            
            (0.99
            )
            
            
            (0.31
            )
            
            
            (0.27
            )
            
            
            0.03Net
      earnings (loss) per shareBasic
      and diluted
            
            
            (0.44
            )
            
            
            (0.99
            )
            
            
            (0.30
            )
            
            
            (0.46
            )
            
            
            0.10Total
      assets
            
            
            10,782
            
            
            
            18,358
            
            
            
            33,339
            
            
            
            38,327
            
            
            
            35,166








Quarterly
Financial Highlights





(in
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)


(unaudited)




2008
            
            
            2007Q4
              $
            
            
            
            Q3
              $
            
            
            
            Q2
              $
            
            
            
            Q1
              $
            
            
            
            Q4
              $
            
            
            
            Q3
              $
            
            
            
            Q2
              $
            
            
            
            Q1
              $Revenues
            
            
            1,910
            
            
            
            1,672
            
            
            
            1,721
            
            
            
            1,709
            
            
            
            1,654
            
            
            
            1,867
            
            
            
            1,953
            
            
            
            2,642Loss
      for the period
            
            
            (4,261
            )
            
            
            (622
            )
            
            
            (522
            )
            
            
            (1,086
            )
            
            
            (10,990
            )
            
            
            (975
            )
            
            
            (1,085
            )
            
            
            (1,381
            )Loss
      per share basic and diluted
            
            
            (0.29
            )
            
            
            (0.04
            )
            
            
            (0.04
            )
            
            
            (0.07
            )
            
            
            (0.75
            )
            
            
            (0.07
            )
            
            
            (0.07
            )
            
            
            (0.10
            )




50


ITEM
6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





DIRECTORS
      AND SENIOR MANAGEMENT


Following
is a table, which discloses the names, functions, areas of expertise within the
Company and present principal occupation(s) of the Company’s directors and
senior management.





Name
            
            Functions
      and areas
              of
      experience within
              the
      Company
            
            Present
      Principal Occupation(s)
            
            Date
      first elected
              Director
      or
              appointed
      Senior
              Officer
      of the
              CompanyMarc
      Ferland1
            
            Director
      and Officer
            
            President,
      and Chief Executive Officer and acting CFO
              Copernic
      Inc.
            
            September
      21, 2007Éric
      Bouchard2
            
            Officer
            
            Vice
      President - Products
              Copernic
      Inc.
            
            December
      22, 2005David
      Goldman
            
            Director
            
            Chairman,
              Copernic
      Inc.
              Director,
      SNC-Lavalin Group Inc. (an engineering and construction company listed on
      the Toronto Stock Exchange)
            
            May
      24, 2001Claude
      E. Forget
            
            Director
            
            Consultant
            
            October
      11, 1999Irwin
      Kramer
            
            Director
            
            President,
      iCongo, Inc.
              (an
      e-commerce and service company)
            
            May
      24, 2001Dr.
      David Schwartz
            
            Director
            
            Associate
      Professor, Bar Ilan
              University
              School
      of Business Administration
            
            May
      23, 2002Lawrence
      Yelin
            
            Director
            
            Attorney,
      Lawrence
      Yelin, Attorney
            
            September
      21, 2007Claire
      Castonguay
            
            Officer
            
            Vice
      President -  Finance and Controller
              Copernic
      Inc.
            
            September
      8, 2008Dennis
      Dion
            
            Officer
            
            Vice
      President - Sales
              Copernic
      Inc.
            
            November
      11, 2008Benoit
      Godbout
            
            Officer
            
            Vice
      President - Chief Technology Officer
              Copernic
      Inc.
            
            June
      17, 2008





Each
Director’s term of office expires at the earliest of the next annual meeting of
shareholders or his resignation as Director.





To the
knowledge of the Company, there is no family relationship among any of the
persons named in this Item 6, nor were any such persons selected as directors or
members of senior management pursuant to any arrangement or understanding with
major shareholders, customers, suppliers or others.





STATEMENT
OF CORPORATE GOVERNANCE PRACTICES





The
directors of the Company strongly believe that sound corporate governance is
essential to produce maximum value to shareholders. The following is a summary
of the governance practices of the Company.





The Board
of Directors has approved and adopted a document entitled “Responsibilities of
the Board of Directors and its three





1 Marc
Ferland is acting CFO until March 31, 2009.


2 Eric
Bouchard did not renew his employment contract which expired on December 31,
2008.


51


Committees”
which sets forth the responsibilities for the Board and these three committees.
That document is available on SEDAR at www.sedar.com. That
document includes the Board’s mandate, the Charters of the Board’s three
committees and the Company’s insider trading policy and code of
ethics.  The Company’s code of ethics is available on SEDAR at www.sedar.com.  In
accordance with the policies and guidelines outlined in that document, the Board
of Directors constantly strives to promote a culture of ethical conduct in an
effort to meet the highest industry standards.  All decisions are
carefully considered from this point of view and the Board of Directors does not
act until all factors have been adequately considered.  This approach
is expected of management and, to a relevant degree, all employees of the
Company.





1.
            Composition
      of the Board of Directors





More than
fifty percent of the directors of the Company are “independent” directors. An
independent director is independent of management and free of any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director’s ability to act in the best interest of the
Company, as required by the standards of the NASDAQ Stock Exchange® and the
Ontario Securities Commission.





The Chair
of the Board of Directors is David Goldman, who is not an independent director.
Mr. Goldman also sits on the board of directors of SNC-Lavalin Group Inc. The
Board feels strongly that Mr. Goldman’s abilities, extensive experience as a
director of listed companies and role in the Company make him best suited for
this position.  The Board will continue to consider whether or not the
position of Chairman should be occupied by an independent director and, if
circumstances change, will take action to adjust the composition of the Board
accordingly or appoint a lead director who is
independent.  Independent directors meet, when they deem it advisable,
through in camera sessions conducted after or during each meeting of the
Board.The
independent directors, when they deem it advisable, make recommendations to the
Board on various matters. The Board will continue to encourage regular meetings
of the independent directors through in camera sessions as it feels that it is a
good way to facilitate Board operations independently of management and to
maintain and improve the quality of governance.





The
directors consider the following nominees to be independent to the Company:
Claude E. Forget, Irwin Kramer, Dr. David Schwartz, and Lawrence
Yelin.  Through October 2, 2001, Claude E. Forget was Chief Executive
Officer of Intasys Billing Technologies, a subsidiary of the Company, whose
business was subsequently sold.  The Board of Directors has determined
that Marc Ferland and David Goldman are not independent because they are
officers of the Company.  Martin Bouchard is not independent because
he was President and Chief Executive Officer of the Company until March 3,
2008.





In June
2008, David Goldman resigned as an officer of the Company.





During
the 2008 fiscal year, the Board of Directors met 10 times and all of the
Directors attended all of the meetings.  Martin Bouchard attended 6 of
the meetings since he resigned on June 17, 2008.  During the 2008
fiscal year, there were no meetings of the independent directors.





The Board
of Directors’ mandate is set forth in the document entitled “Responsibilities of
the Board of Directors and its Three Committees,” which provides in pertinent
part:





It is the
explicit responsibility of the Board of Directors to assume the global
stewardship of the Company and to ensure itself of the pertinence and efficiency
of the key functions and of the following matters:





·
            Strategic
      planning.


·
            Financial
      management.


·
            Identification
      of the principal risks associated with the activities of the Company and
      the establishment of an appropriate system to manage these
      risks.


·
            Succession
      planning, including appointing, training and monitoring
      officers.


·
            The
      communications policy of the Company with its
  shareholders.


·
            The
      integrity of the Company’s internal control and management information
      systems.





The Board
has drawn up a written position description for the Chairman of the Board and
CEO.  The Chairman of a Board committee is mainly responsible for
overseeing how the committee is managed and that it effectively performs its
duties and to guide the committee in the performance of its charter mandate and
any other matter which the Board delegates to the committee.





The Board
ensures that each new director has the necessary abilities, expertise,
availability and knowledge to properly perform his duties and provides him with
the corporate information and documentation required to do
so.  Additional education of directors and information about our
activities is available upon request.


52


All
directors, officers and employees who have information giving them reasonable
grounds to believe that certain accounting practices or the auditing of the
Company are illegal or irregular, or that other violations of our Code of Ethics
have or are occurring, can and are encouraged to utilize the Company’s
Whistleblower Policy.





No
material change report that pertains to any conduct of a director or officer
that constitutes a departure from the Code of Ethics was filed during financial
year 2008.





Our Code
of Ethics clearly states that the directors and executive officers must avoid
any transaction or event which could give rise to a conflict of
interest.  If an event or transaction occurs in which a director has a
material interest, he must disclose his interest to the Board and refrain from
voting with respect to any matter related thereto.





The role
of the Nominating and Governance Committee is, among other things, to assess the
effectiveness of the Board, its committees and its directors.





2.
            Committees
      of the Board of Directors





The
Company maintains three standing committees: the Audit and Finance Committee,
the Nominating and Governance Committee and the Compensation
Committee.





As part
of its ongoing review of corporate governance matters, on March 29, 2006 the
Company’s Board of Directors approved Charters constituting a Compensation
Committee and a Nominating and Governance Committee to segregate the nominating
and executive compensation functions into separate Charters as required by the
standards of the NASDAQ Stock Exchange®.





Composition
of the Audit and Finance Committee





The
current members of the Audit and Finance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin all of whom are
independent. On March 29, 2006, the Board approved a new Charter of the Audit
and Finance Committee of the Company. The Charter provides that the Audit and
Finance Committee shall assist the Board in fulfilling its responsibilities
relating to corporate accounting and reporting practices of the Company and in
the quality and integrity of financial reports of the Company. The Audit and
Finance Committee meets with the financial officers of the Company, including
the Chief Financial Officer, and the independent auditors to review financial
reporting matters, the system of internal accounting controls and the overall
audit plan and examines the quarterly and year-end financial statements before
their presentation to the Board. In addition, the Audit Committee fixes the
compensation and other terms of engagement of the Company’s independent
auditors. In 2008, the Audit and Finance Committee met 7 times and the Company’s
independent auditors were present at 6 of these meetings.





Composition
of the Nominating and Governance Committee





The
current members of the Nominating and Governance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin.





The
Nominating and Governance Committee is responsible for, among other things,
overseeing and making recommendations to the Board on the following
matters:





(i)
            the
      search for and compensation of all senior executives and management of the
      Company and its subsidiaries, including periodic review of
      same;


(ii)
            the
      Company’s management structure and succession
  plans;


(iii)
            the
      recommendation of new candidates as potential directors of the Company and
      the assessment of the performance of current directors and committees;
      and


(iv)
            the
      review and recommendation of procedures to be followed with respect to
      corporate governance guidelines.





Composition
of the Compensation Committee





The
current members of the Compensation Committee are Irwin Kramer, Dr. David
Schwartz, Claude E. Forget and Lawrence Yelin.





The
Compensation Committee is responsible for, among other things, overseeing and
making recommendations to the Board on the following matters:





(i)
            the
      compensation of all senior executives and management of the Company and
      its subsidiaries, including periodic review of
  same;


(ii)
            the
      incentive plans for employees of the Company and its subsidiaries;
      and


(iii)
            the
      Company’s Stock Option Plan and the granting of stock options
      thereunder.


53




Report
on Executive Compensation







As part
of its ongoing dedication to creating shareholder value and promoting corporate
success, the Compensation Committee establishes executive compensation in order
to attract, retain and motivate key executives in the increasing competitive
Internet and information technology sectors and to reward significant
performance achievements.





Consistent
with the Company’s objectives, and in order to further align shareholder and
executive interests, the Compensation Committee places emphasis on base salary,
incentive compensation, discretionary bonus and long-term incentive compensation
by granting of stock options in establishing executive compensation.
Consequently, the standard executive compensation package of the Company is
composed of four major components: (i) base salary and benefits, (ii) short-term
incentive and (iii) long-term incentive compensation.





In making
compensation decisions with respect to each of these components, the
Compensation Committee considers external market data for executives. Towers
Perrin was retained by the Chair of the Compensation Committee in 2007, 2006 and
2005 to assist with preparing information and providing advice on officer and
Board of Director compensation arrangements. Materials prepared by Towers Perrin
have been presented by the Chair to the Compensation Committee for review and
decisions. Towers Perrin’s scope of services in the most recent fiscal year
included providing advice and market data related to Board of Director and
officer compensation arrangements, assisting with the design of special
compensation programs, and other general executive compensation assistance.
Towers Perrin does not provide any other services to the Company. The
Compensation Committee uses the compensation data from Towers Perrin as one of
several factors in determining the appropriate levels of base salary, short-term
and long-term incentives that fairly compensate the Company’s executive
officers.





In
setting the compensation package for executives, the Compensation Committee
balances consideration of base salary with short-term incentive compensation so
that a significant proportion of executive officers’ compensation is linked to
objectives aligned with the interests of the Company’s shareholders. The
compensation packages include:





i)           Salary
and Benefits





Salary
and benefits policies of the Company are determined by bench marking similar
businesses in the Internet sector and are targeted at the mid range in the
sectors, taking into account the economic trends, the Company’s competitive
position and performance and extraordinary contributions to the
Company.





ii)           Short-Term
Incentive Compensation





The
Company provides short-term cash incentive compensation to employees and
officers whose responsibilities and attainment of personal and Company
objectives exceed established expectations, based on individual contributions,
operating results, and financial performance. The amount of these payments is
approved by the Compensation Committee and is based on specific goals in these
areas. Incentive compensation targets for each individual are set during the
first quarter of each year.





In the
case of Named Executive Officers, as defined hereinafter under the heading
“Statement of Executive Compensation”, targeted incentive compensation varies in
proportion to base salary, depending primarily on the level of responsibility of
the individual. Generally,  bonuses are higher when operating results
and financial performance objectives are exceeded and when the objectives are
not met, the incentive bonuses are lower or nil depending on the circumstances
and the individual’s contribution to the Company.





The Board
of Directors, upon recommendation of the Compensation Committee, also may award
bonuses as deemed necessary to compensate management for circumstances where
warranted to reward extraordinary contributions to the Company not reflected in
our results of operations if and when deemed in the Company’s best
interest.





For the
year ended December 31, 2008, for all employees, no incentive compensation was
earned related to Company objectives as minimal financial targets were not
realized; however, some officers were paid bonuses based upon achieving Q2 and
Q4 2008 financial targets.





iii)           Long-Term
Incentive Compensation





The
long-term incentive component of the Company’s compensation program consists of
the stock option plan of the Company which provides for the issuance of options
to executive officers and other employees, directors or consultants to purchase
common shares of the Company. The stock option plan of the Company is described
below under the heading “Stock
Option Plan”.





The
Compensation Committee determines the executives, employees and directors
eligible for the granting of options pursuant to the stock option plan. It also
determines the size of each grant and the date on which each grant is to become
effective. The exercise price of options granted may not be less than the market
price of the Company’s common shares as traded on the NASDAQ Stock Exchange®
in


54


U.S.
dollars determined as of the date the options are granted. The number of options
granted annually to recipients is determined by the Compensation Committee on a
discretionary basis.





The
Compensation Committee may, in its discretion, determine when the options
granted under the stock option plan may be exercised or vested, provided that
the term of such options can not exceed ten (10) years.





Unless
otherwise stipulated by the terms of a stock option grant, which terms are
approved by the Compensation Committee, options granted pursuant to the stock
option plan will lapse thirty (30) days after the holder ceases to be employed
by the Company. In the event of death, any vested option of a holder lapses
three (3) months after his or her death. In the event that the holder’s
employment terminates due to disability, the holder may exercise the vested
options for one (1) year after the date of termination of employment. If the
holder is terminated for cause, vested options terminate
immediately.





In July
2007, the Company reviewed its stock option plan to assess its retention
potential for key employees. The review was initiated following the resignation
of a number of key employees due to a competitive labor market in the high tech
industry in the Quebec City region. PCI Perrault Consulting Inc. was retained by
the Chair of the Compensation Committee to assist with preparing information and
providing advice.





In light
of the above and consistent with the Company’s objectives to retain key
employees, the Board of Directors has, on September 18, 2007, reviewed and
accepted stock option grants to key employees that would vest on equal
increments over a three-year period.





At the
time that the Stock Option Plan was reviewed in July 2007, 1,400,000 Common
Shares were reserved for issuance under this plan. Taking into account options
that have been cancelled of forfeited, options to acquire a net total of 652,000
Common Shares have been granted on September 18, 2007 under the Stock Option
Plan. As of January 1, 2009, 622,384 Common Shares remain available for future
grants.





Conclusion





The
Company’s executive compensation policy links executive compensation to
corporate results and individual contribution, as well as stock performance and
long-term results. The Compensation Committee regularly reviews the various
executive compensation components to ensure that they maintain their
competitiveness in the industry and continue to focus on the Company’s
objectives, values and business strategies.





Depending
on specific circumstances, the Compensation Committee may also recommend
employment terms and conditions that deviate from the above described
policies.





Statement
of Executive and Board Compensation





In the
first half of 2008, the Directors received US $6,250 per quarter and US $1,000
per meeting in person and US $500 by phone. Per quarter, the Chairman of the
Board also received US $3,125, the Audit Committee Chairman received US $2,500
and of the other two Board Committees received US $1,250 each.  On
June 17th, 2008,
the Board reduced its compensation by US $1,250 per quarter in favour of the
grant of 19,000 stock options for each member and 24,000 for the Chairman all at
an exercise price of US $0.62 per share.





The
following summary table, presented in accordance with applicable securities
legislation, sets forth all compensation provided by the Company and its
affiliates for the fiscal years ended December 31, 2006, 2007 and 2008
to:





(i)
            the
      Chief Executive Officer;


(ii)
            the
      Chief Financial Officer;


(iii)
            each
      of the Company’s three most highly compensated executive officers, other
      than the Chief Executive Officer and the Chief Financial Officer, who were
      serving as executive officers at the end of December 31, 2008 and whose
      total salary and bonus exceeded CDN $150,000,
  and


(iv)
            such
      other individuals for whom the foregoing disclosure would have been made
      but for the fact that such individual was not an officer of the Company at
      the end of December 31, 2008 (collectively, the “Named Executive
      Officers”).





55


Summary
Compensation Table





Compensation
is payable in Canadian dollars and converted by using the yearly average U.S.
exchange rate.  Exchange rate conversions were 0.8821 in 2006, 0.9352
in 2007 and 0.9443 in 2008.





Annual
      CompensationName
      and Principal Occupation
            Year
            Salary
              U.S.
      $
            Bonus
              U.S.
      $
            Other
      Annual Compensation
              U.S.
      $
              (Taxable
      Benefits Related to
              Exercised
      Options and Other)Marc
      Ferland
              President
      and Chief Executive Officer and Acting CFO
            2008
              2007
              2006
            190,636
              N/A
              N/A
            Nil
              N/A
              N/A
            7,077
              N/A
              N/AÉric
      Bouchard1
              Vice
      President - Products
            2008
              2007
              2006
            177,560
              169,155
              149,798
            18,882
              10,161
              23,992
            3,813
              3,813
              2,372Daniel
      Bertrand2
              Executive
      Vice President and Chief Financial Officer
            2008
              2007
              2006
            136,310
              172,897
              153,326
            9,441
              12,982
              116,6443
            3,387
              117,534
              3,722Martin
      Bouchard4
              President
      and Chief Executive Officer
            2008
              2007
              2006
            60,999
              220,526
              176,158
            Nil
              22,456
              13,231
            750
              3,813
              2,382Guy
      Fauré5
              President
      and Chief Executive Officer
            2008
              2007
              2006
            N/A
              46,403
              224,705
            N/A
              Nil
              179,9406
            N/A
              502,977
              3,718Patrick
      Hopf7
              Vice
      President - Business Development
            2008
              2007
              2006
            21,569
              154,145
              125,816
            Nil
              Nil
              88,4888
            750
              47,817
              2,869





1Eric Bouchard did
not renew his employment contract which expired on December 31,
2008.
 2Daniel Bertrand
resigned from his position as Executive Vice President and Chief financial
Officer on September 8, 2008. In connection with his
resignation, the Company paid Mr. Bertrand termination compensation and recorded
termination costs of CDN$159,100 in Q3
 2008.
 3Performance bonus
of $9,209 and retention bonus of $107,435.
 4Martin Bouchard
resigned from his position as the President and Chief Executive Officer
effective as of March 3, 2008 for personal reasons.
He was replaced by Marc Ferland.
 5Guy Fauré resigned from his positions
as the President, Chief Executive Officer and a member of the Board of Directors
of the Company effective
as of January 31, 2007. In connection with his resignation, the Company paid Mr.
Fauré termination
compensation and recorded termination
costs of CDN$510,000 in Q1 2007, changed the duration of option agreements and
allowed accelerated vesting of options. These
changes represented an additional non-cash item expense of approximately US
$267,000 which was recorded in Q1 2007.
 6Performance bonus
of $22,492 and retention compensation of $157,448.
 7On February 11,
2008, the Company announced the departure of Patrick Hopf, effective February
11, 2008.
 8Performance bonus
of $6,986 and retention bonus of $81,502.
  56




Option
Grants During the Most Recently Completed Financial Year







Long
      Term Compensation
            All
      Other CompensationName
      and Principal Occupation
            Year
            Awards
            Payouts
            U.S.
      $Securities
              Under
      Options
              #
            Shares
      or Units Subject to
              Resale
      Restrictions
              ($)
            LTIP
      Payouts
              $Marc
      Ferland
              President
      and Chief Executive Officer and Acting CFO
            2008
              2007
              2006
            100,000
              25,000
              N/A
            Nil
              Nil
              N/A
            Nil
              Nil
              N/A
            16,245
              15,455
              N/AÉric
      Bouchard1
              Vice
      President – Products
            2008
              2007
              2006
            Nil
              78,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              NilDaniel Bertrand2
              Executive
      Vice President and Chief Financial Officer
            2008
              2007
              2006
            Nil
              98,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            149,420
              Nil
              NilMartin Bouchard3
              President
      and Chief Executive Officer
            2008
              2007
              2006
            Nil
              155,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              NilDavid Goldman4
              Chairman
            2008
              2007
              2006
            24,000
              20,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            41,455
              108,291
              125,0043Claire
      Castonguay
              Vice
      President, Finance and Controller
            2008
              2007
              2006
            Nil
              22,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              NilDennis
      Dion
              Vice
      President, Sales
            2008
              2007
              2006
            25,000
              N/A
              N/A
            Nil
              N/A
              N/A
            Nil
              N/A
              N/A
            Nil
              N/A
              N/ABenoit
      Godbout
              Vice
      President, Chief Technology Officer
            2008
              2007
              2006
            30,000
              N/A
              N/A
            Nil
              N/A
              N/A
            Nil
              N/A
              N/A
            Nil
              N/A
              N/AGuy Fauré5
              President
      and Chief Executive Officer
            2008
              2007
              2006
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              477,182
              NilPatrick Hopf6
              Vice
      President –Business Development
            2008
              2007
              2006
            Nil
              73,000
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              Nil








1Eric Bouchard did
not renew his employment contract which expired on December 31,
2008.
 2Daniel Bertrand
resigned from his position as Executive Vice President and Chief financial
Officer on September 8, 2008. In connection with his
resignation, the Company paid Mr. Bertrand termination compensation and recorded
terminiation costs of CDN $159,100 in Q3 2008.
 3Martin Bouchard
resigned from his position as the President and Chief Executive Officer
effective as of March 3, 2008 for personal reasons.
He was replaced by Marc Ferland.
 4The Company and
Dave Goldman Advisors Ltd., a company controlled by Mr. Goldman, entered into a
consulting agreement pursuant to which
David Goldman provides his services to the Company. In addition, as part of the
compensation paid to David Goldman, the Company
agreed to grant him options under the Company’s stock option plan.
 5Mr. Fauré resigned from his positions
as the President, Chief Executive Officer and a member of the Board of Directors
of the Company effective
as of January 31, 2007. In connection with his resignation, the Company paid Mr.
Faurétermination
compensation and recorded termination
costs of CDN $510,000 in Q1 2007, changed the duration of option agreements and
allowed accelerated vesting of options. These
changes represented an additional non-cash item expense of approximately US
$267,000 which was recorded in Q1 2007.
 6On February 11,
2008, the Company announced the departure of Patrick Hopf, effective February
11, 2008.
  57


Employment
Agreements and Change of Control Provisions





During
2008, the Company had employment arrangements and agreements with the following
Named Executive Officers. All sums mentioned herein are in Canadian
Dollars.





David
Goldman was Chairman and Chief Executive Officer of the Company until January
12, 2004 when he became the Executive Chairman of the Company. In
June 2008, David Goldman resigned as an officer and became Chairman
of the Company. During the year ended 2003, Mr. Goldman was not paid
any salary or benefits by the Company but rather was rewarded solely through the
granting of stock options which are awarded at the discretion of the Nominating,
Human Resource and Governance Committee. This position was not considered as a
full time position and therefore the level of this award was based solely on the
overall achievements and performance of the Company.





On May 1,
2002, the Company entered into a consulting agreement with David Goldman through
Dave Goldman Advisors Ltd. These consulting arrangements may be terminated on
sixty (60) days’ notice by either party.  On August 12, 2004, the
Company amended the consulting agreement with Dave Goldman Advisors Ltd. As a
result, if there is change of control of the Company, Dave Goldman Advisors Ltd.
will receive a lump sum payment equal to the greater of the past 24 months
consulting payments or CDN $300,000 if:





(i)
            the
      consultant agreement is terminated;





(ii)
            Mr.
      Goldman does not accept a relocation or to perform a substantial part of
      his services outside of the greater Montreal
  area;





(iii)
            Mr.
      Goldman’s responsibilities are greatly reduced for which reason he
      terminates the agreement; or





(iv)
            the
      total compensation offered to the consultant is
  reduced.





On May
23, 2005, the consulting agreement was further amended to increase the hourly
rate of Dave Goldman Advisors Ltd. for services rendered from CDN $200 to CDN
$250. In June 2008, as Mr. Goldman resigned as an officer and became Chairman of
the Company, the consulting agreement was amended to fixed fees of CDN $7,500
per quarter. Total fees for 2008 were $41,455 (2007: $108,291; 2006: $141,971).
The transactions are in the normal course of operations and are measured at the
exchange amount which is the amount of the consideration established and agreed
to by the related parties.





On
January 28, 2009, the Board of Director’s unanimously approved an adjustment to
Mr. David Goldman’s consultancy agreement, to which David Goldman concurred,
that the change of control clause is amended to an entitlement to the lesser of
$300,000 or 3% of the transaction triggering a change of control. The Board
further specified that the resulting payment would be made in the same currency
as the transaction itself. The previous agreement stipulated that in the case of
change of control, David Goldman was entitled to receive a lump sum payment
equal to the greater of the past 24 months consulting payments or CDN
$300,000.





On March
3, 2008, the Company entered into a consulting agreement with Martin Bouchard
through 4332903 Canada Inc. This company is remunerated for services rendered on
an hourly rate of CDN $250. These consulting arrangements may be terminated on
sixty (60) days’ notice by either party. There were no fees for
2008.





Éric
Bouchard has been Vice President - Products since the acquisition of Copernic
Technologies Inc. by the Company.  Éric Bouchard signed an employment
agreement with the Company on December 22, 2005.  Éric Bouchard’s
annual salary is CDN $188,200 with an entitlement to short term annual incentive
compensation for meeting targeted financial performance, to a maximum of 60% of
his base salary for far exceeding targeted performance levels. This compensation
package was contractually negotiated at the time of the acquisition of Copernic
Technologies Inc. and was approved by the Compensation Committee as it was
consistent with the compensation and bonus arrangements with other
officers.





Éric
Bouchard’s employment agreement provides that in the event of a change of
control or sale of the Company, Éric Bouchard may terminate his employment
agreement and will be entitled to one year’s base salary. The employment
agreement also provides that the Company may at any time with or without cause
terminate the agreement.  In such event, the Company must pay Éric
Bouchard the lesser of (i) the base salary of Éric Bouchard from the date of
termination until December 31, 2008, and (ii) one year’s base
salary.  Eric Bouchard’s employment contract expired on December 31,
2008.





On
October 11, 2007, the Company entered into a consulting agreement with Marc
Ferland through Gen24 Marketing, a division of 6556027 Canada Inc. The agreement
provided for a US $5,000 per month retainer and 5% commissions on recognized
revenue of customers and investment proceeds for a 3-year period received from
certain specified customers brought in by Gen24 Marketing to the Company. The
consulting agreement is cancellable on thirty (30) days’ notice by either
party.  Total fees for 2008 were $16,245 (2007:
$15,454).


58


The
monthly retainer of Gen24 Marketing was increased to $10,000 for the month of
February, 2008 and the consulting agreement was terminated as of February 29,
2008.





On March
3, 2008, Marc Ferland entered into an employment agreement with the Company
regarding his appointment as President and Chief Executive Officer for a period
ending on April 20, 2010. Pursuant to the terms and conditions of his employment
agreement, Mr. Ferland is paid an annual salary of CDN $250,000 for a period
ending on April 20, 2010. Mr. Ferland is also entitled to a bonus for meeting
certain financial performance levels, to a maximum of 50% of his base salary.
Under his employment agreement, Mr. Ferland received 100,000 stock options
under the Company’s stock option plan.





Mr.
Ferland’s agreement was amended on September 30, 2008 by adding a retention
incentive bonus equal to one and one-half times his annual salary. The bonus is
earned on a monthly basis at the rate of 1/25th per
each month (commencing as of March 3, 2008). In addition, Mr. Ferland is also
entitled to a bonus of $125,000 in the event of either a transactional event
occurring or the meeting of certain financial performance levels, whichever
occurs first. In addition, Mr. Ferland shall be entitled to a $10,000 bonus for
each quarter that certain other financial performance levels are
met.





If there
is a change in control of the Company, Mr. Ferland will receive a lump sum
payment equal to one and a half times his annual base salary if the following
occurs within one (1) year of such change in control:





(i)
            Mr.
      Ferland is terminated; or





(ii)
            If
      he does not accept a relocation outside of the Province of Quebec;
      or





(iii)
            If
      he does not accept an offer of employment at reduced levels of
      responsibility; or





(iv)
            If
      he does not accept an offer of compensation (including
      performance/incentive plan targets and long-term compensations) which is
      less than his current level.





Stock
Option Plan





In 1999,
the Company adopted a new stock option plan (the “Plan”), replacing all previous
stock option plans of the Company, to provide eligible officers, directors,
employees and consultants of the Company and its subsidiaries compensation
opportunities that will encourage share ownership and enhance the Company’s
ability to attract, retain and motivate such persons and reward significant
performance achievements. Options under the Plan may not be granted with a term
exceeding ten years. The exercise price of the options may not be less than the
market price of the Company’s common shares determined as of the date the
options were granted. Unless the Board determines otherwise, options granted
under the Plan are exercisable within 30 days after an optionee ceases to be
employed or retained by the Company (other than for reason of cause in which
event they terminate immediately, death in which event they are exercisable
within three months and disability in which event they are exercisable within
one year). The Plan, which was approved by shareholders on June 30, 1999, and
subsequently amended as approved by shareholders on June 20, 2000, May 23, 2002
and June 7, 2006 provides that the aggregate number of common shares reserved
for issuance under the Plan shall not exceed 1,400,000 common shares. The
granting of options is subject to the further conditions that: (i) the number of
outstanding common shares of the Company reserved for options to optionees or
issued to optionees within any one year period shall not exceed fifteen percent
(15%) of the outstanding common shares of the Company, and (ii) at no time may
any optionee hold more than five percent (5%) of the outstanding common shares
of the Company under option.





The
following table discloses individual grants of options to the Named Executive
Officers to purchase or acquire common shares of the Company pursuant to the
Plan for the financial year ended December 31, 2008.


59


Aggregate
Options Exercised During the Most Recently Completed Financial Year and
Financial Year-end Option Values





Name
            Securities
              Acquired
      on Exercise
              (#)
            Aggregate
      Value
              Realized
              (U.S.
      $)
            Unexercised
              Options
      at FY-End (#)
              Exercisable/
              Unexercisable
            Value
      of Unexercised
              in-the-Money
      Options at FY-End (U.S. $)
              Exercisable/
              UnexercisableDavid
      Goldman
            Nil
            Nil
            85,667 /
      37,333
            Nil
      / NilDaniel
      Bertrand
            Nil
            Nil
            Nil
      / Nil
            Nil
      / NilPatrick
      Hopf
            Nil
            Nil
            Nil /
      Nil
            Nil
      / NilMartin
      Bouchard
            Nil
            Nil
            Nil
      / Nil
            Nil
      / NilÉric
      Bouchard
            Nil
            Nil
            26,001
      / Nil
            Nil
      / NilClaude
      E. Forget
            Nil
            Nil
            28,334
      / 25,666
            Nil
      / NilDr.
      David Schwartz
            Nil
            Nil
            20,001
      / 25,666
            Nil
      / NilIrwin
      Kramer
            Nil
            Nil
            28,334
      / 25,666
            Nil
      / NilW.
      Brian Edwards
            Nil
            Nil
            Nil
      / Nil
            Nil
      / NilMarc
      Ferland
            Nil
            Nil
            8,334
      / 116,666
            Nil
      / NilLawrence
      Yelin
            Nil
            Nil
            8,334
      / 35,666
            Nil
      / NilGuy
      Fauré
            Nil
            Nil
            60,500
      / Nil
            Nil
      / NilClaire
      Castonguay
            Nil
            Nil
            7,334 / 14,666
            Nil
      / NilDennis
      Dion
            Nil
            Nil
            Nil / 25,000
            Nil
      / NilBenoit
      Godbout
            Nil
            Nil
            Nil / 30,000
            Nil
      / Nil





Option
and SAR Repricing





No
options were repriced during the year ended December 31, 2007 and
2008.





Remainder
of page intentionally left blank.




60




Securities Under Option to Directors
and Named Executive Officers as at December 31,2008




Names
            Securities
      Under Options Granted
              (#)
            Exercise
      or Base Price
              (US
      $/Security)
            Market
      Value of Securities Underlying Options on the Date of Grant
              (US
      $/Security)
            Expiration
              DateClaude
      E. Forget
            25,000
            2.28
            2.28
            11/08/2010Claude
      E. Forget
            10,000
            4.24
            4.24
            06/08/2012Claude
      E. Forget
            19,000
            0.62
            0.62
            06/17/2013David
      Goldman
            50,000
            2.28
            2.28
            11/08/2010David
      Goldman
            29,000
            3.58
            3.58
            11/05/2010David
      Goldman
            20,000
            4.24
            4.24
            06/08/2012David
      Goldman
            24,000
            0.62
            0.62
            06/17/2013Irwin
      Kramer
            25,000
            2.28
            2.28
            11/08/2010Irwin
      Kramer
            10,000
            4.24
            4.24
            06/08/2012Irwin
      Kramer
            19,000
            0.62
            0.62
            06/17/2013Dr. David
      Schwartz
            16,667
            2.28
            2.28
            11/08/2010Dr. David
      Schwartz
            10,000
            4.24
            4.24
            06/08/2012Dr. David
      Schwartz
            19,000
            0.62
            0.62
            06/17/2013Éric
      Bouchard
            21,667
            1.74
            1.74
            09/18/2012Éric
      Bouchard
            4,334
            5.15
            5.15
            01/23/2012Guy
      Fauré
            5,000
            2.57
            2.57
            01/31/2009Guy
      Fauré
            29,000
            3.58
            3.58
            01/31/2009Guy
      Fauré
            26,500
            6.28
            6.28
            01/31/2009Marc
      Ferland
            25,000
            1.67
            1.67
            09/21/2012Marc
      Ferland
            100,000
            1.00
            1.00
            04/02/2013Lawrence
      Yelin
            25,000
            1.67
            1.67
            09/21/2012Lawrence
      Yelin
            19,000
            0.62
            0.62
            06/17/2013Claire
      Castonguay
            22,000
            1.74
            1.74
            09/18/2012Dennis
      Dion
            25,000
            0.22
            0.22
            11/11/2013Benoit
      Godbout
            25,000
            0.62
            0.62
            06/17/2013Benoit
      Godbout
            5,000
            0.22
            0.22
            11/11/2013





61





Share
      Ownership


The
information with respect to shares beneficially owned, controlled or directed by
directors of the Company or Named Executive Officers is in each instance based
upon information furnished by the person concerned. The Company’s articles of
incorporation provide for Common Shares as the only authorized class of shares,
all of which have the same rights. Options to acquire shares held by directors
or Named Executive Officers, are listed in the above table entitled Securities Under Option to Directors
and Named Executive Officers and not included in the information below.
To the knowledge of the Company, the following directors and Named Executive
Officers hold the following shares of the Company as at March 19,
2009.





Director/
      Named Executive Officer
            Number of
      Company
              Shares
      Held1
            
            %
      of Total Number of
              shares
      Is Issued and
              OutstandingMarc
      Ferland, President and Chief Executive Officer, Director
            0
            
            0%Claude
      E. Forget, Director
            80,000
            
            0.5%David
      Goldman, Chairman, Director
            159,044
            
            1.1%Irwin
      Kramer, Director
            0
            
            0%Dr.
      David Schwartz, Director
            3,533
            
            0%Éric
      Bouchard
            0
            
            0%Lawrence
      Yelin, Director
            0
            
            0%Claire
      Castonguay, Vice President, Finance and Controller
            0
            
            0%Dennis
      Dion, Vice President, Sales
            0
            
            0%Benoit
      Godbout, Vice President, Chief Technology Officer
            0
            
            0%





On May
10, 2007, the Company adopted minimum shareholding requirements for directors
and officers. Minimum shareholding requirements are 100,000 shares for the CEO,
40,000 shares for the Chair, 20,000 shares for Executive and Senior Vice
Presidents, 10,000 shares for Vice Presidents, and 10,000 shares for directors
with current officers and directors having five years from this date to achieve
these levels or, for new officers and directors, five years from the effective
date of their appointment as the case may be.








1 Does not
include shares subject to receipt upon exercise of
options.


62





Employees


The
following table provides a breakdown of persons employed by main category of
activity for each of the past three financial years.





NUMBER OFEMPLOYEES BYCATEGORY OFACTIVITYYEAR
            
            SEARCH
      / MEDIA
            
            SOFTWARE2008
            
            15
            
            302007
            
            16
            
            362006
            
            23
            
            36





Pension
      and Retirement Benefits


The
Company does not set aside nor accrue any amounts to provide pension, retirement
or similar benefits.





ITEM
7.    MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS





MAJOR
      SHAREHOLDERS


To the
knowledge of the Company, no shareholder currently owns, directly or indirectly,
or exercises control or direction over voting securities carrying more than 5%
of the voting rights attaching to any class of voting securities of the
Company.





The
Company’s Common Shares are widely held in the United States, Canada and
Europe.





To the
knowledge of the Company, the Company is not directly or indirectly owned or
controlled by another corporation(s), by any foreign government or by any other
natural or legal person(s), whether severally or jointly acting as a “group”
within the meaning of the United States Securities Exchange Act of 1934, as
amended. To the knowledge of the Company, there are no arrangements, which may
at a subsequent date result in a change in control of the Company.





RELATED
      PARTY TRANSACTIONS


The
Company and Dave Goldman Advisors Ltd., a company controlled by Mr. Goldman,
entered into a consulting agreement pursuant to which David Goldman provides
services as an Executive Chairman at an hourly fee of CDN $250. . In June 2008,
as Mr. Goldman resigned as an officer and became Chairman of the Company, the
consulting agreement was amended to fixed fees of CDN $7,500 per quarter.. Total
fees for 2008 were $41,455, (2007 - $108,291; 2006 - $141,971). The payment
of these sums has been approved by the Compensation Committee.  The
transactions are in the normal course of operations and are measured at the
exchange amount which is the amount of the consideration established and agreed
to by the related parties.





The
Company and Marc Ferland, a member of the board of directors of the Company,
entered into an agreement pursuant to which Marc Ferland performs various sales
and marketing projects.  He is remunerated $5,000 per month retainer
and 5% commissions on recognized revenue (as per Canadian GAAP) of customers and
investment proceeds for a 3 year period brought in by his corporation, Gen24
Marketing, to the Company. Total fees for 2008 were $16,245 (2007 -
$15,454).  On March 3, 2008, Mr. Ferland was appointed President and
CEO.  The consulting agreement was therefore terminated when Mr.
Ferland was appointed President and CEO of the Company.





INTEREST
      OF EXPERTS AND COUNSEL


Not
Applicable.





63


ITEM
8.   FINANCIAL INFORMATION





CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION





The
audited consolidated financial statements of the Company and certain other
financial information of the Company are included under Item 17 of this Annual
Report on Form 20-F.





LEGAL
      OR ARBITRATION PROCEEDINGS


None.





POLICY
      ON DIVIDEND DISTRIBUTIONS


The
Company has never declared or paid dividends on its Common Shares. The Company
currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.





SIGNIFICANT
      CHANGES


There
have been no significant changes since the date of the audited consolidated
financial statements of the Company included in this Annual Report on Form
20-F.





Write-down
of intangible assets and goodwill





In Q4
2008, the Company concluded that its software unit was still facing delays in
execution and changes of market conditions of its commercial deployment
solutions.  Based on the Company’s assessment of the fair value of its
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were less than their carrying value.  Therefore, write-downs of
$140,000 for trade names, $192,000 for technology and goodwill of $3,995,000
were recorded in 2008.





Normal
course issuer bid





On
November 11, 2008 the Company announced a normal course issuer bid under which
it may purchase up to a maximum of 700,000 of its common shares, representing
approximately 5% of the issued and outstanding common shares of the Company as
of the date hereof.  Purchases under the normal course issuer bid may
take place over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of
November, 2009.  As of March 2009, no shares have been acquired by the
Company. The Company reserves the right to discontinue its normal course issuer
bid at any time.





Cost
reduction plan





In Q4
2008, the Company continued to execute its cost reduction plan announced at the
end of Q1 2008.  Total costs in 2008 excluding write-downs,
termination costs and restructuring costs were at $6,678,775 compared to
$10,268,891 in 2007.





In
addition, the Company has decided to close its Montreal office in Q1 2009 and
concentrate all its activity in Quebec City.





The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company has recorded $101,012 of restructuring
costs.





Resignation
and departure of officers





Éric
Bouchard, Vice President Marketing and Officer of the Company, for personal
reasons, did not renew his employment contract which expired on December 31,
2008, with the Company. In relation with this departure, 51,999 stock options
were cancelled, resulting in a reversal of employee stock-based compensation
expense of $40,878 that was recorded in Q4 2008.





The
Company accepted the resignation of Mr. Daniel Bertrand, Executive Vice
President and Chief Financial Officer, effective September 8, 2008. Furthermore
Ms. Claire Castonguay, the Company’s Controller for the past three years was
appointed Vice President, Finance and Controller while Mr. Ferland, President
and CEO assumed the additional responsibilities of Chief Financial Officer on an
interim basis. In relation with this resignation, the Company recorded and paid
termination costs of $149,420 in Q3 2008. Furthermore, 121,791 non
vested  stock options held by Mr. Bertrand were cancelled, resulting
in a reversal of employee stock-based compensation expense of $104,741 that was
recorded in Q3 2008. In Q4 2008, an additional 52,709 vested stock options held
by Mr. Bertrand were cancelled.


64





On
February 11, 2008, the Company announced the departure of Patrick Hopf,
Executive Vice President of Business Development.  117,134 options
held by Mr. Hopf were cancelled, resulting in a reversal of employee stock-based
compensation expense of $48,542 which was recorded in Q1 2008.





On
February 8, 2008, the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. 155,000 options held by Mr. Bouchard were cancelled,
resulting in a reversal of employee stock-based compensation expense of $49,320
which was recorded in Q1 2008.  Mr. Marc Ferland, a director of the
Company, was appointed President and CEO commencing on March 3,
2008.





Notice
from NASDAQ





On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company.  The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”).  Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance. If, at anytime before December 15, 2008, the
bid price of the Company’s common stock closes at $1.00 per share or more for a
minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement.  If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted.  At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.





On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.





The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.





Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it
will, upon reinstatement of the rules, still have this number of days, or until
March 19, 2009, to regain compliance. The company can regain compliance, either
during the suspension or during the compliance period resuming after the
suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive
trading days”.





On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.





As at
December 31, 2008, the Company’s closing stock price was at $0.13.





Granting,
exercising and cancellation of stock options





On April
2, 2008, the Company granted 100,000 stock options to an officer, at an exercise
price of $1.00 expiring in five years.





On June
17, 2008, the Company granted 125,000 stock options to directors and a new
officer, at an exercise price of $0.62 expiring in five years.





On
November 11, 2008, the Company granted 125,000 stock options to two officers and
employees at an exercise price of $0.22 expiring in five years.


65


As at
December 31, 2008, 785,819 stock options were forfeited.





ITEM
      9.   THE OFFER AND LISTINGU.S.
      and German Trading Markets


The
Company’s Common Shares are quoted on the NASDAQ Stock Exchange® - Capital
Market under the symbol “CNIC” and on the Third Market Segment of the Frankfurt
and Berlin stock exchanges in Germany under the symbol “IYS1”. On June 21, 2007
following the change of the Company’s name to Copernic Inc., the Company’s
shares began to trade under the symbol CNIC.  Prior to June 2007, the
Company’s shares were quoted under various other trading symbols. With a
corporate name change taking effect in August 1996 the Company’s Common Share
trading symbol was changed to “INTAF” and in April 1999 the symbol was changed
to “INTA”. On January 12, 2004, following the approval of the change of name of
the Company to Mamma.com Inc. the symbol was changed to “MAMA”. On July 11,
2001, the Company filed articles of amendment consolidating its issued and
outstanding Common Shares on the basis of one post-consolidation Common Share
for every ten pre-consolidation Common Shares. The Company’s Common Shares
started trading on the NASDAQ Small Cap Market® on a consolidated basis at the
opening of the markets on July 13, 2001.





The
following table sets forth the price history of the Company’s Common Shares
reported on the NASDAQ Stock Market® and on the Third Market Segment of the
Frankfurt and Berlin stock exchanges in Germany, which reflect inter-dealer
prices without retail mark-ups or commissions and may not represent actual
transactions. As per the Explanatory Notes to this Annual Report on Form 20-F,
all prices referred to below are adjusted to take into account the July 2001
consolidation of the Company’s Common Shares on the basis of 1
post-consolidation common share for every 10 pre-consolidation Common
Shares.





NASDAQ
Stock Exchange Capital Market® Annual High and Low Market Prices– 5
Years Ended December 31,2008(based on closing
prices)





Year
            
            High
            
            Low2008
            
            1.55
            
            0.112007
            
            5.90
            
            1.412006
            
            7.95
            
            0.972005
            
            6.28
            
            2.122004
            
            15.90
            
            3.26





66











NASDAQ
Stock Exchange Capital Market® Quarterly High and Low Market Prices
– 2 Years Ended December 31, 2008 (based on closing prices)





Quarter End
            
            High
            
            Low12/31/08
            
            0.28
            
            0.119/30/08
            
            0.46
            
            0.236/30/08
            
            1.13
            
            0.443/31/08
            
            1.55
            
            1.0112/31/07
            
            3.47
            
            1.419/30/07
            
            3.56
            
            1.456/30/07
            
            5.60
            
            2.623/31/07
            
            5.90
            
            4.07








67


NASDAQ
Stock Exchange Capital Market® Monthly High and Low Market Prices – 6 Months
Ended February 28, 2009 (based on closing prices)





Month
            
            High
            
            LowFeb
            
            0.17
            
            0.15Jan
            
            0.20
            
            0.14Dec
            
            0.18
            
            0.13Nov
            
            0.28
            
            0.16Oct
            
            0.23
            
            0.11Sep
            
            0.31
            
            0.23








Frankfurt
Exchange (based on closing prices) - High and Low Market Prices – 4 Years Ended
December 31, 2008 (in euros)





Year
            
            High
            
            Low2008
            
            1.03
            
            0.102007
            
            2.65
            
            0.602006
            
            5.94
            
            0.702005
            
            4.80
            
            1.77







68







Frankfurt
Exchange (based on closing prices) Quarterly High and Low Market Prices – 2
Years Ended December 31, 2008 and Latest Quarter (in euros)





Quarter
            
            High
            
            Low12/31/08
            
            0.24
            
            0.109/30/08
            
            0.31
            
            0.176/30/08
            
            0.68
            
            0.263/31/08
            
            1.03
            
            0.6012/31/07
            
            2.59
            
            0.789/30/07
            
            2.65
            
            0.976/30/07
            
            4.12
            
            1.913/31/07
            
            4.59
            
            3.19




69


Frankfurt
Exchange (based on closing prices) Monthly High and Low Market Prices – 6 Months
Ended February 28, 2009 (in euros)





Month
            
            High
            
            LowFebruary
      2009
            
            0.16
            
            0.09January
      2009
            
            0.13
            
            0.07December
      2008
            
            0.14
            
            0.12November
      2008
            
            0.24
            
            0.14October
      2008
            
            0.16
            
            0.10September
      2008
            
            0.20
            
            0.19





Equity
Transfer & Trust Company of Toronto, Ontario, Canada acts as registrar and
transfer agent for the Company’s common shares.





ITEM
10. ADDITIONAL INFORMATION





SHARE
      CAPITAL
              
              Not
      Applicable.


MEMORANDUM
AND ARTICLES OF ASSOCIATION





The
Company was incorporated under the laws of the Province of Ontario on July 5,
1985 as ‘Quartet Management Ltd.’, and has an Ontario Corporation Number of
630609. By articles of amendment filed on March 27, 1987, the Company changed
its name to ‘Health Care Products Inc.’.  By articles of amendment
filed on March 28, 1994, the Company changed its name to ‘Celltech Media Inc.’.
By articles of amendment filed on June 21, 1995, the Company changed its name to
‘Smartel Communications Corporation’ and by articles of amendment filed on July
29, 1996, the Company changed its name to ‘Intasys Corporation’. On July 11,
2001, the Company filed articles of amendment consolidating its issued and
outstanding Common Shares on the basis of one post-consolidation common share
for every ten pre-consolidation Common Shares. By articles of amendment filed on
January 8, 2004, the Company changed its name to ‘Mamma.com Inc.’.  By
articles of amendment filed on June 14, 2007, the Company changed its name to
‘Copernic Inc.’.





Section 5
of the Company’s articles of incorporation indicates that there are no
restrictions on the business the Company may carry on or on the powers it may
exercise. Pursuant to Section 15 of the Business Corporations Act
(Ontario) (“OBCA”), a corporation has the capacity and the rights, powers and
privileges of a natural person.





With
respect to a material contract, proposal or arrangement between the Company and
one or more directors thereof or between the Company and another person of which
a director of the Company is a director or in which a director has a material
interest, such material contract, proposal or arrangement, as the case may be,
is neither void nor voidable by reason only of that relationship or by reason
only that a director with an interest in the transaction is present at or is
counted to determine the presence of a quorum at a meeting of directors or
committee of directors that authorized the transaction, if (i) the director
disclosed his or her interest in accordance with the OBCA; (ii) the transaction
was approved by the directors or the shareholders of the Company, as applicable;
and (iii) it was reasonable and fair to the Company at the time it was approved.
Generally, the business corporation laws of the United States vary significantly
on this issue from


70


state to
state. Delaware Law accords similar treatment (a) if conditions (i) and (ii)
above are satisfied or (b) if (iii), without regard to conditions (i) and (ii),
is satisfied, except that any ratification by the board must be by a vote of
disinterested members.





Neither
the Company’s articles of incorporation nor its bylaws restrict the directors
from exercising any power (in the absence of an independent quorum) to approve
their compensation.





The
directors of the Company may from time to time, without the authorization of the
shareholders:





(a)
            borrow
      money upon the credit of the Company;(b)
            issue,
      re-issue, sell or pledge debt obligations of the Company, including
      without limitation, bonds, debentures, notes or other similar obligations
      of the Company whether secured or unsecured;(c)
            subject
      to Section 20 of the OBCA, give a guarantee on behalf of the Company to
      secure performance of any present or future indebtedness, liability or
      obligation of any person; or(d)
            charge,
      mortgage, hypothecate, pledge or otherwise create a security interest in
      all or any currently owned or subsequently acquired, real or personal,
      moveable or immovable property of the Company, including without
      limitation, book debts, rights, powers, franchises and undertakings, to
      secure any present or future indebtedness, liabilities or other
      obligations of the Company.





Although
most progressive U.S. state corporate codes grant similar powers to corporate
boards of directors, some U.S. states still require shareholder approval of
liens in substantially all of a corporation’s assets.





The
directors may from time to time, by resolution, delegate any or all of the
powers referred to above to a director, committee of directors or one or more
officers of the Company. These powers may be varied by enacting a new by-law by
resolution of the directors, which by-law must then be subsequently approved at
a meeting of shareholders or by shareholder resolution. U.S. state corporate
laws establish no general rule concerning directors’ ability to delegate such
duties. More progressive U.S. state corporate laws such as Delaware’s General
Corporation Law allow a board of directors to establish a committee of one or
more directors and delegate such powers to such committee without a by-law or
stockholder approval.





The
Company’s articles of incorporation do not contain any provisions for the
retirement of directors as the result of reaching a certain age limit. The
Company’s by-laws contain a minimum age requirement of 18 years to be named a
director.





Directors
need not be shareholders of the Company.





The
Company is authorized to only issue, and its share capital consists of only,
Common Shares. Each common share entitles the holder to receive notice of, and
to vote on the basis of one vote per common share, at all meetings of
shareholders, to receive any dividend declared by the Company on the Common
Shares and to receive the remaining property of the Company on its dissolution,
liquidation or wind-up. The shareholders do not have the rights to share in the
profits of the Company. The laws of most US states vest Common Shares with
similar powers. The Company has never and does not have plans to declare any
dividends.





In order
to change the rights of holders of Common Shares, an amendment to the Company’s
articles is required. Pursuant to Section 168 of the OBCA, such an amendment can
be effected at a meeting of shareholders upon agreement by a majority of the
shareholders. Pursuant to Section 170, the holders of shares of a class are
entitled to vote separately as a class upon a proposal to amend the articles
that would have the effect of altering the rights of that class or altering the
rights of that class relative to the other classes of shares. Progressive U.S.
state corporate codes generally require similar procedures except that corporate
laws such as New York’s Business Corporation Law and Delaware’s General
Corporation Law permit stockholders to authorize such amendments by majority
consent in writing, without a meeting, subject to certain
limitations.





The
annual meeting of shareholders shall be held at such time, day and place as the
Board, Chairman of the Board or the President may from time to time determine,
provided that an annual meeting must be called not later than 15 months after
the holding of the immediately preceding annual meeting. The Board, the Chairman
of the Board, the President, the Managing Director or Vice President shall have
the power to call a special meeting of shareholders at any time.





In
addition, pursuant to Section 105 of the OBCA, the holders of not less than 5%
of the issued shares of a corporation that carry the right to vote at a meeting
sought to be held, may requisition the directors to call a meeting of
shareholders for the purposes stated in the requisition. Such requisition shall
state the business to be transacted at the meeting. Although there is no general
rule, progressive U.S. state corporation laws provide that the by-laws shall
determine stockholders’ rights to call stockholder meetings. The directors of a
corporation shall call a meeting of shareholders upon receiving the requisition
unless a meeting of shareholders has already been called or a record date has
been fixed and the appropriate notice has been provided. If the directors do
not, within twenty-one days after receiving the requisition, call a meeting and
if the above-noted exceptions are not met, any shareholder who signed the
requisition may call the


71


meeting.





Notice of
the time and place of each meeting of shareholders shall be given not less than
21 nor more than 50 days before the date of the meeting to each director and the
auditor of the Company and to each shareholder who, at the close of business on
the record date for notice or, if no record date for notice is fixed, at the
close of business on the day proceeding the day on which notice is given, is
entered in the securities register as the holder of one or more shares of the
Company carrying the right to vote at the meeting. For every meeting of
shareholders, the Company shall prepare a list of shareholders entitled to
receive notice of the meeting, arranged in alphabetical order and showing the
number of shares entitled to vote at the meeting held by each
shareholder.





The only
persons entitled to be present at a meeting of shareholders shall be those
entitled to vote thereat, the directors and auditors, if any, of the Company and
others who, although not entitled to vote, are entitled or required under the
OBCA or the articles or by-laws of the Company to be present at the meeting. Any
other person may be admitted on the invitation of the Chairman of the meeting or
with the consent of the meeting.





There are
no restrictions in the Company’s articles or by-laws, nor under the OBCA or the
provision of the Securities Act (Ontario) or Securities Act (Quebec) limiting
the right to own, hold or exercise voting rights on the Company’s securities.
Most, if not all U.S. states have enacted some form of takeover disclosure law
or business combination act requiring certain disclosures and/or limiting the
right to own or vote shares acquired in certain situations including hostile
business combinations.





There are
no provisions in the Company’s articles or by-laws that would have the effect of
delaying, deferring or preventing a change in control of the Company and that
would operate only with respect to a merger, acquisition or corporate
restructuring involving the Company.





Pursuant
to the Securities Act (Ontario) (the “Securities Act”), any shareholder holding
or exercising control over more than 10% of the voting rights attached to all
outstanding voting securities of a Company is considered an insider of that
company and among other things is required to disclose any trades in shares of
that company. Similarly, Section 16 and Rule 16(a) of the U.S. Securities
Exchange Act of 1934 (“1934 Act”), under which the Company is registered,
requires holders of 10% or more of the securities of a 1934 Act registered
company to file reports disclosing ownership and transactions in that company’s
securities. The Company, however, currently is deemed a “foreign private issuer”
and is exempt from these provisions. Section 101 of the Securities Act requires
that any person who acquires beneficial ownership of, or the power to exercise
control over, a total of 10% or more of a company’s voting or equity securities
in any class shall issue a news release and file a report containing the
particulars and purpose behind the acquisition. Further reports must be issued
every time such person acquires an additional 2% or more of the company’s voting
or equity securities, or there is a change in any of the material facts
disclosed in the former report. Similarly, Section 13(d) and Regulation 13D of
the 1934 Act requires any person who acquires beneficial ownership or more than
5% of an equity security of any company registered under the 1934 Act to file a
report disclosing the particulars and purpose behind the acquisition. Amendments
must be filed to this report every time such person acquires or disposes of 1%
or more of the equity security or there is some other material change in the
report on file. In addition, Section 14(d) and Regulation 14D of the 1934 Act
imposes certain filing and disclosure requirements on persons making “tender
offers” for equity securities of a 1934 Act registered company.





The
articles of incorporation and by-laws of the Company do not contain any
conditions governing changes in the Company’s capital that are more stringent
than the applicable law.





MATERIAL
      CONTRACTS


The
Company has not entered into any material contracts during the last two fiscal
years other than in the ordinary course of business and other than those
described in “Item 4 - Information on the Company” or elsewhere in this Annual
Report on Form 20-F.





EXCHANGE
      CONTROLS


There is
no Canadian law, government decree or regulation that restricts the export or
import of capital or that affects the remittance of dividends, interest or other
payments to a non-resident holder of Common Shares other than withholding tax
requirements.





There is
no limitation imposed by Canadian law or by the articles or other charter
documents of the Company on the right of a non-resident to hold or vote Common
Shares, other than as provided in the Investment Canada Act, as amended (the
“Investment Act”). The Investment Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust, joint venture or other entity that is not a
“Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after
review, the Minister responsible for the Investment Act is satisfied that the
investment is likely to be of net benefit to Canada based on the criteria set
out in the Investment Act. Investment in Common Shares of the Company (or other
voting shares) by a non-Canadian (other than a “WTO investor,” as defined below)
would be reviewable under the Investment Act if it constitutes an acquisition of
control of the Company, and the value of the assets of the Company were
$5,000,000 Canadian or more. Such an investment in Common Shares of the Company
by a WTO investor would be reviewable under the Investment Act if the value of
the assets of the


72


Company
equalled or exceeded $295,000,000 Canadian for investments made in 2008. The
Investment Act contains rules to determine if an investment constitutes an
acquisition of control of a particular entity. For example, any non-Canadian,
whether a WTO investor or otherwise, would acquire control of the Company for
purposes of the Investment Act if such non-Canadian acquired a majority of the
Common Shares of the Company. The acquisition of less than a majority but at
least one-third of the Common shares of the Company is presumed to be an
acquisition of control of the Company, unless it could be established that on
the acquisition the Company was not controlled in fact by the acquirer through
the ownership of Common Shares. In general, an individual is a WTO Investor if
such individual is a “national” of a country (other than Canada) that is a
member of the World Trade Organization (“WTO Member”) or has a right of
permanent residence in relation to that WTO Member. A corporation or other
entity is a WTO investor if it is a “WTO Investor-controlled entity” pursuant to
detailed rules set out in the Investment Act.





Certain
transactions involving Common Shares of the Company would be exempt from the
Investment Act, including, without limitation: (a) an acquisition of Common
Shares of the Company if the acquisition were made in connection with the
person’s business as a trader or dealer in securities; (b) an acquisition of
control of the Company’s business in connection with the realization of a
security interest granted for a loan or other financial assistance and not for
any purpose related to the provisions of the Investment Act; and (c) an
acquisition of control of the Company’s business by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the ultimate
direct or indirect control in fact of the Company, through the ownership of
voting interests (as defined in the Investment Act), remains
unchanged.





TAXATION


The
following is a summary of certain federal income tax provisions applicable to
United States corporations, citizens and resident alien individuals who purchase
Common Shares and who will hold such shares as capital property for the purpose
of the Income Tax Act (Canada) (the “ITA”). This discussion does not purport to
deal with all relevant aspects of U.S. or Canadian taxation. Shareholders are
advised to consult their own tax advisors regarding the United States income tax
consequences of holding and disposing of the Common Shares as well as any
consequences arising under state and local tax laws or the tax laws of
jurisdictions outside the United States. The summary is based on the assumption
that, for Canadian tax purposes and at all relevant times, a holder of Common
Shares (a) is neither resident nor deemed to be resident in Canada for the
purposes of the ITA, but is resident in the United States for the purposes of
the Canada – United States Income Tax Convention (1980) (the “Treaty”); (b)
deals at arm’s length with the Company and is not affiliated with the Company;
(c) holds the Common Shares as capital property and does not use or hold and is
not deemed to use or hold the Common Shares in the course of carrying on a
business in Canada; and (d) is not an insurer or a financial
institution.





This
summary is based on the current provisions of the Treaty and accompanying
protocols, the ITA, the regulations under the ITA, specific proposals to amend
the ITA or the regulations thereunder announced by the Canadian Minister of
Finance prior to the date of this report and our understanding of the current
administrative and assessing practices of the Canada Revenue Agency (or
CRA).  This summary does not otherwise take into account or anticipate
any changes in law, whether by legislative, governmental or judicial action, nor
does it take into account tax laws or considerations of any province or
territory of Canada.





The
summary is for general information only and does not take into account the
individual circumstances of any particular investor.  Therefore,
investors are urged to consult their own tax advisors with respect to the tax
consequences of an investment in the Common Shares of the Company based on their
specific circumstances, including any consequences of an investment in the
Common Shares arising under state, local or provincial tax laws of other
jurisdictions, including the United States.





For
United States federal income tax purposes, a United States corporation, citizen
or resident alien generally will realize, to the extent of the Company’s current
or accumulated earnings and profits, taxable ordinary income (which may, in
certain circumstances, in the case of qualified dividend income received by non
corporate shareholders before 2011, be taxed at capital gain rates) on the
receipt of cash dividends on the Common Shares equal to the gross amount of such
dividends without reduction for any Canadian withholding tax. Subject to certain
limitations, such withholding tax generally may be credited, against the
holder’s United States federal income tax liability or, alternatively, may be
deducted in computing the holder’s United States federal taxable income.
Dividends paid on the Common Shares will not be eligible for the “dividends
received” deduction, available under certain circumstances to United States
corporations.





Dividends
paid to a holder on Common Shares, including deemed dividends and stock
dividends, will be subject to Canadian non-resident withholding tax, which is
generally applicable to dividends paid by a corporation resident in Canada to a
resident of the United States. Under the terms of the Treaty, non-resident
withholding tax is generally levied at a rate of 15% of the gross amount of the
dividend. If, however, the beneficial owner of the dividends is a company
resident in the United States for the purposes of the Treaty that owns at least
10% of the voting stock of the Company paying the dividends, the rate of
withholding tax under the Treaty is further reduced to 5%. Pursuant to the
Treaty, a resident of the United States will be considered to own the voting
stock owned by an entity that is considered fiscally transparent under the laws
of the United States and that is not a resident of Canada in proportion to such
resident’s ownership interest in the fiscally transparent entity. This proposed
amendment to the Treaty will have effect for amounts paid or credited on or
after the first day of the second month that begins after the date on which the
proposed Protocol enters into force.





73





A holder
may be subject to Canadian income tax in respect of any capital gains realized
on a disposition or deemed disposition of Common Shares. However, a holder will
be exempt from Canadian tax on a capital gain realized on an actual or deemed
disposition of Common Shares unless the Common Shares are “taxable Canadian
property” (as defined in the ITA) to the holder at the time of the disposition.
Provided the Common Shares are listed on a designated stock exchange for the
purposes of the ITA (the National Association of Securities Dealers Automated
Quotation System is a designated stock exchange under the ITA), the Common
Shares (as well as any interests in or options for Common Shares) will not be
“taxable Canadian property” to a holder, unless the holder, persons with whom
the holder did not deal at arm’s length for the purposes of the ITA or the
holder together with such persons owned 25% or more of the shares of any class
or series of the capital stock of the Company at any time during the 60-month
period immediately preceding the disposition or deemed disposition of the Common
Shares. In the event that the Common Shares are not listed on a designated stock
exchange, the Common Shares will be “taxable Canadian property” for the purposes
of the ITA. The Common Shares may be deemed to be “taxable Canadian property”
where the holder acquired them in certain circumstances, including upon the
disposition of other “taxable Canadian property”. In the event that the Common
Shares do constitute “taxable Canadian property”, one half of a capital gain
realized by a holder must be included in the income of a holder while one half
of any capital loss realized by a holder is deductible against the taxable
portion of capital gains realized in the three preceding years or in subsequent
years, subject to the rules of the ITA, however, any capital gain realized on
their disposition by a holder may be exempt from Canadian tax pursuant to the
provisions of the Treaty. The ITA provides for a withholding procedure under
which a purchaser of taxable Canadian property from a non-resident of Canada is
required to withhold certain amounts from the purchase price. In certain
circumstances, a “clearance certificate” may be obtained that relieves, wholly
or in part, the purchaser’s obligation to withhold on the purchase price. As
long as any income or gain from the disposition or deemed disposition of the
Common Shares would be exempt from tax under Part 1 of the ITA due to the
application of the Treaty, the withholding requirements and the clearance
certificate process may not apply. Holders of Common Shares must consult their
own tax advisers to determine if any such Canadian income tax must be
paid.





For
United States federal income tax purposes, upon a sale or exchange of a Common
Share, a holder will recognize gain or loss equal to the difference between the
amount realized on such sale or exchange and the holder’s tax basis in such
common share. For non-corporate taxpayers, the maximum tax rates currently
imposed are 15% on net long-term capital gains and 35% on net short-term capital
gains and ordinary income. US capital gains may result in additional taxes by
application of the Alternative Minimum Tax. As a taxpayer’s income rises, US
federal income tax law phases-out US personal exemptions and increasingly limits
the availability of itemized deductions which may increase the effective tax
rates. The deduction of net capital losses against ordinary income currently is
severely limited under US federal income tax law. Holders of Common Shares must
consult their own tax advisers to determine the effect of federal, state and
local income taxes upon a sale or exchange of Common Shares.





DOCUMENTS
      ON DISPLAY


Documents
concerning the Company which are referred to in the document and otherwise
available for public inspection may be inspected at the executive offices of the
Company as well as the executive or operating offices of the Company’s operating
subsidiaries. Any request for inspection must be made in writing addressed to
the Company’s executive offices to the attention of Mr. Marc Ferland, President
and Chief Executive Officer. Such request must explicitly identify the person
making the request, the documents pertaining to the request as well as the date
and time that the person making such request desires to inspect such documents.
The Company reserves all rights to refuse or limit a request.





ITEM 11.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK





CURRENCY
      RISK


The
Company has employees located in Canada where the local currency is used. No
forward exchange contracts are used to sell currencies at fixed forward
rates.





The
Company is exposed to foreign exchange rate risk in that a higher proportion of
the expenses are denominated in foreign currencies relative to
revenue.  Accordingly, the results are affected, and may be affected
in the future, by exchange rate fluctuations of the foreign currencies relative
to the US dollar.





The
Company does not use derivative financial instruments to reduce its foreign
exchange exposure.  Fluctuations in foreign exchange rates could cause
unanticipated fluctuations in the Company’s operating results.





74


The following table provides an
indication of the Company’s significant foreign exchange currency
exposures:





As
      at2008
              $
            2007
              $CDN
            GBP
            EUR
            AUD
            CDN
            GBP
            EUR
            AUDCash
      and cash equivalents
            56,223
            -
            -
            -
            46,794
            -
            -
            428Restricted
      cash
            -
            -
            -
            -
            -
            404,280
            -
            -Accounts
      receivable
            60,864
            87,803
            51,591
            43,331
            93,875
            125,964
            74,292
            110,290Income
      taxes receivable
            134,572
            -
            -
            -
            216,995
            -
            -
            -Accounts
      payable and accrued liabilities
            840,457
            -
            -
            -
            1,027,761
            5,732
            -
            6,289Deferred
      rent
            5,872
            -
            -
            -
            10,806
            -
            -
            -Capital
      lease obligations
            118,855
            -
            -
            -
            155,859
            -
            -
            -





The
following exchange rates applied during the years 2008 and 2007:





2008
            2007Average
      Rate
            Reporting
      date
            Average
      Rate
            Reporting
      date$CDN
      per $US
            0.9443
            0.8183
            0.9352
            1.0194$Australian
      per $US
            0.8531
            0.6907
            0.8387
            0.8767GBP
      per $US
            1.8552
            1.4470
            2.0016
            1.9973EUR
      per $US
            1.4712
            1.4097
            1.3704
            1.4729





Based on
the Company’s foreign currency exposures noted above, varying the above foreign
exchange rates to reflect a one (1) percent weakening of the US dollar would
have increased the net loss by approximately $61,000 (2007-
$255,000,  2006 - $334,000) assuming that all other variables remained
constant.  An assumed one (1) percent strengthening of the US dollar
would have had a equal but opposite effect on the above currencies to the
amounts shown above, on the basis that all other variables remain
constant.





INTEREST
      RATE RISK





The
Company is subject to interest rate risk on its cash and cash equivalents and
temporary investments.  The risk that the Company will realize a loss
as a result of the decline in the fair value of its cash equivalents and
temporary investments is limited because these have short-term maturities and
are generally held to maturity.





The
Company’s exposure to interest rate risk is as follows:





2008
            2007Maturity
            Interest
      rate
            Interest
      rateCash
      and cash equivalents
            Less
      than 30 days
            0.9%
      to 3.3%
            3.3%
      to 4.2%Temporary
      investments
            120  days
      and more
            1.75%  to
      1.80%
            4.32%
      to 4.57%Capital
      lease obligations
            4
      years (2007- 5 years)
            10.41%
      to 13.08%
            10.41%
      to 11.45%








ITEM 12.
            
            DESCRIPTION OF SECURITIES OTHER
      THAN EQUITY SECURITIES





Not applicable.





PART
      II





ITEM 13.
            
            DEFAULTS, DIVIDEND ARREARAGES
      AND DELINQUENCIES





Not applicable.





75





ITEM 14.
            
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS





Not applicable.





ITEM 15.
            
            CONTROLS
      AND PROCEDURES





Controls
and Procedures





Disclosure
Controls and Procedures





We are
responsible for establishing and maintaining a system of disclosure controls and
procedures, as defined in Rule 13a-15 (e) under the Securities Exchange Act of
1934, (the “Exchange Act”) designed to ensure that information we are required
to disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





We
carried out an evaluation, under the supervision of and with the participation
of our management, including our President and Chief Executive Officer and Vice
President Finance, as to the effectiveness of our disclosure controls and
procedures as of December 31, 2008.





Based
upon that evaluation, our Chief Executive Officer and Vice President Finance
concluded that our disclosure controls and procedures were effective as of
December 31, 2008.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) of the Exchange Act as a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Projections of any assessment of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.  Our
management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this evaluation, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control — Integrated
Framework.”





Based on
our evaluation under the framework in Internal Control-Integrated Framework,
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.





It should
be noted that while management believes that current disclosure and internal
controls and procedures provide a reasonable level of assurance, it cannot be
expected that existing disclosure controls and procedures or internal financial
controls will prevent all human error and circumvention or overriding of the
controls and procedures.  A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.





ITEM 16.
            
            [RESERVED]ITEM
16A.
            
            AUDIT COMMITTEE FINANCIAL
      EXPERT





The
Company’s board of directors has determined that a member of its Audit
Committee, Mr. Irwin Kramer, an independent director (as defined in the Rules of
the National Association of Securities Dealers, Inc.), is an Audit Committee
financial expert as defined in Item 16A of Form 20-F.





76





ITEM
16B.
            
            CODE OF
      ETHICS





The
Company’s board of directors has adopted a Code of Ethics that applies to all of
the Company’s employees, including the Chairman, Chief Executive Officer, Chief
Financial Officer, principal accounting officer and persons performing similar
functions.





ITEM
16C.
            
            PRINCIPAL ACCOUNTANT FEES AND
      SERVICES





RSM
Richter LLP has served as the Company’s independent public accountants to audit
our financial statements for the fiscal years ended December 31, 2008, 2007,
2006 and 2005.





The
following table presents the aggregate fees billed for professional services and
other services rendered by RSM Richter LLP in 2008.




2008
              
              
              2007Audit
      Fees(1)
              
              $
              219,205
              
              
              $
              255,629Audit
      Related Fees(2)
              
              $
              68,237
              
              
              $
              97,048Tax
      Fees(3)
              
              
              -
              
              
              
              -Other
      Fees(4)
              
              
              -
              
              
              $
              3,209TOTAL:
              
              $
              287,443
              
              
              $
              355,886




These
      fees are subject to a pre-approval policy.





(1)
            Audit
      Fees consist of fees billed for the annual audit services engagement and
      other audit services, which are those services that only the external
      auditor reasonably can provide, and include the audit of its financial
      statements; comfort letters and consents; attest services; and services
      associated with the filing of documents with the SEC.(2)
            Audit-Related
      Fees consist of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of the
      Company’s financial statements or that are traditionally performed by the
      external auditor, and include consultations concerning financial
      accounting and reporting standards; due diligence related to
      acquisitions.Tax
      Fees include fees billed for tax compliance services, advice on original
      and amended tax returns and claims for refund, tax consultations (such as
      assistance in connection with tax audits and appeals), tax advice related
      to mergers and acquisitions, transfer pricing, tax planning services and
      expatriate tax planning and services.(3)
            Related
      to assistance for SOX compliance.




77


PROCEDURES
FOR APPROVAL OF AUDIT AND NON-AUDIT SERVICES BY THE EXTERNAL
AUDITORS





I.
            
            Audit Committee Pre-Approval of
      Services





In
accordance with the requirements of securities regulations to which the Company
is subject and to safeguard the continued independence of its external auditors,
all audit and non-audit services to be rendered by the Company’s external
auditors and any related entities (the “Auditors”) to the Company, its
subsidiaries and any material related companies over which the Company exercises
significant influence must be the subject of pre-approval by the Audit Committee
of the Board.





Such
pre-approval shall be based on the following detailed policies and procedures
established by the Audit Committee.





II.     Services
that the Auditors may not Provide





The
Auditors may not act in any capacity where they could reasonably be seen
to:





·
            function
      in the role of the Company’s
management;


·
            audit
      their own work; or


·
            serve
      in an advocacy role on behalf of the
Company





Except as
otherwise permitted and pre-approved hereby, the Auditors will not be asked to
provide any services in the following areas (in each case as more fully defined
in applicable corporate and securities regulations or the regulations and
guidelines of the appropriate oversight authorities governing the accounting and
auditing profession):





1.
            Bookkeeping
      and related functions;2.
            Financial
      information systems design and implementation;3.
            Appraisal,
      valuation, fairness opinions or contribution-in-kind
    reports;4.
            Actuarial
      services;5.
            Internal
      audit outsourcing;6.
            Management
      functions and human resources functions;7.
            Broker-dealer,
      investment advisor or investment banking services;8.
            Legal
      services;9.
            Expert
      services; and10.
            Management
      consulting services.





78





III.    Pre-Approval
      of a Range of Services


The
engagement for the annual audit of the Company’s consolidated financial
statements is specifically approved on an annual basis by the execution of the
audit engagement letter with the Auditors. Subject to paragraph IV below,
engagements of the Auditors involving services for any of the Company’s entities
that fall into the following service definitions are pre-approved by the Audit
Committee.




Type
      of Service
            
            Description









Audit
      Services









Financial
      statement audit
            
            Recurring
      audit of consolidated financial statements
              including
      subsidiary company and statutory audits and tax
              services
      and accounting consultations required to perform
              an
      audit in accordance with Generally Accepted Auditing
              Standards.







Regulatory financial
      filings
              
              Services
      relating to 1933 and 1934 filings with the SEC
                including
      issuance of comfort letters.
                Statutory
      and regulatory filings including prospectuses
                and
      registration statements.


404
      attestation services
              
              Attestation services
      relating to the report on the entity’s

                  internal
      controls as specified in Section 404 of the
                  Sarbanes-Oxley
      Act and any similar requirements that
                  may
      be introduced under Canadian
                  legislation/regulations.







Audit Related
Services
   Employee
      benefit plan audits
                
                Audit
      of pension and other employee benefit plans and
                  funds.
 
  Financial
      due diligence in
                connection
      with acquisitions and
                divestitures
              
              Assistance
      in financial and tax due diligence, including
                review
      of financial statements, financial data and
                records,
      tax returns, tax forms and tax filings, discussion
                with
      target’s finance and accounting personnel.
                Accounting
      consultation and audits in connection with
                acquisitions
      and divestitures.


Other
      attest services
              
              Attest
      services that are not required by statute or
                regulation.
      Quarterly reviews.


79




Application
      and general control
                  reviews
                
                Review
      of IT and general controls related to specific
                  applications,
      including overall general computer controls,
                  excluding
      those that are a part of the financial statement
                  audit.
 
  Consultation
      regarding GAAP
              
              Discussions,
      review and testing of impact of new
                pronouncements,
      acquisition accounting, and other
                GAAP
      topics.







Tax
Services





Tax
      compliance
              
              Preparation
      and/or review of income, capital, sales, use,
                property,
      excise, local, value added (VAT) and GST tax
                returns,
      filings and forms. Consultation regarding
                handling
      of items for tax returns, required disclosures,
                elections,
      and filing positions available.
  
  Tax
      consulting
                
                Assistance
      with tax audits, examinations or requests for
                  information.
      Responding to requests regarding technical
                  interpretations,
      applicable laws and regulations, and tax
                  accounting.
      Tax advice on mergers, acquisitions,
                  restructurings,
      financings, inter-company transactions,
                  foreign
      tax credits, foreign income tax, tax accounting,
                  foreign
      earnings and profits, capital tax, sales tax, use tax,
                  property
      tax, the treatment in any jurisdiction of foreign
                  subsidiary
      income, VAT, GST, excise tax or equivalent
                  taxes
      in the jurisdiction. Assistance with tax appeals that
                  are
      not in front of a tax court or its equivalent. Advice
                  regarding
      tax legislation or codes including
                  interpretations,
      procedures and advance tax rulings or
                  private
      letter rulings thereof, or their equivalent, in
                  applicable
      jurisdictions in the following areas: income,
                    capital,
      sales, use, property, excise, local, value added
                    (VAT)
      and GST taxes.
 
  Transfer
      pricing
                  
                  Advice
      and assistance with respect to transfer pricing
                    matters,
      including preparation of reports used by the
                    company
      to comply with taxing authority documentation
                    requirements
      regarding royalties, services and inter-
                    company
      pricing and assistance with tax
exemptions.
 
  Customs
      and duties
                    
                    Compliance
      reviews and advice on compliance in the
                      areas
      of tariffs and classification, origin, pricing, and
                      documentation.
      Assistance with customs audits or
                      requests
      for information.
 
  80
  Expatriate tax
      services
                      
                      Preparation
      of individual income tax returns, advice on
                        impact
      of changes in local tax laws and consequences of
                        changes
      in compensation programs or practices.
                        Compliance
      and advice in relation to benefits and
                        compensation,
      stock options, and tax equalization
                        policies.
 
  Other
Services
 Valuation
                        
                        Valuation
      services for non-financial reporting in
                          connection
      with tax-only valuations and valuation
                          services
      to review and comment on tax-related valuations
                          prepared
      by the Company or third parties.
 
  Other
                          
                          Fact
      finding services and forensic investigations under
                            the
      supervision of the audit committee; environmental
                            audits;
      non-financial systems design and
implementation.




81





IV.    Limits
on the Pre-Approval of a Range of Services





In the
case of proposed engagements of the Auditors involving any of the services
covered under the range of services under paragraph III where the fees for a
particular engagement are expected to exceed a total of CDN $5,000, specific
pre-approval must be obtained therefore under the provisions of paragraph V
hereof.





The
general pre-approval of the range of services covered under paragraph III will
be brought to the Audit Committee for review and, if thought appropriate,
renewal on an annual basis.





In
respect of services under paragraph III where the fees for a particular
engagement are expected to be less than or equal to a total of CDN $5,000, the
Chairman of the Audit Committee shall be notified expeditiously of any such
services commenced by the Auditors.





In the
event that services under paragraph III are commenced by the Auditors where the
fees for a particular engagement were expected to be less than or equal to a
total of CDN $5,000, specific pre-approval must be obtained therefore under the
provisions of paragraph V hereof if such fees are later expected to exceed a
total of CDN $5,000.





V.    Pre-Approval
      of Individual Services


The
Company’s management and/or the Auditors may seek pre-approval by the Audit
Committee of the engagement of the Auditors to provide particular services in
certain cases.





Where
particular pre-approval is required, the Audit Committee has delegated the
authority to effect such pre-approval to the Chairman of the
Committee.





Under no
circumstances may the Audit Committee delegate its responsibilities to Company
management.





For
greater certainty, if an engagement with the Auditors for a particular service
is contemplated that is neither forbidden under paragraph II hereof, nor covered
under the range of services under paragraph III hereof, in order for such
engagement to proceed it must be the subject of individual pre-approval under
this paragraph.





It is the
responsibility of management to determine whether a particular service is
covered by the pre-approved range of services. Management should seek the
guidance of the audit committee chair where there is any ambiguity about whether
a particular service is pre-approved.





VI.    Engagement
      Letters


Pre-approved
non-audit services shall be provided by the Auditors pursuant to an engagement
letter with the appropriate Company entity that satisfies each of the following
requirements:





1.
            the
      engagement letter shall be in writing and signed by the Auditors;
      and2.
            the
      engagement letter shall set out the particular non-audit services to be
      provided by the Auditors which, unless individually pre-approved, shall be
      within the categories of pre-approved non-audit services described in
      paragraph III hereof.





VII.    Reports
of Services to the Audit Committee





At every
regularly-scheduled meeting of the Audit Committee, management shall report on
all new pre-approved engagements of the Auditors since the last such report. The
Auditors may comment on the report if they wish to do so. All engagement letters
entered into pursuant hereto shall be made available to the Audit Committee upon
demand.





ITEM
16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES





Not
      applicable.







82


ITEM
16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS





None.





ITEM
17.   FINANCIAL STATEMENTS





These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (“Canadian GAAP”). There are
certain measurement differences between Canadian GAAP and U.S. GAAP. Differences
which relate to the Company are summarized in note 27 to our consolidated
financial statements.





Independent
Registered Public Accounting Firm’s Report





To the
Shareholders and Board of Directors of Copernic Inc.





We have
audited the accompanying consolidated balance sheets of Copernic Inc. as at
December 31, 2008 and 2007 and the consolidated statements of operations,
shareholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2008. 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 and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform an audit to
obtain reasonable assurance whether the 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. We believe that our audits provide a reasonable basis
for our opinion.





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 each of the years in
the three-year period ended December 31, 2008 in accordance with Canadian
generally accepted accounting principles.





We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting at December 31, 2008
included in the Controls and Procedures section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations dated March 27, 2009
and, accordingly, we do not express an opinion thereon.





s/s RSM Richter
LLP


Montreal,
Canada


March 27,
2009























83




Copernic
Inc.
 Consolidated
Balance Sheets
 As
at December 31, 2008 and 2007
 
  (expressed
in U.S. dollars)





2008
              $
            
            
            
            2007
              $AssetsCurrent
      assetsCash
      and cash equivalents
            
            
            2,067,705
            
            
            
            2,099,560Restricted
      cash (note 6)
            
            
            -
            
            
            
            807,468Temporary
      investments (note 7)
            
            
            3,005,227
            
            
            
            3,965,384Accounts
      receivable  (note 8)
            
            
            907,560
            
            
            
            918,033Income
      taxes receivable
            
            
            110,121
            
            
            
            221,205Prepaid
      expenses
            
            
            170,864
            
            
            
            208,6556,261,477
            
            
            
            8,220,305Property and
      equipment (note
      9)
            
            
            240,094
            
            
            
            459,872Intangible
      assets  (note 10)
            
            
            918,485
            
            
            
            2,320,676Goodwill  (note
      10)
            
            
            3,362,003
            
            
            
            7,357,00310,782,059
            
            
            
            18,357,856LiabilitiesCurrent
      liabilitiesAccounts
      payable and accrued liabilities  (note 12)
            
            
            991,142
            
            
            
            1,520,619Deferred
      revenue
            
            
            156,789
            
            
            
            211,455Deferred
      rent
            
            
            4,805
            
            
            
            11,016Income
      taxes payable
            
            
            -
            
            
            
            8,100Current
      portion of obligations under capital leases (note 14)
            
            
            57,267
            
            
            
            56,0711,210,003
            
            
            
            1,807,261Obligations under capital
      leases(note
      14)
            
            
            39,992
            
            
            
            99,788Future income taxes(note
      22)
            
            
            259,848
            
            
            
            650,413Commitments(note 26)Shareholders’
      EquityCapital
      stock (note 15)AuthorizedUnlimited
      common shares, no par valueIssued
      and outstanding14,637,531
      common shares
            
            
            96,556,485
            
            
            
            96,556,485Additional
      paid-in capital
            
            
            5,747,028
            
            
            
            5,784,502Accumulated
      other comprehensive income
            
            
            561,137
            
            
            
            561,137Accumulated
      deficit
            
            
            (93,592,434
            )
            
            
            (87,101,730
            )9,272,216
            
            
            
            15,800,39410,782,059
            
            
            
            18,357,856





See
accompanying notes.





Approved
by the Board of Directors









s/s David
      Goldman
            s/s Irwin
      KramerDavid Goldman,
      Chairman of the Board
            Irwin Kramer,
      Director and Chair of the Audit Committee





84




Copernic
Inc.
 Consolidated
Statements of Operations
 For
the years ended December 31
 
  (expressed
in U.S. dollars)





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Revenues  (note17)
            
            
            7,011,631
            
            
            
            8,116,408
            
            
            
            9,596,402Cost of revenues(note 18)
            
            
            2,530,908
            
            
            
            2,636,410
            
            
            
            2,704,101Gross
      Margin
            
            
            4,480,723
            
            
            
            5,479,998
            
            
            
            6,892,301ExpensesMarketing,
      sales and services
            
            
            938,611
            
            
            
            1,897,822
            
            
            
            1,850,176General
      and administration
            
            
            2,907,964
            
            
            
            4,691,572
            
            
            
            3,996,327Product
      development and technical support (note 23)
            
            
            1,938,724
            
            
            
            2,416,410
            
            
            
            2,538,867Amortization
      of property and equipment
            
            
            211,056
            
            
            
            302,509
            
            
            
            178,192Amortization
      of intangible assets
            
            
            1,019,159
            
            
            
            1,991,286
            
            
            
            2,067,009Write-downs
      and settlement costs (note 19)
            
            
            4,432,264
            
            
            
            10,146,311
            
            
            
            1,683,238Restructuring
      charges (note 13)
            
            
            101,012
            
            
            
            -
            
            
            
            -Interest
      and other income
            
            
            (162,880
            )
            
            
            (401,183
            )
            
            
            (415,950
            )Loss
      (gain) on foreign exchange
            
            
            (24,440
            )
            
            
            115,071
            
            
            
            82,20311,361,470
            
            
            
            21,159,798
            
            
            
            11,980,062Loss
      from continuing operations
              before
      income taxes and discontinued operations
            
            
            (6,880,747
            )
            
            
            (15,679,800
            )
            
            
            (5,087,761
            )Recovery
      of income taxes(note 22)
            
            
            (390,043
            )
            
            
            (1,248,974
            )
            
            
            (729,053
            )Loss
      from continuing operations before discontinued operations
            
            
            (6,490,704
            )
            
            
            (14,430,826
            )
            
            
            (4,358,708
            )Results
      of discontinued operations,net of income
      taxes (note
      6)
            
            
            -
            
            
            
            -
            
            
            
            89,328Loss
      for the year
            
            
            (6,490,704
            )
            
            
            (14,430,826
            )
            
            
            (4,269,380
            )Basic
      and diluted loss per share from continuing operations
            
            
            (0.44
            )
            
            
            (0.99
            )
            
            
            (0.31
            )Basic
      and diluted earnings  per share from discontinued
      operations
            
            
            -
            
            
            
            -
            
            
            
            0.01Basic
      and diluted net loss per share
            
            
            (0.44
            )
            
            
            (0.99
            )
            
            
            (0.30
            )


See
accompanying notes.











85




Copernic
Inc.
 Consolidated
Statements of Shareholders’ Equity
 For
the years ended December 31
 
  (expressed
in U.S. dollars)





Number
      of common
              shares
            
            
            Common
              shares
              $
            
            
            Additional
              paid-in
              Capital
              $
            
            
            Accumulated
              Other
              Comprehensive
              Income
              $
            
            
            Accumulated
              deficit
              $
            
            
            Total
              $Balance,
      December 31, 2005
            
            
            14,340,864
            
            
            
            95,298,234
            
            
            
            5,249,902
            
            
            
            370,369
            
            
            
            (68,401,524
            )
            
            
            32,516,981Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            456,281
            
            
            
            
            
            
            
            
            
            
            
            456,281Comprehensive
      income:Net
      loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,269,380
            )
            
            
            (4,269,380
            )Foreign
      currency translation adjustments for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            190,768
            
            
            
            
            
            
            
            190,768Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            190,768
            
            
            
            (4,269,380
            )
            
            
            (4,078,612
            )Balance,
      December 31, 2006
            
            
            14,340,864
            
            
            
            95,298,234
            
            
            
            5,706,183
            
            
            
            561,137
            
            
            
            (72,670,904
            )
            
            
            28,894,650Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            407,076
            
            
            
            
            
            
            
            
            
            
            
            407,076Comprehensive
      income:Net
      loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,430,826
            )
            
            
            (14,430,826
            )Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,430,826
            )
            
            
            (14,430,826
            )Options
      exercised
            
            
            296,667
            
            
            
            1,258,251
            
            
            
            (581,993
            )
            
            
            
            
            
            
            
            
            
            
            676,258Options
      which conditions have changed
              (note
      15)
            
            
            
            
            
            
            
            
            
            
            253,236
            
            
            
            
            
            
            
            
            
            
            
            253,236Balance,
      December 31, 2007
            
            
            14,637,531
            
            
            
            96,556,485
            
            
            
            5,784,502
            
            
            
            561,137
            
            
            
            (87,101,730
            )
            
            
            15,800,394Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            (37,474
            )
            
            
            
            
            
            
            
            
            
            
            (37,474
            )Comprehensive
      income:Net
      loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,490,704
            )
            
            
            (6,490,704
            )Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,490,704
            )
            
            
            (6,490,704
            )Balance,
      December 31, 2008
            
            
            14,637,531
            
            
            
            96,556,485
            
            
            
            5,747,028
            
            
            
            561,137
            
            
            
            (93,592,434
            )
            
            
            9,272,216




See
accompanying notes.








86




Copernic
Inc.
 Consolidated
Statements of Cash Flows
 For
the years ended December 31
  (expressed
in U.S. dollars)





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Cash
      flows from (used for)Operating
      activitiesLoss
      from continuing operations
            
            
            (6,490,704
            )
            
            
            (14,430,826
            )
            
            
            (4,358,708
            )Adjustments
      forAmortization
      of property and equipment
            
            
            211,056
            
            
            
            302,509
            
            
            
            178,192Amortization
      of intangible assets
            
            
            1,019,159
            
            
            
            1,991,286
            
            
            
            2,067,009Employee
      stock-based compensation
            
            
            (37,474
            )
            
            
            660,312
            
            
            
            456,281Write-down
      of  goodwill (note 10)
            
            
            3,995,000
            
            
            
            8,060,841
            
            
            
            -Write-down
      of  intangible assets (note 10)
            
            
            394,192
            
            
            
            1,985,470
            
            
            
            403,425Write-down
      of investment (note 11)
            
            
            -
            
            
            
            150,000
            
            
            
            570,000Write-down
      of  property and equipment (note 9)
            
            
            43,072
            
            
            
            -
            
            
            
            9,813Long-term
      income tax credits
            
            
            -
            
            
            
            -
            
            
            
            54,912Future
      income taxes
            
            
            (390,565
            )
            
            
            (1,250,453
            )
            
            
            (724,177
            )Unrealized
      loss (gain) on foreign exchange
            
            
            (25,201
            )
            
            
            12,813
            
            
            
            -Net
      change in non-cash working capital items (note 21)
            
            
            (439,106
            )
            
            
            990,158
            
            
            
            515,619Cash
      used for operating activities from continuing operations
            
            
            (1,720,571
            )
            
            
            (1,527,890
            )
            
            
            (827,634
            )Cash
      used for operating activities from discontinued operations
            
            
            -
            
            
            
            (6,253
            )
            
            
            (83,948
            )(1,720,571
            )
            
            
            (1,534,143
            )
            
            
            (911,582
            )Investing
      activitiesReimbursement
      related to Copernic Technologies Inc.’s business acquisition (note
      10)
            
            
            -
            
            
            
            -
            
            
            
            379,382Purchase
      of intangible assets
            
            
            (5,054
            )
            
            
            (68,433
            )
            
            
            (51,400
            )Purchase
      of property and equipment
            
            
            (15,879
            )
            
            
            (149,658
            )
            
            
            (76,104
            )Net
      decrease (increase) in temporary investments
            
            
            960,157
            
            
            
            1,626,458
            
            
            
            (1,578,530
            )Cash
      provided from (used for) investing activities
            
            
            939,224
            
            
            
            1,408,367
            
            
            
            (1,326,652
            )Financing
      activitiesIssuance
      of capital stock
            
            
            -
            
            
            
            676,258
            
            
            
            -Repayment
      of obligations under capital leases
            
            
            (57,976
            )
            
            
            (23,071
            )
            
            
            -Cash
      provided from (used for) financing activities
            
            
            (57,976
            )
            
            
            653,187
            
            
            
            -Effect
      of foreign exchange rate changes on cash
      and cash equivalents
            
            
            -
            
            
            
            -
            
            
            
            116,650Net
      change in cash, cash equivalents and restricted cash during the
      year
            
            
            (839,323
            )
            
            
            527,411
            
            
            
            (2,121,584
            )Cash,
      cash equivalents and restricted cash – Beginning of year
            
            
            2,907,028
            
            
            
            2,379,617
            
            
            
            4,501,201Cash,
      cash equivalents and restricted cash – End of year
            
            
            2,067,705
            
            
            
            2,907,028
            
            
            
            2,379,617Cash
      and cash equivalents comprise:Cash
            
            
            1,066,817
            
            
            
            596,493
            
            
            
            777,637Short-term
      investments
            
            
            1,000,888
            
            
            
            1,503,067
            
            
            
            1,601,9802,067,705
            
            
            
            2,099,560
            
            
            
            2,379,617Restricted
      cash (note 6)
            
            
            -
            
            
            
            807,468
            
            
            
            -2,067,705
            
            
            
            2,907,028
            
            
            
            2,379,617Supplemental
      cash flow informationCash
      paid for interest
            
            
            17,314
            
            
            
            7,426
            
            
            
            4,862Cash
      (received) paid for income taxes
            
            
            522
            
            
            
            1,479
            
            
            
            (64,900
            )





See
accompanying notes.


87


Copernic
Inc.


Notes to
Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006







(expressed
in U.S. dollars)





1
            Nature
      of business




Copernic
Inc. is a leading provider of award winning search technology for both the web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.





Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, calendar, emails, and email attachments stored
anywhere on a PC hard drive.




Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic’s search division handles over 1 billion search requests per month and
has media placement partnerships established not only in North America, but in
Europe and Australia.





Search
and graphic advertising





Approximately
80% of our revenues come from our search based businesses which
are:  search property Mamma.com, “The Mother of All Search Engines®”
and its search publisher network representing 68% of these revenues and Copernic
Agent® and Copernic Desktop Search® for 12% of these revenues
respectively.  The revenue model in this sector is simply a
pay-per-click fee that is charged to the advertiser when a user clicks on a
sponsored link. The business model consists of advertisers buying keywords. When
these keywords are searched by a user, the advertiser’s Web site will be listed
in a premium position in the search results, identified as a sponsored result.
The Company aggregates advertisers from other search-based businesses and from
its own direct sales efforts (through direct sales and automated online
marketing initiatives). Advertising revenues generated through third party
search properties have associated payout costs; these payout costs represent a
percentage of the revenues generated from the distribution of search
advertisements onto third party search property.  Higher margins are
obtained through our own properties as there are no payout costs associated with
these revenues.





The other
revenue model is CPM based (cost per one thousand impressions published).
The business model is based on advertisers buying impressions for ad campaigns
(these are creative based campaigns: different size banners, pop-ups, rich media
advertising) and targeting them through our network of publishers. Campaigns can
be targeted in several ways: geo-targeting (by region), or by site category
(e.g.: travel, entertainment, finance).





Software
licensing





Approximately
14% of our revenues came from software licensing. The business model is based on
selling licenses of Copernic Desktop Search® to ISPs, portals, enterprises,
international distributors and resellers as well as Copernic Agent®
Personal/Pro, Copernic Summarizer® and Copernic Tracker® through our e-commerce
store.





Customized
development and maintenance support





Approximately
6% of our revenues were the result of customized development and maintenance
support.





2
            Significant
      accounting policies




These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (“Canadian GAAP”). There are
certain measurement differences between Canadian GAAP and United States
generally accepted accounting principles (“U.S. GAAP”). Differences which relate
to the Company are summarized in note 27.





a)
            Basis
      of presentation




These
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All intercompany balances and
transactions have been eliminated on consolidation.


88




b)
              Use
      of estimates


The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates 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 revenues and expenses during the reporting period.
Significant estimates in these financial statements include the allowance for
doubtful accounts, recovery of future income taxes, goodwill and annual goodwill
impairment test, useful lives and impairment of long-lived assets, stock-based
compensation costs and determination of the fair value of the intangible assets
on acquisitions.  Actual results could differ from those
estimates.




c)
            Cash
      and cash equivalents




Cash and
cash equivalents consist of cash on hand, bank balances available, and highly
liquid investments with an initial term of three months or less that are stated
at cost, which approximates market value.





d)
            Temporary
      investments




Temporary
investments are valued at the amortized cost using the effective interest rate
method.




e)
            Income
      tax credits




Income
tax credits are accounted for using the cost reduction method. Under this
method, tax credits relating to eligible expenditures are deducted from the
cost of the related assets or included in the consolidated statements of
operations as a reduction of the related expenses. Tax credits are recorded in
the year in which the expenditures are incurred provided there is reasonable
assurance of realization.




f)
            Investments




The
Company has investments in equity instruments of privately-held companies. These
investments are generally accounted for under the cost method, as the Company
does not have the ability to exercise significant influence over
operations.  The Company records an investment impairment charge when
it believes an investment has experienced a decline in value that is judged to
be other than temporary.  The Company monitors its investments for
impairment by considering current factors including economic environment, market
conditions and operational performance and other specific factors relating to
the business underlying the investment, and records reductions in carrying
values when necessary. The fair value for privately held securities is estimated
using the best available information as of the valuation date, including the
quoted market prices of comparable public companies, recent financing rounds of
the investee and other investee specific information.





g)
            Financial
      Instruments





Under the
new standards, financial assets and financial liabilities are initially
recognized at fair value and are subsequently accounted for based on their
classification as described below. The classification depends on the purpose for
which the financial instruments were acquired and their characteristics. Except
in very limited circumstances, the classification is not changed subsequent to
initial recognition.





Financial
assets





Held for
trading





Financial
assets that are purchased and incurred with the intention of generating profits
in the near term are classified as held for trading. In addition, any other
financial assets can be designated by the Company upon initial recognition as
held for trading. These instruments are accounted for at fair value with the
change in the fair value recognized in net income during the period. Cash and
cash equivalents are classified as held for trading.





Available-for-sale





Available-for-sale
assets are non-derivative financial assets that are either designated in this
category or not classified in any of the other categories. Financial assets
classified as available-for-sale are carried at fair value with the changes in
fair value recorded in other comprehensive income, except for investments in
equity instruments that do not have a quoted market price in an active market
which should be measured at cost. Interest on available-for-sale assets is
calculated using the effective interest rate method and is recognized in the net
income. When a decline in fair value is determined to be other-than-temporary,
the


89


cumulative
loss included in accumulated other comprehensive income is removed and
recognized in net income (loss). Gains and losses realized on disposal of
available-for-sale securities are recognized in net income (loss). No assets are
classified as available-for-sale.





Held-to-maturity





Securities
that have a fixed maturity date and which the Company has positive intention and
the ability to hold to maturity are classified as held-to-maturity and accounted
for at amortized cost using the effective interest rate method. Temporary
investments are classified as held-to-maturity.





Loans and
receivables





Loans and
receivables are non-derivative financial assets resulting from the delivery of
cash or other assets in return for a promise to repay on a specified date, or on
demand, usually with interest. Loans and receivables are accounted for at
amortized cost using the effective interest rate method. Accounts receivable are
classified as loans and receivable.





Financial
liabilities





Held for
trading





Financial
liabilities classified as held for trading include derivative liabilities that
are not accounted for as hedging instruments, obligations to deliver financial
assets borrowed by a short seller and financial liabilities that are part of a
portfolio of identified financial instruments that are managed together with the
intention of generating profits in the near term. In addition, any other
financial liabilities can be designated by the Company upon initial recognition
as held for trading. These instruments are accounted for at fair value with the
change in the fair value recognized in net income during the period. No
liabilities are classified as held for trading.





Other
liabilities





Other
liabilities are accounted for at amortized cost using the effective interest
rate method. Accounts payable are classified as other liabilities.





h)
            Property
      and equipment




Property
and equipment are recorded at cost, less applicable tax credits and accumulated
amortization. Amortization is calculated using the following methods and annual
rates or period:




Computer
      equipment
            Declining
      balance
            50%Furniture
      and fixtures
            Declining
      balance
            33%Leasehold
      improvements
            Straight-line
            Duration
      of lease




i)
              Intangible
      assets




Intangible assets with
finite useful lives are recorded at cost less accumulated amortization. The
Company provides for the amortization of intangible assets over their estimated
useful lives using the following methods and annual rates:




Trade
      names
            Straight-line
            14%Technology
            Straight-line
            25%Customer
      relationships
            Straight-line
            33%Patents
            Straight-line
            10%Software
            Declining
      balance
            50%





j)
            Goodwill




Goodwill
represents the excess of the purchase price over the fair value of net assets
acquired.  Goodwill is tested for impairment annually on December
31st  of
each year or more often if events or changes in circumstances indicate that it
might be impaired.  The impairment test first consists of a comparison
of the fair value of the reporting unit to which goodwill is assigned with its
carrying amount.  When the carrying amount of a reporting unit exceeds
its fair value, the fair value of the






90
 
  reporting
unit’s goodwill is compared with its carrying amount to measure the amount of
the impairment loss, if any.  Any impairment
loss is charged to earnings in the period in which the loss is incurred.
Management’s determination of the fair value of each reporting unit incorporates
multiple inputs including discounted cash flow calculations, peer company price
to earnings multiples, the level of the Company’s share price and assumptions
that market participants would make in valuing the reporting unit. Other
assumptions include levels of economic capital, future business growth, earnings
projections and weighted average cost of capital used for purpose of
discounting. Decreases in the amount of economic capital allocated to a
reporting unit, decreases in business growth, decreases in earnings projections
and increases in the weighted average cost of capital will all cause the
reporting unit’s fair value to decrease. The Company completed its annual
goodwill assessment for the individual units as of December 31,
2008.


k)
            Impairment
      of long-lived assets




The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. An impairment loss is recognized if the carrying value of a
long-lived asset exceeds the sum of its estimated undiscounted future cash flows
expected from its use. The amount of impairment loss, if any, is determined as
the excess of the carrying value of the assets over their fair
value.




l)
            Revenue
      recognition




Search
advertising, graphic advertising, software licensing, customized development and
maintenance support revenues are recognized when services are rendered, provided
there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is considered probable, and fees are not subject to
forfeiture or other concessions.





With
respect to search advertising and graphic advertising revenues, insertion orders
or signed contracts are generally used as evidence of an arrangement. Revenues
are recognized in accordance with EIC-123, Reporting Revenue Gross as a
Principal Versus Net as an Agent.




Software
licensing agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable and vendor-specific evidence of an arrangement exists to allocate
the total fee to the different elements of an arrangement. Vendor-specific
objective evidence is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by management, if it is probable that the price, once
established, will not change before market introduction.




Revenues
from maintenance support for licenses previously sold and implemented are
recognized ratably over the term of the contract.




Revenues
from customized development, not considered as part of the implementation of
software licenses, are recognized as the services are provided.




Amounts
received in advance of the delivery of products or performance of services are
classified as deferred revenue.





Estimates
of collection likelihood are based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
If it is determined that collection of a fee is not probable, management defers
the fee and recognizes revenues at the time collection becomes probable, which
is generally upon receipt of cash.




m)
            Research
      and development costs





Research
costs are expensed as incurred. Development costs are also expensed as incurred
unless such costs meet the criteria under generally accepted accounting
principles for deferral and amortization. To qualify for deferral, the costs
must relate to a technically feasible, identifiable product which the Company
intends to produce and market, there must be a clearly defined market for the
product, and the Company must have the resources, or access to the resources,
necessary to complete the development. The Company has not deferred any such
development costs during the years ended December 31, 2008 and
2007.


91




n)
              Income
      taxes


The
Company provides for income taxes using the liability method of tax allocation.
Under this method, future income tax assets and liabilities are determined based
on deductible or taxable temporary differences between financial statement
values and tax values of assets and liabilities using enacted income tax rates
expected to be in effect for the year in which the differences are expected to
reverse.




The
Company establishes a valuation allowance against future income tax assets if,
based upon available information, it is more likely than not that some or all of
the future income tax assets will not be realized.




o)
            Foreign
      currency translation




The
functional and reporting currency of the Company is the U.S. dollar. The
functional currency of the Company’s subsidiaries is the local currency.
Accordingly, the financial statements of the Company’s subsidiaries have been
translated into the reporting currency as follows: monetary assets and
liabilities have been translated at the exchange rate in effect at the balance
sheet date, non-monetary assets and liabilities have been translated at the
historical exchange rate.  Revenues and expenses have been translated
at the average exchange rate for each year. All gains or losses resulting from
the application of this translation method are included in net earnings (loss)
for the year.




p)
            Foreign
      currency transactions




Transactions
concluded in currencies other than the functional currency have been translated
as follows: monetary assets and liabilities have been translated at the exchange
rate in effect at the balance sheet date and revenue and expenses have been
translated at the average exchange rate for each period; non-monetary assets and
liabilities have been translated at the rates prevailing at the dates of the
respective transactions. Exchange gains and losses arising from such
transactions are included in net earnings (loss) for the year.




q)
            Stock-based
      compensation




The
Company has one share option plan (described in note 15) and accounts for grants
under this plan in accordance with the fair value-based method of accounting for
stock-based compensation. Compensation expense for stock options awarded under
the plan is measured at the fair value at the grant date using the Black-Scholes
valuation model and is recognized using the accelerated expense attribution
method over the vesting period of the options granted. The Company estimates its
forfeiture rate in order to determine its compensation expense arising from
stock-based awards. Cash consideration received from employees when they
exercise the option is credited to capital stock.




The
Company uses the Black-Scholes option pricing model which requires the input of
subjective assumptions. These assumptions, including estimating the length of
time employees will retain their stock options before exercising them (“the
expected term”), the expected volatility of our common stock price over the
expected term and the number of options that will ultimately not complete their
vesting requirements (“forfeitures”). Changes in subjective assumptions can
materially affect the estimate of fair value of stock-based compensation and,
consequently, the related amount recognized on the Consolidated Statements of
Operations.




r)
            Earnings
      (loss) per share




Basic
earnings (loss) per share are calculated using the weighted average number of
shares outstanding during each of the years (note 16).




Diluted
earnings (loss) per share are calculated based on the weighted average number of
common shares outstanding in each of the years, plus the effects of dilutive
common share equivalents, such as options and warrants outstanding. This method
requires that the dilutive effect of outstanding options and warrants be
calculated using the treasury stock method, as if all dilutive options and
warrants had been exercised at the later of the beginning of the reporting
period or date of issuance, and that the funds obtained thereby were used to
purchase common shares of the Company at the average trading price of the common
shares during the year.


92




s)
              Comparative
      figures
  Certain
comparative figures have been reclassified to conform with the current year’s
presentation.




3
            Change
      in accounting policies





a)  For
changes affecting 2007





Initial
application of primary source of GAAP





On
January 1, 2007, in accordance with the applicable transitional provisions, the
Company applied the recommendations of new Section 1506, “Accounting Changes”,
of the CICA’s Handbook.  This new section, effective for the years
beginning on or after January 1, 2007, prescribes the criteria for changing
accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies, changes in accounting estimates and corrections
of errors.  Furthermore, the new standard requires the communication
of the new primary sources of GAAP that are issued but not yet effective or not
yet adopted by the Company.  The new standard had a negligible effect
on the Company’s financial statements.





Effective
in January 2007, the Company adopted three new accounting standards issued by
the CICA: Section 1530, Comprehensive Income; Section 3855, Financial
Instruments – Recognition and Measurement; and Section 3865, Hedges. These new
accounting standards establish standards for recognizing and measuring financial
instruments, namely financial assets, financial liabilities and derivatives.
Certain changes in the value of these financial instruments are presented under
Comprehensive Income in the Consolidated Statements of Shareholders’ Equity. The
application of these new standards had a negligible effect on the Company’s
financial statements and financial position.





Accounting
policy choice for transaction costs (“EIC-166”)





Issued in
June 2007, EIC-166 addresses whether the entity must make one accounting policy
choice that applies to all financial assets and financial liabilities classified
other than held for trading. This Abstract mentions that the same accounting
policy choice should be made for all similar financial instruments classified as
other than held for trading but that a different accounting policy choice might
be made for financial instruments that are not similar. This accounting
treatment should be applied retrospectively to transaction costs accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after September 30, 2007.  The adoption of
this Abstract had no impact on the Company’s financial statements.





Convertible
and other debt instruments with embedded derivatives (“EIC-164”)





EIC-164
addresses the situation where a company issues a debt instrument that is
convertible at any time at the holder’s option into a fixed number of common
shares. Upon conversion, the issuer is either required or has the option to
satisfy all or part of the obligation in cash. The instrument may also permit
the issuer to redeem the instrument prior to maturity, and/or permit the holder
to force the issuer to redeem the instrument prior to maturity. This Abstract
provides guidance on various issues related to such debt
instruments.





The
accounting treatment in this Abstract should be applied retrospectively to
financial instruments accounted for in accordance with Section 3855 in financial
statements issued for interim and annual periods ending on or after June 30,
2007. The adoption of this Abstract had no impact on the financial
statements.





Accounting
by an investor upon a loss of significant influence (“EIC-165”)





Issued in
April 2007, EIC-165 addresses the situation of how an investor that loses
significant influence in an investee should account for the amount the investor
has in its accumulated other comprehensive income (OCI) for its proportionate
share of the investee’s equity adjustment for OCI.  The amount
recorded by the investor in accumulated OCI for the investor’s proportionate
share of an investee’s equity adjustments for OCI should be deducted from or
added to the carrying value of the investment at the time significant influence
is lost. To the extent that the adjustment results in a carrying value of the
investment that is less than zero, an investor should reduce the carrying value
of the investment to zero and record the remaining balance in net
income.





The
accounting treatment in this Abstract should be applied retrospectively, with
restatement of prior periods, to all financial statements for interim and annual
reporting periods ending June 30, 2007.  The adoption of this Abstract
had no impact on the Company’s financial statements.





93


b)  For
changes affecting 2008





CICA
Section 1535 - Capital Disclosures





In
December 2006, the CICA issued Handbook Section 1535 – Capital
Disclosures.  The new accounting standard requires disclosure of
information about an entity’s objectives, policies, and processes for managing
capital, as well as quantitative data about capital and whether the entity has
complied with any capital requirements.  This Handbook Section is
effective for interim and annual periods beginning on or after October 1,
2007.  The Company has adopted this new Section in its first
quarter.





CICA
Section 3862 – Financial Instruments – Disclosures


CICA
Section 3863 – Financial Instruments – Presentation





In
December 2006, the CICA issued Handbook Section 3862 and 3863 that provide
additional guidance regarding disclosure of the risks associated with both
recognized and unrecognized financial instruments and how those risks are
managed.  These Handbook Sections are also effective for interim and
annual periods beginning on or after October 1, 2007. The Company has adopted
these new Sections in its first quarter.





EIC-169,
Determining Whether a Contract is Routinely Denominated in a Single
Currency





Issued
January 8, 2008, EIC-169 provides guidance on how to define or apply the term
“routinely denominated in commercial transactions around the world” as discussed
in Section 3855 when assessing contracts for embedded foreign currency
derivatives.  It also determines the factors that can be used to
determine whether a contract for the purchase or sale of a non-financial item
such as a commodity is routinely denominated in a particular currency in
commercial transactions around the world.  The accounting treatment of
this Abstract should be applied retrospectively to embedded foreign currency
derivatives in host contracts that are not financial instruments accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after March 15, 2008. The adoption of this Abstract
did not have any impact on the Company’s financial statements.





c)  Future
accounting changes





Goodwill
and Intangible Assets - Section 3064





In
January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets.  The
objectives of Section 3064 are to reinforce the principle-based approach to the
recognition of assets only in accordance with the definition of an asset and the
criteria for asset recognition; and clarify the application of the concept of
matching revenues and expenses such that the current practice of recognizing
asset items that do not meet the definition and recognition criteria is
eliminated.  This standard also provides guidance for the recognition
of internally developed intangible assets (including research and development
activities), ensuring consistent treatment of all intangible assets, whether
separately acquired or internally developed.  This Section applies to
interim and annual periods beginning on or after October 1, 2008, with early
adoption encouraged.  The adoption of the new standard will not have
any impact on the Company’s financial statements.





Transition
to International Financial Reporting Standards (“IFRS”)





In
February 2008, the Canadian Accounting Standards Board confirmed
that  publicly accountable enterprises will be required to transition
from Canadian GAAP to IFRS for interim and annual financial reporting purposes
for fiscal years beginning on or after January 1, 2011 with comparative
information. In May 2008, the Canadian Securities Administrators issued Staff
Notice 52-320, which provides guidance on the disclosure of changes expected in
accounting policies related to the change over IFRS. In accordance with the
notice, the Company is required to provide an update of the Company’s IFRS
conversion plan in each financial reporting period prior to conversion on
January 1, 2011.





The
Company started working on the conversion plan in Q4 2008 with the help of an
external advisor. The project consists of three phases to be completed in order
to change over to IFRS: the diagnostic, development and
implementation.





The first
phase includes the identification of significant differences between existing
Canadian GAAP and IFRS that are relevant for the Company and the review of the
alternatives available upon adoption.  In Q4 2008, the Company has
performed a diagnostic review and established that the most significant
differences for the Company between Canadian GAAP and IFRS relate to revenue
recognition, property and equipment, leases, provisions, reporting currency,
presentation and additional disclosure requirements under IFRS. Additional
differences might be identified in the future as changes to IFRS standards are
released.





The
second phase includes identification, evaluation and selection of accounting
policies necessary for the Company to change over to IFRS as well as potential
first-time adoption exemptions. During this phase, the Company will assess the
impact of the transition


94


on the
data system and internal control over financial reporting, the further training
required for the financial team and the impact on business activities such as
foreign currency, capital requirements, banking agreements or compensation
arrangements. The Company began this phase in Q1 2009.





The
implementation phase will integrate all the solutions into the Company’s
financial system and processes that are necessary for the Company to convert to
IFRS.





4
            Capital
      structure financial policies




The
Company’s objectives when managing capital are:




•
            to
      safeguard the Company’s ability to continue as a going concern, so that it
      can continue to provide returns for shareholders and benefits for other
      stakeholders, and




•    to
provide an adequate return to shareholders by pricing products and services
commensurately with the level of risk.




The
Company sets the amount of capital in proportion to risk. The Company manages
the capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of its assets. In order to
maintain or adjust the capital structure, the Company may issue new shares, or
sell assets to reduce its risk.





In order
to maximize flexibility to finance our ongoing growth and expansion and be able
to take advantage of additional new capital investment and acquisition
opportunities, the Company does not currently pay a dividend. The Company is not
subject to any capital requirements imposed by a regulator.





The
Company’s capital is composed exclusively of shareholders’ equity. The Company’s
primary uses of capital are to finance increases in non-cash working capital and
capital expenditures. The Company currently funds these requirements out of its
liquidities.





The
primary measure used by the Company to monitor its liquidity situation is by
maintaining liquidities at a minimum of cash used for operating activities from
continuing operations of the previous year adjusted by net change in non-cash
working capital items, current portion of obligations under capital leases and
expected capital expenditures for the next year.





2008
              $
            
            
            
            2007
              $Cash
      used for operating activities from continuing operations
            
            
            (1,720,569
            )
            
            
            (1,527,890
            )Add:
      net change in non-cash working capital items
            
            
            439,106
            
            
            
            (990,158
            )current
      portion of obligations under capital leases
            
            
            (57,267
            )
            
            
            (56,071
            )expected
      capital expenditures for the next year
            
            
            (45,000
            )
            
            
            (21,000
            )(1,383,730
            )
            
            
            (2,595,119
            )Minimum
      required liquidities for the coming year
            
            
            1,400,000
            
            
            
            2,600,000








2008
              $
            
            
            
            2007
              $Total
      cash, cash equivalents  and temporary
investments
            
            
            5,072,932
            
            
            
            6,064,944Minimum
      required liquidities
            
            
            (1,400,000
            )
            
            
            (2,600,000
            )Available
      liquidities
            
            
            3,672,932
            
            
            
            3,464,944





5
            Financial
      Instruments





On
January 1, 2008, the Company adopted the requirements of the CICA Handbook
Section 3862, “Financial Instruments Disclosures” and Handbook Section 3863,
“Financial Instruments – Presentation”.  These Handbook Sections
require disclosures to enable users to evaluate the significance of financial
instruments for the entity’s financial position and performance, and the nature
and extent of an entity’s exposure to risks arising from financial instruments,
including how the entity manages those risks.





95


Financial
Instruments – Carrying Values and Fair Values





Fair
value estimates are made as of a specific point in time, using available
information about the financial instrument.  These estimates are
subjective in nature and may not be determined with precision.





The
Company has determined that the carrying value of its short-term financial
assets and liabilities approximates their fair value because of the relatively
short periods to maturity of these instruments.





Foreign
Currency Exchange Rate Risk





The
Company is exposed to foreign exchange rate risk in that a higher proportion of
the expenses are denominated in foreign currencies relative to
revenue.  Accordingly, the results are affected, and may be affected
in the future, by exchange rate fluctuations of the foreign currencies relative
to the US dollar.





The
Company does not use derivative financial instruments to reduce its foreign
exchange exposure.  Fluctuations in foreign exchange rates could cause
unanticipated fluctuations in the Company’s operating results.





The following table provides an
indication of the Company’s significant foreign exchange currency
exposures:






As
      at2008
              $
            2007
              $CDN
            
            
            GBP
            
            
            EUR
            
            
            AUD
            
            
            CDN
            
            
            GBP
            
            
            EUR
            
            
            AUDCash
      and cash equivalents
            
            
            56,223
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            46,794
            
            
            
            -
            
            
            
            -
            
            
            
            428Restricted
      cash
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            404,280
            
            
            
            -
            
            
            
            -Accounts
      receivable
            
            
            60,864
            
            
            
            87,803
            
            
            
            51,591
            
            
            
            43,331
            
            
            
            93,875
            
            
            
            125,964
            
            
            
            74,292
            
            
            
            110,290Income
      taxes receivable
            
            
            134,572
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            216,995
            
            
            
            -
            
            
            
            -
            
            
            
            -Accounts
      payable and accrued liabilities
            
            
            840,457
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,027,761
            
            
            
            5,732
            
            
            
            -
            
            
            
            6,289Deferred
      rent
            
            
            5,872
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,806
            
            
            
            -
            
            
            
            -
            
            
            
            -Capital
      lease obligations
            
            
            118,855
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            155,859
            
            
            
            -
            
            
            
            -
            
            
            
            -





The
following exchange rates applied during the years 2008 and 2007:





2008
            
            
            2007Average
      Rate
            
            
            Reporting
      date
            
            
            Average
      Rate
            
            
            Reporting
      date$CDN
      per $US
            
            
            0.9443
            
            
            
            0.8183
            
            
            
            0.9352
            
            
            
            1.0194$Australian
      per $US
            
            
            0.8531
            
            
            
            0.6907
            
            
            
            0.8387
            
            
            
            0.8767GBP
      per $US
            
            
            1.8552
            
            
            
            1.4470
            
            
            
            2.0016
            
            
            
            1.9973EUR
      per $US
            
            
            1.4712
            
            
            
            1.4097
            
            
            
            1.3704
            
            
            
            1.4729





Based on
the Company’s foreign currency exposures noted above, varying the above foreign
exchange rates to reflect a one (1) percent weakening of the US dollar would
have increased the net loss by approximately $61,000 (2007-
$255,000,  2006 - $334,000) assuming that all other variables remained
constant.  An assumed one (1) percent strengthening of the US dollar
would have had a equal but opposite effect on the above currencies to the
amounts shown above, on the basis that all other variables remain
constant.





Credit
Risk





Credit
risk results from the possibility that a loss may occur from the failure of
another party to perform according to the terms of the contract.  The
Company regularly monitors the credit risk exposure and takes steps to mitigate
the likelihood of these exposures from resulting in actual loss.





The
Company, in the normal course of business, monitors the financial condition of
its customers and reviews the credit risk history of each
customer.  As at December 31, 2008, four customers (with AR higher
than 10% of net trade AR) represented 52% of net trade accounts receivable,
compared to 54% from four customers for the same period last year, resulting in
a significant concentration of credit risk. As at December 31, 2008, the Company
did have a significant exposure with one of the four customers which represented
15% of net trade accounts receivable.  The Company establishes an
allowance for doubtful accounts that corresponds to the credit risk of its
specific customers, historical trends and economic circumstances.  The
Company does not


96


believe
it is exposed to an unusual level of customer credit risk except for the
specific customer mentioned.  As of December 31, 2008, trade
receivables of $82,081 (2007 - $73,677) were over 60 days but not
impaired.  As of March 27, 2009, most of these trade receivable have
been collected. These relate to a number of independent customers for whom there
is no history of default.





Interest
Rate Risk





The
Company is subject to interest rate risk on its cash and cash equivalents and
temporary investments.  The risk that the Company will realize a loss
as a result of the decline in the fair value of its cash equivalents and
temporary investments is limited because these have short-term maturities and
are generally held to maturity.





The
Company’s exposure to interest rate risk is as follows:





2008
            2007Maturity
            Interest
      rate
            Interest
      rateCash
      and cash equivalents
            Less
      than 30 days
            0.9%
      to 3.3%
            3.3%
      to 4.2%Temporary
      investments
            120  days
      and more
            1.75%  to
      1.80%
            4.32%
      to 4.57%Capital
      lease obligations
            4
      years (2007- 5 years)
            10.41%
      to 13.08%
            10.41%
      to 11.45%





Liquidity
Risk





Liquidity
risk is the risk that the Company will not be able to meet its financial
obligations as they become due.  The Company’s approach in managing
liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the
Company’s reputation.  The Company also manages liquidity risk by
continuously monitoring actual budgeted cash flows.  Also, the Board
of Directors reviews and approves the Company’s operating and capital budgets,
as well as any material transactions out of the ordinary course of business,
including proposals on mergers, acquisitions or other major investments or
divestitures.  Accounts payable and accrued liabilities will be
entirely paid between 0 to 12 months.





The
Company had no derivative financial liabilities as at December 31, 2008 and
December 31, 2007.





6
            Discontinued
      operations




Digital
Arrow LLC and High Performance Broadcasting, Inc.





In
September 2005, following the poor performance of Digital Arrow LLC (“Digital
Arrow”) and High Performance Broadcasting, Inc. located in Florida, management
decided to discontinue its subsidiary’s operations.





Consequently,
the results of the operations of Digital Arrow have been recorded as
discontinued operations and the results of the Company for the years ended
December 31, 2008, 2007 and 2006 have been reclassified to account for the
closure of the subsidiary’s operations.





Summary
of discontinued operations





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Revenues
            
            
            -
            
            
            
            -
            
            
            
            -Earnings  before
      income taxes
            
            
            -
            
            
            
            -
            
            
            
            89,328Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            89,328





For the
year 2006, earnings before income taxes is the same as net
earnings.





97


Liquidation
of IBT UK





As at
December 31, 2007, $807,468 of restricted cash was kept in IBT UK until the
final liquidation VAT clearance was received.  On January 14, 2008,
$347,373 became available as a pre-liquidation VAT clearance was
received.  The remaining balance of $460,095 was released June 18,
2008.





7
            Temporary
      Investments




In 2008,
temporary investments consist of term deposits issued by the Royal Bank of
Canada, bearing a weighted average interest rate of 1.78% per annum and maturing
on various dates up to May 2009. The market value of term deposits as at
December 31, 2008 approximates its book value.





In 2007,
temporary investments consisted of commercial paper, with ratings of A1+ and P1
as per Standard & Poor and Moody’s respectively, bore a weighted average
interest rate 4.51% per annum and matured on various dates up to March 2008. The
market value of the commercial paper as at December 31, 2007 approximates its
book value.





8
            Accounts
      receivable




Accounts
receivable comprise of the following:





2008
              $
            
            
            
            2007
              $Trade
      accounts receivable
            
            
            839,245
            
            
            
            842,459Allowance
      for doubtful accounts
            
            
            (1,185
            )
            
            
            (9,808
            )838,060
            
            
            
            832,651Other
            
            
            69,500
            
            
            
            85,382907,560
            
            
            
            918,033





9
            Property
      and equipment




2008Cost
              $
            
            
            Accumulated
              amortization
              $
            
            
            Net
              $Computer
      equipment
            
            
            916,169
            
            
            
            735,421
            
            
            
            180,748Furniture
      and fixtures
            
            
            152,575
            
            
            
            119,603
            
            
            
            32,972Leasehold
      improvements
            
            
            95,691
            
            
            
            69,317
            
            
            
            26,3741,164,435
            
            
            
            924,341
            
            
            
            240,094





2007Cost
              $
            
            
            Accumulated
              amortization
              $
            
            
            Net
              $Computer
      equipment
            
            
            1,513,749
            
            
            
            1,167,247
            
            
            
            346,502Furniture
      and fixtures
            
            
            176,750
            
            
            
            115,946
            
            
            
            60,804Leasehold
      improvements
            
            
            189,230
            
            
            
            136,664
            
            
            
            52,5661,879,729
            
            
            
            1,419,857
            
            
            
            459,872





Computer
equipment include assets under capital leases with an original cost of $127,366
(2007 - $108,895) and accumulated depreciation of $61,896 (2007 - $22,627) as at
December 31, 2008. Property and equipment also includes computer equipment
that  is not depreciated since they are not yet put in operation with
an original cost of $26,263 (2007 - $99,672). In 2008, a write-down
of


98


$43,072
for property and equipment was recorded as the Company estimated that the fair
value of these assets were lower than their carrying value.





Amortization
of property and equipment includes $39,269 (2007 – $22,627) of amortization on
computer equipment under capital leases.





10
            Goodwill
      and other intangible assets





a)
            Intangible
      assets





2008Cost
              $
            
            
            Accumulated
              amortization
              $
            
            
            Impairment
              provision
              $
            
            
            Net
              $Trade
      names
            
            
            2,560,518
            
            
            
            873,091
            
            
            
            1,473,415
            
            
            
            214,012Technology
            
            
            3,400,000
            
            
            
            2,568,630
            
            
            
            192,000
            
            
            
            639,370Customer
      relationships
            
            
            2,000,000
            
            
            
            1,347,945
            
            
            
            652,055
            
            
            
            -Software
            
            
            336,378
            
            
            
            263,924
            
            
            
            7,351
            
            
            
            65,103Patents
            
            
            77,622
            
            
            
            22,781
            
            
            
            54,841
            
            
            
            -8,374,518
            
            
            
            5,076,371
            
            
            
            2,379,662
            
            
            
            918,485








2007Cost
                $
              
              
              Accumulated
                amortization
                $
              
              
              Impairment
                provision
                $
              
              
              Net
                $Trade
      names
              
              
              2,560,518
              
              
              
              782,633
              
              
              
              1,333,415
              
              
              
              444,470Technology
              
              
              3,400,000
              
              
              
              1,718,630
              
              
              
              -
              
              
              
              1,681,370Customer
      relationships
              
              
              2,000,000
              
              
              
              1,347,945
              
              
              
              652,055
              
              
              
              -Software
              
              
              325,218
              
              
              
              192,328
              
              
              
              -
              
              
              
              132,890Patents
              
              
              77,622
              
              
              
              15,676
              
              
              
              -
              
              
              
              61,9468,363,358
              
              
              
              4,057,212
              
              
              
              1,985,470
              
              
              
              2,320,676




In 2008,
the Company’s software unit is still facing delays in execution and changes in
market conditions of its commercial deployment solutions.  Based on
its assessment of the fair value of the Company’s assets related to software,
the Company concluded that the assets related to it had suffered a loss in value
and the fair value of intangible assets was less than its carrying value for
these assets.  Therefore, write-downs of $140,000 for trade names and
$192,000 for technology were recorded in 2008.  Also, in 2008,
write-downs of $54,841 for patents and $7,351 for software were recorded as the
Company estimated that the fair value of these intangible assets was lower than
their carrying value. For the same reasons, in 2007, write-downs of $1,333,415
for trade names and $652,055 for customer relationships were
recorded.




Intangible
assets include assets under capital leases with an original cost of $44,807
(2007 - $38,701) and accumulated depreciation of $27,255 (2007 - $9,675) as at
December 31, 2008. Intangible assets also include software that is not
depreciated since it is not yet in operation with an original cost of nil (2007
- $26,439).




Amortization
of intangible assets includes $17,580 (2007 - $9,675) of amortization on
software under capital leases.


99




b)
              Goodwill


The
changes in the carrying amount of goodwill for the years ended December 31,
2008 and 2007 are as follows:




Copernic
              Technologies
              Inc.
            
            
            FocusIN
            
            
            Total$
            
            
            $
            
            
            $Balance
      – December 31, 2006
            
            
            14,571,534
            
            
            
            846,310
            
            
            
            15,417,844Write-down
            
            
            (7,214,531
            )
            
            
            (846,310
            )
            
            
            (8,060,841
            )Balance
      – December 31, 2007
            
            
            7,357,003
            
            
            
            -
            
            
            
            7,357,003Write-down
            
            
            (3,995,000
            )
            
            
            -
            
            
            
            (3,995,000
            )Balance
      – December 31, 2008
            
            
            3,362,003
            
            
            
            -
            
            
            
            3,362,003




The
Company’s software unit is still facing delays in execution and changes in
market conditions of its commercial deployment solutions.  Based on
the Company’s assessment of the fair value of its assets related to the software
and search / media units, the Company concluded that the related goodwill had
suffered a loss in value and the fair value of the related goodwill was less
than its carrying value.  Therefore, a write-down of $3,995,000 was
recorded in 2008 for the software unit. For the same reasons, the Company
recorded in 2007, write-downs of $7,214,531 for the software unit due to delays
in execution and changes in market conditions of its commercial deployment
solutions and $846,310 for the search / media unit, explained by decreased
revenues due to industry pressures on advertising rates, slow down in sponsored
clicks and general decrease for all graphic ads.





In 2006,
$379,382 was received by the Company from the sellers of Copernic Technologies
Inc. to compensate for a reduction of research and development tax credits prior
to the acquisition date, the purchase price and goodwill were then reduced
accordingly.





11
            Investments





Investments
comprise of the following:


2008
              $
            
            
            
            2007
              $LTRIM
      Technologies Inc. (4,891,686 Class “A”
              common
      shares and 359,281 Class “A” preference shares)
            
            
            -
            
            
            
            -Tri-Link
      Technologies Inc. (4,054,874 Preference shares)
            
            
            -
            
            
            
            -TECE,
      Inc. (5,000,000 Common shares)
            
            
            -
            
            
            
            --
            
            
            
            -





In 2007,
based on the assessment of the fair value of the Company’s investment in LTRIM
Technologies Inc. (“LTRIM”), the Company concluded that its investment has
suffered a loss in value other than a temporary decline due to LTRIM’s
significant corporate restructuring and therefore recorded a write-down of
$150,000 to bring it to nil.







100








12
            Trade
      accounts payable and accrued
liabilities




Trade
accounts payable and accrued liabilities comprise of the following:





2008
              $
            
            
            
            2007
              $Trade
      accounts payable and accrued liabilities
            
            
            618,685
            
            
            
            971,474OtherAccrued
      employee costs
            
            
            163,019
            
            
            
            412,759Directors
      and officers payable
            
            
            201,982
            
            
            
            123,541Companies
      owned by directors (a) (b) (c)
            
            
            7,456
            
            
            
            12,845991,142
            
            
            
            1,520,619





(a)
      The amount payable to companies owned by directors relates to consulting
      agreement between the Company and the companies owned by current
      directors.





(b)
      Services provided by two directors for 2008 were $57,700 (2007 - $123,746;
      2006 - $141,971). The transactions are in the normal course of operations
      and are measured at the exchange amount which is the amount of the
      consideration established and agreed to by the related
      parties.





(c)
      David Goldman resigned as an officer and became Chairman of the Company in
      June 2008.






13
              Restructuring
      charges




2008
              $
            
            
            
            2007
              $Restructuring
      chargesLease termination
      cost
            
            
            31,391
            
            
            
            -Severance
            
            
            18,093
            
            
            
            -Head hunters’
    fees
            
            
            49,769
            
            
            
            -Other
            
            
            1,759
            
            
            
            -101,012
            
            
            
            -Disbursements
            
            
            16,561
            
            
            
            -Restructuring
      accounts payable and accrued liabilities
              Balance,
      beginning of year
            
            
            -
            
            
            
            -Balance,
      end of  year
            
            
            84,451
            
            
            
            -





In order
to reduce its costs, the Company has decided to close its Montreal office in Q1
2009 and concentrate all its activity in Quebec City.





The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000 of which $101,012 was recorded in 2008.




101







14
            Obligations
      under capital leases




As at
December 31, 2008, future minimum payments for obligations under capital leases
are as follows:





2008
              $
            
            
            
            2007
              $2008
            
            
            -
            
            
            
            70,4492009
            
            
            65,302
            
            
            
            70,4492010
            
            
            39,697
            
            
            
            38,5522011
            
            
            2,188
            
            
            
            -107,187
            
            
            
            179,450Less:
      Interest (Weighted average rate of  11.20 %; 2007-
      10.99%)
            
            
            9,928
            
            
            
            23,591Less:
      Current portion
            
            
            57,267
            
            
            
            56,07139,992
            
            
            
            99,788





15
            Capital
      stock




On
November 11, 2008 the Company filed a Notice of Intention with the Ontario
Securities Commission to make a Normal Course Issuer Bid (“The Notice”). In the
Notice, the Company stated its intention to purchase up to a maximum of 700,000
of its common shares, representing approximately 5% of the issued and
outstanding common shares of the Company as of the date
hereof.  Purchases under the Normal Course Issuer Bid may take place
over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of November, 2009.  The
Company reserves the right to discontinue its Normal Course Issuer Bid at any
time.





a)
            Stock
      options




The
Company’s stock option plan is administered by the Compensation Committee, which
is a subcommittee of the Board of Directors. The Compensation Committee
designates eligible participants to be included under the plan, and designates
the number of options and the share price pursuant to the new options, subject
to applicable securities laws and stock exchange regulations. The options, when
granted, will have an exercise price of no less than the market price of shares
at the date of grant and a life not exceeding 10 years. The options vest in
equal increments over a period of three or four years, commencing one year from
the grant date.  The number of options granted in any fiscal year
shall not exceed 15% of the issued and outstanding common shares at the date of
the grant.  The fair value of granted options are estimated as the
date of grant using the Black-Scholes option pricing model.




On
January 25, 2006, the Company granted to employees 9,661 stock options at an
exercise price of $3.08 expiring in five years.





On March
17, 2006, 25,000 stock options were granted to a new director, at an exercise
price of $2.13 expiring in five years.





On March
27, 2006, the Company granted 25,000 stock options to an employee at an exercise
price of $2.11 expiring in five years.




On
January 23, 2007, the Company granted to Officers and employees 70,500 and
21,803 stock options, respectively, at an exercise price of $5.15 expiring in
five years.





In
January 2007, in connection with the resignation of two Officers, the Company
changed the duration of their option agreements and allowed accelerated vesting
options for one of the officers. These changes represented an additional
non-cash item expense of $253,236 which was recorded in Q1 2007.





On
February 26, 2007, 10,000 stock options were granted to a new employee, at an
exercise price of $4.99 expiring in five years.





On March
29, 2007, the Company granted 2,632 stock options to an employee at an exercise
price of $4.75 expiring in five years.


102


On April
30, 2007, the Company granted 40,000 stock options to a new employee at an
exercise price of $4.90 expiring in five years.





On June
8, 2007, the Company granted 60,000 stock options to directors at an exercise
price of $4.24 expiring in five years.





On
September 18, 2007, the Company granted 652,000 stock options to Officers and
employees at an exercise price of $1.74 expiring in five years.





On
September 21, 2007, the Company granted 50,000 stock options to two new Members
of the Board of the Company at an exercise price of $1.67 expiring in five
years.





On
November 8, 2007, the Company granted 4,000 stock options to an employee at an
exercise price of $2.23 expiring in five years.





On April
2, 2008, the Company granted 100,000 stock options to an Officer at an exercise
price of $1.00 expiring in five years.





On June
17, 2008, the Company granted 125,000 stock options to Directors and a new
Officer at an exercise price of $0.62 expiring in five years.





On
November 11, 2008, the Company granted 125,000 stock options to officers and
employees at an exercise price of $0.22 expiring in five years.





As at
December 31, 2008, no stock options were exercised (2007 - 296,667) and 785,819
(2007 - 83,605) stock options were forfeited or expired.




Information
with respect to stock option activity for 2006, 2007 and 2008 is as
follows:





Number
      of options
            
            
            Weighted
      average
              exercise
      price
              $Outstanding
      – December 31, 2005
            
            
            661,083
            
            
            
            2.90Granted
            
            
            59,661
            
            
            
            2.28Forfeited
            
            
            (38,512
            )
            
            
            1.64Outstanding
      – December 31, 2006
            
            
            682,232
            
            
            
            2.84Granted
            
            
            910,935
            
            
            
            2.43Forfeited
            
            
            (71,215
            )
            
            
            4.03Expired
            
            
            (11,850
            )
            
            
            3.57Exercised
            
            
            (296,667
            )
            
            
            2.28Outstanding
      – December 31, 2007
            
            
            1,213,435
            
            
            
            2.59Granted
            
            
            350,000
            
            
            
            0.59Forfeited
            
            
            (785,819
            )
            
            
            2.43Outstanding
      – December 31, 2008
            
            
            777,616
            
            
            
            1.85




Details
of stock options outstanding as at December 31, 2008 are as
follows:






103






Outstanding
      options
            
            
            Exercisable
      optionsRange
      of exercise
              prices
              $
            
            Number
      of options
            
            
            Weighted
      average remaining contractual life
              (years)
            
            
            Weighted
              average
              exercise
              price
              $
            
            
            Number
      of options
            
            
            Weighted
              average
              exercise
              price
              $0.22
      – 1.50
            
            
            352,500
            
            
            
            4.53
            
            
            
            0.59
            
            
            
            2,500
            
            
            
            1.501.51
      – 3.58
            
            
            328,834
            
            
            
            2.52
            
            
            
            2.26
            
            
            
            245,505
            
            
            
            2.453.59
      – 6.28
            
            
            96,282
            
            
            
            2.44
            
            
            
            5.02
            
            
            
            55,016
            
            
            
            5.48777,616
            
            
            
            3.42
            
            
            
            1.85
            
            
            
            303,021
            
            
            
            2.99




As at
December 31, 2007 and 2006 there were 233,862 and 298,320 options exercisable at
weighted average prices of $3.37 and $2.81, respectively.




The fair
values of all options granted during 2008, 2007 and 2006 were estimated as of
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:






2008
            
            
            2007
            
            
            2006Expected
      option life (years)
            
            
            2.86
            
            
            
            3.03
            
            
            
            4.00Volatility
            
            
            87.49
            %
            
            
            86.09
            %
            
            
            75.81
            %Risk-free
      interest rate
            
            
            2.85
            %
            
            
            4.28
            %
            
            
            4.01
            %Dividend
      yield
            
            nil
            
            
            nil
            
            
            nil




The
weighted average grant-date fair values for stock options granted during 2008,
2007 and 2006 were $0.33, $1.40 and $1.34 per option, respectively.





Stock-based
compensation (recovery) expense recognized in 2008, 2007 and 2006 in regards to
the stock options was ($37,474), $660,312 and $456,281,
respectively.




Information
with respect to warrant activity for 2006, 2007 and 2008 is as
follows:





Number
      of warrants
            
            
            Weighted
      average exercise
              price
              $Outstanding
      – December 31, 2006, 2007 and 2008
            
            
            646,392
            
            
            
            15.60





The
warrants will expire from April to July 2009.


104





For
various price ranges, the weighted average characteristics of warrants
outstanding and exercisable as at December 31, 2008 were as
follows:





Range
      of
              exercise
      prices
              $
            
            Number
      of warrants
            
            
            Weighted
      average remaining contractual life
              (years)
            
            
            Weighted
      average exercise price
              $11.34
      – 13.89
            
            
            40,000
            
            
            
            2.41
            
            
            
            12.3115.82
            
            
            606,392
            
            
            
            2.50
            
            
            
            15.82646,392
            
            
            
            2.49
            
            
            
            15.60





16
            Earnings
      (loss) per share




2008
            
            
            2007
            
            
            2006Weighted
      average number of shares – Basic and Diluted
            
            
            14,637,531
            
            
            
            14,564,894
            
            
            
            14,340,864





Options,
at weighted average exercise price of $2.99 to purchase 303,021 common shares
(2007 – 233,682; 2006 – 298,320), warrants at weighted average exercise price of
$15.60 to purchase 646,392 common shares (2007 - 646,392; 2006 - 646,392) have
been excluded from the above calculations since they would all have an
anti-dilutive effect.





17
            Revenues




2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Search
      and graphic advertising
            
            
            5,606,383
            
            
            
            7,354,709
            
            
            
            8,024,972Software
      licensing
            
            
            951,022
            
            
            
            415,263
            
            
            
            957,488Customized
      development and maintenance support
            
            
            454,226
            
            
            
            346,436
            
            
            
            613,9427,011,631
            
            
            
            8,116,408
            
            
            
            9,596,402





18
            Cost
      of revenues




2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Search and
      graphic advertising payouts
            
            
            2,169,916
            
            
            
            2,262,356
            
            
            
            2,309,435ISP
      charges
            
            
            360,992
            
            
            
            374,054
            
            
            
            394,6662,530,908
            
            
            
            2,636,410
            
            
            
            2,704,101






105





19
            Write-downs
      and settlement costs




2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Write-down
      of goodwill (note 10)
            
            
            3,995,000
            
            
            
            8,060,841
            
            
            
            -Write-downs
      of property and equipment and intangible assets  (notes 9 and
      10)
            
            
            437,264
            
            
            
            1,985,470
            
            
            
            413,238Write-down
      of investment (note 11)
            
            
            -
            
            
            
            150,000
            
            
            
            570,000Class
      action closure costs
            
            
            -
            
            
            
            (50,000
            )
            
            
            50,000Class
      action settlement costs
            
            
            -
            
            
            
            -
            
            
            
            650,0004,432,264
            
            
            
            10,146,311
            
            
            
            1,683,238





20
            Consolidated
      statement of cash flows




In 2008,
the Company acquired $18,471 of computer equipment (2007- $108,895) and $6,106
of software equipment under capital leases (2007- $38,701).





21
            Net
      change in non-cash working capital
items





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Cash
      flows provided from (used for):Accounts
      receivable
            
            
            10,473
            
            
            
            1,816,139
            
            
            
            418,842Income
      taxes receivable
            
            
            111,084
            
            
            
            (111,203
            )
            
            
            525,447Prepaid
      expenses and other assets
            
            
            37,791
            
            
            
            71,751
            
            
            
            36,912Accounts
      payable and accrued liabilities
            
            
            (529,477
            )
            
            
            (769,067
            )
            
            
            (454,958
            )Income
      taxes payable
            
            
            (8,100
            )
            
            
            -
            
            
            
            (415
            )Deferred
      rent
            
            
            (6,211
            )
            
            
            (1,257
            )
            
            
            12,108Deferred
      revenue
            
            
            (54,666
            )
            
            
            (16,205
            )
            
            
            (22,317
            )(439,106
            )
            
            
            990,158
            
            
            
            515,619





22
            Income
      taxes




a)
            The
      provision for (recovery of) income taxes is detailed as
      follows:




2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Current
            
            
            522
            
            
            
            1,479
            
            
            
            (4,876
            )Future
      (recovered)
            
            
            (390,565
            )
            
            
            (1,250,453
            )
            
            
            (724,177
            )(390,043
            )
            
            
            (1,248,974
            )
            
            
            (729,053
            )




106
  b)
                A
      reconciliation of the combined Canadian Federal and provincial income tax
      rate with the Company’s effective income tax rate is as
      follows:


2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Loss
      from continuing operations before income taxes
            
            
            (6,880,747
            )
            
            
            (15,679,800
            )
            
            
            (5,087,761
            )Expected
      recovery of income taxes at the statutory rate
            
            
            (2,126,151
            )
            
            
            (5,020,672
            )
            
            
            (1,629,101
            )Impact
      of foreign and provincial rates
            
            
            9,200
            
            
            
            3,654
            
            
            
            (3,676
            )Change
      in future income tax balance due to change in rate
            
            
            41,582
            
            
            
            1,316,637
            
            
            
            1,475,114Unrecognized
      benefit of current year tax losses and undeducted research
      and development expenses, and other temporary
    differences
            
            
            208,650
            
            
            
            (176,111
            )
            
            
            (571,165
            )Benefit
      of prior years’ tax losses not previously recognized
            
            
            -
            
            
            
            -
            
            
            
            (27,891
            )Permanent
      difference:Impairment
      of goodwill
            
            
            1,234,455
            
            
            
            2,367,218
            
            
            
            -Non-deductible
      expenses
            
            
            242,221
            
            
            
            260,300
            
            
            
            27,666Recovery
      of income taxes
            
            
            (390,043
            )
            
            
            (1,248,974
            )
            
            
            (729,053
            )





c)
            The
      major components of the net future income tax asset classified by the
      source of temporary differences are as
follows:




2008
              $
            
            
            
            2007
              $AssetsProperty
      and equipment
            
            
            2,343,235
            
            
            
            2,802,656Non-capital
      losses (expiring 2009-2028)
            
            
            4,328,865
            
            
            
            6,515,429Unrealized
      impairment losses on investments
            
            
            748,437
            
            
            
            932,368Research
      and development expenses
            
            
            616,339
            
            
            
            668,801Financing
      expenses
            
            
            -
            
            
            
            89,657Intangible
      assets
            
            
            382,595
            
            
            
            476,619Goodwill
            
            
            228,140
            
            
            
            284,206Other
            
            
            117,331
            
            
            
            62,3528,764,942
            
            
            
            11,832,088LiabilitiesIntangible
      assets
            
            
            259,848
            
            
            
            650,413Net
      future income tax assets before valuation
            
            
            8,505,094
            
            
            
            11,181,675Valuation
      allowance
            
            
            (8,764,942
            )
            
            
            (11,832,088
            )(259,848
            )
            
            
            (650,413
            )Presented
      as:Current
      asset
            
            
            -
            
            
            
            -Long-term
      asset
            
            
            -
            
            
            
            -Long-term
      liability
            
            
            (259,848
            )
            
            
            (650,413
            )(259,848
            )
            
            
            (650,413
            )





107


As at
December 31, 2008, the Company also has temporary differences in the United
States of America consisting mainly of non-capital losses for $1,929,723 (2007 -
$2,214,559).  No future tax assets were recognized in 2008 and in 2007
for these temporary differences.




In
addition, the Company has capital losses amounting to $16,075,738 in 2008 (2007
- $19,650,152) with no expiration date. No future tax assets were recognized in
2008 and in 2007 for these capital losses.





d)
            As
      at December 31, 2008, the Company has non-capital loss carryforwards
      totalling approximately $16,130,000 for Federal and Provincial income tax
      purposes which may be used to reduce taxable income in future years. These
      losses may be claimed no later than fiscal years ending
      December 31:




$2009
            
            
            2,440,0002010
            
            
            3,259,0002014
            
            
            808,0002015
            
            
            5,256,0002026
            
            
            706,0002027
            
            
            3,616,0002028
            
            
            45,000






23
            Product
      development and technical support
expenses




The
following details the net product development and technical support expenses
included in the consolidated statements of operations:





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Product
      development and technical support expenses
            
            
            1,719,804
            
            
            
            2,050,266
            
            
            
            2,268,310Research
      and development expenses
            
            
            398,763
            
            
            
            567,825
            
            
            
            485,9442,118,567
            
            
            
            2,618,091
            
            
            
            2,754,254Less:
      research and development tax credits
            
            
            179,843
            
            
            
            201,681
            
            
            
            215,3871,938,724
            
            
            
            2,416,410
            
            
            
            2,538,867





As of
December 31, 2008 the Company has non-refundable tax credits of $319,179 (2007 -
$315,001) with no expiration date.




108




24
            Segment
      information






Management
follows and measures its operations using two separate segments:


·
            Search
      / Media


o
            This
      segment includes the metasearch and vertical search engines such
      as:


§
            Mamma.com –The Mother
      of all Search Engines is a search site on the Web that simultaneously
      searches a variety of engines, directories, and deep content
      sites.


§
            Mamma Videos –Find,
      explore, and view broadband videos from a wide range of topics including
      TV shows, movies, music, and news from providers across the
      Web.


§
            Mamma Jobs –Provides job seekers
      free instant access in one single search for job boards, newspapers and
      associations.


o
            This
      segment also includes our media network consisting of active publishers in
      the combined search and graphic ad categories which provides online
      marketing solutions such as:


§
            Pay-per-click
      advertising –Advertisers bid or pay a fixed
      price for position on search listing advertisements on our own properties
      as well as within our Publisher
Network.


§
            Graphic ad
      network –Allows
      advertisers to pay a CPM price for graphic ads to be distributed though
      our Publisher Network.


§
            XML search feeds –Our
      property provides third party’s content, whether commercial or
      non-commercial search result
listings.


·
            Software


o
            This
      segment includes various sophisticated technology such
  as:


§
            Copernic
      Desktop Search® –Software that allows to find
      files and e-mails with the power of a search engine right on a
      desktop.  With the Company’s new mobile plug-in, PC files can be
      accessed by mobile devices.  There are three product types
      available:


·
            Copernic
      Desktop Search® Home Edition: for personal use with basic features and is
      now ad supported.


·
            Copernic
      Desktop Search® Pro Edition for SMEs with features such as the indexing of
      Microsoft Outlook’s calendar, tasks and
notes.


·
            Copernic
      Desktop Search® Corporate Edition: enterprise-oriented desktop search
      solution that is secure, scalable and easy to deploy and provides searches
      on Intranets.


§
            Copernic
      Agent® –An Internet
      search and tracking tool
software.


§
            Copernic
      Tracker®–A software that
      keeps users up to date with what is new on the
  Web.


§
            Copernic
      Summarizer®–Creates concise
      document summaries of any file or Web page to save users time spent
      reading, without missing any important information.


o
            This
      segment also includes software customization and
    maintenance.


109


The
segmented information is presented for the continuing operations.





For
      the twelve months endedDecember
      31, 2008Search/Media
            
            
            Software
            
            
            Total$
            
            
            $
            
            
            $Revenues
            
            
            5,606,383
            
            
            
            1,405,248
            
            
            
            7,011,631Costs
      of revenues
            
            
            2,530,908
            
            
            
            -
            
            
            
            2,530,908Marketing,
      sales and services
            
            
            499,788
            
            
            
            438,823
            
            
            
            938,611Product
      development and technical support
            
            
            556,988
            
            
            
            1,381,736
            
            
            
            1,938,724Amortization
      of property and equipment
            
            
            121,887
            
            
            
            89,169
            
            
            
            211,056Amortization
      of intangible assets
            
            
            38,875
            
            
            
            980,284
            
            
            
            1,019,159Write-downs
      and settlement costs
            
            
            50,424
            
            
            
            4,381,840
            
            
            
            4,432,264Segmented
      operating income (loss)
            
            
            1,807,513
            
            
            
            (5,866,604
            )
            
            
            (4,059,091
            )Unallocated
      expensesGeneral
      and administration expenses, interest, loss on foreign exchange and
      restructuring charges
            
            
            
            
            
            
            
            
            
            
            2,821,656Loss
      from continuing operations before income taxes and discontinued
      operations
            
            
            
            
            
            
            
            
            
            
            (6,880,747
            )





As
      atDecember
      31, 2008Search/Media
            
            
            Software
            
            
            Total$
            
            
            $
            
            
            $Property
      and equipment
            
            
            135,579
            
            
            
            104,515
            
            
            
            240,094Intangible
      assets
            
            
            32,550
            
            
            
            885,935
            
            
            
            918,485Goodwill
            
            
            -
            
            
            
            3,362,003
            
            
            
            3,362,003168,129
            
            
            
            4,352,453
            
            
            
            4,520,582





For
      the twelve months endedDecember
      31, 2007Search/Media
            
            
            Software
            
            
            Total$
            
            
            $
            
            
            $Revenues
            
            
            7,354,709
            
            
            
            761,699
            
            
            
            8,116,408Costs
      of revenues
            
            
            2,636,410
            
            
            
            -
            
            
            
            2,636,410Marketing,
      sales and services
            
            
            1,084,777
            
            
            
            813,045
            
            
            
            1,897,822Product
      development and technical support
            
            
            980,360
            
            
            
            1,436,050
            
            
            
            2,416,410Amortization
      of property and equipment
            
            
            164,783
            
            
            
            137,726
            
            
            
            302,509Amortization
      of intangible assets
            
            
            49,515
            
            
            
            1,941,771
            
            
            
            1,991,286Write-downs
      and settlement costs
            
            
            846,310
            
            
            
            9,200,001
            
            
            
            10,046,311Segmented
      operating income (loss)
            
            
            1,592,554
            
            
            
            (12,766,894
            )
            
            
            (11,174,340
            )Unallocated
      expensesGeneral
      and administration expenses, interest and loss on foreign
      exchange
            
            
            
            
            
            
            
            
            
            
            4,505,460Loss
      from continuing operations before income taxes and discontinued
      operations
            
            
            
            
            
            
            
            
            
            
            (15,679,800
            )






110





As
      atDecember
      31, 2007Search/Media
            
            
            Software
            
            
            Total$
            
            
            $
            
            
            $Property
      and equipment
            
            
            277,394
            
            
            
            182,478
            
            
            
            459,872Intangible
      assets
            
            
            72,671
            
            
            
            2,248,005
            
            
            
            2,320,676Goodwill
            
            
            -
            
            
            
            7,357,003
            
            
            
            7,357,003350,065
            
            
            
            9,787,486
            
            
            
            10,137,551





Geographic
segment





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Revenues:Canada
            
            
            124,621
            
            
            
            204,820
            
            
            
            884,494United
      States
            
            
            3,746,538
            
            
            
            3,730,229
            
            
            
            4,682,376Europe
            
            
            2,794,957
            
            
            
            3,217,451
            
            
            
            3,728,775Australia
            
            
            212,309
            
            
            
            542,571
            
            
            
            241,137Other
            
            
            133,206
            
            
            
            421,337
            
            
            
            59,6207,011,631
            
            
            
            8,116,408
            
            
            
            9,596,402





2008
              $
            
            
            
            2007
              $
            
            
            
            2006
              $Long-lived
      assets and goodwill:Canada
            
            
            4,520,582
            
            
            
            10,137,551
            
            
            
            22,111,9704,520,582
            
            
            
            10,137,551
            
            
            
            22,111,970





25
            Major
      Customer




The
Company has one major customer that accounts for more than 10% of the Company’s
sales.  Sales to this customer represents approximately 10% (2007 -
14%; 2006 - 11%) of the Company’s sales. The outstanding accounts receivable
from this customer as at December 31, 2008 amount to approximately 13% (2007 -
18%) of the total accounts receivable.





26
            Commitments




The
Company is committed under operating lease agreements. Future minimum payments
under these leases as at December 31, 2008 are as follows:





$2009
            
            
            249,0002010
            
            
            46,0002011
            
            
            27,0002012
            
            
            18,0002013
            
            
            -





Other
commitments




The
Company maintains directors and officers insurance, which may cover certain
liabilities arising from its obligation to indemnify its directors, officers and
former directors, officers and employees of acquired companies, in certain
circumstances. It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each
particular agreement. Such indemnification agreements may not be subject to
maximum loss clauses. Historically, the Company has not incurred material costs
as a result of obligations under these agreements and it has not accrued any
liabilities related to such indemnification obligations in its financial
statements.


111





As at
December 31, 2008, the Company has change of control agreements with certain
executive officers and a few employees.  If there is a change of
control of the Company and their employments are not required, the Company will
have to pay lump sums up to a maximum of $614,181 for these specific executive
officers and employees.





27
            United
      States generally accepted accounting
principles




As a
registrant with the Securities and Exchange Commission in the United States, the
Company is required to reconcile its financial results for significant
measurement differences between Canadian GAAP and U.S. GAAP as they specifically
relate to the Company.





For the
years ended December 31, 2008, 2007 and 2006, the Company does not have any
significant adjustments to record in order to reconcile its reported net
earnings (loss) under Canadian GAAP and U.S. GAAP.





The
effects of these adjustments on the consolidated balance sheets of the Company
are as follows:





2008
              $
            
            
            
            2007
              $Capital
      stockCapital
      stock in accordance with Canadian GAAP
            
            
            96,556,485
            
            
            
            96,556,485Reduction
      of stated capital (b)
            
            
            16,769,570
            
            
            
            16,769,570Capital
      stock in accordance with U.S. GAAP
            
            
            113,326,055
            
            
            
            113,326,055Additional
      paid-in capitalAdditional
      paid-in capital in accordance with Canadian GAAP
            
            
            5,747,028
            
            
            
            5,784,502Stock-based
      compensation costs  (c)Cumulative
      effect of prior years
            
            
            1,037,690
            
            
            
            1,037,690Additional
      paid-in capital in accordance with U.S. GAAP
            
            
            6,784,718
            
            
            
            6,822,192Accumulated
      deficitIn
      accordance with Canadian GAAP
            
            
            (93,592,434
            )
            
            
            (87,101,730
            )Reduction
      of stated capital to deficit (b)
            
            
            (16,769,570
            )
            
            
            (16,769,570
            )Stock-based
      compensation costs (c)Cumulative
      effect of prior years
            
            
            (1,037,690
            )
            
            
            (1,037,690
            )Accumulated
      deficit in accordance with U.S. GAAP
            
            
            (111,399,694
            )
            
            
            (104,908,990
            )Shareholders’
      equity in accordance with U.S. GAAP
            
            
            9,272,216
            
            
            
            15,800,394







a)
            Consolidated
      statement of cash flows




The
consolidated statement of cash flows was prepared under Canadian
GAAP.  There are no measurement differences between Canadian GAAP and
U.S. GAAP as they specifically apply to the Company.





b)
            Reduction
      of stated capital




Under
U.S. GAAP, the reduction of stated capital in the amount of $16,769,570
undertaken by the Company on June 28, 1995 would not be permitted.




c)
            Stock-based
      compensation costs




The
Company prospectively adopted the fair value method of accounting for stock
options granted to employees.  As a result of this change, there is no
difference between the Company’s net earnings (loss) for 2008, 2007 and 2006
under U.S. GAAP as compared to Canadian GAAP.


112






For all
fiscal years prior to 2003, under U.S. GAAP, the Company had elected to measure
stock-based compensation costs using the intrinsic value method (APB 25). Under
this method, compensation cost is measured as the difference between the fair
value of the stock at the date of the grant over the exercise price.
Compensation cost is amortized to expense over the appropriate vesting period.
Under Canadian GAAP, no such compensation cost was recognized.







d)
            Non-refundable
      tax credits




Under
U.S. GAAP, non-refundable tax credits must be presented as a reduction of the
provision for income taxes. Under Canadian GAAP, these tax credits are presented
as a reduction of the related research and development expenses. Under U.S.
GAAP, there would be no change in earnings (loss) from continuing operations and
net earnings (loss) for the year; however, earnings (loss) from continuing
operations before income taxes and recovery of income taxes under U.S. GAAP
would be different.  Since the Company has not recorded any
non-refundable tax credits for 2008, 2007 and 2006, a reconciliation is not
required.




28
            Subsequent
      events





On
January 28, 2009, the Board of Director’s unanimously approved an adjustment to
Mr. David Goldman’s consultancy agreement, to which David Goldman concurred,
that the change of control clause is amended to an entitlement to the lesser
of  $300,000 or 3% of the transaction triggering a change of control.
The Board further specified that the resulting payment would be made in the same
currency as the transaction itself. The previous agreement stipulated that in
the case of change of control, David Goldman was entitled to receive a lump sum
payment equal to the greater of the past 24 months consulting payments or CDN
$300,000.





On
February 2, 2009, the Company sold 5,200,000 shares of TECE Inc. for CDN
$208,000.  The Company’s investment in TECE Inc. was completely
written off in 2001.





On
February 3, 2009, a lawsuit was filed against the Company by one former officer.
The plaintiff alleges an unlawful dismissal by the Company and seeks damages
amounting to CDN $256,775. The Company denies the allegations against it,
believes that the claim is without merit, and intends to defend
itself.





On March
4, 2009 the Company announced that Claire Castonguay, Vice President, Finance
and Controller will terminate her employment with the Company at the end of the
quarter consistent with the closure of the Montreal office at that time.
Jean-Rock Fournier, Vice President Finance since the beginning of the quarter
and also located in Quebec City will assume the duties of Chief Financial
Officer, effective March 31st. Mr.
Fournier is a  Chartered Accountant since 2000, practiced public
accounting with KPMG, and has been Vice President Finance with Axion
Technologies and PGI, both companies in the Information Technology
sector.
















113


ITEM
      18.   FINANCIAL STATEMENTS
              
              Not applicable.See Item
      17 above.
              
              ITEM
      19.   EXHIBITS


The
following are filed in support of the statements contained herein and are in
addition to those exhibits previously filed with the Commission:




1.1
                Articles
      of Incorporation of Mamma.com Inc., as amended. (Filed as Exhibit 1.1 to
      the Company’s Form 20-F filed May 31, 2005).


1.2
              Bylaws
      of Mamma.com Inc., as amended. (Filed as Exhibit 1.2 to the Company’s Form
      20-F filed May 31, 2005).
  4.1
                Consulting
      Agreement between Dave Goldman Advisors Ltd. and Intasys Corporation dated
      October 30, 2001 and renewed on May 1, 2002. (Filed as Exhibit 4.4 to the
      Company’s Form 20-F filed May 31, 2005).


4.2
              Consulting
      Agreement between Maxim Group LLC and Intasys Corporation dated January
      29, 2003, the Amended Agreement dated May 5, 2003 and the termination
      letter regarding the investment banking agreement. (Filed as Exhibit 4.5
      to the Company’s Report on Form 20-F filed May 31, 2005).
  4.3
                Consulting
      Agreement between Sam Luft and Intasys Corporation dated April 1, 2002 and
      expired on March 1, 2003. (Filed as Exhibit 4.6 to the Company’s Form 20-F
      filed May 31, 2005).
  4.4
                  Asset
      Purchase Agreement dated January 27, 2004 (without Exhibits and
      Schedules), the Amendment to Asset Purchase Agreement dated February 12,
      2004, the Escrow Agreement dated February 12, 2004 and the Indemnity
      Agreement dated February 12, 2004 between Mamma.com Inc. and ACE*COMM.
      (Filed as Exhibit 4.7 to the Company’s Form 20-F filed May 31,
      2005).


4.5
            Merriman
      Curhan Ford & Co. Advisory Agreement and Engagement Letter dated March
      16, 2004 (Filed as Exhibit 4.8 to the Company’s Form 20-F filed May
      31, 2005).




4.6
            Securities
      Purchase Agreement among the Company, Chris Tsistinas, Erik Kretschmar,
      Digital Arrow LLC and High Performance Broadcasting, Inc. dated June 10,
      2004. (Filed as Exhibit 4.9 to the Company’s Report on Form 20-F filed May
      31, 2005).4.7
            Securities
      Purchase Agreement among the Company and several purchasers thereunder
      dated June 30, 2004. (Filed as Exhibit 4.10 to the Company’s Form 20-F
      filed May 31, 2005).4.8
            Revised
      Merriman Curhan Ford & Co. Advisory Agreement and Engagement Letters
      dated July 16 and September 8, 2004. (Filed as Exhibit 4.11 to the
      Company’s Form 20-F filed May 31, 2005).4.9
            Amendment
      to Consulting Agreement among Mamma.com Inc. and Dave Goldman Advisors
      Ltd. and David Goldman dated May 23, 2005.  (Filed as Exhibit
      4.12 to the Company’s Form 20-F filed May 31, 2005)4.10
            Share
      Purchase Agreement among Mamma.com Inc., Martin Bouchard, Éric Bouchard,
      4332903 Canada, Inc., 4332911 Canada, Inc. and others, (Filed as Exhibit
      99.2 to the Company’s Form 6-K filed December 29, 2005).4.11
            Share
      Purchase Agreement among Mamma.com Inc., Copernic Technologies, Inc. and
      others dated December 22, 2005 (Filed as Exhibit 99.3 to the Company’s
      Form 6-K filed December 29, 2005).4.12
            Consulting
      Agreement between ThomasLloyd Capital LLC and Copernic Inc. dated June 7,
      2007 and expired on December 31, 2007.8.1*
            Subsidiary
      of Copernic Inc.




11
            Code
      of Ethics (filed as Exhibit 11 to the Company’s Form 20-F filed March 31,
      2006).12.1*
            Certification
      of Marc Ferland under Rule 13a-14(a) or Rule 15d-14(a) of the Securities
      Exchange Act of 1934.






114




12.2*
            Certification
      of Claire Castonguay under Rule 13a-14(a) or Rule 15d-14(a) of the
      Securities Exchange Act of 1934.13.1*
            Certifications
      under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
      1934 and Section 1350 of Chapter 18 of Title 18 of the United States
      Code.15.1*
            Consent
      of RSM Richter LLP.15.2
            Audit
      and Finance Committee Charter (filed as Exhibit 15.3 to the Company’s Form
      20-F filed March 31, 2006).15.3
            Compensation
      Committee Charter (filed as Exhibit 15.4 to the Company’s Form 20-F filed
      March 31, 2006).15.4
            Nominating
      and Corporate Governance Committee Charter (filed as Exhibit 15.5 to the
      Company’s Form 20-F filed March 31, 2006).





*
      Filed as an Exhibit to this Annual Report on Form 20-F.


115







SIGNATURES





Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant certifies that it meets all requirements for filing an Annual Report
on Form 20-F and has duly caused this Annual Report to be signed on its
behalf.





Dated:March 27,
      2009COPERNIC
      INC.By:
            
            s/s
      David GoldmanName:
            
            David
      GoldmanTitle:
            
            Chairmans/s
      Marc FerlandName:
            
            Marc
      FerlandTitle:
            
            President
      and Chief Executive Officer and Acting CFOs/s
      Claire
      CastonguayName:
            
            Claire
      CastonguayTitle:
            
            Vice
      President Finance and Controller