UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION
                WASHINGTON,
      D.C. 20549FORM
      20-Fo REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                ORx ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2008
                ORo TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                ORo SHELL COMPANY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of
      1934
                
                Date
      of event requiring this shell company reportFor
      the transition period from __________ to __________.Commission
      File No. 001-14835NORTHCORE
      TECHNOLOGIES INC.
                (Exact
      name of Registrant as specified in its charter)Not
      Applicable
                (Translation
      of Registrant’s name into English)ONTARIO,
      CANADA
                (Jurisdiction
      of incorporation or organization)302
      The East Mall, Suite 300 Toronto, Ontario M9B 6C7
                (Address
      of principal executive offices)Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act.
                NoneSecurities
      registered or to be registered pursuant to Section 12(g) of the
      Act.
                Common
      SharesSecurities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.
                NoneIndicate
      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.109,527,181
      Common Shares as of December 31, 2008Indicate
      by check mark if the registrant is a well-known seasoned issuer as defined
      in Rule 405 of the Securities Act
                Yes 
      o No
      x   
   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.
                Yes
      o No
      xIndicate
      by 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.Yes
      xNo oIndicate
      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-2 of the
      Exchange Act. (Check one):
                Large
      Accelerated filer o Accelerated
      filer o Non-accelerated
      filer xIndicate
      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
      xIndicate
      by check mark which financial statement item the registrant has elected to
      follow.Item
      17 o Item 18
      xIf
      this an annual report, indicate by check mark whether the registrant is a
      shell company (as determined in Rule 12b-2 of the Exchange
      Act).
                Yes
      o No
      x
 
  
 2
  
  NORTHCORE
TECHNOLOGIES INC.
  Annual
Report on Form 20-F for the Fiscal Year
 Ended
December 31, 2008
  FORWARD
LOOKING STATEMENTS
  From
time to time, we make oral and written statements that may be considered
"forward looking statements" (rather than historical facts).  We are
taking advantage of the "safe-harbour" provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements we may make
from time to time, including the forward-looking statements in this Annual
Report.
  You
can identify these statements when you see words such as "may", "expect",
"anticipate", "estimate", "believe", "intend", and other similar
expressions.  These forward-looking statements relate, among other
items, to:
  •
                  our
      future capital needs;
 •
                  future
      expectations as to profitability and operating
  results;
 •
                  our
      ability to further develop business relationships and
      revenues;
 •
                  our
      expectations about the markets for our products and
    services;
 •
                  acceptance
      of our products and services;
 •
                  competitive
      factors;
 •
                  our
      ability to repay debt;
 •
                  our
      ability to maintain operating
expenses;
 •
                  our
      ability to attract and retain
employees;
 •
                  new
      products and technological changes;
 •
                  our
      ability to develop appropriate strategic
  alliances;
 •
                  protection
      of our proprietary technology;
 •
                  our
      ability to acquire complementary products or businesses and integrate them
      into our business;
 •
                  our
      ability to increase revenue from existing products and
      services;
 •
                  our
      ability to expand the scope of our product offering;
  and
 •
                  geographic
      expansion of our business.
 
  We
have based these forward-looking statements largely on our current plans and
expectations.  Forward-looking statements are subject to risks and
uncertainties, some of which are beyond our control.  Our actual
results could differ materially from those described in our forward-looking
statements as a result of the factors described in the “Risk Factors” included
elsewhere in this Annual Report, including, among others:
  •
                  the
      timing of our future capital needs and our ability to raise additional
      capital when needed;
 •
                  our
      ability to repay our debt to
lenders;
 •
                  increasingly
      longer sales cycles;
 •
                  potential
      fluctuations in our financial results and our difficulties in
      forecasting;
 •
                  volatility
      of the stock markets and fluctuations in the market price of our
      stock;
 •
                  the
      ability to buy and sell our shares on the Over the Counter Bulletin
      Board;
 •
                  our
      ability to compete with other companies in our
  industry;
 •
                  our
      dependence upon a limited number of
customers;
 •
                  our
      ability to retain and attract key
personnel;
 •
                  risk
      of significant delays in product
development;
 •
                  failure
      to timely develop or license new
technologies;
  3
  
 •
                  risks
      relating to any requirement to correct or delay the release of products
      due to software bugs or errors;
 •
                  risk
      of system failure or interruption;
 •
                  risks
      associated with any further dramatic expansions and retractions in the
      future;
 •
                  risks
      associated with international
operations;
 •
                  problems
      which may arise in connection with the acquisition or integration of new
      businesses, products, services, technologies or other strategic
      relationships;
 •
                  risks
      associated with protecting our intellectual property, and potentially
      infringing the intellectual property rights of
  others;
 •
                  fluctuations
      in currency exchanges;
 •
                  risks
      to holders of our common shares following any issuance of our preferred
      shares; and
 •
                  the
      ability to enforce legal claims against us or our officers or
      directors.
 
 
 We
do not have, and do not undertake, any obligation to publicly update or revise
any forward-looking statements contained in this Annual Report, whether as a
result of new information, future events or otherwise.  Because of
these risks and uncertainties, the forward-looking statements and circumstances
discussed in this Annual Report might not transpire.
  Trademarks
or trade names which we own and are used in this Annual Report include: DYN@MIC
BUYERTM and DYN@MIC SELLERTM. Each trademark, trade name, or service mark of any
other company appearing in this Annual Report belongs to its
holder.
   4
  TABLE
OF CONTENTS
 
 
 PagePART
      I
                    
                    
                    
                    7ITEM
      1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
                    7ITEM
      2 - OFFER STATISTICS AND EXPECTED TIMETABLE
                    7ITEM
      3 - KEY INFORMATION
                    7A.
                    Selected
      Financial Data
                    7B.
                    Capitalization
      and Indebtedness
                    9C.
                    Reasons
      For The Offer And Use Of Proceeds
                    9D.
                    Risk
      Factors
                    9ITEM
      4 - INFORMATION ON THE COMPANY
                    17A.
                    History
      and Development of the Company
                    17B.
                    Business
      Overview
                    21C.
                    Organizational
      Structure
                    32D.
                    Property,
      Plant and Equipment
                    32ITEM
      4A - UNRESOLVED STAFF COMMENTS
                    32ITEM
      5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF
      OPERATIONS33A.
                    Operating
      Results
                    34B.
                    Liquidity
      and Capital Resources
                    42C.
                    Research
      and Development, Patents, and Licenses, Etc.
                    46D.
                    Trend
      Information
                    46E.
                    Off-Balance
      Sheet Arrangements
                    47F.
                    Tabular
      Disclosure of Contractual Obligations
                    47ITEM
      6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
                    48A.
                    Directors
      And Senior Management
                    48B.
                    Compensation
                    50C.
                    Board
      Practices
                    51C.1.
      Audit Committee Information
                    52D.
                    Employees
                    53E.
                    Share
      Ownership
                    55ITEM
      7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                    55A.
                    Major
      Shareholders
                    55B.
                    Related
      Party Transactions
                    56ITEM
      8 - FINANCIAL INFORMATION
                    57ITEM
      9 - THE OFFER AND LISTING
                    57
  5
   ITEM
      10 - ADDITIONAL INFORMATION
                    60A.
                    Share
      Capital
                    60B.
                    Memorandum
      and Articles of Association
                    60C.
                    Material
      Contracts
                    63D.
                    Exchange
      Controls
                    65E.
                    Taxation
                    65F.
                    Dividends
      and Paying Agents
                    71G.
                    Statements
      by Experts
                    71H.
                    Documents
      on Display
                    71I.
                    Subsidiary
      Information
                    72ITEM
      11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
                    72ITEM
      12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
                    72PART
      II
                    72ITEM
      13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
                    72ITEM
      14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                    72ITEM
      15 - CONTROLS AND PROCEDURES
                    73ITEM
      16 [RESERVED]
                    73ITEM
      16
                    73A.
                    Audit
      Committee Financial Expert
                    73B.
                    Code
      of Ethics
                    73C.
                    Principal
      Accountant Fees and Services
                    74D.
                    Exemptions
      from the Listing Standards For Audit Committees
                    74E.
                    Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                    74PART
      III
                    74ITEM
      17- FINANCIAL STATEMENTS
                    74ITEM
      18 - FINANCIAL STATEMENTS
                    74ITEM
      19 – EXHIBITS
                    74
   
  
  
  
  
  
  6
   
  
  
  
  
  Unless
otherwise indicated, all references in this Annual Report to “dollars” or “$”
are references to Canadian dollars.  Our financial statements are
expressed in Canadian dollars.  Except as otherwise noted, certain
financial information presented in this Annual Report has been translated from
Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.224 to US$1.00 (or
US$0.776 to Cdn 1.00), the noon buying rate in New York City on
December 31, 2008 for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York.  These
translations are not intended to suggest that Canadian dollars have been or
could be converted into U.S. dollars at that or any other rate.
  PART
I
  ITEM
1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  Not
applicable.
  ITEM
2 - OFFER STATISTICS AND EXPECTED TIMETABLE
  Not
applicable.
  ITEM
3 - KEY INFORMATION
  A.
                    SELECTED
      FINANCIAL DATA
  The
selected financial data set forth below should be read in conjunction with, and
is qualified by reference to, our consolidated financial statements and the
related notes, and the section "Operating and Financial Review and Prospects"
included elsewhere in this Annual Report.  The consolidated statement
of operations data for the years ended December 31, 2008, 2007, and 2006 and
consolidated balance sheet data as of December 31, 2008 and 2007, as set
forth below, are derived from our audited consolidated financial statements and
the related notes included elsewhere in this Annual Report. The consolidated
statement of operations data for the years ended December 31, 2005 and 2004 and
the consolidated balance sheet data as at December 31, 2006, 2005, and 2004
have been derived from our audited consolidated financial statements for those
years, as adjusted for discontinued operations related to the disposition of the
Company’s Norwegian subsidiary ADB Systemer AS in June 2006, which are not
included in this Annual Report but have previously been filed with the
Commission.
  We
have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in Canada, which differ in certain
respects from accounting principles generally accepted in the United
States.  However, as applied to us, for all fiscal periods for which
financial data is presented in this Annual Report, Canadian GAAP and U.S. GAAP
were substantially identical in all material respects, except as disclosed in
Note 21 of our consolidated financial statements.
  Historical
results are not necessarily indicative of results to be expected for any future
period.
  
   7
  
 Year Ended December
      31,(3)Statement
      of Operations Data:
                          
                          2008
                            (Cdn$)
                          
                          
                          2007
                            (Cdn$)
                          
                          
                          2006
                            (Cdn$)
                          
                          
                          2005
                            (Cdn$)
                          
                          
                          2004
                            (Cdn$)(in
      thousands except for per share data)Revenue
                          
                          
                          741
                          
                          
                          
                          1,166
                          
                          
                          
                          1,073
                          
                          
                          
                          1,285
                          
                          
                          
                          1,478Operating
      expenses:General
      and administrative
                          
                          
                          1,485
                          
                          
                          
                          1,703
                          
                          
                          
                          1,790
                          
                          
                          
                          2,559
                          
                          
                          
                          3,043Customer
      service and technology
                          
                          
                          689
                          
                          
                          
                          762
                          
                          
                          
                          664
                          
                          
                          
                          839
                          
                          
                          
                          854Sales
      and marketing
                          
                          
                          117
                          
                          
                          
                          276
                          
                          
                          
                          377
                          
                          
                          
                          505
                          
                          
                          
                          561Employee
      stock options
                          
                          
                          43
                          
                          
                          
                          94
                          
                          
                          
                          137
                          
                          
                          
                          105
                          
                          
                          
                          27Depreciation
      and amortization
                          
                          
                          33
                          
                          
                          
                          39
                          
                          
                          
                          92
                          
                          
                          
                          95
                          
                          
                          
                          149Interest
      expense
                          
                          
                          729
                          
                          
                          
                          604
                          
                          
                          
                          783
                          
                          
                          
                          717
                          
                          
                          
                          443Total
      expenses
                          
                          
                          3,096
                          
                          
                          
                          3,478
                          
                          
                          
                          3,843
                          
                          
                          
                          4,778
                          
                          
                          
                          5,077Loss
      from continuing operations
                          
                          
                          (2,355
                          )
                          
                          
                          (2,312
                          )
                          
                          
                          (2,770
                          )
                          
                          
                          (3,493
                          )
                          
                          
                          (3,599
                          )Loss
                          
                          
                          (2,355
                          )
                          
                          
                          (2,312
                          )
                          
                          
                          (648
                          )
                          
                          
                          (3,501
                          )
                          
                          
                          (5,104
                          )Loss
      per common share (1)
                          
                          
                          (0.02
                          )
                          
                          
                          (0.02
                          )
                          
                          
                          (0.01
                          )
                          
                          
                          (0.05
                          )
                          
                          
                          (0.08
                          )Weighted
      average number of common shares
                          
                          
                          108,861
                          
                          
                          
                          93,094
                          
                          
                          
                          79,933
                          
                          
                          
                          72,904
                          
                          
                          
                          61,938
  As
      at December 31,Balance
      Sheet Data: (2)
                        
                        2008
                          (Cdn$)
                        
                        
                        2007
                          (Cdn$)
                        
                        
                        2006
                          (Cdn$)
                        
                        
                        2005
                          (Cdn$)
                        
                        
                        2004
                          (Cdn$)(in
      thousands)Working
      capital (deficit)
                        
                        
                        (1,692
                        )
                        
                        
                        (372
                        )
                        
                        
                        (2,132
                        )
                        
                        
                        (1,164
                        )
                        
                        
                        381Total
      assets
                        
                        
                        812
                        
                        
                        
                        687
                        
                        
                        
                        813
                        
                        
                        
                        1,843
                        
                        
                        
                        2,493Shareholders’
      deficiency
                        
                        
                        (2,403
                        )
                        
                        
                        (1,600
                        )
                        
                        
                        (2,255
                        )
                        
                        
                        (2,710
                        )
                        
                        
                        (1,009
                        )
 
 (1)
                  For
      each fiscal year, the Company excluded the effect of all convertible debt,
      stock options and share-purchase warrants, as their impact would have been
      anti-dilutive.
 (2)
                  The
      Company has not paid dividends since its
  formation.
 (3)
                  The
      statement of operations data for the years ended December 31, 2005 and
      2004 have been restated to reflect the impact of the classification of the
      Company’s Norwegian subsidiary, ADB Systemer AS, as discontinued
      operations as a result of the disposition in June
  2006.
   8
  EXCHANGE
RATES
  The
following tables set forth, for the periods indicated, certain exchange rates
based on the noon buying rate in New York City for cable transfers in Canadian
dollars, as certified for customs purposes by the Federal Reserve Bank of New
York.  Such rates are the number of U.S. dollars per one Canadian
dollar and are the inverse of the rates quoted by the Federal Reserve Board of
New York for Canadian Dollars per U.S. $1.00.  On March 27, 2009, the
exchange rate was US$1.00 = Cdn$1.2392.
  Year
      Ended December 31,Rate
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Average
      during year (1)
                        
                        
                        1.06677
                        
                        
                        
                        0.9419
                        
                        
                        
                        0.8844
                        
                        
                        
                        0.8254
                        
                        
                        
                        0.7702(1)
      The average rate is the average of the exchange rates on the last day of
      each month during the year.
  Month
                        High
      during month
                        Low
      during monthSeptember
      2008
                        1.0797
                        1.0338October
      2008
                        1.2942
                        1.0607November
      2008
                        1.2849
                        1.1502December
      2008
                        1.2971
                        1.1962January
      2009
                        1.2749
                        1.1822February
      2009
                        1.2710
                        1.2190
 
  B.
                    CAPITALIZATION
      AND INDEBTEDNESS
  Not
applicable.
  C.
                    REASONS
      FOR THE OFFER AND USE OF PROCEEDS.
  Not
applicable.
  D.
                    RISK
      FACTORS
  The
following is a summary of certain risks and uncertainties, which we face in our
business.  This summary is not meant to be
exhaustive.  These Risk Factors should be read in conjunction with
other cautionary statements, which we make in this Annual Report and in our
other public reports, registration statements and public
announcements.
  WE WILL NEED ADDITIONAL CAPITAL AND
IF WE ARE UNABLE TO SECURE ADDITIONAL FINANCING WHEN WE NEED IT, WE MAY BE
REQUIRED TO SIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS
  We
have not yet realized profitable operations and have relied on non-operational
sources of financing to fund our operations.  Since we began our
operations, we have been funded primarily through the sale of securities to
investors in a series of private placements, convertible debt instruments, sales
of equity to, and investments from, strategic partners, gains from investments,
option exercises, a rights offering and, to a limited extent, through cash flow
from operations.  While our Company’s financial statements for the
year-ended December 31, 2008, have been prepared on the basis of accounting
principles applicable to a going concern, certain adverse conditions and events
cast substantial doubt upon the validity of this assumption. We have not yet
realized profitable operations and have relied on non-operational sources of
financing to fund operations.  Our ability to continue as a going
concern will be dependent on management’s ability to successfully execute its
business plan including a substantial increase in revenue as well as maintaining
operating expenses at or near the same level as 2008.  We cannot
provide assurance that we will be able to execute on our business plan or assure
that efforts to raise additional financings would be successful.
   9
   
   Management
believes that continued existence beyond 2008 is dependent on its ability to
increase revenue from existing products, and to expand the scope of its product
offering which entails a combination of internally developed software and
partnerships with third parties.  As of December 31, 2008, we had cash
on hand and cash equivalents of approximately $460,000.
  We
do not have any committed sources of additional financing at this time and we
are uncertain whether additional funding will be available when we need it on
terms that will be acceptable to us or at all. If we are not able to obtain
financing when we need it, we would be unable to carry out our business plan and
would have to significantly curtail or cease our operations. We have included in
Note 2 to our financial statements for the year ended December 31, 2008, a
discussion about our ability to continue as a going concern. Potential sources
of financing include strategic relationships, public or private sales of our
shares, debt, convertible securities or other arrangements. If we raise funds by
selling additional shares, including common shares or other securities
convertible into common shares, the ownership interests of our existing
shareholders will be diluted.  If we raise funds by selling preferred
shares, such shares may carry more voting rights, higher dividend payments or
more favorable rights upon distribution than those for the common
shares.  If we incur debt, the holders of such debt may be granted
security interests in our assets.  Because of our potential long-term
capital requirements, we may seek to access the public or private equity or debt
markets whenever conditions are favorable, even if we do not have an immediate
need for additional capital at that time. The auditors’ report on our 2008
consolidated financial statements includes additional comments that refer to
this uncertainty with respect to our ability to continue as a going concern. If
we fail to obtain financing when we need it, it would have a material adverse
effect on our business, financial condition, cash flows and results of
operations.
  WE
ARE NOT PROFITABLE AND WE MAY NEVER BECOME PROFITABLE
  We
have accumulated losses of approximately $113.61 million as of December 31,
2008.  For the year ended December 31, 2008 our loss was $2.35
million. We have never been profitable and expect to continue to incur losses
for the foreseeable future.  We cannot assure you that we will earn
profits or generate positive cash flows from operations in the
future.
  OUR
ABILITY TO REPAY OUR DEBT TO LENDERS
  We
have not yet realized profitable operations and have relied on non-operational
sources of financing to fund our operations. We have been funded primarily
through the sale of securities to investors in a series of private placements,
which have included a series of convertible debt instruments. As these debt
instruments become due we cannot provide assurance that we will have the funds
on hand to repay lenders. We may need to renegotiate or restructure certain debt
arrangements, as they become due in order to maintain operations.
  THE
LIMITED OPERATING HISTORY OF OUR JOINT VENTURE WITH GE COMMERCIAL FINANCE HAS
MADE US DEPENDENT UPON A SMALLER CUSTOMER BASE OF LARGER CLIENTS
  In December 2003 we formed the joint
venture, GE Asset Manager, LLC with the General Electric Capital Corporation,
through its business division GE Commercial Finance, Capital Solutions (“GE” or
“GE Commercial Finance”). Growing this business venture has required us to shift
focus from a broad spectrum of customers to focusing on a small number of large
clients.  By further investing in our relationship with GE Commercial
Finance, we are increasing our business risk by becoming substantially dependent
on the business generated by the joint venture.
   10
   
   WE ARE A GROWTH STAGE COMPANY AND ARE
SUBJECT TO THE RISKS INHERENT IN A NEW BUSINESS
  Our
business and prospects must be considered in light of the risks, uncertainties
and expenses frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving
markets.  Our business strategy may not be successful and we may not
successfully address those risks.
  WE
MAY EXPERIENCE INCREASINGLY LONGER SALES CYCLES
  A
significant portion of our revenue in any quarter is derived from a relatively
small number of contracts.  We often experience sales cycles of six
(6) to eighteen (18) months.  If the length of our sales cycles
increases, our revenues may decrease and our quarterly results would be
adversely affected.  In addition, our current and future expense
levels are based largely on our investment plans and estimates of future
revenues and are, to a large extent, fixed.  We may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Any significant shortfall in revenues relative to our planned
expenditures would have a material adverse effect on our business, financial
condition, cash flows and results of operations.
  POTENTIAL
FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL FORECASTING
DIFFICULT
  Our
operating results have varied on a quarterly basis in the past and may fluctuate
significantly as a result of a variety of factors, many of which are outside our
control. Factors that may affect our quarterly operating results
include:
  •
                  General
      economic conditions as well as economic conditions specific to our
      industry;
 •
                  Long
      sales cycles, which characterize our
industry;
 •
                  Implementation
      delays, which can affect payment and recognition of
    revenue;
 •
                  Any
      decision by us to reduce prices for our solutions in response to price
      reductions by competitors;
 •
                  The
      amount and timing of operating costs and capital expenditures relating to
      monitoring or expanding our business, operations and infrastructure;
      and
 •
                  The
      timing of, and our ability to integrate, any future acquisition,
      technologies or products or any strategic investments or relationships
      into which we may enter.
 
 Due
to these factors, our quarterly revenues and operating results are difficult to
forecast.  We believe that period-to-period comparisons of our
operating results may not be meaningful and should not be relied upon as an
indication of future performance. In addition, it is likely that in one or more
future quarters, our operating results will fall below the expectations of
securities analysts and investors.  In such event, the trading price
of our common shares would almost certainly be materially adversely
affected.
  OUR SHARE PRICE HAS FLUCTUATED
SUBSTANTIALLY AND MAY CONTINUE TO DO SO
  The
trading price of our common shares on The Toronto Stock Exchange and on the
Nasdaq Over the Counter Bulletin Board (“OTCBB”) has fluctuated significantly in
the past and could be subject to wide fluctuations in the future. The market
prices for securities of technology companies have been highly volatile. These
companies have experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to their operating
performance.  Broad market and industry factors may materially and
adversely affect the market price of our common shares, regardless of our
operating performance. In addition, fluctuations in our operating results and
concerns regarding our competitive position can have an adverse and
unpredictable effect on the market price of our shares.
  In
the past, following periods of volatility in the market price of a company’s
securities, securities class-action litigation has often been instituted against
that company. Such litigation, if instituted against us, could result in
substantial costs and a diversion of management’s attention and resources, which
could have a material adverse effect on our business, results of operations,
cash flow, financial condition and prospects. If we do not prevail in any such
action, which may be brought, we could be forced to pay damages.
 
  11
  
 THE ABILITY TO BUY OR SELL OUR COMMON
SHARES ON THE OTCBB MAY BE LIMITED
  Our
common shares trade on the OTCBB.  The OTCBB is generally considered
to be a less efficient market than the Nasdaq National Market or the Nasdaq
SmallCap Market on which our shares previously traded.  As a result,
the ability to buy or sell our common shares on the OTCBB may be
limited.  In addition, since our shares are no longer listed on the
Nasdaq National Market or Nasdaq SmallCap Market, our shares may be subject to
the “penny stock” regulations described below.  De-listing from the
Nasdaq National Market and the Nasdaq SmallCap Market does not affect the
listing of our common shares on The Toronto Stock Exchange.
  OUR
COMMON SHARES ARE SUBJECT TO “PENNY STOCK” REGULATIONS WHICH MAY AFFECT YOUR
ABILITY TO BUY OR SELL OUR COMMON SHARES
  Our
shares are characterized as “penny stocks” which may severely affect market
liquidity.  The Securities Enforcement and Penny Stock Reform Act of
1990 requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock.
  Securities
and Exchange Commission regulations generally define a penny stock to be an
equity security that has a market price of less than US$5.00 per share, subject
to certain exceptions.  The regulations require, prior to any
transaction involving a penny stock, delivery of a disclosure schedule
explaining the penny stock market and the risks associated
therewith.  The penny stock regulations may adversely affect the
market liquidity of our common shares by limiting the ability of broker/dealers
to trade the shares and the ability of purchasers of our common shares to sell
in the secondary market.  Certain institutions and investors will not
invest in penny stocks.
  THE
MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE
  The
market for asset lifecycle management solutions is rapidly evolving and
intensely competitive. We face significant competition in each segment of our
business (asset sourcing, procurement, asset management and asset
disposition).  We expect that competition will further intensify as
larger existing companies expand their product lines and industry consolidation
accelerates.
  Many
of our competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we. We cannot be certain that we will be able to compete
with them effectively. If we fail to do so, it would have a material adverse
effect on our business, financial condition, cash flows and results of
operations.
  IMPACT
OF CURRENT GLOBAL ECONOMIC CONDITIONS
  Recently,
global financial markets and economic conditions have been, and may continue to
be, disrupted and volatile. As a result of concerns about the stability of
financial markets generally and the solvency of creditors specifically, the cost
of obtaining money from the credit markets generally has increased as many
lenders and institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt on terms similar
to current debt and in some cases, ceased to provide funding to
borrowers. Concerns about the current economic situation may also have the
effect of tightening the equity markets making any equity based financing which
we may desire to undertake difficult to obtain, or obtainable only on terms and
conditions which we may find burdensome or unacceptable.  These issues,
along with the current weak economic conditions have made, and may continue to
make, it more difficult for us to obtain necessary funding on reasonable and
competitive terms, and as a result, our ability to continue our businesses,
pursue improvements, and continue future growth may be limited or
curtailed.  In addition, current weak economic conditions may negatively
impact our customers’ ability to obtain financing and fund their
businesses.  As a result, we may incur decreases in sales, which will
negatively impact our revenue.
   12
  
   WE
DEPEND HEAVILY ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OR
THEY REDUCE THEIR BUSINESS WITH US, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR
REVENUES
  In
2008, two customers accounted for 61 percent and 13 percent, respectively,
(2007-two customers accounted for 69 percent, and 10 percent, respectively) of
total revenues from continuing operations.  If our relationships with
any of these customers is severed or meaningfully altered, we would experience a
significant decline in our performance, particularly through reduced revenues,
which would have a material adverse effect on our business, financial condition,
cash flows and results of operations.
  WE
MAY NOT BE ABLE TO RETAIN OR ATTRACT THE HIGHLY SKILLED PERSONNEL WE
NEED
  Our
success is substantially dependent on the ability and experience of our senior
management and other key personnel.  We do not have long-term
employment agreements with any of our key personnel and maintain no “key person”
life insurance policies.
  We
may need to hire new or additional personnel to respond to attrition or future
growth of our business.  However, there is significant competition for
qualified personnel. We cannot be certain we will be able to retain existing
personnel or hire additional, qualified personnel when needed.
 
 SIGNIFICANT
DELAYS IN PRODUCT DEVELOPMENT WOULD HARM OUR REPUTATION AND RESULT IN LOSS OF
REVENUE
 
 If
we experience significant product development delays, our position in the market
would be harmed, and our revenues could be substantially reduced, which would
adversely affect our operating results.  As a result of the
complexities inherent in our software, major new product enhancements and new
products often require long development and test periods before they are
released.  On occasion, we have experienced delays in the scheduled
release date of new or enhanced products, and we may experience delays in the
future.  Delays may occur for many reasons, including an inability to
hire a sufficient number of developers, discovery of bugs and errors or a
failure of our current or future products to conform to industry
requirements.  Any such delay, or the failure of new products or
enhancements in achieving market acceptance, could materially impact our
business and reputation and result in a decrease in our revenues.
  WE
MAY HAVE TO EXPEND SIGNIFICANT RESOURCES TO KEEP PACE WITH RAPID TECHNOLOGICAL
CHANGE
  Our
industry is characterized by rapid technological change, changes in user and
customer requirements, frequent new service or product introductions embodying
new technologies and the emergence of new industry standards and
practices.  Any of these could hamper our ability to compete or render
our proprietary technology obsolete.  Our future success will depend,
in part, on our ability to:
  •
                  Develop
      new proprietary technology that addresses the increasingly sophisticated
      and varied needs of our existing and prospective
  customers;
 •
                  Anticipate
      and respond to technological advances and emerging industry standards and
      practices on a timely and cost-effective
basis;
 •
                  Continually
      improve the performance, features and reliability of our products in
      response to evolving market demands;
and
 •
                  License
      leading technologies.
  We
may be required to make substantial expenditures to accomplish the foregoing or
to modify or adapt our services or infrastructure. If we are unable to do so, it
would have a material adverse effect on our business, financial condition, cash
flows and results of operations.
  13
   
 OUR
BUSINESS COULD BE SUBSTANTIALLY HARMED IF WE HAVE TO CORRECT OR DELAY THE
RELEASE OF PRODUCTS DUE TO SOFTWARE BUGS OR ERRORS
  We
sell complex software applications and services.  Our applications may
contain undetected errors or bugs when first introduced or as new versions are
released.  Our software products may also contain undetected
viruses.  Further, software we license from third parties and
incorporate into our products may contain errors, bugs or
viruses.  Errors, bugs and viruses may result in any of the
following:
  •      Adverse
customer reactions;
 •      Negative
publicity regarding our business and our products;
 •      Harm
to our reputation;
 •      Loss
of or delay in market acceptance;
 •      Loss
of revenue or required product changes;
 •      Diversion
of development resources and increased development expenses;
 •      Increased
service and warranty costs;
 •      Legal
action by our customers; and
 •      Increased
insurance costs.
 
 SYSTEMS
DEFECTS, FAILURES OR BREACHES OF SECURITY COULD CAUSE A SIGNIFICANT DISRUPTION
TO OUR BUSINESS, DAMAGE OUR REPUTATION AND EXPOSE US TO LIABILITY
  We
host certain websites and applications for our customers.  Our systems
are vulnerable to a number of factors that may cause interruptions in our
ability to enable or host solutions for third parties, including, among
others:
  •
                  Damage
      from human error, tampering and
vandalism;
 •
                  Breaches
      of security;
 •
                  Fire
      and power losses;
 •
                  Telecommunications
      failures and capacity limitations;
and
 •
                  Software
      or hardware defects.
 
 Despite
the precautions we have taken and plan to take, the occurrence of any of these
events or other unanticipated problems could result in service interruptions,
which could damage our reputation, and subject us to loss of business and
significant repair costs.  Certain of our contracts require that we
pay penalties or permit a customer to terminate the contract if we are unable to
maintain minimum performance levels. Although we continue to take steps to
enhance the security of our systems and ensure that appropriate back-up systems
are in place, our systems are not now, nor will they ever be, fully
secure.
  OUR
BUSINESS HAS UNDERGONE DRAMATIC EXPANSION AND RETRACTION PHASES SINCE OUR
FORMATION.  WE MAY NOT BE ABLE TO MANAGE FURTHER DRAMATIC EXPANSIONS
AND RETRACTIONS IN THE FUTURE
  Our
business has undergone dramatic expansion and retraction since our formation,
which has placed significant strain on our management resources.  If
we should grow or retract dramatically in the future, there may be further
significant demands on our management, administrative, operating and financial
resources.  In order to manage these demands effectively, we will need
to expand and improve our operational, financial and management information
systems and motivate, manage and retain employees.  We cannot assure
you that we will be able to do so, that our management, personnel or systems
will be adequate, or that we will be able to achieve levels of revenue
commensurate with the resulting levels of operating expenses.
   14
  
   SALES
TO CUSTOMERS OUTSIDE CANADA ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE,
WHICH EXPOSES US TO CERTAIN RISKS
  While
we currently operate out of Canada, many of our customers are based outside of
Canada. There are risks inherent in doing business outside Canada,
including:
 
 •
                  Differing
      laws and regulatory requirements;
 •
                  Political
      and economic risks;
 •
                  Currency
      and foreign exchange fluctuations and
controls;
 •
                  Tariffs,
      customs, duties and other trade
barriers;
 •
                  Longer
      payment cycles and problems in collecting accounts
    receivable;
 •
                  Potentially
      adverse tax consequences; and
 •
                  Any
      of these risks could adversely affect the success of our
      business;
 
 PART
I  ACQUISITIONS
OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND/OR
DISTRACTIONS FOR OUR MANAGEMENT
   In the future, we may seek to acquire
other businesses or make investments in complementary businesses or
technologies. We may not be able to acquire or manage additional businesses
profitably or successfully integrate any acquired businesses with our
business.  Businesses that we acquire may have liabilities that we
underestimate or do not discover during our pre-acquisition
investigations.  Certain liabilities, even if we do not expressly
assume them, may be imposed on us as the successor to the
business.  Further, each acquisition may involve other special risks
that could cause the acquired businesses to fail to meet our
expectations.  For example:
  •
                  The
      acquired businesses may not achieve expected
  results;
 •
                  We
      may not be able to retain key personnel of the acquired
      businesses;
 •
                  We
      may incur substantial, unanticipated costs, delays or other operational or
      financial problems when we try to integrate businesses we acquire with our
      own;
 •
                  Our
      management’s attention may be diverted;
or
 •
                  Our
      management may not be able to manage the combined entity effectively or to
      make acquisitions and grow our business internally at the same
      time.
 
 The occurrence of one or more of these
factors could have a material adverse effect on our business, financial
condition, cash flows and results of operations.  In addition, we may
incur debt or issue equity securities to pay for any future acquisitions or
investments, which could dilute the ownership interest of our existing
shareholders.
  IF
WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN
CERTAIN LICENSES, OUR COMPETITIVE POSITION MAY BE WEAKENED
  Our
performance and ability to compete are dependent in part on our
technology.  We rely on a combination of patent, copyright, trademark
and trade secret laws as well as confidentiality agreements and technical
measures, to establish and protect our rights in the technology we develop. We
cannot guarantee that any patents issued to us will afford meaningful protection
for our technology.  Competitors may develop similar technologies
which do not conflict with our patents.  Others may challenge our
patents and, as a result, our patents could be narrowed or
invalidated.
  Our
software is protected by common law copyright laws, as opposed to registration
under copyright statutes.  Common law protection may be narrower than
that which we could obtain under registered copyrights.  As a result,
we may experience difficulty in enforcing our copyrights against certain third
parties.  The source code for our proprietary software is protected as
a trade secret.  As part of our confidentiality protection procedures,
we generally enter into agreements with our employees and consultants and limit
access to, and distribution of, our software, documentation and other
proprietary information.  We cannot assure you that the steps we take
will prevent misappropriation of our technology or that agreements entered into
for that purpose will be enforceable. In order to protect our intellectual
property, it may be necessary for us to sue one or more third
parties.  While this has not been necessary to date, there can be no
guarantee that we will not be required to do so in future to protect our rights.
The laws of other countries may afford us little or no protection for our
intellectual property.
  15
  
 
 We
also rely on a variety of technology that we license from third parties,
including our database and Internet server software, which is used to perform
key functions.  These third-party technology licenses may not continue
to be available to us on commercially reasonable terms, or at all. If we are
unable to maintain these licenses or obtain upgrades to these licenses, we could
be delayed in completing or prevented from offering some products or
services.
  OTHERS
COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY
RESULT IN COSTLY AND TIME-CONSUMING LITIGATION
  Our
success will also depend partly on our ability to operate without infringing
upon the proprietary rights of others, as well as our ability to prevent others
from infringing on our proprietary rights.  We may be required at
times to take legal action in order to protect our proprietary
rights.  Also, from time to time, we may receive notice from third
parties claiming that we infringe their patent or other proprietary rights. In
the past, a certain third party claimed that certain of our technology infringed
their intellectual property rights.    The claim with the
particular third party has been resolved in a prior period through a licensing
arrangement.  There can be no assurances that other third parties will
not make similar claims in the future.
  We
believe that infringement claims will increase in the technology sector as
competition intensifies.  Despite our best efforts, we may be sued for
infringing on the patent or other proprietary rights of others.  Such
litigation is costly, and even if we prevail, the cost of such litigation could
harm us.  If we do not prevail or cannot fund a complete defense, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license.  We cannot be certain that
any required license would be available to us on acceptable terms, or at
all.  If we fail to obtain a license, or if the terms of a license are
burdensome to us, this could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
  WE
ARE SUBJECT TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS
  The
Company’s revenue from software licensing and related services and application
hosting and development enabling agreements is transacted in various currencies
including the Canadian dollar, U.S. dollar and U.K. pound. Correspondingly,
operating expenses related to these activities are transacted in the
above-denoted currencies. The Company does not use derivative instruments to
manage exposure to foreign exchange fluctuations. Fluctuations in the exchange
rates of these currencies or the exchange rate of other currencies against the
Canadian dollar could have a material adverse effect on our business, financial
condition, cash flows and results of operations.
  OUR
PREFERRED SHARES COULD PREVENT OR DELAY A TAKEOVER THAT SOME OR A MAJORITY OF
SHAREHOLDERS CONSIDER FAVORABLE
  Our
Board of Directors, without any further vote of our shareholders, may issue
preferred shares and determine the price, preferences, rights and restrictions
of those shares.  The rights of the holders of common shares will be
subject to, and may be adversely affected by, the rights of the holders of any
series of preferred shares that may be issued in the future.  That
means, for example, that we can issue preferred shares with more voting rights,
higher dividend payments or more favorable rights upon distribution than those
for our common shares.  If we issue certain types of preferred shares
in the future, it may also be more difficult for a third party to acquire a
majority of our outstanding voting shares and such issuance may, in certain
circumstances, deter or delay mergers, tender offers or other possible
transactions that may be favored by some or a majority of our
shareholders.
  
   16
  
  IT
MAY BE DIFFICULT FOR YOU TO ENFORCE LEGAL CLAIMS AGAINST US OR OUR OFFICERS OR
DIRECTORS
  We
are incorporated under the laws of the Province of Ontario,
Canada.  Certain of our directors and officers are residents of Canada
and substantially all of our assets and the assets of such persons are located
outside the United States.  As a result, it may be difficult for
holders of common shares to effect service of legal process within the United
States upon those directors and officers who are not residents of the United
States.  It may also be difficult to realize in the United States upon
judgments of courts of the United States without enforcing such judgments in our
home jurisdiction or the jurisdiction of residence of the director or officer
concerned.
 
 ITEM
4 - INFORMATION ON THE COMPANY
  A.
HISTORY AND DEVELOPMENT OF THE COMPANY
  Our
name is Northcore Technologies Inc. (“Northcore, or the “Company”). The Company
was formed pursuant to the Business Corporations Act
(Ontario). The business began as Internet Liquidators Inc. (“IL Inc.”), a
business corporation formed under the laws of Ontario, Canada, in September 1995
and after a series of corporate reorganizations, as described below, developed
into the present Company.
 
 In
May 1996, Internet Liquidators International Inc. (“ILI Inc.”), also an Ontario
company, acquired all of the shares of IL Inc. The two companies, IL Inc. and
ILI Inc., were amalgamated on January 9, 1997.  By articles of
amendment dated June 25 1998, the name of ILI Inc. was changed to Bid.Com
International Inc.
 
 On
October 11, 2001, Bid.Com acquired substantially all of the shares of ADB
Systemer ASA, a public limited liability company organized under the laws of the
Kingdom of Norway. As part of the acquisition of ADB Systemer, Bid.Com completed
a two for one share consolidation and changed its name to ADB Systems
International Inc. (“ADB Inc.”) by articles of amendment dated October 11,
2001.
 
 During
2002, ADB Inc. entered into a series of agreements with the Brick Warehouse
Corporation (“The Brick”) whereby the parties agreed to cooperate in online
retail operations that utilized the retail technology that the Company had
developed and operated under the name “Bid.Com International Inc.” in the online
sale of consumer products to be supplied by The Brick. In connection with these
transactions The Brick granted to the Company a secured loan and the Company
completed a corporate reorganization by plan of arrangement, as described
below.
 
 On
August 20, 2002, a new Ontario company was formed called ADB Systems
International Ltd. (“ADB Ltd.”), which was incorporated by certificate and
Articles of Incorporation. Pursuant to a plan of arrangement approved by the
shareholders of ADB Inc. on October 22, 2002 and by the Ontario Superior Court
of Justice on October 24, 2002 (the “Arrangement”) the shareholders of ADB Inc.
exchanged their shares of ADB Inc. for shares of ADB Ltd., as the Company was
then known, on a one-for-one basis on October 31, 2002. As a result of the
Arrangement, the business of ADB Inc., including all assets and liabilities of
ADB Inc. (other than those related to retail activities, which remained with ADB
Inc.), was transferred to the Company in the form of a return of capital. The
name of ADB Inc. was subsequently changed to Bid.Com International Ltd. and on
June 30, 2003, the Company exercised its option to transfer to The Brick all of
the issued shares of Bid.Com International Ltd. (formerly ADB Inc.) in
satisfaction of the outstanding principal amount and accrued interest on the
loan then owing to The Brick.
 
 On
June 30, 2006, in connection with the disposition of the Company’s Norwegian
subsidiary ADB Systemer AS, the Company changed its name, by articles of
amendment, to Northcore Technologies Inc. Effective July 18, 2006 the Company’s
stock symbols were changed to NTI on the TSX and to NTLNF on the
over-the-counter bulletin board (OTCBB).
 
 The
principal and registered office of the Company is located at 302 The East Mall,
Suite 300 Toronto, Ontario, Canada, M9B 6C7 and our telephone number is (416)
640-0400.  Additional information on the Company can be found at
www.northcore.com. The information contained on our web site is not deemed to be
part of this Annual Report.
  17
  
 MAJOR
DEVELOPMENTS
  Significant
product and business developments over the last three fiscal years have been as
follows:
 
 FISCAL
      2008
 
 Northcore
completed a number of customer and operational activities throughout the course
of 2008.  These activities were designed to accelerate revenue
opportunities, solidify our financial position, and strengthen our abilities to
work with our customers and partners.
  OPERATIONS
 Of
note, Northcore:
 
 •
                  Enhanced
      the organization’s technology infrastructure to allow the Company to
      accommodate greater numbers of clients and attendant
  users;
 •
                  Completed
      a series of private placements securing gross proceeds of $1,803,000
      through the issuances of Series L, M and N secured subordinated
      notes;
 •
                  Entered
      into an agreement with the remaining Series G debt holders to repay the
      accrued interest of $113,000 and the principal of $240,000 over a two year
      term at an interest rate of 12 percent, in blended interest and principal
      quarterly payments of $40,000; and
 •
                  Increased
      the size of the applications development team during the fourth quarter to
      more effectively service new and existing clients as well as evolve the
      current technology base;
 
 CUSTOMER
ACTIVITIES
 During
2008 Northcore focused on expanding the breadth of existing customer
relationships and extending the product line in order to open up new
opportunities. Results of this strategy include:
 
 •
                  Significant
      enhancements to the core Asset Tracking system, performed in partnership
      with Kraft Foods, enabling anticipatory asset
  sourcing;
 •
                  Creation
      of the first generation of a mobile Asset Tracking platform, extending
      product reach into a customer base that requires a portable, rugged-ized,
      execution environment; and
 •
                  Completed
      the delivery of a large scale mission critical application to a Fortune
      500 company that was put into global
use;
 
 JOINT
VENTURE WITH GE COMMERCIAL FINANCE
 Throughout
2008, Northcore continued to support GE Asset Manager, LLC, our joint venture
with GE Commercial Finance. The provision of Asset Disposition services to a
number of key clients, such as Western Express, Kitty Hawk, and the Hyster and
Yale corporations, are examples of this focus.
 
 Working
closely with GE, we have also augmented the core GE Asset Manager product suite,
with enhancements to Asset Appraiser and tighter integration of the Asset
Tracking technology to the Asset Sales platform. We expect this to have broad
customer appeal.
 
 We
also supported a significant international expansion in the use of Asset Tracker
by Kraft Foods.
 
 We
believe that the combination of these activities will open up significant
opportunities for the coming year.
 
 
  18
  
 FISCAL
      2007
 
 Northcore
completed a number of customer and operational activities throughout the course
of 2007.  These activities were designed to accelerate revenue
opportunities, solidify our financial position, and strengthen our abilities to
work with our customers and partners.
 
 OPERATIONS
 Of
note, Northcore:
 
 •
                  Announced
      a management change, naming Duncan Copeland as Chief Executive Officer and
      Jim Moskos as Chief Operating Officer effective July 12,
    2007;
 
 •
                  Generated
      gross proceeds of $1.65 million through a rights offering to eligible
      shareholders;
 
 •
                  Completed
      a private placement, issuing a new Series K subordinated notes with a face
      amount of $1.36 million to existing holders of our Series G
      Notes.   In addition, Northcore completed a private
      placement issuance of 2.99 million common shares in consideration of the
      $449,000 Series G accrued interest debt;
and
 
 •
                  Refinanced
      the Series H subordinated notes with a principal balance of $170,000 and
      accrued interest of $60,000.  The Company entered into an
      agreement with debt holders in December 2007 to repay the accrued interest
      of $60,000 in cash in January 2008 and the principal of $170,000 over a
      two year term at an interest rate of 11 percent, in blended interest and
      principal quarterly payments of
$24,000;
 
 CUSTOMER
ACTIVITIES
 
 Northcore
devoted considerable effort in 2007 to growing our customer base and building
long-term relationships with existing clients.  Our customers take
advantage of Northcore’s suite of asset management software solutions and custom
applications to introduce process improvements and reduce operational
costs.  Through these efforts, Northcore:
 
 •
                  Renewed
      a three-year application hosting agreement with GE Commercial Finance to
      provide web-based capabilities for asset disposition, asset tracking and
      asset appraisal;
 
 •
                  Extended
      the terms of its technology and services agreements with the School Board
      of Broward County, the State of Tennessee Department of General Services,
      and Newfoundland and Labrador Housing Corporation. The customers use
      Northcore’s technology and services to manage their maintenance
      activities;
 
 •
                  A
      key thrust of our activities in 2007 focused on increasing our revenue
      stream from the provision of technology-based services to our customers,
      such as The Brick.  These services allow Northcore to extend our
      relationships and provide a point of differentiation for the Company. In
      particular, these services center on the development of applications
      customized specifically for the needs of our customers;
  and
 
 •
                  The
      most prominent achievement related to our services delivery strategy was
      the signing of a master professional services agreement with a leading
      Fortune 500 customer.  This agreement, which already
      has  resulted in a number of revenue-generating projects, is
      designed to streamline the process by which Northcore delivers future
      technology and application development services to all of the customer’s
      businesses;
 
 
 
  19
  JOINT
VENTURE WITH GE COMMERCIAL FINANCE
 
 •
                  Throughout
      2007, Northcore devoted considerable effort in support of GE Asset
      Manager, LLC, our joint venture with GE Commercial Finance.  In
      particular, we launched a web-based sales platform to remarket off-lease
      and pre-owned equipment for the Toro Company. This private-branded sales
      platform, accessible via www.toroused.com, takes advantage of Northcore’s
      asset disposition and technology hosting
  capabilities.
 
 •
                  Working
      with GE, we also delivered asset disposition capabilities to a number of
      organizations looking to maximize the yield for their surplus
      assets.  These customer organizations, such as the Fastenal
      Company and Arthur Machinery, represent several industry verticals
      including transportation, construction materials and manufacturing
      equipment.
 
 •
                  Throughout
      the year, we also continued to support a number of existing joint venture
      customers, such as Kraft Foods and GE Infrastructure.  Both
      organizations expanded their use of Asset Tracker, our web-based
      application for asset management.
 
 FISCAL
2006
 
 •
                  Northcore
      successfully completed a number of operational and customer activities in
      2006.  The most significant of which included the sale of our
      Norway business unit and renaming the Company to Northcore Technologies
      Inc., both of which received shareholder approval, and concentrating our
      sales and marketing efforts in North America.  These
      developments underscore our strategic direction for 2008 and
      beyond.
 
 •
                  Effective
      July 18, 2006 our stock symbol on the TSX was changed to NTI and our
      symbol on the OTCBB was changed to
NTLNF.
 
 •
                  In
      addition to our operational activities, Northcore devoted considerable
      effort in 2006 to adding new customers and building long-term
      relationships with existing clients, such as GE Commercial Finance,
      Paramount Resources and Trilogy Energy Trust.  These customers,
      who take advantage of Northcore’s suite of asset management software
      solutions, are also now able to leverage our technology-based
      services.
 
 •
                  Northcore
      increased its market offerings by introducing application development,
      software customization and systems integration
      capabilities.  These technology-based services allow Northcore
      to extend our relationships with customers and provide a point of
      differentiation for the Company.
 
 JOINT
VENTURE WITH GE COMMERCIAL FINANCE
 
 •
                  In
      2006, Northcore continued to devote significant attention to the rollout
      of GE Asset Manager, LLC, and our joint venture effort with GE Commercial
      Finance, Capital Solutions (“GE” or “GE Commercial Finance”). Northcore’s
      joint venture efforts have generated a number of positive results to
      date.  Through the joint venture, Northcore has strengthened its
      relationship with GE, delivered new web-based asset management
      capabilities, expanded new relationships with customers such as Kraft
      Foods Inc., the Toro Company and Fastenal Company. These activities
      provide a basis for continued growth in the near and
      long-term.
 
  20
   COMPANY’S
JOINT VENTURE WITH GE COMMERCIAL FINANCE
  On
December 31, 2003 ADB Systems USA, Inc. (“ADB USA”), a wholly owned subsidiary
of the Company, entered into an Amended and Restated Operating Agreement (the
“Operating Agreement”) with General Electric Capital Corporation through its
business division GE Commercial Finance. This agreement was entered into in
connection with the establishment of GE Asset Manager, LLC, a joint business
venture in which both GE Commercial Finance and ADB USA hold a 50 percent
interest.  Pursuant to this business venture, GE Commercial Finance
and ADB USA also entered into the following agreements that are included as
exhibits to the Operating Agreement:  ADB License Agreement, ADB
Services Agreement, GE License Agreement and GE Service Agreement. GE Asset
Manager, LLC, which carries on business under the name GE Commercial Finance
Asset Manager (“GE Asset Manager”), is an integrated, web-based business
enabling mid- and large-size organizations to reduce operating costs by
simplifying and consolidating their asset management programs. GE Asset Manager
features all-in-one capabilities designed for sourcing of new equipment,
tracking and reallocation of existing assets, automated appraisal management and
disposition of surplus equipment.
 
 PRINCIPAL
CAPITAL EXPENDITURES AND DIVESTITURES
  For
a description of principal capital expenditures and divestitures, see ITEM 5 - OPERATING AND FINANCIAL
REVIEW AND PROSPECTS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  As of March 30, 2009 we do not have
any significant current capital divestitures or any current capital
expenditures.
 
  B.
BUSINESS OVERVIEW
  The
Company develops and sells software products and services that allow our
customers to source, buy, track, manage and sell assets, primarily in
asset-intensive industries.  We refer to our product and services
suite as asset lifecycle management solutions.  Our solutions can
reduce sourcing and procurement costs, improve tracking and monitoring of asset
performance and reduce operational downtime.
 
 Designed
to help our customers get full value from their capital assets, we believe the
Company’s integrated asset management solutions:
 
 •
                  Streamline
      sourcing/procurement activities while reducing purchasing
      costs;
 •
                  Schedule
      preventative and corrective maintenance activities, eliminating
      unnecessary operational downtimes and reducing maintenance
      costs;
 •
                  Manage
      inventory of materials more effectively, resulting in reduced purchase
      costs, improved access to supplies, and easier tracking of assets
      regardless of their location; and
 •
                  Generate
      higher yield for surplus assets that are disposed or sold
      on-line.
 
 Our
current customers include GE Commercial Finance, Newfoundland and Labrador
Housing Corporation, Paramount Resources, Trilogy Energy Trust, The School Board
of Broward County and The State of Tennessee Department of General
Services.
 
 Through
our wholly owned subsidiary, ADB Systems USA, Inc., Northcore owns a 50 percent
interest in GE Asset Manager, LLC a joint business venture launched with GE
Commercial Finance which operates under the name GE Commercial Finance Asset
Manager  (see Part I - Item 4.A - “Joint Venture with GE Commercial
Finance”). GE Asset Manageroffers a suite of integrated, web-based solutions
that are designed to help organizations gain greater control of their capital
assets and implement new process efficiencies to their operational activities
which we believe enables our customers to:
 
 •
                  Automate
      sourcing and tendering processes;
 •
                  Track
      and re-deploy assets more
effectively;
 •
                  Automate
      equipment appraisals; and
 •
                  Efficiently
      market and sell surplus
equipment.
  21
  
 
 We
believe however, that the current economic turmoil paradoxically bodes well for
Northcore. In times where access to new capital is reduced, or rendered more
difficult, companies are motivated to “stretch” existing capital investments by
redeploying idle and surplus assets back into productive use. In addition,
assets that are ultimately unneeded represent a “harvest” opportunity, if they
can be liquidated efficiently. The product suite offered by Northcore and by
extension our joint venture (GE Asset Manager, LLC) provides an efficient, cost
effective solution to help organizations achieve these goals.
 
 
 INDUSTRY
BACKGROUND AND OVERVIEW
  Asset
management applications have existed for more than thirty years, initially
through computerized maintenance management systems (CMMS), and more recently
including more comprehensive and robust enterprise asset management (EAM) and
enterprise resource planning (ERP) solutions.  These early systems
automated daily management of assets, while more recent ERP solutions
consolidated basic asset information with financial information at the corporate
level. Asset Management applications, as provided by Northcore, encompass
elements of both approaches, and are increasingly delivered via web-based or
hosted systems.
 
 Current
asset management systems provide a number of capabilities including maintenance
scheduling, materials management, electronic procurement, and asset tracking. In
essence, asset management activities have evolved to integrate all aspects of an
asset’s lifecycle.
 
 There
are a number of industry trends driving the demand for asset management
capabilities, including the need to:
 
 •
                  Improve
      the utilization of assets;
 •
                  Comply
      with industry standards and requirement such as, Sarbanes-Oxley financial
      requirements;
 •
                  Reduce
      operating expenses and improve bottom-line performance;
  and
 •
                  Introduce
      new operational efficiencies.
 
 PRODUCTS
AND SERVICES
 
 The
Company offers solutions to manage all aspects of the asset lifecycle -
sourcing/procurement, maintenance, materials management and
disposition.  Below is a detailed description of our
offerings:
  Dyn@mic Buyer(TM)
  An
on-line sourcing solution, Dyn@mic Buyer automates tendering activities, and can
be used to improve the decision-making process involved in the sourcing of goods
by providing automated analysis and selection among competing supplier bids,
based on a variety of pre-determined factors.
  Key
features include:
  •
                  The
      ability for buyers to create tenders using automated tools that accelerate
      the purchasing process and reduce procurement
  costs.
 •
                  Capabilities
      for buyers to post and distribute their tenders on-line to qualified
      suppliers.
 •
                  The
      ability for buyers to assign values to criteria involved in the purchase
      decision, such as price, product availability, post-sales support and
      certification standards.  Buyers then weigh suppliers’ responses
      to tender questions for evaluation.
 •
                  Functionality
      that allows for the posting of detailed technical information, question
      and answer forums, and automatic e-mail notification of amended or new
      buyer-posted documents.
 •
                  Capabilities
      to allow for the use of sealed bid-sourcing formats enabling users to post
      their product or service requirements to selected vendors.  The
      sealed bid system differs from the request for quotation in that the
      vendors only have one opportunity to supply a bid.  Only after
      the close of the auction is the user able to view the vendor
      bids.
  22
  
 Dyn@mic
Buyer is delivered to our customers via a hosted model. Fees for Dyn@mic Buyer
are determined on an annual basis, depending on the number of sourcing events
identified by customers. Service fees are charged separately for implementation,
systems integration, training and other consulting activities. Dyn@mic Buyer can
be bundled with our procurement solutions or used separately depending on
customer requirements.  Current users of Dyn@mic Buyer include the
National Health Service (U.K.) and Vesta Insurance.
  ProcureMate(TM)
 
 ProcureMate
is a web-based business-to-business e-procurement solution designed to reduce
purchase costs, improve purchasing efficiencies and reduce maverick
buying.  ProcureMate allows users to select goods for purchase from a
web-based catalog and automatically issue purchase orders to their suppliers. In
connection with the sale of our Norwegian subsidiary in June 2006, the Company
entered into a value-added reseller agreement with ADB Systemer AS to continue
to bring ProcureMate to market.
  Key
features of ProcureMate include:
  •
                  The
      ability to notify suppliers automatically of purchase orders requiring
      processing;
 •
                  Functionality
      for allowing on-line dialogue to take place between buyers and
      suppliers;
 •
                  The
      ability to integrate to enterprise resource planning and financial
      systems, reducing manual efforts for processing and consolidating purchase
      orders, goods receipt and payment
activities;
 •
                  Functionality
      for facilitating direct payment and electronic funds transfer;
      and
 •
                  The
      ability to integrate user workflow and approvals into the procurement
      process;
 
  ProcureMate
is licensed to customers and license fees for ProcureMate are based on the
number of users named by the customer.  Service fees are charged
separately for implementation, systems integration, training and other
consulting activities.  ProcureMate can be bundled with our other
on-line purchasing solutions or used separately depending on customer
requirements.  Existing ProcureMate users include National Health
Service (U.K.), Vesta Insurance, Vinmonopolet, Norway’s government-run retailer
of wine and spirits, and Hordaland HFK County, a large local government entity
in Norway.
 
 WorkMate(TM)
 
 A
comprehensive asset management solution, WorkMate provides integrated
capabilities for asset maintenance, asset tracking, materials management and
procurement functionality. In connection with the sale of our Norwegian
subsidiary in June 2006, the Company entered into a value added reseller
agreement with ADB Systemer AS to continue to bring WorkMate to
market.
 
 WorkMate
is designed for use by customers in asset intensive industries - typically those
where maintenance, repair and operations purchases outnumber raw material
purchases by more than ten to one on a transaction volume
basis.  Examples of asset intensive industries are oil and gas,
process industries (such as mining) and the utilities sector.
 
 The
three main modules (procurement, materials management and maintenance
functionality) may be licensed independently or together as a fully integrated
system:
 
 •
                  Procurement
      Module - for sophisticated domestic and international purchasing
      operations.  Key capabilities include: order requisitioning,
      quotations, purchase orders, contracts, cost controls and vendor
      catalogues.  The procurement module also monitors supplier
      performance in terms of accuracy, punctuality and
  cost.
 •
                  Materials
      Management Module - for managing inventory and logistics
      operations.  Key features include: inventory status, goods
      receipt, stock issue, reordering, packing/unpacking, transportation, and
      goods return and equipment rentals.  This Module will log all
      movements of an item and generates the necessary financial
      transactions.
  23
  
 •
                  Maintenance
      Module - for all types of maintenance, including corrective, preventive or
      condition-based activities. Customers can automate manual routines and
      track maintenance costs and equipment
history.
 
 Each WorkMate module also includes
workflow and reporting tools.
 
 WorkMate
is a licensed client-server application and pricing is based on the number of
users named by the customer.  Service fees are charged separately for
implementation, systems integration, training and other consulting
activities.  WorkMate users include some of the largest global players
in the oil and gas sector, such as: BP (Norway), Halliburton Productos, Prosafe,
Talisman Energy, Paramount Resources and Mesta AS.
 
 Dyn@mic
Seller(TM)
 
 An
on-line sales solution designed to help our customers with the disposition of
surplus assets and equipment.  Dyn@mic Seller integrates multiple
pricing methods, such as fixed priced, top bid (auction), Dutch (declining
price) and hybrids, through private-labeled websites. Dyn@mic Seller is
delivered through a hosted model.
 
 Key
capabilities of the product include:
 
 •
                  Traditional
      rising price auctions, where the highest bids win the items being sold.
      The rising price auction allows participants to competitively bid on
      available products by incrementally adjusting their bid
      amounts.  Our user interface allows users to easily identify
      current leading bidders, minimum new bids and initial bid
      pricing.  Participants are informed of their bid status, and
      advised whether they have won, been outbid, approved or declined via
      electronic mail.
 •
                  A
      patented Dutch (declining) auction format, in which a starting price is
      set and a limited time period is allocated for a fixed quantity of the
      product to be sold.  As time advances, the price drops in small
      increments until the asset is sold.  The declining bid auction
      allows participants to bid in a real-time format utilizing on-screen data
      which provides the time and quantity remaining as well as the falling
      price of the items for sale.
 •
                  Hybrid
      auction formats that blend multiple pricing formats to meet a customer’s
      particular needs.
 •
                  Fixed
      price sales where assets are sold in a catalogue or directory
      format.  The purchaser cannot bid on the price, but merely
      elects whether or not to purchase the good or
  service.
 
 Our customers pay monthly hosting fees
for use of Dyn@mic Seller and typically also enter into a revenue sharing
arrangement with us.  Service fees for implementation, systems
integration, training and other consulting activities are charged
separately.  Current customers of Dyn@mic Seller include GE Commercial
Finance.
  
  24
   RELATED SERVICES
 
 In
connection with our software offerings, we provide the following services to our
customers:
 
 CONSULTING
 
 A
significant number of our customers request our advice regarding their business
and technical processes, often in conjunction with a scoping exercise conducted
both before and after the execution of a contract.  This advice can
relate to development or optimization of assorted business processes, such as
sourcing or procurement activities, assisting in the development of technical
specifications, and recommendations regarding internal workflow
activities.
 
 CUSTOMIZATION
AND IMPLEMENTATION
 
 Based
generally upon the up-front scoping activities, we are able to customize our
solutions as required to meet the customer's particular needs.  This
process can vary in length depending on the degree of customization, the
resources applied by the customer and the customer's business
requirements.  We work closely with our customers to ensure that new
features and functionality meet their expectations.  We also provide
the professional services work required for the implementation of our customer
solutions, including loading of data, identification of business processes, and
integration to other systems applications.
 
 APPLICATION
DEVELOPMENT
 
 A growing number of our
customers have engaged us to develop web-based applications that support their
unique asset management requirements. Typically, these application development
projects become the proprietary technology of our customers and are not resold
by us. We charge customers based on hourly service rates or through a fixed
price format.
 
 TRAINING
 
 Upon
completion of implementation (and often during implementation), we train
customer personnel to utilize our solutions.   Training can be
conducted in one-on-one or group situations. We also conduct “train the trainer”
sessions.
 
 MAINTENANCE
AND SUPPORT
 
 We
provide regular software upgrades and ongoing support to our customers.
Northcore provides these services for a yearly maintenance fee of 18 percent of
the license fee for client/server environment or as part of its monthly hosting
fees.
 
 HOSTING
 
 We
also provide technology-hosting services to our customers. Through these
services, customers gain access to Northcore's applications via the
Internet through dedicated, secure websites.  Our hosting services enable
customers to accelerate the deployment of technology initiatives while
limiting investments in systems configuration and new hardware
infrastructure.
 
 GE
ASSET MANAGER
 
 GE
Asset Manager is a joint venture between GE Commercial Finance and Northcore
Technologies Inc. that combines GE’s equipment financing and asset management
expertise together with our experience in providing mission critical technology
solutions for asset lifecycle management.
  25
  
 With
organizations needing to generate improved bottom-line results and comply with
new financial regulatory requirements, GE Asset Manager has introduced a new
suite of integrated, web-based solutions that are designed to help organizations
gain greater control of their capital assets and implement new process
efficiencies to their operational activities.
 
 Our
industry-proven solutions enable our customers to:
 
 •
                  Track
      and re-deploy assets more
effectively;
 •
                  Automate
      equipment appraisals;
 •
                  Efficiently
      market and sell surplus equipment;
and
 •
                  Automate
      sourcing and tendering processes.
 
 The
four key components to Asset Manager’s offerings are as follows:
 
 Asset
Buyer
 
 Asset
Buyer is a web-based solution designed for automating sourcing activities and
improving purchasing decisions.  Using Asset Buyer, purchasers can
determine the factors that are the most important to their procurement decisions
and identify suppliers that deliver the greatest value - from the lowest price
to the ability to match exact specification requirements.
 
 Asset
Buyer also streamlines the procurement process, making it easier to create and
distribute tenders, select vendors and negotiate with suppliers.
 
 With
Asset Buyer, organizations can:
 •
                  Generate
      cost savings on sourcing
activities;
 •
                  Reduce
      purchasing cycle times;
 •
                  Take
      advantage of multiple sourcing formats including request for proposals,
      reverse auction, and sealed bid;
and
 •
                  Rank
      suppliers based on their ability to match buying criteria improve
      relations with suppliers through on-line
  collaborations.
 
 Asset
Tracker
 
 Designed
to allow organizations to more effectively utilize their assets, Asset Tracker
is a web-based solution for keeping track of the location, details and status of
capital equipment - regardless of where the equipment is being
deployed.
 
 Using
a dedicated tracking site that is password protected, Asset Tracker provides
users the ability to search and locate capital assets throughout their
organization. Users can search for equipment in a number of
ways.  Assets can be searched by business unit, function, or by
specific piece of equipment category.
 
 Once
an asset is located, users can determine its status and take appropriate
action.  Idle or under-utilized assets, for example, can be
re-deployed, helping to increase their value to the organization and reducing
capital spending on new equipment.
 
 Assets
no longer required or deemed surplus can be earmarked for disposition through
traditional or on-line sales methods, such as Asset Seller (described
below).
 
 With
Asset Tracker, users can:
  26
  
 •
                  Search
      and request for capital equipment within their organization, across
      multiple locations or facilities;
 •
                  Review
      asset details, such as equipment description, image, financial
      information, and contact
information;
 •
                  Add
      new asset details by uploading data from spreadsheet
      applications;
 •
                  Extract
      asset details and generate asset management
  reports;
 •
                  Instantly
      determine the status of capital
equipment;
 •
                  Transfer
      and re-deploy idle assets; and
 •
                  Dispose
      of unnecessary or surplus
equipment.
 
 Asset
Appraiser
 
 Asset
Appraiser is a web-based solution that allows organizations to more effectively
manage the capital equipment appraisal process. With Asset Appraiser users can
create an appraisal scope, confirm appraisal data, distribute documents and data
collection tools, compile appraisal results and access stored appraisals on-line
in a protected environment.
 
 Asset
Appraiser allows users to:
 
 •
                  Automate
      and accelerate the appraisal process using web-based
  tools;
 •
                  Gain
      instant access to ongoing project details from anywhere in the
      world;
 •
                  Store
      asset data in a secure repository for future reference, retrieval and
      analysis;
 •
                  Access
      appraisals in a 24 x 7 environment;
 •
                  Store
      and review appraisals in a secure
environment;
 •
                  Download
      spreadsheet templates into reports;
 •
                  Add
      attachments, such as image, text or movie files, to reports;
      and
 •
                  Assist
      with compliance with the Uniform Standards of Professional Appraisal
      Practice.
 
 Asset
Seller
 
 Asset
Seller facilitates instant and global access to a buying community by presenting
surplus equipment or inventory on geasset.com, GE's equipment re-marketing
website. Asset Seller is a proven take-to-market solution that will connect a
company's equipment to a global community of qualified organizational buyers
using multiple sales platforms, all developed to help maximize asset recovery
value and improve cycle time.
  Asset
Seller brings together multiple sales platforms into one integrated on-line
environment, providing flexibility, while maximizing the yield for your surplus
equipment.
   Asset
Seller's direct sale platform features equipment showcases that are designed to
promote private treaty sales. Other sales platforms available through Asset
Seller include ranked sealed bid and top bid sale events that enable you to
market equipment in an auction-like environment.
   Utilizing
GE's patent pending ranked sealed bid method, Asset Seller encourages multiple
bids and retains buyer anonymity, creating competitive sales environments that
generate a higher recovery for asset investment.
  Asset
Seller also enables organizations to feature equipment specifications, photos,
videos and contact information, and allows them to coordinate off-line sales
activities such as equipment inspections. Current customers of Asset Seller,
through our joint venture, include The Toro Company.
 
  27
  THIRD
PARTY BUSINESS RELATIONSHIPS
 
 Designed
to extend the value of the solutions we deliver to our customers, Northcore has
fostered relationships with a number of leading technology and professional
service organizations. These relationships allow Northcore to develop
world-class offerings that leverage the leading-edge technologies, proven
methodologies and subject matter expertise of our business
partners.
 
 Northcore’s
existing business relationships include:
 
 ADB
SYSTEMER AS
  Based
in Stavanger, Norway ADB Systemer AS provides enterprise asset management
technology for oil and gas companies and public sector organizations. Upon the
share sale of ADB Systemer AS, effective June 30, 2006, the Company entered into
a value added reseller agreement with ADB Systemer AS to continue to bring
WorkMate and ProcureMate to market.
  DONNA
CONA
  Donna
Cona is Canada's largest Aboriginal Information and Communications Technology
company. The company was incorporated in 1996, and has successfully been
providing information technology and management consulting services to public
sector organizations.
  GE
COMMERCIAL FINANCE
 
 Backed by more than 65
years of operating experience, a strong credit rating, and the vast resources of
its parent, General Electric Company, GE Capital offers a wide range of
value-added financial products and services through a network of 28 specialized
businesses in five core niches: Equipment Management, Customer Services,
Specialized Financing, Mid-Market Financing and Specialty
Insurance.
 
 BUSINESS
CYCLES
 
 As
many of the customers of the Company and GE Asset Manager are large,
multinational organizations or quasi-governmental entities, we may experience
increasingly longer sales and collection cycles. Additional information on
business cycle risks are set out in Item 3.D. of this Annual Report under the
heading Risk
Factors.
 
 For
additional information regarding business cycles, see Part I - Item 5 under the
heading “OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.
 
 STRATEGY
 
 Our
business strategy is to expand our customer base, particularly in the financial
services, manufacturing, public, and oil and gas sectors, through superior
software functionality and through the industry expertise of our
employees.  In particular, our strategy is comprised of the following
key components:
  EXPAND
JOINT VENTURE WITH GE AND INCREASE OUR CUSTOMER BASE
  Since
the launch of GE Asset Manager, we have focused our efforts on increasing the
number of joint venture customers and enhancing our portfolio of asset
management technology. This focus will be a cornerstone of our efforts in
2009.
  STRENGTHEN
OUR POSITION AS AN ASSET MANAGEMENT SOLUTION PROVIDER AND IMPROVE OUR VISIBILITY
AMONG TARGET SECTOR
  While
we have expanded our customer base and increased the number of users of our
technology, Northcore is committed to solidifying our position as a provider of
asset management solutions particularly among our target markets.
   28
   MAINTAIN AND ENHANCE OUR
TECHNOLOGY
  Based
on the relative pricing and functionality of our products as compared with those
of our competitors, we consider our proprietary software offerings to be
competitive, however it is critical that we continue to maintain and enhance our
technology.
  SEEKING ACQUISITIONS AND STRATEGIC
INVESTMENTS
  We
plan to seek to expand by seeking technologies, products, and services that
complement our existing business.  If appropriate opportunities are
available, we may acquire businesses, technologies or products or enter into
strategic relationships that may further diversify revenue sources and product
offerings, expand our customer base or enhance our technology
platform.
 
 CUSTOMERS
 
 We provide our solutions to customers
in a variety of industries, including: financial services, manufacturing,
government and oil and gas.
  The revenue structures and particular
services provided vary depending upon the needs of the customer and the solution
concerned.  For licensed offerings we generally collect a license fee
based on number of users, service fees for implementation and training, and
support and maintenance fees that are collected on a recurring annual
basis.  For hosted offerings, we generally collect an up-front
implementation fee, monthly hosting fee, and a share of revenue or transaction
volumes.
  The
following is a representative list of some of the customers for whom we have
implemented or are implementing our solutions:
 
 Customer
                          Solution(s)
                          Industry
      Segment
                          Geographic
      LocationGE
      Capital Solutions
                          Dyn@mic
      Seller
                          Financial
      Services
                          USParamount
                          WorkMate
                          Oil
      and Gas
                          CanadaTrilogy
      Energy Trust
                          WorkMate
                          Oil
      and Gas
                          CanadaThe
      Brick
                          WorkMate
                          Consumer
      Products Retailer
                          CanadaCustomers
      serviced by our joint venture, Asset ManagerKraft
      Foods Global, Inc.
                          Asset
      Tracker
                          Manufacturing
                          USGE
      Infrastructure
                          Asset
      Tracker
                          Manufacturing
                          USThe
      Toro Company
                          Asset
      Tracker
                          Manufacturing
                          USGlobal
      Electronics Services-GE Capital Solutions
                          Asset
      Tracker
                          Financial
      Services
                          US
 
 SALES
AND MARKETING
 
 We
market our solutions primarily through our direct sales force. Our sales
organization is regional with personnel located in our principal offices in
Toronto (Canada).
  Our
marketing efforts are focused on targeted marketing campaigns, rather than
broad-based "awareness" campaigns. Potential customers are identified through
direct contact, responses to requests for information, attendance at trade shows
and through industry contacts.
   The
GE sales force takes the lead in the sales and marketing efforts of the Asset
Manager joint venture.
   29
   
  We
use reference customers to assist us in our marketing efforts, both through
direct contact with potential customers and through site branding and case
studies.  We also rely on our co-marketing partners to assist in our
marketing efforts.
 
 TECHNOLOGY
PLATFORM
 
 Northcore
has devoted significant resources to developing its proprietary software
technology. The technology platform is constructed using distributed software
technologies which allow for rapid development and deployment of new software
technology in order to take advantage of emerging business
opportunities.
 
 Our
company's core technology platform is based on Microsoft applications, including
the Windows NT operating system and a SQL server relational database, all
residing on scaleable hardware. The software is constructed using an advanced
proprietary XML framework and resides on an N-tier architecture. The support of
open systems allows integration with a large variety of existing commercial,
proprietary and legacy applications.  Other applications, which are
also operational in a Microsoft NT environment, have been developed using Power
Builder and are dependent on an Oracle relational database.
  CUSTOMER
SERVICE AND TECHNOLOGY
 
 Based
on the relative pricing and functionality of our products as compared with those
of competitors, we believe that our proprietary software provides a competitive
advantage, and that our future success depends, in part, on our ability to
continue developing and enhancing that software.  Therefore, we have
focused our customer service and technology efforts on the continued development
of our proprietary software offerings.
  Our
ongoing software development and technology efforts are aimed at the continued
“productization” of specific elements of our software, enhancing the features
and functionality of our existing software components, the development of new
software components, and the integration of superior third party technology into
our environment.  Productization involves the development of reusable
applications to reduce programming time and costs for customer
implementations.
  Our
software development and technology expenditures were approximately $689,000,
$762,000 and $664,000 for the year ended December 31, 2008, 2007 and 2006,
respectively, including salaries and related expenses of our personnel engaged
in research and development.
 
 Our
software development and technology activities in 2008 included the ongoing
development of new applications framework implemented in Microsoft.Net. The new
framework will be used as the foundation of all future Web based products. There
was also a substantial amount of time devoted to the extension of our
integration tool set, which allows us to connect our core product suite to
pre-existing customer owned third party applications.
 
 CUSTOMER
CONCENTRATION
 
 The
majority of our revenue is generated by a small number of customers as discussed
above in Item 3-D Risk Factors - WE DEPEND HEAVILY ON A LIMITED NUMBER OF
CUSTOMERS, AND IF WE LOSE ANY OF THEM OR THEY REDUCE THEIR BUSINESS WITH US, WE
WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES. See also Item 5-D under the
heading Credit Risk.
 
 INTELLECTUAL
PROPERTY
 
 We
rely on a combination of patent, copyright, trademark and trade secret laws, as
well as confidentiality agreements and technical measures, to establish and
protect our proprietary rights.
  30
  
  In
March 1999 and July 2001, we received patents from the U.S. Patent and Trademark
Office covering the process whereby we conduct Dutch auctions over electronic
distribution channels. We have patent applications pending in Canada covering
the same technology.  We also continue to explore other patent
opportunities, and may have other applications pending from time to time. We do
not believe, however, that our ability to obtain patents is material to our
success or results.
  Our
proprietary software is subject to common law copyright protection, but we do
not have, and do not intend to pursue, any registered
copyrights.  Common law protection may be narrower than that which we
could obtain under registered copyrights.  As a result, we may
experience difficulty in enforcing our copyrights against certain third party
infringements.  The source code for our proprietary software is
protected as a trade secret.
  Our
major trademarks or tradenames include: NorthcoreTM, DYN@MIC SELLERTM, DYN@MIC
BUYERTM and POWERED BY NorthcoreTM. We also claim rights in other unregistered
trademarks.
  Our
competitive position is also dependent upon our unpatented trade
secrets.  In an effort to protect our trade secrets, and as part of
our confidentiality procedures, we generally enter into confidentiality and
non-disclosure agreements with our employees and consultants and generally limit
access to and distribution of our software, documentation and other proprietary
information.  Additionally, we limit physical access to our premises,
software and hardware and employ security measures to protect against damage or
theft.
  The
Company entered into a Patent License Agreement with NCR Corporation on April
17, 2002.  The agreement provides the Company with access to specific
technology patents over a seven-year period for US $100,000
annually.
 
 COMPETITION
 
 The
market for each solution comprising our asset lifecycle management suite is
intensely competitive.  Many of the companies we compete with have
much greater financial, technical, research and development resources than we
do.
  To remain and become more competitive,
we will need to make continued investments in product development and improve
our market visibility and financial situation.
  Although
we offer a broad range of asset lifecycle management solutions, we face
significant competition in each of the component product areas from the
following companies:
  •
                  Sourcing
      - Ariba, Inc., Emptoris, Inc., Moai, and SAP
AG;
 •
                  Procurement
      -Ariba, Inc., IBM, and broader ERP solution providers such as Oracle and
      SAP AG;
 •
                  Asset
      Management- Indus International Inc., Infor, IBM, Mincom Ltd., and broader
      ERP solution providers such as Oracle and SAP AG;
  and
 •
                  Sales
      solutions - eBay Inc.
 
 In
addition, many organizations use in-house developers to develop solutions for
certain elements of the asset lifecycle.
  31
  
 
 C.
ORGANIZATIONAL STRUCTURE
 
 The
Company has the following organizational structure, which includes the
subsidiaries as set out below:
 
 CORPORATE ORGANIZATIONAL
STRUCTURE
 AS OF MARCH 30,
2009
 
 
 
 
 D.
PROPERTY, PLANT AND EQUIPMENT
 
 The
table below lists the location of our facilities, which is held by us pursuant
to a lease agreement, and summarizes certain information about the
location.
 
 Location
                    Use
                    Square
      Feet
                      (Approximate)
                    Term
      of Lease302
      The East Mall, Suite 300 Toronto, Ontario
                    Executive,
      Administrative, Engineering and Marketing
                    5,435
                    Expires
      Oct. 2009
 
 We
believe that we have adequate space for our current needs.  As we
expand, we expect that suitable additional space will be available on
commercially reasonable terms.  We do not own any real estate nor do
we currently own or lease warehouse space.
 
 ITEM
4A - UNRESOLVED STAFF COMMENTS
 
 Not
Applicable.
 
 
  32
  
 
 
 
 
 ITEM
      5 -OPERATING AND FINANCIAL REVIEW AND PROSPECTS MANAGEMENT’S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS
  YOU
SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "ITEM
3.A-SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.  IN ADDITION
TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS.  SEE "FORWARD-LOOKING STATEMENTS".
  Overview
  We
develop and sell software solutions and services that allow our customers to
source, manage, and sell their assets and capital equipment.  We refer
to our product and services suite as asset lifecycle management
solutions.  Our solutions help our customers reduce sourcing,
procurement and maintenance costs, improve asset utilization, reduce operational
downtime, and generate higher yields for surplus equipment.
  The
Company operates in a single reportable operating segment, that is, the design
and delivery of software solutions for use by its customers. The single
reportable operating segment derives its revenues from the sale of software
licenses and related services.
 
 Our
company is headquartered in Toronto (Canada).
 
 Our
shares trade on both the Toronto Stock Exchange (TSX: NTI) and the OTC Bulletin
Board (OTCBB: NTLNF).
  33
  
 SELECTED
ANNUAL INFORMATION
 (in
thousands of Canadian dollars)
 
 Year
      ended December 31,
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006(in
      thousands, except per share amounts)Revenues
                                  
                                  $
                                  741
                                  
                                  
                                  $
                                  1,166
                                  
                                  
                                  $
                                  1,073Operating
      expenses:General
      and administrative
                                  
                                  
                                  1,485
                                  
                                  
                                  
                                  1,703
                                  
                                  
                                  
                                  1,790Customer
      service and technology
                                  
                                  
                                  689
                                  
                                  
                                  
                                  762
                                  
                                  
                                  
                                  664Sales
      and marketing
                                  
                                  
                                  117
                                  
                                  
                                  
                                  276
                                  
                                  
                                  
                                  377Employee
      stock options
                                  
                                  
                                  43
                                  
                                  
                                  
                                  94
                                  
                                  
                                  
                                  137Depreciation
      and amortization
                                  
                                  
                                  33
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  92Total
      operating expenses
                                  
                                  
                                  2,367
                                  
                                  
                                  
                                  2,874
                                  
                                  
                                  
                                  3,060Loss
      from continuing operations before the under-noted
                                  
                                  
                                  (1,626
                                  )
                                  
                                  
                                  (1,708
                                  )
                                  
                                  
                                  (1,987
                                  )Interest
      expense:Cash
      interest expense
                                  
                                  
                                  335
                                  
                                  
                                  
                                  272
                                  
                                  
                                  
                                  345Accretion
      of secured subordinated notes
                                  
                                  
                                  394
                                  
                                  
                                  
                                  333
                                  
                                  
                                  
                                  454Interest
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (16
                                  )729
                                  
                                  
                                  
                                  604
                                  
                                  
                                  
                                  783Loss
      from continuing operations
                                  
                                  
                                  (2,355
                                  )
                                  
                                  
                                  (2,312
                                  )
                                  
                                  
                                  (2,770
                                  )Income
      from discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,122LOSS
      FOR THE YEAR
                                  
                                  $
                                  (2,355
                                  )
                                  
                                  $
                                  (2,312
                                  )
                                  
                                  $
                                  (648
                                  )OTHER
      COMPREHENSIVE INCOME, NET OF TAX:Foreign
      currency translation adjustment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (90
                                  )COMPREHENSIVE
      LOSS
                                  
                                  $
                                  (2,355
                                  )
                                  
                                  $
                                  (2,312
                                  )
                                  
                                  $
                                  (738
                                  )LOSS
      PER SHARE:From
      continuing operations, basic and diluted
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.03
                                  )Loss
      per share, basic and diluted
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.01
                                  )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
      (000’s)
                                  
                                  
                                  108,861
                                  
                                  
                                  
                                  93,094
                                  
                                  
                                  
                                  79,933
 
 A.
OPERATING RESULTS
 
 DISCONTINUED
OPERATIONS
 
 On
May 18, 2006, the Company entered into an agreement with ADB Systemer Holding AS
(the “Buyer”), to sell 100 percent of the Company's interest in its Norwegian
subsidiary ADB Systemer AS, (“ADB Systemer”) for NOK 15,000,000 or approximately
Canadian $2,687,000 in cash, subject to shareholder approval.  As
compensation for the transfer of U.K. contracts to the Buyer, the Company
receives a royalty of 10 percent of net annual sales from the contracts for a
period of four years from the sale closing date.  These royalties are
recognized in earnings as they become due.  The Company recorded a
total of $38,000 (2007-$116,000, 2006-$77,000) in royalties for the year ended
December 31, 2008.  Certain shareholders of the Buyer were employees
or executive officers of ADB Systemer and shareholders of the
Company.  On June 21, 2006 the Company received approval from
shareholders at its annual general meeting to proceed with the sale of ADB
Systemer and changed its name to Northcore Technologies Inc. effective June 30,
2006.  The sale of the shares of ADB Systemer included the sale of the
ADB Systems name.  Upon the sale of ADB Systemer, the Company retained
access to all existing technology that will be used to service existing
customers through a Value Added Reseller Agreement entered into with ADB
Systemer.
  34
  
 The following summarizes the statement
of operations and statement of cash flows information for the Company’s
discontinued operations.
 
 Income
      Statement
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006(in
      thousands, except per share amounts)Revenue
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            2,399Income
      from operations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            331Gain
      from disposition of discontinued operations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,791Income
      from discontinued operations
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            2,122Income
      per share from discontinued operations, basic and diluted
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            0.02
 
 Statement
      of Cash Flows
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006(in
      thousands)Operating
      activities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (317
                              )Investing
      activities - Net proceeds from disposition of discontinued
      operations
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,643Financing
      activities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Cash
      flows from discontinued operations
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              2,326
 RESULTS
OF OPERATIONS
 
 COMPARISON OF YEARS ENDED
DECEMBER 31, 2008 AND DECEMBER 31, 2007
 
 LOSS
 
 Our
loss for the year ended December 31, 2008 was $2.355 million, an increase of
$43,000 or two percent from the loss of $2.312 million reported for the year
ended December 31, 2007. The increase in loss was attributable in the reduction
in revenue and the increase in interest expense, partially offset by the
decrease in operating expenses.
 
 REVENUES
 
 Revenues
are comprised of services (application development activities, software
implementation and license fees, training and consulting, product maintenance
and customer support), application hosting and royalty fees.
 
 Revenues
decreased to $741,000 for the year ended December 31, 2008 from $1.166 million
for the year ended December 31, 2007, representing a decrease of $425,000 or 36
percent.  The most significant decrease was in the area of services,
where revenues decreased to $454,000, from $794,000 in 2007, a decline of
$340,000 or 43 percent.  A smaller workforce, the decline in legacy
applications (WorkMate and COMPASS) users and the depreciation in the U.S.
dollars were the main reasons for the decline in services
revenues.  Royalty fees also decreased to $38,000, from $116,000 in
2007, a decline of $78,000 or 67 percent.  Hosting fees declined to
$249,000, from $256,000 in 2007, a slight decline of $7,000 or three
percent.  The depreciation in the U.S. dollars was the main reason for
this decrease in hosting fees during 2008.
  35
  
 GENERAL
AND ADMINISTRATIVE
 
 General
and administrative expenses include, primarily: all salaries and related
expenses (including benefits and payroll taxes) other than technology staff
compensation (which is included in customer service and technology expenses),
and sales and marketing staff compensation (which is included in sales and
marketing expenses), occupancy costs, foreign exchange gains or losses,
professional fees, insurance, investor relations, regulatory filing fees, and
travel and related costs.
 
 General
and administrative expenses decreased by $218,000 or 13 percent, to $1.485
million for the year ended December 31, 2008, as compared to $1.703 million for
the year ended December 31, 2007.  Continued cost-containment efforts
resulted in year-over-year savings in the following areas; salaries and benefits
due to a smaller administrative workforce; investor relations and insurance
premiums due to lower premiums; and rent and occupancy costs due to rent rebates
pertaining to the prior years received during the current year.  These
savings were partially offset by the increase in professional fees due to higher
legal and consulting fees and additional financing cost relating to the
issuances of the secured subordinated notes during the year.
 
 CUSTOMER
SERVICE AND TECHNOLOGY
 
 Customer
service and technology expenses consist of costs associated with acquired and
internally developed software, and research and development expenses, including
fees to independent contractors and salaries and related expenses of personnel
engaged in these activities.
 
 Customer service and technology
expenses decreased by $73,000 to $689,000 for the year ended December 31, 2008,
as compared to $762,000 for the year ended December 31, 2007, representing an
decrease of 10 percent.  The decrease in expenses was due primarily to
the decrease in staffing levels compared to last year.
 
 SALES
AND MARKETING
 
 Sales
and marketing costs include all salaries and related expenses of sales and
marketing personnel as well as business development expenses such as
advertising, sales support materials, and trade show costs.
 
 Sales
and marketing costs for the year ended December 31, 2008 amounted to $117,000,
compared to $276,000 for 2007, representing a decrease of $159,000 or 58
percent.  This decline was a result of a reduction in staffing levels
in North America and the Company opting out the renewal of the sales and
marketing contract with Sandstorm Technologies, which expired during the fourth
quarter of 2007.
 
 EMPLOYEE
STOCK OPTIONS
 
 For
the year ended December 31, 2008, employee stock option expense amounted to
$43,000, as compared to $94,000 for the year ended December 31, 2007, a decrease
$51,000 or 54 percent.  The decrease was due to only 480,000 stock
options granted in the current year as compared to 1,350,000 options granted in
2007.
  36
  
 
 
 DEPRECIATION
  Depreciation
expense for the year ended December 31, 2008 was $33,000, relatively consistent
with $39,000 recorded for the year ended December 31, 2007.
 
 INTEREST
EXPENSE
 
 Interest
expense reflects interest incurred from debt instruments and
loans.  Interest expense for the year ended December 31, 2008 was
$729,000 compared to $605,000 for December 31, 2007, representing an increase of
$124,000 or 20 percent.  During 2008, cash interest expense of
$335,000 and non-cash interest expense of $394,000 were incurred related to
secured subordinated notes and notes payable.  Comparatively, cash
interest expense of $272,000 and non-cash interest expense of $333,000 were
recorded in 2007.  The increase in interest expense was due to the new
Series L, M and N subordinated notes issued during 2008
 
 INTEREST INCOME
 
 There
was no interest income for the year ended December 31, 2008, as compared to
$1,000 for the year ended December 31, 2007.
 
 COMPARISON OF YEARS ENDED
DECEMBER 31, 2007 AND DECEMBER 31, 2006
 
 LOSS
 
 Our
loss for the year ended December 31, 2007 was $2.312 million, an increase of 257
percent from the loss of $648,000 reported for the year ended December 31,
2006.   In 2006, the Company recorded earnings from discontinued
operations of $2.122 million, including a gain of $1.791 million realized on the
sale of the Norway business unit, thus reducing the loss.  Loss from
continuing operations for the year ended December 31, 2007 was $2.312 million,
an improvement of 17 percent from a loss from continuing operations of $2.770
million reported for the year ended December 31, 2006.   The
improvement in loss from operations was attributable to an increase in revenue,
combined with a reduction in operating and interest expenses.
 
 REVENUES
 
 Revenues
are comprised of services (application development activities, software
implementation and license fees, training and consulting, product maintenance
and customer support), application hosting and royalty fees.
 
 Revenue
increased to $1.166 million for the year ended December 31, 2007 from $1.073
million for the year ended December 31, 2006, representing an increase of
$93,000 or nine percent.  The increase in North America's revenue of
$389,000 or 59 percent was partially offset by the decrease in Ireland/U.K.'s
revenue of $296,000 or 72 percent.  The growth in North America's
revenue was attributed to the 119 percent increase in revenues
related to the Company’s strategic partner, while the decline
in Ireland/U.K.'s revenue was due to current year's revenue which
consisted of the 10 percent royalty, whereas 2006's revenue included our full
share of earnings for the first half of the year and the 10 percent royalty
subsequent to the sale of ADB Systemer.
 
 GENERAL
AND ADMINISTRATIVE
 
 General
and administrative expenses include, primarily: all salaries and related
expenses (including benefits and payroll taxes) other than technology staff
compensation (which is included in customer service and technology expenses),
and sales and marketing staff compensation (which is included in sales and
marketing expenses), occupancy costs, foreign exchange gains or losses,
professional fees, insurance, investor relations, regulatory filing fees, and
travel and related costs.
  37
  
 General
and administrative expenses decreased by $87,000 or five percent, to $1.703
million for the year ended December 31, 2007, as compared to $1.790 million for
the year ended December 31, 2006.
 
 Year-over-year
savings in the amount of $89,000 resulted from salary expense reductions arising
from a smaller administrative workforce and favorable Canadian dollar exchange
rates pertaining to US dollar-denominated salaries.  Continued
cost-containment efforts resulted in $76,000 savings in investor relations,
$65,000 in lower insurance premiums, and $34,000 savings in travel
expenses.  These savings were partially offset by the increase in
professional fees of $51,000 due to higher accounting and consulting fees and an
increase in rent and occupancy costs of $63,000 due to rent rebates recorded in
the prior year.
 
 CUSTOMER
SERVICE AND TECHNOLOGY
 
 Customer
service and technology expenses consist of costs associated with acquired and
internally developed software, and research and development expenses, including
fees to independent contractors and salaries and related expenses of personnel
engaged in these activities.
 
 Customer
service and technology expenses increased by $98,000 to $762,000 for the year
ended December 31, 2007, as compared to $664,000 for the year ended December 31,
2006, representing an increase of 15 percent.  The increase in
expenses was due primarily to the increase in professional fees and staffing
costs.
 
 SALES
AND MARKETING
 
 Sales
and marketing costs include all salaries and related expenses of sales and
marketing personnel as well as business development expenses such as
advertising, sales support materials, and trade show costs.
 
 Sales
and marketing costs for the year ended December 31, 2007 amounted to $276,000,
as compared to $377,000 for 2006, representing a decrease of $101,000 or 27
percent.  This decrease was attributable to lower staffing levels in
the sales department, partially offset by the appointment of Sandstorm
Technology Inc. as an independent sales agent to actively market and sell
products and services offered by Northcore.  The contract with
Sandstorm Technology Inc. expired during the fourth quarter of
2007.
  EMPLOYEE
STOCK OPTIONS
 
 The
2007 employee stock option expense represents the fair value of the stock
options vesting from the July 11, 2007, August 4, 2006 and June 21, 2006 grants
of 1,350,000, 500,000 and 50,000 stock options respectively.  For the
year ended December 31, 2007, employee stock option expense amounted to $94,000,
as compared to $137,000 for the year ended December 31, 2006, a decrease of 31
percent.  This decrease was due to the vesting of prior period grants
and the related expense.
 
 DEPRECIATION AND
AMORTIZATION
 
 Depreciation
and amortization expense was $39,000 for the year ended December 31, 2007, as
compared to $92,000 for the year ended December 31, 2006, representing a
decrease of 58 percent.  The decrease was due to the adoption of the
new accounting policies for financial instruments, whereby the Company wrote off
the balance of deferred charges through the opening deficit as of January 1,
2007.
 
 INTEREST
EXPENSE
 
 Interest
expense reflects interest incurred from debt instruments and
loans.  Interest expense for the year ended December 31, 2007 was
$605,000 compared to $799,000 for December 31, 2006, representing a decrease of
24 percent.  During 2007, cash interest expense of $272,000 and
non-cash interest expense of $333,000 was incurred related to secured
subordinated notes.  Comparatively, cash interest expense of $345,000
and non-cash interest expense of $454,000 were recorded in 2006.  The
decrease in interest expense was due to the maturity of Series G and H
subordinated notes; partially offset by the issuance of the Series K
subordinated notes in 2007.
  38
  
 INTEREST
INCOME
 
 Interest
income reflects interest from investments in cash and marketable
securities.  Interest income was $1,000 for the year ended December
31, 2007, as compared to $16,000 for the year ended December 31,
2006.  Interest income in 2006 was realized from investing the
proceeds from the sale of ADB Systemer.
 
 GOING
CONCERN
 
 The
Company has incurred negative annual cash flows from operations since inception
and expects to continue to expend substantial funds to continue to develop
technology, build an infrastructure to support business development efforts and
expand other areas of business including the acquisition of, or strategic
investments in, complementary products, businesses or
technologies.  The Company’s ability to continue as a going concern
will be dependent on management’s ability to successfully execute its business
plan including a substantial increase in revenue as well as maintaining
operating expenses at or near the same level as 2008.  The Company
cannot provide assurance that it will be able to execute on its business plan or
assure that efforts to raise additional financings would be
successful.
 
 The
consolidated financial statements have been prepared on the basis of accounting
principles applicable to a going concern.  If the going concern
assumption were not appropriate, adjustments would be necessary in the carrying
value of assets and liabilities, the reported losses and the balance sheet
classification used.
 
 The
continued existence beyond 2008 is dependent on Company’s ability to increase
revenue from existing products and services, and to expand the scope of its
product offering which entails a combination of internally developed software
and business ventures with third parties and to raise additional
financing.
 
 CRITICAL
ACCOUNTING ESTIMATES
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting years.  Estimates are used when determining items such as
the allowance for doubtful accounts, the fair value assigned to the debt and
equity components of the secured subordinated notes and the expected
requirements for non-operational funding.  Actual results could differ
from those estimates.
 
 CRITICAL
ACCOUNTING POLICIES
 
 We
periodically review our financial reporting and disclosure practices and
accounting policies to ensure that they provide accurate and transparent
information relative to the current economic and business environment. As part
of this process, we have reviewed our selection, application and communication
of critical accounting policies and financial disclosures. We have determined
that the critical accounting policies related to our core ongoing business
activities are primarily those that relate to revenue
recognition.  Other significant accounting policies are described in
Note 3 to our audited annual consolidated financial statements for the year
ended December 31, 2008.
 
 
  39
  
 REVENUE
RECOGNITION
 
 The
Company’s revenues are derived from application hosting services, software
license fees, software implementation activities, training and consulting
services, product maintenance and customer support, application development
activities, and hosting fees. Fees for services are billed separately from
licenses of the Company’s products.  The Company recognizes revenue in
accordance with Canadian GAAP, which in the Company’s circumstances, are not
materially different from the amounts that would be determined under provisions
of the American Institute of Certified Public Accountants Statements of Position
(SOP) No. 97-2, “Software Revenue Recognition”, and as amended by Statement of
Position 98-9, “Modification of SOP 97-2, Software revenue Recognition, With
Respect to Certain Transactions”. The Company also considers the provisions of
The Canadian Institute of Chartered Accountants (CICA) Emerging Issues Committee
(EIC) 141, which is analogous to Staff Accounting Bulletin (SAB) 104, “Revenue
Recognition in Financial Statements”, and CICA EIC 142, which is analogous to
the Emerging Issues Task Force consensus EITF 00-21, “Accounting for Revenue
Arrangements with Multiple Elements,” in determining the appropriate revenue
recognition methodology.
 
 HOSTING
FEES
 
 The
Company earns revenue from the hosting of customer websites and
applications.  Under our existing hosting contracts, we charge
customers a recurring periodic flat fee.  The fees are recognized as
the hosting services are provided.
 
 APPLICATION
DEVELOPMENT FEES
 
 Typically,
development of applications for our customers is provided based on a
predetermined fixed hourly rate basis.  Revenue is recognized as time
is incurred throughout the development process.
 
 SOFTWARE
LICENSE REVENUE
 
 The
Company recognizes software license revenue in accordance with the terms of the
license agreement and when the following criteria as set out in SOP No. 97-2 are
met:
  •         Persuasive
evidence of an arrangement exists;
 •         Delivery
has occurred;
 •         Fee
is fixed or determinable; and
 •         Collectibility
is probable.
 
 Software
license revenue consists of fixed license fee agreements involving perpetual
licenses.
 
 Software
license agreements may be part of multiple element arrangements that include
consulting and implementation services.  When these services are
considered essential to the functionality of the license, the associated revenue
is recognized on the basis of the percentage of completion method as specified
by contract accounting principles.  When these services are not
considered essential to the functionality of the license, the entire arrangement
fee is allocated to each element in the arrangement based on the respective
vendor specific objective evidence (VSOE) of the fair value of each
element.  The amount allocated to license revenues is based on the
price charged by the Company when the same element is sold in similar quantities
to a customer of a similar size and nature.  If this amount is not
determinable, the residual software license revenue is the amount of the total
arrangement fee less the fair value of any undelivered elements.  VSOE
used in determining fair value for installation, implementation and training is
based on the standard daily rates for the type of service being provided
multiplied by the estimated time to complete each task.  VSOE used in
determining the fair value of maintenance and support is based on the annual
renewal rates.  The revenue allocable to the software license is
recognized when the revenue recognition criteria are met.  The revenue
allocable to the consulting services is recognized as the services are
performed
  40
  
 IMPLEMENTATION,
TRAINING AND CONSULTING SERVICE FEES
 
 The
Company receives revenue from implementation of its product offerings,
consulting services and training services. Customers are charged a fee based on
time and expenses. Revenue from implementation, consulting services and training
fees is recognized as the services are performed or deferred until contractually
defined milestones are achieved or until customer acceptance has occurred, as
the case may be, for such contracts.
 
 PRODUCT
MAINTENANCE AND CUSTOMER SUPPORT FEES
 
 The
Company receives revenue from maintaining its products and the provision of
on-going support services to customers. The maintenance and support fees are
typically equal to a specified percentage of the customers’ license fee. If
associated with the fixed fee license model, the maintenance revenues received
are recorded as deferred revenue and recognized on a straight-line basis over
the contract period.
 
 Services
revenue from maintenance and support is recognized when the services are
performed.  Maintenance and support revenues paid in advance are
non-refundable and are recognized on a straight-line basis over the term of the
agreement, which typically is 12 months.
 
 ADOPTION
OF NEW ACCOUNTING POLICIES
 
 CAPITAL
DISCLOSURES
 
 Effective January 1, 2008, the
Company adopted the new recommendations of the CICA Handbook Section 1535,
Capital Disclosures. This new Handbook Section establishes standards for
disclosing information about an entity’s capital and how it is
managed.  It requires the disclosure of information about an entity’s
objectives, policies and processes for managing capital.  These new
disclosures are included in Note 17.
 
 FINANCIAL INSTRUMENTS
 
 Effective
January 1, 2008, the Company adopted the new recommendations of CICA Handbook
Section 3862, Financial Instruments - Disclosures and Handbook Section 3863,
Financial Instruments - Presentation.  Section 3862 requires entities
to provide disclosures in their financial statements that enable users to
evaluate the significance of financial instruments on the entity’s financial
position and its performance and the nature and extent of risks arising from
financial instruments to which the entity is exposed during the period and at
the balance sheet date, and how the entity manages those
risks.  Section 3863 establishes standards for presentation of
financial instruments and non-financial derivatives.  It deals with
the classification of financial instruments, from the perspective of the issuer,
between liabilities and equities, the classification of related interest,
dividends, losses and gains, and circumstances in which financial assets and
financial liabilities are offset.
 
 The
adoption of these standards did not have any impact on the classification and
valuation of the Company’s financial instruments.  The new disclosures
pursuant to these new Handbook Sections are included in Note 16.
 
 
 
  41
  
 
 UNADOPTED
NEW ACCOUNTING PRONOUNCEMENTS
 
 GOODWILL AND INTANGIBLE
ASSETS
 
 In
2008, the CICA issued Handbook Section 3064, Goodwill and Intangible
Assets.  Section 3064, which replaces CICA Handbook Section 3062,
Goodwill and Other Intangible Assets, and CICA Handbook Section 3450, Research
and Development Costs, establishes standards for the recognition, measurement
and disclosure of goodwill and intangible assets.  This new standard
is effective for the Company’s interim and annual consolidated financial
statements for periods commencing January 1, 2009. The Company is assessing the
impact of the new standard on its consolidated financial
statements.
 
 BUSINESS
COMBINATIONS
 
 In
October of 2008, the CICA issued Handbook Section 1582, Business Combinations,
concurrently with Handbook Section 1601, Consolidated Financial Statements, and
Handbook Section 1602, Non-controlling Interests.  Section 1582, which
replaces CICA Handbook Section 1581, Business Combinations, establishes
standards for the measurement of a business combination and the recognition and
measurement of assets acquired and liabilities assumed.  Section 1601,
which replaces CICA Handbook Section 1600, carries forward the existing Canadian
guidance on aspects of the preparation of consolidated financial statements
subsequent to acquisition other than non-controlling
interests.  Section 1602 establishes guidance for the treatment of
non-controlling interests subsequent to acquisition through a business
combination. These new standards are effective for the Company’s interim and
annual consolidated financial statements commencing on January 1, 2011 with
earlier adoption permitted as of the beginning of a fiscal year. The Company is
assessing the impact of the new standards on its consolidated financial
statements.
 
 INTERNATIONAL
FINANCIAL REPORTING STANDARDS (“IFRS”)
 
 In
2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic
plan that will significantly affect financial reporting requirements for
Canadian companies.  The AcSB strategic plan outlines the convergence
of Canadian GAAP with IFRS over an expected five year transitional
period.
 
 In
February 2008, the AcSB confirmed that IFRS will be mandatory in Canada for
profit-oriented publicly accountable entities for fiscal periods beginning on or
after January 1, 2011.  The Company’s first IFRS financial statements
will be for the year ending December 31, 2011 and will include the comparative
period for 2010.  Starting in the first quarter of 2011, the Company
will provide unaudited consolidated financial information in accordance with
IFRS including comparative figures for 2010.
 
 The
Company has assembled an IFRS transition team and is committed to the
development of its IFRS changeover plan during the coming year.  The
Company is evaluating accounting policy differences between Canadian GAAP and
IFRS based on management’s current understanding of these
standards.  However, the financial reporting impact of the transition
to IFRS has not yet been determined.
 
 B.  LIQUIDITY
AND CAPITAL RESOURCES
 
 LIQUIDITY
 
 The
Company has been funded to date primarily through a series of private placements
of equity and convertible debentures, sales of equity to and investments from
strategic partners, gains from investments and option
exercises.  Since inception, the Company has received aggregate net
proceeds of $93.5 million from debt and equity financing and has realized net
proceeds of $26.4 million from disposal of investments. The Company has not
earned profits to date and, at December 31, 2008, has an accumulated deficit of
$113.6 million.  The Company expects to incur losses into 2009 and
there can be no assurance that it will ever achieve
profitability.  Operating results have varied on a quarterly basis in
the past and may fluctuate significantly in the future as a result of a variety
of factors, many of which are outside of the Company’s control.
  42
  
 The
Company has incurred negative annual cash flows from operations since inception
and expects to continue to expend substantial funds to continue to develop
technology, build an infrastructure to support business development efforts and
expand other areas of business including the acquisition of, or strategic
investments in, complementary products, businesses or
technologies.  The Company has historically relied on non-operational
sources of financing to fund its operations.  The Company’s ability to
continue as a going concern is dependent on management’s ability to successfully
execute its business plan and to successfully repay or refinance obligations as
they come due.  Management believes that it has the ability to raise
additional financing.  The Company cannot provide assurance that it
will be able to execute on its business plan or assure that efforts to raise
additional financings would be successful.
 
 Cash
and cash equivalents decreased by $18,000 to $460,000 as at December 31, 2008
from $478,000 as at December 31, 2007.
 
 Current
assets of $793,000 were exceeded by current liabilities (excluding deferred
revenue) of $2.455 million in the current fiscal year by $1.662
million.  Current assets of $635,000 were exceeded by current
liabilities (excluding deferred revenue) of $955,000 by $320,000 in the prior
year.  Deferred revenue has been excluded from current liabilities as
it is expected to be settled by existing resources other than cash.
 
 a)
OPERATING
 
 Cash
outflows from operating activities improved to $1.491 million in the current
fiscal year compared to cash outflows from operating activities of $1.571
million in the prior year.   The improvement was due to an
increase in non-cash working capital as per below.
 
 Non-cash
working capital resulted in inflows of $394,000 in fiscal 2008 compared to
inflows of $275,000 in fiscal 2007, an increase of $119,000, as summarized in
the following table:




2008
                                  
                                  
                                  2007
                                  
                                  
                                  Change(in
      thousands on Canadian dollars)Accounts
      receivable
                                  
                                  $
                                  (186
                                  )
                                  
                                  $
                                  35
                                  
                                  
                                  $
                                  (221
                                  )Deposits
      and prepaid expenses
                                  
                                  
                                  11
                                  
                                  
                                  
                                  25
                                  
                                  
                                  
                                  (14
                                  )Accounts
      payable
                                  
                                  
                                  249
                                  
                                  
                                  
                                  (26
                                  )
                                  
                                  
                                  275Accrued
      liabilities
                                  
                                  
                                  342
                                  
                                  
                                  
                                  257
                                  
                                  
                                  
                                  85Deferred
      revenue
                                  
                                  
                                  (22
                                  )
                                  
                                  
                                  (16
                                  )
                                  
                                  
                                  (6
                                  )$
                                  394
                                  
                                  
                                  $
                                  275
                                  
                                  
                                  $
                                  119
  b)
INVESTING
 
 There
were no capital assets additions during 2008, compared to $11,000 in 2007.
 
 c)
FINANCING
 
 Financing
activities generated net inflows of $1.473 million in fiscal 2008, as compared
to $1.585 million in fiscal 2007.  Cash inflows in the current year
were a result of the issuance of Series L, M and N notes, which raised total
proceeds of $1.803 million, partially offset by the repayment of notes payable
of $329,000.  In 2007, the Company raised net proceeds of $1.245
million through a rights offering to existing shareholders during the third
quarter of 2007, as well as the repayment of demand loans of $340,000 to private
investors as part of the rights offering.
  43
  
 d)
CONTRACTUAL OBLIGATIONS
 
 As
at December 31, 2008, the Company's contractual obligations, including payments
due by periods over the next five years, are as follows:
 
 Total
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013(in
      thousands of Canadian dollars)Operating
      leases
                        
                        $
                        128
                        
                        
                        $
                        128
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -License
      agreements
                        
                        
                        30
                        
                        
                        
                        30
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Notes
      payable
                        
                        
                        382
                        
                        
                        
                        382
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Secured
      subordinated notes -principal repayment(i)
                        
                        
                        3,638
                        
                        
                        
                        1,310
                        
                        
                        
                        300
                        
                        
                        
                        825
                        
                        
                        
                        -
                        
                        
                        
                        1,203Secured
      subordinated notes -interest
      payment (i)
                        
                        
                        1,085
                        
                        
                        
                        185
                        
                        
                        
                        244
                        
                        
                        
                        159
                        
                        
                        
                        -
                        
                        
                        
                        497$
                        5,263
                        
                        
                        $
                        2,035
                        
                        
                        $
                        544
                        
                        
                        $
                        984
                        
                        
                        $
                        -
                        
                        
                        $
                        1,700
 
 (i)  Assumes
secured subordinated notes are held to maturity.
 
 FUNDING
 
 OVERVIEW
 
 The
Company has been funded to date primarily through a series of private placements
of equity and convertible debentures, sales of equity to and investments from
strategic partners, gains from investments and option
exercises.  Since inception, the Company has received aggregate net
proceeds of $93.5 million from debt and equity financing and has realized net
proceeds of $26.4 million from disposal of investments.
 
 FUNDING
- 2008
 
 On
December 12, 2008, the Company issued Series N secured subordinated notes with a
face value of $600,000.  The Series N notes mature on December 12,
2011, have an annual interest rate of 10 percent and are convertible into equity
units at a price of $0.10 per unit.  Interest is payable in cash upon
the earlier of each quarter end, conversion, or maturity of the
notes.   Each equity unit consists of one common share and one
share-purchase warrant with an exercise price of $0.15 per
warrant.  The warrants expire on December 12, 2011.  Dundee
Securities Corporation received a brokerage commission of four percent on a
portion of the private placement.  The afore-mentioned conversion
provisions are subject to a four month and one day hold period.  The
Series N notes are secured by a general security agreement on the assets of the
Company, subordinated to the security claims provided to the holders of
previously issued notes.
 
 On
July 11, 2008, the Company issued Series M secured subordinated notes with a
face value of $678,000.  The Series M notes mature on July 11, 2013,
have an annual interest rate of 10 percent and are convertible into equity units
at a price of $0.05 per unit.  Interest is payable in cash upon the
earlier of maturity or conversion.   Each equity unit consists of
one common share and one share-purchase warrant with an exercise price of $0.10
per warrant.  The warrants expire on the earlier of (i) July 11, 2013
and (ii) the date which is twenty days following the issuance of a notice by the
Company to holders confirming that the closing price of the Company’s common
shares on the Toronto Stock Exchange, was greater than or equal to $0.20 for the
preceding 10 consecutive trading days.  Dundee Securities Corporation
received a brokerage commission of four percent on a portion of the private
placement.  The afore-mentioned conversion provisions are subject to a
four month and one day hold period.  The Series M notes are secured by
a general security agreement on the assets of the Company, subordinated to the
security claims provided to the holders of previously issued
notes.
  44
  
 Subsequent
to the year ended December 31 2008, the Company announced the conversion of
secured subordinated notes and the additional proceeds secured from the exercise
of warrants.  Series M note holders have converted $660,000 out of a
total of $678,000 debentures and exercised a total of 13,200,000 common
share-purchase warrants out of a possible 13,560,000 warrants, for total
proceeds of $1,320,000.  As per the terms of the debenture, the
remaining warrant options have expired.
 
 As
a result of this transaction, the Company issued 26,400,000 common shares,
comprised of 13,200,000 common shares from the conversion of the Series M notes
and 13,200,000 common shares from the exercising of the associated
warrants
 
 On
March 31, 2008, the Company issued Series L secured subordinated notes with a
face value of $525,000.  The Series L notes mature March 31, 2013,
have an annual interest rate of 10 percent and are convertible into equity units
at a price of $0.10 per unit.  Interest for the first two years is
payable in shares upon the earlier of conversion or each anniversary date of the
closing date.  Interest payable for the remaining term of the notes is
payable in cash upon the earlier of conversion, each anniversary date of the
closing date, or maturity.   Each equity unit consists of one
common share and one share-purchase warrant with an exercise price of $0.15 per
warrant.  The warrants expire on the earlier of (i) March 31, 2013 and
(ii) the date which is sixty days following the issuance of a notice by the
Company to holders confirming that the closing price of the Company’s common
shares, on the Toronto Stock Exchange, was greater than or equal to $0.36 for
any 10 consecutive trading days.  The afore-mentioned conversion
provisions are subject to a four month and one day holding
period.  The Series L notes are secured by a general security
agreement on the assets of the Company, subordinated to the security claims
provided to the holders of previously issued notes.
 
 FUNDING
- 2007
 
 The
Series G secured subordinated notes with a face amount of $1,600,000 matured on
June 15, 2007. In connection with the refinancing of the Series G notes, the
Company completed a private placement issuance of the new Series K secured
subordinated notes with a face amount of $1,360,000, to existing holders of
$1,360,000 of the Series G secured subordinated notes.
 
 The
Series K notes were issued to private investors including an amount totaling
$60,000 issued to two directors/officers of the Company.  The Series K
notes mature June 15, 2009, have an annual interest rate of 11 percent and are
convertible into common shares of the Company at a price of $0.12 per common
share.  Interest on the Series K notes is payable in common shares
upon the earlier of each quarter end, maturity or conversion of the
notes.  At any time after the closing, the Series K notes, including
any accrued interest thereon, will be automatically converted into common shares
at the Conversion Price when the volume weighted average trading price of the
common shares through its principal trading market for a 10 consecutive trading
day period is $0.30 or more.  The Series K notes are secured by a
general security agreement on the assets of the Company, subordinated to the
security claims provided to the holders of previously issued notes.
 
 In
addition, on June 15, 2007, the Company completed a private placement issuance
of 2,992,000 common shares, at $0.15 per common share, to holders of $1,360,000
of the Series G secured subordinated notes, in payment of the related accrued
interest on $1,360,000 of the Series G secured subordinated notes of
$449,000.
 
 Subsequent
to the year ended December 31, 2007, the Company entered into an agreement with
the remaining Series G debt holders to repay the accrued interest of $113,000
and the principal of $240,000 in cash over a two year term at 12 percent in
blended interest and principal quarterly payments of $40,000.  The
total refinanced amount was $353,000 ($233,000 representing current portion of
notes payable and $120,000 representing long term portion of notes
payable).  The notes payable mature on December 31, 2009 and are
secured as per the Series G security terms.
  45
  
 The Series H secured subordinated notes
with a principal balance of $170,000 matured on October 21, 2007.  The
Company entered into an agreement with the debt holders to repay the accrued
interest of $60,000 in cash and the principal of $170,000 repaid over a two year
term at 11 percent in blended interest and principal quarterly payments of
$24,000.  The total refinanced amount was $230,000 ($145,000
representing current portion of notes payable and $85,000 representing long term
portion of notes payable).  The notes payable were issued to private
investors including an amount totaling $20,000 issued to a director/officer of
the Company.  The notes payable mature on December 31, 2009 and are
secured as per the Series H security terms.
 
 During the quarter ended June 30, 2007,
the Company received operating loans from a private investor in the amount of
$280,000.  During the quarter ended September 30, 2007, the Company
received an additional $60,000 of operating loans from this
investor.  The loans bore interest at 8 percent, were due on demand
and were secured by a general security agreement on the assets of the
Company.  The loans were settled during the quarter ended September
30, 2007 through the issuance of common shares as part of the rights
offering.
 
 FUNDING
- 2006
 
 On
February 8, 2006, the Company completed a transaction resulting in the issuance
of Series J secured subordinated notes with a face value of $755,000 for net
proceeds of $750,000.  The Series J notes were issued to private
investors including an amount totaling $105,000 issued to three
directors/officers of the Company. The Series J notes mature February 8, 2011,
have an annual interest rate of 11 percent and are convertible into equity units
at a price of $0.15 per unit.  Interest for the first year is payable
in shares of the Company with interest payable for the remaining term of the
notes payable in cash upon the earlier of maturity and
conversion.   Each equity unit consists of one common share and
one share-purchase warrant with an exercise price of $0.20.  The
warrants expire on the earlier of (i) February 8, 2009 and (ii) the date which
is sixty days following the issuance of a notice by the Company to holders
confirming that the closing price of the Company’s common shares, on the Toronto
Stock Exchange, was greater than or equal to $0.35 for any 10 consecutive
trading days.  The afore-mentioned conversion provisions are subject
to a four month and one day hold period.  The Series J notes are
secured by a general security agreement on the assets of the Company,
subordinated to the security claims provided to the holders of previously issued
notes.
 
 C.  RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
 
 Not
applicable.
 
 D.  TREND
INFORMATION
 
 FOREIGN
EXCHANGE RISK
 
 The
Company’s revenue from software licensing and related services and e-commerce
enabling agreements is transacted in various currencies including the Canadian
dollar, U.S. dollar and U.K. pound.  As the majority of our revenues
are realized in U.S dollar and our expenses are transacted in Canadian dollar,
the appreciation of the U.S dollar against the Canadian dollar may have a
favorable impact on our results.  The Company does not use derivative
instruments to manage exposure to foreign exchange
fluctuations.
  46
  
 
 
 INTEREST
RATE RISK
 
 The
Company has limited exposure to fluctuations in interest rates.  The
Company does not use derivative instruments to manage its exposure to interest
rate risk.
 
 CREDIT
RISK
 
 Credit
risk arises from the potential that a customer will fail to meet its contractual
obligations under a software licensing and related services agreement or an
e-commerce enabling agreement.
 
 The
Company invests its cash and cash equivalents in investments that are of high
credit quality. Given these high credit ratings, the Company does not expect any
investees to fail to meet their obligations.
 
 At
December 31, 2008, three customers accounted for 66 percent, 13 percent and 12
percent, respectively, (2007 - three customers accounted for 52 percent, 24
percent and 11 percent, respectively) of total accounts receivable.
 
 E.  OFF-BALANCE
SHEET ARRANGEMENTS
 
 The
Company does not have any off-balance sheet special purpose entities or other
off-balance sheet arrangements.
 
 F.  TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
 As
at December 31, 2008, the Company's contractual obligations, including payments
due by periods over the next five years, are as follows:
 
 Total
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013(in
      thousands of Canadian dollars)Operating
      leases
                  
                  $
                  128
                  
                  
                  $
                  128
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -License
      agreements
                  
                  
                  30
                  
                  
                  
                  30
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Notes
      payable
                  
                  
                  382
                  
                  
                  
                  382
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Secured
      subordinated notes -principal repayment(i)
                  
                  
                  3,638
                  
                  
                  
                  1,310
                  
                  
                  
                  300
                  
                  
                  
                  825
                  
                  
                  
                  -
                  
                  
                  
                  1,203Secured
      subordinated notes -interest
      payment (i)
                  
                  
                  1,085
                  
                  
                  
                  185
                  
                  
                  
                  244
                  
                  
                  
                  159
                  
                  
                  
                  -
                  
                  
                  
                  497$
                  5,263
                  
                  
                  $
                  2,035
                  
                  
                  $
                  544
                  
                  
                  $
                  984
                  
                  
                  $
                  -
                  
                  
                  $
                  1,700
 (i)
Assumes secured subordinated notes are held to maturity.
  47
  
 ITEM
6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 A.  DIRECTORS AND
SENIOR MANAGEMENT
 
 The
following table sets forth the name, age and position of each of the individuals
who served as a director and/or an executive officer during the past year. This
list includes the dates of resignation and appointment, as applicable, of
individuals who resigned or were appointed directors or officers during the past
year. This information is supplied based on our records and information
furnished by our executive officers and directors.
  Name,
      Age and Municipality of Residence
                    Director
      Since
                    Position
      with the CompanyDUNCAN
      G. COPELAND, 52
                      Potomac,
      MD, USA
                    June
      23, 2004
                    Director
      and Chief Executive Officer, since July 11, 2007JIM
      MOSKOS, 46,
                      Toronto,
      Ontario
                    June
      7, 1999
                    Director
      and Chief Operating Officer, since July 11, 2007
                      President,
      Technology Group from October 19, 1999 to July 11, 2007T.
      CHRISTOPHER BULGER, (1)(2)(3)
      51,
                      Toronto,
      Ontario
                    May
      28, 1996
                    Director
      and non-executive Chairman of the Board since  October 14,
      2005DARROCH
      ROBERTSON (1)(3),
      57,
                      Port
      Stanley, Ontario
                    June
      25, 2003
                    Director________________________
                      (1)Member of the Management Resources and Compensation
      Committee
                      (2)Member of the Corporate Governance Committee
                      (3)
      Member of the Audit
Committee
 
 The
business experience of each of our current directors and executive officers for
at least the last five years is as follows:
  Directors
  DUNCAN COPELAND, Potomac,
Maryland
 Director
since June 23, 2004
 Chief Executive
Officer
 
 Mr.
Copeland has been our Chief Executive Officer since July 11, 2007. He has been a
Director of the Company since its inception, except for the period from
2001-2004. Mr. Copeland has been a member of the faculties of the Richard Ivey
School of Business, The University of Western Ontario and the Robert Emmett
McDonough School of Business, Georgetown University. He is a trustee of the
Charles Babbage Foundation. Mr. Copeland holds a doctorate from the Harvard
Business School.
 
 JIM MOSKOS, Toronto,
Ontario
 Director
since June 7, 1999
 Chief
Operating Officer
 
 Mr.
Moskoshas been
Chief Operating Officer of the Company since July 11, 2007. Mr. Moskos served as
President of the Technology Group since from October 19, 1999 to July 11, 2007
and Vice President - Technology from September 1997 to October 19,
1999.  From September 1994 to August 1997, Mr. Moskos was Senior
Technology Manager for the Canadian Department of Indian Affairs and Northern
Development responsible for setting the technical direction for all aspects of
application development.
 
  48
  
 T. CHRISTOPHER BULGER,
Toronto, Ontario
 Director
since May 28, 1996
 Non-executive
Chairman of the Board of Directors, Chairman of the Management Resources and
Compensation Committee and member of the Corporate Governance and Audit
Committees
 
 Mr. Bulger has been the non-executive
Chairman of the Board since October 14, 2005 and a director of the Company since
May 28, 1996. Mr. Bulger has been Chief Financial Officer of Zeno Global Limited
since December 2007, a new out-of-home advertising technology that provides
moving ads to moving people. Mr. Bulger was Chairman and CEO of Megawheels
Technologies Inc., (“Megawheels”) from Jan 01, 2001 to April 30, 2007, a
software and solutions provider to the online classified advertising industry.
From December 1999 to December 2001, Mr. Bulger was President and Chief
Executive Officer of eLab Technology Ventures Inc. Mr. Bulger served as
Executive Vice President of our Company from September 1998 to December 1999 and
Chief Financial Officer of the Company from April 1996 to September 1998. Mr.
Bulger is a CFA, holds an MBA from  INSEAD, France and an HBA from The
Richard Ivey School of Business, Canada.
 
 DARROCH (RICK) ROBERTSON, Port
Stanley, Ontario
 Director
since June 25, 2003
 Chairman
of the Audit Committee and member of the Management Resources and Compensation
Committee
  Mr.
Robertson has been an Associate Professor of Business at the Richard Ivey School
of Business, The University of Western Ontario, for the past eleven
years.  He has served as both the Director of the MBA program
and the Director of the undergraduate HBA program at the Ivey
School.  Mr. Robertson was also a director and chair of the audit
committee of Stackpole Limited, a TSX listed company.  Mr. Robertson
has also served as an elected member of council for the Institute of Chartered
Accountants of Ontario, where he was chair on the audit committee and by-laws
committee. Mr. Robertson is a CA and holds an MBA and PhD (Business) from the
University of Western Ontario.
 
  Director’s relationship to
Megawheels Technologies Inc. subject to Cease Trade Order
  Chris
Bulger, the non-executive Chairman and a director of the Company, is also the
acting Chief Executive Officer and formerly the Chairman and a director of
Megawheels which was listed on the TSX Venture exchange under the symbol "MWT",
and which was issued a cease trade order on January 9, 2007 by the Ontario
Securities Commission under paragraph 2 and paragraph 2.1 of subsection 127(1)
and subsection 127(5) because Megawheels failed to provide continuous disclosure
material of audited annual financial statements for the year ended August 31,
2006. Megawheels is undergoing an orderly wind-up of operations.
 
 
  49
  
 
 B.           COMPENSATION
  Summary
Compensation Table
 
 The
following table provides a summary of compensation earned during the most
recently completed fiscal year by the Company’s Named Executive Officers
(“NEOs”). The Company’s NEOs, as at the end of 2008, were our Chief Executive
Officer, Duncan Copeland, and our Chief Operating Officer, Jim
Moskos.  The table also discloses the executive compensation for Mr.
Tam Nguyen, the Company’s Corporate Controller, who is responsible for the
Company’s day-to-day financial activities and who provides the CFO
certifications required under Multilateral Instrument 52-109.
 
 Awards
                                            PayoutsAnnual
      Compensation
                                            
                                            RestrictedOptions/
                                            Shares
      orOther
      Annual
                                            SARs
                                            Restricted
                                            LTIP
                                            All
      OtherSalary
                                            Bonus
                                            Compensation
                                            Granted
                                            Share
      Units
                                            Payout
                                            CompensationName
      And Principal Position
                                            Year
                                            ($)
                                            ($)
                                            ($)(1)
                                            (#)
                                            ($)
                                            ($)
                                            ($)Duncan
      Copeland
                                            2008
                                            45,000
                                            Nil
                                            Nil
                                            Nil
                                            Nil
                                            Nil
                                            NilCEO
                                            2007
                                            30,000
                                            Nil
                                            Nil
                                            250,000
                                            Nil
                                            Nil
                                            NilJim
      Moskos
                                            2008
                                            200,000
                                            Nil
                                            12,000
                                            Nil
                                            Nil
                                            Nil
                                            NilCOO
                                            2007
                                            200,000
                                            Nil
                                            12,000
                                            500,000
                                            Nil
                                            Nil
                                            Nil2006
                                            200,000
                                            Nil
                                            12,000
                                            20,000
                                            Nil
                                            Nil
                                            NilTam
      Nguyen
                                            2008
                                            95,000
                                            Nil
                                            10,000
                                            100,000
                                            Nil
                                            Nil
                                            NilCorporate
      Controller
                                            2007
                                            90,000
                                            Nil
                                            6,500
                                            40,000
                                            Nil
                                            Nil
                                            Nil2006
                                            90,000
                                            Nil
                                            Nil
                                            100,000
                                            Nil
                                            Nil
                                            Nil
 
 (1)
              The
      Company’s provision of automotive related
  expenses.
  Our
company has a stock option plan (the “Plan”) which was originally adopted on May
15, 1996, and as amended most recently by shareholder approval on September 12,
2001, and currently provides that options may not be granted to purchase more
than 5,350,000 common shares. The Plan provides for the issuance of stock
options to directors, officers and full time employees of the Company and it
subsidiaries or any other person engage to provide ongoing services to the
Company, which may expire as much as 10 years from the date of grant, at prices
not less than the fair market value of the common shares on the date of grant.
The Management Resources and Compensation Committee of the Board of Directors,
whom administer the Plan, reserves the right to attach vesting periods to stock
options granted.  For options granted to senior management during the
fiscal year ended December 31, 2008 see Summary Compensation Table
above.
 
 Subsequent
to the year ended December 31, 2008, the Management Resources and Compensation
Committee has also granted options to insider directors as tabulated
below;
 
 Stock
      Option Grants to Insider Directors subsequent to the fiscal year ended
      December 31, 2008Name:
                #
      Options Granted
                Price
      CDN$
                Date
      of Grant
                Expiry
      Date of OptionDuncan
      Copeland
                80,000
                0.20
                March
      11, 2009
                March
      11, 2014Jim
      Moskos
                120,000
                0.20
                March
      11, 2009
                March
      11, 2014
  50
  For
option grants to outside directors subsequent to the fiscal year ended December
31, 2008, not included in the above mentioned compensation table, see the table
below under the heading Compensation of Directors.
 
 During
2008, we did not provide any pension, retirement or similar benefits to our
directors and officers as a group.
  Compensation
of Directors
 
 For
the 2008 financial year, directors received no cash payment as fees for meetings
of the Board or Committees of the Board, which they attend, and no cash payments
as fee for the signing of any resolution of directors or documents on behalf of
the Company.  All directors are reimbursed for reasonable
out-of-pocket travel and other expenses incurred by them in attending meetings
of the Board or Committee meetings.
 
 The
Management Resources and Compensation Committee is responsible for
recommendations to the Board regarding the granting of incentive stock options
to  directors to encourage their serving on the Board and Committees,
to afford them the opportunity to be compensated properly, and to provide them
with an equity stake in the Company.
 
 The
following table provides a summary of the option grants to outside directors
subsequent to the fiscal year ended December 31, 2008, which were not included
in the summary compensation table above.
 
 Stock
      Option Grants to Outside Directors subsequent to the fiscal year ended
      December 31, 2008Name:
                #
      Options Granted
                Price
      CDN$
                Date
      of Grant
                Expiry
      Date of OptionChris
      Bulger
                80,000
                0.20
                March
      11, 2009
                March
      11, 2014Darroch
      Robertson
                80,000
                0.20
                March
      11, 2009
                March
      11, 2014
 
 During
the 2008 financial year, Christopher Bulger, Chairman of the Board, received
$45,000 compensation for acting as Chair of the Board.
 
 C.           BOARD
PRACTICES
  Our
articles of incorporation currently provide for a Board of Directors consisting
of not less than 3 and not more than 15 directors, to be elected annually. The
Business Corporations
Act (Ontario) provides that, where a minimum and maximum number of
directors is provided for in the articles of a company, the directors of that
company may, if empowered by special resolution of the shareholders, by a
resolution determine the number of directors to be elected at each annual
meeting of the shareholders.
 
 Our
Board of Directors presently consists of four directors. Under Canadian law, a
majority of our Board of directors and of each of our Board Committees must be
residents of Canada, subject to certain exceptions.  Each of our
directors holds office until the next annual meeting of shareholders, until his
successor has been elected and qualified, or his earlier resignation or
removal.  Our executive officers are appointed by our Board of
directors and serve at the discretion of our Board of Directors.
 
 None of the directors have any contract
or arrangement entitling them to benefits upon termination of their
directorship.
 
 The
three committees of the Board are the Audit Committee, Management Resources and
Compensation Committee, and the Corporate Governance Committee.
  51
  
 The
Audit Committee, all of whose members are unrelated as defined by the TSX
Corporate Governance Guidelines and Independent as defined by Nasdaq listing
standards, meets with our management and our auditors on a periodic basis,
before the release of quarterly results and before submission of our annual
financial statements to the Board. The committee is responsible for the review
and assessment of our audit practices, financial reporting and internal
controls, inquiry of the auditors as to cooperation in access and disclosure by
our management and the ultimate approval of our annual financial statements for
submission to the Board and to the shareholders. The committee is also
responsible for the appointment, compensation and oversight of the work of our
auditors (including resolution of disagreements between management and our
auditors regarding financial reporting).  Our Audit Committee consists
of Darroch Robertson (Chairman) and Chris Bulger. The Company is in the process
of filling in the position of third member of the Committee.
 
 The
Management Resources and Compensation Committee, all of whose members are
unrelated as defined by the TSX Corporate Governance Guidelines and Independent
as defined by Nasdaq listing standards, is responsible for recommendations to
the Board regarding the appointment or removal of executive officers, reviewing
the performance of the executive officers and fixing their compensation. The
committee is also responsible for administering our stock option plan and
ensuring that salary and benefit programs are continuously suitable for
attracting, retaining and encouraging the development of knowledgeable,
experienced and capable management and employees. The Management Resources and
Compensation Committee of our Company consists of Christopher Bulger (Chairman)
and Darroch Robertson both of whom are directors of our Company.
 
 The
Corporate Governance Committee, all of whose members are unrelated as defined by
the TSX Corporate Governance Guidelines and Independent as defined by Nasdaq
listing standards, oversees the implementation of our governance
practices.  The committee also oversees the process for nominations to
the Board and assesses the overall effectiveness of the Board. The Corporate
Governance Committee consists of Chris Bulger (Chairman); he is a director of
our Company. The Company is in the process of filling in the position of second
member of the Committee.
 
 C.
1.  AUDIT COMMITTEE INFORMATION
  As a reporting issuer in jurisdictions
that have adoptedMultilateral Instrument
52-110 Audit Committees (“MI 52-110”) the Company is required to provide
disclosure with respect to its Audit Committee including the text of the Audit
Committee’s Charter, composition of the Committee, and the fees paid to the
external auditor.
 
 1.
The Audit Committee’s Charter
 
 A Copy of the Audit Committee Charter
adopted by the Board of Directors on June 03, 2008 is attached to this Annual
Report as Exhibit 4.26.
 
 2.
Composition of the Audit Committee
 
 Name
                    Relevant
      Education and ExperienceDarroch
      Robertson*‡
                    Mr.
      Robertson has been an Associate Professor of Business at the Richard Ivey
      School of Business, The University of Western Ontario, for the
      past eleven years.  He has served as both the Director
      of MBA program and the Director of the undergraduate HBA program at
      the Ivey School.  Mr. Robertson was also a director and chair of
      the audit committee of Stackpole Limited, a TSX listed
      company.  Mr. Robertson has also served as an elected member of
      council for the Institute of Chartered Accountants of Ontario, where he
      was chair on the audit committee and by-laws committee. Mr. Robertson is a
      CA and holds an MBA and PhD (Business) from the University of Western
      Ontario.Christopher
      Bulger*‡
                    Mr.
      Bulger has been the non-executive Chairman of the Board since October 14,
      2005 and a director of the Company since May 28, 1996. Mr. Bulger has been
      Chief Financial Officer of Zeno Global Limited since November, 2007, a new
      out-of-home advertising technology that provides moving ads to moving
      people. Mr. Bulger is also acting Chief Executive Officer and
      formerly Chairman of Megawheels Inc., a software and solutions provider to
      the online classified advertising industry. From December 1999 to December
      2001, Mr. Bulger was President and Chief Executive Officer of eLab
      Technology Ventures Inc. Mr. Bulger served as Executive Vice President of
      our Company from September 1998 to December 1999 and Chief Financial
      Officer of the Company from April 1996 to September 1998. Mr. Bulger is a
      CFA, holds an MBA from  INSEAD, France and an HBA from The Richard
      Ivey School of Business, Canada.
 (*)
independent as such term is defined in MI 52-110
 (‡)
financially literate as such term is defined in MI 52-110
  52
  
 3.
Reliance on Certain Exemptions
 
 At
no time since the commencement of the Company’s most recently completed
financial year has the Company relied on the exemption in Section 2.4 of MI
52-110 (De Minimis Non-audit Services), Section 3.3(2) (Controlled Companies),
Section 3.6 (Temporary Exemption for Limited and Exceptional Circumstances), or
an exemption from MI 52-110, in whole or in part granted under Part 8 of MI
52-110, nor has the Company relied on Section 3.8 (Acquisition of Financial
Literacy) of MI 52-110.
 
 4.
Audit Committee Oversight
 
 Directly
responsible for overseeing the work of the external auditor engaged for the
purpose of preparing or issuing an auditor's report or performing other audit,
review or attest services for the issuer, including the resolution of
disagreements between management and the external auditor regarding financial
reporting.  The Committee also recommends fees of the external
auditors to the Board of Directors.
 
 5.
Pre-Approval Policies
 
 Pursuant
to the Audit Committee Charter Adopted by the Board of Directors on June 03,
2008, the Audit Committee is responsible for the pre-approval of all non-audit
services to be provided to the Company or its subsidiary entities by the
independent auditor.
 
 6.
External Auditor Service Fees (By Category)
  Year
                  Audit
      Fees(1)
                  Tax
      Fees(2)2007
                  $178,000
                  $3,0002008
                  $174,500
                  $3,000
 
 (1)
              Audit
      Fees represent costs associated with the audit of the Company’s annual
      consolidated financial statements including review of securities filings
      and review of the Company’s interim consolidated Financial
      Statements.
 
 (2)
              Tax
      Fees represent costs associated with the preparation of the Company’s
      annual tax filings, tax planning and
advice.
 
 D.
EMPLOYEES
 
 As
of March 30, 2009 we employed a total of 15 full-time employees as
follows:
 
 North
      AmericaSales
      and Marketing
                  1Technical
      Services
                  9Finance
      Legal Affairs and Admin
                  3Executive
                  2TOTAL
                  15
 
  53
  
 The
number of our employees as of March 30, 2009 is decreased by one employee from
Sales and Marketing department as compared to the number of our employees as of
March 1, 2008.
 
 As
of March 1, 2008 we employed a total of 16 full-time employees as
follows:
 
 North
      AmericaSales
      and Marketing
                  2Technical
      Services
                  9Finance
      Legal Affairs and Admin
                  3Executive
                  2TOTAL
                  16
  The
number of our employees as of March 1, 2008 is consistent with the number of our
employees as of May 31, 2007.
  As
of May 31, 2007 we employed a total of 16 full-time employees as
follows:
 
 North
      AmericaSales
      and Marketing
                  2Technical
      Services
                  9Finance
      Legal Affairs and Admin
                  3Executive
                  2TOTAL
                  16
  The
number of our employees as of May 31, 2007 represents a 65 percent decrease in
our workforce as compared with the number of our employees as of May 31, 2006
due to the sale of our Norwegian business unit effective June 30,
2006.
  As
of May 31, 2006 we employed a total of 46 full-time employees and one part-time
employee as follows:
  North
      America
                  Ireland
      and U.K.
                  NorwaySales
      and Marketing
                  4
                  1
                  2Technical
      Services
                  4
                  0
                  12Product
      Group
                  3
                  0
                  12Finance
      and Admin
                  3
                  0
                  2Executive
                  2
                  0
                  1TOTAL
                  16
                  1
                  29
  None
of our employees are represented by a labor union, and we consider our employee
relations to be good.
   54
   
  E.    SHARE
OWNERSHIP
  The
following table sets forth information concerning share and option ownership of
each of our current directors and officers as of March 30, 2009:
 
 Name
                                Number
      of
                                  Common
      Shares
                                  Owned
      (1)
                                Number
      of
                                  Common
      Underlying
                                  Options
      (2)
                                Range
      of
                                  Exercise
      Prices
                                  of
      Options
                                Range
      of
                                  Expiration
      Dates
                                  of
      Options
                                Percentage
                                  of
      Common
                                  Shares
                                  Beneficially
                                  Owned (3)T.
      Christopher Bulger
                                330,313
                                845,000
                                $0.12
      - $0.22
                                1/25/10
      - 03/11/14
                                *Jim
      Moskos
                                153,703
                                1,232,500
                                $0.12
      - $0.22
                                1/25/10
      - 03/11/14
                                *Darroch
      Robertson
                                5,000
                                287,500
                                $0.12
      - $0.22
                                1/25/10
      - 03/11/14
                                *Duncan
      Copeland
                                169,550
                                445,000
                                $0.12-
      $0.22
                                11/15/08
      - 03/11/14
                                *Tam
      Nguyen
                                -
                                245,000
                                $0.10-
      $0.22
                                1/25/10
      - 12/23/13
                                -
 * Represents less than 1
percent.
  (1)
                  Represents shares owned
      beneficially by the named individual other than those shares which may be
      acquired under our Company's option plans.  Unless otherwise
      noted, all persons referred to above have sole voting and sole investment
      power.
  (2)
                  Includes all shares which the
      named individual has the right to acquire under all vested and unvested
      options and warrants granted to such individual under the Company's option
      plan.
  (3)
                  This information
      is based on 137,437,541 common shares outstanding as of March 30,
      2009.  Common shares subject to options exercisable within 60
      days are deemed outstanding for computing the percentage ownership of the
      person holding the options but are not deemed outstanding for computing
      the percentage ownership of any other
  person.
  ITEM
7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 A.
              MAJOR
      SHAREHOLDERS
 
 Kris
Sammy, a registered individual portfolio manager with Dundee Securities
Corporation, beneficially owns and/or exercises control or direction over
17,299,310 common shares and convertible debentures with warrants, representing
a total of 11.60 percent of the outstanding common shares of Northcore
Technologies Inc. assuming full exercise of his convertible
securities.
 
 This
information is based on our records, information provided to us by directors and
executive officers and a review of information, including press releases filed
by our shareholders with the Ontario Securities Commission prior to March 30,
2009, and insider reports filed with the Ontario Securities
Commission.  The Company’s major shareholders do not have any voting
rights that differ from the rights of our other shareholders.
  As
at March 30, 2009 the shareholders of record held 137,437,541 common
shares.
  WE
ARE NOT AWARE OF ANY OTHER CORPORATION, FOREIGN GOVERNMENT, OR OTHER PERSON OR
ENTITY THAT DIRECTLY OR INDIRECTLY OWNS OR CONTROLS OUR COMPANY, SEVERALLY OR
JOINTLY. WE ARE NOT AWARE OF ANY ARRANGEMENTS, WHICH MAY AT A LATER DATE RESULT
IN A CHANGE IN CONTROL OF OUR COMPANY.
  55
  
 B.           RELATED
PARTY TRANSACTIONS
 
 The
following officers and directors purchased Series K notes:  Jim
Moskos, Chief Operating Officer and a director of the Company, purchased $10,000
of Series K notes that have not yet been converted.
 
 In
connection with the refinancing of the Series G notes, on June 15, 2007 the
Company completed a private placement issuance of 2,992,000 common shares, at
$0.15 per common share, to holders of $1,360,000 of the Series G secured
subordinate notes, in payment of the related $449,000 accrued
interest.  The following officers and directors participated in the
equity offering and received shares in payment of the interest accrued on their
Series G notes:  Jim Moskos, Chief Operating Officer and a director of
the Company, was issued 22,000 shares.
 
 The
following officers and directors purchased Series J notes:  Jim
Moskos, Chief Operating Officer and a director of the Company, purchased $13,000
of Series J notes that have not yet been converted and Chris Bulger, Chairman of
the Board, purchased $56,000 of Series J notes that have not yet been
converted.
 
 The
following officers and directors purchased Series I notes:  Jim
Moskos, Chief Operating Officer and a director of the Company, purchased $10,000
of Series I notes that have not yet been converted; Chris Bulger, Chairman of
the Board, purchased $20,000 of Series I notes that have not yet been converted
and Duncan Copeland, CEO of the Company and a director of the Company, purchased
$60,000 of Series I notes that have not yet been converted.
 
 The
Series H secured subordinated notes with a principal balance of $170,000 matured
on October 21, 2007. The Company entered into an agreement with the remaining
debt holders to repay the accrued interest of $60,000 and the principal of
$170,000 repaid over a two year term at 11 percent in blended interest and
principal quarterly payments of $24,000. The notes payable were issued to
private investors including an amount totaling $20,000 to Jim
Moskos.  The notes payable mature on December 31, 2009 and are secured
as per the Series H security terms.
 
 As
at December 31, 2008, accrued interest included $50,000 (2007 - $28,000) in
interest payable relating to the aforementioned secured subordinated notes due
to related parties
 
 During
the year ended December 31, 2008, interest payments relating to the secured
subordinated notes totaling $9,000 (2007 - $60,000) were made to related
parties.
 
 During
the year ended December 31, 2008, the Company received and repaid advances from
a director and officer in the amount of $59,000 (2007 -
$89,000).  During the year ended December 31, 2006, the Company repaid
advances from related parties totaling $137,000.   The Company
also paid $15,000 in advisory fees to a director in connection with the sale of
ADB Systemer.
 
 During
2008, interest expense on advances from related parties was $1,000 (2007 -
$1,000, 2006 - $4,000).
 
 Kris
Sammy, a registered individual portfolio manager with Dundee Securities
Corporation, beneficially owns and/or exercises control or direction over
17,299,310 common shares and convertible debentures with warrants, representing
a total of 11.60 percent of the outstanding common shares of Northcore
Technologies Inc. assuming full exercise of his convertible
securities.
  56
  
 
 ITEM
8 - FINANCIAL INFORMATION
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 See “Item 18 - Financial Statements”
and the Consolidated Financial Statements and notes thereto accompanying this
Annual Report beginning on page F-1. All contingencies and commitments set out
in the Financial Statements have been reviewed and updated as at the date of
filing this Annual Report.
  LEGAL
PROCEEDINGS
  Neither
we, nor any of our subsidiaries, is a party to, or the subject of, any material
legal proceedings.
 
 DIVIDEND
POLICY
 
 We
have not declared or paid any cash dividends on our common shares.  We
currently intend to retain any future earnings for use in the operation and
expansion of our business.  We do not anticipate paying any cash
dividends on our common shares in the foreseeable future.
 
 We
have not issued any preferred shares.  The dividend entitlement of any
preferred shares issued will be determined by our Board of
Directors.
  SIGNIFICANT
CHANGES
  Except as otherwise disclosed in this
report, there has been no significant change in our financial position since
December 31, 2008.
 
  ITEM
9 - THE OFFER AND LISTING
 
 Our
common shares are listed on The Toronto Stock Exchange and are quoted for
trading on the OTCBB.  The Company’s stock symbols are NTI on the TSX
and NTLNF on the OTCBB.
 
 For
additional information about the trading of our common shares, see Item 3-D -
Risk Factors - YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BE
LIMITED.
 
 The
following tables set forth the range of high and low sales prices (rounded to
the nearest hundredth) as reported by The Toronto Stock Exchange and the OTCBB
during the calendar years and quarters indicated.
   57
  
  THE
TORONTO STOCK EXCHANGE
  High
                        Low(Cdn
      $)
                        (Cdn
      $)ANNUAL
      MARKET PRICES2004
      Calendar Year
                        0.52
                        0.162005
      Calendar Year
                        0.36
                        0.142006
      Calendar Year
                        0.25
                        0.132007 Calendar Year
                        0.20
                        0.072008 Calendar Year
                        0.15
                        0.04QUARTERLY
      MARKET PRICES2007
      CALENDAR YEARFirst
      Quarter
                        0.20
                        0.13Second
      Quarter
                        0.18
                        0.12Third
      Quarter
                        0.15
                        0.08Fourth
      Quarter
                        0.15
                        0.072008 CALENDAR
    YEARFirst
      Quarter
                        0.11
                        0.06Second
      Quarter
                        0.11
                        0.04Third
      Quarter
                        0.13
                        0.05Fourth
      Quarter
                        0.15
                        0.09MONTHLY
      MARKET PRICESSeptember
      2008
                        0.13
                        0.10October
      2008
                        0.13
                        0.10November
      2008
                        0.14
                        0.11December
      2008
                        0.15
                        0.09January
      2009
                        0.21
                        0.13February
      2009
                        0.26
                        0.16
 
   58
  NASDAQ
AND OTCBB
  High
                  Low(U.S.
      $)
                  (U.S.
      $)ANNUAL
      MARKET PRICES2004
      Calendar Year
                  0.41
                  0.122005
      Calendar Year
                  0.29
                  0.112006 Calendar Year
                  0.27
                  0.102007
      Calendar Year
                  0.20
                  0.062008
      Calendar Year
                  0.15
                  0.03QUARTERLY
      MARKET PRICES2007 CALENDAR
    YEARFirst
      Quarter
                  0.20
                  0.10Second
      Quarter
                  0.19
                  0.10Third
      Quarter
                  0.19
                  0.07Fourth
      Quarter
                  0.15
                  0.062008 CALENDAR
    YEARFirst
      Quarter
                  0.11
                  0.03Second
      Quarter
                  0.11
                  0.03Third
      Quarter
                  0.15
                  0.03Fourth
      Quarter
                  0.13
                  0.03MONTHLY
      MARKET PRICESSeptember
      2008
                  0.15
                  0.06October
      2008
                  0.10
                  0.03November
      2008
                  0.13
                  0.05December
      2008
                  0.11
                  0.08January
      2009
                  0.17
                  0.05February
      2009
                  0.18
                  0.05
 
  
   59
  
  ITEM
10 - ADDITIONAL INFORMATION
  A.
              Share
      Capital
  Not
applicable.
  B.
              Memorandum
      and Articles of Association
  The
Articles of Arrangement for the Company are on file with the Ministry of
Consumer and Commercial Relations for the Province of Ontario under Ontario
Corporation Number 1539169.  Our articles do not include a stated
purpose.
  Directors
 
 Directors
of our Company need not be shareholders.  In accordance with our
by-laws and the Business
Corporations Act (Ontario), a majority of our directors must be residents
of Canada, subject to certain exceptions.  In addition, directors must
be at least 18 years of age, of sound mind, and not bankrupt.  Neither
our articles or by-laws, nor the Business Corporations Act
(Ontario), impose any mandatory retirement age for directors.
  A
director who is a party to, or who is a director or officer of or has a material
interest in any person who is a party to, a material contract or transaction or
proposed material contract or transaction with our Company shall disclose to our
Company the nature and extent of his interest at the time and in the manner
provided by the Business
Corporations Act (Ontario). The Business Corporations Act
(Ontario) prohibits such a director from voting on any resolution to approve the
contract or transaction unless the contract or transaction:
 
 •
              Is
      an arrangement by way of security for money lent to or obligations
      undertaken by the director for the benefit of our Company or an
      affiliate;
 •
              Relates
      primarily to his or her remuneration as a director, officer, employee or
      agent of our Company or an
affiliate;
 •
              Is
      for indemnity or insurance; or
 •
              Is
      with an affiliate.
 
 Our
      Board of Directors may, on behalf of our Company and without authorization
      of our shareholders:
 
 •
              Borrow
      money upon the credit of our
Company;
 •
              Issue,
      reissue, sell or pledge bonds, debentures, notes or other evidences or
      indebtedness or guarantees of our Company, either secured or
      unsecured;
 •
              Subject
      to certain disclosure requirements of the Business Corporations
      Act (Ontario), give, directly or indirectly, financial assistance
      to any person by means of a loan, a guarantee or otherwise on behalf of
      our Company to secure performance or any present or future indebtedness,
      liability or obligation of any person;
and
 •
              Mortgage,
      hypothecate, pledge or otherwise create a security interest in all or any
      currently owned or subsequently acquired real or personal property of our
      Company, movable or immovable, including without limitation book debts,
      rights, powers, franchises and undertakings, to secure any bonds,
      debentures, notes or other evidences of indebtedness or guarantee or any
      other obligation of our Company.
 
  60
  
 
 Common
Shares
 
 Our
articles authorize the issuance of an unlimited number of common shares. The
holders of the common shares of our Company are entitled to receive notice of
and to attend all meetings of the shareholders of our Company and have one vote
for each common share held at all meetings of the shareholders of our Company,
except for meetings at which only holders of another specified class or series
of shares of our Company are entitled to vote separately as a class or series.
Subject to the prior rights of the holders of preferred shares of our Company
and to any other shares ranking senior to the common shares with respect to
priority in the payment of dividends, the holders of common shares are entitled
to receive dividends and our Company will pay dividends, as and when declared by
our Board of Directors, out of moneys properly applicable to the payment of
dividends, in such amount and in such form as our Board of Directors may from
time to time determine, and all dividends which our Board of Directors may
declare on the common shares shall be declared and paid in equal amounts per
share on all common shares at the time outstanding. In the event of the
dissolution, liquidation or winding-up of our Company, whether voluntary or
involuntary, or any other distribution of assets of our Company among its
shareholders for the purpose of winding up its affairs, subject to the prior
rights of the holders of preferred shares and to any other shares ranking senior
to the common shares with respect to priority in the distribution of assets upon
dissolution, liquidation or winding-up, the holders of the common shares will be
entitled to receive the remaining property and assets of our
Company.   There are no redemption or sinking-fund provisions
that attach to the common shares, nor are there any provisions that discriminate
against existing or prospective holders of common shares as a result of owning a
substantial number of shares.  The holders of our common shares are
not liable to further capital calls by our Company.
 
 Preferred
Shares
 
 Our
articles of incorporation authorize the issuance of an unlimited number of
preferred shares, in one or more series. The Ontario Business Corporations Act
does not impose restrictions upon our Board of Directors issuing preferred
shares of the type authorized by our articles of incorporation. Our Board of
Directors may fix, before issuing, the number of preferred shares of each
series, the designation, rights, privileges, restrictions and conditions
attaching to the preferred shares of each series, including any voting rights,
any right to receive dividends (which may be cumulative or non-cumulative and
variable or fixed) or the means of determining the dividends, the dates of
payment, any terms and conditions of redemption or purchase, any conversion
rights, and any rights on the liquidation, dissolution or winding-up of our
Company, any sinking fund or other provisions, the whole to be subject to the
issue of a Certificate of Amendment setting forth the designation, rights,
privileges, restrictions and conditions attaching to the preferred shares of the
series. Our articles of incorporation require that preferred shares of each
series must, with respect to the payment of dividends and the distribution of
assets or the return of capital in the event of the liquidation, dissolution or
winding-up of our Company, whether voluntary or involuntary, rank on a parity
with the preferred shares of every other series and be entitled to preference
over the common shares and over any other shares ranking junior to the preferred
shares. The preferred shares of one series shall participate ratably with the
preferred shares of every other series in respect of all dividends and similar
amounts.  The holders of our preferred shares are not liable to
further capital calls by our Company.  None of our preferred shares
are currently issued or outstanding.
 
 Action
Necessary to Change the Rights of Shareholders
 
 In
order to change the rights of our shareholders, we would need to amend our
articles of incorporation to effect the change.  Such an amendment
would require the approval of holders of two-thirds of the shares cast at a duly
called special meeting. If we wish to amend the rights of holders of a specific
class of shares, such approval would also be required from the holders of that
class. A shareholder is entitled to dissent in respect of such a resolution and,
if the resolution is adopted and our Company implements such changes, demand
payment of the fair value of its shares.
  61
  
 Meetings
of Shareholders
 
 An
annual meeting of shareholders is held each year for the purpose of considering
the financial statements and reports, electing directors, appointing auditors
and for the transaction of other business as may be brought before the meeting.
The President, the Chairman of the Board or the Board of Directors has the power
to call a special meeting of shareholders at any time. Notice of the time and
place of each meeting of shareholders must be given not less than 21 days, nor
more than 50 days, before the date of each meeting to each director, to the
auditor and to each shareholder who at the close of business on the record date
for notice is entered in the securities register as the holder of one or more
shares carrying the right to vote at the meeting. Notice of a meeting of
shareholders called for any other purpose other than consideration of financial
statements and auditors’ report, election of directors and reappointment of the
incumbent auditor, must state the nature of the business in sufficient detail to
permit the shareholder to form a reasoned judgment on, and must state the text
of, any special resolution or by-law to be submitted to the meeting. The only
persons entitled to be present at a meeting of shareholders are those entitled
to vote thereat, the directors of our Company, the auditor of our Company and
others who although not entitled to vote are entitled or required to be present
at the meeting. Any other person may be admitted only on the invitation of the
chairman of the meeting or with the consent of the meeting. If a corporation is
winding-up, the Business
Corporations Act (Ontario) permits a liquidator appointed by the
shareholders, during the continuance of a voluntary winding-up, to call and
attend meetings of the shareholders. In circumstances where a court orders a
meeting of shareholders, the court may direct how the meeting may be held,
including the parties entitled, or required, to attend the meeting.
 
 Limitations
on Rights to Own Securities
 
 There
is no limitation imposed by Canadian law or by the articles or other charter
documents on the right of a non-resident to hold or vote common shares or
preferred shares with voting rights, other than as provided in the Investment
Canada Act, as amended by the World Trade Organization Agreement Implementation
Act.  The Investment Canada Act generally prohibits implementation of
a reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a “Canadian,” as
defined in the Investment Canada Act (a “non-Canadian”), unless, after review,
the minister responsible for the Investment Act is satisfied that the investment
is likely to be a net benefit to Canada.
  An
investment in our voting shares by a non-Canadian (other than a “World Trade
Organization Investor,” as defined below) would be reviewable under the
Investment Canada Act if it were an investment to acquire direct control of our
Company, and the value of our assets were $5.0 million or more.  An
investment in our voting shares by a World Trade Organization Investor would be
reviewable under the Investment Canada Act if it were an investment to acquire
direct control of our Company, and the value of our assets equaled or exceeded
$209 million.  A non-Canadian, whether a World Trade Organization
Investor or otherwise, would acquire control of us for purposes of the
Investment Canada Act if he or she acquired a majority of our voting
shares.  The acquisition of less than a majority, but at least
one-third of our voting shares, would be presumed to be an acquisition of
control of our Company, unless it could be established that we were not
controlled in fact by the acquirer through the ownership of voting
shares.  In general, an individual is a World Trade Organization
Investor if he or she is a “national” of a country (other than Canada) that is a
member of the World Trade Organization (“World Trade Organization Member”) or
has a right of permanent residence in a World Trade Organization
Member.  A corporation or other entity will be a World Trade
Organization investor if it is a “World Trade Organization investor-controlled
entity” pursuant to detailed rules set out in the Investment Canada
Act.  The United States is a World Trade Organization
Member.
   62
  
  Certain
transactions involving our voting shares would be exempt from the Investment
Canada Act, including:  (a) an acquisition of our voting shares 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 our Company 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 Canada Act; and (c) an acquisition of control of our Company by
reason of an amalgamation, merger, consolidation or corporate reorganization,
following which the ultimate direct or indirect control in fact of our Company,
through the ownership of voting interests, remains unchanged.
  Change
of Control
 
 Our
authorized capital consists of an unlimited number of common shares and an
unlimited number of preferred shares. The Board of Directors, without any
further vote by the common shareholders, has the authority to issue preferred
shares and to determine the price, preferences, rights and restrictions,
including voting and dividend rights, of these shares. The rights of the holders
of common shares are subject to the rights of holders of any preferred shares
that the Board of Directors may issue in the future. That means, for example,
that we can issue preferred shares with more voting rights, higher dividend
payments or more favorable rights upon dissolution, than the common shares. If
we issued certain types of preferred shares in the future, it may also be more
difficult for a third-party to acquire a majority of our outstanding voting
shares.
 
 Our
articles do not contain any provisions that govern the ownership threshold above
which shareholder ownership must be disclosed.
 
 C.    Material
Contracts
  The
following is a summary of our Company’s material contracts entered into within
the last three years.
  1.           SERIES
N NOTES: On December 12, 2008, the Company completed a transaction resulting in
the issuance of Series N secured subordinated notes with a face value of
$600,000.  The Series N notes mature on December 12, 2011, have an
annual interest rate of 10 percent and are convertible into equity units at a
price of $0.10 per unit.  Interest is payable in cash upon the earlier
of each quarter end, conversion, or maturity of the notes.   Each
equity unit consists of one common share and one share-purchase warrant with an
exercise price of $0.15 per warrant.  The warrants expire on December
12, 2011.  Dundee Securities Corporation received a brokerage
commission of four percent on a portion of the private placement.  The
afore-mentioned conversion provisions are subject to a four month and one day
hold period.  The Series N notes are secured by a general security
agreement on the assets of the Company, subordinated to the security claims
provided to the holders of previously issued notes.
 
 2.           SERIES
M NOTES: On July 11, 2008, the Company completed a transaction resulting in the
issuance of Series M secured subordinated notes with a face value of
$678,000.  The Series M notes mature on July 11, 2013, have an annual
interest rate of 10 percent and are convertible into equity units at a price of
$0.05 per unit.  Interest is payable in cash upon the earlier of
conversion or maturity of the notes.   Each equity unit consists
of one common share and one share-purchase warrant with an exercise price of
$0.10 per warrant.  The warrants expire on the earlier of (i) July 11,
2013 and (ii) the date which is twenty days following the issuance of a notice
by the Company to holders confirming that the closing price of the Company’s
common shares on the Toronto Stock Exchange, was greater than or equal to $0.20
for the preceding 10 consecutive trading days.  Dundee Securities
Corporation received a brokerage commission of four percent on a portion of the
private placement.  The afore-mentioned conversion provisions are
subject to a four month and one day hold period.  The Series M notes
are secured by a general security agreement on the assets of the Company,
subordinated to the security claims provided to the holders of previously issued
notes.
 
 Subsequent
to the year ended December 31 2008, the Company announced the conversion of
secured subordinated notes and the additional proceeds secured from the exercise
of warrants.  Series M note holders have converted $660,000 out of a
total of $678,000 debentures and exercised a total of 13,200,000 common
share-purchase warrants out of a possible 13,560,000 warrants, for total
proceeds of $1,320,000.  As per the terms of the debenture, the
remaining warrant options have expired.
  63
  
 As
a result of this transaction, the Company issued 26,400,000 common shares,
comprised of 13,200,000 common shares from the conversion of the Series M notes
and 13,200,000 common shares from the exercising of the associated
warrants
 
 3.           SERIES
L NOTES: On March 31, 2008, the Company issued Series L secured subordinated
notes with a face value of $525,000.  The Series L notes mature March
31, 2013, have an annual interest rate of 10 percent and are convertible into
equity units at a price of $0.10 per unit.  Interest for the first two
years is payable in shares upon the earlier of conversion or each anniversary
date of the closing date.  Interest payable for the remaining term of
the notes is payable in cash upon the earlier of conversion, each anniversary
date of the closing date, or maturity.   Each equity unit
consisted of one common share and one share-purchase warrant with an exercise
price of $0.15 per warrant.  The warrants expire on the earlier of (i)
March 31, 2013 and (ii) the date which is sixty days following the issuance of a
notice by the Company to holders confirming that the closing price of the
Company’s common shares, on the Toronto Stock Exchange, was greater than or
equal to $0.36 for any 10 consecutive trading days.  Dundee Securities
Corporation received a brokerage commission of four percent on a portion of the
private placement.  The afore-mentioned conversion provisions are
subject to a four month and one day holding period.  The Series L
notes are secured by a general security agreement on the assets of the Company,
subordinated to the security claims provided to the holders of previously issued
notes.
 
 4.           RIGHTS
OFFERING: On July 23, 2007, the Company offered eligible shareholders as of the
record date of July 30, 2007, approximately 86,896,000 rights to subscribe for
up to approximately 21,724,000 additional common shares in the
Company.  Each eligible holder received one right for every common
share held in the Company.  Four rights entitled the holder to
purchase one common share in the Company, priced at $0.08
each.  Shareholders who exercised all of their rights were also
entitled to acquire supplemental shares under the provisions of the additional
subscription privilege.  Each shareholder with an address of record in
the provinces or territories of Canada was eligible for the rights
offering.  The rights offering closed on August 22, 2007.
 
 As
a result of the rights offering, the Company raised net proceeds of $1,245,000
and settled demand loans of $340,000 through the issuance of 20,628,302 common
shares, each priced at $0.08 per share.
 
 5.           EQUITY
PRIVATE PLACEMENT: On June 15, 2007 the Company completed a private placement
issuance of 2,992,000 common shares, at $0.15 per share common share, to holders
of $1,360,000 of the Series G secured subordinated notes, in payment of the
related accrued interest on $1,360,000 of the Series G secured subordinated
notes of $449,000.
 
 6.           SERIES
K NOTES: On June 15, 2007 the Company completed a transaction resulting in the
issuance of Series K secured subordinated notes with a face value of $1,360,000.
The Series K notes were issued to private investors including an amount totaling
$60,000 issued to two directors/officers of the Company.  The Series K
notes mature June 15, 2009, have an annual interest rate of 11 percent and are
convertible into common shares of the Company at a price of $0.12 per common
share.  Interest on the Series K notes is payable in common shares
upon the earlier of each quarter end, maturity or conversion of the
notes.  At any time after the closing, the Series K notes, including
any accrued interest thereon, will be automatically converted into common shares
at the Conversion Price when the volume weighted average trading price of the
common shares through its principal trading market for a 10 consecutive trading
day period is $0.30 or more.  The Series K notes are secured by a
general security agreement on the assets of the Company, subordinated to the
security claims provided to the holders of previously issued notes.
 
 7.           SHARE
PURCHASE AGREEMENT: On May 18, 2006, the Company entered into a share purchase
agreement with ADB Systemer Holdings Inc. to sell 100 percent of its shares in
its Norwegian subsidiary ADB Systemer AS, (“ADB Systemer”) for NOK 15,000,000,
orapproximately
Canadian $2,687,000 in cash (the “Share Sale”).
  64
  
 8.           SERIES
J NOTES: On February 8, 2006, the Company completed a transaction resulting in
the issuance of Series J secured subordinated notes with a face value of
$755,000.  The Series J notes were issued to private investors
including an amount totaling $105,000 issued to three directors/officers of the
Company. The Series J notes mature February 8, 2011, have an annual interest
rate of 11 percent and are convertible into equity units at a price of $0.15 per
unit.  Interest for the first year is payable in shares of the Company
with interest payable for the remaining term of the notes payable in cash upon
the earlier of maturity and conversion.   Each equity unit
consists of one common share and one share-purchase warrant with an exercise
price of $0.20. The warrants expired on February 8, 2009. The afore-mentioned
conversion provisions are subject to a four month and one day hold
period.  The Series J notes are secured by a general security
agreement on the assets of the Company, subordinated to the security claims
provided to the holders of previously issued notes.
 
 D.           Exchange
Controls
  As
of the date hereof, we are not aware of any law, government decree or regulation
in Canada restricting the export or import of capital or affecting the
remittance of dividends, interest or other payments to a non-resident holder of
our common shares, other than withholding tax requirements.
 
 E.           Taxation
  The
following summary describes material Canadian federal income tax consequences
generally applicable to a holder of our common shares who is not a resident of
Canada, and who, for purposes of the Income Tax Act (Canada), (i) holds such
shares as capital property and (ii) deals at arm’s length with
us.  Generally, common shares will be considered capital property to a
holder provided that such holder does not hold such securities in the course of
carrying on a business and has not acquired such securities in a transaction or
transactions considered to be a concern in the nature of trade which includes a
transaction or transactions of the same kind and carried on in the same manner
as a transaction or transactions of an ordinary trader or dealer in property of
the same kind.
  This
summary is based upon the current provisions of the Income Tax Act and the
regulations thereunder and on an understanding of the published administrative
practices of the Canadian Customs and Revenue Agency. This summary does not take
into account or anticipate any possible changes in law, or the administration
thereof, whether by legislative, governmental or judicial action, except
proposals for specific amendment thereto which have been publicly announced by
the Canadian Minister of Finance prior to the date hereof.
  This
summary does not address all aspects of Canadian federal income tax law that may
be relevant to shareholders based upon their particular circumstances, and does
not deal with provincial, territorial or foreign income tax consequences, which
might differ significantly from the consequences under Canadian federal income
tax law.
  Shareholders
are advised to consult their tax advisors regarding the application of the
Canadian federal income tax law to their particular circumstances, as well as
any Canadian provincial, territorial or other tax consequences or any U.S.
federal, state or local tax consequences or other foreign income tax
consequences of the acquisition, ownership and disposition of our common
shares.
   65
  Taxation
of Dividends
  A
holder of a common share who is not resident in Canada for purposes of the
Income Tax Act will be subject to Canadian withholding tax on dividends paid or
credited, or deemed under the Income Tax Act to be paid or credited, to the
holder of the common share. The rate of withholding tax under the Income Tax Act
on dividends is 25 percent of the amount of the dividend. Such rate may be
reduced under the provisions of an applicable international tax treaty to which
Canada is a party. Under the tax treaty that Canada has entered into with the
United States, the rate of Canadian withholding tax applicable in respect of
dividends paid or credited by a Canadian corporation to a shareholder resident
in the United States, is generally reduced to 15 percent, or 5 percent in the
case of a corporate holder which owns 10 percent or more of the voting shares. A
foreign tax credit for the tax withheld may be available under applicable US tax
law to a US holder against U.S. federal income tax
liability.  Moreover, pursuant to Article XXI of the Canada-U.S.
Treaty, an exemption from Canadian withholding tax generally is available in
respect of dividends received by certain trusts, companies and other
organizations whose income is exempt from tax under the laws of the United
States.
  Disposition
of Common Shares
  A
non-resident holder of a common share will not be subject to tax under the
Income Tax Act in respect of a capital gain realized on the disposition of a
common share unless the common share constitutes or is deemed to constitute
“taxable Canadian property” as defined in the Income Tax Act. Shares of a
corporation that are listed on a prescribed stock exchange (which includes
shares traded on certain U.S. stock exchanges, including the Nasdaq National
Market), are generally not considered to be taxable Canadian property. However,
such shares are considered taxable Canadian property in the hands of a
non-resident holder if, at any time during the 60-month period immediately
preceding disposition by the holder, 25 percent or more of our issued shares of
any class were owned by the non-resident holder together with persons with whom
the non-resident did not deal at arm’s length.
  An
interest in or option in respect of common shares or other securities
convertible into or exchangeable for common shares could constitute taxable
Canadian property if the common shares that could be acquired upon the exercise
of the option, the conversion or exchange rights or in which there is such
interest are themselves taxable Canadian property.  Taxable Canadian
property also includes any common share held by a non-resident if the
non-resident used the common share in carrying on a business (other than an
insurance business) in Canada, or, if the non-resident is a non-resident
insurer, any common share that is its “designated insurance property” for the
year. A non-resident whose common shares constitute or are deemed to constitute
taxable Canadian property will realize upon the disposition or deemed
disposition of a common share, a capital gain (or a capital loss) to the extent
that the proceeds of disposition are greater than (or less than) the aggregate
of the adjusted cost base to the holder of a common share and any reasonable
costs of disposition.
  One-half
of any capital gain realized by a holder (a taxable capital gain) will be
included in computing the holder’s income. One-half of any capital loss realized
by a holder may, subject to certain restrictions applicable to holders that are
corporations, normally be deducted from the holder’s taxable capital gains
realized in the year of disposition, the three preceding taxation years or any
subsequent taxation years, subject to detailed rules contained in the Income Tax
Act.
  A
purchase by us of our common shares (other than a purchase of our common shares
on the open market in a manner in which shares would normally be purchased by
any member of the public in the open market) will give rise to a deemed dividend
under the Income Tax Act equal to the difference between the amount we paid on
the purchase and the paid-up capital of such shares determined in accordance
with the Income Tax Act. The paid-up capital of such shares may be less than the
cost of such shares to the holder. Any such dividend deemed to have been
received by a non-resident holder will be subject to non-resident withholding
tax as described above. The amount of any such deemed dividend will reduce the
proceeds of disposition of the common share to the non-resident holder for the
purpose of computing the amount of the non-resident holder’s capital gain or
loss under the Income Tax Act.
   66
  
  Even if the common shares constitute
taxable Canadian property to a non-resident holder and their disposition would
give rise to a capital gain, an exemption from tax under the Income Tax Act may
be available under the terms of an applicable international tax treaty to which
Canada is a party. A holder resident in the United States for purposes of the
Canada-U.S. Treaty will generally be exempt from Canadian tax in respect of a
gain on the disposition of common shares provided that the value of the common
shares is not derived principally from real property situated in Canada. Our
common shares would qualify for this exemption, however Article XIII paragraph 5
of the Canada-U.S. Treaty provides that the treaty exemption does not apply
where the U.S. resident holder was an individual who was a Canadian resident for
120 months during any period of 20 consecutive years preceding the time of the
sale and was resident in Canada at any time during the ten years immediately
preceding the sale and owned the shares at the time he/she ceased to be resident
in Canada. If the exemption from such Canadian tax in respect of such gain is
not available under the Canada-U.S. Treaty, a foreign tax credit may be
available under applicable US tax law for U.S. federal income tax purposes.
Non-residents are advised to consult their tax advisers with regard to the
availability of a treaty exemption.
 
 U.S.
Federal Income Tax Considerations
 
 The
following summary describes certain material United States federal income tax
consequences arising to U.S. Holders (as defined below) from the purchase,
ownership and sale of common shares. This summary is based on the provisions of
the Internal Revenue Code of 1986, as amended, final, temporary and proposed
United States Treasury Regulations, revenue rulings and administrative
pronouncements of the Internal Revenue Service, and court decisions, all as in
effect as of the date of this Annual Report and all of which are subject to
change, possibly on a retroactive basis.
  This
summary does not address the considerations that may be applicable to any
particular U.S. Holder based on such U.S. Holder's particular circumstances nor
to particular classes of shareholders (including but not limited to financial
institutions, broker-dealers, insurance companies, real estate investment
trusts, regulated investment companies, persons who have elected mark-to-market
accounting, tax-exempt organizations, persons who hold ordinary shares as part
of a straddle, "hedge" or "conversion transaction" with other investments,
persons who own (directly, indirectly or through attribution) 10 percent or more
of our Company's outstanding voting shares, persons whose functional currency is
not the U.S. dollar, persons who are not citizens or residents of the United
States, foreign corporations, foreign partnerships or foreign estates or trusts,
or persons who acquired their common shares pursuant to the exercise of employee
stock options or rights or otherwise as compensation). Additionally, the
discussion does not consider the tax treatment of persons who hold common shares
through a partnership or other pass-through entity.  The summary does
not discuss United States federal alternative minimum tax; foreign, state, or
local taxes; nor the possible application of United States federal non-income
taxes (e.g., gift or estate tax).  This summary considers only U.S.
Holders that will own their common shares as capital assets.
  This
summary is addressed only to a holder of common shares who is (i) a citizen or
resident of the United States, as defined under United States tax laws, (ii) the
trust was in existence on August 20, 1996 and a corporation organized in the
United States or under the laws of the United States or any state thereof, (iii)
an estate, the income of which is includable in gross income for United States
federal income tax purposes regardless of source, or (iv) a trust, if (1) a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (2) the trust has a valid
election in effect under applicable United States Treasury Regulations to be
treated as a U.S. person (each, a "U.S. Holder"). This summary is for general
information purposes only and does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to a decision to purchase
common shares.
  Each
shareholder should consult with such shareholder's own tax advisor as to the
particular tax consequences to such shareholder of the purchase, ownership and
sale of their common shares, including the effects of applicable state, local,
foreign or other tax laws and possible changes in the tax laws.
  
  67
  
 Circular
230 Disclosure
 
 Any
tax statement made herein regarding any U.S. federal tax is not intended or
written to be used, and cannot be used, by any taxpayer for purposes of avoiding
any penalties.  Any such statement herein is written in connection
with the marketing or promotion of the transaction to which the statement
relates.  Each taxpayer should seek advice based on the taxpayer’s
particular circumstances from an independent tax advisor.
 
 Treatment
of Dividend Distributions
 
 Subject
to the discussion below under "Tax Status Of The Company”, a distribution by our
Company to a U.S. Holder in respect of the common shares (including the amount
of any Canadian taxes withheld thereon) will generally be treated for United
States federal income tax purposes as a dividend to the extent of our Company's
current and accumulated earnings and profits, as determined under United States
federal income tax principles. To the extent, if any, that the amount of any
such distribution exceeds our Company's current and accumulated earnings and
profits, as so computed, it will first reduce the U.S. Holder's tax basis in the
common shares owned by him, and to the extent it exceeds such tax basis, it will
be treated as capital gain from the sale of common shares.
 
 While
it is not anticipated that our Company will pay dividends in the foreseeable
future, the gross amount of any distribution from our Company received by a U.S.
Holder which is treated as a dividend for United States federal income tax
purposes (before reduction for any Canadian tax withheld at source) will be
included in such U.S. Holder's gross income as ordinary income and generally
will not qualify for the dividends received deduction applicable in certain
cases to United States corporations. If you are an individual, dividends that we
pay you through 2010 will be subject to tax at long-term capital gain rates,
provided certain holding period and other requirements are satisfied and
provided that in the year such dividends are paid, or any preceding taxable
year, we are not a  controlled foreign corporation or a passive
foreign investment company (as discussed below).
 
 For
United States federal income tax purposes, the amount of any dividend paid in
Canadian dollars by our Company to a U.S. Holder will equal the U.S. dollar
value of the amount of the dividend paid in Canadian dollars, at the exchange
rate in effect on the date of the distribution, regardless of whether the
Canadian dollars are actually converted into U.S. dollars at that time. Canadian
dollars received by a U.S. Holder will have a tax basis equal to the U.S. dollar
value thereof determined at the exchange rate on the date of the distribution.
Currency exchange gain or loss, if any, recognized by a U.S. Holder on the
conversion of Canadian dollars into U.S. dollars will generally be treated as
U.S. source ordinary income or loss to such holder. U.S. Holders should consult
their own tax advisors concerning the treatment of foreign currency gain or
loss, if any, on any Canadian dollars received as a distribution.
 
 A
U.S. Holder generally will be entitled to deduct any Canadian taxes withheld
from dividends in computing United States taxable income, or to credit such
withheld taxes against the United States federal income tax imposed on such U.S.
Holder's dividend income. No deduction for Canadian taxes may be claimed,
however, by an individual (noncorporate) U.S. Holder that does not itemize
deductions. The amount of foreign taxes for which a U.S. Holder may claim a
credit in any year is subject to complex limitations and restrictions, which
must be determined on an individual basis. Distributions with respect to common
shares that are taxable as dividends will generally constitute foreign source
income for purposes of the foreign tax credit limitation. The total amount of
allowable foreign tax credits in any year generally cannot exceed regular U.S.
tax liability for the year attributable to foreign source taxable income. The
limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. For this purpose, dividends distributed
by our Company with respect to the common shares will generally constitute
"passive income." Foreign income taxes exceeding a shareholder's credit
limitation for the year of payment or accrual of such tax can be carried back
for one taxable year and forward for ten taxable years, subject to the credit
limitation applicable in each of such years.
  68
  
 Sale
or Exchange of a Common Share
 
 Subject
to the discussion below under "Tax Status Of The Company", the sale or exchange
by a U.S. Holder of a common share generally will result in the recognition of
gain or loss by the U.S. Holder in an amount equal to the difference between the
amount realized and the U.S. Holder's basis in the common share sold. Such gain
or loss will be capital gain or loss provided that the common share is a capital
asset in the hands of the holder. The gain or loss realized by an individual
(noncorporate) U.S. Holder on the sale or exchange of a common share will be
long-term capital gain or loss subject to a preferential rate of tax if the
common share had been held for more than one year.  If the common
share had been held by such individual U.S. Holder for not more than one year,
such gain will be short-term capital gain. The deductibility of a capital loss
recognized on the sale, exchange or other disposition of common shares is
subject to limitations. A U.S. Holder that receives foreign currency upon
disposition of common shares and subsequently converts the foreign currency into
U.S. dollars generally will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the
U.S. dollar. U.S. Holders should consult their own tax advisors regarding
treatment of any foreign currency gain or loss on any Canadian dollars received
in respect of the sale, exchange or other disposition of common
shares.
 
 Tax
Status of the Company
 
 Controlled Foreign
Corporations.  A non-US company generally will be a “controlled
foreign corporation” under Section 957 of the Internal Revenue Code (a “CFC”) if
more than 50 percent of its total voting power or the total value of its
outstanding shares is owned, directly or indirectly, by citizens or residents of
the U.S., domestic partnerships, domestic corporations, domestic estates, or
domestic trusts (each as defined in Section 7701(a)(30) of the Internal Revenue
Code), each of which own, directly or indirectly, 10 percent or more of the
total voting power of the outstanding shares of the company (a “10 percent
Shareholder”).
 
 If our Company is a CFC, a 10 percent
Shareholder generally will be subject to current U.S. federal income tax with
respect to (a) such 10 percent Shareholder’s pro rata share of the “subpart F
income” (as defined in Section 952 of the Internal Revenue Code) of our Company
and (b) such 10 percent Shareholder’s pro rata share of the earnings of our
Company invested in “United States property” (as defined in Section 956 of the
Internal Revenue Code).  In addition, under Section 1248 of the
Internal Revenue Code, any gain recognized on the sale or other taxable
disposition of the common shares by a U.S. Holder that was a 10 percent
Shareholder at any time during the five-year period ending with such sale or
other taxable disposition generally will be treated as a dividend to the extent
of the “earnings and profits” of our Company that are attributable to such
common shares.
 
 The Company does not believe that it
currently is a CFC.  However, there can be no assurances that our
Company will not be a CFC for the current or any future taxable
year.
 
 Passive Foreign Investment
Companies.  A non-U.S. company will be a passive foreign
investment company if 75 percent or more of its gross income (including the pro
rata share of the gross income of any company (United States or foreign) in
which the company is considered to own 25 percent or more of the shares
(determined by market value)) in a taxable year is passive income.
Alternatively, the company will be considered to be a passive foreign investment
company if at least 50 percent of the value of the company's assets (averaged
over the year) (including the pro rata share of the value of the assets of any
company in which the company is considered to own 25 percent or more of the
shares (determined by market value)) in a taxable year are held for the
production of, or produce, passive income. Passive income generally includes,
among others, interest, dividends, royalties, rents and
annuities.
  69
  
 If
our Company is a passive foreign investment company for any taxable year, a U.S.
Holder, in the absence of an election by such U.S. Holder to treat our Company
as a "qualified electing fund" (a "QEF election"), as discussed below, would,
upon certain distributions by our Company and upon disposition of the common
shares at a gain, be liable to pay tax at the highest tax rate on ordinary
income in effect for each period to which the income is allocated, plus interest
on the tax, as if the distribution or gain had been recognized ratably over the
days in the U.S. Holder's holding period for the common shares during which our
Company was a passive foreign investment company. Additionally, if our Company
is a passive foreign investment company, U.S. Holders who acquire shares from
U.S. decedents would be denied the normally available step-up of the income tax
basis for such common shares to fair market value at the date of death and
instead would have a tax basis equal to the U.S. decedent's basis, if
lower.
 
 If
our Company is treated as a passive foreign investment company for any taxable
year, U.S. Holders should consider whether to make a QEF election for United
States federal income tax purposes. If a U.S. Holder has a QEF election in
effect for all taxable years that such U.S. Holder has held the common shares
and our Company was a passive foreign investment company, distributions and gain
will not be recognized ratably over the U.S. Holder's holding period or subject
to an interest charge, gain on the sale of common shares will be characterized
as capital gain and the denial of basis step-up at death described above would
not apply. Instead, each such U.S. Holder is required for each taxable year that
our Company is a qualified electing fund to include in income a pro rata share
of the ordinary earnings of our Company as ordinary income and a pro rata share
of the net capital gain of our Company as capital gain, subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge. In order to comply with the requirements of a QEF election, a U.S.
Holder must receive from our Company certain information. We intend to supply
U.S. Holders with the information needed to report income and gain pursuant to a
QEF election in the event our Company is classified as a passive foreign
investment company. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the Internal Revenue
Service.  A shareholder makes a QEF election by attaching a completed
IRS Form 8621 (including the passive foreign investment company annual
information statement) to a timely filed United States federal income tax return
or, if not required to file United States Federal income tax return, by filing
such form with the IRS Service Center listed on IRS Form 8621. Even if a QEF
election is not made, a shareholder in a passive foreign investment company who
is a U.S. Holder must file a completed IRS Form 8621 every year.
 
 As
an alternative to making a QEF election, a U.S. Holder may elect to make a
mark-to-market election with respect to the common shares owned by him if such
stock qualifies as “marketable stock.” To qualify as “marketable stock,” the
stock must be regularly traded on a qualified exchange.  Under
applicable Treasury regulations, a “qualified exchange” includes a national
securities exchange that is registered with the SEC or the national market
system established under the Securities Exchange Act of 1934 and certain foreign
securities exchanges.  Under applicable Treasury Regulations, PFIC
stock traded on a qualified exchange is regularly traded on such exchange for
any calendar year during which such stock is traded, other than in de minimis quantities, on at
least 15 days during each calendar quarter.  We cannot assure U.S.
Holders that our common shares will be treated as regularly traded stock on a
qualified exchange. If the mark-to-market election were made, then the rules set
forth above would not apply for periods covered by the election. Under such
election, a U.S. Holder includes in income each year an amount equal to fair
market value of the common shares owned by such U.S. Holder as of the close of
the taxable year over the U.S. Holder's adjusted basis in such shares. The U.S.
Holder would be entitled to a deduction for the excess, if any, of such U.S.
Holder's adjusted basis in his common shares over the fair market value of such
shares as of the close of the taxable year; provided, however, that such
deduction would be limited to the extent of any net mark-to-market gains with
respect to the common shares included by the U.S. Holder under the election for
prior taxable years. The U.S. Holder's basis in his common shares is adjusted to
reflect the amounts included or deducted pursuant to this election. Amounts
included in income pursuant to the mark-to-market election, as well as gain on
the sale or exchange of the common shares, will be treated as ordinary income.
Ordinary loss treatment applies to the deductible portion of any mark-to-market
loss, as well as to any loss realized on the actual sale or exchange of the
common shares to the extent that the amount of such loss does not exceed the net
mark-to-market gains previously included with respect to such common shares. The
mark-to-market election applies to the tax year for which the election is made
and all later tax years, unless the common shares cease to be marketable or the
IRS consents to the revocation of the election.
  70
  
 We
have not determined whether our Company may have been a passive foreign
investment company during 2008. There can be no assurance that our Company will
not be classified as a passive foreign investment company in 2008, or
thereafter, because the tests for determining passive foreign investment company
status are applied annually and it is difficult to make accurate predictions of
future income and assets, which are relevant to this determination. U.S. Holders
who hold common shares during a period when our Company is a passive foreign
investment company will be subject to the foregoing rules, even if our Company
ceases to be a passive foreign investment company, subject to certain exceptions
for U.S. Holders who made a QEF election or mark-to-market election. U.S.
Holders are urged to consult with their own tax advisors about making a QEF
election or mark-to-market election and other aspects of the passive foreign
investment company rules.
 
 Back-Up
Withholding and Information Reporting
 
 U.S.
Holders generally are subject to information reporting requirements and back-up
withholding with respect to dividends paid on common shares, or proceeds paid
from the disposition of common shares, unless the U.S. Holder provides an IRS
Form W-9 or otherwise establishes an exemption.
 
 The
amount of any back-up withholding will be allowed as a credit against a U.S.
Holder’s federal income tax liability and may entitle such holder to a refund,
provided that certain required information is furnished to the IRS.
 
 F.           Dividends
and Paying Agents
  Not
applicable.
 
 G.
              Statements
      by Experts
  Not
applicable.
 
 H.
              Documents
      on Display
  We
have filed this Annual Report on Form 20-F with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Statements made in this
Annual Report as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to this Annual Report, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
  We
are subject to the informational requirements of the Exchange Act and file
reports and other information with the Securities and Exchange
Commission.  Reports and other information which we file with the
Securities and Exchange Commission, including this Annual Report on
Form 20-F, may be inspected and copied at the public reference facilities
of the Securities and Exchange Commission at:
  100F
      Street, N.E
                Washington
      D.C.  20549
 You can also obtain copies of this
material by mail from the Public Reference Section of the Securities and
Exchange Commission, 100F Street, N.E., Washington, D.C. 20549, at prescribed
rates.  Additionally, copies of this material may also be obtained
from the Securities and Exchange Commission’s Internet site at
http://www.sec.gov.  The Commission’s telephone number is
1-800-SEC-0330.
   71
  
  I.
              Subsidiary
      Information
  Not
applicable.
  ITEM
11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Not
applicable.
  ITEM
12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
 Not
applicable.
 
 PART
II
 
 ITEM
13 - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES
 
 Not
applicable.
 
 ITEM
14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
 
 Not
applicable.
 
 ITEM
15 - CONTROLS AND PROCEDURES
 
 DISCLOSURE
CONTROLS AND PROCEDURES
 
 The
Company’s management has evaluated the effectiveness of the Company’s disclosure
controls and procedures as of December 31, 2008.  Based on that
evaluation, the Company’s management, including the Chief Executive Officer and
the Corporate Controller, concluded that, as of that date, the Company’s
disclosure controls and procedures were effective to give reasonable assurance
that the information required to be disclosed by the Company in our corporate
filings is recorded, processed, summarized and reported within the required time
periods.
 
 MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.
 
 The
term “internal control over financial reporting” is defined as a process
designed by, or under the supervision of, the Chief Executive Officer and
Corporate Controller, or persons performing similar functions, and effected by
the Company’s board of directors, management and other personnel, 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:
 
 •
              Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
 •
              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
      registrant are being made only in accordance with authorizations of
      managementand directors of the registrant;
and
 •
              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.
  72
  
 Because
of its inherent limitations, internal controls over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
assessed the design and operating effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008.  In making
this assessment, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  Based on this assessment,
management believes that, as of December 31, 2008, the Company’s internal
control over financial reporting was effective.
 
 Management
is aware that there is a lack of segregation of duties due to the small number
of employees dealing with general, administrative and financial
matters.  However, management has decided that considering the
employees involved and the compensating control procedures in place, including
substantive periodic review of financial statements by the Audit Committee to
ensure that internal controls over financial reporting and disclosure controls
and procedures are effective, the risks associated with segregation are
insignificant and the potential benefits of adding employees to more clearly
segregate duties do not justify the expenses associated with such
increase.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
 
 CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 There
has been no changes in the Company's internal controls over financial reporting
during the year ended December 31, 2008, that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
  ITEM
16 - [RESERVED]
 
 ITEM
16A - AUDIT COMMITTEE FINANCIAL EXPERT
 
 The Company’s Board of Directors has
determined that it has at least one audit committee financial expert serving on
its audit committee.  The Board of Directors has determined that
Darroch Robertson is an audit committee financial expert.
 
 ITEM
16B - CODE OF ETHICS
 
 The
Company has adopted a Code of Business Conduct and Ethics that applies to all
directors, officers and employees. The Code of Business Conduct and Ethics is
attached as an exhibit to this report. We did not amend, modify or grant any
waiver from any provision of our Code of Business Conduct and Ethics during the
last fiscal year.
 
 ITEM
16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The following table sets forth the
aggregate fees billed for each of the last two fiscal years for professional
services rendered by our auditors for the audit of our annual financial
statements and other services.
  73
  
 FEES
OF AUDITORS
 
 Year
                        Audit
      Fees(1)
                        Tax
      Fees(2)2007
                        $178,000
                        $3,0002008
                        $174,500
                        $3,000
 
 (1)
              Audit
      Fees represent costs associated with the audit of the Company’s annual
      consolidated financial statements including review of securities filings
      and review of the Company’s interim consolidated Financial
      Statements.
 
 (2)
              Tax
      Fees represent costs associated with the preparation of the Company’s
      annual tax filings, tax planning and
advice.
 
 Before
the Company’s auditor is engaged by the Company to render audit or non-audit
services, the engagement is approved by the Audit Committee.  100
percent of the audit and non-audit services provided by the Company’s auditor
were pre-approved by the Audit Committee pursuant to the Audit Committee’s
pre-approval policy.
 
 ITEM
16D - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
 Not
applicable.
 
 ITEM
16E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
 
 During
the last fiscal year, there were no purchases by or on behalf of the Company or
any affiliated purchaser of any class of the Company’s equity securities
registered under Section 12 of the Securities Exchange Act.
 
 PART
III
 
 ITEM
17- FINANCIAL STATEMENTS
 
 Not
applicable.
 
 ITEM
18 - FINANCIAL STATEMENTS
 
 See
the Index to Consolidated Financial Statements accompanying this report on page
F-1.
 
 ITEM
19 - EXHIBITS
 
 Exhibits
filed as part of this Annual Report.
 
 1.1
                        Articles
      of Arrangement of the Company filed with the Ontario Ministry of Consumer
      and Business Services on October 31, 2002.(1)1.2
                        By-laws
      of the Company.(2)2.1
                        Form
      of Convertible Secured Note.(6)2.2
                        Registration
      Rights Agreement, dated as of June 16, 2000, between Bid.Com International
      and Acqua Wellington Value Fund Ltd.(4)2.3
                        Form
      of Warrant issued or issuable upon exercise of Convertible Secured
      Notes.(6)
  74
  
  4.1
                                      Salary
      Protection Letter, dated February 12, 1997, between the Company and
      Jeffrey Lymburner.(3)4.2
                                      Option
      Agreement dated February 19, 2001 between Bid.Com International Inc. and
      Wendell Willick.(5)4.3
                                      Amendment
      to Option Agreement dated May 2, 2001 between Bid.Com International Inc.
      and Wendell Willick.(5)4.4
                                      Board
      Support Agreement, dated as of September 7, 2001 between Bid.Com
      International Inc. and ADB Systemer ASA.(5)4.5
                                      Board
      Representation Agreement, dated as of September 7, 2001 between Bid.Com
      International Inc. and LimeRock Partners LLC, Jan Pedersen, Sandnes
      Investering, Rogaland Investering, AIG Private Bank Ltd. and Karstein
      Gjersvik.(5)4.6
                                      Employment
      Agreement, dated as of September 18, 2001 between Bid.Com International
      Inc. and Jan Pedersen.(5)4.7
                                      Subscription
      Agreement, dated as of April 25, 2002, between ADB Systems International
      Inc. and Stonestreet Limited Partnership.(5)4.8
                                      Arrangement
      Agreement, dated as of August 23, 2002, between ADB Systems International
      Inc. and ADB Systems International Ltd.(1)4.9
                                      General
      Conveyance and Assumption Agreement, dated August 23, 2002, between ADB
      Systems International Inc. and ADB Systems International Ltd.(2)4.10
                                      Loan
      Agreement, dated August 23, 2002, and Loan Agreement Amending Agreement
      entered into as of August 30, 2002 among The Brick Warehouse Corporation,
      ADB Systems International Inc. and ADB Systems International Ltd.(6)4.11
                                      Form
      of Supply Services and Licensing Agreement, dated August 23, 2002, among
      The Brick Warehouse Corporation, ADB Systems International Inc., and ADB
      Systems International Ltd.(6)4.12
                                      Form
      of General Security Agreement, dated as of April 30, 2002, between ADB
      Systems International Inc. and each of Stonestreet Limited Partnership and
      Greenwich Growth Fund Ltd.(6)4.13
                                      Form
      of Subscription Agreement, dated August 30, 2002, between ADB Systems
      International Inc. and Stonestreet Limited Partnership.(6)4.14
                                      Form
      of Subscription Agreement, dated August 30, 2002, between ADB Systems
      International Inc. and Greenwich Growth Fund Ltd.(6)4.15
                                      Co-operation
      Agreement made as of August 23, 2002 between ADB Systems International
      Inc., ADB Systems International Ltd. and The Brick Warehouse
      Corporation.(6)4.16
                                      Agency
      Agreement dated June 15, 2004 between ADB Systems International Ltd. and
      First Associates Investments Inc.(7)4.17
                                      General
      Security Agreement dated as of May 19, 2004 between ADB Systems
      International Ltd. and Stonestreet Limited Partnership.(7)4.18
                                      Form
      of Subscription Agreement between ADB Systems International Ltd. and First
      Associates Investments Inc.(7)4.19
                                      Subscription
      Agreement dated May 19, 2004 between ADB Systems International Ltd. and
      Stonestreet Limited Partnership.(7)4.20
                                      Formof
      Subscription Agreement for Equity Private Placements(8)
  75
  
  4.21
                                            Form
      of Subscription Agreement for Series I Convertible Secured Debenture.(11)4.22
                                            Form
      of Series I Convertible Secured Debenture.(11)4.23
                                            Form
      of Subscription Agreement for Series J Convertible Secured Debenture.(11)4.24
                                            Form
      of Series J Convertible Secured Debenture.
      (11)4.25
                                            Share
      Purchase Agreement between ADB Systems International Ltd. and ADB Systemer
      Holding as, dated May 18, 2006.(9)4.26
                                            The
      Audit Committee’s Charter*4.27
                                            Form
      of Subscription Agreement for June 15, 2007 Equity Private
      Placement4.28
                                            Form
      of Subscription Agreement for Series K Convertible Secured
      Debenture4.29
                                            Form
      of Series K Convertible Secured Debenture4.30
                                            Form
      of Subscription Agreement for Series L Convertible Secured
      Debenture*4.31
                                            Form
      of Subscription Agreement for Series M Convertible Secured
      Debenture*4.32
                                            Form
      of Subscription Agreement for Series N Convertible Secured
      Debenture*8.1
                                            List
      of Subsidiaries*11.1
                                            Code
      of Business Conduct and Ethics of Northcore Technologies Inc.(10)12.
      1
                                            CEO
      Certification.*12.
      2
                                            Corporate
      Controller Certification.*13.1
                                            Certification
      pursuant to 18 U.S.C. Section 1350.*13.2
                                            Certification
      pursuant to 18 U.S.C. Section 1350.*14.1
                                            Report
      of Independent Registered Public Accounting Firm*14.2
                                            Schedule
      of Valuation And Qualifying
Accounts*
 
 
  *
                  Filed
      herewith(1)
                  Incorporated
      by reference from Exhibit 1 to the Company’s Current Report on Form 6-K,
      Filing No. 1 for the Month of November 2002, filed with the Securities and
      Exchange Commission on November 5, 2002.(2)
                  Incorporated
      by reference from Exhibit 1.2 of Amendment No. 1 to the Company’s
      Registration Statement on Form 20-F, File No. 001-14835, filed with the
      Securities and Exchange Commission on March 30, 1999.(3)
                  Incorporated
      by reference from Exhibit 3.27 of Amendment No. 1 to the Company’s
      Registration Statement on Form 20-F, File No. 001-14835, filed with the
      Securities and Exchange Commission on March 30, 1999.(4)
                  Incorporated
      by reference from the Exhibits to the Company’s Annual Report on Form
      20-F, File No. 001-14835, filed with the Securities and Exchange
      Commission on May 23, 2001.(5)
                  Incorporated
      by reference from the Exhibits to the Company’s Annual Report on Form
      20-F, File No. 001-14835, filed with the Securities and Exchange
      Commission on May 17,
2002.
  76
  
  (6)
                        Incorporated
      by reference from Exhibits to the Company’s Annual Report on Form 20-F,
      File No. 001-14835, filed with the Securities and Exchange Commission on
      May 20, 2003.(7)
                        Incorporated
      by reference from Exhibits to the Company’s Annual Report on Form 20-F,
      File No. 001-14835, filed with the Securities and Exchange Commission on
      June 30, 2004.(8)
                        Incorporated
      by reference from Exhibits to the Company’s Annual Report on Form 20-F,
      File No. 001-14835, filed with the Securities and Exchange Commission on
      June 30, 2005.(9)
                        Incorporated
      by reference from Exhibit 99.6 to the Company’s Filing No. 1 for the Month
      of May on Form 6-K, File No. 001-14835 filed with the Securities and
      Exchange Commission on May 31, 2006.(10)
                        Incorporated
      by reference from Exhibit 99.6 to the Company’s Filing No. 1 for the Month
      of March on Form 6-K, File No. 001-14835 filed with the Securities and
      Exchange Commission on March 30, 2007.(11)
                        Incorporated
      by reference from Exhibits to the Company’s Annual Report on Form 20-F,
      File No. 001-14835,  filed with the Securities and Exchange
      Commission on June 25,
2007.
 
 
  77
  SIGNATURES
 
 The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused and authorized the undersigned to sign this Annual
Report on its behalf.
  NORTHCORE
      TECHNOLOGIES INC.By:
                                      -sd/- Duncan
      CopelandName:
                                      Duncan
      CopelandTitle:
                                      Chief
      Executive OfficerBy:
                                      -sd/- Tam
      NguyenName:
                                      Tam
      NguyenTitle:
                                      Corporate
      ControllerDated:
      March 30,
2009
   78




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 Audited
Consolidated Financial Statements for the years ended December 31, 2008, 2007,
2006,
 
 
 Management’s
      Report
                                F-2Report
      of Independent Registered Public Accounting Firm
                                F-2Consolidated
      Balance Sheets as at December 31, 2008 and 2007
                                F-3Consolidated
      Statements of Operations and Comprehensive Income  for the years
      ended December 31, 2008, 2007, and 2006
                                F-4Consolidated
      Statements of Deficit for the years ended December 31, 2008, 2007 and
      2006
                                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007, and
      2006
                                F-6Notes
      to Consolidated Financial Statements
                                F-7













MANAGEMENT’S
REPORT


March
30, 2009





Preparation
of the consolidated financial statements accompanying this annual report and the
presentation of all other information in this report is the responsibility of
management.  The consolidated financial statements have been prepared
in accordance with appropriate and generally accepted accounting principles and
reflect management’s best estimates and judgments.  All other
financial information in the report is consistent with that contained in the
consolidated financial statements.  The Company maintains appropriate
systems of internal control, policies and procedures which provide management
with reasonable assurance that assets are safeguarded and that financial records
are reliable and form a proper basis for preparation of financial
statements.





The
Board of Directors ensures that management fulfills its responsibilities for
financial reporting and internal control through an Audit Committee which is
composed of non-executive directors. The Audit Committee reviewed the
consolidated financial statements with management and external auditors and
recommended their approval by the Board of Directors.  The
consolidated financial statements have been audited by KPMG LLP, Chartered
Accountants.  Their report stating the scope of their audit and their
opinion on the consolidated financial statements is presented
below.






duncan copeland
            tam nguyenDuncan
      CopelandCEO
            Tam
      NguyenController




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
the Board of Directors of
 Northcore
Technologies Inc.
 
 We
have audited the accompanying consolidated balance sheets of Northcore
Technologies Inc. (the "Company") and subsidiaries as of December 31, 2008 and
2007 and the related consolidated statements of operations and comprehensive
income, deficit and cash flows for each of the years in the three-year period
ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of 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 conformity with Canadian generally accepted accounting
principles.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 2
to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern.  Management’s
plans in regard to these matters are also described in Note 2.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 On
January 1, 2008, the Company adopted the new recommendations of The Canadian
Institute of Chartered Accountants' Handbook Section 1535, Capital Disclosures,
Section 3862, Financial Instruments - Disclosures and Section 3863, Financial
Instruments - Presentation.  The effect of those changes is discussed
in note 3 to the consolidated financial statements.
 
 Canadian
generally accepted accounting principles vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in Note 21 to the consolidated financial statements.
 
  /s/  KPMG
LLP
 Chartered
Accountants, Licensed Public Accountants
 Toronto,
Canada
 March
30, 2009







Northcore
Technologies Inc. F-2







CONSOLIDATED
      BALANCE SHEETS
                            December
      31, 2008 and 2007
                            (in thousands of Canadian
      dollars)2008
                          
                          
                          2007ASSETSCURRENTCash
                          
                          $
                          460
                          
                          
                          $
                          478Accounts
      receivable
                          
                          
                          305
                          
                          
                          
                          119Deposits
      and prepaid expenses
                          
                          
                          28
                          
                          
                          
                          38793
                          
                          
                          
                          635CAPITAL
      ASSETS (Note 5)
                          
                          
                          19
                          
                          
                          
                          52$
                          812
                          
                          
                          $
                          687LIABILITIESCURRENTAccounts
      payable
                          
                          $
                          570
                          
                          
                          $
                          321Accrued
      liabilities
                          
                          
                          378
                          
                          
                          
                          256Deferred
      revenue
                          
                          
                          30
                          
                          
                          
                          52Current
      portion of notes payable (Note 7)
                          
                          
                          382
                          
                          
                          
                          378Current
      portion of secured subordinated notes (Note 8)
                          
                          
                          1,125
                          
                          
                          
                          -2,485
                          
                          
                          
                          1,007NOTES
      PAYABLE (Note 7)
                          
                          
                          -
                          
                          
                          
                          205SECURED
      SUBORDINATED NOTES (Note 8)
                          
                          
                          730
                          
                          
                          
                          1,0753,215
                          
                          
                          
                          2,287SHAREHOLDERS’
      DEFICIENCYShare
      capital (Note 10)
                          
                          
                          104,676
                          
                          
                          
                          104,495Contributed
      surplus (Note 11)
                          
                          
                          2,161
                          
                          
                          
                          2,099Warrants
      (Note 12)
                          
                          
                          510
                          
                          
                          
                          533Stock
      options (Note 13)
                          
                          
                          1,389
                          
                          
                          
                          1,346Other
      options (Note 14)
                          
                          
                          193
                          
                          
                          
                          193Conversion
      feature on secured subordinated notes (Note 8)
                          
                          
                          2,280
                          
                          
                          
                          991Deficit
                          
                          
                          (113,612
                          )
                          
                          
                          (111,257
                          )(2,403
                          )
                          
                          
                          (1,600
                          )$
                          812
                          
                          
                          $
                          687


Going
concern (Note 2)


Commitments
and contingencies (Note 18)


Canadian
and United States accounting policy differences (Note 21)


Subsequent
event (Note 22)


duncan copeland
              christopher bulgerDuncan
      CopelandCEO
              Christopher
      BulgerDirector


See
accompanying notes to consolidated financial statements.




Northcore
Technologies Inc. F-3




CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                Years
      ended December 31, 2008, 2007 and 2006
                (in thousands of Canadian dollars, except per
      share amounts)


2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Revenues
      (Note 15)
                                  
                                  
                                  741
                                  
                                  
                                  
                                  1,166
                                  
                                  
                                  
                                  1,073Operating
      expenses:General
      and administrative
                                  
                                  
                                  1,485
                                  
                                  
                                  
                                  1,703
                                  
                                  
                                  
                                  1,790Customer
      service and technology
                                  
                                  
                                  689
                                  
                                  
                                  
                                  762
                                  
                                  
                                  
                                  664Sales
      and marketing
                                  
                                  
                                  117
                                  
                                  
                                  
                                  276
                                  
                                  
                                  
                                  377Employee
      stock options (Note 13 (b))
                                  
                                  
                                  43
                                  
                                  
                                  
                                  94
                                  
                                  
                                  
                                  137Depreciation
                                  
                                  
                                  33
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  92Total
      operating expenses
                                  
                                  
                                  2,367
                                  
                                  
                                  
                                  2,874
                                  
                                  
                                  
                                  3,060Loss
      from continuing operations before the under-noted
                                  
                                  
                                  (1,626
                                  )
                                  
                                  
                                  (1,708
                                  )
                                  
                                  
                                  (1,987
                                  )Interest
      expense:Cash
      interest expense
                                  
                                  
                                  335
                                  
                                  
                                  
                                  272
                                  
                                  
                                  
                                  345Accretion
      of secured subordinated notes
                                  
                                  
                                  394
                                  
                                  
                                  
                                  333
                                  
                                  
                                  
                                  454Interest
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (16
                                  )729
                                  
                                  
                                  
                                  604
                                  
                                  
                                  
                                  783Loss
      from continuing operations
                                  
                                  
                                  (2,355
                                  )
                                  
                                  
                                  (2,312
                                  )
                                  
                                  
                                  (2,770
                                  )Income
      from discontinued operations (Note 4)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,122LOSS
      FOR THE YEAR
                                  
                                  $
                                  (2,355
                                  )
                                  
                                  $
                                  (2,312
                                  )
                                  
                                  $
                                  (648
                                  )OTHER
      COMPREHENSIVE INCOME, NET OF TAX:Foreign
      currency translation adjustment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (90
                                  )COMPREHENSIVE
      LOSS
                                  
                                  $
                                  (2,355
                                  )
                                  
                                  $
                                  (2,312
                                  )
                                  
                                  $
                                  (738
                                  )LOSS
      PER SHARE (Note 10 (e)):From
      continuing operations, basic and diluted
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.03
                                  )Loss
      per share, basic and diluted
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.01
                                  )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
      (000’s)
                                  
                                  
                                  108,861
                                  
                                  
                                  
                                  93,094
                                  
                                  
                                  
                                  79,933








See
accompanying notes to consolidated financial statements.




Northcore
Technologies Inc. F-4




CONSOLIDATED
      STATEMENTS OF DEFICIT
                Years
      ended December 31, 2008, 2007 and 2006
                (in
      thousands of Canadian
dollars)


2008
                            
                            
                            2007
                            
                            
                            2006DEFICIT,
      BEGINNING OF YEAR
                            
                            $
                            (111,257
                            )
                            
                            $
                            (109,015
                            )
                            
                            $
                            (108,367
                            )CHANGE
      IN ACCOUNTING POLICY - FINANCIAL INSTRUMENTS (Note 3)
                            
                            
                            -
                            
                            
                            
                            70
                            
                            
                            
                            -DEFICIT,
      BEGINNING OF YEAR, AS RESTATED
                            
                            
                            (111,257
                            )
                            
                            
                            (108,945
                            )
                            
                            
                            (108,367
                            )LOSS
      FOR THE YEAR
                            
                            
                            (2,355
                            )
                            
                            
                            (2,312
                            )
                            
                            
                            (648
                            )DEFICIT,
      END OF YEAR
                            
                            $
                            (113,612
                            )
                            
                            $
                            (111,257
                            )
                            
                            $
                            (109,015
                            )








See
accompanying notes to consolidated financial statements.




Northcore
Technologies Inc. F-5




CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                Years
      ended December 31, 2008, 2007 and 2006
                (in
      thousands of Canadian dollars)


2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006NET
      INFLOW (OUTFLOW) OF CASH
                                    RELATED
      TO THE FOLLOWING ACTIVITIESOPERATINGLoss
      for the year from continuing operations
                                  
                                  $
                                  (2,355
                                  )
                                  
                                  $
                                  (2,312
                                  )
                                  
                                  $
                                  (2,770
                                  )Items
      not affecting cash:Employee
      stock options
                                  
                                  
                                  43
                                  
                                  
                                  
                                  94
                                  
                                  
                                  
                                  137Depreciation
                                  
                                  
                                  33
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  92Accretion
      of secured subordinated notes
                                  
                                  
                                  394
                                  
                                  
                                  
                                  333
                                  
                                  
                                  
                                  454(1,885
                                  )
                                  
                                  
                                  (1,846
                                  )
                                  
                                  
                                  (2,087
                                  )Changes
      in non-cash operating working capital (Note 19)
                                  
                                  
                                  394
                                  
                                  
                                  
                                  275
                                  
                                  
                                  
                                  50(1,491
                                  )
                                  
                                  
                                  (1,571
                                  )
                                  
                                  
                                  (2,037
                                  )INVESTINGCapital assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (11
                                  )
                                  
                                  
                                  (65
                                  )Marketable
      securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  13-
                                  
                                  
                                  
                                  (11
                                  )
                                  
                                  
                                  (52
                                  )FINANCINGIssuance
      of secured subordinated notes (Note 8)
                                  
                                  
                                  1,803
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  750Repayment
      of notes payable (Note 7)
                                  
                                  
                                  (330
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Repayment
      of secured subordinated notes (Note 8)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (435
                                  )Demand
      loans (Note 7 (d))
                                  
                                  
                                  -
                                  
                                  
                                  
                                  340
                                  
                                  
                                  
                                  -Issuance of common shares (Note
      10 (d))
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,245
                                  
                                  
                                  
                                  -Advances from related parties
      (Note 6)
                                  
                                  
                                  59
                                  
                                  
                                  
                                  89
                                  
                                  
                                  
                                  -Repayment
      to related parties (Note 6)
                                  
                                  
                                  (59
                                  )
                                  
                                  
                                  (89
                                  )
                                  
                                  
                                  (137
                                  )1,473
                                  
                                  
                                  
                                  1,585
                                  
                                  
                                  
                                  178CASH
      FLOWS FROM DISCONTINUED OPERATIONS (Note 4)Operating
      activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (317
                                  )Investing
      activities - Net proceeds from disposition of discontinued
      operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,643-
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,326NET
      CASH INFLOW (OUTFLOW) DURING THE YEAR
                                  
                                  
                                  (18
                                  )
                                  
                                  
                                  3
                                  
                                  
                                  
                                  415CASH,
      BEGINNING OF YEAR
                                  
                                  
                                  478
                                  
                                  
                                  
                                  475
                                  
                                  
                                  
                                  60CASH,
      END OF YEAR
                                  
                                  $
                                  460
                                  
                                  
                                  $
                                  478
                                  
                                  
                                  $
                                  475





SUPPLEMENTAL
DISCLOSURE OF CASH PAYMENTS


Interest
      paid
              
              $
              250
              
              
              $
              16
              
              
              $
              45





SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES - See Note 19














See
accompanying notes to consolidated financial statements.




Northcore
Technologies Inc. F-6


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




1.    DESCRIPTION
OF BUSINESS





Northcore
Technologies Inc. (“Northcore” or the “Company”) provides software solutions and
services that help organizations source, manage and sell their capital equipment
and assets.  Northcore works with a number of customers and partners
in a variety of sectors including financial services, manufacturing, oil and
gas, and government.





Northcore
owns a 50 percent interest in GE Asset Manager, LLC (also referred to as “GE
Asset Manager”), a joint venture with GE Capital Corporation, through its
business division GE Commercial Finance, Capital Solutions.








2.    GOING
CONCERN





While
the accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern, certain adverse
conditions and events cast substantial doubt upon the validity of this
assumption.  Financial statements are required to be prepared on a
going concern basis unless management either intends to liquidate the Company or
cease trading or has no realistic alternative but to do so within the
foreseeable future.  The going concern basis of presentation assumes
that the Company will continue in operation for the foreseeable future and be
able to realize its assets and discharge its liabilities and commitments in the
normal course of operations.  The Company has not yet realized
profitable operations and has relied on non-operational sources of financing to
fund operations.  The Company’s ability to continue as a going concern
will be dependent on management’s ability to successfully execute its business
plan including a substantial increase in revenue as well as maintaining
operating expenses at or near the same level as 2008.  The Company
cannot provide assurance that it will be able to execute on its business plan or
assure that efforts to raise additional financings would be
successful.





These
consolidated financial statements do not include adjustments or disclosures that
may result from the Company’s inability to continue as a going
concern.  If the going concern assumption were not appropriate for
these consolidated financial statements, then adjustments would be necessary in
the carrying values of assets and liabilities, the reported losses and the
balance sheet classifications used.





The
continued existence beyond 2008 is dependent on the Company’s ability to
increase revenue from existing products and services, and to expand the scope of
its product offering which entails a combination of internally developed
software and business ventures with third parties, and to raise additional
financing.








3.    SIGNIFICANT
ACCOUNTING POLICIES





The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP), which are
substantially the same as generally accepted accounting principles in the United
States (U.S. GAAP), except as disclosed in Note 21.  The accompanying
consolidated financial statements are prepared using accounting principles
applicable to a going concern, which assumes that the Company will continue in
operation for a reasonable period of time and will be able to realize its assets
and discharge its liabilities in the normal course of operations (See Note
2).





Principles
of Consolidation


The
accompanying consolidated financial statements include the accounts of the
Company and subsidiaries over which it exercises control.  All
inter-company balances and transactions have been eliminated on
consolidation.





Investment
in Jointly Controlled Company


On
September 23, 2003, the Company established a joint venture with the GE
Commercial Finance, with each entity holding a 50 percent interest in the joint
venture.  The joint venture operates under the name of GE Asset
Manager, LLC.  The consolidated financial statements of the Company
reflect the Company’s pro rata share of the joint venture’s assets, liabilities,
and results of operations in accordance with the proportionate consolidation
method of accounting (See Note 20).


Northcore
Technologies Inc. F-7
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


Capital
Assets and Amortization


Capital
assets are recorded at cost less accumulated
amortization.  Amortization is calculated on a straight-line basis in
amounts sufficient to amortize the cost of capital assets over their estimated
useful lives as follows:




Computer
      hardware
                  3
      yearsComputer
      software
                  1
      year or life of the licenseFurniture
      and fixtures
                  5
      yearsLeasehold
      improvements
                  shorter
      of useful life or life of the
lease








Software
Development Costs


The
cost of software internally developed for client applications through e-commerce
enabling agreements and software licensing is expensed as incurred.





Translation
of Foreign Currencies


The
accompanying consolidated financial statements are prepared in Canadian
dollars.  The Company’s foreign subsidiaries in the United States,
Ireland and the United Kingdom are classified as fully integrated with the
functional currency being the Canadian dollar.  The Company uses the
temporal method of foreign currency translation for these
operations.  Monetary assets and liabilities are translated at the
exchange rates in effect on the balance sheet date.  Non-monetary
assets are translated at historic exchange rates.  Revenue and expense
amounts are translated using the average monthly exchange rates except
amortization of capital assets, which is translated at historic exchange
rates.  Gains and losses from foreign exchange translations are
included in the statement of operations.





The
Company’s former subsidiary in Norway was classified as a self-sustaining
operation whereby the functional currency of the operation was the Norwegian
krone.  The Company used the current rate method of translation for
these operations.  Assets and liabilities were translated at the rate
of exchange in effect at the balance sheet date.  Revenue and expenses
(including depreciation and amortization) were translated using the monthly
average exchange rate.  Gains and losses from foreign exchange
translations of the financial statements were included as a separate component
of shareholders’ deficiency.  The Company sold its Norwegian
subsidiary in 2006 (See Note 4).





Loss
Per Share


The
treasury stock method of calculating diluted loss per share is
used.  For all years presented, all stock options, convertible
debentures and warrants are anti-dilutive, therefore diluted loss per share is
equal to basic loss per share.  The basic loss per share calculation
is based on the weighted average number of shares outstanding during the
year.





Revenue
Recognition


The
Company’s revenues are derived from application hosting services, software
license fees, software implementation activities, training and consulting
services, product maintenance and customer support, and application development
activities, and hosting fees.  Fees for services are billed separately
from licenses of the Company’s products.  The Company recognizes
revenue in accordance with Canadian GAAP, which in the Company’s circumstances,
is not materially different from the amounts that would be determined under
provisions of the American Institute of Certified Public Accountants Statements
of Position (SOP) No. 97-2, “Software Revenue Recognition”, and as amended by
Statement of Position 98-9, “Modification of SOP 97-2, Software revenue
Recognition, With Respect to Certain Transactions”. The Company also considers
the provisions of The Canadian Institute of Chartered Accountants (CICA)
Emerging Issues Committee (EIC) 141, which is analogous to Staff Accounting
Bulletin (SAB) 104, “Revenue Recognition in Financial Statements”, and CICA EIC
142, which is analogous to the Emerging Issues Task Force consensus EITF 00-21,
“Accounting for Revenue Arrangements with Multiple Elements,” in determining the
appropriate revenue recognition methodology.


Northcore
Technologies Inc. F-8
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)
 Hosting
Fees


The
Company earns revenue from the hosting of customer websites and
applications.  Under existing hosting contracts, the Company charge
customers a recurring periodic flat fee.  The fees are recognized as
the hosting services are provided.





Application
Development Fees


Typically,
development of applications for our customers is provided based on a
predetermined fixed hourly rate basis.  Revenue is recognized as time
is incurred throughout the development process.





Software
License Revenue


The
Company recognizes software license revenue in accordance with the terms of the
license agreement and when the following criteria as set out in SOP No. 97-2 are
met:




•
            Persuasive
      evidence of an arrangement exists;


•
            Delivery
      has occurred;


•
            Fee
      is fixed or determinable; and


•
            Collectibility
      is probable.




Software
license revenue consists of fixed license fee agreements involving perpetual
licenses.





Software
license agreements may be part of multiple element arrangements that include
consulting and implementation services.  When these services are
considered essential to the functionality of the license, the associated revenue
is recognized on the basis of the percentage of completion method as specified
by contract accounting principles.  When these services are not
considered essential to the functionality of the license, the entire arrangement
fee is allocated to each element in the arrangement based on the respective
vendor specific objective evidence (VSOE) of the fair value of each
element.  The amount allocated to license revenues is based on the
price charged by the Company when the same element is sold in similar quantities
to a customer of a similar size and nature.  If this amount is not
determinable, the residual software license revenue is the amount of the total
arrangement fee less the fair value of any undelivered elements.  VSOE
used in determining fair value for installation, implementation and training is
based on the standard daily rates for the type of service being provided
multiplied by the estimated time to complete each task.  VSOE used in
determining the fair value of maintenance and support is based on the annual
renewal rates.  The revenue allocable to the software license is
recognized when the revenue recognition criteria are met.  The revenue
allocable to the consulting services is recognized as the services are
performed.





Implementation,
Training and Consulting Service Fees


The
Company receives revenue from implementation of its product offerings,
consulting services and training services.  Customers are charged a
fee based on time and expenses.  Revenue from implementation,
consulting service and training fees is recognized as the services are performed
or deferred until contractually defined milestones are achieved or until
customer acceptance has occurred, as the case may be, for such
contracts.





Product
Maintenance and Customer Support Fees


The
Company receives revenue from maintaining its products and the provision of
on-going support services to customers.  The maintenance and support
fees are typically equal to a specified percentage of the customers’ license
fee.  If associated with the fixed fee license model, the maintenance
revenues received are recorded as deferred revenue and recognized on a
straight-line basis over the contract period.





Services
revenue from maintenance and support is recognized when the services are
performed.  Maintenance and support revenues paid in advance are
non-refundable and are recognized on a straight-line basis over the term of the
agreement, which typically is 12 months.





Deferred
Revenue


Deferred
revenue is comprised of the unrecognized portion of consulting and
implementation fees received from maintenance and support of e-commerce enabling
agreements, and the unrecognized portion of license, installation, and
consulting revenue on the sale of software licenses and related
services.


Northcore
Technologies Inc. F-9
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


Deferred
Charges


Deferred
charges were comprised of expenditures incurred in the issuance of secured
subordinated notes.  The Company had previously deferred these costs
and amortized them over the term of the related debt
instruments.  Under CICA Handbook Section 3855, the carrying value of
transaction costs at December 31, 2006 of $41,000 was charged to opening deficit
on transition on January 1, 2007.





Secured
Subordinated Notes


Financial
instruments that contain both a liability and an equity element are required to
have the instrument’s component parts classified separately under Canadian
GAAP.  The Company uses the Cox-Rubinstein binomial valuation model to
determine the fair value of the conversion feature at the issue dates of
convertible secured subordinated notes and discloses the liability and equity
components separately on its balance sheet.





Financial
Instruments


Effective
January 1, 2007, the Company adopted the new recommendations of the CICA
Handbook Section 1530, Comprehensive Income; Section 3251, Equity; Section 3855,
Financial Instruments - Recognition and Measurement; and, Section 3865,
Hedges.  These new handbook Sections, which apply to fiscal years
beginning on or after October 1, 2006, provide requirements for the recognition
and measurement of financial instruments and on the use of hedge
accounting.  Section 1530 establishes standards for reporting and
presenting comprehensive income, which is defined as the change in equity from
transactions and other events from non-owner sources.  Other
comprehensive income refers to items recognized in comprehensive income that are
excluded from net income calculated in accordance with GAAP.





Under
Section 3855, financial instruments must be classified into one of these five
categories: held-for-trading; held-to-maturity; loans and receivables;
available-for-sale financial assets; or other financial
liabilities.  All financial instruments, including derivatives, are
measured in the balance sheet at fair value except for loans and receivables,
held-to-maturity investments and other financial liabilities, which are measured
at amortized cost using the effective interest rate
method.  Subsequent measurement and changes in fair value will depend
on their initial classification, as follows: held-for-trading financial assets
are measured at fair value and changes in fair value are recognized in net
income; available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income until the
investment is de-recognized or impaired at which time the amounts would be
recorded in net income.





Upon
adoption of these new standards, the Company designated its accounts receivable
as loans and receivables, which are measured at amortized
cost.  Accounts payable, accrued liabilities and secured subordinated
notes are classified as other financial liabilities, which are measured at
amortized cost.  The Company had neither available for sale, nor held
to maturity instruments during the years ended December 31, 2008 and
2007.





There
are no significant embedded derivatives or non-financial derivatives that
require separate fair value recognition on the consolidated balance sheet on
transition and as at December 31, 2008.





The
Company charges all qualifying transaction costs related to debt issuance to
earnings as incurred.  The Company had previously deferred these costs
and amortized them over the term of the related debt instruments.  The
carrying value of transaction costs at December 31, 2006 of $41,000 was charged
to opening deficit on transition on January 1, 2007.





The
adoption of these handbook sections resulted in an adjustment to reduce deficit
in the amount of $70,000, comprised of a decrease in deferred charges of $41,000
offset by a decrease in secured subordinated notes of $111,000 at January 1,
2007, being the difference in the carrying amount of secured subordinated notes
at December 31, 2006 and the carrying amount calculated using the effective
interest rate method from inception.





The
Company had no “other comprehensive income or loss” transactions during the
years ended December 31, 2008 and 2007 and no opening or closing balances for
accumulated other comprehensive income or loss.





Under
the new standards, policies followed for periods prior to the effective date
generally are not reversed, except that prior periods are reclassified to
reflect the application of foreign currency translation of self-sustaining
foreign operations.  Other comprehensive loss for the year ended
December 31, 2006 is comprised of foreign currency losses on translation of the
Company’s former subsidiary in Norway, which was sold in the second quarter of
2006.


Northcore
Technologies Inc. F-10
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


Effective
January 1, 2008, the Company adopted the new recommendations of CICA Handbook
Section 3862, Financial Instruments - Disclosures and Handbook Section 3863,
Financial Instruments - Presentation.  Section 3862 requires entities
to provide disclosures in their financial statements that enable users to
evaluate the significance of financial instruments on the entity’s financial
position and its performance and the nature and extent of risks arising from
financial instruments to which the entity is exposed during the period and at
the balance sheet date, and how the entity manages those
risks.  Section 3863 establishes standards for presentation of
financial instruments and non-financial derivatives.  It deals with
the classification of financial instruments, from the perspective of the issuer,
between liabilities and equities, the classification of related interest,
dividends, losses and gains, and circumstances in which financial assets and
financial liabilities are offset.





The
adoption of these standards did not have any impact on the classification and
valuation of the Company’s financial instruments.  The new disclosures
pursuant to these new Handbook Sections are included in Note 16.


Capital
Disclosures





Effective
January 1, 2008, the Company adopted the new recommendations of the CICA
Handbook Section 1535, Capital Disclosures.  This new Handbook Section
establishes standards for disclosing information about an entity’s capital and
how it is managed.  It requires the disclosure of information about an
entity’s objectives, policies and processes for managing
capital.  These new disclosures are included in Note 17.





Stock-Based
Compensation


The
Company accounts for stock-based compensation using the fair value method of
accounting, which is consistent with CICA 3870, “Stock-based Compensation and
Other Stock-based Payments.”  The estimated fair value is amortized to
expense over the vesting period.  Performance based options are
expensed upon achievement of specific criteria.





Stock-based
compensation to third parties is recognized and recorded in the accounts of the
Company at the fair market value of the equity instrument as determined by the
Cox-Rubinstein binomial valuation model.





Income
Taxes


The
Company accounts for income taxes in accordance with the asset and liability
method.  The determination of future tax assets and liabilities is
based on differences between the financial statement and income tax bases of
assets and liabilities, using substantively enacted tax rates in effect for the
year in which the differences are expected to reverse.  Future tax
assets are recorded to recognize tax benefits only to the extent that, based on
available evidence, it is more likely than not that they will be
realized.





Use
of Significant Accounting Estimates


The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting years.  Estimates are used when determining items such as
the allowance for doubtful accounts, the fair value assigned to the debt and
equity components of the secured subordinated notes and the expected
requirements for non-operational funding.  Actual results could differ
from those estimates.








UNADOPTED
NEW ACCOUNTING PRONOUNCEMENTS





Goodwill
and intangible assets:


In
2008, the CICA issued Handbook Section 3064, Goodwill and Intangible
Assets.  Section 3064, which replaces CICA Handbook Section 3062,
Goodwill and Other Intangible Assets, and CICA Handbook Section 3450, Research
and Development Costs, establishes standards for the recognition, measurement
and disclosure of goodwill and intangible assets.  This new standard
is effective for the Company’s interim and annual consolidated financial
statements for periods commencing January 1, 2009. The Company is assessing the
impact of the new standard on its consolidated financial
statements.


Northcore
Technologies Inc. F-11
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


Business
combinations:


In
October of 2008, the CICA issued Handbook Section 1582, Business Combinations,
concurrently with Handbook Section 1601, Consolidated Financial Statements, and
Handbook Section 1602, Non-controlling Interests.  Section 1582, which
replaces CICA Handbook Section 1581, Business Combinations, establishes
standards for the measurement of a business combination and the recognition and
measurement of assets acquired and liabilities assumed.  Section 1601,
which replaces CICA Handbook Section 1600, carries forward the existing Canadian
guidance on aspects of the preparation of consolidated financial statements
subsequent to acquisition other than non-controlling
interests.  Section 1602 establishes guidance for the treatment of
non-controlling interests subsequent to acquisition through a business
combination.  These new standards are effective for the Company’s
interim and annual consolidated financial statements commencing on January 1,
2011 with earlier adoption permitted as of the beginning of a fiscal
year.  The Company is assessing the impact of the new standards on its
consolidated financial statements.





International
Financial Reporting Standards (“IFRS”)


In
2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic
plan that will significantly affect financial reporting requirements for
Canadian companies.  The AcSB strategic plan outlines the convergence
of Canadian GAAP with IFRS over an expected five year transitional
period.





In
February 2008, the AcSB confirmed that IFRS will be mandatory in Canada for
profit-oriented publicly accountable entities for fiscal periods beginning on or
after January 1, 2011. The Company’s first IFRS financial statements will be for
the year ending December 31, 2011 and will include the comparative period for
2010.  Starting in the first quarter of 2011, the Company will provide
unaudited consolidated financial information in accordance with IFRS including
comparative figures for 2010.





The Company has
assembled an IFRS transition team and is committed to the development of its
IFRS changeoverplan during the coming year.  The Company is
evaluating accounting policy differences between Canadian GAAP and IFRS based on
management’s current understanding of these standards.  However, the
financial reporting impact of the transition to IFRS has not yet been
determined.








4.
            DISCONTINUED
      OPERATIONS





On
May 18, 2006, the Company entered into an agreement with ADB Systemer Holding AS
(the “Buyer”), to sell 100 percent of the Company's interest in its Norwegian
subsidiary ADB Systemer AS, (“ADB Systemer”) for NOK 15,000,000 or approximately
$2,687,000 in cash, subject to shareholder approval.  As compensation
for the transfer of UK contracts to the Buyer, the Company receives a royalty of
10 percent of net annual sales from the contracts for a period of four years
from the sale closing date.  These royalties are recognized in
earnings as they become due.  The Company recorded a total of $38,000
(2007 - $116,000, 2006 - $77,000) in royalties for the year ended December 31,
2008. Certain shareholders of the Buyer were employees or executive officers of
ADB Systemer and shareholders of the Company.  On June 21, 2006 the
Company received approval from shareholders at its annual general meeting to
proceed with the sale of ADB Systemer and changed its name to Northcore
Technologies Inc. effective June 30, 2006.  The sale of the shares of
ADB Systemer included the sale of the ADB Systems name. Upon the sale of ADB
Systemer, the Company retained access to all existing technology that will be
used to service existing customers through a Value Added Reseller Agreement
entered into with ADB Systemer.


The
following summarizes the statement of operations and statement of cash flows
information for the Company’s discontinued operations.
 
 Income
      Statement
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006(in
      thousands, except per share amounts)Revenue
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,399Income
      from operations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        331Gain
      from disposition of discontinued operations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,791Income
      from discontinued operations
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,122Income
      per share from discontinued operations, basic and diluted
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        0.02
  Northcore
Technologies Inc. F-12
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


Statement
      of Cash Flows
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006(in
      thousands)Operating
      activities
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            (317
                            )Investing
      activities - Net proceeds from disposition of discontinued
      operations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,643Financing
      activities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Cash
      flows from discontinued operations
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            2,326








5.    CAPITAL
ASSETS




2008
                  
                  
                  2007Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net
      Book Value
                  
                  
                  Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Net
      Book Value(in
      thousands)Computer
      hardware
                  
                  $
                  91
                  
                  
                  $
                  76
                  
                  
                  $
                  15
                  
                  
                  $
                  2,479
                  
                  
                  $
                  2,437
                  
                  
                  $
                  42Leasehold
      improvements
                  
                  
                  27
                  
                  
                  
                  23
                  
                  
                  
                  4
                  
                  
                  
                  27
                  
                  
                  
                  17
                  
                  
                  
                  10Computer
      software
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  13
                  
                  
                  
                  -Furniture
      and fixtures
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  266
                  
                  
                  
                  266
                  
                  
                  
                  -$
                  118
                  
                  
                  $
                  99
                  
                  
                  $
                  19
                  
                  
                  $
                  2,785
                  
                  
                  $
                  2,733
                  
                  
                  $
                  52




During
2008, the Company recorded capital asset amortization in the amount
of  $33,000 (2007 - $39,000, 2006 - $31,000).  Also during
2008, the Company wrote off both the costs and related accumulated depreciation
totaling $2,667,000, of assets that have been fully depreciated and are no
longer in use.  No gain or loss was recorded.








6.     TRANSACTIONS
WITH RELATED PARTIES





During
the year ended December 31, 2008, interest expense on advances from a director
was $1,000 (2007 - $1,000, 2006 - $4,000).





During
the year ended December 31, 2008, the Company received and repaid advances from
a director and officer in the amount of $59,000 (2007-
$89,000).  During the year ended December 31, 2006, the Company repaid
advances from related parties totaling $137,000.   The Company
also paid $15,000 in advisory fees to a director in connection with the sale of
ADB Systemer (See Note 4).





During
the year ended December 31, 2008, the Company paid $9,000 (2007 - $60,000) in
interest relating to the secured subordinated notes to related
parties.  In addition, refer to Note 7 (c).





7.     NOTES
PAYABLE AND DEMAND LOAN





a)
              The
      Series H secured subordinated notes with a principal balance of $170,000
      matured on October 21, 2007.  The Company entered into an
      agreement with the debt holders in December 2007 to repay the accrued
      interest of $60,000 in cash in January 2008 and the principal of $170,000
      over a two year term at an interest rate of 11 percent, in blended
      quarterly interest and principal payments of $24,000.  As of the
      date of refinancing, the total amount to be repaid was $230,000 ($145,000
      representing the current portion of notes payable including the accrued
      interest of $60,000, and $85,000 representing the long term portion of
      notes payable).  The notes payable were issued to private
      investors including an amount totaling $20,000 issued to a
      director/officer of the Company.  The notes payable mature on
      December 31, 2009 and are secured as per the Series H security
      terms.





During
the year ended December 31, 2008, the Company repaid $132,000 and accrued
additional interest in the amount of $17,000.  The balance outstanding
as at December 31, 2008 is $115,000.




Northcore
Technologies Inc. F-13
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


b)
              During
      the quarter ended March 31, 2008, the Company entered into an agreement
      with the remaining Series G debt holders to repay the accrued interest of
      $113,000 and the principal of $240,000 over a two year term at an interest
      rate of 12 percent in blended interest and principal quarterly payments of
      $40,000.  As of the date of refinancing, the total refinanced
      amount was $353,000 ($233,000 representing the current portion of notes
      payable including the accrued interest of $113,000, and $120,000
      representing the long term portion of notes payable).  The notes
      payable mature on December 31, 2009 and are secured as per the Series G
      security terms.  The classification of this obligation at
      December 31, 2007 was reflected based on these
  terms.





During
the year ended December 31, 2008, the Company repaid $165,000 and accrued
additional interest in the amount of $27,000.  The balance outstanding
as at December 31, 2008 is $215,000.





c)
              During
      the quarter ended March 31, 2008, the Company entered into an agreement to
      assign $50,000 face value of the Series K secured subordinated notes held
      by a director and shareholder of the Company to a Canadian financial
      institution.  The Company agreed to repay the accrued interest
      and related costs of $30,000 and the principal of $50,000 over a two year
      term at an interest rate of 11 percent in blended interest and principal
      quarterly payments of $11,000.  The total refinanced amount was
      $80,000 ($52,000 representing the current portion of notes payable and
      accrued interest and $28,000 representing the long term portion of notes
      payable and accrued interest).  The notes payable mature on
      December 31, 2009 and are secured as per the Series K security
      terms.





Upon
the initial issuance of the Series K secured subordinated notes, the Company
separated the liability and equity components.  For the $50,000 face
value, the resulting pro rata fair values of the liability component of the
notes and the conversion features of the shares were $27,000 and $23,000,
respectively.  The liability component was to be accreted to $50,000
over the term of the Series K notes through the recording of non-cash interest
expense until such date as which the underlying notes were converted into common
shares.





As
of the date of the assignment, the liability component had been accreted to
$34,000.  As a result of the refinancing and the terms of the note
payable, the Company recorded the following amounts during the quarter ended
March 31, 2008: (1) the equity component of the Series K notes of $23,000 was
transferred to contributed surplus; (2) the 29,000 common shares recorded in the
amount of $4,000, which were issued in settlement of previously recorded
interest expense of $4,000 on the $50,000 of Series K notes up to the period
ended March 31, 2008 were cancelled and the amount was reclassified to the notes
payable balance; (3) the 110,000 common shares recorded in the amount of
$17,000, which were issued in settlement of the previously recorded interest
expense of $17,000 on the Series G notes that were rolled into the $50,000 of
Series K notes were cancelled and the amount was reclassified to the notes
payable balance; and (4) a charge of $25,000 was recorded in general and
administrative expenses in order to record the face amount of the note payable
as of the date of refinancing.





During
the year ended December 31, 2008, the Company repaid $33,000 and accrued
additional interest in the amount of $5,000.  The balance outstanding
as at December 31, 2008 is $52,000.





d)
            During
      the year ended December 31, 2007, the Company received operating loans
      from a private investor in the amount of $340,000.  The loans
      bore interest at 8 percent, were due on demand and were secured by a
      general security agreement on the assets of the Company.  The
      loans were settled during 2007 through the issuance of common shares as
      part of the rights offering (See Note 10
(d)).





8.   SECURED
SUBORDINATED NOTES





a)
              During the year ended December
      31, 2008, the Company issued Series N secured subordinated notes with a
      face value of $600,000.  The Series N notes mature on December
      12, 2011, have an annual interest rate of 10 percent and are convertible
      into equity units at a price of $0.10 per unit.  Interest is
      payable in cash upon the earlier of each quarter end, conversion, or
      maturity of the notes.   Each equity unit consists of one
      common share and one share-purchase warrant with an exercise price of
      $0.15 per warrant.  The warrants expire on December 12,
      2011.  Dundee Securities Corporation received a brokerage
      commission of four percent on a portion of the private
      placement.  The afore-mentioned conversion provisions are
      subject to a four month and one day hold period.  The Series N
      notes are secured by a general security agreement on the assets of the
      Company, subordinated to the security claims provided to the holders of
      previously issued
notes.




Northcore
Technologies Inc. F-14
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series N secured subordinated notes.  The Company
determined the fair value of the liability component of the Series N notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series N notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $211,000, $215,000 and $174,000,
respectively.  The liability component will be accreted to $600,000
over the term of the Series N notes through the recording of a non-cash interest
expense until such date at which the underlying notes are converted into common
shares.  Financing costs in the amount of $8,000 were expensed in
general and administrative expenses as incurred on the issuance of Series N
notes.





b)
            During
      the year ended December 31, 2008, the Company issued Series M secured
      subordinated notes with a face value of $678,000.  The Series M
      notes mature on July 11, 2013, have an annual interest rate of 10 percent
      and are convertible into equity units at a price of $0.05 per
      unit.  Interest is payable in cash upon the earlier of
      conversion or maturity of the notes.   Each equity unit
      consists of one common share and one share-purchase warrant with an
      exercise price of $0.10 per warrant.  The warrants expire on the
      earlier of (i) July 11, 2013 and (ii) the date which is twenty days
      following the issuance of a notice by the Company to holders confirming
      that the closing price of the Company’s common shares on the Toronto Stock
      Exchange, was greater than or equal to $0.20 for the preceding 10
      consecutive trading days.  Dundee Securities Corporation
      received a brokerage commission of four percent on a portion of the
      private placement.  The afore-mentioned conversion provisions
      are subject to a four month and one day hold period.  The Series
      M notes are secured by a general security agreement on the assets of the
      Company, subordinated to the security claims provided to the holders of
      previously issued notes.





As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series M secured subordinated notes.  The Company
determined the fair value of the liability component of the Series M notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series M notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $117,000, $315,000 and $246,000,
respectively.  The liability component will be accreted to $678,000
over the term of the Series M notes through the recording of a non-cash interest
expense until such date at which the underlying notes are converted into common
shares.  Financing costs in the amount of $8,000 were expensed in
general and administrative expenses as incurred on the issuance of Series M
notes.





c)
            During
      the year ended December 31, 2008, the Company issued Series L secured
      subordinated notes with a face value of $525,000.  The Series L
      notes mature March 31, 2013, have an annual interest rate of 10 percent
      and are convertible into equity units at a price of $0.10 per
      unit.  Interest for the first two years is payable in shares
      upon the earlier of conversion or each anniversary date of the closing
      date.  Interest payable for the remaining term of the notes is
      payable in cash upon the earlier of conversion, each anniversary date of
      the closing date, or maturity.   Each equity unit consisted
      of one common share and one share-purchase warrant with an exercise price
      of $0.15 per warrant.  The warrants expire on the earlier of (i)
      March 31, 2013 and (ii) the date which is sixty days following the
      issuance of a notice by the Company to holders confirming that the closing
      price of the Company’s common shares, on the Toronto Stock Exchange, was
      greater than or equal to $0.36 for any 10 consecutive trading
      days.  Dundee Securities Corporation received a brokerage
      commission of four percent on a portion of the private
      placement.  The afore-mentioned conversion provisions are
      subject to a four month and one day holding period.  The Series
      L notes are secured by a general security agreement on the assets of the
      Company, subordinated to the security claims provided to the holders of
      previously issued notes.




Northcore
Technologies Inc. F-15
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series L secured subordinated notes.  The Company
determined the fair value of the liability component of the Series L notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series L notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $119,000, $221,000 and $185,000,
respectively.  The liability component will be accreted to $525,000
over the term of the Series L notes through the recording of a non-cash interest
expense until such date at which the underlying notes are converted into common
shares.  Financing costs in the amount of $21,000 were expensed in
general and administrative expenses as incurred on the issuance of Series L
notes.





d)
            During
      the year ended December 31, 2007, the Company issued Series K secured
      subordinated notes with a face value of $1,360,000.  The Series
      K notes were issued to private investors including an amount totaling
      $60,000 issued to two directors/officers of the Company.  The
      Series K notes mature June 15, 2009, have an annual interest rate of 11
      percent and are convertible into common shares of the Company at a price
      of $0.12 per common share.  Interest on the Series K notes is
      payable in common shares upon the earlier of each quarter end, maturity or
      conversion of the notes.  At any time after the closing, the
      Series K notes, including any accrued interest thereon, will be
      automatically converted into common shares at the Conversion Price when
      the volume weighted average trading price of the common shares through its
      principal trading market for a 10 consecutive trading day period is $0.30
      or more.  The Series K notes are secured by a general security
      agreement on the assets of the Company, subordinated to the security
      claims provided to the holders of previously issued
  notes.





As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series K secured subordinated notes.  The Company
determined the fair value of the liability component of the Series K notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series K notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the shares were $744,000 and
$616,000, respectively.  The liability component will be accreted to
$1,360,000 over the term of the Series K notes through the recording of a
non-cash interest expense until such date at which the underlying notes are
converted into common shares.





During
the quarter ended March 31, 2008, the Company entered into an agreement to
assign $50,000 face value of the Series K secured subordinated notes held by a
director and shareholder of the Company to a Canadian financial institution (See
Note 7 (c)).





e)
            During
      the year ended December 31, 2006, the Company issued Series J secured
      subordinated notes with a face value of $755,000.  The Series J
      notes were issued to private investors including an amount totaling
      $105,000 issued to three directors/officers of the Company. The Series J
      notes mature February 8, 2011, have an annual interest rate of 11 percent
      and are convertible into equity units at a price of $0.15 per
      unit.  Interest for the first year is payable in shares of the
      Company with the provision that the total number of shares issued as
      interest payment cannot exceed 6,529,959 shares.  Interest
      payable for the remaining term of the notes is payable in cash upon the
      earlier of maturity and conversion.   Each equity unit
      consisted of one common share and one share-purchase warrant with an
      exercise price of $0.20 per warrant.  The warrants expire on the
      earlier of (i) February 8, 2009 and (ii) the date which is sixty days
      following the issuance of a notice by the Company to holders confirming
      that the closing price of the Company’s common shares, on the Toronto
      Stock Exchange, was greater than or equal to $0.35 for any 10 consecutive
      trading days.  The afore-mentioned conversion provisions are
      subject to a four month and one day holding period.  The Series
      J notes are secured by a general security agreement on the assets of the
      Company, subordinated to the security claims provided to the holders of
      previously issued notes.





As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series J secured subordinated notes.  The Company
determined the fair value of the liability component of the Series J notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series J notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $202,000, $353,000 and $200,000,
respectively.  The liability component will be accreted to $755,000
over the term of the Series J notes through the recording of a non-cash interest
expense until such date at which the underlying notes are converted into common
shares.




Northcore
Technologies Inc. F-16
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


During
2006, $470,000 (face value) of the Series J notes (book value of $156,000) were
converted into 3,133,000 equity units represented by 3,133,000 common shares
valued at $220,000 and 3,133,000 warrants valued at $125,000.





During
2008, $60,000 (face value) of the Series J notes (book value of $27,000) were
converted into 400,000 equity units represented by 400,000 common shares valued
at $28,000 and 400,000 warrants valued at $16,000 (See table
below).





f)
              During
      the year ended December 31, 2005, the Company issued Series I secured
      subordinated notes with a face value of $1,200,000.  The Series
      I notes were issued to private investors including an amount totaling
      $110,000 issued to four directors/officers of the Company. The Series I
      notes mature September 12, 2010, have an annual interest rate of 11
      percent and are convertible into equity units at a price of $0.15 per
      unit.  Interest for the first year is payable in shares with the
      provision that the total number of shares issued as interest payment
      cannot exceed 974,000 shares.  Any of the first year interest
      not paid through the issuance of shares will be paid in
      cash.  Interest payable for the remaining term of the notes is
      payable in cash upon the earlier of maturity and
      conversion.   Each equity unit consisted of one common
      share and one share-purchase warrant with an exercise price of
      $0.20.  The warrants expire on September 12,
      2010.  The Series I notes are secured by a general security
      agreement on the assets of the Company, subordinated to the security
      claims provided to the holders of previously issued
  notes.





As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series I secured subordinated notes.  The Company
determined the fair value of the liability component of the Series I notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series I notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $280,000, $472,000 and $448,000,
respectively.  The liability component will be accreted to $1,200,000
over the term of the Series I notes through the recording of a non-cash interest
expense until such date at which the underlying notes are converted into common
shares.





Financing
costs in the amount of $137,000 were incurred in the issuance of the Series I
notes.  A portion of these financing costs, in the amount of $32,000
attributed to the liability component of the notes was allocated to deferred
charges.  The remaining financing costs of $105,000 attributed to the
equity portions of the notes were recorded as a reduction to the conversion
feature on secured subordinated notes amount within shareholders’
deficiency.





In
addition to the financing costs described above, the Company issued to the
financing agent, PowerOne Capital Markets Limited (“PowerOne”), an option to
purchase up to 747,000 equity units at a purchase price of $0.15 per
unit.  The option expires on September 12, 2010.  Each
equity unit consists of one common share and one share-purchase warrant with an
exercise price of $0.20.  The share-purchase warrants expire on
September 12, 2010.  Using the Cox-Rubinstein binomial valuation
model, the Company has determined the fair value of these equity units to be
$193,000 and included this amount in other options.  The portion of
the fair value of this option, in the amount of $45,000, attributable to the
liability component of the notes was allocated to deferred
charges.  The remaining portion, in the amount of $148,000,
attributable to the equity components of the notes was recorded as a reduction
to the conversion feature on secured subordinated notes amount within
shareholders’ deficiency.




Northcore
Technologies Inc. F-17
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





During
2006, $900,000 (face value) of the Series I notes (book value of $291,000) were
converted into 6,000,000 equity units represented by 6,000,000 common shares
valued at $257,000 and 6,000,000 warrants valued at $243,000.





g)
              During
      the year ended December 31, 2004, the Company issued Series H secured
      subordinated notes with a face value of $520,000.  The Series H
      notes were issued to private investors including an amount totaling
      $270,000 issued to three directors/officers of the Company.  The
      Series H notes matured October 21, 2007, had an annual rate of interest of
      11 percent payable upon the earlier of maturity and conversion and were
      convertible into equity units at a price of $0.20 per
      unit.  Each equity unit consisted of one common share and one
      half of a share-purchase warrant with an exercise price of $0.40 per
      warrant.  The share-purchase warrants expired on October 21,
      2008.  The Series H secured subordinated notes were to
      automatically convert into units when the share price of the Company
      closes at or above $0.45 for 10 consecutive trading days during the
      term.  Holders could convert the notes into units at anytime
      following a four-month hold period.  If the holder did not
      convert and no automatic conversion takes place, the Company must repay
      the principal amount in cash.  In order to obtain the required
      approvals to issue the Series H notes, the Company retroactively increased
      the interest rate on the Series G notes from an annual rate of 7 percent
      to an annual rate of 11 percent. The Series H notes were secured by a
      general security agreement on the assets of the Company, subordinated to
      the security claims provided to the holders of previously issued
      notes.





As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series H secured subordinated notes.  The Company
determined the fair value of the liability component of the Series H notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series H notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $282,000, $184,000 and $54,000,
respectively.  The liability component was to be accreted to $520,000
over the term of the Series H notes through the recording of a non-cash interest
expense until such date at which the underlying notes were converted into common
shares.





Financing
costs in the amount of $43,000 were incurred in the issuance of the Series H
notes.  Included in the financing costs was the incremental interest
expense associated with the retroactive increase of the interest rate on the
Series G notes.  A portion of these financing costs, in the amount of
$23,000 attributed to the liability component of the notes was allocated to
deferred charges.  The remaining financing costs of $20,000 attributed
to the equity portions of the notes were recorded as a reduction to the
conversion feature on secured subordinated notes amount within shareholders’
deficiency.





During
2005, $350,000 (face value) of the Series H notes (book value of $226,000) were
converted into 1,750,000 equity units represented by 1,750,000 common shares
valued at $113,000 and 875,000 warrants valued at $33,000.





During
2007, the remaining $170,000 (face value) balance of the Series H notes (book
value $170,000) matured and was refinanced (See Note
7(a)).  Accordingly, 850,000 equity units represented by 850,000
common shares valued at $55,000 and 425,000 warrants valued at $17,000 were
canceled (See table below).





h)
              During
      the year ended December 31, 2004, the Company issued Series G secured
      subordinated notes with a face value of $1,710,000.  The Series
      G notes were issued to private investors including an amount totaling
      $170,000 issued to three directors/officers of the Company. The Series G
      notes matured June 15, 2007, had an annual rate of interest of 7 percent
      payable upon the earlier of maturity and conversion and were convertible
      into equity units at a price of $0.31 per unit.  Each equity
      unit consisted of one common share and one half of a share-purchase
      warrant with an exercise price of $0.50.  The share-purchase
      warrants expired on June 15, 2008.  The Series G secured
      subordinated notes were to automatically convert into units when the
      volume-weighted average share price of the Company closes above $0.70 for
      any 20 consecutive trading days.  The Series G notes were
      secured by a general security agreement on the assets of the Company,
      subordinated to the security claims provided to the holders of previously
      issued notes.




Northcore
Technologies Inc. F-18
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


As
required by Canadian GAAP, the Company separated the liability and equity
components of the Series G secured subordinated notes.  The Company
determined the fair value of the liability component of the Series G notes by
calculating the present value of the associated cash flows, using a discount
rate that reflects the Company’s underlying rate of borrowing.  The
Company determined the fair value of the conversion feature at the issue date of
the Series G notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair values of the liability component
of the notes and the conversion features of the units, comprised of shares and
attached warrants, was $959,000, $539,000 and $212,000,
respectively.  The liability component was to be accreted to
$1,710,000 over the term of the Series G notes through the recording of a
non-cash interest expense.





Financing
costs in the amount of $230,000 were incurred in the issuance of the Series G
notes.  A portion of these financing costs, in the amount of $129,000
attributed to the liability component of the notes was allocated to deferred
charges.  The remaining financing costs of $101,000 attributed to the
equity portions of the notes were recorded as a reduction to the conversion
feature on secured subordinated notes amount within shareholders’
deficiency.





In
addition to the financing costs described above, the Company issued to First
Associates Investment Inc. (“First Associates”) an option to purchase up to
485,000 equity units at a purchase price of $0.31 per unit.  The
option expired on June 15, 2006.  Each equity unit consisted of one
common share and one half of a share-purchase warrant with an exercise price of
$0.50.  The share-purchase warrants expired on June 15,
2008.  Using the Cox-Rubinstein binomial valuation model, the Company
determined the fair value of these equity units to be $59,000.  The
portion of the fair value of these options, in the amount of $33,000,
attributable to the liability component of the notes was allocated to deferred
charges.  The remaining portion, in the amount of $26,000,
attributable to the equity components of the notes was recorded as an increase
to shareholders’ deficiency.





Subsequent
to the issuance of the Series G notes, the interest rate payable on the notes
was retroactively increased to 11 percent.  The increase in the
interest rate was a condition of the issuance of the Series H notes (See (g)
above).





During
2006, $60,000 (face value) of the Series G notes (book value of $51,000) was
repaid. Accordingly, 194,000 equity units represented by 194,000 common shares
valued at $16,000 and 96,000 warrants valued at $6,000 were
canceled.





During
2007, $50,000 (face value) of the Series G notes (book value of $47,000) were
converted into 162,000 equity units represented by 162,000 common shares valued
at $13,000 and 81,000 warrants valued at $5,000 (See table below).





During
2007, the remaining $1,600,000 (face value) balance of the Series G notes (book
value $1,600,000) matured.  Accordingly, 5,161,000 equity units
represented by 5,161,000 common shares valued at $419,000 and 2,580,000 warrants
valued at $165,000 were canceled (See table below).





In
connection with the refinancing of the maturing Series G notes in 2007, the
Company completed a private placement issuance of the new Series K secured
subordinated notes with a face amount of $1,360,000 (See (d) above), to existing
holders of $1,360,000 of the Series G secured subordinated notes.  The
Company refinanced the remaining balance of $240,000 Series G notes through the
issuance of notes payable (See Note 7 (b)).





In
addition, on June 15, 2007, the Company completed a private placement issuance
of 2,992,000 common shares, at $0.15 per share common share, to holders of
$1,360,000 of the Series G secured subordinated notes, in payment of the related
accrued interest on $1,360,000 of the Series G secured subordinated notes of
$449,000 (See Note 10 (c)).




Northcore
Technologies Inc. F-19
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





i)
            During
      the year ended December 31, 2008, the Company recorded cash interest
      expense aggregating $335,000 (2007 - $272,000, 2006 - $345,000) and
      interest accretion of $394,000 (2007 - $333,000, 2006 -
      $454,000).





j)
            As
      at December 31, 2008, accrued liabilities include $234,000 (2007 -
      $109,000) of unpaid interest payable relating to the secured subordinated
      notes.





k)
              Accrued
      liabilities include accrued interest payable to related parties as
      follows:




2008
                    
                    
                    2007(in
      thousands)Series
      I
                    
                    $
                    28
                    
                    
                    $
                    16Series
      J
                    
                    
                    22
                    
                    
                    
                    10Series
      K
                    
                    
                    -
                    
                    
                    
                    2Total
                    
                    $
                    50
                    
                    
                    $
                    28





l)
              Interest
      payments relating to the secured subordinated notes totaling $9,000,
      $60,000 and $3,000 were made to  related parties during the
      years ended December 31, 2008, 2007 and 2006,
  respectively.





m)
              The
      following summarizes the face and fair values of the liability and equity
      components of the secured subordinated
notes.




Secured
      Subordinated Notes
                            
                            2008
                            
                            
                            2007Face
      Value
                            
                            
                            Carrying
      Value
                            
                            
                            Face
      Value
                            
                            
                            Carrying
      Value(in
      thousands)Opening
      balance
                            
                            $
                            1,945
                            
                            
                            $
                            1,075
                            
                            
                            $
                            2,405
                            
                            
                            $
                            1,926Change
      in accounting policy (Note 3)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (111
                            )Issuance
      of notes:Series
      N (Note 8 (a))
                            
                            
                            600
                            
                            
                            
                            211
                            
                            
                            
                            -
                            
                            
                            
                            -Series
      M (Note 8 (b))
                            
                            
                            678
                            
                            
                            
                            117
                            
                            
                            
                            -
                            
                            
                            
                            -Series
      L (Note 8 (c))
                            
                            
                            525
                            
                            
                            
                            119
                            
                            
                            
                            -
                            
                            
                            
                            -Series
      K (Note 8 (d))
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,360
                            
                            
                            
                            744Accreted
      (non-cash) interest
                            
                            
                            -
                            
                            
                            
                            394
                            
                            
                            
                            -
                            
                            
                            
                            333Conversion
      of notes:Series
      J (Note 8 (e))
                            
                            
                            (60
                            )
                            
                            
                            (27
                            )
                            
                            
                            -
                            
                            
                            
                            -Series
      G (Note 8 (h))
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (50
                            )
                            
                            
                            (47
                            )Maturity
      of notes:Series
      H (Note 8 (g))
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (170
                            )
                            
                            
                            (170
                            )Series
      G (Note 8 (h))
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,600
                            )
                            
                            
                            (1,600
                            )Refinancing
      of notes:Series
      K (Note 8 (d))
                            
                            
                            (50
                            )
                            
                            
                            (34
                            )
                            
                            
                            -
                            
                            
                            
                            -Closing
      balance
                            
                            $
                            3,638
                            
                            
                            $
                            1,855
                            
                            
                            $
                            1,945
                            
                            
                            $
                            1,075Current
      portion of notes
                            
                            $
                            1,310
                            
                            
                            $
                            1,125
                            
                            
                            $
                            -
                            
                            
                            $
                            -Long
      term portion of notes
                            
                            
                            2,328
                            
                            
                            
                            730
                            
                            
                            
                            1,945
                            
                            
                            
                            1,075Closing
      balance
                            
                            $
                            3,638
                            
                            
                            $
                            1,855
                            
                            
                            $
                            1,945
                            
                            
                            $
                            1,075




Northcore
Technologies Inc. F-20
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




Conversion
      Features on Secured Subordinated Notes Including Conversion of Attached
      Warrants
                                      
                                      2008
                                      
                                      
                                      2007Common
      Shares Issuable
                                      
                                      
                                      Carrying
      Value
                                      
                                      
                                      Common
      Shares Issuable
                                      
                                      
                                      Carrying
      Value(in
      thousands of shares and dollars)Opening
      balance
                                      
                                      
                                      19,133
                                      
                                      
                                      $
                                      991
                                      
                                      
                                      
                                      17,059
                                      
                                      
                                      $
                                      1,049Issuance
      of notes:Series
      N (Note 8 (a))
                                      
                                      
                                      12,000
                                      
                                      
                                      
                                      389
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Series
      M (Note 8 (b))
                                      
                                      
                                      27,120
                                      
                                      
                                      
                                      561
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Series
      L (Note 8 (c))
                                      
                                      
                                      10,500
                                      
                                      
                                      
                                      406
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Series
      K (Note 8 (d))
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      11,333
                                      
                                      
                                      
                                      616Conversion
      of notes:Series
      J (Note 8 (e))
                                      
                                      
                                      (800
                                      )
                                      
                                      
                                      (44
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Series
      G (Note 8 (h))
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (243
                                      )
                                      
                                      
                                      (18
                                      )Maturity
      of notes:Series
      H (Note 8 (g))
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,275
                                      )
                                      
                                      
                                      (72
                                      )Series
      G (Note 8 (h))
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (7,741
                                      )
                                      
                                      
                                      (584
                                      )Refinancing
      of notes:Series
      K (Note 8 (d))
                                      
                                      
                                      (416
                                      )
                                      
                                      
                                      (23
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Closing
      balance
                                      
                                      
                                      67,537
                                      
                                      
                                      $
                                      2,280
                                      
                                      
                                      
                                      19,133
                                      
                                      
                                      $
                                      991






9.      INCOME
TAXES





The
Company accounts for income taxes under the asset and liability
method.  Under the asset and liability method, a future tax asset is
recorded based upon tax losses carried forward and differences in tax and
accounting values in the Company’s assets and liabilities.  The tax
asset is reduced by a valuation allowance to the extent that it is more likely
than not that the asset would not be realized.  The valuation
allowance is reviewed and adjusted as appropriate for each reporting
period.  At December 31, 2008 and 2007, the Company established the
valuation allowance at 100 percent of the future tax asset.




2008
                      
                      
                      2007(in
      thousands)FUTURE
      TAX ASSETTax
      losses carried forward
                      
                      $
                      6,582
                      
                      
                      $
                      6,800Difference
      in tax and accounting valuationsfor
      capital assets and investments
                      
                      
                      69
                      
                      
                      
                      896,651
                      
                      
                      
                      6,889Valuation
      allowance
                      
                      
                      (6,651
                      )
                      
                      
                      (6,889
                      )Future
      tax asset
                      
                      $
                      -
                      
                      
                      $
                      -PROVISION
      FOR INCOME TAXESIncome
      taxes at statutory rate
                      
                      $
                      (789
                      )
                      
                      $
                      (786
                      )Foreign
      income affected at higher rates
                      
                      
                      -
                      
                      
                      
                      (21
                      )Change
      in enacted rates
                      
                      
                      106
                      
                      
                      
                      1,241Non-taxable
      income on inter-company debt forgiveness
                      
                      
                      -
                      
                      
                      
                      (2,385
                      )Non-deductible
      portion of capital loss
                      
                      
                      -
                      
                      
                      
                      1,024Non-deductible
      interest on subordinated notes
                      
                      
                      114
                      
                      
                      
                      97Expiry
      of losses in subsidiaries
                      
                      
                      790
                      
                      
                      
                      -Stock-based
      compensation not deductible for tax
                      
                      
                      12
                      
                      
                      
                      28Other,
      net
                      
                      
                      5
                      
                      
                      
                      (64
                      )238
                      
                      
                      
                      (866
                      )Change
      to valuation allowance
                      
                      
                      (238
                      )
                      
                      
                      866Provision
      for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -
  Northcore
Technologies Inc. F-21
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




The
provision for income taxes differs from the amount computed by applying the
combined Canadian Federal and Provincial statutory income tax rate of 33.5
percent (2007 - 34 percent) to the loss from continuing operations before income
taxes.  The sources and tax effects of the differences are indicated
above.





Tax
loss carry-forwards at December 31, 2008 expire as follows:




Year
                                      
                                      Amount(in
      thousands)2009
                                      
                                      $
                                      1,4082010
                                      
                                      
                                      3,7822014
                                      
                                      
                                      3,0472015
                                      
                                      
                                      3,3512026
                                      
                                      
                                      2,5882027
                                      
                                      
                                      2,0502028
                                        Tax
      loss carry-forwards that do not expire
                                      
                                      
                                      1,988
      9,587$
                                      27,801




The
Company has net operating loss carry-forwards of $18,214,000 that expires in
years 2009 through 2028, and indefinite loss carry-forwards of
$9,587,000.  The indefinite loss carry-forwards are comprised of net
capital losses from continuing Canadian operations of $4,479,000 and from
discontinued operations of $5,108,000, which are available to reduce future
year’s capital gains.




10.           SHARE
CAPITAL





a)
            Authorized




Unlimited
      number of common sharesUnlimited
      number of preference shares - issuable in
series




b)  Outstanding Common
Shares




2008
                              
                              
                              2007
                              
                              
                              2006Number
                              
                              
                              Amount
                              
                              
                              Number
                              
                              
                              Amount
                              
                              
                              Number
                              
                              
                              Amount(in
      thousands of shares and dollars)Opening
      balance
                              
                              
                              108,287
                              
                              
                              $
                              104,495
                              
                              
                              
                              83,742
                              
                              
                              $
                              101,867
                              
                              
                              
                              74,120
                              
                              
                              $
                              100,859Shares
      issued pursuant to:Conversion of
      debentures (Note 8)
                              
                              
                              400
                              
                              
                              
                              55
                              
                              
                              
                              162
                              
                              
                              
                              59
                              
                              
                              
                              9,133
                              
                              
                              
                              924Payment
      of interest (Note 10 (c))
                              
                              
                              979
                              
                              
                              
                              147
                              
                              
                              
                              3,755
                              
                              
                              
                              557
                              
                              
                              
                              489
                              
                              
                              
                              84Shares
      cancelled (Note 7 (c))
                              
                              
                              (139
                              )
                              
                              
                              (21
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Rights
      offering (Note 10 (d))
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              20,628
                              
                              
                              
                              2,012
                              
                              
                              
                              -
                              
                              
                              
                              -Closing
      balance
                              
                              
                              109,527
                              
                              
                              $
                              104,676
                              
                              
                              
                              108,287
                              
                              
                              $
                              104,495
                              
                              
                              
                              83,742
                              
                              
                              $
                              101,867





In
addition to the above, the conversion of the remaining secured subordinated
notes would result in the issuance of 2,000,000 (2007 - 2,000,000) common shares
for Series I notes, 1,500,000 (2007 - 1,900,000) common shares for Series J
notes, 10,917,000 (2007 - 11,333,000) common shares for Series K notes,
5,250,000 (2007 - nil) common shares for Series L notes, 13,560,000 (2007 - nil)
common shares for Series M notes, and 6,000,000 (2007 - nil) common shares for
Series N notes.





c)
            Payment of
      Interest





During
the year ended December 31, 2008, accrued interest in the amount of $147,000
relating to Series K notes was settled through the issuance of 979,000 common
shares based on a fair value of $0.15 per share.




Northcore
Technologies Inc. F-22
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)







During
the year ended December 31, 2007, upon maturity of Series G notes, accrued
interest in the amount of $449,000 was settled through the issuance of 2,992,000
common shares based on a fair value of $0.15 per share.





During
the year ended December 31, 2007, accrued interest in the amount of $108,000
relating to Series I, J and K was settled through the issuance of 763,000 common
shares based on an average fair value of $0.15 per share.





During
the year ended December 31, 2006, upon conversion of Series I notes, accrued
interest in the amount of $60,000 was settled through the issuance of 361,000
common shares based on a fair value of $0.16 per share.





During
the year ended December 31, 2006, upon conversion of Series J notes, accrued
interest in the amount of $24,000 was settled through the issuance of 128,000
common shares based on a fair value of $0.19 per share.





d)
            Rights
      Offering





On
July 23, 2007, the Company offered eligible shareholders as of the record date
of July 30, 2007, approximately 86,896,000 rights to subscribe for up to
approximately 21,724,000 additional common shares in the
Company.  Each eligible holder received one right for every common
share held in the Company.  Four rights entitled the holder to
purchase one common share in the Company, priced at $0.08
each.  Shareholders who exercised all of their rights were also
entitled to acquire supplemental shares under the provisions of the additional
subscription privilege.  Each shareholder with an address of record in
the provinces or territories of Canada was eligible for the rights
offering.  The rights offering closed on August 22, 2007.




In
connection with the rights offering, the Company recorded a distribution to its
shareholders of $449,000 which was valued using the Cox-Rubinstein binomial
valuation model with the following assumptions: volatility of 62 percent, a risk
free interest rate of 4.65 percent, a maturity of 23 days and a dividend yield
of nil.





The
distribution was recorded as a reduction to contributed surplus.  Upon
issuance of the common shares under the rights offering, the value of the
exercised rights of $427,000 was recorded as part of the common shares issued
and the balance of $22,000 remained in contributed surplus.





As
a result of the rights offering, the Company raised net proceeds of $1,245,000
and settled demand loans of $340,000 through the issuance of 20,628,302 common
shares, each priced at $0.08 per share.





e)
            Loss Per
      Share





The
following table sets forth the computation of basic and diluted loss per
share.




2008
                    
                    
                    2007
                    
                    
                    2006(in
      thousands, except per share amounts)Numerator:Loss
      from continuing operations
                    
                    $
                    (2,355
                    )
                    
                    $
                    (2,312
                    )
                    
                    $
                    (2,770
                    )Income
      from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,122Loss
      for the year
                    
                    $
                    (2,355
                    )
                    
                    $
                    (2,312
                    )
                    
                    $
                    (648
                    )Denominator:Weighted
      average number of shares outstanding, basic and diluted
                    
                    
                    108,861
                    
                    
                    
                    93,094
                    
                    
                    
                    79,933Loss
      per share from continuing operations,basic
      and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.03
                    )Loss
      per share, basic and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.01
                    )




Northcore
Technologies Inc. F-23
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




For each fiscal year,
the Company excluded the effect of all convertible debt, stock options and
share-purchase warrants, as their impact would have been
anti-dilutive.





11.           CONTRIBUTED
SURPLUS




a)
            The
      following table summarizes the transactions within contributed
      surplus.




2008
                      
                      
                      2007(in
      thousands)Opening
      balance
                      
                      $
                      2,099
                      
                      
                      $
                      1,819Allocation
      of recorded value of expired warrants (Note 11 (b))
                      
                      
                      39
                      
                      
                      
                      52Refinancing
      of note (Note 7 (c))
                      
                      
                      23
                      
                      
                      
                      -Rights
      offering (Note 10 (d))
                      
                      
                      -
                      
                      
                      
                      (427
                      )Repayment
      of secured subordinated notes (Note 11 (c))
                      
                      
                      -
                      
                      
                      
                      655Closing
      balance
                      
                      $
                      2,161
                      
                      
                      $
                      2,099




b)
            During the year ended December
      31, 2008, recorded value of $39,000 (2007 - $52,000) related to expired
      warrants was allocated from warrants to contributed surplus (See Note 12
      (b)).





c)
            During
      the year ended December 31, 2007, recorded value of $655,000 related to
      the maturity of secured subordinated notes was allocated from conversion
      features on secured subordinated notes to contributed surplus (See Note
      8).





12.
            WARRANTS





a)
            The
      following table summarizes the transactions within
    warrants.




2008
                          
                          
                          2007Number
                          
                          
                          Amount
                          
                          
                          Number
                          
                          
                          Amount(in
      thousands of warrants and dollars)Opening
      balance
                          
                          
                          16,339
                          
                          
                          $
                          533
                          
                          
                          
                          17,064
                          
                          
                          $
                          580Warrants
      issued pursuant to:Conversion of
      debentures (Note 8)
                          
                          
                          400
                          
                          
                          
                          16
                          
                          
                          
                          81
                          
                          
                          
                          5Warrants
      expired (Note 12 (b))
                          
                          
                          (5,956
                          )
                          
                          
                          (39
                          )
                          
                          
                          (806
                          )
                          
                          
                          (52
                          )Closing
      balance
                          
                          
                          10,783
                          
                          
                          $
                          510
                          
                          
                          
                          16,339
                          
                          
                          $
                          533





In
addition to the above, the conversion of the remaining secured subordinated
notes would result in the issuance of 2,000,000 (2007 - 2,000,000) common
share-purchase warrants for Series I notes, 1,500,000 (2007 - 1,900,000) common
share-purchase warrants for Series J notes, 5,250,000 (2007 - nil) common
shares-purchase warrants for Series L notes, 13,560,000 (2007 - nil) common
shares-purchase warrants for Series M notes, and 6,000,000 (2007 - nil) common
shares-purchase warrants for Series N notes.





b)
            During
      the year ended December 31, 2007, the Company issued 81,000 common
      share-purchase warrants with an exercise price of $0.50 and an expiry date
      of June 15, 2008 as a result of the conversion of the Series G
      notes.  These warrants expired unexercised on June 15, 2008 and
      were accordingly cancelled.





During
the year ended December 31, 2005, the Company issued 875,000 common
share-purchase warrants with an exercise price of $0.40 and an expiry date of
October 21, 2008 as a result of the conversion of the Series H
notes.  These warrants expired unexercised on October 21, 2008 and
were accordingly cancelled.





During
the year ended December 31, 2004, the Company issued 5,000,000 common
share-purchase warrants with an exercise price of $0.35 and an expiry date of
December 6, 2008 as a result a private placement.  These warrants
expired unexercised on December 6, 2008 and were accordingly
cancelled.





During
the year ended December 31, 2004, the Company issued 806,000 common
share-purchase warrants with an exercise price of $0.50 and an expiry date of
May 19, 2007 as a result of the conversion of the Series F
notes.  These warrants expired unexercised on May 19, 2007 and were
accordingly cancelled.




Northcore
Technologies Inc. F-24
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





13.
            STOCK
      OPTIONS




a)
            Stock
      options are comprised of the following
  components:





2008
                          
                          
                          2007Number
                          
                          
                          Amount
                          
                          
                          Number
                          
                          
                          Amount(in
      thousands of options and dollars)Employees
      (Note 13 (b))
                          
                          
                          3,446
                          
                          
                          $
                          1,273
                          
                          
                          
                          3,532
                          
                          
                          $
                          1,230Non-employees
                          
                          
                          -
                          
                          
                          
                          116
                          
                          
                          
                          -
                          
                          
                          
                          116Total
                          
                          
                          3,446
                          
                          
                          $
                          1,389
                          
                          
                          
                          3,532
                          
                          
                          $
                          1,346


b)
            Employee Stock
      Options




The
Company has a stock option plan which provides for the issuance of stock options
to employees, which may expire as much as 10 years from the date of grant, at
prices not less than the fair market value of the common shares on the date of
grant. A total of 5,350,000 options has been authorized by the Company’s
shareholders for issuance under the stock option plan.





The
Management Resources and Compensation Committee of the Board of Directors
reserves the right to determine the vesting periods to stock options
granted.  The options expire between 2010 and 2013.





A
summary of changes in the employee stock option plan for the two years ended
December 31, 2008 is as follows:





2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Number
      of Options
                      (in
      thousands)
                    
                    
                    Weighted
      Average Exercise PriceOpening
      balance
                    
                    
                    3,532
                    
                    
                    
                    2,220
                    
                    
                    $
                    0.16
                    
                    
                    $
                    0.18Granted
                    
                    
                    480
                    
                    
                    
                    1,350
                    
                    
                    
                    0.10
                    
                    
                    
                    0.12Cancelled
                    
                    
                    (566
                    )
                    
                    
                    (38
                    )
                    
                    
                    0.18
                    
                    
                    
                    0.14Closing
      balance
                    
                    
                    3,446
                    
                    
                    
                    3,532
                    
                    
                    $
                    0.14
                    
                    
                    $
                    0.16Exercisable,
      end of year
                    
                    
                    3,046
                    
                    
                    
                    2,921
                    
                    
                    $
                    0.15
                    
                    
                    $
                    0.18





On
December 23, 2008, the Company granted 480,000 stock options to certain
employees of the Company.  The options have an exercise price of $0.10
and expire on December 23, 2013.  These options vest quarterly over a
six-quarter period commencing with the quarter ended December 31,
2008.





On
July 11, 2007, the Company granted 1,350,000 stock options to employees,
officers and directors.  The options have an exercise price of $0.12
and expire on July 11, 2012.  Of these options, 600,000 options vested
immediately with the remaining 750,000 to vest quarterly over a six-quarter
period commencing with the quarter ended September 30, 2007.





On
August 4, 2006, the Company granted 500,000 stock options to employees, officers
and directors.  The options have an exercise price of $0.15 and expire
on August 4, 2011.  The options are comprised of two categories:
non-performance based options and performance based options.  The
non-performance based options account for 460,000 of the options granted. These
options vested quarterly over a six-quarter period commencing with the quarter
ended September 30, 2006.  The remaining 40,000 performance-based
options were granted to certain Company officers and will vest upon the
achievement of specific Company performance objectives.  None of the
performance-based options have vested as at December 31, 2008.








Northcore
Technologies Inc. F-25
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




On
June 21, 2006, the Company granted 50,000 stock options to certain employees of
the Company.  The options have an exercise price of $0.15 and expire
on June 21, 2011.  These options vested quarterly over a four-quarter
period commencing with the quarter ended June 30, 2006.




A
summary of the status of the Company’s outstanding options at December 31, 2008
is as follows:





Exercise
      Prices
                
                
                Number
      of Options Outstanding
                  (in
      thousands)
                
                
                Remaining
      Contractual Life
                  (in
      years)
                
                
                Number
      of Options Exercisable
                  (in
      thousands)$
                0.10
                
                
                
                480
                
                
                
                4.9
                
                
                
                80$
                0.12
                
                
                
                1,234
                
                
                
                3.5
                
                
                
                1,234$
                0.15
                
                
                
                390
                
                
                
                2.6
                
                
                
                390$
                0.16
                
                
                
                900
                
                
                
                2.0
                
                
                
                900$
                0.22
                
                
                
                442
                
                
                
                1.1
                
                
                
                4423,446
                
                
                
                
                
                
                
                3,046





The
aggregate exercise price for employee options outstanding at December 31, 2008
was approximately $496,000 (2007 - $549,000).





The
Company determined the fair value of employee stock option grants using the
Cox-Rubinstein binomial valuation model with the following assumptions on a
weighted average basis:





2008
                  2007
                  2006Dividend
      yield
                  -
                  -
                  -Risk
      free interest rate
                  1.82%
                  4.61%
                  4.21%Volatility
                  73.27%
                  82.82%
                  87.27%Expected
      term, in years
                  5
                  5
                  5





The
Company records compensation expense for stock options granted to employees and
directors based on the fair value method of accounting.  For the year
ended December 31, 2008, the employee stock option expense was $43,000 (2007 -
$94,000, 2006 - $137,000).  The weighted average grant date fair
values of the options issued during the year was $0.07 (2007 - $0.08, 2006 -
$0.11).








14.
            OTHER
      OPTIONS





During
the year ended December 31, 2005, the Company issued 747,000 compensation
options with a fair value of $193,000 relating to the issuance of Series I
secured subordinated notes (See Note 8 (f)).  The options entitle the
holder to purchase an equity unit at a purchase price of $0.15 per
unit.  The options expire on September 12, 2010.  Each
equity unit consists of one common share and one share-purchase warrant with an
exercise price of $0.20.  The share-purchase warrants expire on
September 12, 2010.







15.
            REVENUES





Revenues
are comprised of the following:




2008
                      
                      
                      2007
                      
                      
                      2006(in
      thousands)Services
                      
                      $
                      454
                      
                      
                      $
                      794
                      
                      
                      $
                      809Hosting
      fees
                      
                      
                      249
                      
                      
                      
                      256
                      
                      
                      
                      187Royalty
      fees
                      
                      
                      38
                      
                      
                      
                      116
                      
                      
                      
                      77$
                      741
                      
                      
                      $
                      1,166
                      
                      
                      $
                      1,073


Northcore
Technologies Inc. F-26
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


16.
            FINANCIAL
      INSTRUMENTS AND FINANCIAL RISK
FACTORS





a)
            Financial
      Instruments





The
Company has classified its financial instruments as follows:




2008
                          
                          
                          2007(in
      thousands)Financial
      Assets:Held
      for trading, measured at fair valueCash
      and cash equivalents
                          
                          $
                          460
                          
                          
                          $
                          478Loans
      and receivables, recorded at amortized costAccounts
      receivable
                          
                          $
                          305
                          
                          
                          $
                          119Financial
      Liabilities:Other
      financial liabilities, recorded at amortized costAccounts
      payable, accrued liabilities, notes payable and secured subordinated
      notes
                          
                          $
                          3,185
                          
                          
                          $
                          2,235


The
Company had neither available for sale, nor held to maturity financial
instruments during years ended December 31, 2008 and December 31,
2007.





b)
            Financial
      Risk Factors





Foreign
Exchange Risk


The
Company’s revenue from software licensing and related services and e-commerce
enabling agreements is transacted in various currencies including the Canadian
dollar, U.S. dollar, and U.K. pound.  Correspondingly, operating
expenses related to these activities are transacted in the above-denoted
currencies.  The Company does not use derivative instruments to manage
exposure to foreign exchange fluctuations.  During the year ended
December 31, 2008, the Company incurred foreign exchange losses in the amount of
$16,000 (2007 - $13,000, 2006 - $8,000), which is recorded in general and
administrative expenses.





A
10 percent change of the Canadian dollar against the following currency as at
December 31, 2008 would impact loss by the amount shown below:





December
      31, 2008(in
      thousands)U.S.
      dollar
                          
                          $
                          55U.K.
      pound
                          
                          
                          6$
                          61





Interest
Rate Risk


The
Company has limited exposure to fluctuations in interest rates.  The
Company does not use derivative instruments to reduce its exposure to interest
rate risk.





Credit
Risk


Credit
risk arises from the potential that a customer will fail to meet its contractual
obligations under a software licensing and related services agreement or an
e-commerce enabling agreement.





The
Company invests its cash and cash equivalents in investments that are of high
credit quality.  Given these high credit ratings, the Company does not
expect any investees to fail to meet their obligations.





In
2008, two customers accounted for 61 percent and 13 percent, respectively, (2007
- two customers accounted for 69 percent and 10 percent, respectively, 2006 -
three customers accounted for 34 percent, 18 percent and 12 percent,
respectively) of total revenues.  At December 31, 2008, three
customers accounted for 66 percent, 13 percent and 12 percent, respectively,
(2007 - three customers accounted for 52 percent, 24 percent and 11 percent,
respectively) of total accounts receivable.




Northcore
Technologies Inc. F-27
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)


The
following table summarizes the aging of accounts receivable as at the reporting
date.





2008
                    
                    
                    2007(in
      thousands)Current
                    
                    $
                    86
                    
                    
                    $
                    99Past
      due (61-120 days)
                    
                    
                    35
                    
                    
                    
                    -Past
      due (> 120 days)
                    
                    
                    184
                    
                    
                    
                    20$
                    305
                    
                    
                    $
                    119





The
allowance for doubtful accounts recorded for the year ended December 31, 2008
was $11,000 (2007 - $nil).





Fair
Value


The
fair value of monetary assets and liabilities approximates amounts at which they
would be exchanged between knowledgeable and unrelated persons.  The
amounts recorded in the consolidated financial statements approximate fair
value, with the exception of the secured subordinated series I, J, K, L, M and N
notes as it is not practical to determine the fair value of the notes as at
December 31, 2008 considering that they are not publicly traded.





Liquidity
Risk


Liquidity
risk is the risk that the Company will not be able to meet its financial
obligations as they come due.  The Company’s approach to managing
liquidity is to ensure that it will have sufficient liquidity to meet its
liabilities when due,  see Going Concern (Note
2).  The Company manages its liquidity risk by continuously monitoring
forecast and actual cash flows.





As
at December 31, 2008, the Company's contractual obligations and financial
liabilities, including interest payments due by periods over the next five
fiscal years, are as follows:




(in
      thousands)
                          
                          Carrying
      Value
                          
                          
                          Total
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012
                          
                          
                          2013Notes
      payable
                          
                          $
                          382
                          
                          
                          $
                          382
                          
                          
                          $
                          382
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Secured
      subordinated notes - principal repayment
                          
                          
                          1,856
                          
                          
                          
                          3,638
                          
                          
                          
                          1,310
                          
                          
                          
                          300
                          
                          
                          
                          825
                          
                          
                          
                          -
                          
                          
                          
                          1,203Secured
      subordinated notes - interest payments
                          
                          
                          234
                          
                          
                          
                          1,085
                          
                          
                          
                          185
                          
                          
                          
                          244
                          
                          
                          
                          159
                          
                          
                          
                          -
                          
                          
                          
                          497Accounts
      payable
                          
                          
                          570
                          
                          
                          
                          570
                          
                          
                          
                          570
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Accrued
      liabilities
                          
                          
                          377
                          
                          
                          
                          377
                          
                          
                          
                          377
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          3,419
                          
                          
                          $
                          6,052
                          
                          
                          $
                          2,824
                          
                          
                          $
                          544
                          
                          
                          $
                          984
                          
                          
                          $
                          -
                          
                          
                          $
                          1,700





17.   CAPITAL
DISCLOSURES





The
Company’s objective when managing capital is to safeguard its accumulated
capital in order to provide adequate return to shareholders by maintaining
sufficient levels of funds, in order to support and further expand upon the
Company’s current base of products and services.





The
capital structure of the Company consists of debt, net of cash and cash
equivalents and equity comprised of issued capital, contributed surplus and
deficit.  The Company manages its capital structure and makes
adjustments to it, based on the level of funds required to manage its
operations.  In order to achieve these objectives, the Company invests
its excess capital in highly liquid financial instruments.




Northcore
Technologies Inc. F-28
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





18.   COMMITMENTS
AND CONTINGENCIES





(a)
              Minimum
      payments under operating leases are as
follows:




Year
              Amount
                (in
      thousands)2009
              128




(b)
              The
      Company entered into a licensing agreement with NCR Corporation on April
      17th, 2002.  The agreement provides the Company with access to
      specific technology patents over a seven-year period for a minimum of US
      $100,000 annually up to a cumulative maximum of US
    $5,000,000.





19.   SUPPLEMENTAL
CASH FLOWS INFORMATION





The
following table sets forth the changes in non-cash operating working capital
items resulting from the inflow (outflow) of cash in the year.




2008
                    
                    
                    2007
                    
                    
                    2006(in
      thousands)Accounts
      receivable
                    
                    $
                    (186
                    )
                    
                    $
                    35
                    
                    
                    $
                    130Deposits
      and prepaid expenses
                    
                    
                    11
                    
                    
                    
                    25
                    
                    
                    
                    52Accounts
      payable
                    
                    
                    249
                    
                    
                    
                    (26
                    )
                    
                    
                    (320
                    )Accrued
      liabilities
                    
                    
                    342
                    
                    
                    
                    257
                    
                    
                    
                    211Deferred
      revenue
                    
                    
                    (22
                    )
                    
                    
                    (16
                    )
                    
                    
                    (23
                    )$
                    394
                    
                    
                    $
                    275
                    
                    
                    $
                    50





The
following table summarizes the non-cash financing activities of the
Company.





2008
                    
                    
                    2007
                    
                    
                    2006(in
      thousands)Issuance
      of common shares in settlement of interest payments (Note 10
      (c))
                    
                    $
                    147
                    
                    
                    $
                    557
                    
                    
                    $
                    84Issuance
      of common shares in settlement of demand loans (Note 7(d))
                    
                    
                    -
                    
                    
                    
                    340
                    
                    
                    
                    -Reduction
      in debt from conversion of secured subordinated notes (Note 8
      (m))
                    
                    
                    (27
                    )
                    
                    
                    (47
                    )
                    
                    
                    (447
                    )Reduction
      in conversion feature from conversion of secured subordinated notes (Note
      8 (m))
                    
                    
                    (44
                    )
                    
                    
                    (18
                    )
                    
                    
                    (845
                    )Issuance
      of Series K subordinated notes to refinance Series G subordinated
      notes
                    
                    
                    -
                    
                    
                    
                    1,360
                    
                    
                    
                    -Issuance
      of demand loans upon maturity of Series G subordinated
    notes
                    
                    
                    -
                    
                    
                    
                    320
                    
                    
                    
                    -





20.   INVESTMENT
IN JOINTLY CONTROLLED COMPANY




On
September 23, 2003 the Company established a joint venture with the General
Electric Capital Corporation, through its business division GE Commercial
Finance, Capital Solutions (“GE Commercial Finance”), with each entity holding a
50 percent interest in the joint venture.  The joint venture operates
under the name of GE Asset Manager, LLC.  The joint business venture
develops and markets asset management technology to customers in a broad range
of industries.  Upon the establishment of this joint venture,
1,000,000 share-purchase warrants issued by Northcore to GE
vested.  The fair value of these warrants of $188,000, calculated at
the vesting date, was reflected on the consolidated balance sheets as an
acquired agreement.  This acquired agreement was fully amortized as of
December 2004.




Northcore
Technologies Inc. F-29
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





The
consolidated financial statements of the Company reflect the Company’s pro rata
share of the joint venture’s assets, liabilities, and results of operations in
accordance with the proportionate consolidation method of
accounting.  The effect of proportionate consolidation of the joint
venture on the Company’s consolidated financial statements is summarized as
follows:





For
      the years ended December 31,
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006(in
      thousands)Consolidated Statements of
      OperationsOperating
      revenue
                    
                    $
                    80
                    
                    
                    $
                    73
                    
                    
                    $
                    72Operating
      expenses
                    
                    
                    (5
                    )
                    
                    
                    (3
                    )
                    
                    
                    (3
                    )Net
      income
                    
                    $
                    75
                    
                    
                    $
                    70
                    
                    
                    $
                    69Consolidated
      Balance SheetsCurrent
      assets
                    
                    $
                    49
                    
                    
                    $
                    36
                    
                    
                    $
                    15Current
      liabilities
                    
                    
                    (31
                    )
                    
                    
                    (31
                    )
                    
                    
                    (35
                    )Net
      investment
                    
                    $
                    18
                    
                    
                    $
                    5
                    
                    
                    $
                    (20
                    )Consolidated
      Statements of Cash FlowsOperating
      activities
                    
                    $
                    (27
                    )
                    
                    $
                    21
                    
                    
                    $
                    (20
                    )Investing
      activities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Financing
      activities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      cash inflow (outflow)
                    
                    $
                    (27
                    )
                    
                    $
                    21
                    
                    
                    $
                    (20
                    )


21.   CANADIAN
AND UNITED STATES ACCOUNTING POLICY DIFFERENCES





The
consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles as applied in Canada,
which conform in all material respects with generally accepted accounting
principles in the United States, except as noted below.





(a)
      Consolidated Financial
      Statements




Consolidated Balance
Sheets





2008
                                CDN.
                                GAAP
                              
                              
                              2008
                                U.S.
      GAAP
                              
                              
                              2007
                                CDN.
                                GAAP
                              
                              
                              2007
                                U.S.
      GAAP(in
      thousands)Cash
                              
                              
                              460
                              
                              
                              
                              460
                              
                              
                              
                              478
                              
                              
                              
                              478Accounts
      receivable
                              
                              
                              305
                              
                              
                              
                              305
                              
                              
                              
                              119
                              
                              
                              
                              119Deposits
      and prepaid expense
                              
                              
                              28
                              
                              
                              
                              28
                              
                              
                              
                              38
                              
                              
                              
                              38Capital
      assets
                              
                              
                              19
                              
                              
                              
                              19
                              
                              
                              
                              52
                              
                              
                              
                              52Deferred
      charges (Note 21 (b))
                              
                              
                              -
                              
                              
                              
                              61
                              
                              
                              
                              -
                              
                              
                              
                              44Accounts
      payable and accrued liabilities
                              
                              
                              (948
                              )
                              
                              
                              (948
                              )
                              
                              
                              (577
                              )
                              
                              
                              (577
                              )Deferred
      revenue
                              
                              
                              (30
                              )
                              
                              
                              (30
                              )
                              
                              
                              (52
                              )
                              
                              
                              (52
                              )Current
      portion of notes payable
                              
                              
                              (382
                              )
                              
                              
                              (382
                              )
                              
                              
                              (378
                              )
                              
                              
                              (378
                              )Current
      portion of secured subordinated notes (Note 21 (b))
                              
                              
                              (1,125
                              )
                              
                              
                              (686
                              )
                              
                              
                              -
                              
                              
                              
                              -Notes
      payable
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (205
                              )
                              
                              
                              (205
                              )Secured
      subordinated notes (Note 21 (b))
                              
                              
                              (730
                              )
                              
                              
                              (2,110
                              )
                              
                              
                              (1,075
                              )
                              
                              
                              (1,556
                              )Shareholders’
      deficiency (Note 21 (b))
                              
                              
                              2,403
                              
                              
                              
                              3,283
                              
                              
                              
                              1,600
                              
                              
                              
                              2,037




Northcore
Technologies Inc. F-30
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)




Consolidated
Statements of Operations


2008
                                
                                
                                2007
                                
                                
                                2006(in
      thousands, except per share amounts)Loss
      for the year as reported under Canadian GAAP
                                
                                $
                                (2,355
                                )
                                
                                $
                                (2,312
                                )
                                
                                $
                                (648
                                )Adjustments:Accretion
      of interest on secured subordinated notes(Note
      21 (b))
                                
                                
                                394
                                
                                
                                
                                333
                                
                                
                                
                                454Amortization
      of deferred charges relating to secured subordinated notes under Canadian
      GAAP (Note 21 (b))
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                62Amortization
      of deferred charges relating to secured subordinated notes under U.S. GAAP
      (Note 21 (b))
                                
                                
                                (21
                                )
                                
                                
                                (65
                                )
                                
                                
                                (350
                                )Amortization
      of beneficial conversion feature (Note 21
    (b))
                                
                                
                                (303
                                )
                                
                                
                                (160
                                )
                                
                                
                                (698
                                )Income
      from discontinued operations (Note 4)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,122
                                )Loss
      from continuing operations for the year as reported under U.S.
      GAAP
                                
                                $
                                (2,285
                                )
                                
                                $
                                (2,204
                                )
                                
                                $
                                (3,302
                                )Income
      from discontinued operations (Note 4)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,122Loss
      for the year as reported under U.S. GAAP
                                
                                
                                (2,285
                                )
                                
                                
                                (2,204
                                )
                                
                                
                                (1,180
                                )Other
      comprehensive loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (90
                                )Comprehensive
      loss as reported under U.S. GAAP
                                
                                $
                                (2,285
                                )
                                
                                $
                                (2,204
                                )
                                
                                $
                                (1,270
                                )Basic
      and diluted loss per share from continuing operations
                                
                                $
                                (0.02
                                )
                                
                                $
                                (0.02
                                )
                                
                                $
                                (0.04
                                )Basic
      and diluted loss per share
                                
                                $
                                (0.02
                                )
                                
                                $
                                (0.02
                                )
                                
                                $
                                (0.01
                                )


(b)  Financial Instruments with
      Liability and Equity
Elements





Under
Canadian GAAP, the secured subordinated notes (See Note 8) are recorded based
upon the relative fair values of the liability and equity components of the
instruments.  The liability component is accreted to the face value of
the subordinated notes over the term to maturity until the underlying notes are
converted into common shares.  Under U.S. GAAP, upon issuance, the
secured subordinated notes would have been recorded as a liability and
reclassified to equity only upon conversion.  No value would have been
assigned to the conversion option under U.S. GAAP if no beneficial conversion
option exists.  Accordingly, the interest accretion of $394,000 (2007
- $333,000, 2006 - $454,000) that is recorded under Canadian GAAP is reversed
under U.S. GAAP.





Additionally,
under Canadian GAAP, the financing costs arising from the issuance of the
convertible notes are allocated between the liability and equity components of
the notes.  Under Canadian GAAP, the Company had previously deferred
financing costs associated with the liability component of the notes and
amortized them over the term of the related debt instruments.  Under
HB Section 3855, the carrying value of transaction costs at December 31, 2006 of
$41,000 was charged to opening deficit on transition on January 1, 2007 (See
Note 3).  Under U.S. GAAP, all of the financing costs are deferred and
amortized over the term of the underlying debt.  As a result, the 2008
amortization expense under U.S GAAP is $21,000 (2007 - $65,000, 2006 - $128,000)
compared to an amortization expense of $nil (2007 - $nil, 2006 - $62,000) under
Canadian GAAP.  In addition, the deferred financing costs are $61,000
at December 31, 2008 (2007 - $44,000) under U.S. GAAP as compared to $nil (2007
- $nil) under Canadian GAAP.





Furthermore,
under Canadian GAAP, conversion of debt results in the allocation of any
unamortized deferred financing charges associated with that debt to
shareholders’ deficiency.  Under U.S. GAAP, such unamortized financing
charges are expensed upon conversion of the associated
debt.  Accordingly, under U.S. GAAP, an amount of $nil (2007 - $1,000,
2006 - $222,000), representing the unamortized financing charges associated with
the conversion of the Series G notes (2007 - Series G notes, 2006 - Series G and
I notes), is expensed.  The unamortized financing charges under
Canadian GAAP, in the amount of $nil (2007 - $nil, 2006 - $53,000), were
allocated to contributed surplus upon the conversion of the Series G notes (2007
- Series G notes, 2006 - Series G and I notes).




Northcore
Technologies Inc. F-31
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





Further,
under U.S. GAAP, the beneficial conversion feature represented by the excess of
the fair value of the shares issuable on conversion of the subordinated notes,
measured on the commitment date, over the amount of the loan proceeds to be
allocated to the common shares upon conversion would be allocated to additional
paid in capital.  This results in a discount on the subordinated notes
that is recognized as additional interest expense over the term of the
subordinated notes and any unamortized balance is expensed immediately upon
conversion of the subordinated notes.  Accordingly, for U.S. GAAP
purposes, the Company has recognized a beneficial conversion feature in the
amount of $776,000 relating to the Series L, M and N subordinated
notes.  In 2007, the Company recognized beneficial conversion features
of $340,000 relating to the Series K subordinated notes.  In 2006, the
Company recognized beneficial conversion features of $220,000 relating to the
Series J subordinated notes.  An interest expense of $303,000 (2007 -
$160,000, 2006 - $698,000) results from the amortization of the discount over
the term to maturity of those subordinated notes as well as the unamortized
discount for those subordinated notes converted during the
year.  Canadian GAAP does not require the recognition of any
beneficial conversion feature.





(c)Investment in
      Jointly Controlled Company





Canadian
GAAP requires the proportionate consolidation of investments in joint
ventures.  Proportionate consolidation is generally not permitted
under U.S. GAAP; instead investments in joint ventures are accounted for in
accordance with the equity basis of accounting.





Although
the application of proportionate consolidation has no impact on the Company’s
loss or shareholders’ deficiency, it does increase the amounts reported for the
Company’s current assets, current liabilities, revenue, expenses and cash flow
from operations by the amounts disclosed in Note 20 as compared to the amounts
that would otherwise be reported under U.S. GAAP.  As allowed under
the rules of the Securities and Exchange Commission, this difference has not
been reflected in the tables of certain financial statement differences items
presented above.





(d)  Additional Disclosures as
      Required in Accordance with U.S.
GAAP





U.S.
GAAP requires the disclosure of the allowance for doubtful
accounts.  The accounts receivable balance reported on the
consolidated balance sheet at December 31, 2008, includes an allowance for
doubtful accounts in the amount of $11,000 (2007 - $nil).





U.S.
GAAP requires the disclosure of accrued liabilities that exceed five percent of
current liabilities.  Included in accrued liabilities at December 31,
2008 are accrued interest payable of $234,000 (2007 - $109,000) and accrued
audit fees of $99,000 (2007 - $98,000).





U.S.
GAAP requires the disclosure of non-cash interest components incurred during the
year.  In 2008, the Company incurred $303,000 (2007 - $160,000, 2006 -
$698,000) in non-cash interest expense associated with secured subordinated
notes.





(e)  Impact of New Accounting
      Pronouncements




In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements.  This new standard defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles and expands disclosures about fair value
measurements.  This new standard is effective for the Company
beginning January 1, 2008.  The adoption of this standard did not have
any impact on the Company’s fair value measurements.





As
discussed in Note 3, the Company adopted certain new financial instrument
accounting standards for Canadian GAAP purposes.  These changes in
accounting policies were not required to be made for U.S. GAAP
purposes.




Northcore
Technologies Inc. F-32
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Years
ended December 31, 2008, 2007 and 2006
 (in
Canadian dollars)





22.   SUBSEQUENT
EVENT





In
February 2009, the Company announced the conversion of secured subordinated
notes and the additional proceeds secured from the exercise of
warrants.  Series M note holders have converted $660,000 out of a
total of $678,000 debentures and exercised a total of 13,200,000 common
share-purchase warrants out of a possible 13,560,000 warrants, for total
proceeds of $1,320,000.  As per the terms of the debenture, the
remaining warrant options have expired.





As
a result of this transaction, the Company issued 26,400,000 common shares,
comprised of 13,200,000 common shares from the conversion of the Series M notes
and 13,200,000 common shares from the exercising of the associated
warrants.




Northcore
Technologies Inc. F-33