UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
20-F
  r
              
              REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934ORx
              
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007ORr
              
              TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934ORr
              
              SHELL COMPANY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of
      1934
  
 
 Date
      of event requiring this shell company report:
      _______________________________
                
                For
      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.108,286,703
      Common Shares as of December 31, 2007Indicate
      by check mark if the registrant is a well-known seasoned issuer as defined
      in Rule 405 of the Securities Act
                Yes
      o No xIf
      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
      x No
      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 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









NORTHCORE
TECHNOLOGIES INC.
  Annual
Report on Form 20-F for the Fiscal Year
 Ended December 31,
2007
  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
customer;
 •
              our
      ability to retain and attract key
personnel;
 •
              risk
      of significant delays in product
development;
 •
              failure
      to timely develop or license new
technologies;
            
 2
  •
                failure
      to timely develop or license new
technologies;
 •
                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.
  3
 TABLE
OF CONTENTS
 
   PART
      I
                    
                    6ITEM
      1- IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
                    6ITEM
      2 - OFFER STATISTICS AND EXPECTED TIMETABLE
                    6ITEM
      3- KEY INFORMATION
                    6A. Selected
      Financial Data
                    6B. Capitalization
      and Indebtedness
                    8C. Reasons
      For The Offer And Use Of Proceeds
                    8D. Risk
      Factors
                    8ITEM
      4 - INFORMATION ON THE COMPANY
                    15A. History
      and Development of the Company
                    15B. Business
      Overview
                    19C. Organizational
      Structure
                    29D. Property, Plant
      and Equipment
                    29ITEM
      4A - UNRESOLVED STAFF COMMENTS
                    29ITEM
      5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF
      OPERATIONS
                    29A. Operating
      Results
                    31B. 
      Liquidity and Capital Resources
                    39C. Customer
      Service and Technology
                    42D. Trend
      Information
                    42E. 
      Off-Balance Sheet Arrangements
                    42F. Tabular
      Disclosure of Contractual Obligations
                    42ITEM
      6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
                    43A. Directors And
      Senior Management
                    43B. Compensation
                    45C. Board
      Practices
                    46C.1.   Audit Committee Information
                    47D. Employees
                    48E. Share
      Ownership
                    49ITEM
      7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                    50A. Major
      Shareholders
                    50B. Related
      Party Transactions
                    50ITEM
      8 - FINANCIAL INFORMATION
                    52ITEM
      9 - THE OFFER AND LISTING
                    52
    4
  ITEM
      10 - ADDITIONAL INFORMATION
                    55A.Share
      Capital
                    55B. Memorandum and
      Articles of Association
                    55C. Material
      Contracts
                    58D. Exchange
      Controls
                    58E. Taxation
                    58F. Dividends and
      Paying Agents
                    64G. Statements by
      Experts
                    64H. Documents on
      Display
                    64I. 
      Subsidiary Information
                    64ITEM
      11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
                    64ITEM
      12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
                    65PART
      II
                    
                    65ITEM
      13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
                    65ITEM
      14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                    65ITEM
      15 - CONTROLS AND PROCEDURES
                    65ITEM
      16 [RESERVED]
                    66ITEM
      16
                    66A. Audit
      Committee Financial Expert
                    66B. Code of
      Ethics
                    66C. Principal
      Accountant Fees and Services
                    67D. Exemptions from
      the Listing Standards For Audit Committees
                    67E. Purchases of
      Equity Securities by the Issuer and Affiliated Purchasers
                    67PART
      III
                    
                    67ITEM
      17- FINANCIAL STATEMENTS
                    67ITEM
      18 - FINANCIAL STATEMENTS
                    67ITEM
      19 - EXHIBITS
                    67
   5
 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$0.9881 to US$1.00
(or US$1.0120 to Cdn 1.00), the noon buying rate in New York City on
December 31, 2007 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, 2007, 2006, and 2005 and
consolidated balance sheet data as of December 31, 2007 and 2006, 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, 2004
and 2003 and the consolidated balance sheet data as at December 31, 2005,
2004, and 2003 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.
  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.
  
 6
  Statement
      of Operations Data:
                Year
      Ended December 31,(3)2007
                  (Cdn$)
                
                
                2006
                  (Cdn$)
                
                
                2005
                  (Cdn$)
                
                
                2004
                  (Cdn$)
                
                
                2003
                  (Cdn$)(in
      thousands except for per share data)Revenue
                
                
                1,166
                
                
                
                1,073
                
                
                
                1,285
                
                
                
                1,478
                
                
                
                2,456Operating
      expenses:General
      and administrative
                
                
                1,703
                
                
                
                1,790
                
                
                
                2,559
                
                
                
                3,043
                
                
                
                3,208Customer
      service and technology
                
                
                762
                
                
                
                664
                
                
                
                839
                
                
                
                854
                
                
                
                831Sales
      and marketing
                
                
                276
                
                
                
                377
                
                
                
                505
                
                
                
                561
                
                
                
                737Employee
      stock options
                
                
                94
                
                
                
                137
                
                
                
                105
                
                
                
                27
                
                
                
                135Depreciation
      and amortization
                
                
                39
                
                
                
                92
                
                
                
                95
                
                
                
                149
                
                
                
                634Interest
      expense
                
                
                604
                
                
                
                783
                
                
                
                717
                
                
                
                443
                
                
                
                286Total
      expenses
                
                
                3,478
                
                
                
                3,843
                
                
                
                4,778
                
                
                
                5,077
                
                
                
                5,831Loss
      from continuing operations
                
                
                (2,312
                )
                
                
                (2,770
                )
                
                
                (3,493
                )
                
                
                (3,599
                )
                
                
                (3,375
                )Net
      Loss
                
                
                (2,312
                )
                
                
                (648
                )
                
                
                (3,501
                )
                
                
                (5,104
                )
                
                
                (2,815
                )Loss
      per common share (1)
                
                
                (0.02
                )
                
                
                (0.01
                )
                
                
                (0.05
                )
                
                
                (0.08
                )
                
                
                (0.05
                )Weighted
      average number of common shares
                
                
                93,094
                
                
                
                79,933
                
                
                
                72,904
                
                
                
                61,938
                
                
                
                54,324
   Balance
      Sheet Data: (2)
                As
      at December 31,2007
                  (Cdn$)
                
                
                2006
                  (Cdn$)
                
                
                2005
                  (Cdn$)
                
                
                2004
                  (Cdn$)
                
                
                2003
                  (Cdn$)(in
      thousands)Working
      capital
                
                
                (372
                )
                
                
                (2,132
                )
                
                
                (1,164
                )
                
                
                381
                
                
                
                486Total
      assets
                
                
                687
                
                
                
                813
                
                
                
                1,843
                
                
                
                2,493
                
                
                
                3,211Shareholders’
      (deficiency) equity
                
                
                (1,600
                )
                
                
                (2,255
                )
                
                
                (2,710
                )
                
                
                (1,009
                )
                
                
                1,026
  (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, 2004
      and 2003 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.  The
      figures for 2003 are unaudited.
   7
  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 19, 2008, the
exchange rate was US$1.00 = Cdn$1.0027.
  Year
      Ended December 31,Rate
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004
                  
                  
                  2003Average
      during year (1)
                  
                  
                  0.9419
                  
                  
                  
                  0.8844
                  
                  
                  
                  0.8254
                  
                  
                  
                  0.7702
                  
                  
                  
                  0.7205
 
 (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
      2007
              
              
              1.0041
              
              
              
              0.9482October
      2007
              
              
              1.0531
              
              
              
              0.9998November
      2007
              
              
              1.0908
              
              
              
              0.9993December
      2007
              
              
              1.0221
              
              
              
              0.9789January
      2008
              
              
              1.0096
              
              
              
              0.9714February
      2008
              
              
              1.0291
              
              
              
              0.9815
  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, 2007, 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 2007.  Management’s
2008 business plan includes an increase in revenue and operating cash flow
primarily from major new contracts in North America. 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.
  8
  Management
believes that continued existence beyond 2007 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, 2007, we had cash
on hand and cash equivalents of approximately $478,000.
  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, 2007, 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 2007
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 net losses of approximately $111 million as of December 31,
2007.  For the year ended December 31, 2007 our net loss was
$2.312 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 MAKES
EVALUATING OUR BUSINESS DIFFICULT.
  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.
   9
 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.
 
 
 10
 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.
  WE
DEPEND HEAVILY ON A 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
REVENTUES.
  In
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 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.
  
 11
  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.
  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.
 
 12
 
 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.
  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;
      and
 •
              potentially
      adverse tax consequences.
  Any
of these risks could adversely affect the success of our business.
  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:
   13
  •
              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.
 
 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 Company does not believe it
does or ever has infringed the intellectual property rights of any third
party.  The claim with the particular third party has been resolved
through a licensing arrangement.  There can be no assurances that
other third parties will not make similar claims in the future.
  14
 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, UK pound and EURO. 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.
  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 - INFORMATIONON 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.
 
 15
 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 Systems International Inc. (“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.
  MAJOR
DEVELOPMENTS
  Significant
product and business developments over the last three fiscal years have been as
follows:
 
 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
      James Moskos as Chief Operating Officer.  The management change
      took effect July 12, 2007.
 
 •
              Generated
      gross proceeds of $1.65 million through a rights offering to eligible
      shareholders.
   16
 
 •
              Completed
      a private placement, issuing a new Series K subordinated notes with a face
      amount of $1.36 million to existing holders of 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.
 
 •
              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.
 
 •
              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 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.
 
 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.
 
 
 17
 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 2007 and
      beyond.
 
 •
              Effective
      July 18, 2006 our stock symbol on the TSX was changed to NTI and our
      symbol on the Over The Counter Bulletin Board (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.  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.
 
 Fiscal
2005
 
 •
              Throughout
      2005, the Company expanded existing customer relationships while making
      efforts to add new customer organizations.  Cross selling of
      ancillary software and services within established customer relationships
      continued and the Company was able to expand its working relationship with
      National Health Service (UK), Paramount (Canada), and GE Commercial
      Finance(US), among others.  New customers included Mesta AS
      (Norway), Star Energy  (UK) and Trilogy
  (Canada).
 
 •
              In
      North America, the Company continued to focus on the expansion of
      activities related to GE’s Asset Manager, LLC, (GEAM) the joint venture
      co-owned by the Company and GE Commercial
      Finance.  Incrementally through the year, software was refined
      in order to expand GEAM’s array of offerings to its clients and sales
      efforts broadened to include the appraisal industry, a commercial segment
      vital to the valuation and financing of assets.  In this area,
      the joint venture successfully established a co-operation agreement with
      the North American Auctioneers Association (“NAA”) for the provision of
      appraisal services online.
 
 •
              The
      Company undertook a number of software development initiatives in 2005 to
      ensure continued technology leadership.  The most substantial
      single project involved the re-architecture of certain WorkMate and
      ProcureMate elements, which resulted in enhanced functionality for a
      number of customers.
  Joint Venture withGE 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, Capital Solutions (“GE” or “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’s Asset Manager” or “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’s 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.
 
 18
 
 PRINCIPAL
CAPITAL EXPENDITURES AND DIVESTITURES
  For
a description of principal capital expenditures and divestitures, see Item 5 -
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - REALIZED GAINS AND LOSSES ON
MARKETABLE SECURITIES AND STRATEGIC INVESTMENTS and CAPITAL
ASSETS.  As of February 27, 2008 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, 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 (“GE’s Asset Manager” or “Asset Manager”) (see Part I - Item 4.A -
“Joint Venture with GE Commercial Finance”). GE's Asset Manager offers 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 enabling 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.
  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.
 
 19
 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.
 
 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 (UK) 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.
  20
 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.
 •
              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 (UK), 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.
 •
              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, stating
      whether they have won, been outbid, approved or declined via electronic
      mail.
      21
  •
                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 format 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.
  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% 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’s
Asset Manager
 
 GE's
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.
  22
  With
organizations needing to generate improved bottom-line results and comply with
new financial regulatory requirements, GE's 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).
 
 23
 With
Asset Tracker, users can:
 
 •
              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.
  THIRD
PARTY BUSINESS RELATIONSHIPS
 
 Designed
to extend the value of the solutions we deliver to our customers, Northcore has
forged 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:
 
 24
 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 AAA 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’s 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
2008.
  Strengthen
our position as an Asset Management Solution Provider and improve our visibility
among target sectors.
  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.
  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.
  
 25
  CUSTOMERS
 
 We provide our solutions to customers
in a variety of industries, including: oil and gas, health, public authorities,
and financial services.
  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
              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
              US
 
 For
information regarding the regional market segments in which the Company
competes, see Note 22 to the Consolidated Financial Statements for the year
ended December 31, 2007 included in this Annual Report.
 
 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.  Sales for each regional
segment are based on the location of third party customers.
 Net
      Revenue by Geographic Regions:
              
              2007
              
              
              2006
              
              
              2005(in
      thousands)North
      America
              
              $ 1,050
              
              
              $ 661
              
              
              $ 657Ireland
      and U.K.
              
              
              116
              
              
              
              412
              
              
              
              628Revenue
      from discontinued operations
              
              
              -
              
              
              
              2,399
              
              
              
              4,490$ 1,166
              
              
              $ 3,472
              
              
              $ 5,775
  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.
  26
 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 $762,000 for
the year ended December 31, 2007,  $664,000 for the year ended
December 31, 2006 and $839,000 for the year ended December 31, 2005,
including salaries and related expenses of our personnel engaged in research and
development.
 
 Our
software development and technology activities in 2007 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.
  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.
   27
 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
29, 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.
 •
              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.
 •
              Sales
      solutions - eBay Inc.
  In
addition, many organizations use in-house developers to develop solutions for
certain elements of the asset lifecycle.
 
 28
 C.
ORGANIZATIONAL STRUCTURE
 
 The
Company has the following organizational structure, which include the
subsidiaries set out below:
  
 
 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.
  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.
  29
 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. Sales for each regional segment are based on the
location of the third party customer.
  The
Company operates in two reportable geographic segments: (1 )North America;
and  (2) Ireland and the United Kingdom.
  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).
 
 SELECTED
ANNUAL INFORMATION
 (in
thousands of Canadian dollars)
 
 Year
      ended December 31,
              
              2007
              
              
              2006
              
              
              2005(Restated
      - note 1)Service
      revenue
              
              $
              1,166
              
              
              $
              1,063
              
              
              $
              1,163License
      revenue
              
              
              -
              
              
              
              10
              
              
              
              122Total
      revenue
              
              
              1,166
              
              
              
              1,073
              
              
              
              1,285Operating
      expenses:General
      and administrative
              
              
              1,703
              
              
              
              1,790
              
              
              
              2,559Customer
      service and technology
              
              
              762
              
              
              
              664
              
              
              
              839Sales
      and marketing
              
              
              276
              
              
              
              377
              
              
              
              505Employee
      stock options
              
              
              94
              
              
              
              137
              
              
              
              105Depreciation
      and amortization
              
              
              39
              
              
              
              92
              
              
              
              95Other
      income
              
              
              -
              
              
              
              -
              
              
              
              (42
              )Total
      operating expenses
              
              
              2,872
              
              
              
              3,060
              
              
              
              4,061Loss
      from continuing operations before the under-noted
              
              
              (1,708
              )
              
              
              (1,987
              )
              
              
              (2,776
              )Interest
      expense:Cash
      interest expense
              
              
              272
              
              
              
              345
              
              
              
              312Accretion
      of secured subordinated notes
              
              
              333
              
              
              
              454
              
              
              
              405Interest
      income
              
              
              (1
              )
              
              
              (16
              )
              
              
              -604
              
              
              
              783
              
              
              
              717Loss
      from continuing operations
              
              
              (2,312
              )
              
              
              (2,770
              )
              
              
              (3,493
              )Income
      (loss) from discontinued operations
              
              
              -
              
              
              
              2,122
              
              
              
              (8
              )NET
      LOSS FOR THE YEAR
              
              $
              (2,312
              )
              
              $
              (648
              )
              
              $
              (3,501
              )OTHER
      COMPREHENSIVE INCOME, NET OF TAX:Foreign
      currency translation adjustment
              
              
              -
              
              
              
              (90
              )
              
              
              (22
              )COMPREHENSIVE
      LOSS
              
              $
              (2,312
              )
              
              $
              (738
              )
              
              $
              (3,523
              )LOSS
      PER SHARE:From
      continuing operations, basic and diluted
              
              $
              (0.02
              )
              
              $
              (0.03
              )
              
              $
              (0.05
              )Net
      loss per share, basic and diluted
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              (0.05
              )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
      (000’s)
              
              
              93,093
              
              
              
              79,933
              
              
              
              72,904
 
 1.  In
accordance with GAAP, prior periods have been restated as a result of the
disposition of ADB Systemer in June 2006.
 
 30
 RECONCILIATION
OF NET LOSS TO EBITDA
 
 Year
      ended December 31,
              
              2007
              
              
              2006
              
              
              2005(Restated
      - note 1)Net
      loss for the year, as per above
              
              $
              (2,312
              )
              
              $
              (648
              )
              
              $
              (3,501
              )Reconciling
      items:Employee
      stock options
              
              
              94
              
              
              
              137
              
              
              
              105Depreciation
      and amortization
              
              
              39
              
              
              
              92
              
              
              
              95Interest
      expense:Cash
      interest expense
              
              
              272
              
              
              
              345
              
              
              
              312Accretion
      of secured subordinated notes
              
              
              333
              
              
              
              454
              
              
              
              405Other
      income
              
              
              -
              
              
              
              -
              
              
              
              (42
              )Interest
      income
              
              
              (1
              )
              
              
              (16
              )
              
              
              -(Income)
      loss from discontinued operations
              
              
              -
              
              
              
              (2,122
              )
              
              
              8EBITDA
              
              $
              (1,575
              )
              
              $
              (1,758
              )
              
              $
              (2,618
              )
 
 1.
              In
      accordance with GAAP, prior periods have been restated as a result of the
      disposition of ADB Systemer in June
2006.
 
 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 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
$116,000 (December 31, 2006 - $77,000) in royalties for the year ended December
31, 2007.  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
consolidated financial statements and related note disclosures for 2005 have
been restated to reflect the impact of the discontinued operations.
 
 The
following summarizes the statement of operations and statement of cash flows
information for the Company’s discontinued operations.
   31
 
 Income
      Statement
              
              2007
              
              
              2006
              
              
              2005(in
      thousands, except per share amounts)Revenue
              
              $
              -
              
              
              $
              2,399
              
              
              $
              4,491Income
      (loss) from operations
              
              
              -
              
              
              
              331
              
              
              
              (8
              )Gain
      from disposition of discontinued operations
              
              
              -
              
              
              
              1,791
              
              
              
              -Income
      (loss) from discontinued operations
              
              $
              -
              
              
              $
              2,122
              
              
              $
              (8
              )Income
      per share from discontinued operations, basic and diluted
              
              $
              -
              
              
              $
              0.02
              
              
              $
              -
  Statement
      of Cash Flows
              
              2007
              
              
              2006
              
              
              2005(in
      thousands)Operating
      activities
              
              $
              -
              
              
              $
              (317
              )
              
              $
              141Investing
      activities - Net proceeds from disposition of discontinued
      operations
              
              
              -
              
              
              
              2,643
              
              
              
              -Financing
      activities
              
              
              -
              
              
              
              -
              
              
              
              -Cash
      flows from discontinued operations
              
              $
              -
              
              
              $
              2,326
              
              
              $
              141
 
  
 32
 RESULTS
OF OPERATIONS
 
 Comparison of Years Ended
December 31, 2007 and December 31, 2006
 
 Net Loss.  Our net
loss for the year ended December 31, 2007 was $2.312 million, an increase of 257
percent from the net 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 net 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.
 
 The
loss before interest, taxes, depreciation, amortization, employee stock options
and discontinued operations (“EBITDA”) was $1.575 million for 2007 as compared
to $1.758 million for 2006, a decrease in the EBITDA loss of $183,000 or 10
percent.  The Company considers EBITDA to be a meaningful performance
measure as it provides an approximation of operating cash flows. This decrease
in EBITDA loss was the result of an improvement in revenue of $93,000 or nine
percent, from $1.073 million in 2006 to $1.166 million in 2007, combined with
savings of $90,000 in associated expenses (general and administrative, customer
service and technology and sales and marketing) from $2.831 million in 2006 to
$2.741 million in 2007.
 
 Revenue.  Revenue is
comprised of 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.
 
 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.
 
 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 favourable 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.
 
 33
 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 the
year.
 
 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.   See the discussion under “New Accounting
Policies”.
 
 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 was 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.
 
 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.
 
 Comparison of Years Ended
December 31, 2006 and December 31, 2005
 
 Net Loss.  Our net
loss for the year ended December 31, 2006 was $648,000, a decrease of 81 percent
from the net loss of $3.501 million reported for the year ended December 31,
2005.   The improvement in net loss was attributed to the
earnings recorded from discontinued operations in 2006 of $2.122 million,
including a gain of $1.791 million realized on the sale of ADB
Systemer.  Loss from continuing operations for the year ended December
31, 2006 was $2.770 million, an improvement of 21 percent from a loss from
continuing operations of $3.493 million reported for the year ended December 31,
2005.   The improvement in loss from operations was attributable
to a reduction in operating expenses of $1.072 million, partially offset by a
decline in revenue of $212,000.
 
 The
loss before interest, taxes, depreciation, amortization, employee stock options
and discontinued operations (“EBITDA”) was $1.758 million for 2006 as compared
to $2.618 million for 2005, a decrease in the EBITDA loss of $860,000 or 33
percent.  This decrease in EBITDA loss was the result of a $1.072
million decrease in the associated expenses (general and administrative,
customer service and technology and sales and marketing) from $3.903 million in
2005 to $2.831 million in 2006, partially offset by the decrease of $212,000 in
revenue, from $1.285 million in 2005 to $1.073 million in 2006.  The
reduction in expenses of 27 percent in 2006 when compared to 2005 was achieved
in the areas of general and administrative expenses by $769,000, customer
service and technology expenses by $175,000 and sales and marketing expenses by
$128,000.
 
 Revenue.  Revenues
is comprised of application hosting services, software license fees, software
implementation activities, training and consulting services, product maintenance
and customer support, application development activities, and hosting
fees.
 
 34
 Revenue
decreased to $1.073 million for the year ended December 31, 2006 from $1.285
million for the year ended December 31, 2005, representing a decline of $212,000
or 16 percent.  This decline was attributable to the decrease in
Ireland’s revenue as a result of transferring existing sales contracts to the
Buyer upon the disposition of ADB Systemer on June 30, 2006.
 
 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 $769,000 or 30 percent, to $1.790
million for the year ended December 31, 2006, as compared to $2.559 million for
the year ended December 31, 2005.
 
 Year-over-year
savings in the amount of $396,000 resulted from salary expense reductions
arising from a smaller administrative workforce and favourable Canadian dollar
exchange rates pertaining to US dollar-denominated
salaries.  Continued cost-containment efforts resulted in $109,000
savings in investor relations, $195,000 savings in professional fees and a
reduction in connectivity and occupancy costs of $158,000 largely due to the
recovery of utilities and property taxes in North America and the relocation of
the administrative office in Ireland.  The Company also recovered
$58,000 in bad debts previously written off.  These savings were
partially offset by the loss of overhead costs recovered from ADB Systemer in
the previous 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 $175,000 to $664,000 for the year
ended December 31, 2006, as compared to $839,000 for the year ended December 31,
2005, representing a decline of 21 percent.  The decrease in costs is
due primarily to the decrease in professional fees, travel expense and staffing
levels in Ireland.
 
 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, 2006 amounted to $377,000,
as compared to $505,000 for 2005, representing a decrease of $128,000 or 25
percent.  This decrease is attributable to lower staffing levels in
the sales department combined with decreased advertising and tradeshow
activities and related travel expenses throughout 2006.
 
 Employee Stock
Options.  The 2006 employee stock option expense represents the
fair value of the stock options vesting from the August 4, 2006, June 21, 2006,
December 22, 2005 and January 25, 2005 grants of 500,000, 50,000, 1 million and
1.5 million stock options respectively.  For the year ended December
31, 2006, employee stock option expense amounted to $137,000, as compared to
$105,000 for the year ended December 31, 2005, an increase of 30
percent.  This increase was due to the expenses associated with the
above noted option grants.
 
 Depreciation and
Amortization.  Depreciation and amortization expense was
$92,000 for the year ended December 31, 2006, consistent with an expense
of  $95,000 the year ended December 31, 2005.
 
 Interest
Expense.  Interest expense reflects interest incurred from debt
instruments and loans.  Interest expense for the year ended December
31, 2006 was $799,000 compared to $717,000 for December 31, 2005, representing
an increase of 10 percent.  During 2006, cash interest expense of
$345,000 and non-cash interest expense of $454,000 was incurred related to
secured subordinated notes.  Comparatively, cash interest expense of
$312,000 and non-cash interest expense of $405,000 was recorded in
2005.  The increase in interest expense was due to the increase
in secured subordinated notes outstanding during 2006.
 
 35
 Interest
Income.  Interest income reflects interest from investments in
cash and marketable securities.  Interest income was $16,000 for the
year ended December 31, 2006, as compared to $nil for the year ended December
31, 2005.  Interest income was realized from investing the proceeds
from the sale of ADB Systemer.
 
 Other
Income.  During the year ended December 31, 2005, the Company
received a $42,000 refund from a U.S.-based credit card institution formally
engaged by the Company when it operated its on-line retail activities in the
U.S.  No similar refunds were received in 2006.
 
 CRITICAL
ACCOUNTING ESTIMATES
 
 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 2007.  Management’s
2008 business plan includes a significant increase in revenue and operating cash
flow primarily from major new contracts in North America.  The revenue
contained in management’s business plan is based on detailed estimates of
revenue on a customer-by-customer basis.  Management does not
anticipate a material increase in 2008 expenses over those incurred in 2007, in
order to attain the 2008 revenue goals.  Additionally, 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.
 
 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 net losses and the balance sheet
classification used.
 
 Management
believes that continued existence beyond 2007 is dependent on its 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.
 
 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 in 2008.  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, 2007.
 
 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.
 
 36
 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
 
 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.
 
 37
 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.
 
 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 year ended December 31, 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, 2007.
 
 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 year
ended December 31, 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 income for the years ended
December 31, 2006 and 2005 comprises foreign currency losses on translation of
the Company’s former subsidiary in Norway, which was sold in the second quarter
of 2006.
 
 UNADOPTED
NEW ACCOUNTING PRONOUNCEMENTS
 
 Capital
Disclosures
 In
2006, the CICA issued Handbook Section 1535, Capital Disclosures (CICA
1535).  CICA 1535 requires that an entity disclose information that
enables users of its financial statements to evaluate an entity’s objectives,
policies and processes for managing capital including disclosures of any
externally imposed capital requirements and the consequences for
non-compliance.  Disclosures required by the new standard will be
included in the Company’s interim and annual consolidated financial statements
commencing January 1, 2008.
 
 38
 Financial
Instruments
 In
2006, the CICA issued Handbook Section 3862, Financial Instruments -
Disclosures, and Handbook Section 3863, Financial Instruments -
Presentation.  These standards enhance existing disclosure
requirements and place greater emphasis on disclosures related to recognized and
unrecognized financial instruments and how those risks are
managed.  Disclosures required by these standards will be included in
the Company’s interim and annual consolidated financial statements commencing
January 1, 2008.
 
 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 $91.7 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, 2007, has an accumulated deficit of
$111 million.  The Company expects to incur losses into 2008 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.
 
 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's business plan continues to anticipate a
significant increase in revenue and operating cash flow, particularly from North
American business currently under development, but there is no assurance that
these objectives will be met.
 
 Cash
and cash equivalents increased by $3,000 to $478,000 as at December 31, 2007
from $475,000 as at December 31, 2006.
 
 Current
assets of $635,000 were exceeded by current liabilities (excluding deferred
revenue) of $955,000 in the current fiscal year by $320,000.  Current
assets of $692,000 were exceeded by current liabilities (excluding deferred
revenue) of $2.756 million by $2.064 million in the prior
year.  Deferred revenue has been excluded from current liabilities as
it is expected to be settled by resources other than cash.
  Management
believes that continued existence beyond 2007 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. We have included in Note 2 to our financial statements for
the year ended December 31, 2007, a discussion about the ability of the Company
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. The auditors’ report on our 2007 consolidated
financial statements includes additional comments that refer to this uncertainty
with respect to our ability to continue as a going concern.
 
 a)
Operating
 Cash
outflows from operating activities improved significantly to $1.571 million in
the current fiscal year compared to cash outflows from operating activities of
$2.037 million in the prior year.   The improvement was due to a
reduction in net loss from continuing operations, combined with an increase in
non-cash working capital as per below.
 
 39
 Non-cash
working capital resulted in inflows of $275,000 in fiscal 2007 as compared to
inflows of $50,000 in fiscal 2006, an increase of $225,000, as summarized in the
following table:
 
 2007
              
              
              2006
              
              
              Difference(in
      thousands on Canadian dollars)Accounts
      receivable
              
              $
              35
              
              
              $
              130
              
              
              $
              (95
              )Deposits
      and prepaid expenses
              
              
              25
              
              
              
              52
              
              
              
              (27
              )Accounts
      payable
              
              
              (26
              )
              
              
              (320
              )
              
              
              294Accrued
      liabilities
              
              
              257
              
              
              
              211
              
              
              
              47Deferred
      revenue
              
              
              (16
              )
              
              
              (23
              )
              
              
              7$
              275
              
              
              $
              50
              
              
              $
              225
  b)
Investing
 In
2007, $11,000 was spent on capital asset acquisitions as compared to $65,000 in
expenditures for 2006.  In 2006, the Company redeemed marketable
securities totaling $13,000.  No such redemption was made in
2007.
 
 c)
Financing
 Financing
activities generated net inflows of $1.585 million in fiscal
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.
 
 Cash
flows from financing activities generated net cash inflows of $178,000 in fiscal
2006.  The sources of cash included the issuance of convertible debt,
partially offset by the repayment of secured subordinated notes and advances
from related parties.
 
 CAPITAL
RESOURCES
 
 During
2007, the Company purchased $11,000 in capital assets, as compared to $65,000 in
2006.
 
 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 $91.7 million from debt and equity financing and has realized net
proceeds of $26.4 million from disposal of investments.
 
 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 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.
 
 40
 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 is $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.
 
 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
is $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.
 
 Funding -
2005
 On
September 12, 2005, the Company issued Series I secured subordinated notes with
a face value of $1,200,000 for net proceeds of $1,063,000.  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 consists 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.
 
 On
February 23, 2005, the Company completed a transaction resulting in the issuance
of 2,500,000 equity units at a price of $0.23 per unit for net proceeds of
$570,000.  Each equity unit consists of one common share and one
common share-purchase warrant with an exercise price of $0.40
each.  The warrants expire on February 22, 2009.
 
 41
 
 C.  CUSTOMER
SERVICE AND TECHNOLOGY
 
 For
a discussion of the Company’s customer service and technology policies for the
last three years, see Item 4 - B. BUSINESS OVERVIEW under the heading “PRODUCTS
AND SERVICES”.
 
 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, UK pound and EURO.  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.
 
 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.
 
 At
December 31, 2007, three customers accounted for 52 percent, 24 percent and 11
percent, respectively, (2006 - two customers accounted for 64 percent and 17
percent, respectively) of total accounts receivable.  The Company does
not have a history of non-payment.
 
 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, 2007 the Company's contractual obligations, including payments
due by periods over the next five years, are as follows:
 Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012(in
      thousands of Canadian dollars)Operating
      leases
              
              $
              288
              
              
              $
              160
              
              
              $
              128
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -License
      agreements
              
              
              125
              
              
              
              100
              
              
              
              25
              
              
              
              -
              
              
              
              -
              
              
              
              -Demand
      loans
              
              
              352
              
              
              
              209
              
              
              
              143
              
              
              
              -
              
              
              
              -
              
              
              
              -Notes
      payable
              
              
              230
              
              
              
              145
              
              
              
              85
              
              
              
              -
              
              
              
              -
              
              
              
              -Secured
      subordinated notes -principal repayment(i)
              
              
              1,945
              
              
              
              -
              
              
              
              1,360
              
              
              
              300
              
              
              
              285
              
              
              
              -Secured
      subordinated notes -interest
      payment (i)
              
              
              482
              
              
              
              150
              
              
              
              75
              
              
              
              132
              
              
              
              125
              
              
              
              -$
              3,422
              
              
              $
              764
              
              
              $
              1,816
              
              
              $
              432
              
              
              $
              410
              
              
              $
              -
 
 (i)  Assumes
secured subordinated notes are held to maturity.
 
 
 42
 
 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, 51
                  Potomac,
      MD, USA
              June
      23, 2004
              Director
      and
                Chief
      Executive Officer, since July 11, 2007JIM
      MOSKOS, 45,
                  Toronto,
      Ontario
              June
      7, 1999
              Director
      and
                Chief
      Operating Officer, since July 11, 2007
                President,
      Technology Group from October 19, 1999 to
                July
      11, 2007JEFFREY
      LYMBURNER, 51,
                  Oldsmar,
      Florida, USA
              May
      28, 1996
              Director
      and
                Chief
      Executive Officer from August 1, 1999 to
                July
      11, 2007T.
      CHRISTOPHER BULGER, (1)(2)(3)
      50,
                  Toronto,
      Ontario
              May
      28, 1996
              Director
      and
                non-executive
      Chairman of the Board since
                October
      14, 2005DAVE
      GELINEAU(1)(2)(3),
                  49,
      Ottawa, Ontario
              Sept.
      23, 2005
              DirectorDARROCH
      ROBERTSON (1)(3),
      56,
                  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 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 and is
President of Copeland and Company, a consultancy based in North Potomac,
Maryland. 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
Operations 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.
 
 43
  JEFFREY LYMBURNER, Oldsmar,
Florida
 Director
since May 28, 1996
  Mr.
Lymburneris the
Chief Executive Officer of Channel Shift LLC. Mr. Lymburner served as the
Company’s Chief Executive Officer from August 1, 1999 to July 11, 2007 and was a
founding shareholder of our Company. He was President of our Company from its
founding in 1995 to October 11, 2001. Prior to the founding of our company, Mr.
Lymburner was President of Completely Mobile Inc., a cellular and wireless data
company, from 1990 to 1995.
 
 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 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.
 
 DAVE GELINEAU, Ottawa,
Ontario
 Director
since September 23, 2005
 Member
of the Management Resources and Compensation, Corporate Governance and Audit
Committees
 Mr.
Gelineau has more than 25 years of sales and marketing experience in the
information technology sector working closely with public sector organizations.
Mr. Gelineau currently works as a senior sales executive with Donna Cona,
Canada's leading aboriginal information technology services and consulting
organization. Previously, Mr. Gelineau worked with Accenture, IBM and Xwave, and
was responsible for identifying, constructing and implementing partnership
strategies with Oracle, Sybase, Cognos, Hewlett-Packard as well as several
dominant telecommunications companies.
 
 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 Technologies Inc., (“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 currently
completing its audits for 2006 and 2007.
 
 44
 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 2007, were our Chief Executive
Officer, Jeff Lymburner, from January 1 up to July 11, 2007, Duncan Copeland,
Chief Executive Officer from July 11, 2007 and our Chief Operating Officer,
James Moskos (President, Technology Group, up to July 11, 2007). 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
              2007
              30,000
              Nil
              Nil
              250,000
              Nil
              Nil
              NilCEOJeffrey
      Lymburner
              2007
              83,800
              Nil
              10,000
              20,000
              Nil
              Nil
              Nilformer
      CEO
              2006
              113,400
              Nil
              13,608
              20,000
              Nil
              Nil
              Nil2005
              116,300
              Nil
              13,950
              155,300
              Nil
              Nil
              NilJames
      Moskos
              2007
              200,000
              Nil
              12,000
              500,000
              Nil
              Nil
              NilCOO
              2006
              200,000
              Nil
              12,000
              20,000
              Nil
              Nil
              Nil2005
              200,000
              Nil
              12,000
              650,000
              Nil
              Nil
              NilTam
      Nguyen
              2007
              90,000
              Nil
              6,500
              40,000
              Nil
              Nil
              NilCorporate
      Controller
              2006
              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, 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, including insider
directors during the fiscal year ended December 31, 2007 see Summary
Compensation Table above. For option grants to outside directors during the
fiscal year ended December 31, 2007, not included in the above mentioned
compensation table, see the table below under the heading Compensation of
Directors.
 
 During
2007, we did not provide any pension, retirement or similar benefits to our
directors and officers as a group.
 
 Compensation
of Directors
 
 For
the 2007 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.
 
 45
 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
during 2007, which were not included in the summary compensation table
above.
 
 Stock
      Option Grants to Outside Directors during the fiscal year ended December
      31, 2007Name:
              #
      Options Granted
              Price
      CDN$
              Date
      of Grant
              Expiry
      Date of OptionChris
      Bulger
              250,000
              0.12
              July
      11, 2007
              July
      11, 2012Darroch
      Robertson
              60,000
              0.12
              July
      11, 2007
              July
      11, 2012Dave
      Gelineau
              20,000
              0.12
              July
      11, 2007
              July
      11, 2012
 
 During
the 2007 financial year, Christopher Bulger, Chairman of the Board, received
$60,000 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 has the authority to fix the
number of directors to a number within the minimum and maximum number of
directors as set forth in the articles, and has determined by resolution that
the size of the Board is 6 directors.
 
 Our
Board of Directors presently consists of six 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.
 
 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), Chris Bulger and Dave Gelineau.
 
 The
Management Resources and Compensation Committee, all of whose members are
unrelated as defined by the TSX Corporate Governance Guidelines, 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), Darroch Robertson and David Gelineau all of whom
are directors of our Company.
 
 46
 The
Corporate Governance Committee, all of whose members are unrelated as defined by
the TSX Corporate Governance Guidelines, 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) and David
Gelineau both of whom are directors of our Company.
 
 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 May 18, 2005 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.David
      Gelineau*‡
              Mr.
      Gelineau has more than 25 years of sales and marketing experience in the
      information technology sector working closely with public sector
      organizations. Mr. Gelineau currently works as a senior sales executive
      with Donna Cona, Canada's leading aboriginal information technology
      services and consulting organization. Previously, Mr. Gelineau worked with
      Accenture, IBM and Xwave, and was responsible for identifying,
      constructing and implementing partnership strategies with Oracle, Sybase,
      Cognos, Hewlett-Packard as well as several dominant telecommunications
      companies.
 (*)
independent as such term is defined in MI 52-110
 (‡)
financially literate as such term is defined in MI 52-110
 
 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.
 
 47
 4.
Audit Committee Oversight
 
 At
no time since the commencement of the Company’s more recently completed
financial year was a recommendation of the Audit Committee to nominate or
compensate an external auditor not adopted by the Board of
Directors.
 
 5.
Pre-Approval Policies
 
 Pursuant
to the Audit Committee Charter Adopted by the Board of Directors on May 18,
2005, 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)
              Audit
      Related Fees
              Tax
      Fees(2)
              Other
      Fees(3)2006
              $166,000
              0
              $3,000
              $10,0002007
              $178,000
              0
              $3,000
              0
 
 (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.
 
 (3)
              Other Fees represent costs
      associated with the review and recommended accounting treatment related to
      complicated contracts or
arrangements.
 
 D.           EMPLOYEES
 
 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% 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.
  48
 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
      UK
              
              
              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
  The
number of our employees as of May 31, 2006 represents a 6% decrease in our
workforce as compared with the number of our employees as of December 31,
2005.
  As
of December 31, 2005 we employed a total of 49 full-time employees and one
part-time employee as follows:
  North
      America
              
              
              Ireland
                and
      UK
              
              
              NorwaySales
      and Marketing
              
              
              4
              
              
              
              2
              
              
              
              2Technical
      Services
              
              
              4
              
              
              
              0
              
              
              
              12Product
      Group
              
              
              4
              
              
              
              0
              
              
              
              12Finance
      and Admin
              
              
              4
              
              
              
              0
              
              
              
              2Executive
              
              
              2
              
              
              
              0
              
              
              
              1TOTAL
              
              
              18
              
              
              
              2
              
              
              
              29
  None
of our employees are represented by a labor union, and we consider our employee
relations to be good.
  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 1, 2008:
 Name
              Number
      of
                Common
      Shares
                Owned
      (1)
              Number
      of
                Common
      Underlying
                Options
      (2)
              Range
      of
                Exercise
      Prices
                of
      Options
              Range
      of
                ExpirationDates
                of
      Options
              Percentage
      of
                Common
      Shares
                Beneficially
      Owned (3)Jeffrey
      Lymburner
              4,373,625
              195,300
              $0.12
      - $0.22
              1/25/10
      - 07/11/12
              4.02%T.
      Christopher Bulger
              330,313
              765,000
              $0.12
      - $0.22
              1/25/10
      - 07/11/12
              *Jim
      Moskos
              146,371
              1,170,000
              $0.12
      - $0.22
              1/25/10
      - 07/11/12
              *Darroch
      Robertson
              5,000
              195,000
              $0.12
      - $0.22
              1/25/10
      - 07/11/12
              *Duncan
      Copeland
              128,300
              405,000
              $0.12-
      $0.22
              11/15/08
      - 07/11/12
              *David
      Gelineau
              1,400
              85,000
              $0.12
      - $0.17
              11/15/08
      - 07/11/12
              *
 
 *
Represents less than 1%.
   49
  (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
      108,538,085 common shares outstanding as of February 29,
      2008.  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
16,263,060 common shares and Cdn.$55,000 convertible debentures with warrants,
representing a total of 14.98% of the outstanding common shares of Northcore
Technologies Inc. (the “Company”) assuming full exercise of his convertible
securities.
 
 The
shares were purchased for investment purposes on behalf of accounts managed by
him on a discretionary basis and for his personal and family member accounts.
Prior to August 22, 2007, he owned and/or controlled 8,334,700 common shares and
Cdn.$55,000 convertible debentures with warrants, representing approximately
9.86% of the outstanding common shares of the Company at that time (assuming
full exercise of his convertible securities). He acquired an additional
2,125,325 common shares on August 22, 2007 and 4,514,822 common shares on August
28, 2007 pursuant to a rights offering by the Company. A further 44,688 common
shares were acquired on October 15, 2007 (as payment in lieu of interest on
certain debentures) and an additional 1,243,525 common shares through various
trades (including transfers of shares between managed and non-managed client
accounts) from August 23, 2007 to December 24, 2007.
 
 Mr.
Sammy acquired beneficial ownership and/or direction and control of the
securities of the Company in the ordinary course of his investment management
activities on behalf of clients and in the case of personal holdings, for
personal investment purposes. He may purchase or sell securities of the Company
in the future on the open market or in private offerings, depending on factors
material to his investment decisions. A news release regarding Kris Sammy’s
holdings in Northcore was issued by Dundee Securities Corporation, on January
18, 2008 indicated that at no point of time did or does Mr. Sammy intend to
launch a formal take-over bid or propose a transaction that could constitute a
take-over bid
 
 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 February 29,
2008, 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 February 29, 2008 the shareholders of record held 108,538,085 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.
  B.
                RELATED
      PARTY TRANSACTIONS
 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: Jeff Lymburner, CEO of the Company at the time, was issued
110,000 shares and Jim Moskos, Chief Operating Officer and a director of the
Company, was issued 22,000 shares.
 
 50
 Also,
on June 15, 2007 the Company completed a private placement issuance of 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 following
officers and directors purchased Series K notes: Jeff Lymburner, CEO of the
Company at the time, purchased $50,000 of Series K notes that have not yet been
converted and Jim Moskos, Chief Operating Officer and a director of the Company,
purchased $10,000 of Series K notes that have not yet been
converted.
 
 On
May 18, 2006, the Company entered into a share purchase agreement with ADB
Systemer Holdings AS (the “Buyer”) to sell 100 percent of its shares in its
Norwegian subsidiary ADB Systemer AS, (“ADB Systemer”) for NOK
15,000,000in
cash (the “Share Sale”). Six of the shareholders of the Buyer were employees or
executive officers of ADB Systemer at the time of the transaction.
 
 On
February 8, 2006, the Company issued Series J secured subordinated notes with a
face value of $755,000.  The following officers and directors
purchased Series J notes: Jeff Lymburner, CEO of the Company at the time,
purchased $36,000 of Series J notes that have not yet been converted; 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.
 
 On
September 12, 2005 the Company issued Series I secured subordinated notes with a
face value of $1,200,000 for net proceeds of $1,063,000. The following officers
and directors purchased Series I notes: Jeff Lymburner, CEO of the Company at
the time, purchased $20,000 of Series I notes that have not yet been converted;
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.
 
 On
October 21, 2004 the Company issued to private investors Series H secured
subordinated notes in the aggregate principal amount of $520,000 for net
proceeds of  $477,000.  The following officers and directors
purchased Series H notes: Jeff Lymburner, CEO of the Company at the time,
purchased $200,000 of Series H notes that were converted on June 16, 2005 to
1,000,000 common shares and 500,000 common share-purchase warrants; Jim Moskos,
Chief Operating Officer and a director of the Company, purchased $20,000 of
Series H notes that have not yet been converted; and Paul Godin, a director of
the Company at the time, purchased $50,000 of Series H notes that were converted
on September 21, 2005 to 250,000 common shares and 125,000 common share-purchase
warrants.  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 in case 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 and $50,000 to the father of the former
CEO.  The notes payable mature on December 31, 2009 and are secured as
per the Series (H) security terms.
 
 On
June 15, 2004 the Company issued to private investors Series G secured
subordinated notes in the aggregate principal amount of $1.71 million for net
proceeds of  $1.48 million.  The following officers and
directors purchased Series G notes: Jeff Lymburner, CEO of the Company at the
time, purchased $100,000 of Series G notes, of which $50,000 were converted
($25,000 on January 11, 2007 and $25,000 on March 8, 2007) to 161,000 common
shares and 81,000 common share-purchase warrants; Jan Pedersen, President,
European Operations and a director of the Company at the time, purchased $60,000
of Series G notes that was repaid in 2006; and Jim Moskos, Chief Operating
Officer and a director of the Company, purchased $10,000 of Series G notes which
was restructured upon maturity, as discussed above.
 
 As
at December 31, 2007, accrued interest included $28,000 (2006 - $62,000) in
interest payable relating to the aforementioned secured subordinated notes due
to related parties.  During 2007, interest expense on the
aforementioned secured subordinated notes from related parties was $33,000 (2006
- $47,000).
 
 51
 During
the year ended December 31, 2007, the Company received and repaid advances from
a director and officer in the amount of $89,000.  During the year
ended December 31, 2006, the Company repaid advances from related parties
totaling $137,000 (2005 - $nil).   The Company also paid $15,000
(2005 - $nil) in advisory fees to a director in connection with the sale of ADB
Systemer (See Note 4 of the Company’s Consolidated Financial Statements
accompanying this report).
 
 During
2007, interest expense on advances from related parties was $1,000 (2006 -
$4,000).
 
 For
additional information regarding related party transactions, see the heading
“Transactions with Related Parties” in the Company’s Management’s Discussion and
Analysis in the Company’s Annual Report for the year ending December 31, 2007
and Note 7 to the Consolidated Financial Statements.
  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, 2007.
  ITEM
9 - THE OFFER AND LISTING
 
 Our
common shares are listed on The Toronto Stock Exchange and are quoted for
trading on the OTCBB.  Upon the change of name of the Company to
Northcore Technologies Inc. the Company’s stock symbols were changed, effective
July 18, 2006, to NTI on the TSX and to NTLNF on the OTCBB.
 
 Our
common shares were quoted for trading on the OTCBB under the symbol “ADBY” from
August 22, 2002 until November 15, 2004 and under the symbol “ADBYF” from
November 15, 2004 until July 18, 2006.
 
 From
October 18, 2001 to July 17,2006, our common shares traded on the Toronto Stock
Exchange under the symbol “ADY”.
 
 52
 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.
  
  THE
TORONTO STOCK EXCHANGE
  High
              
              
              Low(Cdn
      $)
              
              
              (Cdn
      $)ANNUAL MARKET
      PRICES2003
      Calendar Year
              
              
              0.85
              
              
              
              0.172004
      Calendar Year
              
              
              0.52
              
              
              
              0.162005
      Calendar Year
              
              
              0.36
              
              
              
              0.142006
      Calendar Year
              
              
              0.25
              
              
              
              0.132007 Calendar Year
              
              
              0.20
              
              
              
              0.07QUARTERLY MARKET
      PRICES2006 CALENDAR
      YEARFirst
      Quarter
              
              
              0.19
              
              
              
              0.14Second
      Quarter
              
              
              0.24
              
              
              
              0.15Third
      Quarter
              
              
              0.25
              
              
              
              0.14Fourth
      Quarter
              
              
              0.19
              
              
              
              0.132007 CALENDAR
      YEARFirst Quarter
              
              
              0.20
              
              
              
              0.13Second Quarter
              
              
              0.18
              
              
              
              0.12Third Quarter
              
              
              0.15
              
              
              
              0.08Fourth Quarter
              
              
              0.15
              
              
              
              0.07MONTHLY MARKET
      PRICESSeptember
      2007
              
              
              0.14
              
              
              
              0.09October
      2007
              
              
              0.15
              
              
              
              0.10November
      2007
              
              
              0.12
              
              
              
              0.09December
      2007
              
              
              0.11
              
              
              
              0.07January
      2008
              
              
              0.10
              
              
              
              0.06February
      2008
              
              
              0.09
              
              
              
              0.06
 
   53
  NASDAQ
AND OTCBB
  High
              
              
              Low(U.S.
      $)
              
              
              (U.S.
      $)ANNUAL MARKET
      PRICES2003 Calendar Year
              
              
              0.54
              
              
              
              0.112004
      Calendar Year
              
              
              0.41
              
              
              
              0.122005
      Calendar Year
              
              
              0.29
              
              
              
              0.112006 Calendar Year
              
              
              0.27
              
              
              
              0.102007
      Calendar Year
              
              
              0.20
              
              
              
              0.06QUARTERLY MARKET
      PRICES2006 CALENDAR
      YEARFirst
      Quarter
              
              
              0.15
              
              
              
              0.12Second
      Quarter
              
              
              0.27
              
              
              
              0.13Third
      Quarter
              
              
              0.24
              
              
              
              0.12Fourth
      Quarter
              
              
              0.20
              
              
              
              0.102007 CALENDAR
      YEARFirst
      Quarter
              
              
              0.20
              
              
              
              0.10Second
      Quarter
              
              
              0.19
              
              
              
              0.10Third
      Quarter
              
              
              0.19
              
              
              
              0.07Fourth
      Quarter
              
              
              0.15
              
              
              
              0.06MONTHLY MARKET PRICESSeptember
      2007
              
              
              0.14
              
              
              
              0.07October
      2007
              
              
              0.15
              
              
              
              0.07November
      2007
              
              0.13
              
              
              0.07December
      2007
              
              
              0.12
              
              
              
              0.06January
      2008
              
              
              0.08
              
              
              
              0.05February
      2008
              
              
              0.11
              
              
              
              0.03
  54
  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.
 
 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.
 
 55
 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 preferred
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.
 
 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.
 
 56
 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.
  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.
 
  57
 C.Material
Contracts
  The
following is a summary of our Company’s material contracts entered into within
the last two years.
  1.
              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 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.
  2.
              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”).
  3.
              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
      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.
  4.
              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.
 
 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 an adventure or 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.
  58
 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.
  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% 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%, or 5% in the case of a corporate
holder which owns 10% 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% 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.
  59
 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.
  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% 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 who owns less than 10% of our Company's
outstanding voting shares, (ii) 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.
  60
 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.
  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 the preceding taxable
year, we are not 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.
 
 61
 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 company generally will be a “controlled
foreign corporation” under Section 957 of the Internal Revenue Code (a “CFC”) if
more than 50% 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% or more of the total voting power
of the outstanding shares of the company (a “10% Shareholder”).
 
 If our Company is a CFC, a 10%
Shareholder generally will be subject to current U.S. federal income tax with
respect to (a) such 10% 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% 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% 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% 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% 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% 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% 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.
 
 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.
 
 62
 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
and 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.
 
 We
have not determined whether our Company may have been a passive foreign
investment company during 2007. There can be no assurance that our Company will
not be classified as a passive foreign investment company in 2007, 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. 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.
 
 63
 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.
  I.
              Subsidiary
      Information.
  Not
applicable.
  ITEM
11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Not
applicable.
  
 64
  ITEM
12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
 Not
applicable.
 
 PART
II
 
 ITEM
13 - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES
 
 SERIES
G NOTE REFINANCING:
 
 On
June 15, 2007, the Company completed the restructuring of  $1,360,000
of the Series G Note debt through the private placement issuance of common
shares in payment of accrued interest and the reinvestment of the principal debt
through the issuance of Series K secured subordinated notes.
 
 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 is $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.
 
 SERIES
H NOTE REFINANCING:
 
 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 $14,000.  The total refinanced amount
is $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.
 
 As
of the date of filing this Annual Report all amounts of default have been
rectified.
 
 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, 2007.  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 Companyin 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:
 
 65
 (a)           Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
 (b)           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 management and directors of
the registrant; and
 (c)           Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
 
 Because
of its inherent limitations, internal 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 effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007.  In making this assessment,
management used the criteria set forth in Internal Control - Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Based on this assessment, management
believes that, as of December 31, 2007, 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
have been no changes in the Company's internal controls over financial reporting
during the year ended December 31, 2007, 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.
 
 66
 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.
 
 ITEM
5- FEES OF AUDITORS
  Year
              Audit
      Fees(1)
              Audit
      Related Fees
              Tax
      Fees(2)
              Other
      Fees(3)2006
              $166,000
              0
              $3,000
              $10,0002007
              $178,000
              0
              $3,000
              0
 
 (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.
 
 (3)
              Other Fees represent costs
      associated with the review and recommended accounting treatment related to
      complicated contracts or
arrangements.
 
 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% 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)
  67
  2.3
                Form
      of Warrant issued or issuable upon exercise of Convertible Secured
      Notes.(6)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
                Form
      of Subscription Agreement for Equity Private Placements(8)4.21
                Form
      of Subscription Agreement for Series I Convertible Secured Debenture.
      (11)4.22
                Form
      of Series I Convertible Secured Debenture.(11)
  
  68
  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
      Placement*4.28
                Form
      of Subscription Agreement for Series K Convertible Secured
      Debenture*4.29
                Form
      of Series K 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.*
 
  *
              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.
  (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.
  
 
 
 69
 
 
 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:
              /s/ Duncan
      CopelandName:
              Duncan
      CopelandTitle:
              Chief Executive
      OfficerDated: March 19,
      2008
              By:
              /s/ Tam
      NguyenName:
              Tam NguyenTitle:
              Corporate
      Controller
 
 
 70
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 Audited
Consolidated Financial Statements for the years ended December 31, 2007, 2006,
2005,
 
 
 Management’s
      Report
                
                
                F-2Report
      of Independent Registered Public Accounting Firm
                
                
                F-2Consolidated
      Balance Sheets as at December 31, 2007 and 2006
                
                
                F-3Consolidated
      Statements of Operations and Comprehensive Incomefor
      the years ended December 31, 2007, 2006, and 2005
                
                
                F-4Consolidated
      Statements of Deficit for the years ended December 31, 2007, 2006 and
      2005
                
                
                F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006, and
      2005
                
                
                F-6Notes
      to Consolidated Financial Statements
                
                
                F-7
        Northcore
Technologies Inc. F-1
  MANAGEMENT’S
REPORT
 March 19, 2008
 
 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.
   signature
                  signatureDuncan
      Copeland
                    CEO
                  Tam
      Nguyen
                    Corporate
Controller
 
 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, 2007 and
2006 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, 2007. 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, 2007 and 2006 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2007, 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.
 
 As
discussed in note 3 to the consolidated financial statements, the Company
adopted new accounting pronouncements related to the recognition and measurement
of financial instruments, and the disclosure and presentation of comprehensive
income in 2007.
 
 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.
  
 Chartered
Accountants, Licensed Public Accountants
 Toronto,
Canada
 March
19, 2008
 
 
 Northcore
Technologies Inc. F-2
 
  Consolidated
      Balance Sheets
                    December
      31, 2007 and 2006
                    (in thousands of Canadian
      dollars)2007
                  
                  
                  2006ASSETSCURRENTCash
                  
                  $
                  478
                  
                  
                  $
                  475Accounts
      receivable
                  
                  
                  119
                  
                  
                  
                  154Deposits
      and prepaid expenses
                  
                  
                  38
                  
                  
                  
                  63635
                  
                  
                  
                  692CAPITAL
      ASSETS (Note 5)
                  
                  
                  52
                  
                  
                  
                  80DEFERRED
      CHARGES (Note 6)
                  
                  
                  -
                  
                  
                  
                  41$
                  687
                  
                  
                  $
                  813LIABILITIESCURRENTAccounts
      payable
                  
                  $
                  321
                  
                  
                  $
                  347Accrued
      liabilities
                  
                  
                  256
                  
                  
                  
                  727Deferred
      revenue
                  
                  
                  52
                  
                  
                  
                  68Current
      portion of notes payable (Note 8)
                  
                  
                  378
                  
                  
                  
                  -Current
      portion of secured subordinated notes (Note 9)
                  
                  
                  -
                  
                  
                  
                  1,6821,007
                  
                  
                  
                  2,824NOTES
      PAYABLE (Note 8)
                  
                  
                  205
                  
                  
                  
                  -SECURED
      SUBORDINATED NOTES (Note 9)
                  
                  
                  1,075
                  
                  
                  
                  2442,287
                  
                  
                  
                  3,068SHAREHOLDERS’
      DEFICIENCYShare
      capital (Note 11)
                  
                  
                  104,495
                  
                  
                  
                  101,867Contributed
      surplus (Note 12)
                  
                  
                  2,099
                  
                  
                  
                  1,819Warrants
      (Note 13)
                  
                  
                  533
                  
                  
                  
                  580Stock
      options (Note 14)
                  
                  
                  1,346
                  
                  
                  
                  1,252Other
      options (Note 15)
                  
                  
                  193
                  
                  
                  
                  193Conversion
      feature on secured subordinated notes (Note 9)
                  
                  
                  991
                  
                  
                  
                  1,049Deficit
                  
                  
                  (111,257
                  )
                  
                  
                  (109,015
                  )(1,600
                  )
                  
                  
                  (2,255
                  )$
                  687
                  
                  
                  $
                  813
  Continuation
of the business (Note 2)
 Commitments
and contingencies (Note 17)
 Canadian
and United States accounting policy differences (Note 21)
 Subsequent
event (Note 8)
  On behalf of the Board:
 
  signature
                  signatureDuncan
      Copeland
                    Director
                  Christopher
      Bulger
                    Director
   
 See
accompanying notes to consolidated financial statements.
   Northcore
Technologies Inc. F-3
  Consolidated
      Statements of Operations and Comprehensive Income
                    Years
      ended December 31, 2007, 2006 and 2005
                    (in thousands of Canadian dollars, except per
      share amounts)
 
 2007
                  
                  
                  2006
                  
                  
                  2005Service
      revenue
                  
                  $
                  1,166
                  
                  
                  $
                  1,063
                  
                  
                  $
                  1,163License
      revenue
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  122Total
      revenue
                  
                  
                  1,166
                  
                  
                  
                  1,073
                  
                  
                  
                  1,285Operating
      expenses:General
      and administrative
                  
                  
                  1,703
                  
                  
                  
                  1,790
                  
                  
                  
                  2,559Customer
      service and technology
                  
                  
                  762
                  
                  
                  
                  664
                  
                  
                  
                  839Sales
      and marketing
                  
                  
                  276
                  
                  
                  
                  377
                  
                  
                  
                  505Employee
      stock options (Note 14 (b))
                  
                  
                  94
                  
                  
                  
                  137
                  
                  
                  
                  105Depreciation
      and amortization
                  
                  
                  39
                  
                  
                  
                  92
                  
                  
                  
                  95Other
      income (Note 19)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (42
                  )Total
      operating expenses
                  
                  
                  2,874
                  
                  
                  
                  3,060
                  
                  
                  
                  4,061Loss
      from continuing operations before the under-noted
                  
                  
                  (1,708
                  )
                  
                  
                  (1,987
                  )
                  
                  
                  (2,776
                  )Interest
      expense:Cash
      interest expense
                  
                  
                  272
                  
                  
                  
                  345
                  
                  
                  
                  312Accretion
      of secured subordinated notes
                  
                  
                  333
                  
                  
                  
                  454
                  
                  
                  
                  405Interest
      income
                  
                  
                  (1
                  )
                  
                  
                  (16
                  )
                  
                  
                  -604
                  
                  
                  
                  783
                  
                  
                  
                  717Loss
      from continuing operations
                  
                  
                  (2,312
                  )
                  
                  
                  (2,770
                  )
                  
                  
                  (3,493
                  )Income
      (loss) from discontinued operations (Note 4)
                  
                  
                  -
                  
                  
                  
                  2,122
                  
                  
                  
                  (8
                  )NET
      LOSS FOR THE YEAR
                  
                  $
                  (2,312
                  )
                  
                  $
                  (648
                  )
                  
                  $
                  (3,501
                  )OTHER
      COMPREHENSIVE INCOME, NET OF TAX:Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  (90
                  )
                  
                  
                  (22
                  )COMPREHENSIVE
      LOSS
                  
                  $
                  (2,312
                  )
                  
                  $
                  (738
                  )
                  
                  $
                  (3,523
                  )LOSS
      PER SHARE (Note 11 (f)):From
      continuing operations, basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.05
                  )Net
      loss per share, basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.05
                  )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
      (000’s)
                  
                  
                  93,094
                  
                  
                  
                  79,933
                  
                  
                  
                  72,904
 
 See
accompanying notes to consolidated financial statements.
   Northcore
Technologies Inc. F-4
   Consolidated
      Statements of Deficit
                    Years
      ended December 31, 2007, 2006 and 2005
                    (in
      thousands of Canadian dollars)
 
 2007
                  
                  
                  2006
                  
                  
                  2005DEFICIT,
      BEGINNING OF YEAR
                  
                  $
                  (109,015
                  )
                  
                  $
                  (108,367
                  )
                  
                  $
                  (104,866
                  )CHANGE
      IN ACCOUNTING POLICY - FINANCIAL INSTRUMENTS (Note 3)
                  
                  
                  70
                  
                  
                  
                  -
                  
                  
                  
                  -DEFICIT,
      BEGINNING OF YEAR, AS RESTATED
                  
                  
                  (108,945
                  )
                  
                  
                  (108,367
                  )
                  
                  
                  (104,866
                  )NET
      LOSS FOR THE YEAR
                  
                  
                  (2,312
                  )
                  
                  
                  (648
                  )
                  
                  
                  (3,501
                  )DEFICIT,
      END OF YEAR
                  
                  $
                  (111,257
                  )
                  
                  $
                  (109,015
                  )
                  
                  $
                  (108,367
                  )
 
 See
accompanying notes to consolidated financial statements.
    Northcore
Technologies Inc. F-5
  Consolidated
      Statements of Cash Flows
                    Years
      ended December 31, 2007, 2006 and 2005
                    (in
      thousands of Canadian dollars)
 
 2007
                  
                  
                  2006
                  
                  
                  2005NET
      INFLOW (OUTFLOW) OF CASH
                    RELATED
      TO THE FOLLOWING ACTIVITIESOPERATINGNet
      loss for the year from continuing operations
                  
                  $
                  (2,312
                  )
                  
                  $
                  (2,770
                  )
                  
                  $
                  (3,493
                  )Items
      not affecting cash:Employee
      stock options
                  
                  
                  94
                  
                  
                  
                  137
                  
                  
                  
                  105Depreciation
      and amortization
                  
                  
                  39
                  
                  
                  
                  92
                  
                  
                  
                  95Accretion
      of secured subordinated notes
                  
                  
                  333
                  
                  
                  
                  454
                  
                  
                  
                  405(1,846
                  )
                  
                  
                  (2,087
                  )
                  
                  
                  (2,888
                  )Changes
      in non cash operating working capital (Note 18)
                  
                  
                  275
                  
                  
                  
                  50
                  
                  
                  
                  827(1,571
                  )
                  
                  
                  (2,037
                  )
                  
                  
                  (2,061
                  )INVESTINGCapital assets
                  
                  
                  (11
                  )
                  
                  
                  (65
                  )
                  
                  
                  (36
                  )Proceeds from disposal of
      capital assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4Marketable
      securities
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  -(11
                  )
                  
                  
                  (52
                  )
                  
                  
                  (32
                  )FINANCINGDemand
      loans (Note 8)
                  
                  
                  340
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of common shares (Note
      11 (e))
                  
                  
                  1,245
                  
                  
                  
                  -
                  
                  
                  
                  570Advances from related parties
      (Note 7)
                  
                  
                  89
                  
                  
                  
                  -
                  
                  
                  
                  137Repayment
      to related parties (Note 7)
                  
                  
                  (89
                  )
                  
                  
                  (137
                  )
                  
                  
                  -Issuance
      of secured subordinated notes and notes payable, net (Note
    9)
                  
                  
                  -
                  
                  
                  
                  750
                  
                  
                  
                  1,095Repayment
      of secured subordinated notes (Note 9)
                  
                  
                  -
                  
                  
                  
                  (435
                  )
                  
                  
                  -Deferred
charges
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (32
                  )1,585
                  
                  
                  
                  178
                  
                  
                  
                  1,770CASH
      FLOWS FROM DISCONTINUED OPERATIONS (Note 4)Operating
      activities
                  
                  
                  -
                  
                  
                  
                  (317
                  )
                  
                  
                  141Investing
      activities - Net proceeds from disposition of discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  2,643
                  
                  
                  
                  --
                  
                  
                  
                  2,326
                  
                  
                  
                  141NET
      CASH INFLOW (OUTFLOW) DURING THE YEAR
                  
                  
                  3
                  
                  
                  
                  415
                  
                  
                  
                  (182
                  )CASH,
      BEGINNING OF YEAR
                  
                  
                  475
                  
                  
                  
                  60
                  
                  
                  
                  242CASH,
      END OF YEAR
                  
                  $
                  478
                  
                  
                  $
                  475
                  
                  
                  $
                  60
 
 SUPPLEMENTAL
      DISCLOSURE OF CASH PAYMENTSInterest
      paid
                  
                  $
                  16
                  
                  
                  $
                  45
                  
                  
                  $
                  53
 
 SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES - See Note 18
 
 See
accompanying notes to consolidated financial statements.
  Northcore
Technologies Inc. F-6
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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, government
and oil and gas.
 
 Through
its wholly owned subsidiary, ADB Systems USA, Inc., Northcore owns a 50 percent
interest in GE Asset Manager, LLC (also referred to as “GE Asset Manager”), a
joint venture launched with GE Commercial Finance.
 
 
 2.      CONTINUATION
OF THE BUSINESS
 
 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
2007.   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.
 
 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 net losses and the
balance sheet classifications used.
 
 Management
believes that continued existence beyond 2007 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, 2007, 2006 and 2005
 (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 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, 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.
 
 
 Northcore
Technologies Inc. F-8
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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 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, 2007, 2006 and 2005
 (in
Canadian dollars)
 Deferred
Charges
 Deferred
charges are 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.  Under U.S. GAAP, the conversion of
secured subordinated notes results in the expensing of the associated
unamortized deferred charge.  The impact of this difference in
Canadian GAAP from U.S. GAAP is disclosed in these notes to the consolidated
financial statements under Canadian and United States accounting policy
differences (See Note 21).
 
 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.  For similar instruments,
U.S. GAAP does not permit separate disclosure of different elements of a
financial instrument in the financial statements.  The impact of this
difference in U.S. GAAP from Canadian GAAP is disclosed in the notes to the
consolidated financial statements under Canadian and United States accounting
policy differences (See Note 21).
 
 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 year ended December 31, 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, 2007.
 
 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.
   Northcore
Technologies Inc. F-10
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 The
Company had no “other comprehensive income or loss” transactions during the year
ended December 31, 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 years ended
December 31, 2006 and 2005 comprises foreign currency losses on translation of
the Company’s former subsidiary in Norway, which was sold in the second quarter
of 2006.
 
 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
 
 Capital
Disclosures
 In
2006, the CICA issued Handbook Section 1535, Capital Disclosures (CICA
1535).  CICA 1535 requires that an entity disclose information that
enables users of its financial statements to evaluate an entity’s objectives,
policies and processes for managing capital including disclosures of any
externally imposed capital requirements and the consequences for
non-compliance.  Disclosures required by the new standard will be
included in the Company’s interim and annual consolidated financial statements
commencing January 1, 2008.
 
 Financial
Instruments
 In
2006, the CICA issued Handbook Section 3862, Financial Instruments -
Disclosures, and Handbook Section 3863, Financial Instruments -
Presentation.  These standards enhance existing disclosure
requirements and place greater emphasis on disclosures related to recognized and
unrecognized financial instruments and how those risks are
managed.  Disclosures required by these standards will be included in
the Company’s interim and annual consolidated financial statements commencing
January 1, 2008.
 
 
 Northcore
Technologies Inc. F-11
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 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 $116,000
(December 31, 2006 - $77,000) in royalties for the year ended December 31,
2007.  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
consolidated financial statements and related note disclosures for 2005 have
been restated to reflect the impact of the discontinued operations.
 
 The
following summarizes the statement of operations and statement of cash flows
information for the Company’s discontinued operations.
 Income
      Statement
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(in
      thousands, except per share amounts)Revenue
                  
                  $
                  -
                  
                  
                  $
                  2,399
                  
                  
                  $
                  4,491Income
      (loss) from operations
                  
                  
                  -
                  
                  
                  
                  331
                  
                  
                  
                  (8
                  )Gain
      from disposition of discontinued operations
                  
                  
                  -
                  
                  
                  
                  1,791
                  
                  
                  
                  -Income
      (loss) from discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  2,122
                  
                  
                  $
                  (8
                  )Income
      per share from discontinued operations, basic and diluted
                  
                  $
                  -
                  
                  
                  $
                  0.02
                  
                  
                  $
                  -
  Statement
      of Cash Flows
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(in
      thousands)Operating
      activities
                  
                  $
                  -
                  
                  
                  $
                  (317
                  )
                  
                  $
                  141Investing
      activities - Net proceeds from disposition of discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  2,643
                  
                  
                  
                  -Financing
      activities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cash
      flows from discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  2,326
                  
                  
                  $
                  141
 
 
 
 Northcore
Technologies Inc. F-12
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
  5.      CAPITAL
ASSETS
 2007
                    
                    2006Cost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net
      Book Value
                    
                    
                    Cost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Net
      Book Value(in
      thousands)Computer
      hardware
                    
                    $
                    2,479
                    
                    
                    $
                    2,437
                    
                    
                    $
                    42
                    
                    
                    $
                    2,472
                    
                    
                    $
                    2,407
                    
                    
                    $
                    65Computer
      software
                    
                    
                    13
                    
                    
                    
                    13
                    
                    
                    
                    -
                    
                    
                    
                    13
                    
                    
                    
                    13
                    
                    
                    
                    -Furniture
      and fixtures
                    
                    
                    266
                    
                    
                    
                    266
                    
                    
                    
                    -
                    
                    
                    
                    266
                    
                    
                    
                    266
                    
                    
                    
                    -Leasehold
      improvements
                    
                    
                    27
                    
                    
                    
                    17
                    
                    
                    
                    10
                    
                    
                    
                    27
                    
                    
                    
                    12
                    
                    
                    
                    15$
                    2,785
                    
                    
                    $
                    2,733
                    
                    
                    $
                    52
                    
                    
                    $
                    2,778
                    
                    
                    $
                    2,698
                    
                    
                    $
                    80
  During
2007, the Company recorded capital asset amortization in the amount of $39,000
(2006 - $31,000, 2005 - $31,000).
 
 
 6.      DEFERRED
CHARGES
 
 a)
                  The
      following table summarizes the transactions within deferred
      charges.
 
 2007
                  
                  
                  2006(in
      thousands)Opening
      balance
                  
                  $
                  41
                  
                  
                  $
                  156Adoption
      of accounting standards (Note 3)
                  
                  
                  (41
                  )
                  
                  
                  -Amortization
      (Note 6 (b))
                  
                  
                  -
                  
                  
                  
                  (62
                  )Allocation
      to contributed surplus (Note 6 (c))
                  
                  
                  -
                  
                  
                  
                  (53
                  )Closing
      balance
                  
                  $
                  -
                  
                  
                  $
                  41
  b)
                  During
      2007, amortization of deferred charges in the amount of $nil (2006 -
      $62,000, 2005 - $63,000) was recorded and included in depreciation and
      amortization expense.
 
 c)
                  During
      2006, conversion of the Series I notes resulted in the allocation of
      $51,000 in unamortized deferred charges to contributed surplus (See Note
      12 (e)).  In addition, the repayment of Series G notes resulted
      in the allocation of $2,000 in unamortized deferred charges to contributed
      surplus.
 
 
 7.      TRANSACTIONS
WITH RELATED PARTIES
 
 During
the year ended December 31, 2007, the Company compensated the new Chief
Executive Officer in the amount of $30,000 for the period from July 12, 2007 to
December 31, 2007.  The Company also compensated the Chairman in the
amount of $60,000 (2006 - $55,000) for acting as the Chair of the
Board.
 
 During
the year ended December 31, 2007, interest expense on advances from a director
was $1,000 (2006 - $4,000).
 
 During
the year ended December 31, 2007, the Company received and repaid advances from
a director and officer in the amount of $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).
 
 
 Northcore
Technologies Inc. F-13
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 8.      NOTES
PAYABLE AND DEMAND LOANS
 
 The
Series H secured subordinated notes with a principal balance of $170,000 matured
on October 21, 2007 (See Note 9 (d)).  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 interest and principal
quarterly payments of $24,000.  The total amount to be repaid is
$230,000 ($145,000 representing current portion of notes payable including the
accrued interest of $60,000, 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 (See Note 9 (d)).
 
 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 over a two year term at an interest rate of 12
percent in blended interest and principal quarterly payments of
$40,000.  The total refinanced amount is $353,000 ($233,000
representing current portion of notes payable including the accrued interest of
$113,000, 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 (See Note 9 (e)).  The
classification of this obligation at December 31, 2007 has been reflected based
on these 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 (See Note 11 (e)).
 
 
 9.      SECURED
SUBORDINATED NOTES
 
 a)
                  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 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.
 
 b)
                  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.
   
 Northcore
Technologies Inc. F-14
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 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.
 
 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 (See table
below).
 
 c)
                  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-15
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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 (See table
below).
 
 d)
                  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 expire 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 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 8).  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).
   Northcore
Technologies Inc. F-16
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 e)
                  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 expire on June 15, 2008.  The Series G secured
      subordinated notes will automatically convert into units when the
      volume-weighted average share price of the Company closes above $0.70 for
      20 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. 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.
 
 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 accreted to $1,710,000 over
the term of the Series G 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 $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 expire 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 (d)
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 (See table
below).
 
 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).
 
 Northcore
Technologies Inc. F-17
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 In
connection with the refinancing of the maturing 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 (See (a) above), to existing holders of
$1,360,000 of the Series G secured subordinated notes.  Subsequent to
year-end, the Company refinanced the balance of $240,000 Series G notes through
the issuance of notes payable (See Note 8).
 
 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 11
(d)).
 
 f)
                  During
      the year ended December 31, 2003, the Company issued Series E secured
      subordinated notes with a face value of $1,000,000.  The Series
      E notes had an annual rate of interest of 11 percent that was paid
      quarterly in arrears, matured August 19, 2006 and were convertible into
      equity units at a price of $0.35 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 Series E secured
      subordinated notes would have automatically converted into units when the
      share price of the Company closed above $0.70 for five consecutive trading
      days during the term.  Note holders could convert into units at
      anytime following a four-month hold period.  If the holder did
      not convert and no automatic conversion took place, the Company would have
      the principal amount to the holders of the Series E secured subordinated
      notes in cash.  As part of this private placement, the Company
      issued 30,000 common share-purchase warrants to an associate of
      Stonestreet Limited Partnership (“Stonestreet”) in consideration for
      professional fees.  Each such warrant entitled the holder to
      purchase one common share of the Company for $0.50 at any time up to and
      including August 18, 2006.  The Series E 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 E secured subordinated notes.  The Company
determined the fair value of the debt component of the Series E 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 E notes using the Cox-Rubinstein binomial valuation
model.  The resulting pro rata fair value of the liability component
of the secured subordinated notes and the conversion features of the units,
comprised of shares and attached warrants, was $596,000, $296,000 and $108,000,
respectively.  The liability component was to be accreted to
$1,000,000 over the term of the Series E notes through the recording of non-cash
interest expense until such date at which the underlying notes are converted
into common shares.
 
 The
Series E notes were issued to private investors including an amount totaling
$100,000 issued to three directors/officers of the Company.  Costs in
the amount of $6,000 associated with the issuance of the Series E secured
subordinated notes were recorded as a reduction of the equity component of these
notes.
 
 During
2006, the remaining $375,000 (face value) balance of the Series E notes (book
value of $375,000) was repaid. Accordingly, 1,072,000 equity units represented
by 1,072,000 common shares valued at $110,000 and 536,000 warrants valued at
$40,000 were canceled (See table below).
 
 g)
                  During
      the year ended December 31, 2007, the Company recorded cash interest
      expense aggregating $272,000 (2006 - $345,000, 2005 - $312,000) and
      interest accretion of $333,000 (2006 - $454,000, 2005 -
      $405,000).
 
 h)
                  As
      at December 31, 2007, accrued liabilities include $109,000 (2006 -
      $574,000) of unpaid interest payable relating to the secured subordinated
      notes.
 
 
 
 Northcore
Technologies Inc. F-18
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 i)
                  Accrued
      liabilities include accrued interest payable to related parties as
      follows:
 2007
                  
                  
                  2006(in
      thousands)Series
      G
                  
                  $
                  -
                  
                  
                  $
                  31Series
      H
                  
                  
                  -
                  
                  
                  
                  5Series
      I
                  
                  
                  16
                  
                  
                  
                  16Series
      J
                  
                  
                  10
                  
                  
                  
                  10Series
      K
                  
                  
                  2
                  
                  
                  
                  -Total
                  
                  $
                  28
                  
                  
                  $
                  62
 
 j)   Interest
      payments relating to the secured subordinated notes totaling $60,000 and
      $3,000, were made to related parties during the years ended December 31,
      2007 and December 31, 2006,
respectively.
 
 k)   The
      following summarizes the face and fair values of the liability and equity
      components of the secured subordinated
notes.
 
 Secured
      Subordinated Notes
                  
                  2007
                  
                  
                  2006Face
      Value
                  
                  
                  Carrying
      Value
                  
                  
                  Face
      Value
                  
                  
                  Carrying
      Value(in
      thousands)Opening
      balance
                  
                  $
                  2,405
                  
                  
                  $
                  1,926
                  
                  
                  $
                  3,455
                  
                  
                  $
                  2,143Change
      in accounting policy (Note 3)
                  
                  
                  -
                  
                  
                  
                  (111
                  )
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of notes:Series
      K (Note 9 (a))
                  
                  
                  1,360
                  
                  
                  
                  744
                  
                  
                  
                  -
                  
                  
                  
                  -Series
      J (Note 9 (b))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  755
                  
                  
                  
                  202Accreted
      (non-cash) interest
                  
                  
                  -
                  
                  
                  
                  333
                  
                  
                  
                  -
                  
                  
                  
                  454Conversion
      of notes:Series
      G (Note 9 (e))
                  
                  
                  (50
                  )
                  
                  
                  (47
                  )
                  
                  
                  -
                  
                  
                  
                  -Series
      J (Note 9 (b))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (470
                  )
                  
                  
                  (156
                  )Series
      I (Note 9 (c))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (900
                  )
                  
                  
                  (291
                  )Maturity
      of notes:Series
      H (Note 9 (d))
                  
                  
                  (170
                  )
                  
                  
                  (170
                  )
                  
                  
                  -
                  
                  
                  
                  -Series
      G (Note 9 (e))
                  
                  
                  (1,600
                  )
                  
                  
                  (1,600
                  )
                  
                  
                  -
                  
                  
                  
                  -Repayment
      of notes:Series
      G (Note 9 (e))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (60
                  )
                  
                  
                  (51
                  )Series
      E (Note 9 (f))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (375
                  )
                  
                  
                  (375
                  )Closing
      balance
                  
                  $
                  1,945
                  
                  
                  $
                  1,075
                  
                  
                  $
                  2,405
                  
                  
                  $
                  1,926
 
 Current
      portion of notes
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,820
                  
                  
                  $
                  1,682Long
      term portion of notes
                  
                  
                  1,945
                  
                  
                  
                  1,075
                  
                  
                  
                  585
                  
                  
                  
                  244Closing
      balance
                  
                  $
                  1,945
                  
                  
                  $
                  1,075
                  
                  
                  $
                  2,405
                  
                  
                  $
                  1,926
 
 
 
 Northcore
Technologies Inc. F-19
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 Conversion
      Features on Secured Subordinated Notes Including Conversion of Attached
      Warrants
                  
                  2007
                  
                  
                  2006Common
      Shares
                    Issuable
                  
                  
                  Carrying
      Value
                  
                  
                  Common
      Shares
                    Issuable
                  
                  
                  Carrying
      Value(in
      thousands of shares and dollars)Opening
      balance
                  
                  
                  17,059
                  
                  
                  $
                  1,049
                  
                  
                  
                  27,156
                  
                  
                  $
                  1,513Issuance
      of notes:Series
      K (Note 9 (a))
                  
                  
                  11,333
                  
                  
                  
                  616
                  
                  
                  
                  -
                  
                  
                  
                  -Series
      J (Note 9 (b))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,067
                  
                  
                  
                  553Conversion
      of notes:Series
      G (Note 9 (e))
                  
                  
                  (243
                  )
                  
                  
                  (18
                  )
                  
                  
                  -
                  
                  
                  
                  -Series
      J (Note 9 (b))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6,266
                  )
                  
                  
                  (345
                  )Series
      I (Note 9 (c))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,000
                  )
                  
                  
                  (500
                  )Maturity
      of notes:Series
      H (Note 9 (d))
                  
                  
                  (1,275
                  )
                  
                  
                  (72
                  )
                  
                  
                  -
                  
                  
                  
                  -Series
      G (Note 9 (e))
                  
                  
                  (7,741
                  )
                  
                  
                  (584
                  )
                  
                  
                  -
                  
                  
                  
                  -Repayment
      of notes:Series
      G (Note 9 (e))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (290
                  )
                  
                  
                  (22
                  )Series
      E (Note 9 (f))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,608
                  )
                  
                  
                  (150
                  )Closing
      balance
                  
                  
                  19,133
                  
                  
                  $
                  991
                  
                  
                  
                  17,059
                  
                  
                  $
                  1,049
  
 10.   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, 2007 and 2006, the Company established the
valuation allowance at 100 percent of the future tax asset.
 2007
                  
                  
                  2006(in
      thousands)FUTURE
      TAX ASSETTax
      losses carried forward
                  
                  $
                  6,800
                  
                  
                  $
                  5,881Difference
      in tax and accounting valuations for capital assets and
      investments
                  
                  
                  89
                  
                  
                  
                  1426,889
                  
                  
                  
                  6,023Valuation
      allowance
                  
                  
                  (6,889
                  )
                  
                  
                  (6,023
                  )Future
      tax asset
                  
                  $
                  -
                  
                  
                  $
                  -PROVISION
      FOR INCOME TAXESIncome
      taxes at statutory rate
                  
                  $
                  (786
                  )
                  
                  $
                  (942
                  )Foreign
      income affected at higher rates
                  
                  
                  (21
                  )
                  
                  
                  (14
                  )Change
      in enacted rates
                  
                  
                  1,241
                  
                  
                  
                  271Non-taxable
      income on inter-company debt forgiveness
                  
                  
                  (2,385
                  )Non-deductible
      portion of capital loss
                  
                  
                  1,024
                  
                  
                  
                  -Stock-based
      compensation not deductible for tax
                  
                  
                  28
                  
                  
                  
                  45Other,
      net
                  
                  
                  33
                  
                  
                  
                  38(866
                  )
                  
                  
                  (602
                  )Change
      to valuation allowance
                  
                  
                  866
                  
                  
                  
                  602Provision
      for income taxes
                  
                  $
                  -
                  
                  
                  $
                  -
  Northcore
Technologies Inc. F-20
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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 34 percent
(2006 - 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, 2007 expire as follows:
  Year
                  
                  Amount(in
      thousands)2009
                  
                  $
                  1,4082010
                  
                  
                  3,7822014
                  
                  
                  3,0472015
                  
                  
                  3,3512026
                  
                  
                  2,7942027
                  
                  
                  2,188Tax
      loss carry-forwards that do not expire
                  
                  
                  14,993$
                  31,563
 
 The
Company has net operating loss carry-forwards of $16,570,000 that expires in
years 2009 through 2027, and indefinite loss carry-forwards of $14,993,000 of
which $5,391,000 relate to Ireland.  Also included in the indefinite
loss carry-forwards are net capital losses of $4,494,000 from continuing
Canadian operations and $5,108,000 from discontinued operations which are
available to reduce future year’s capital gains.
 
 
 11.  
SHARE CAPITAL
 
 a)
                  Authorized
  Unlimited
      number of common sharesUnlimited
      number of preference shares - issuable in
series
  b)    
Outstanding Common
Shares
 2007
                    
                    
                    2006
                    
                    
                    2005Number
                    
                    
                    Amount
                    
                    
                    Number
                    
                    
                    Amount
                    
                    
                    Number
                    
                    
                    Amount(in
      thousands of shares and dollars)Opening
      balance
                    
                    
                    83,742
                    
                    
                    $
                    101,867
                    
                    
                    
                    74,120
                    
                    
                    $
                    100,859
                    
                    
                    
                    69,870
                    
                    
                    $
                    100,052Shares
      issued pursuant to:Private
      placement (Note 11 (c))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,500
                    
                    
                    
                    468Conversion
      of debentures (Note 9)
                    
                    
                    162
                    
                    
                    
                    59
                    
                    
                    
                    9,133
                    
                    
                    
                    924
                    
                    
                    
                    1,750
                    
                    
                    
                    339Payment
      of interest (Note 11 (d))
                    
                    
                    3,755
                    
                    
                    
                    557
                    
                    
                    
                    489
                    
                    
                    
                    84
                    
                    
                    
                    -
                    
                    
                    
                    -Rights
      offering (Note 11 (e))
                    
                    
                    20,628
                    
                    
                    
                    2,012
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Closing
      balance
                    
                    
                    108,287
                    
                    
                    $
                    104,495
                    
                    
                    
                    83,742
                    
                    
                    $
                    101,867
                    
                    
                    
                    74,120
                    
                    
                    $
                    100,859
 In
addition to the above, the conversion of the remaining secured subordinated
notes would result in the issuance of nil (2006 - 5,323,000) common shares for
Series G notes, nil (2006 - 850,000) common shares for Series H notes, 2,000,000
(2006 - 2,000,000) common shares for Series I notes, 1,900,000 (2006 -
1,900,000) common shares for Series J notes and 11,333,000 (2006 - nil) common
shares for Series K notes.
 
 c)
                  Private
      Placement
 
 During
the year ended December 31, 2005, the Company completed a transaction resulting
in the issuance of 2,500,000 common shares at a price of $0.23 per share and
1,250,000 share-purchase warrants, each exercisable into one common share at a
price of $0.40 per warrant, for gross proceeds of $575,000 and net proceeds of
$570,000.  Net proceeds of $444,000 were allocated to the common
shares and the balance of $126,000 to warrants.  The warrants expire
on February 23, 2009.
   Northcore
Technologies Inc. F-21
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 During
the year ended December 31, 2005, a reduction to the financing costs related to
a private share placement in December 2004, resulted in a $24,000 increase to
the amount of share capital.
 
 d)
                  Payment of
      Interest
 
 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 a 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.
 
 e)
                  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 was recorded 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.
  
 Northcore
Technologies Inc. F-22
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 f)
                  Loss Per
      Share
 
 The
following table sets forth the computation of basic and diluted loss per
share.
 2007
                    
                    
                    2006
                    
                    
                    2005(in
      thousands, except per share amounts)Numerator:Loss
      from continuing operations
                    
                    $
                    (2,312
                    )
                    
                    $
                    (2,770
                    )
                    
                    $
                    (3,493
                    )Income
      (loss) from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    2,122
                    
                    
                    
                    (8
                    )Net
      loss for the year
                    
                    $
                    (2,312
                    )
                    
                    $
                    (648
                    )
                    
                    $
                    (3,501
                    )Denominator:Weighted
      average number of shares outstanding, basic and diluted
                    
                    
                    93,094
                    
                    
                    
                    79,933
                    
                    
                    
                    72,904Loss
      per share from continuing operations,basic
      and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.05
                    )Net
      loss per share, basic and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
 
 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.
 
 
 12.  
CONTRIBUTED SURPLUS
  a)
                  The
      following table summarizes the transactions within contributed
      surplus.
 2007
                  
                  
                  2006(in
      thousands)Opening
      balance
                  
                  $
                  1,819
                  
                  
                  $
                  1,555Allocation
      of recorded value of expired warrants (Note 12 (b))
                  
                  
                  52
                  
                  
                  
                  67Rights
      offering (Note 11 (e))
                  
                  
                  (427
                  )
                  
                  
                  -Repayment
      of secured subordinated notes (Note 12 (c))
                  
                  
                  655
                  
                  
                  
                  170Allocation
      of recorded value of expired options (Note 12 (d))
                  
                  
                  -
                  
                  
                  
                  78Allocation
      of unamortized deferred charges upon conversion of secured subordinated
      notes (Note 12 (e))
                  
                  
                  -
                  
                  
                  
                  (51
                  )Closing
      balance
                  
                  $
                  2,099
                  
                  
                  $
                  1,819
  b)
                  During the year ended December
      31, 2007, recorded value of $52,000 (2006 - $67,000) related to expired
      warrants was allocated from warrants to contributed surplus (See Note 13
      (b)).
  c)
                  During the year ended December
      31, 2007, recorded value of $655,000 (2006 - $170,000) related to the
      maturity of secured subordinated notes was allocated from conversion
      features on secured subordinated notes to contributed surplus (See Note
      9).
  d)
                  During the year ended December
      31, 2006, recorded value of $78,000 related to expired options was
      allocated from options to contributed surplus (See Note
      15).
 
 e)
                  During the year ended December
      31, 2006, conversion of the Series I secured subordinated notes resulted
      in the reduction of contributed surplus by $51,000 due to the allocation
      of unamortized deferred charges (See Note 6
  (c)).
 
 
 
 Northcore
Technologies Inc. F-23
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 13.
                  WARRANTS
 
 a)
                  The
      following table summarizes the transactions within
    warrants.
 2007
                  
                  
                  2006Number
                  
                  
                  Amount
                  
                  
                  Number
                  
                  
                  Amount(in
      thousands of warrants and dollars)Opening
      balance
                  
                  
                  17,064
                  
                  
                  $
                  580
                  
                  
                  
                  8,854
                  
                  
                  $
                  278Warrants
      issued pursuant to:Conversion
      of debentures (Note 9)
                  
                  
                  81
                  
                  
                  
                  5
                  
                  
                  
                  9,133
                  
                  
                  
                  369Warrants
      expired (Note 13 (b))
                  
                  
                  (806
                  )
                  
                  
                  (52
                  )
                  
                  
                  (923
                  )
                  
                  
                  (67
                  )Closing
      balance
                  
                  
                  16,339
                  
                  
                  $
                  533
                  
                  
                  
                  17,064
                  
                  
                  $
                  580
 
 In
addition to the above, the conversion of the remaining secured subordinated
notes would result in the issuance of nil (2006 - 2,661,000) common
share-purchase warrants for Series G notes, nil (2006 - 425,000) common
share-purchase warrants for Series H notes, 2,000,000 (2006 - 2,000,000) common
share-purchase warrants for Series I notes and 1,900,000 (2006 - 1,900,000)
common share-purchase warrants for Series J notes.
 
 b)
                  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 secured
      subordinated notes.  These warrants expired unexercised on May
      19, 2007 and were accordingly
canceled.
 
 During
the year ended December 31, 2004, the Company issued 893,000 common
share-purchase warrants with an exercise price of $0.50 and an expiry date of
August 19, 2006 in connection with the issuance of Series E
notes.  These warrants expired unexercised on August 19, 2006 and were
accordingly cancelled.
 
 During
the year ended December 31, 2003, the Company issued 30,000 common
share-purchase warrants, with an exercise price of $0.50 per warrant, in
consideration for professional fees related to the issuance of Series E
notes.  These warrants expired unexercised on August 19, 2006 and were
accordingly cancelled.
 
 
 14.
                  STOCK
      OPTIONS
  a)
                  Stock
      options are comprised of the following
  components:
 2007
                  
                  
                  2006Number
                  
                  
                  Amount
                  
                  
                  Number
                  
                  
                  Amount(in
      thousands of options and dollars)Employees
      (Note 14 (b))
                  
                  
                  3,532
                  
                  
                  $
                  1,230
                  
                  
                  
                  2,220
                  
                  
                  $
                  1,136Non-employees
                  
                  
                  -
                  
                  
                  
                  116
                  
                  
                  
                  -
                  
                  
                  
                  116Total
                  
                  
                  3,532
                  
                  
                  $
                  1,346
                  
                  
                  
                  2,220
                  
                  
                  $
                  1,252
 
  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.
 
 Northcore
Technologies Inc. F-24
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 The
aggregate exercise price for employee options outstanding at December 31, 2007
was approximately $549,000 (2006 - $392,000).  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 2008 and 2012.
 
 A
summary of changes in the employee stock option plan for the two years ended
December 31, 2007 is as follows:
 2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Number
      of Options
                    (in
      thousands)
                  
                  
                  Weighted
      Average
                    Exercise
      PriceOpening
      balance
                  
                  
                  2,220
                  
                  
                  
                  2,997
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.23Granted
                  
                  
                  1,350
                  
                  
                  
                  550
                  
                  
                  
                  0.12
                  
                  
                  
                  0.15Cancelled
                  
                  
                  (38
                  )
                  
                  
                  (1,327
                  )
                  
                  
                  0.14
                  
                  
                  
                  0.28Closing
      balance
                  
                  
                  3,532
                  
                  
                  
                  2,220
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.18Exercisable,
      end of year
                  
                  
                  2,921
                  
                  
                  
                  1,827
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.18
 
 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 vest 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, 2007.
 
 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 vest quarterly over a four-quarter
period commencing with the quarter ended June 30, 2006.
 
 On
December 22, 2005, the Company granted 1,000,000 stock options to certain
employees, officers and directors of the Company.  The options have an
exercise price of $0.16 and expire on December 22, 2008.  The options
are comprised of two categories: non-performance based options and performance
based options.  The non-performance based options account for 500,000
of the options granted. Of these options, 400,000 vest quarterly over a
four-quarter period and 100,000 were cancelled in the quarter ended March 31,
2006.  The remaining 500,000 performance-based options were granted to
an officer and director of the Company and will vest upon the achievement of
specific Company performance objectives.  All of these
performance-based options have vested as at December 31, 2007.
 
 On
November 15, 2005, the Company granted 75,000 stock options to directors of the
Company.  The options have an exercise price of $0.17 and expire on
November 15, 2008.  The options vested on the date of
grant.
 
 On
January 25, 2005, the Company granted 1,500,000 stock options to employees,
officers and directors.  The options have an exercise price of $0.22
and expire on January 25, 2010.  The options are comprised of two
categories: non-performance based options and performance based
options.  The non-performance based options account for 1,361,000 of
the options granted.  These options vest quarterly over a six-quarter
period commencing with the quarter ended March 31, 2005.  The
remaining 139,000 performance-based options were granted to certain Company
officers and will vest upon the achievement of specific Company performance
objectives.  None of these performance-based options have vested as at
December 31, 2007.
 
 Northcore
Technologies Inc. F-25
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 A
summary of the status of the Company’s outstanding options at December 31, 2007
is as follows:
 Exercise
      Prices
                  Number
      of Options Outstanding
                    (in
      thousands)
                  Remaining
      Contractual
                    Life
      in Years
                  Number
      of Options Exercisable
                    (in
      thousands)$   0.12
                  1,342
                  4.5
                  847$   0.15
                  520
                  3.6
                  480$   0.16
                  900
                  3.0
                  900$   0.17
                  75
                  0.9
                  75$   0.22
                  695
                  2.1
                  6193,532
                  
                  2,921
 
 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:
 2007
                  
                  
                  2006
                  
                  
                  2005Dividend
      yield
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Risk
      free interest rate
                  
                  
                  4.61
                  %
                  
                  
                  4.21
                  %
                  
                  
                  3.86
                  %Volatility
                  
                  
                  82.82
                  %
                  
                  
                  87.27
                  %
                  
                  
                  86.66
                  %Expected
      term, in years
                  
                  
                  5
                  
                  
                  
                  5
                  
                  
                  
                  4.07
 
 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, 2007, the employee stock option expense was $94,000 (2006 -
$137,000, 2005 - $105,000).  The weighted average grant date fair
values of the options issued during the year was $0.08 (2006 - $0.11, 2005 -
$0.16)
 
 
 15.
                  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 9 (c)).  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.
 
 During
the year ended December 31, 2004, the Company issued 485,000 compensation
options with a fair value of $59,000 relating to the issuance of Series G
secured subordinated notes (See Note 9 (e)).  The options entitle the
holder to purchase an equity unit at a purchase price of $0.31 per unit. The
options expired unexercised on June 15, 2006.  Each equity unit
consists of one common share and one half of a share-purchase warrant with an
exercise price of $0.50.  The share-purchase warrants expire on June
15, 2008.
 
 Also
during the year ended December 31, 2004, the Company issued 150,000 compensation
options with a fair value of $19,000 relating to a private equity placement (See
Note 11 (c)).  The options entitle the holder to purchase an equity
unit at a purchase price of $0.20 per unit.  The options expired
unexercised on December 6, 2006.  Each equity unit consists of one
common share and one share-purchase warrant with an exercise price of
$0.35.  The share-purchase warrants expire on December 6,
2008.
 
 
 Northcore
Technologies Inc. F-26
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 16.
                  FINANCIAL
      INSTRUMENTS
 
 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, UK pound, and EURO.  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, 2007, the Company incurred foreign exchange losses in the amount of
$13,000 (2006 - $8,000, 2005 - $11,000), which is recorded in general and
administrative expenses.
  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.
 
 In
2007, two customers accounted for 69 percent and 10 percent, respectively, (2006
- three customers accounted for 34 percent, 18 percent and 12 percent,
respectively, 2005 - two customers accounted for 31 percent and 29 percent,
respectively) of total revenues from continuing operations.  At
December 31, 2007, three customers accounted for 52 percent, 24 percent and 11
percent, respectively, of total accounts receivable.  At December 31,
2006, two customers accounted for 64 percent and 17 percent, respectively, of
total accounts receivable.
 
 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 and K notes as it is not practical to
determine the fair value of the notes as at December 31, 2007, considering that
they are not publicly traded.
 
 
 17.  
COMMITMENTS AND CONTINGENCIES
 
 (a)
                  Minimum
      payments under operating leases are as
follows:
  Year
                    
                    Amount
                      (in
      thousands)2008
                    
                    $
                    1602009
                    
                    
                    128
 (b)
                  The
      Company entered into a licensing agreement with NCR Corporation on April
      29th, 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.
 
  
 
 
 Northcore
Technologies Inc. F-27
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 18.  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.
 2007
                  
                  
                  2006
                  
                  
                  2005(in
      thousands)Accounts
      receivable
                  
                  $
                  35
                  
                  
                  $
                  130
                  
                  
                  $
                  250Deposits
      and prepaid expenses
                  
                  
                  25
                  
                  
                  
                  52
                  
                  
                  
                  70Accounts
      payable
                  
                  
                  (26
                  )
                  
                  
                  (320
                  )
                  
                  
                  380Accrued
      liabilities
                  
                  
                  257
                  
                  
                  
                  211
                  
                  
                  
                  112Deferred
      revenue
                  
                  
                  (16
                  )
                  
                  
                  (23
                  )
                  
                  
                  15$
                  275
                  
                  
                  $
                  50
                  
                  
                  $
                  827
 
 The
following table summarizes the non-cash financing activities of the
Company.
 2007
                  
                  
                  2006
                  
                  
                  2005(in
      thousands)Issuance
      of common shares in settlement of interest payments (Note 11
      (d))
                  
                  $
                  557
                  
                  
                  $
                  84
                  
                  
                  $
                  -Issuance
      of common shares in settlement of demand loans (Note 8)
                  
                  
                  340
                  
                  
                  
                  -
                  
                  
                  
                  -Reduction
      in debt from conversion of secured subordinated notes (Note 9
      (k))
                  
                  
                  (46
                  )
                  
                  
                  (447
                  )
                  
                  
                  (226
                  )Reduction
      in conversion feature from conversion of secured subordinated notes (Note
      9 (k))
                  
                  
                  (18
                  )
                  
                  
                  (845
                  )
                  
                  
                  (146
                  )Issuance
      of common shares in settlement of accounts payable (Note 11
      (c))
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  24Issuance
      of compensation options relating to issuance of secured subordinated notes
      (Note 15)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (193
                  )
 
 
 19.
                  OTHER
      INCOME
  The
Company ceased its on-line retail activities in October 2000; however, during
2005, the Company received non-recurring proceeds of $42,000 related to on-line
retail activities that had been carried out prior to October 2000.
 
 
 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-28
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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,
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Consolidated Statements of
      OperationsOperating
      revenue
                  
                  $
                  73
                  
                  
                  $
                  72
                  
                  
                  $
                  9Operating
      expenses
                  
                  
                  (3
                  )
                  
                  
                  (3
                  )
                  
                  
                  (1
                  )Net
      income
                  
                  $
                  70
                  
                  
                  $
                  69
                  
                  
                  $
                  8Consolidated
      Balance SheetsCurrent
      assets
                  
                  $
                  36
                  
                  
                  $
                  15
                  
                  
                  $
                  35Current
      liabilities
                  
                  
                  (31
                  )
                  
                  
                  (35
                  )
                  
                  
                  (27
                  )Net
      investment
                  
                  $
                  5
                  
                  
                  $
                  (20
                  )
                  
                  $
                  8Consolidated
      Statements of Cash FlowsOperating
      activities
                  
                  $
                  69
                  
                  
                  $
                  77
                  
                  
                  $
                  35Financing
      activities
                  
                  
                  (48
                  )
                  
                  
                  (97
                  )
                  
                  
                  -Net
      cash inflow (outflow)
                  
                  $
                  21
                  
                  
                  $
                  (20
                  )
                  
                  $
                  35
 
 
 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
  2007
                  
                  
                  2006(in
      thousands)Cash
                  
                  $
                  478
                  
                  
                  $
                  475Accounts
      receivable
                  
                  
                  119
                  
                  
                  
                  154Deposits
      and prepaid expense
                  
                  
                  38
                  
                  
                  
                  63Capital
      assets
                  
                  
                  52
                  
                  
                  
                  80Deferred
      charges (Note 21 (b))
                  
                  
                  44
                  
                  
                  
                  110Accounts
      payable and accrued liabilities
                  
                  
                  (577
                  )
                  
                  
                  (1,075
                  )Deferred
      revenue
                  
                  
                  (52
                  )
                  
                  
                  (68
                  )Current
      portion of notes payable
                  
                  
                  (378
                  )
                  
                  
                  -Current
      portion of secured subordinated notes (Note 21 (b))
                  
                  
                  -
                  
                  
                  
                  (1,450
                  )Notes
      payable
                  
                  
                  (205
                  )
                  
                  
                  -Secured
      subordinated notes (Note 21 (b))
                  
                  
                  (1,556
                  )
                  
                  
                  (747
                  )Shareholders’
      deficiency (Note 21 (b))
                  
                  
                  2,037
                  
                  
                  
                  2,458
 
  Northcore
Technologies Inc. F-29
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 Consolidated Statements of
Operations
 2007
                    
                    
                    2006
                    
                    
                    2005(in
      thousands, except per share amounts)Net
      loss for the year as reported under Canadian GAAP
                    
                    $
                    (2,312
                    )
                    
                    $
                    (648
                    )
                    
                    $
                    (3,501
                    )Adjustments:
                      Accretion of
      interest on secured subordinated notes (Note 21
(b))
                    
                    
                    333
                    
                    
                    
                    454
                    
                    
                    
                    405Amortization of
      deferred charges relating to secured subordinated notes under Canadian
      GAAP (Note 21 (b))
                    
                    
                    -
                    
                    
                    
                    62
                    
                    
                    
                    63Amortization of
      deferred charges relating to secured subordinated notes under U.S. GAAP
      (Note 21 (b))
                    
                    
                    (65
                    )
                    
                    
                    (350
                    )
                    
                    
                    (148
                    )Amortization of
      beneficial conversion feature (Note 21 (b))
                    
                    
                    (160
                    )
                    
                    
                    (698
                    )
                    
                    
                    (117
                    )(Income) loss
      from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    (2,122
                    )
                    
                    
                    8Net
      loss from continuing operations for the year as reported under U.S.
      GAAP
                    
                    $
                    (2,204
                    )
                    
                    $
                    (3,302
                    )
                    
                    $
                    (3,290
                    )Income
      (loss) from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    2,122
                    
                    
                    
                    (8
                    )Net
      loss for the year as reported under U.S. GAAP
                    
                    
                    (2,204
                    )
                    
                    
                    (1,180
                    )
                    
                    
                    (3,298
                    )Other
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    (90
                    )
                    
                    
                    (22
                    )Comprehensive
      loss as reported under U.S. GAAP
                    
                    $
                    (2,204
                    )
                    
                    $
                    (1,270
                    )
                    
                    $
                    (3,320
                    )Basic
      and diluted loss per share from continuing operations
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.05
                    )Basic
      and diluted net loss per share
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
  (b)  Financial Instruments with
      Liability and Equity
Elements
 
 Under
Canadian GAAP, the secured subordinated notes (See Note 9) 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 $333,000 (2006
- $454,000, 2005 - $405,000) 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.  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 2007
amortization expense under U.S GAAP is $65,000 (2006 - $128,000, 2005 -
$125,000) compared to an amortization expense of $nil (2006 - $62,000, 2005 -
$63,000) under Canadian GAAP.  In addition, the deferred financing
costs are $44,000 at December 31, 2007 (2006 - $110,000) under U.S. GAAP as
compared to $nil (2006 - $41,000) 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 additional amount of $1,000
(2006 - $222,000, 2005 - $23,000), representing the unamortized financing
charges associated with the conversion of the Series G notes (2006 - Series G
and I notes, 2005 - Series H notes), is expensed.  The unamortized
financing charges under Canadian GAAP, in the amount of $1,000 (2006 - $53,000,
2005 - $12,000), were allocated to contributed surplus upon the conversion of
the Series G notes (2006 - Series G and I notes, 2005 - Series H
notes).
  Northcore
Technologies Inc. F-30
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (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 $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.  In 2005, the Company recognized
beneficial conversion features of $664,000 relating to the Series I subordinated
notes.  An interest expense of $160,000 (2006 - $698,000, 2005 -
$117,000) 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
net 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 table of certain consolidated balance sheet 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, 2007, includes an allowance for
doubtful accounts in the amount of $nil (2006 - $nil).
 
 U.S.
GAAP requires the disclosure of accrued liabilities that exceed five percent of
current liabilities.  Included in accrued liabilities at December 31,
2007 are accrued interest payable of $109,000 (2006 - $574,000) and accrued
audit fees of $98,000 (2006 - $95,000).
 
 U.S.
GAAP requires the disclosure of non-cash interest components incurred during the
year.  In 2007, the Company incurred $160,000 (2006 - $698,000, 2005 -
$117,000) 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 Company is currently assessing the
impact of this standard.
 
 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-31
 Notes
to the Consolidated Financial Statements
 Years
ended December 31, 2007, 2006 and 2005
 (in
Canadian dollars)
 22.
                  SEGMENTED
      INFORMATION
 
 The
Company operates in a single reportable operating segment, that is, the design,
delivery, hosting and support 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.  Sales for each regional segment are based on the location
of third party customer.
 
 The
Company operates in two reportable geographic segments: 1) North America; and 2)
Ireland and the United Kingdom.   The accounting policies of the
segments are the same as those described in the significant accounting policies
in Note 3.  Substantially all of the Company’s assets are in
Canada.  Information about the Company’s geographical net revenues is
set forth below:
 Net
      Revenue by Geographic Regions:
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(in
      thousands)North
      America
                  
                  $
                  1,050
                  
                  
                  $
                  661
                  
                  
                  $
                  657Ireland
      and U.K.
                  
                  
                  116
                  
                  
                  
                  412
                  
                  
                  
                  628Revenue
      from discontinued operations (Note 4)
                  
                  
                  -
                  
                  
                  
                  2,399
                  
                  
                  
                  4,490$
                  1,166
                  
                  
                  $
                  3,472
                  
                  
                  $
                  5,775