UNITED
                  STATES SECURITIES AND EXCHANGE COMMISSION
                **WASHINGTON,
                  D.C. 20549****FORM
                  20-F**o           REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934
                
                ORx           ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
                
                ORo           TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
                
                ORo          SHELL
                  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE
                  ACT of 1934
                
                Date
                  of event requiring this shell company report
                  ___________________For
                  the transition period from __________ to __________.Commission
                  File No. **001-14835****NORTHCORE
                  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.
                
                **None**Securities
                  registered or to be registered pursuant to Section 12(g) of the
                  Act.
                
                **Common
                  Shares**Securities
                  for which there is a reporting obligation pursuant to Section 15(d)
                  of the
                  Act.
                
                **None**Indicate
                  the number of outstanding shares of each of the issuer’s classes of
                  capital or common stock as of the close of the period covered by
                  the
                  Annual Report.**83,742,508
                  Common Shares as of December 31, 2006**Indicate
                  by check mark if the registrant is a well-known seasoned issuer
                  as defined
                  in Rule 405 of the Securities Act
                
                Yes oNo
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 oNo
xIndicate
                  by check mark whether the registrant (1) has filed all reports
                  required to
                  be filed by Section 13 or 15(d) of the Securities Exchange Act
                  of 1934
                  during the preceding 12 months (or for such shorter period that
                  the
                  registrant was required to file such reports), and (2) has been
                  subject to
                  such filing requirements for the past 90 days.Yes xNo
                    oIndicate
                  by check mark whether the registrant is a large accelerated filer,
                  an
                  accelerated filer, or a non-accelerated filer.  See definition
                  of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
                  Exchange Act. (Check one):
                
                Large
                  Accelerated filer o          Accelerated
                  filer o          Non-accelerated
                  filer xIndicate
                  by check mark which financial statement item the registrant has
                  elected to
                  follow.Item
                  17 oItem
                  18xIf
                  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 oNo
x













**NORTHCORE
      TECHNOLOGIES INC.**




**Annual
      Report on Form 20-F for the Fiscal Year**


**Ended
      December 31, 2006**




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 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; 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;


•
            increasingly
                longer collection 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;


•
            your
                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
                ability to repay our debt to
                lenders;


•
            our
                ability to retain and attract key
                personnel;


•
            risk
                of significant delays in product
                development;


•
            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;





3








•
            problems
                which may arise in connection with the acquisition or integration
                of new
                businesses, products, services, technologies or other strategic
                relationships;


•
            risks
                associated with international
                operations;


•
            risks
                associated with protecting our intellectual property, and potentially
                infringing the intellectual property rights of others;
                and


•
            sensitivity
                to the overall economic
                environment.


•
            increasingly
                longer sales cycles





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:  BID BUDDYTM; SEARCH BUDDYTM; DYNAMIC BUYERTM and DYNAMIC
      SELLERTM. Each trademark, trade name, or service mark of any other company
      appearing in this Annual Report belongs to its holder.







4





**TABLE
      OF CONTENTS**





PagePART
                I
            7ITEM
                1
            -
                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
            7ITEM
                2
            -
                OFFER STATISTICS AND EXPECTED TIMETABLE
            7ITEM
                3
            -
                KEY INFORMATION
            7A.
            Selected
                Financial Data
            7B.
            Capitalization
                and Indebtedness
            9C.
            Reasons
                For The Offer And Use Of Proceeds
            9D.
            Risk
                Factors
            9ITEM
                4
            -
                INFORMATION ON THE COMPANY
            17A.
            History
                and Development of the Company
            17B.
            Business
                Overview
            .20C.
            Organizational
                Structure
            30D.
            Property,
                Plants and Equipment
            30ITEM
                4A
            -
                UNRESOLVED STAFF COMMENTS
            30ITEM
                5
            -
                OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION AND
                ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF
                OPERATIONS.
            30A.
            Operating
                Results
            33B.
            Liquidity
                and Capital Resources
            41C.
            Customer
                Service and Technology
            45D.
            Trend
                Information.
            45E.
            Off-Balance
                Sheet Arrangements
            45F.
            Tabular
                Disclosure of Contractual Obligations.
            45ITEM
                6
            -
                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
            46A.
            Directors
                And Senior Management
            46B.
            Compensation
            47C.
            Board
                Practices
            49D.
            Employees
            49E.
            Share
                Ownership
            51ITEM
                7
            -
                MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
            51A.
            Major
                Shareholders
            51B.
            Related
                Party Transactions
            51





5





ITEM
                  8
              -
                  FINANCIAL INFORMATION
              53ITEM
                  9
              -
                  THE OFFER AND LISTING
              53ITEM
                  10
              -
                  ADDITIONAL INFORMATION
              56A.
              Share
                  Capital
              56B.
              Memorandum
                  and Articles of Association
              56C.
              Material
                  Contracts
              59D.
              Exchange
                  Controls
              60E.
              Taxation
              60F.
              Dividends
                  and Paying Agents
              65G.
              Statements
                  by Experts.
              66H.
              Documents
                  on Display
              66I.
              Subsidiary
                  Information
              66ITEM
                  11
              -
                  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
              66ITEM
                  12
              -
                  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
              66PART
                  II
              66ITEM
                  13
              -
                  DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES
              66ITEM
                  14
              -
                  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
                  OF
                  PROCEEDS
              67ITEM
                  15
              -
                  CONTROLS AND PROCEDURES
              67ITEM
                  16
              [RESERVED]
              67ITEM
                  16
              
              67A.
              Audit
                  Committee Financial Expert
              67B.
              Code
                  of Ethics
              67C.
              Principal
                  Accountant Fees and Services
              68D.
              Exemptions
                  from the Listing Standards For Audit Committees
              68E.
              Purchases
                  of Equity Securities by the Issuer and Affiliated
                  Purchasers
              68PART
                  III
              .68ITEM
                  17
              -
                  FINANCIAL STATEMENTS
              68ITEM
                  18
              -
                  FINANCIAL STATEMENTS
              68ITEM
                  19
              -
                  EXHIBITS
              68







6






Unless
      otherwise indicated, all references in this Annual Report to “dollars” or “$”
are references to Canadian dollars.  Our financial statements are
      expressed in Canadian dollars.  Except as otherwise noted, certain
      financial information presented in this Annual Report has been translated from
      Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.1307 to US$1.00
      (or US$ 0.8844 to Cdn 1.00), the noon buying rate in New York City on
      December 31, 2006 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, 2006, 2005, and 2004 and
      consolidated balance sheet data as of December 31, 2006 and 2005, 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,
      2003
      and 2002 and the consolidated balance sheet data as at December 31, 2004,
      2003, and 2002 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 20 of our consolidated financial statements.




Historical
      results are not necessarily indicative of results to be expected for any future
      period.







7








**Year
                  Ended December 31**(3)**Statement
                  of Operations Data:**
              
              **2006**
                **(Cdn$)**
              
              
              **2005**
                **(Cdn$)**
              
              
              **2004**
                **(Cdn$)**
              
              
              **2003**
                **(Cdn$)**
              
              
              **2002**
                **(Cdn$)****(in
                  thousands except for per share data)**Revenue
              
              
              1,073
              
              
              
              1,285
              
              
              
              1,478
              
              
              
              2,456
              
              
              
              2,654Operating
                  expenses:General
                  and administrative
              
              
              1,790
              
              
              
              2,517
              
              
              
              3,043
              
              
              
              3,208
              
              
              
              4,906Customer
                  service and technology
              
              
              664
              
              
              
              839
              
              
              
              854
              
              
              
              831
              
              
              
              1,405Sales
                  and marketing
              
              
              377
              
              
              
              505
              
              
              
              561
              
              
              
              737
              
              
              
              1,478Employee
                  stock options
              
              
              137
              
              
              
              105
              
              
              
              27
              
              
              
              135
              
              
              
              -Depreciation
                  and amortization
              
              
              92
              
              
              
              95
              
              
              
              149
              
              
              
              634
              
              
              
              1,326Interest
                  expense
              
              
              783
              
              
              
              717
              
              
              
              443
              
              
              
              286
              
              
              
              182Total
                  expenses
              
              
              3,843
              
              
              
              4,778
              
              
              
              5,077
              
              
              
              5,831
              
              
              
              9,297Loss
                  from continuing operations
              
              
              (2,770
              )
              
              
              (3,493
              )
              
              
              (3,599
              )
              
              
              (3,375
              )
              
              
              (6,643
              )Net
                  Loss
              
              
              (648
              )
              
              
              (3,501
              )
              
              
              (5,104
              )
              
              
              (2,815
              )
              
              
              (9,364
              )Loss
                  per common share (1)
              
              
              (0.01
              )
              
              
              (0.05
              )
              
              
              (0.08
              )
              
              
              (0.05
              )
              
              
              (0.22
              )Weighted
                  average number of common shares
              
              
              79,933
              
              
              
              72,904
              
              
              
              61,938
              
              
              
              54,324
              
              
              
              41,968









As
                at December 31**Balance
                Sheet Data: (2)**
            
            2006
              (Cdn$)
            
            
            **2005**
              **(Cdn$)**
            
            
            **2004**
              **(Cdn$)**
            
            
            **2003**
              **(Cdn$)**
            
            
            **2002**
              **(Cdn$)****(in
                thousands)**Working
                capital
            
            
            (2,132
            )
            
            
            (1,164
            )
            
            
            381
            
            
            
            486
            
            
            
            (1,757
            )Total
                assets
            
            
            813
            
            
            
            1,843
            
            
            
            2,493
            
            
            
            3,211
            
            
            
            6,355Shareholders’
                (deficiency) equity
            
            
            (2,255
            )
            
            
            (2,710
            )
            
            
            (1,009
            )
            
            
            1,026
            
            
            
            1,198





(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)
            We
                have not paid dividends since our
                formation.


(3)
            The
                statement of operations data for the years ended December 31, 2005,
                2004,
                2003 and 2002 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 and 2002 are
                unaudited.







8





EXCHANGE
      RATES




The
      following tables set forth, for the periods indicated, certain exchange rates
      based on the noon buying rate in New York City for cable transfers in Canadian
      dollars, as certified for customs purposes by the Federal Reserve Bank of New
      York.  Such rates are the number of U.S. dollars per one Canadian
      dollar and are the inverse of the rates quoted by the Federal Reserve Board
      of
      New York for Canadian Dollars per U.S. $1.00.  On May 31, 2007, the
      exchange rate was US$1.00 = Cdn$0.9345**.**




Year
                Ended December 31,Rate
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Average
                during year (1)
            
            
            0.8844
            
            
            
            0.8254
            
            
            
            0.7702
            
            
            
            0.7205
            
            
            
            0.6344




(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 monthDecember
                2006
            0.8760
            0.8582January
                2007
            0.8586
            0.8457February
                2007
            0.8631
            0.8437March
                2007
            0.8673
            0.8467April
                2007
            0.9035
            0.8633May
                2007
            0.9345
            0.8980





**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 and, to a limited extent, through cash flow from
      operations.  While our Company’s financial statements for the
      year-ended December 31, 2006, have been prepared on the basis of accounting
      principles applicable to a going







9







concern,
      certain adverse conditions and events cast substantial doubt upon the validity
      of this assumption. The Company has not yet realized profitable operations
      and
      has 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 2006.  Management’s 2007
      business plan includes an increase in revenue and operating cash flow primarily
      from major new contracts in North America. 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.




Management
      believes that continued existence beyond 2006 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, 2006, we had cash
      on hand and cash equivalents of approximately $475,000.




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, 2006, 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.
      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 2006
      consolidated financial statements includes additional comments that refers
      to
      this uncertainty with respect to our ability to continue as a going
      concern.




WE
      ARE NOT PROFITABLE AND WE MAY NEVER BECOME PROFITABLE.




We
      have accumulated net losses of approximately $109 million as of December 31,
      2006.  For the year ended December 31, 2006 our net loss was
      $648,000.  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.




THE
      LIMITED OPERATING HISTORY OF OUR JOINT VENTURE WITH GE COMMERCIAL FINANCE,
      CAPITAL SOLUTIONS MAKES EVALUATING OUR BUSINESS DIFFICULT.




In
      December 2003 we formed the joint
      venture, GE Asset Manager, LLC with GE Capital Solutions. Growing this business
      venture has required the Company 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 Capital Solutions we are increasing our
      business risk by becoming substantially dependent on the business generated
      by
      the joint venture.




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.














10





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.





THE
      ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BE
      LIMITED.




On
      June 3, 2002, we transferred the listing of our common shares from the Nasdaq
      National Market to the Nasdaq SmallCap Market (now known as the Nasdaq Capital
      Market).  On August 22, 2002,







11







our
      common shares were delisted from the Nasdaq SmallCap Market because we did
      not
      satisfy the minimum bid price per share requirement for continued listing on
      that market.  Our common shares immediately became eligible for and
      began trading 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, your
      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 will not affect the
      listing of the 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
      common shares have traded on the Nasdaq National and Small Cap Markets and
      on
      the OTCBB at prices below US$5.00 since April 2000 (on a pre-consolidation
      basis).  As a result, 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 (sourcing, procurement, enterprise asset management
      and
      asset disposition).  We expect that competition will further intensify
      as new companies enter the different segments of our market and larger existing
      companies expand their product lines.




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 assure you 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.




CUSTOMER
      CONCENTRATION




Northcore
      maintains excellent working relationships with a number of key organizations
      such as GE Commercial Finance, Paramount Resources and Trilogy Energy Trust.
      If
      our business or contractual relationships with any these customers is severed
      or
      meaningfully altered, we would experience a significant decline in our
      performance, particularly through reduced revenues. In 2006, three customers
      accounted for 34 percent, 18 percent and 12 percent, respectively, (2005 -
      two
      customers accounted for 31 percent and 29 percent, respectively, 2004 - two
      customers accounted for 32 percent and 15 percent, respectively) of total
      revenues.  At December 31, 2006, one customer accounted for 64 percent
      of total accounts receivable.  At December 31, 2005, there were three
      customers that accounted for 27 percent, 24 percent and 21 percent,
      respectively, of total accounts receivable.







12







WE
      MAY NOT BE ABLE TO RETAIN OR ATTRACT THE HIGHLY SKILLED PERSONNEL WE
      NEED.




Our
      success is substantially dependent on the ability and experience of our senior
      management and other key personnel.  We do not have long-term
      employment agreements with any of our key personnel and maintain no “key person”
life insurance policies.




We
      may need to hire new or additional personnel to respond to attrition or future
      growth of our business.  However, there is significant competition for
      qualified personnel. We cannot be certain we will be able to retain existing
      personnel or hire additional, qualified personnel when needed.




SIGNIFICANT
      DELAYS IN PRODUCT DEVELOPMENT WOULD HARM OUR REPUTATION AND RESULT IN LOSS
      OF
      REVENUE.





If
      we experience significant product development delays, our position in the market
      would be harmed, and our revenues could be substantially reduced, which would
      adversely affect our operating results.  As a result of the
      complexities inherent in our software, major new product enhancements and new
      products often require long development and test periods before they are
      released.  On occasion, we have experienced delays in the scheduled
      release date of new or enhanced products, and we may experience delays in the
      future.  Delays may occur for many reasons, including an inability to
      hire a sufficient number of developers, discovery of bugs and errors or a
      failure of our current or future products to conform to industry
      requirements.  Any such delay, or the failure of new products or
      enhancements in achieving market acceptance, could materially impact our
      business and reputation and result in a decrease in our revenues.




WE
      MAY HAVE TO EXPEND SIGNIFICANT RESOURCES TO KEEP PACE WITH RAPID TECHNOLOGICAL
      CHANGE.




Our
      industry is characterized by rapid technological change, changes in user and
      customer requirements, frequent new service or product introductions embodying
      new technologies and the emergence of new industry standards and
      practices.  Any of these could hamper our ability to compete or render
      our proprietary technology obsolete.  Our future success will depend,
      in part, on our ability to:




•
            develop
                new proprietary technology that addresses the increasingly sophisticated
                and varied needs of our existing and prospective
                customers;


•
            anticipate
                and respond to technological advances and emerging industry standards
                and
                practices on a timely and cost-effective
                basis;


•
            continually
                improve the performance, features and reliability of our products
                in
                response to evolving market demands;
                and


•
            license
                leading technologies.




We
      may be required to make substantial expenditures to accomplish the foregoing
      or
      to modify or adapt our services or infrastructure.




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 products.  Our software products 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;





13





•      loss
      of revenue or required product changes;


•      diversion
      of development resources and increased development expenses;


•      increased
      service and warranty costs;


•      legal
      action by our customers; and


•      increased
      insurance costs.




SYSTEMS
      DEFECTS, FAILURES OR BREACHES OF SECURITY COULD CAUSE A SIGNIFICANT DISRUPTION
      TO OUR BUSINESS, DAMAGE OUR REPUTATION AND EXPOSE US TO LIABILITY.




We
      host certain websites and sub-sites 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.







14





ACQUISITIONS
      OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND/OR
      DISTRACTIONS FOR OUR MANAGEMENT.




In
      the future, we may seek to acquire
      other businesses or make investments in complementary businesses or
      technologies. We may not be able to acquire or manage additional businesses
      profitably or successfully integrate any acquired businesses with our
      business.  Businesses that we acquire may have liabilities that we
      underestimate or do not discover during our pre-acquisition
      investigations.  Certain liabilities, even if we do not expressly
      assume them, may be imposed on us as the successor to the
      business.  Further, each acquisition may involve other special risks
      that could cause the acquired businesses to fail to meet our
      expectations.  For example:




•
            the
                acquired businesses may not achieve expected
                results;


•
            we
                may not be able to retain key personnel of the acquired
                businesses;


•
            we
                may incur substantial, unanticipated costs, delays or other operational
                or
                financial problems when we try to integrate businesses we acquire
                with our
                own;


•
            our
                management’s attention may be diverted;
                or


•
            our
                management may not be able to manage the combined entity effectively
                or to
                make acquisitions and grow our business internally at the same
                time.





The
      occurrence of one or more of these
      factors could have a material adverse effect on our business, financial
      condition, cash flows and results of operations.  In addition, we may
      incur debt or issue equity securities to pay for any future acquisitions or
      investments, which could dilute the ownership interest of our existing
      shareholders.




IF
      WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN
      CERTAIN LICENSES, OUR COMPETITIVE POSITION MAY BE WEAKENED.




Our
      performance and ability to compete are dependent in part on our
      technology.  We rely on a combination of patent, copyright, trademark
      and trade secret laws as well as confidentiality agreements and technical
      measures, to establish and protect our rights in the technology we develop.
      We
      cannot guarantee that any patents issued to us will afford meaningful protection
      for our technology.  Competitors may develop similar technologies
      which do not conflict with our patents.  Others may challenge our
      patents and, as a result, our patents could be narrowed or
      invalidated.




Our
      software is protected by common law copyright laws, as opposed to registration
      under copyright statutes.  Common law protection may be narrower than
      that which we could obtain under registered copyrights.  As a result,
      we may experience difficulty in enforcing our copyrights against certain third
      parties.  The source code for our proprietary software is protected as
      a trade secret.  As part of our confidentiality protection procedures,
      we generally enter into agreements with our employees and consultants and limit
      access to, and distribution of, our software, documentation and other
      proprietary information.  We cannot assure you that the steps we take
      will prevent misappropriation of our technology or that agreements entered
      into
      for that purpose will be enforceable. In order to protect our intellectual
      property, it may be necessary for us to sue one or more third
      parties.  While this has not been necessary to date, there can be no
      guarantee that we will not be required to do so in future to protect our rights.
      The laws of other countries may afford us little or no protection for our
      intellectual property.





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.





15







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.




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.




OUR
      BUSINESS IS SENSITIVE TO THE OVERALL ECONOMIC ENVIRONMENT. ANY SLOWDOWN IN
      INFORMATION TECHNOLOGY SPENDING BUDGETS COULD HARM OUR OPERATING
      RESULTS.




Any
      significant downturn in our customers' markets or in general economic conditions
      that results in reduced information technology spending budgets would likely
      result in a decreased demand for our products and services, longer selling
      cycles and lower prices, any of which may harm our business.




WE
      ARE SUBJECT TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS.




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. 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
      preference 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.







16





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.





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 company was formed called ADB Systems International
      Ltd.
      (“ADB Ltd.”), which was incorporated by certificate and Articles of
      Incorporation. Pursuant to a plan of arrangement approved by the shareholders
      of
      ADB Inc. on October 22, 2002 and by the Ontario Superior Court of Justice on
      October 24, 2002 (the “Arrangement”) the shareholders of ADB Inc. exchanged
      their shares of ADB Inc. for shares of ADB Ltd., as the Company was then known,
      on a one-for-one basis on October 31, 2002. As a result of the Arrangement,
      the
      business of ADB Inc., including all assets and liabilities of ADB Inc. (other
      than those related to retail activities, which remained with ADB Inc.), was
      transferred to the Company in the form of a return of capital. The name of
      ADB
      Inc. was subsequently changed to Bid.Com International Ltd. and on June 30,
      2003, the Company exercised its option to transfer to The Brick all of the
      issued shares of Bid.Com International Ltd. (formerly ADB Inc.) in satisfaction
      of the outstanding principal amount and accrued interest on the loan then owing
      to The Brick.





On
      June 30, 2006, in connection with the disposition of the Company’s Norwegian
      subsidiary ADB Systemer AS, the Company changed its name, by Articles of
      Amendment, to Northcore Technologies Inc. Effective July 18, 2006 the Company’s
      stock symbols were changed to NTI on the TSX and to NTLNF on the
      over-the-counter bulletin board (OTCBB).





The
      principal and registered office of the Company is located at 302 The East Mall,
      Suite 300 Toronto, Ontario, Canada, M9B 6C7 and our telephone number is (416)
      640-0400.  Additional information on the Company can be found at
      www.northcore.com. The information contained on our web site is not deemed
      to be
      part of this Annual Report.





17











**MAJOR
      DEVELOPMENTS**




Significant
      product and business developments over the last three fiscal years have been
      as
      follows:





***Fiscal
      2006***





•
            Northcore
                successfully completed a number of operational 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,
                and provided 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, Capital Solutions (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 Capital Solutions.  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.








18





***Fiscal
      2004***





•
            The
                Company was engaged in a number of activities aimed at expanding
                our
                relationships with existing customers and developing relationships
                with
                new customer organizations. Through these efforts, which included
                the
                introduction of new technology enhancements to our suite of product
                offerings, the cross selling of ancillary applications, and the increase
                in the number of users of our technology, the Company was able to
                expand
                our working relationships with BP the National Health Services (UK),
                and
                GE CEF, among others.





•
            In
                North America, the primary thrust of our activities in 2004 concentrated
                on the rollout of Asset Manager from GE, our joint venture with GE
                Commercial Finance. This joint venture is designed to combine GE’s
                equipment financing and asset management expertise together with
                our
                experience in providing mission-critical technology solutions for
                asset
                lifecycle management. Together, we have developed a suite of integrated
                web-based solutions to help our customers gain greater control of
                their
                capital assets and implement new process efficiencies to their operational
                activities.





•
            Through
                the joint venture, we signed a customer agreement with Kraft Foods
                Global,
                Inc. (“Kraft”) and continued to service our customer agreement with the
                General Electric Company, acting through its GE Aircraft Engines
                division
                (“GE Aircraft Engines”).





•
            The
                Company made a number of enhancements to our suite of technology
                product
                offerings in 2004.   These enhancements, which centered on
                re-architecting the under-lying platform of our Dyn@mic Buyer solution
                and
                expanding the functionality of our WorkMate and Material Transfer
                applications, allow us to stay current with the latest technology
                trends
                while maintaining a competitive
                advantage.





•
            A
                key cornerstone of our technology activities focused on the development
                of
                Asset Tracker, a new, web-based asset-tracking offering that is delivered
                through our joint venture with GE.




***The
      Brick Transaction***




On
      August 30, 2002, we entered into a
      series of agreements with The Brick Warehouse Corporation (“The Brick”) which
      contemplated a series of transactions among The Brick, ADB Systems International
      Inc. (“Old ADB”) and ADB. We refer to those transactions in this Form 20-F
      Annual Report as “The Brick Transaction”.




Pursuant
      to The Brick Transaction:




•
            The
                Brick made a $2.0 million secured loan to Old ADB and ADB at an interest
                rate of 12% per year;


•
            ADB
                and Old ADB agreed to enter into the an arrangement agreement (the
                “Arrangement”); and


•
            The
                Brick and Old ADB agreed to utilize the online retail technology,
                experience and expertise of ADB developed and operated under the
                name
                “Bid.Com International Inc.” for the online sale of consumer products to
                be supplied by The Brick (which we refer to in this report as the
“Retail
                Business”).




The
      $2.0 million secured loan made by The Brick matured on June 30, 2003. At
      maturity, ADB had the right, at its option, to: (i) repay the loan in cash
      or
      (ii) transfer to The Brick all of the issued shares of Old ADB owned by ADB
      in
      satisfaction of the outstanding principal amount and accrued interest then
      owing
      to The Brick.  The obligations of Old ADB and ADB were secured by a
      general security agreement delivered by ADB to The Brick covering all the
      property and assets of ADB. On June 30, 2003, ADB exercised its option to
      transfer to The Brick all of the issued shares of Old ADB in satisfaction of
      the
      outstanding principal amount and accrued interest then owing to The
      Brick.




The
      principal consequences of the Arrangement, which was effective as of October
      31,
      2002, are as follows:




1.
            Shareholders
                of Old ADB received from ADB one common share of ADB in exchange
                for each
                of their common shares of Old ADB.  As a result (i) Old ADB
                became a wholly owned subsidiary of ADB and (ii) each former shareholder
                of Old ADB owns the same number of shares in ADB that it owned in
                Old ADB
                prior to the exchange.







19







2.
            Old
                ADB transferred all of its assets to ADB and ADB assumed all of the
                liabilities and obligations of Old ADB, except that Old ADB retained
                specific assets and liabilities of the Retail
                Business.




3.
            The
                registered office, articles of incorporation, by-laws, directors
                and
                executive officers of Old ADB immediately prior to the Arrangement
                became
                the registered office, articles, by-laws, directors and executive
                officers
                of ADB upon consummation of the
                Arrangement.




4.
            ADB
                adopted the Stock Option Plan of Old ADB.  Upon consummation of
                the Arrangement, all options, warrants or debt that was exercisable
                or
                convertible into shares of Old ADB became convertible into the same
                number
                of shares of ADB.




5.
            The
                articles of amalgamation of Old ADB were amended to: (i) change the
                name
                of Old ADB to Bid.Com International Ltd. and (ii) delete the authorized
                Preference Shares (as defined in such articles) and the rights,
                preferences and restrictions on the transfer of such Preference
                Shares.




Upon
      completion of the Arrangement, the Toronto Stock Exchange approved the listing
      of the ADB common shares issued in exchange for Old ADB common shares or
      issuable upon the exercise of options or warrants or conversion of
      debt.  ADB common shares are listed on the Toronto Stock Exchange for
      trading under the symbol “ADY”.  The shares of Old ADB ceased trading
      on the Toronto Stock Exchange on November 5, 2002.  On April 2, 2003
      an order was issued by the Ontario Securities Commission pursuant to which
      Old
      ADB has ceased to be a reporting issuer in all jurisdictions in Canada in which
      it was a reporting issuer.




***Joint
      Venture withGE Commercial Finance, Commercial Equipment
      Financing***




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 Capital
      Solutions”).  This agreement was entered into in connection with the
      establishment of GE Asset Manager, LLC a joint business venture in which both
      GE
      Capital Solutions and ADB USA hold a 50 percent interest.  Pursuant to
      this business venture, GE Capital Solutions 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 (“*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. *Asset Manager* features
      all-in-one capabilities designed for sourcing of new equipment, tracking and
      reallocation of existing assets, automated appraisal management and disposition
      of surplus equipment.





**PRINCIPAL
      CAPITAL EXPENDITURES AND DIVESTITURES**




For
      a description of principal capital expenditures and divestitures, see Item
      5 -
      OPERATING AND FINANCIAL REVIEW AND PROSPECTS - REALIZED GAINS AND LOSSES ON
      MARKETABLE SECURITIES AND STRATEGIC INVESTMENTS and CAPITAL
      ASSETS.  As of May 31, 2007 we do not have any significant current
      capital divestitures or any current capital expenditures so far in
      2007.




**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;





20








•
            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 and Mortgage Corporation, Paramount Resources, The School Board of
      Broward County, The State of Tennessee Department of General Services and
      Trilogy Energy Trust.





Through
      our wholly owned subsidiary, ADB Systems USA, Inc., Northcore owns a 50 percent
      interest in GE Commercial Finance Asset Manager1, a joint business venture launched
      with the
      General Electric Capital Corporation, through its business division GE
      Commercial Finance, Capital Solutions (referred to in this AIF as “GE” or “GE
      Capital Solutions”). 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 software has 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.  The early systems automated daily
      management of assets, while ERP solutions consolidated basic asset information
      with financial information at the corporate level. Asset Management solutions
      encompass elements of both; have evolved to integrate web-based delivery
      platforms.





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 e.g.,
                Sarbanes-Oxley;


•
            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:







1The
        legal corporate
        name of the joint venture is GE Asset Manager, LLC which operates under the
        name
        GE Commercial Finance Asset Manager (referred to in this AIF as “*GE’s Asset
        Manager”* or “*Asset Manager*”). Additional information on this joint
        venture is provided in this Annual Report under the heading ***Joint
        Venture with******GE Commercial Finance, Capital
        Solutions.***





21





***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.





Customers
      in asset intensive industries - typically those, design WorkMate for use 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.





***ProcureMate*****(TM)** - ProcureMate is a web-based business-to-business e-Procurement
      solution designed to reduce purchase costs, improve purchasing efficiencies
      and
      reduce maverick buying.  ProcureMate allows users to select goods for
      purchase from a web-based catalog and automatically issue purchase orders to
      their suppliers. In connection with the sale of our Norwegian subsidiary in
      June
      2006, the Company entered into a value added reseller agreement with ADB
      Systemer AS to continue to bring ProcureMate to market.




Key
      features of ProcureMate include:




•
            The
                ability to notify suppliers automatically of purchase orders requiring
                processing.


•
            Functionality
                for allowing on-line dialogue to take place between buyers and
                suppliers.


•
            The
                ability to integrate to enterprise resource planning and financial
                systems, reducing manual efforts for processing and consolidating
                purchase
                orders, goods receipt and payment
                activities.


•
            Functionality
                for facilitating direct payment and electronic funds
                transfer.


•
            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 BP (Norway),
      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.





***Dyn@mic
      Buyer*****(TM)** - An on-line sourcing solution,
      Dyn@mic Buyer automates the tendering process, and can be used to improve the
      decision-making process involved in sourcing goods by providing automated
      analysis and selection among competing bids, based on a variety of
      pre-determined factors.







22





Key
      features of the product 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 licensed to our customers. 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 corporate users of Dyn@mic Buyer include the
      National Health Service (UK) and Vesta Insurance.





***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 an application
      service provider 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.


•
            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 Capital
      Solutions.




**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.








23





***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 Northcore 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
      Northcore. The Company charges 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.*******Northcore
      also provides technology hosting services to our customers. Through these
      services, customers gain access to Northcore's applications via the
      Internet through dedicated, secure websites.  Northcore's 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, Capital
      Solutions and Northcore Technologies Inc. that combines GE’s equipment financing
      and asset management expertise together with Northcore's experience in providing
      mission critical technology solutions for asset lifecycle
      management.


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:









24








•
            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 Manager 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.


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.





25








***Asset
      Seller***





Asset
      Seller facilitates instant and global access to a buying community by presenting
      your 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
      your
      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:





***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
      Capital Solutions****-*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
      manufacturing, oil and gas, public and financial services sectors, through
      superior software functionality and through the industry expertise of our
      employees.  In particular, our strategy is comprised of the following
      key components:





26














***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
      2007.




***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.







**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
                Location**GE
                Capital Solutions
            Dyn@mic
                Seller
            Financial
                Services
            USParamount
            WorkMate
            Oil
                and Gas
            CanadaTrilogy
                Energy Trust
            WorkMate
            Oil
                and Gas
            Canada**Customers
                serviced by our joint venture, Asset Manager**Kraft
                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 21 to the Consolidated Financial Statements for the year
      ended December 31, 2006 included in this annual report.





27








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:**
              
              **2006**
              
              
              **2005**
              
              
              **2004**(in
                  thousands)North
                  America
              
              $
              661
              
              
              $
              657
              
              
              $
              797Ireland
                  and U.K.
              
              
              412
              
              
              
              628
              
              
              
              681Revenue
                  from discontinued operations
              
              
              2,399
              
              
              
              4,490
              
              
              
              3,452$
              3,472
              
              
              $
              5,775
              
              
              $
              4,930





**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) and Tampa (Florida, USA). Northcore also entered into a
      business development agreement with Sandstorm Technologies, a leading sales
      and
      marketing firm with offices in New York, Chicago and Ottawa. Acting as sales
      agent, Sandstorm will represent Northcore’s suite of asset management offerings
      to leading North American companies in a number of key industry verticals,
      such
      as manufacturing, financial services and healthcare.




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.




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.







28











Our
      software development and technology expenditures were approximately $664,000
      for
      the year ended December 31, 2006,  $839,000 for the year ended
      December 31, 2005 and $854,000 for the year ended December 31, 2004,
      including salaries and related expenses of our personnel engaged in research
      and
      development.





Our
      software development and technology activities in 2006 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.




**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.




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 Procuri,
                Inc.


•
            Procurement
                -Ariba, Inc., MRO Software, Inc., and broader ERP solution providers
                such
                as Oracle and SAP AG.





29








•
            Asset
                Management- Indus International Inc., Infor, MRO Software, Inc.,
                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.





**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".












30





Overview







We
      develop and sell software solutions and services that allow our customers to
      source, manage, and sell their assets and capital equipment.  We refer
      to our product and services suite as asset lifecycle management
      solutions.  Our solutions help our customers reduce sourcing,
      procurement and maintenance costs, improve asset utilization, reduce operational
      downtime, and generate higher yields for surplus equipment.




The
      Company operates in a single reportable operating segment, that is, the design
      and delivery of software solutions for use by its customers. The single
      reportable operating segment derives its revenues from the sale of software
      licenses and related services. Sales for each regional segment are based on
      the
      location of the third party customer.




The
      Company operates in the following reportable geographic segments: North America
      and Ireland and the United Kingdom




Our
      company is headquartered in Toronto (Canada), and also maintains an office
      in
      Tampa (U.S.).





Our
      shares trade on both the Toronto Stock Exchange (TSX: NTI) and the OTC Bulletin
      Board (OTCBB: NTLNF).





































31








**SELECTED
      ANNUAL INFORMATION**


(in
      thousands of Canadian dollars)


**Year
                  ended December 31,**
              
              **2006**
              
              
              **2005**
              
              
              **2004****(Restated
                  - note 1)**
              
              
              **(Restated
                  - note 1)**License
                  revenue
              
              $
              10
              
              
              $
              122
              
              
              $
              255Service
                  revenue
              
              
              1,063
              
              
              
              1,163
              
              
              
              1,223Total
                  revenue
              
              
              1,073
              
              
              
              1,285
              
              
              
              1,478Operating
                  expenses:General
                  and administrative
              
              
              1,790
              
              
              
              2,559
              
              
              
              3,043Customer
                  service and technology
              
              
              664
              
              
              
              839
              
              
              
              854Sales
                  and marketing
              
              
              377
              
              
              
              505
              
              
              
              561Employee
                  stock options
              
              
              137
              
              
              
              105
              
              
              
              27Depreciation
                  and amortization
              
              
              92
              
              
              
              95
              
              
              
              149Other
                  income
              
              
              -
              
              
              
              (42
              )
              
              
              -Total
                  operating expenses
              
              
              3,060
              
              
              
              4,061
              
              
              
              4,634Loss
                  from continuing operations before the under-noted
              
              
              (1,987
              )
              
              
              (2,776
              )
              
              
              (3,156
              )Interest
                  expense:Cash
                  interest expense
              
              
              345
              
              
              
              312
              
              
              
              177Accretion
                  of secured subordinated notes
              
              
              454
              
              
              
              405
              
              
              
              266Interest
                  income
              
              
              (16
              )
              
              
              -
              
              
              
              -783
              
              
              
              717
              
              
              
              443Loss
                  from continuing operations
              
              
              (2,770
              )
              
              
              (3,493
              )
              
              
              (3,599
              )Income
                  (loss) from discontinued operations
              
              
              2,122
              
              
              
              (8
              )
              
              
              (1,505
              )NET
                  LOSS FOR THE YEAR
              
              $
              (648
              )
              
              $
              (3,501
              )
              
              $
              (5,104
              )LOSS
                  PER SHARE:***From
                  continuing operations, basic and diluted***
              
              $
              (0.03
              )
              
              $
              (0.05
              )
              
              $
              (0.06
              )***Net
                  loss per share, basic and diluted***
              
              $
              (0.01
              )
              
              $
              (0.05
              )
              
              $
              (0.08
              )***WEIGHTED
                  AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
                  (000’s)***
              
              
              79,933
              
              
              
              72,904
              
              
              
              61,938




**RECONCILIATION
      OF NET LOSS TO EBITDA**


**Year
                ended December 31,**
            
            **2006**
            
            
            **2005**
            
            
            **2004****(Restated
                - note 1)**
            
            
            **(Restated
                - note 1)**Net
                loss for the year, as per above
            
            $
            (648
            )
            
            $
            (3,501
            )
            
            $
            (5,104
            )Reconciling
                items:Employee
                stock options
            
            
            137
            
            
            
            105
            
            
            
            27Interest
                expense:Cash
                interest expense
            
            
            345
            
            
            
            312
            
            
            
            177Accretion
                of secured subordinated notes
            
            
            454
            
            
            
            405
            
            
            
            266Depreciation
                and amortization
            
            
            92
            
            
            
            95
            
            
            
            149Other
                income
            
            
            -
            
            
            
            (42
            )
            
            
            -Interest
                income
            
            
            (16
            )
            
            
            -
            
            
            
            -(Income)
                loss from discontinued operations
            
            
            (2,122
            )
            
            
            8
            
            
            
            1,505EBITDA
            
            $
            (1,758
            )
            
            $
            (2,618
            )
            
            $
            (2,980
            )




1.  In
      accordance with GAAP, prior periods have been restated as a result of the
      disposition of ADB Systemer in June 2006.





32








**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% 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 receivable.  The Company received a total of $77,000 in
      royalties from the period of discontinued operations to the year
      end.  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 change 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 and
      entered into a Value Added Reseller Agreement with ADB Systemer.





The
      consolidated financial statements and related note disclosures for 2005 and
      2004
      have been restated to reflect the impact of the discontinued
      operations.





The
      following summarizes the balance sheet, statement of operations and statement
      of
      cash flows information for the Company’s discontinued operations.


**Balance
                Sheet**
            
            **2006**
            
            
            **2005**(in
                thousands)Current
                assets
            
            $
            -
            
            
            $
            1,114Long
                term assets
            
            
            -
            
            
            
            56Current
                liabilities
            
            
            -
            
            
            
            (894
            )Net
                assets from discontinued operations
            
            $
            -
            
            
            $
            276




**Income
                  Statement**
              
              **2006**
              
              
              **2005**
              
              
              **2004**(in
                  thousands, except per share amounts)Revenue
              
              $
              2,399
              
              
              $
              4,491
              
              
              $
              3,453Income
                  (loss) from operations
              
              
              331
              
              
              
              (8
              )
              
              
              (1,505
              )Gain
                  from disposition of discontinued operations
              
              
              1,791
              
              
              
              -
              
              
              
              -Income
                  (loss) from discontinued operations
              
              $
              2,122
              
              
              $
              (8
              )
              
              $
              (1,505
              )Income
                  (loss) per share from discontinued operations, basic and
                  diluted
              
              $
              0.02
              
              
              $
              -
              
              
              $
              (0.02
              )


**Statement
                  of Cash Flows**
              
              **2006**
              
              
              **2005**
              
              
              **2004**(in
                  thousands)Operating
                  activities
              
              $
              (317
              )
              
              $
              141
              
              
              $
              (673
              )Investing
                  activities - Net proceeds from disposition of discontinued
                  operations
              
              
              2,643
              
              
              
              -
              
              
              
              -Financing
                  activities
              
              
              -
              
              
              
              -
              
              
              
              -Cash
                  (deficiency) from discontinued operations
              
              $
              2,326
              
              
              $
              141
              
              
              $
              (673
              )




Since
      2001 when ADB Systemer was acquired, it was expected that ADB Systemer would
      complement our technology portfolio enabling us to offer customers full
      lifecycle asset optimization capability.  Additionally, we expected
      ADB Systemer to be a steady performer, generating moderate profits and growth
      while other areas of ADB business, with larger growth and profit potential,
      were
      being developed.





33










Over
      the past two years it had been expected that North American lifecycle asset
      management software licensing and the joint venture with GE would begin to
      grow,
      both strategically and financially.  Although financial results were
      slower than anticipated, on the strategic front, there is little doubt that
      GE
      based relationships formed in 2004 and 2005 were essential foundations for
      increased levels of deal flow and strategic activity early in 2006.





Management
      believes that this heightened level activity through our GE joint venture and
      emerging opportunities in the North American government and oil and gas sectors
      will continue beyond 2006.





Following
      the sale of ADB Systemer, the Company continues to develop its activities in
      the
      oil and gas industry in Western Canada, building on successful relationships
      with Paramount and Trilogy within the broader context of this sector’s strong
      economic growth.  Both customers have recently upgraded their software
      licenses or expanded their use of our enterprise asset management
      applications.  As noted, we continue to have access to ADB Systemer’s
      software through long-term agreements.  New opportunities have also
      emerged for the Company in the North American government sectors.





In
      addition to our concentration on the oil and gas and government sectors, we
      expect to benefit from an increased focus on GE’s Asset Manager, the joint
      venture we established with GE in 2004.  Many client relationships and
      strategic developments related to the joint venture have now progressed to
      the
      stage where we feel that by devoting further management attention to these
      opportunities we will see greater growth and profit potential than would be
      the
      case if we had retained ownership of the Norway business.





Moreover,
      the Company has also seen an increased demand for its technology-based
      services.  These services, which include application development,
      software customization, systems integration and training, provide revenue growth
      opportunities while allowing Northcore to expand our relationships with key
      customers.








**RESULTS
      OF OPERATIONS**





*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 gain realized on the sale of the Norway business
      unit.





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 of $860,000 or 33 percent.  The
      Company considers EBITDA to be a meaningful performance measure as it provides
      an approximation of operating cash flows. This decrease in EBITDA 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.**  Revenue
      is comprised of software license sales and service fees for consulting,
      implementation, application hosting, training, maintenance and support
      activities.





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 Norway
      upon the disposition of Norway on June 30, 2006.








34





**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 Norway in the
      previous year.





**Sales
      and Marketing.**  Sales and marketing costs include all
      salaries and related expenses of sales and marketing personnel as well as
      business development expenses such as advertising, sales support materials,
      and
      trade show costs.





Sales
      and marketing costs for the year ended December 31, 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.





**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.





**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.  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.





**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 Norway.








35





**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.








*Comparison
      of Years Ended December 31, 2005 and December 31, 2004*





**Net
      Loss.**  Our net loss for the year ended December 31, 2005 was
      $3.501 million, a decrease of 31 percent from the net loss of $5.104 million
      reported for the year ended December 31, 2004.





The
      loss before interest, taxes, depreciation, amortization, employee stock options
      and discontinued operations (“EBITDA”) was $2.618 million for 2005 as compared
      to $2.980 million for 2004, a decrease of $362,000 or 12 percent.  The
      Company considers EBITDA to be a meaningful performance measure as it provides
      an approximation of operating cash flows.  This decrease in EBITDA was
      the result of a $555,000 decrease in the associated expenses (general and
      administrative, customer service and technology and sales and marketing) from
      $4.458 million in 2004 to $3.902 million in 2005, partially offset by the
      decrease of $193,000 in revenue, from $1.478 million in 2004 to $1.285 million
      in 2005.  The reduction in expenses of 12 percent in 2005 when
      compared to 2004 was achieved in the areas of general and administrative
      expenses by $484,000, customer service and technology expenses by $15,000 and
      sales and marketing expenses by $56,000.





**Revenue.**  Revenue
      is comprised of software license sales and service fees for consulting,
      implementation, application hosting, training, maintenance and support
      activities.





Revenue
      decreased to $1.285 million for the year ended December 31, 2005 from $1.478
      million for the year ended December 31, 2004, representing a decline of $193,000
      or 13 percent.  This decline was attributable to reduced revenue in
      North America of $140,000 and reduced revenue in Ireland of
      $53,000.





In
      North America, continued focus on GE Asset Manager, LLC joint venture activities
      in preparation for long-term growth resulted in the decline in 2005’s
      revenue.





**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 $484,000 to $2.559 million for the
      year
      ended December 31, 2005, as compared to $3.043 million for the year ended
      December 31, 2004, representing a decline of 16 percent.





Year-over-year
      savings in the amount of $141,000 resulted from salary expense reductions
      arising from a smaller administrative workforce and favorable Canadian dollar
      exchange rates pertaining to US dollar-denominated
      salaries.  Continued cost containment efforts resulted in $38,000
      savings in travel expenses, savings in investor relations of $84,000 and a
      reduction in connectivity and occupancy costs of $241,000 largely due to the
      relocation of the North American head office and the administrative office
      in
      Ireland.  These savings were partially offset an increase in office
      expenses of $20,000.





**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, 2005 amounted to $505,000,
      as compared to $561,000 for 2004, a decrease of 10 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 2005.








36





**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 was $839,000 for the year ended December 31,
      2005, as compared to $854,000 for the year ended December 31, 2004, representing
      a decline of two percent.





**Employee
      Stock Options.**  Effective January 1, 2003, the Company
      adopted the accounting recommendations contained in the CICA handbook Section
      3870 - “Stock-based Compensation and Other Stock-based Compensation
      Payments”.  As a result, the Company recorded an employee stock option
      expense of $105,000 for the year ended December 31, 2005 and $27,000 for the
      year ended December 31, 2004, an increase of 289 percent.  The
      increase in employee stock option expense was due to the vesting of stock
      options that were granted in early 2005.  No employee stock options
      were granted in 2004.  The 2004 expense arises from the vesting of
      stock options that were granted in 2003.   No stock compensation
      expense is recognized for employee grants made before January 1,
      2003.





**Depreciation
      and Amortization.**  Depreciation and amortization expense was
      $105,000 for the year ended December 31, 2005 as compared to $149,000 for the
      year ended December 31, 2004, a decrease of 30 percent.  This decrease
      reflects software acquired in the acquisition of ADB Systemer, which was fully
      amortized by the end of the third quarter of 2004.





**Interest
      Expense.**  Interest expense reflects interest incurred from
      debt instruments and loans.  Interest expense for the year ended
      December 31, 2005 was $717,000 compared to $443,000 for December 31,
      2004.  During 2005, cash interest expense of $312,000 and non-cash
      interest expense of $405,000 was incurred related to secured subordinated
      notes.  Comparatively, cash interest expense of $177,000 and non-cash
      interest expense of $266,000 was recorded in 2004.  The increase in
      interest expense was due to the increase in secured subordinated notes
      outstanding during 2005.





**Interest
      Income.**  Interest income reflects interest from investments
      in cash and marketable securities.  Interest income was negligible for
      both years ended December 31, 2005 and 2004.





**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 2004.








**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 2006.  Management’s
      2007 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 2007 expenses over those incurred in 2006,
      in
      order to attain the 2007 revenue goals.  Additionally, management
      believes that it has the ability to raise additional financing if
      required.  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.








37





Management
      believes that continued existence beyond 2006 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.





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 2007.  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,
      2006.








**REVENUE
      RECOGNITION**





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





**Hosting
      Fees**


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





**Software
      Development Fees**


Typically,
      development of software for our customers is provided based on a predetermined
      fixed 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.








38





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
      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.





**Deferred
      Charges**


Deferred
      charges are comprised of expenditures incurred in the issuance of secured
      subordinated notes.  The deferred charges are amortized over the term
      of the underlying notes on a straight-line basis.  In accordance with
      Canadian GAAP, conversion of the underlying notes results in the allocation
      of
      the associated unamortized deferred charge to shareholders’
deficiency.  Under U.S. GAAP, note conversion 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 20).





**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.  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 these consolidated financial
      statements under Canadian and United States accounting policy differences (See
      Note 20).





**Stock-Based
      Compensation**


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








39





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 in 2007.  Actual results
      could differ from those estimates.








**Impact
      of New Accounting Pronouncements:**





In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based
      Payment".  SFAS No. 123(R) requires employee stock options and
      rights to purchase shares under stock participation plans to be accounted for
      under the fair value method, and eliminates the ability to account for these
      instruments under the intrinsic value method prescribed by APB Opinion No.
      25,
      as allowed under the original provisions of SFAS No. 123.  SFAS No.
      123(R) requires the use of an option pricing model for estimating fair value,
      which is amortized to expense over the service periods.  The
      requirements of SFAS No. 123(R) are effective for the first fiscal year
      beginning after June 15, 2005. SFAS No. 123(R) allows for either prospective
      recognition of compensation expense or retrospective recognition, which may
      be
      back to the original issuance of SFAS No. 123.  The above standard did
      not have a significant impact on the financial position, results of operations
      or cash flows for the year ended December 31, 2006.





In
      June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
      in
      Income Taxes, an Interpretation of SFAS 109.  This interpretation
      prescribes the measurement and recognition criteria of a tax position taken
      or
      expected to be taken in a tax return.  This interpretation is
      effective for the Company beginning January 1, 2007.  The Company is
      currently assessing the impact of this standard.





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.





In
      2006 the Company adopted Staff Accounting Bulleting No. 108, "Considering the
      Effects of Prior Year Misstatements when Quantifying Misstatements in Current
      Year Financial Statements" ("SAB 108").  SAB 108 clarifies the way that a
      company should evaluate identified unadjusted errors for materiality.  SAB
      108 requires that the effect of misstatements that were not corrected at the
      end
      of the prior year be considered in quantifying misstatements in the current
      year
      financial statements.  Two techniques were identified as being used by
      companies in practice to accumulate and quantify misstatements - the "rollover"
      approach and the "iron curtain" approach.  The above standard did not have
      a significant impact on the financial position, results of operations, or cash
      flows for the year ended December 31, 2006.














40







**Recent
        Canadian****Accounting Pronouncements:**




**Financial
      Instruments**


In
      2005, the CICA issued Handbook Section 3855, Financial Instruments - Recognition
      and Measurement, Handbook Section 1530, Comprehensive Income, Handbook Section
      3251, Equity, and Handbook Section 3855, Hedges.  The new standards
      are effective for interim and annual financial statements commencing on or
      after
      October 1, 2006.  The Company will adopt the new standards on January
      1, 2007.





Other
      comprehensive income (loss) will form part of shareholders’ equity.  A
      new statement entitled “Consolidated Statement of Comprehensive Income (Loss)”
will be added to the Company’s consolidated financial statements and will
      include net income as well as other comprehensive income (loss).





The
      Company is currently evaluating the impact of this new standard.





**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.  The new standard will be effective for the Company
      effective 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 $90.1 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, 2006, has an accumulated deficit
      of
      $109 million.  The Company expects to incur losses into 2007 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 $402,000 to $475,000 as at December 31, 2006
      from $73,000 as at December 31, 2005.





Current
      assets of $692,000 were exceeded by current liabilities (excluding deferred
      revenue) of $2.756 million in the current fiscal year by $2.064
      million.  Current assets of $1.586 million were exceeded by current
      liabilities (excluding deferred revenue) of $2.659 million by $1.073 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.





**a)
      Operating**


Cash
      outflows from operating activities improved slightly to $2.037 million in the
      current fiscal year compared to cash outflows from operating activities of
      $2.061 million in the prior year.








41





Non-cash
      working capital resulted in inflows of $50,000 in fiscal 2006 as compared to
      inflows of $827,000 in fiscal 2005, a decrease of $777,000, as summarized in
      the
      following table:


**2006**
              
              
              **2005**
              
              
              **Difference**(in
                  thousands on Canadian dollars)Accounts
                  receivable
              
              $
              130
              
              
              $
              250
              
              
              $
              (120
              )Deposits
                  and prepaid expenses
              
              
              52
              
              
              
              70
              
              
              
              (18
              )Accounts
                  payable
              
              
              (320
              )
              
              
              380
              
              
              
              (700
              )Accrued
                  liabilities
              
              
              211
              
              
              
              112
              
              
              
              99Deferred
                  revenue
              
              
              (23
              )
              
              
              15
              
              
              
              (38
              )$
              50
              
              
              $
              827
              
              
              $
              (777
              )
  **b)
      Investing**


In
      2006, $65,000 was spent on capital asset acquisitions as compared to $36,000
      in
      expenditures for 2005.  In 2005, proceeds in the amount of $4,000 were
      earned from the disposal of capital assets.  No such proceeds were
      earned in 2006.  Also in 2006, the Company redeemed marketable
      securities totaling $13,000.  No such redemption was made in
      2005.





**c)
      Financing**


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 advances from related parties.  Cash flows generated
      as the result of financing activities totaled $1.770 million in fiscal
      2005.  The sources of cash included an equity private placement,
      issuance of convertible debt and advances from related parties, which was
      slightly offset by deferred financing costs related to the convertible debt
      issuance.





**d)
      Contractual Obligations**


As
      at December 31, 2006 the Company's contractual obligations, including payments
      due by periods over the next five years, are as follows:


**Total**
            
            
            **2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**(in
                thousands of Canadian dollars)Operating
                leases
            
            $
            466
            
            
            $
            178
            
            
            $
            160
            
            
            $
            128
            
            
            $
            -
            
            
            $
            -License
                agreements
            
            
            254
            
            
            
            113
            
            
            
            113
            
            
            
            28
            
            
            
            -
            
            
            
            -Secured
                subordinated notes - principal repayment(i)
            
            
            2,405
            
            
            
            1,820
            
            
            
            -
            
            
            
            -
            
            
            
            300
            
            
            
            285Secured
                subordinated notes -interest
                payment (i)
                (ii)
            
            
            922
            
            
            
            632
            
            
            
            -
            
            
            
            -
            
            
            
            165
            
            
            
            125$
            4,047
            
            
            $
            2,743
            
            
            $
            273
            
            
            $
            156
            
            
            $
            465
            
            
            $
            410





(i)  Assumes
      secured subordinated notes are held to maturity.


(ii)
      Assumes interest in the amount of $31,000 related to Series J note is payable
      in
      common shares in 2007.





**CAPITAL
      RESOURCES**


During
      2006, the Company purchased $65,000 in capital assets, as compared to $36,000
      in
      2005.





The
      Company has Series G secured subordinated notes with a face value
      of  $1.6 million and Series H secured subordinated notes with a face
      value of $170,000, maturing in June and October 2007,
      respectively.  The Company expects to make arrangements to repay the
      notes or adjust the terms and conditions in the event that market conditions
      do
      not result in conversion of the notes.  There can be no certainty that
      funding to repay the notes will be available as required or under favorable
      economic terms.











42





**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 $90.1 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 approximately $1.6
      million matured on June 15, 2007.  In connection with the refinancing
      of the Series G notes, on June 19, 2007 the Company announced the completion
      of
      the private placement issuance of the new Series K secured subordinated notes
      with a face amount of approximately $1.36 million, to existing holders of $1.36
      million of the Series G secured subordinated notes.





In
      addition, the Company also completed a private placement issuance of
      approximately 2.99 million common shares, at $0.15 per share common share,
      to
      holders of $1.36 million of the Series G secured subordinated notes, in payment
      of the related accrued interest on $1.36 million of the Series G secured
      subordinated notes of $449,000.  This private placement received
      approval from the Company’s board of directors and conditional approval from the
      TSX, and closed by June 19, 2007.





The
      Series K notes were issued for a two year term with 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.
      For
      the purposes of the interest calculation the share price shall be the greater
      of
      $0.15 and the volume weighted average trading price of the common shares over
      the 20 day trading period ending at the close of business on the day prior
      to
      the date on which the interest payment is due, reduced by the maximum percentage
      discount permitted by the Toronto Stock Exchange (“TSX”). 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 private placement received approval from the Company’s board of
      directors and conditional approval of the TSX, and closed by June 19,
      2007.





The
      Company is currently negotiating with the remaining Series G debt holder to
      undertake a similar transaction.  As a result, the Company continues
      to record the remaining $240,000 of the Series G secured subordinated notes
      and
      related accrued interest of approximately $79,000 as current
      liabilities.





**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





43





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.





**Funding
      - 2004**


On
      December 6, 2004, the Company completed a transaction resulting in the issuance
      of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common
      share-purchase warrants exercisable into one common share at a price of $0.35
      for gross proceeds of $1,000,000.  The warrants expire on December 6,
      2008.  Gross proceeds were comprised of $800,000 in cash and $200,000
      in services.  Issuance costs in the amount of $70,000 were incurred,
      including $19,000 representing the fair value of 150,000 compensation options
      issued to First Associates.  The compensation options are exercisable
      into 150,000 equity units at a price of $0.20 per unit.  Each equity
      unit consists of one common share and one common share-purchase warrant with
      an
      exercise price of $0.35 and an expiry date of December 6, 2008.  The
      compensation options expire on December 6, 2006.  Included in this
      private placement were 100,000 shares issued to a director of the Corporation
      for net proceeds of $20,000.





On
      October 21, 2004, the Company issued Series H secured subordinated notes with
      a
      face value of $520,000 for net proceeds of $500,000.  The Series H
      notes mature October 21, 2007, have an annual rate of interest of 11 percent
      payable upon the earlier of maturity and conversion and are convertible into
      equity units at a price of $0.20 per unit.  Each equity unit consists
      of one common share and one half of a share-purchase warrant with an exercise
      price of $0.40.  The share-purchase warrants expire on October 21,
      2008.  The Series H secured subordinated notes will 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 may convert
      the notes into units at anytime following a four-month hold
      period.  If the holder does 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
      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
      June 15, 2004, the Company issued Series G secured subordinated notes with a
      face value of $1,710,000 for net proceeds of $1,624,000.  The Series G
      notes mature June 15, 2007, have an annual rate of interest of 7 percent payable
      upon the earlier of maturity and conversion and are convertible into equity
      units at a price of $0.31 per unit.  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.  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 may convert the notes into units at anytime following a
      four-month hold period.  If the holder does not convert and no
      automatic conversion takes place, the Company must repay the principal amount
      in
      cash.  The Series G 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
      May 19, 2004, the Company issued Series F secured subordinated notes with a
      face
      value of $500,000 for net proceeds of $474,000.  The Series F notes
      have an annual rate of interest of 7 percent paid quarterly in arrears, mature
      May 19, 2007 and are convertible into equity units at a price of $0.31 per
      unit.  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 May 19, 2007.  The Series F secured
      subordinated notes will automatically convert into units when the share price
      of
      the Company closes above $0.70 for five consecutive trading days during the
      term.  Holders may convert the notes into units at anytime following a
      four-month hold period.  If the holder does not convert and no
      automatic conversion takes place, the Company must repay the principal amount
      in
      cash. The Series F notes are secured by a general security agreement on the
      assets of the Company, subordinated to the security claims provided to the
      holders of previously issued notes.








44





**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 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.





At
      December 31, 2006, one customer accounted for 64 percent of total accounts
      receivable from continuing operations.  At December 31, 2005, there
      were three customers that accounted for 27 percent, 24 percent and 21 percent,
      respectively, of total accounts receivable from continuing
      operations.  The Company does not have a history of
      non-payment.





**Net
      Operating Losses for Tax Purposes****.**


We
      have available an aggregate of approximately $26 million of net operating losses
      for tax purposes that may be used to reduce taxable income in future years,
      of
      which $1.4 million expires in 2009, $3.8 million expires in 2010, $3.0 million
      expires in 2014, $3.4 million expires in 2015 and $2.6 million expires in 2026.
      In addition, there is $12 million that do not expire related to tax losses
      in
      Ireland. Our net operating losses are subject to assessment of our tax returns
      by taxation authorities.








**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, 2006 the Company's contractual obligations, including payments
      due by periods over the next five years, are as follows:


**Total**
            
            
            **2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**(in
                thousands of Canadian dollars)Operating
                leases
            
            $
            466
            
            
            $
            178
            
            
            $
            160
            
            
            $
            128
            
            
            $
            -
            
            
            $
            -License
                agreements
            
            
            254
            
            
            
            113
            
            
            
            113
            
            
            
            28
            
            
            
            -
            
            
            
            -Secured
                subordinated notes -principal repayment(i)
            
            
            2,405
            
            
            
            1,820
            
            
            
            -
            
            
            
            -
            
            
            
            300
            
            
            
            285Secured
                subordinated notes -interest
                payment (i)
                (ii)
            
            
            922
            
            
            
            632
            
            
            
            -
            
            
            
            -
            
            
            
            165
            
            
            
            125$
            4,047
            
            
            $
            2,743
            
            
            $
            273
            
            
            $
            156
            
            
            $
            465
            
            
            $
            410








45





(i)  Assumes
      secured subordinated notes are held to maturity.


(ii)
      Assumes interest in the amount of $31,000 related to Series J note is payable
      in
      common shares in 2007.








**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
            PositionJeffrey
                Lymburner
            50
            Director
                and Chief Executive OfficerT.
                Christopher Bulger(1),(2),(3)
            50
            Director
                and Chairman of the BoardJim
                Moskos
            44
            Director
                and President, Northcore  Technology GroupDarroch
                (Rick) Robertson(3)
            55
            DirectorDuncan
                G. Copeland(1),(2),(3)
            50
            DirectorDavid
                Gelineau(1),(2)
            48
            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***




**JEFFREY
      LYMBURNER**, Oldsmar, Florida


Director
      since May 28, 1996


*Chief
      Executive Officer*




Mr.
      Lymburner****has been our Chief Executive Officer since
      August 1, 1999 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


*Chairman
      of the Board of Directors and Chairman of the Management Resources and
      Compensation Committee*





Mr.
      Bulger has been our Chairman of the
      Board since October 14, 2005 and a director of the Company since May 28, 1996.
      Mr. Bulger is Chief Executive Officer and former Chairman of Megawheels Inc.,
      a
      software and solutions provider to the online classified advertising industry,
      listed on the Canadian Venture Exchange. 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 and holds an MBA from  INSEAD,
      France and an HBA from The Richard Ivey School of Business, Canada.








46





**JIM
      MOSKOS**, Toronto, Ontario


Director
      since June 7, 1999





Mr.
      Moskos****has been President of the ADB Technology Group
      since October 19, 1999.  Mr. Moskos served as Vice President -
      Technology of our company 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.





**DARROCH
      (RICK) ROBERTSON**, London, Ontario


Director
      since June 25, 2003


*Chairman
      of the Audit 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 six
      years.  He is currently the Director of MBA program and was 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.





**DUNCAN
      COPELAND**, North Potamac, Maryland


Director
      since June 23, 2004


*Chair
      of the Corporate Governance Committee and a Member of the Audit and Management
      Resources and Compensation Committees*





Mr.
      Copeland 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.





**DAVE
      GELINEAU**, Ottawa, Ontario


Director
      since September 23, 2005


*Member
      of the Management Resources and Compensation and Corporate Governance
      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.








**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 2006, were our Chief Executive
      Officer and our President, Technology Group.





**Awards**
            **Payouts****Annual
                Compensation**
            
            **Restricted****Options/**
            **Shares
                or****Other
                Annual**
            **SARs**
            **Restricted**
            **LTIP**
            **All
                Other****Salary**
            **Bonus**
            **Compensation**
            **Granted**
            **Share
                Units**
            **Payout**
            **Compensation****Name
                And Principal Position**
            **Year**
            **($)**
            **($)**
            **($)(1)**
            **(#)**
            **($)**
            **($)**
            **($)**Jeffrey
                Lymburner
            2006
            113,400
            Nil
            13,608
            20,000
            Nil
            Nil
            NilCEO
                (2)
            2005
            116,300
            Nil
            13,950
            155,300
            Nil
            Nil
            Nil2004
            130,130
            Nil
            15,616
            Nil
            Nil
            Nil
            NilJames
                Moskos
            2006
            200,000
            Nil
            12,000
            20,000
            Nil
            Nil
            NilPresident,
                Technology Group
            2005
            200,000
            Nil
            12,000
            650,000
            Nil
            Nil
            Nil2004
            190,000
            Nil
            12,000
            Nil
            Nil
            Nil
            Nil


(1)
            The
                Company’s provision of automotive related expenses and
                options.




(2)
            Mr.
                Lymburner’s salary is U.S.
                $100,000.








47





Our
          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.  The Management Resources and Compensation Committee of the
          Board of Directors reserves the right to attach vesting periods to stock
          options
          granted.  For options granted to directors and senior management
          during the fiscal year ended December 31, 2006 see Summary Compensation
          Table
          above. For option grants to outside directors during the fiscal year ended
          December 31, 2006, not included in the above mentioned compensation table,
          see
          the table below under the heading Compensation of Directors.
 
 During
          2006, we did not provide any pension, retirement or similar benefits to
          our
          directors and officers as a group.


Jeff
      Lymburner has entered into a non-competition and salary protection agreement
      with our company, dated February 21, 1997, which provides, among other
      things, that he (i) will not compete with our company for a period of 12
      months, which may be extended by us to 24 months, following the termination
      of
      his employment with our company, in consideration of which we will pay his
      full
      annual salary during such period; and (ii) if his employment with us is
      terminated other than by reason of death, disability or cause (as such terms
      are
      defined in such agreements), we will continue to pay his full annual salary
      for
      12 months (or 24 months if we exercise our option to extend the non-competition
      restrictions for 24 months) following the date of termination.




**Compensation
      of Directors**





For
      the 2006 financial year, directors received no fees for meetings of the Board
      or
      Committees of the Board, which they attend, and no fee for the signing of any
      resolution of directors or documents on behalf of the Company.  All
      directors are reimbursed for reasonable out-of-pocket travel and other expenses
      incurred by them in attending meetings of the Board or Committee
      meetings.





The
      Company grants directors incentive stock options 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.  For the 2006 financial year, directors received the
      following option allocations: each independent director received 20,000 options,
      priced at market at time of issue with a five year term and vesting immediately;
      directors who were members of a Board Committee were granted 5,000 additional
      options per committee membership priced at market at time of issue, with a
      five
      year term vesting immediately; each of the Chairs of the Management Resources
      and Compensation Committee and the Corporate Governance Committee were granted
      an additional 10,000 options, respectively, priced at market at time of issue,
      with a five year term vesting immediately; and the Chair of the Audit Committee
      was granted an additional 25,000 options, priced at market at time of issue,
      with a five year term vesting immediately.





The
      following table provides a summary of the option grants to outside directors
      during 2006, which were not included in the previous compensation
      table.





**Stock
                Option Grants to Outside Directors during the fiscal year ended December
                31, 2006**Name:
            #
                Options
              Granted
            Price
              CDN$
            Date
                of
              Grant
            Expiry
                Date
              of
                OptionChris
                Bulger
            45,000
            0.15
            Aug.
                4, 2006
            Aug.
                4, 2011Duncan
                Copeland
            45,000
            0.15
            Aug.
                4, 2006
            Aug.
                4, 2011Darroch
                Robertson
            55,000
            0.15
            Aug.
                4, 2006
            Aug.
                4, 2011David
                Gelineau
            30,000
            0.15
            Aug.
                4, 2006
            Aug.
                4, 2011








48








During
      the 2006 financial year, Christopher Bulger, Chairman of the Board, received
      $60,000 compensation for consulting services.








**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 6 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.





Except
      for Jeffrey Lymburner's salary
      protection agreements, no director has 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 Duncan Copeland.





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), Duncan Copeland, and David Gelineau all of whom
      are directors of our Company.





The
      Corporate Governance Committee, all of whose members are unrelated as defined
      by
      the TSX Corporate Governance Guidelines, 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 Duncan Copeland (Chairman),
      Chris
      Bulger, and David Gelineau all of whom are directors of our
      Company.








**D.           EMPLOYEES**





As
      of May 31, 2007 we employed a total of 16 full-time employees as
      follows:





49








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.




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





As
      of December 31, 2004 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
            2
            9Product
                Group
            4
            0
            10Finance
                and Admin
            3
            1
            2Executive
            3
            1
            1TOTAL
            18
            5
            24




None
      of our employees are represented by a labor union, and we consider our employee
      relations to be good**.**







50












**E.    SHARE
      OWNERSHIP**




The
      following table sets forth information concerning share and option ownership
      of
      each of our current directors and officers as of May 31, 2007:


**Name**
              **Number
                  of**
                **Common
                  Shares**
                **Owned
                  (1)**
              **Number
                  of**
                **Common
                  Underlying**
                **Options
                  (2)**
              **Range
                  of**
                **Exercise
                  Prices**
                **of
                  Options**
              **Range
                  of Expiration**
                **Dates
                  of Options**
              **Percentage
                  of Common Shares Beneficially Owned (3)**Jeffrey
                  Lymburner
              4,373,625
              175,300
              $0.15
                  - $0.22
              1/25/10
                  - 08/04/11
              5%T.
                  Christopher Bulger
              265,000
              515,000
              $0.15
                  - $0.22
              1/25/10
                  - 08/04/11
              *Jim
                  Moskos
              21,375
              670,000
              $0.15
                  - $0.22
              1/25/10
                  - 08/04/11
              *Darroch
                  Robertson
              5,000
              135,000
              $0.15
                  - $0.22
              1/25/10
                  - 08/04/11
              *Duncan
                  Copeland
              87,050
              155,000
              $0.15
                  - $0.22
              11/15/08
                  - 08/04/11
              *David
                  Gelineau
              1,400
              65,000
              $0.15
                  - $0.17
              11/15/08
                  - 08/04/11
              *




*
      Represents less than 1%.




(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
                83,903,798  common shares outstanding as of May 31,
                2007.  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**




As
      at May 31, 2007 the shareholders of record held 83,903,798 common
      shares.





We
      are not aware of any 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**





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,
      purchased $100,000 of Series G notes that have not yet been converted; Jan
      Pedersen, President, European Operations and a director of the Company at the
      time, purchased $60,000 of Series G notes that was repaid during the year;
      and
      Jim Moskos, President Technology Group and a director of the Company, purchased
      $10,000 of Series G notes that have not yet been converted.








51





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, 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, President,
      Technology Group 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.





On
      December 6, 2004, the Company completed a private placement resulting in the
      issuance of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common
      share-purchase warrants exercisable into one common share at a price of $0.35
      for gross proceeds of $1.0 million.  Included in this private
      placement were 100,000 shares issued to Paul Godin, a director of the Company
      for gross proceeds of $20,000. The warrants were issued for a four year term
      and
      will expire on December 6, 2008.





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,
      purchased $20,000 of Series I notes that have not yet been converted; Jim
      Moskos, President, Technology Group 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, a director of the Company, purchased $60,000
      of Series I notes that have not yet been converted.





During
      the year ended December 31, 2005, the Company received advances from three
      of
      its directors/officers of which $137,000 was outstanding as at December 31,
      2005.  The total advances included $66,000 that paid interest at a
      rate of 12% per annum, were secured by a general security agreement on the
      assets of the Company and matured as follows:





•
            $44,000
                maturing on July 29, 2006;


•
            $5,000
                maturing on August 12, 2006; and


•
            $17,000
                maturing on August 15, 2006.





The
      remaining amount of $71,000 was interest free and had no specific terms of
      repayment.




As
      at December 31,
      2005, accrued liabilities included $5,000 (2004 - $nil) in interest payable
      relating to the above amounts due to related parties.  During 2005,
      interest expense on amount owing to related parties was $5,000 (2004
      -$nil).




On
      February 8, 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 following officers and directors
      purchased Series J notes: Jeff Lymburner, CEO of the Company, purchased $36,000
      principal amount of Series J notes that have not yet been converted; Jim Moskos,
      President, Technology Group and a director of the Company, purchased $13,000
      principal amount of Series J notes that have not yet been converted; and Chris
      Bulger, Chairman of the Board, purchased $56,000 principal amount of Series
      J
      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.





As
      at December 31, 2006, accrued interest included $62,000 (2005 - $35,000) in
      interest payable relating to the aforementioned secured subordinated notes
      due
      to related parties.  During 2006, interest expense on the
      aforementioned secured subordinated notes from related parties was $47,000
      (2005
      - $44,000).








52





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 to the Company’s Consolidated Financial
      Statements.





As
      at December 31, 2006, accrued liabilities included $nil (2005 - $5,000) in
      interest payable relating to the above amounts due to related
      parties.  During 2006, interest expense on advances from related
      parties was $4,000 (2005 - $5,000).





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, 2006
      and Note7 to the Consolidated Financial Statements.





**ITEM
      8 - FINANCIAL INFORMATION**





See
      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**




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 $2.80 million in cash subject to shareholder approval (the “Share
      Sale”). On June 21, 2006 the Company received approval from shareholders at its
      annual general meeting to proceed with the Share Sale, which closed on June
      30,
      2006. Sale of the shares of ADB Systemer included the sale of the ADB Systems
      name. Following the sale of ADB Systemer, the Company retained access to all
      existing technology that continues to be used to service existing customers.
      In
      addition, the Company obtained Shareholder approval to change its name to
      Northcore Technologies Inc. by filing Articles of Amendment effective June
      30,
      2006.




**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.








53





Our
      common shares were quoted on the Nasdaq National Market from April 20, 1999
      until June 3, 2002 and were quoted on the Nasdaq SmallCap Market from June
      3,
      2002 until August 21, 2002 at which time they were delisted because we did
      not
      satisfy the minimum bid price per share requirement for continued listing on
      that market.  The shares were listed on the Nasdaq exchanges from
      April 20, 1999 until October 17, 2001 under the symbol “BIDS” and from October
      18, 2001 until August 21, 2002 under the symbol “ADBI”.  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
      June 6, 1996 to February 8, 1998, our common shares were quoted for trading
      on
      the Canadian Dealing Network under the symbol “ILII.”  Our common
      shares were traded on The Toronto Stock Exchange from February 9, 1998 to July
      17, 1998 under the symbol “ILI” and from July 18, 1998 to October 17, 2001 under
      the symbol “BII”.  Since October 18, 2001, our common shares have been
      traded on the Toronto Stock Exchange under the symbol “ADY”.





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, the OTCBB
      (beginning June 4, 2002) and Nasdaq (until June 3, 2002) during the calendar
      years and quarters indicated.




54
  THE
        TORONTO STOCK EXCHANGE
  High
              
              
              Low(Cdn
                  $)
              
              
              (Cdn
                  $)ANNUAL
                  MARKET PRICES2002
                  Calendar Year
              
              
              0.93
              
              
              
              0.072003
                  Calendar Year
              
              
              0.85
              
              
              
              0.172004
                  Calendar Year
              
              
              0.52
              
              
              
              0.162005
                  Calendar Year
              
              
              0.36
              
              
              
              0.142006
                  Calendar Year
              
              
              0.25
              
              
              
              0.13QUARTERLY
                  MARKET PRICES2004
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.52
              
              
              
              0.34Second
                  Quarter
              
              
              0.38
              
              
              
              0.25Third
                  Quarter
              
              
              0.36
              
              
              
              0.19Fourth
                  Quarter
              
              
              0.28
              
              
              
              0.162005
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.36
              
              
              
              0.19Second
                  Quarter
              
              
              0.29
              
              
              
              0.15Third
                  Quarter
              
              
              0.23
              
              
              
              0.16Fourth
                  Quarter
              
              
              0.23
              
              
              
              0.142006
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.19
              
              
              
              0.14Second
                  Quarter
              
              
              0.24
              
              
              
              0.15Third
                  Quarter
              
              
              0.25
              
              
              
              0.14Fourth
                  Quarter
              
              
              0.19
              
              
              
              0.13MONTHLY
                  MARKET PRICESDecember
                  2006
              
              
              0.17
              
              
              
              0.13January
                  2007
              
              
              0.17
              
              
              
              0.13February
                  2007
              
              
              0.20
              
              
              
              0.15March
                  2007
              
              
              0.20
              
              
              
              0.15April
                  2007
              
              
              0.18
              
              
              
              0.14May
                  2007
              
              
              0.16
              
              
              
              0.13
 
   55
  NASDAQ
        AND OTCBB
  High
              
              
              Low(U.S.
                  $)
              
              
              (U.S.
                  $)ANNUAL
                  MARKET PRICES2002
                  Calendar Year
              
              
              0.59
              
              
              
              0.042003
                  Calendar Year
              
              
              0.54
              
              
              
              0.112004 Calendar Year
              
              
              0.41
              
              
              
              0.122005
                  Calendar Year
              
              
              0.29
              
              
              
              0.112006
                  Calendar Year
              
              
              0.27
              
              
              
              0.10QUARTERLY
                  MARKET PRICES2004
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.41
              
              
              
              0.26Second
                  Quarter
              
              
              0.29
              
              
              
              0.18Third
                  Quarter
              
              
              0.27
              
              
              
              0.15Fourth
                  Quarter
              
              
              0.22
              
              
              
              0.122005
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.29
              
              
              
              0.15Second
                  Quarter
              
              
              0.25
              
              
              
              0.16Third
                  Quarter
              
              
              0.28
              
              
              
              0.13Fourth
                  Quarter
              
              
              0.18
              
              
              
              0.112006
                  CALENDAR YEARFirst
                  Quarter
              
              
              0.15
              
              
              
              0.12Second
                  Quarter
              
              
              0.27
              
              
              
              0.13Third
                  Quarter
              
              
              0.24
              
              
              
              0.12Fourth
                  Quarter
              
              
              0.20
              
              
              
              0.10MONTHLY
                  MARKET PRICESDecember
                  2006
              
              
              0.15
              
              
              
              0.11January
                  2007
              
              
              0.15
              
              
              
              0.11February
                  2007
              
              
              0.20
              
              
              
              0.10March
                  2007
              
              0.16
              
              
              0.10April
                  2007
              
              
              0.16
              
              
              
              0.10May
                  2007
              
              
              0.15
              
              
              
              0.11
  **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.
   56
  ***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 preference 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 preference 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.
 
  57
  ***Preference
        Shares***
 
 Our
        articles of incorporation authorize the issuance of an unlimited number of
        preference shares, in one or more series. The Ontario Business Corporations
        Act
        does not impose restrictions upon our Board of Directors issuing preference
        shares of the type authorized by our articles of incorporation. Our Board
        of
        Directors may fix, before issuing, the number of preference shares of each
        series, the designation, rights, privileges, restrictions and conditions
        attaching to the preference 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 preference shares
        of
        the series. Our articles of incorporation require that preference 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 preference shares of every other series and be entitled to preference
        over the common shares and over any other shares ranking junior to the
        preference shares. The preference shares of one series shall participate
        ratably
        with the preference shares of every other series in respect of all dividends
        and
        similar amounts.  The holders of our preference shares are not liable
        to further capital calls by our Company.  None of our preference
        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.
 
 ***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
        preference 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.
   58
  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 preference shares. The Board of Directors, without any
        further vote by the common shareholders, has the authority to issue preference
        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 preference shares
        that the Board of Directors may issue in the future. That means, for example,
        that we can issue preference shares with more voting rights, higher dividend
        payments or more favorable rights upon dissolution, than the common shares.
        If
        we issued certain types of preference shares in the future, it may also be
        more
        difficult for a third-party to acquire a majority of our outstanding voting
        shares.
 
 Our
        articles do not contain any provisions that govern the ownership threshold
        above
        which shareholder ownership must be disclosed.
 
 **C.Material
        Contracts**
  The
        following is a summary of our Company’s material contracts entered into since
        January 1, 2004.
  1.
              EQUITY
                  PRIVATE PLACEMENT: On February 23, 2005, the Company competed a
                  transaction resulting in the issuance of 2,500,000 units (“Units”) of the
                  Company, each Unit consisting of one common share of the Company
                  and one
                  half of one non-transferable Common Share purchase Warrant, at
                  a price of
                  $0.23 per Unit, each whole Warrant entitling the holder to acquire
                  one
                  Common Share at an exercise price of $0.40. The Warrants comprising
                  part
                  of the Units were issued for a term of 4 years and will expire
                  on February
                  23, 2009. The aggregate consideration in money received by our
                  Company
                  from the subscribers for Units was
                  $575,000.
  2.
              SERIES
                  I NOTES: 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
   59
  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.
  3.
              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.
  4.
              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”).
  
 **C.**
              **Exchange
                  Controls**
  There
        is no 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 common shares, other than withholding
        tax
        requirements.
 
 
 **D.**
              **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.
  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.
   60
  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.
  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.
   61
  
  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.
  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.
  62
  
 **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.
 
 **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.
 
  63
  **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.
 
 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
  64
  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 2006. There can be no assurance that our Company
        will
        not be classified as a passive foreign investment company in 2006, 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.
 
 **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.
  65
  
 **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.F
                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.F.,
        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**
  (a)    Quantitative
        Information about Market Risk
  See
        Item 5 - Operating and Financial
        Review and Prospects - Liquidity and Capital Resources - Foreign Currency
        Rate
        Fluctuations; Interest Rate and Investment Risk.
  (b)     Qualitative
        Information about Market Risk
  See
        Item 5 - Operating and Financial
        Review and Prospects - Liquidity and Capital Resources - Foreign Currency
        Rate
        Fluctuations; Interest Rate and Investment Risk.
  **ITEM
        12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
        SECURITIES**
 
 Not
        applicable.
 
 **PART
        II**
 
 **ITEM
        13 - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES**
 
 There
        were no material defaults, and no dividend arrearages or delinquencies during
        the fiscal year ended December 31, 2006.
 
  66
  **ITEM
        14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
        PROCEEDS**
 
 There
        were no material modifications to the rights of our security holders during
        the
        fiscal year ended December 31, 2006.
 
 **ITEM
        15 - CONTROLS AND PROCEDURES**
 
 The
        Company’s management, with the participation of the Company’s Chief Executive
        Officer and its Corporate Controller and the Chairman of the Board has evaluated
        the effectiveness of the Company’s disclosure controls and procedures as of
        December 31, 2006.  Based on that evaluation, the Company’s
        management, including the Chief Executive Officer and the Chairman of the
        Board,
        concluded that the Company’s disclosure controls and procedures were
        effective.
 
 Although
        the Company continues to refine its disclosure controls and procedures from
        time
        to time, the CEO and Chairman of the Board have concluded that, as of December
        31, 2006, the process was effective enough to ensure material information
        relating to the Company and its consolidated subsidiaries was accumulated
        and
        communicated up to management in sufficient time for management to make
        decisions regarding the Company's disclosure as required by securities
        legislation.****
 
 **Internal
        Controls Over Financial Reporting**
 
 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 to ensure that 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.
 
 There
        has been no change in the Company's internal controls over financial reporting
        during the year ended December 31, 2006, 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.  The Board
        of directors has determined that Mr. Robertson is independent, as that term
        is
        defined under Rule 4200-1(a)(14) of the Nasdaq Stock Market
        Rules.****Mr. Robertson has been an Associate Professor of
        Business at the Richard Ivey School of Business, The University of Western
        Ontario, for the past five years. He is currently the Director of the MBA
        program and was 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 Ltd., 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 of the audit committee and by-laws
        committee.
 
 **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.
 
 
  67
  
 **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.
 
 **FEES
        OF AUDITORS**
  **Year**
              **Audit**
                **Fees(1)**
              **Audit
                  Related**
                **Fees(2)**
              **Tax**
                **Fees(3)**
              **Other**
                **Fees(4)**2005
              $185,000
              $54,700
              -
              -2006
              $110,000
              $56,000
              $3,000
              $10,000
 
 (1)
              Audit
                  Fees represent costs associated with the audit of the Company’s
                  consolidated financial statements including review of securities
                  filings.
 
 (2)
              Audit
                  Related Fees represent costs associated with reviews of the Company’s
                  interim financial statements.
 
 (3)
              Tax
                  Fees represent costs associated with the preparation of the Company’s
                  annual tax filings, tax planning and
                  advice.
 
 (4)
              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)
  68
  
  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
              Formof
                  Subscription Agreement for Equity Private Placements(8)4.21
              Form
                  of Subscription Agreement for Series I Convertible Secured
                  Debenture.(11)
  69
  
  4.22
              Form
                  of Series I Convertible Secured Debenture.(11)4.23
              Form
                  of Subscription Agreement for Series J Convertible Secured
                  Debenture.(11)4.24
              Form
                  of Series J Convertible Secured Debenture.(11)4.25
              Share
                  Purchase Agreement between ADB Systems International Ltd. and ADB
                  Systemer
                  Holding as, dated May 18, 2006.(9)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 29, 2006.
  70
  
 
 
 
 
 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/
                    Jeffrey LymburnerName:
                Jeffrey
                    LymburnerTitle:
                Chief
                    Executive OfficerDated:
                    June 22, 2007
                By:
                /s/
                    Tam NguyenName:
                Tam
                    NguyenTitle:
                Corporate
                    Controller
  
  71
   **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  Audited
        Consolidated Financial Statements for the years ended December 31, 2006,
        2005,
        2004,
 
 Management’s
                  Report
              F-1Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as at December 31, 2006 and 2005
              F-3Consolidated
                  Statements of Operations for the years ended December 31, 2006,
                  2005, and
                  2004
              F-4Consolidated
                  Statements of Deficit for the years ended December 31, 2006, 2005
                  and
                  2004
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2006,
                  2005, and
                  2004
              F-6Notes
                  to Consolidated Financial Statements
              F-7
 
 
 **MANAGEMENT’S
        REPORT**
 March
        23, 2007
  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 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 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.
 
 Jeffrey
                  Lymburner
              
              Tam
                  Nguyen**CEO**
              
              **Corporate
                  Controller**
 
  
    **Northcore
              Technologies Inc.  2006 Annual Report** F-1
  **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") as of December 31, 2006 and 2005 and the
        related consolidated statements of operations, deficit and cash flows for
        each
        of the years in the two-year period ended December 31, 2006. 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 as
        of
        December 31, 2006 and 2005 and the results of its operations and its cash
        flows
        for each of the years in the two-year period ended December 31, 2006, in
        conformity with Canadian generally accepted accounting principles.
  The
        comparative figures for the year ended December 31, 2004, prior to the
        adjustments for discontinued operations as described in Note 4, were audited
        by
        another firm of Chartered Accountants.  We have audited the adjustments
        described in Note 4 that were applied to restate the 2004 financial statements
        and, in our opinion, such adjustments are appropriate and have been properly
        applied.
  
 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.
 
 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 20 to the consolidated financial statements.
 
 
 
 Chartered
        Accountants
 Toronto,
        Canada
 March
        23, 2007, except as to
 Note
        22, which is as of June 21, 2007
  
 **Northcore
              Technologies Inc.  2006 Annual Report**F-2
  **Consolidated
                        Balance Sheets**
                      **December
                        31, 2006 and 2005**
                      **(in
                        thousands of****Canadian dollars)**
 **2006**
                    
                    
                    **2005****(Restated
                        - Note 4)****ASSETS**CURRENTCash
                    
                    $
                    475
                    
                    
                    $
                    60Marketable
                        securities
                    
                    
                    -
                    
                    
                    
                    13Accounts
                        receivable
                    
                    
                    154
                    
                    
                    
                    284Deposits
                        and prepaid expenses
                    
                    
                    63
                    
                    
                    
                    115Current
                        assets from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    1,114692
                    
                    
                    
                    1,586CAPITAL
                        ASSETS (Note 5)
                    
                    
                    80
                    
                    
                    
                    45DEFERRED
                        CHARGES (Note 6)
                    
                    
                    41
                    
                    
                    
                    156LONG
                        TERM ASSETS FROM DISCONTINUED OPERATIONS  (Note
                        4)
                    
                    
                    -
                    
                    
                    
                    56$
                    813
                    
                    
                    $
                    1,843**LIABILITIES**CURRENTAccounts
                        payable
                    
                    $
                    347
                    
                    
                    $
                    667Accrued
                        liabilities
                    
                    
                    727
                    
                    
                    
                    618Due
                        to related parties (Note 7)
                    
                    
                    -
                    
                    
                    
                    137Deferred
                        revenue
                    
                    
                    68
                    
                    
                    
                    91Current
                        portion of secured subordinated notes (Note 8)
                    
                    
                    1,682
                    
                    
                    
                    343Current
                        liabilities from discontinued operations (Note 4)
                    
                    
                    -
                    
                    
                    
                    8942,824
                    
                    
                    
                    2,750SECURED
                        SUBORDINATED NOTES (Note 8)
                    
                    
                    244
                    
                    
                    
                    1,8003,068
                    
                    
                    
                    4,550NON-CONTROLLING
                        INTEREST
                    
                    
                    -
                    
                    
                    
                    3**SHAREHOLDERS’
                        DEFICIENCY**Share
                        capital (Note 10)
                    
                    
                    101,867
                    
                    
                    
                    100,859Contributed
                        surplus (Note 11)
                    
                    
                    1,819
                    
                    
                    
                    1,555Warrants
                        (Note 12)
                    
                    
                    580
                    
                    
                    
                    278Stock
                        options (Note 13)
                    
                    
                    1,252
                    
                    
                    
                    1,091Other
                        options (Note 14)
                    
                    
                    193
                    
                    
                    
                    271Conversion
                        feature on secured subordinated notes (Note 8)
                    
                    
                    1,049
                    
                    
                    
                    1,513Cumulative
                        translation account
                    
                    
                    -
                    
                    
                    
                    90Deficit
                    
                    
                    (109,015
                    )
                    
                    
                    (108,367
                    )(2,255
                    )
                    
                    
                    (2,710
                    )$
                    813
                    
                    
                    $
                    1,843
 Continuation
          of the business (Note 2)
 Commitments
          and contingencies (Note 16)
 Canadian
          and United States accounting policy differences (Note 20)
 Subsequent
          event (Note 22)
  On
          behalf of the Board:
  
 Jeffrey
                    Lymburner
                James
                    MoskosDirector
                Director
  See
          accompanying notes to consolidated financial
          statements.
 **Northcore
              Technologies Inc.  2006 Annual Report**F-3
 
 **Consolidated
                  Statements of Operations**
                **Years
                  ended December 31, 2006, 2005 and 2004**
                **(in
                  thousands of****Canadian dollars, except per share
                  amounts)**
  **2006**
                
                
                **2005**
                
                
                **2004****(Restated
                    -**
                  **Note
                    4**
                
                
                **(Restated
                    -**
                  **Note
                    4**License
                    revenue
                
                $
                10
                
                
                $
                122
                
                
                $
                255Service
                    revenue
                
                
                1,063
                
                
                
                1,163
                
                
                
                1,223Total
                    revenue
                
                
                1,073
                
                
                
                1,285
                
                
                
                1,478Operating
                    expenses:General
                    and administrative
                
                
                1,790
                
                
                
                2,559
                
                
                
                3,043Customer
                    service and technology
                
                
                664
                
                
                
                839
                
                
                
                854Sales
                    and marketing
                
                
                377
                
                
                
                505
                
                
                
                561Employee
                    stock options (Note 13)
                
                
                137
                
                
                
                105
                
                
                
                27Depreciation
                    and amortization
                
                
                92
                
                
                
                95
                
                
                
                149Other
                    income (Note 18)
                
                
                -
                
                
                
                (42
                )
                
                
                -Total
                    operating expenses
                
                
                3,060
                
                
                
                4,061
                
                
                
                4,634Loss
                    from continuing operations before the under-noted
                
                
                (1,987
                )
                
                
                (2,776
                )
                
                
                (3,156
                )Interest
                    expense:Cash
                    interest expense
                
                
                345
                
                
                
                312
                
                
                
                177Accretion
                    of secured subordinated notes
                
                
                454
                
                
                
                405
                
                
                
                266Interest
                    income
                
                
                (16
                )
                
                
                -
                
                
                
                -783
                
                
                
                717
                
                
                
                443Loss
                    from continuing operations
                
                
                (2,770
                )
                
                
                (3,493
                )
                
                
                (3,599
                )Income
                    (loss) from discontinued operations (Note 4)
                
                
                2,122
                
                
                
                (8
                )
                
                
                (1,505
                )NET
                    LOSS FOR THE YEAR
                
                $
                (648
                )
                
                $
                (3,501
                )
                
                $
                (5,104
                )LOSS
                    PER SHARE (Note 10 (f)):From
                    continuing operations, basic and diluted
                
                $
                (0.03
                )
                
                $
                (0.05
                )
                
                $
                (0.06
                )Net
                    loss per share, basic and diluted
                
                $
                (0.01
                )
                
                $
                (0.05
                )
                
                $
                (0.08
                )WEIGHTED
                    AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
                    (000’s)
                
                
                79,933
                
                
                
                72,904
                
                
                
                61,938
  See
          accompanying notes to consolidated financial statements.
  **Northcore
                Technologies Inc.  2006 Annual Report**F-4
  **Consolidated
                      Statements of Deficit**
                    **Years
                      ended December 31, 2006, 2005 and 2004**
                    **(in
                      thousands of Canadian
                      dollars)**
 
 **2006**
                  
                  
                  **2005**
                  
                  
                  **2004**DEFICIT,
                      BEGINNING OF YEAR
                  
                  $
                  (108,367
                  )
                  
                  $
                  (104,866
                  )
                  
                  $
                  (99,762
                  )NET
                      LOSS FOR THE YEAR
                  
                  
                  (648
                  )
                  
                  
                  (3,501
                  )
                  
                  
                  (5,104
                  )DEFICIT,
                      END OF YEAR
                  
                  $
                  (109,015
                  )
                  
                  $
                  (108,367
                  )
                  
                  $
                  (104,866
                  )
 
 See
            accompanying notes to consolidated financial statements.
 **Northcore
                Technologies Inc.  2006 Annual Report**F-5
  **Consolidated
                      Statements of Cash Flows**
                    **Years
                      ended December 31, 2006, 2005 and 2004**
                    **(in
                      thousands of Canadian
                      dollars)**
 **2006**
                  
                  
                  **2005**
                  
                  
                  **2004****(Restated
                      - Note 4**
                  
                  
                  **(Restated
                      - Note 4****NET
                      INFLOW (OUTFLOW) OF CASH****RELATED
                      TO THE FOLLOWING ACTIVITIES****OPERATING**Net
                      loss for the year from continuing operations
                  
                  $
                  (2,770
                  )
                  
                  $
                  (3,493
                  )
                  
                  $
                  (3,599
                  )Items
                      not affecting cash:Employee
                      stock options
                  
                  
                  137
                  
                  
                  
                  105
                  
                  
                  
                  27Depreciation
                      and amortization
                  
                  
                  92
                  
                  
                  
                  95
                  
                  
                  
                  149Accretion
                      of secured subordinated notes
                  
                  
                  454
                  
                  
                  
                  405
                  
                  
                  
                  266(2,087
                  )
                  
                  
                  (2,888
                  )
                  
                  
                  (3157
                  )Changes
                      in non cash operating working capital (Note 17)
                  
                  
                  50
                  
                  
                  
                  827
                  
                  
                  
                  597(2,037
                  )
                  
                  
                  (2,061
                  )
                  
                  
                  (2,560
                  )**INVESTING**Capital
                      assets
                  
                  
                  (65
                  )
                  
                  
                  (36
                  )
                  
                  
                  (40
                  )Proceeds
                      from disposal of
                      capital assets
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  -Marketable
                      securities
                  
                  
                  13
                  
                  
                  
                  -
                  
                  
                  
                  -(52
                  )
                  
                  
                  (32
                  )
                  
                  
                  (40
                  )**FINANCING**Advances
                      from (repayment to)
                      related parties (Note 7)
                  
                  
                  (137
                  )
                  
                  
                  137
                  
                  
                  
                  -Issuance
                      of secured
                      subordinated notes, net (Note 8)
                  
                  
                  750
                  
                  
                  
                  1,095
                  
                  
                  
                  2,598Repayment
                      of secured subordinated notes (Note 8)
                  
                  
                  (435
                  )
                  
                  
                  -
                  
                  
                  
                  -Deferred
                      charges (Note
                      6)
                  
                  
                  -
                  
                  
                  
                  (32
                  )
                  
                  
                  (167
                  )Issuance
                      of common shares (Note
                      10 (b))
                  
                  
                  -
                  
                  
                  
                  570
                  
                  
                  
                  903178
                  
                  
                  
                  1,770
                  
                  
                  
                  3,334**CASH
                      FLOWS FROM DISCONTINUED OPERATIONS (Note 4)**Operating
                      activities
                  
                  
                  (317
                  )
                  
                  
                  141
                  
                  
                  
                  (673
                  )Investing
                      activities - Net proceeds from disposition of discontinued
                      operations
                  
                  
                  2,643
                  
                  
                  
                  -
                  
                  
                  
                  -2,326
                  
                  
                  
                  141
                  
                  
                  
                  (673
                  )NET
                      CASH INFLOW (OUTFLOW) DURING THE YEAR
                  
                  
                  415
                  
                  
                  
                  (182
                  )
                  
                  
                  61CASH,
                      BEGINNING OF YEAR
                  
                  
                  60
                  
                  
                  
                  242
                  
                  
                  
                  181CASH,
                      END OF YEAR
                  
                  $
                  475
                  
                  
                  $
                  60
                  
                  
                  $
                  242
  SUPPLEMENTAL
            DISCLOSURE OF CASH PAYMENTS
  Interest
                      paid
                  
                  $
                  45
                  
                  
                  $
                  53
                  
                  
                  $
                  60
 
 SUPPLEMENTAL
            DISCLOSURE OF NON-CASH FINANCING ACTIVITIES - See Note 17
 
 See
            accompanying notes to consolidated financial statements.
  
 **Northcore
                  Technologies Inc.  2006 Annual Report**F-6
 
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(in
              Canadian dollars)**
 
 
 **1.    DESCRIPTION
            OF BUSINESS**
 
 Northcore
            Technologies Inc., formerly ADB Systems International Ltd. (“Northcore” or the
“Company”) changed its name by filing Articles of Amendment on June 30,
            2006.  Northcore provides software solutions and services that help
            organizations source, manage and sell their capital equipment and
            assets.  Northcore works with a growing 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.  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 2006.  Management believes that
            it has the ability to raise additional financing if required.  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 2006 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
            business ventures with third parties.
 
 **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 20.  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
            19).
  **Northcore
                  Technologies Inc.  2006 Annual Report**F-7
 
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(in
              Canadian dollars)**
 
 
 **Marketable
            Securities**
 Marketable
            securities are comprised of interest-bearing certificates carried at
            cost plus
            accrued interest which approximate market value.
 
 **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
                  
                  
                  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 is 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 software license fees, implementation,
            training and consulting services, product maintenance and customer support,
            software development, and hosting fees. Fees for services are billed
            separately
            from licenses of the Company’s product.  The Company recognizes
            revenue in accordance with Canadian GAAP, which in the Company’s circumstances,
            is not materially different from the amounts that would be determined
            under
            provisions of the American Institute of Certified Public Accountants
            Statements
            of Position (SOP) No. 97-2, “Software Revenue Recognition”, and as amended by
            Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue
            Recognition, With Respect to Certain Transactions”. The Company also considers
            the provisions of The Canadian Institute of Chartered Accountants (“CICA”) 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 on EITF 00-21, “Accounting for Revenue
            Arrangements with Multiple Elements,” in determining the appropriate revenue
            recognition methodology.
 
 **Northcore
                  Technologies Inc.  2006 Annual Report**F-8
 
 **Notes
              to the Consolidated Financial Statements**
 **Years
              ended December 31, 2006, 2005 and 2004**
 **(in
                Canadian dollars)**
 **Hosting
            Fees**
 The
            Company earns revenue from the hosting of customer websites.  Under
            existing hosting contracts, the Company charge customers a recurring
            periodic
            flat fee.  The fees are recognized as the hosting services are
            provided.
 
 **Software
            Development Fees**
 Typically,
            development of software for our customers is provided based on a predetermined
            fixed 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
            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.
 
 
 
 **Northcore
                  Technologies Inc.  2006 Annual Report**F-9
 **Notes
              to the Consolidated Financial Statements**
 **Years
              ended December 31, 2006, 2005 and 2004**
 **(in
                Canadian dollars)**
 **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.
 
 **Deferred
            Charges**
 Deferred
            charges are comprised of expenditures incurred in the issuance of secured
            subordinated notes.  The deferred charges are amortized over the term
            of the underlying notes on a straight-line basis.  In accordance with
            Canadian GAAP, conversion of the underlying notes results in the allocation
            of
            the associated unamortized deferred charge to shareholders’
deficiency.  Under U.S. GAAP, note conversion 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 20).
 
 **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.  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 these consolidated financial
            statements under Canadian and United States accounting policy differences
            (See
            Note 20).
 
 **Stock-Based
            Compensation**
 The
            Company accounts for stock-based compensation based on the fair value
            method of
            accounting, which is consistent with CICA 3870, “Stock-based Compensation and
            Other-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 in 2007.  Actual results
            could differ from those estimates.
 
 **ADOPTION
            OF NEW ACCOUNTING PRONOUNCEMENTS**
  **Financial
            Instruments**
 In
            2005, the CICA issued Handbook Section 3855, Financial Instruments -
            Recognition
            and Measurement, Handbook Section 1530, Comprehensive Income, Handbook
            Section
            3251, Equity, and Handbook Section 3855, Hedges.  The new standards
            are effective for interim and annual financial statements commencing
            on or after
            October 1, 2006.  The Company will adopt the new standards on January
            1, 2007.
 
 **Northcore
                  Technologies Inc.  2006 Annual Report**F-10
 
 **Notes
              to the Consolidated Financial Statements**
 **Years
              ended December 31, 2006, 2005 and 2004**
 **(in
                Canadian dollars)**
 Other
            comprehensive income (loss) will form part of shareholders’ equity.  A
            new statement entitled “Consolidated Statement of Comprehensive Income (Loss)”
will be added to the Company’s consolidated financial statements and will
            include net income as well as other comprehensive income (loss).
 
 The
            Company is currently evaluating the impact of this new standard.
 
 **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.  The new standard will be effective for the Company
            effective January 1, 2008.
 
  **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
            Canadian $2,687,000 in cash, subject to shareholder approval.  As
            compensation for the transfer of UK contracts to the Buyer, the Company
            will
            receive a royalty of 10% of net annual sales from the contracts for a
            period of
            four years from the sale closing date.  These royalties will be
            recognized in earnings as receivable.  The Company received a total of
            $77,000 in royalties from the period of discontinued operations to the
            year
            end.  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 retains access to all existing technology
            that will
            be used to service existing customers and entered into a Value Added
            Reseller
            Agreement with ADB Systemer.
  The
            consolidated financial statements and related note disclosures for 2005
            and 2004
            have been restated to reflect the impact of the discontinued
            operations.
 
 The
            following summarizes the balance sheet, statement of operations and statement
            of
            cash flows information for the Company’s discontinued operations.
  **Balance
                      Sheet**
                  
                  **2006**
                  
                  
                  **2005**(in
                      thousands)Current
                      assets
                  
                  $
                  -
                  
                  
                  $
                  1,114Long
                      term assets
                  
                  
                  -
                  
                  
                  
                  56Current
                      liabilities
                  
                  
                  -
                  
                  
                  
                  (894
                  )Net
                      assets from discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  276
 
 **Income
                      Statement**
                  
                  **2006**
                  
                  
                  **2005**
                  
                  
                  **2004**(in
                      thousands, except per share amounts)Revenue
                  
                  $
                  2,399
                  
                  
                  $
                  4,491
                  
                  
                  $
                  3,453Income
                      (loss) from operations
                  
                  
                  331
                  
                  
                  
                  (8
                  )
                  
                  
                  (1,505
                  )Gain
                      from disposition of discontinued operations
                  
                  
                  1,791
                  
                  
                  
                  -
                  
                  
                  
                  -Income
                      (loss) from discontinued operations
                  
                  $
                  2,122
                  
                  
                  $
                  (8
                  )
                  
                  $
                  (1,505
                  )Income
                      (loss) per share from discontinued operations, basic and
                      diluted
                  
                  $
                  0.02
                  
                  
                  $
                  -
                  
                  
                  $
                  (0.02
                  )
 
 
 **Northcore
                  Technologies Inc.  2006 Annual Report**F-11
  **Notes
              to the Consolidated Financial Statements**
 **Years
              ended December 31, 2006, 2005 and 2004**
 **(in
                Canadian dollars)**
  **Statement
                      of Cash Flows**
                  
                  **2006**
                  
                  
                  **2005**
                  
                  
                  **2004**(in
                      thousands)Operating
                      activities
                  
                  $
                  (317
                  )
                  
                  $
                  141
                  
                  
                  $
                  (673
                  )Investing
                      activities - Net proceeds from disposition of discontinued
                      operations
                  
                  
                  2,643
                  
                  
                  
                  -
                  
                  
                  
                  -Financing
                      activities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cash
                      (deficiency) from discontinued operations
                  
                  $
                  2,326
                  
                  
                  $
                  141
                  
                  
                  $
                  (673
                  )
 
 
 **5.    CAPITAL
            ASSETS**
 **2006**
                      
                      
                      **2005****(Restated
                          - Note 4)****Cost**
                      
                      
                      **Accumulated**
                        **Amortization**
                      
                      
                      **Net
                          Book**
                        **Value**
                      
                      
                      **Cost**
                      
                      
                      **Accumulated**
                        **Amortization**
                      
                      
                      **Net
                          Book**
                        **Value**(in
                          thousands)Computer
                          hardware
                      
                      $
                      2,472
                      
                      
                      $
                      2,407
                      
                      
                      $
                      65
                      
                      
                      $
                      2,407
                      
                      
                      $
                      2,385
                      
                      
                      $
                      22Computer
                          software
                      
                      
                      13
                      
                      
                      
                      13
                      
                      
                      
                      -
                      
                      
                      
                      13
                      
                      
                      
                      11
                      
                      
                      
                      2Furniture
                          and fixtures
                      
                      
                      266
                      
                      
                      
                      266
                      
                      
                      
                      -
                      
                      
                      
                      266
                      
                      
                      
                      266
                      
                      
                      
                      -Leasehold
                          improvements
                      
                      
                      27
                      
                      
                      
                      12
                      
                      
                      
                      15
                      
                      
                      
                      27
                      
                      
                      
                      6
                      
                      
                      
                      21$
                      2,778
                      
                      
                      $
                      2,698
                      
                      
                      $
                      80
                      
                      
                      $
                      2,713
                      
                      
                      $
                      2,668
                      
                      
                      $
                      45
  During
            2006, the Company recorded capital asset amortization in the amount of
            $31,000
            (2005 - $31,000, 2004 - $117,000).
 
 **6.    DEFERRED
            CHARGES**
 
 a)
                  The
                      following table summarizes the transactions within deferred
                      charges.
 **2006**
                  
                  
                  **2005**(in
                      thousands)Opening
                      balance
                  
                  $
                  156
                  
                  
                  $
                  155Series
                      I financing costs (Note 6 (b))
                  
                  
                  -
                  
                  
                  
                  77Amortization
                      (Note 6 (c))
                  
                  
                  (62
                  )
                  
                  
                  (63
                  )Allocation
                      to contributed surplus (Note 6 (d))
                  
                  
                  (53
                  )
                  
                  
                  (13
                  )Closing
                      balance
                  
                  $
                  41
                  
                  
                  $
                  156
 
 b)
                  During
                      2005, financing costs in the amount of $77,000 associated with
                      the
                      liability component of the Series I notes were recorded as
                      deferred
                      charges.  These financing costs include $45,000 representing the
                      allocation of the fair value of commission options issued in
                      conjunction
                      with these notes (See Note 8 (b)).  The deferred charges are
                      being amortized on a straight-line basis over the term of the
                      underlying
                      debt.
 
 c)
                  During
                      2006, amortization of deferred charges in the amount of $62,000
                      (2005 -
                      $63,000, 2004 - $32,000) was recorded and included in depreciation
                      and
                      amortization expense.
 
 d)
                  During
                      2006, conversion of the Series I notes (2005 - Series H notes)
                      resulted in
                      the allocation of $51,000 (2005 - $13,000) in unamortized deferred
                      charges
                      to contributed surplus (See Note 11(b)).  In addition, the
                      repayment of Series G notes resulted in the allocation of $2,000
                      (2005 -
                      $nil) in unamortized deferred charges to contributed
                      surplus.
   **Northcore
                  Technologies Inc.  2006 Annual Report**F-12
 **Notes
                to the Consolidated Financial Statements**
 **Years
                ended December 31, 2006, 2005 and 2004**
 **(in
                  Canadian dollars)**
  **7.    DUE
              TO RELATED PARTIES**
 
 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).
 
 As
              at December 31, 2006, accrued liabilities included $nil (2005 - $5,000)
              in
              interest payable relating to the above amounts due to related
              parties.  During 2006, interest expense on advances from related
              parties was $4,000 (2005 - $5,000).
  **8.    SECURED
              SUBORDINATED NOTES**
 
 a)
                    During
                        the year ended December 31, 2006, the Company issued Series
                        J secured
                        subordinated notes with a face value of $755,000.  The Series J
                        notes were issued to private investors including an amount
                        totaling
                        $105,000 issued to three directors/officers of the Company.
                        The Series J
                        notes mature February 8, 2011, have an annual interest rate
                        of 11 percent
                        and are convertible into equity units at a price of $0.15
                        per
                        unit.  Interest for the first year is payable in shares of the
                        Company with the provision that the total number of shares
                        issued as
                        interest payment cannot exceed 6,529,959 shares.  Interest
                        payable for the remaining term of the notes is payable in
                        cash upon the
                        earlier of maturity and conversion.   Each equity unit
                        consisted of one common share and one share-purchase warrant
                        with an
                        exercise price of $0.20 per warrant.  The warrants expire on the
                        earlier of (i) February 8, 2009 and (ii) the date which is
                        sixty days
                        following the issuance of a notice by the Company to holders
                        confirming
                        that the closing price of the Company’s common shares, on the Toronto
                        Stock Exchange, was greater than or equal to $0.35 for any
                        10 consecutive
                        trading days.  The afore-mentioned conversion provisions are
                        subject to a four month and one day holding period.  The Series
                        J notes are secured by a general security agreement on the
                        assets of the
                        Company, subordinated to the security claims provided to
                        the holders of
                        previously issued notes.
 
 As
              required by Canadian GAAP, the Company separated the liability and
              equity
              components of the Series J secured subordinated notes.  The Company
              determined the fair value of the liability component of the Series
              J notes by
              calculating the present value of the associated cash flows, using a
              discount
              rate that reflects the Company’s underlying rate of borrowing.  The
              Company determined the fair value of the conversion feature at the
              issue date of
              the Series J notes using the Cox-Rubinstein binomial valuation
              model.  The resulting pro rata fair values of the liability component
              of the notes and the conversion features of the units, comprised of
              shares and
              attached warrants, was $202,000, $353,000 and $200,000,
              respectively.  The liability component will be accreted to $755,000
              over the term of the Series J notes through the recording of a non-cash
              interest
              expense until such date at which the underlying notes are converted
              into common
              shares.
 
 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).
 
 b)
                    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.
  **Northcore
                  Technologies Inc.  2006 Annual Report**F-13
  **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
  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 (See Note 6).  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.
 
 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).
 
 c)
                    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 mature October 21, 2007, have an annual rate
                        of interest of
                        11 percent payable upon the earlier of maturity and conversion
                        and are
                        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 will
                        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 may convert the notes into units at anytime
                        following a four-month hold period.  If the holder does 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 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 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 will be accreted to
              $520,000 over the term of the Series H notes through the recording
              of a non-cash
              interest expense until such date at which the underlying notes are
              converted
              into common shares.
 
  **Northcore
                  Technologies Inc.  2006 Annual Report**F-14
 **Notes
                to the Consolidated Financial Statements**
 **Years
                ended December 31, 2006, 2005 and 2004**
 **(in
                  Canadian dollars)**
  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 (See table
              below).
 
 d)
                    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 mature June 15, 2007, have an annual rate of interest
                        of 7 percent
                        payable upon the earlier of maturity and conversion and are
                        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 may
                        convert the notes into units at anytime following a four-month
                        hold
                        period.  If the holder does not convert and no automatic
                        conversion takes place, the Company must repay the principal
                        amount in
                        cash. The Series G 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 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 will be 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 are 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 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.  Using the Cox-Rubinstein binomial valuation model, the Company
              has 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.
   **Northcore
                  Technologies Inc.  2006 Annual Report**F-15
 **Notes
                to the Consolidated Financial Statements**
 **Years
                ended December 31, 2006, 2005 and 2004**
 **(in
                  Canadian dollars)**
  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 (c)
              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).
 
 e)
                    During
                        the year ended December 31, 2004, the Company issued Series
                        F secured
                        subordinated notes with a face value of $500,000.  The Series F
                        notes had an annual rate of interest of 7 percent paid quarterly
                        in
                        arrears, matured May 19, 2007 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 May 19,
                        2007.  The Series F secured subordinated notes would have
                        automatically convert into units when the share price of
                        the Company
                        closed above $0.70 for five consecutive trading days during
                        the
                        term.  Holders could convert the notes into units at anytime
                        following a four-month hold period.  If the holder does not
                        convert and no automatic conversion took place, the Company
                        would have
                        repaid the principal amount in cash.  The Series F 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.
 
 During
              2004, all of the Series F notes were converted into equity units.
 
 As
              required by Canadian GAAP, the Company separated the liability and
              equity
              components of the Series F secured subordinated notes.  The Company
              determined the fair value of the liability component of the Series
              F 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 F 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 $286,000, $159,000 and $55,000,
              respectively.  The liability component would have been accreted to
              $500,000 over the term of the Series F 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 $26,000 were incurred in the issuance of the
              Series F
              notes.  A portion of these financing costs, in the amount of $15,000
              attributed to the liability component of the notes was allocated to
              deferred
              charges.  The remaining financing costs of $11,000 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.
 
 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.
  **Northcore
                  Technologies Inc.  2006 Annual Report**F-16
 **Notes
                to the Consolidated Financial Statements**
 **Years
                ended December 31, 2006, 2005 and 2004**
 **(in
                  Canadian dollars)**
  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, 2006 the Company recorded cash
                        interest
                        expense aggregating $345,000 (2005 - $312,000, 2004 - $173,000)
                        and
                        interest accretion of $454,000 (2005 - $405,000, 2004 -
                        $266,000).
 
 h)
                    As
                        at December 31, 2006, accrued liabilities include $574,000
                        (2005 -
                        $363,000) of unpaid interest payable relating to the secured
                        subordinated
                        notes.
 
 i)
                    Accrued
                        liabilities include accrued interest payable to related parties
                        as
                        follows:
 **2006**
                    
                    
                    **2005**(in
                        thousands)Series
                        E
                    
                    $
                    -
                    
                    
                    $
                    1Series
                        G
                    
                    
                    31
                    
                    
                    
                    29Series
                        H
                    
                    
                    5
                    
                    
                    
                    1Series
                        I
                    
                    
                    16
                    
                    
                    
                    3Series
                        J
                    
                    
                    10
                    
                    
                    
                    -Total
                    
                    $
                    62
                    
                    
                    $
                    34
 
 j)
                    Interest
                        payments relating to the secured subordinated notes totaling
                        $3,000 and
                        $15,000, respectively, were made to related parties during
                        the years ended
                        December 31, 2006 and December 31,
                        2005.
 
 
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-17
 **Notes
                to the Consolidated Financial Statements**
 **Years
                ended December 31, 2006, 2005 and 2004**
 **(in
                  Canadian dollars)**
 
 k)
                    The
                        following summarizes the face and fair values of the liability
                        and equity
                        components of the secured subordinated
                        notes.
 
 **Secured
                        Subordinated Notes**
                    
                    **2006**
                    
                    
                    **2005****Face
                        Value**
                    
                    
                    **Fair
                        Value**
                    
                    
                    **Face
                        Value**
                    
                    
                    **Fair
                        Value**(in
                        thousands)Opening
                        balance
                    
                    $
                    3,455
                    
                    
                    $
                    2,143
                    
                    
                    $
                    2,605
                    
                    
                    $
                    1,684Issuance
                        of notes:Series
                        I (Note 8 (b))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,200
                    
                    
                    
                    280Series
                        J (Note 8 (a))
                    
                    
                    755
                    
                    
                    
                    202Accreted
                        (non-cash) interest
                    
                    
                    -
                    
                    
                    
                    454
                    
                    
                    
                    -
                    
                    
                    
                    405Conversion
                        of notes:Series
                        H (Note 8 (c))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (350
                    )
                    
                    
                    (226
                    )Series
                        I (Note 8 (b))
                    
                    
                    (900
                    )
                    
                    
                    (291
                    )
                    
                    
                    -
                    
                    
                    
                    -Series
                        J (Note 8 (a))
                    
                    
                    (470
                    )
                    
                    
                    (156
                    )
                    
                    
                    -
                    
                    
                    
                    -Repayment
                        of notes:Series
                        E (Note 8 (f))
                    
                    
                    (375
                    )
                    
                    
                    (375
                    )
                    
                    
                    -
                    
                    
                    
                    -Series
                        G (Note 8 (d))
                    
                    
                    (60
                    )
                    
                    
                    (51
                    )
                    
                    
                    -
                    
                    
                    
                    -Closing
                        balance
                    
                    $
                    2,405
                    
                    
                    $
                    1,926
                    
                    
                    $
                    3,455
                    
                    
                    $
                    2,143
 
 Current
                        portion of notes
                    
                    $
                    1,820
                    
                    
                    $
                    1,682
                    
                    
                    $
                    375
                    
                    
                    $
                    343Long
                        term portion of notes
                    
                    
                    585
                    
                    
                    
                    244
                    
                    
                    
                    3,080
                    
                    
                    
                    1,800Closing
                        balance
                    
                    $
                    2,405
                    
                    
                    $
                    1,926
                    
                    
                    $
                    3,455
                    
                    
                    $
                    2,143
 **Conversion
                        Features on Secured**
                      **Subordinated
                        Notes Including**
                      **Conversion
                        of Attached Warrants**
                    
                    **2006**
                    
                    
                    **2005****Common
                        Shares**
                    
                    
                    **Fair
                        Value**
                    
                    
                    **Common
                        Shares**
                    
                    
                    **Fair
                        Value**(in
                        thousands)Opening
                        balance
                    
                    
                    27,156
                    
                    
                    $
                    1,513
                    
                    
                    
                    13,781
                    
                    
                    $
                    992Issuance
                        of notes:Series
                        I
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    16,000
                    
                    
                    
                    667Series
                        J
                    
                    
                    10,067
                    
                    
                    
                    553
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
                        of notes:Series
                        H (Note 8 (c))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,625
                    )
                    
                    
                    (146
                    )Series
                        I (Note 8 (b))
                    
                    
                    (12,000
                    )
                    
                    
                    (500
                    )
                    
                    
                    -
                    
                    
                    
                    -Series
                        J (Note 8 (a))
                    
                    
                    (6,266
                    )
                    
                    
                    (345
                    )
                    
                    
                    -
                    
                    
                    
                    -Repayment
                        of notes:Series
                        E (Note 8 (f))
                    
                    
                    (1,608
                    )
                    
                    
                    (150
                    )
                    
                    
                    -
                    
                    
                    
                    -Series
                        G (Note 8 (d))
                    
                    
                    (290
                    )
                    
                    
                    (22
                    )
                    
                    
                    -
                    
                    
                    
                    -Closing
                        balance
                    
                    
                    17,059
                    
                    
                    $
                    1,049
                    
                    
                    
                    27,156
                    
                    
                    $
                    1,513
 
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-18
 
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
  **9.    INCOME
              TAXES**
 
 The
              Company accounts for income taxes under the asset and liability
              method.  Under the asset and liability method, a future tax asset is
              recorded based upon tax losses carried forward and differences in tax
              and
              accounting values in the Company’s assets and liabilities.  The tax
              asset is reduced by a valuation allowance to the extent that it is
              more likely
              than not that the asset would not be realized.  The valuation
              allowance is reviewed and adjusted as appropriate for each reporting
              period.  At December 31, 2006 and 2005, the Company established the
              valuation allowance at 100 percent of the future tax asset.
  **2006**
                    
                    
                    **2005**(in
                        thousands)FUTURE
                        TAX ASSETTax
                        losses carried forward
                    
                    $
                    5,881
                    
                    
                    $
                    5,211Difference
                          in tax and accounting valuationsfor capital assets and
                          investments
                    
                    
                    142
                    
                    
                    
                    2106,023
                    
                    
                    
                    5,421Valuation
                        allowance
                    
                    
                    (6,023
                    )
                    
                    
                    (5,421
                    )Future
                        tax asset
                    
                    $
                    -
                    
                    
                    $
                    -PROVISION
                        FOR INCOME TAXESIncome
                        taxes at statutory rate
                    
                    $
                    (942
                    )
                    
                    $
                    (1,262
                    )Foreign
                        losses affected at (higher) lower rates
                    
                    
                    (14
                    )
                    
                    
                    89Change
                        in enacted rates
                    
                    
                    271
                    
                    
                    
                    -Stock-based
                        compensation not deductible for tax
                    
                    
                    45
                    
                    
                    
                    31Other,
                        net
                    
                    
                    38
                    
                    
                    
                    (98
                    )(602
                    )
                    
                    
                    (1,240
                    )Change
                        to valuation allowance
                    
                    
                    602
                    
                    
                    
                    1,240Provision
                        for income taxes
                    
                    $
                    -
                    
                    
                    $
                    -
  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
              (2005 - 36 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, 2006 expire as follows:
  **Year**
                    
                    **Amount**(in
                        thousands)2009
                    
                    $        1,4082010
                    
                    3,7822014
                    
                    3,0472015
                    
                    3,3512026
                    
                    2,635Tax
                        loss carry-forwards that do not expire
                    
                    11,989$      26,212
 
 The
              Company has Canadian net operating loss carry-forwards of $14,223,000
              that
              expires in years 2009 through 2026, and indefinite loss carry forwards
              of
              $11,989,000 of which $5,877,000 relate to Ireland.  Also included in
              the indefinite loss carry-forwards are net capital losses of $1,004,000
              from
              continuing Canadian operations and $5,108,000 from discontinued operations
              which
              are available to reduce future year’s capital gains.
 
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-19
 
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 
 **10.      SHARE
              CAPITAL**
 
 *a)*
                    **Authorized**
  Unlimited
                        number of common sharesUnlimited
                        number of preference shares - issuable in
                        series
  *b)*    **Outstanding Common
              Shares**
 **2006**
                    
                    
                    **2005**
                    
                    
                    **2004****Number**
                    
                    
                    **Amount**
                    
                    
                    **Number**
                    
                    
                    **Amount**
                    
                    
                    **Number**
                    
                    
                    **Amount**(in
                        thousands of shares and dollars)Opening
                        balance
                    
                    
                    74,120
                    
                    
                    $
                    100,859
                    
                    
                    
                    69,870
                    
                    
                    $
                    100,052
                    
                    
                    
                    59,423
                    
                    
                    $
                    97,674Shares
                        issued pursuant to:Private
                        placement (Note 10 (c))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,500
                    
                    
                    
                    468
                    
                    
                    
                    5,000
                    
                    
                    
                    930Conversion of debentures (Note 8)
                    
                    
                    9,133
                    
                    
                    
                    924
                    
                    
                    
                    1,750
                    
                    
                    
                    339
                    
                    
                    
                    4,357
                    
                    
                    
                    1,227Payment of interest (Note 10 (d))
                    
                    
                    489
                    
                    
                    
                    84
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    920
                    
                    
                    
                    195Exercise of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    72
                    
                    
                    
                    26Re-issuance
                        of treasury shares (Note 10 (e))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    98
                    
                    
                    
                    -Closing
                        balance
                    
                    
                    83,742
                    
                    
                    $
                    101,867
                    
                    
                    
                    74,120
                    
                    
                    $
                    100,859
                    
                    
                    
                    69,870
                    
                    
                    $
                    100,052
 
 In
              addition to the above, the conversion of the remaining secured subordinated
              notes would result in the issuance of nil (2005 - 1,071,000) common
              shares for
              Series E notes, 5,323,000 (2005 - 5,516,000) common shares for Series
              G notes,
              850,000 (2005 - 850,000) common shares for Series H notes, 2,000,000
              (2005 -
              8,000,000) common shares for Series I notes and 1,900,000 (2005 - nil)
              common
              shares for Series J notes.
 
 *c)*
                    **Private
                        Placement**
 
 On
              February 23, 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, 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 (See Note 12).  The
              warrants expire on February 23, 2009.
 
 In
              the third quarter of 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.
 
 On
              December 6, 2004, the Company completed a transaction resulting in
              the issuance
              of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common
              share-purchase warrants exercisable into one common share at a price
              of $0.35
              per warrant for gross proceeds of $1,000,000.  The warrants expire on
              December 6, 2008.  Gross proceeds were comprised of $800,000 in cash
              and $200,000 in legal services.  The $200,000 was applied, in part, to
              outstanding payables and the remainder was recorded as a prepaid retainer
              for
              legal services.  Issuance costs in the amount of $70,000 were
              incurred, including $19,000 representing the fair value of 150,000
              compensation
              options issued to First Associates.  The compensation options are
              exercisable into 150,000 equity units at a price of $0.20 per
              unit.  Each equity unit consists of one common share and one common
              share-purchase warrant with an exercise price of $0.35 per warrant
              and an expiry
              date of December 6, 2008.  The compensation options expired
              unexercised on December 6, 2006.  Included in this private placement
              were 100,000 shares issued to a director of the Company for gross proceeds
              of
              $20,000.
 
 
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-20
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 
 *d)*
                    **Payment
                        of Interest**
 
 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.
 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)*
                    **Re-issuance
                        of Treasury Shares**
 
 An
              unclaimed certificate for 98,000 common shares previously issued from
              treasury
              in the 2001 acquisition of ADB Systemer ASA, and not included in the
              number of
              shares outstanding, was reissued during 2004.
 
 *f)*
                    **Loss
                        Per Share**
 
 The
              following table sets forth the computation of basic and diluted loss
              per
              share.
 **2006**
                    
                    
                    **2005**
                    
                    
                    **2004**(in
                        thousands, except per share amounts)**Numerator:**Loss
                        from continuing operations
                    
                    $
                    (2,770
                    )
                    
                    $
                    (3,493
                    )
                    
                    $
                    (3,599
                    )Income
                        (loss) from discontinued operations (Note 4)
                    
                    
                    2,122
                    
                    
                    
                    (8
                    )
                    
                    
                    (1,505
                    )Net
                        loss for the year
                    
                    $
                    (648
                    )
                    
                    $
                    (3,501
                    )
                    
                    $
                    (5,104
                    )**Denominator:**Weighted
                        average number of shares outstanding, basic and diluted
                    
                    
                    79,933
                    
                    
                    
                    72,904
                    
                    
                    
                    61,938Loss
                        per share from continuing operations,basic
                        and diluted
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.06
                    )Net
                        loss per share, basic and diluted
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
 
 For
              each fiscal year, the Company excluded the effect of all convertible
              debt, stock
              options and share-purchase warrants, as their impact would have been
              anti-dilutive.
 
 **11.         CONTRIBUTED
              SURPLUS**
  *a)*
                    The
                        following table summarizes the transactions within contributed
                        surplus.
  **2006**
                    
                    
                    **2005**(in
                        thousands)Opening
                        balance
                    
                    $
                    1,555
                    
                    
                    $
                    1,282Allocation
                        of unamortized deferred charges upon conversion of secured
                        subordinated
                        notes (Note 11 (b))
                    
                    
                    (51
                    )
                    
                    
                    (13
                    )Allocation
                        of recorded value of expired warrants (Note 11 (c))
                    
                    
                    67
                    
                    
                    
                    286Allocation
                        of recorded value of expired options (Note 11 (d))
                    
                    
                    78
                    
                    
                    
                    -Repayment
                        of secured subordinated notes (Note 11 (e))
                    
                    
                    170
                    
                    
                    
                    -Closing
                        balance
                    
                    $
                    1,819
                    
                    
                    $
                    1,555
  *b)*
                    During
                        the year ended December 31, 2006, conversion of the Series
                        I (2005 -
                        Series H) secured subordinated notes resulted in the reduction
                        of
                        contributed surplus by $51,000 (2005 - $13,000) due to the
                        allocation of
                        unamortized deferred charges (See Note 6
                        (d)).
  
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-21
 
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
  *c)*
                    During
                        the year ended December 31, 2006, recorded value of $67,000
                        (2005 -
                        $286,000) related to expired warrants was allocated from
                        warrants to
                        contributed surplus (See Note 12
                        (c)).
  *d)*
                    During
                        the year ended December
                        31, 2006, recorded value of $78,000 (2005 - $nil) related
                        to expired
                        options was allocated from options to contributed surplus
                        (See Note
                        14).
  *e)*
                    During
                        the year ended December
                        31, 2006, recorded value of $170,000 (2005 - $nil) related
                        to the
                        repayment of secured subordinated notes was allocated from
                        conversion
                        features on secured subordinated notes to contributed surplus
                        (See Note
                        8).
 
 
 **12.**
                    **WARRANTS**
 
 *a)*
                    The
                        following table summarizes the transactions within
                        warrants.
  **2006**
                      
                      
                      **2005****Number**
                      
                      
                      **Amount**
                      
                      
                      **Number**
                      
                      
                      **Amount**(in
                          thousands)Opening
                          balance
                      
                      
                      8,854
                      
                      
                      $
                      278
                      
                      
                      
                      11,512
                      
                      
                      $
                      405Warrants
                          issued pursuant to:Private
                          placement  (Note 10 (c))
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,250
                      
                      
                      
                      126Conversion
                          of debentures (Series J - Note 8 (a), Series I - Note 8
                          (b), Series H -
                          Note 8 (c))
                      
                      
                      9,133
                      
                      
                      
                      369
                      
                      
                      
                      875
                      
                      
                      
                      33Warrants
                          expired (Note 12 (b))
                      
                      
                      (923
                      )
                      
                      
                      (67
                      )
                      
                      
                      (4,783
                      )
                      
                      
                      (286
                      )Closing
                          balance
                      
                      
                      17,064
                      
                      
                      $
                      580
                      
                      
                      
                      8,854
                      
                      
                      $
                      278
  In
              addition to the above, the conversion of the remaining secured subordinated
              notes would result in the issuance of nil (2005 - 536,000) common share-purchase
              warrants for Series E notes, 2,661,000 (2005 - 2,758,000) common share-purchase
              warrants for Series G notes, 425,000 (2005 - 425,000) common share-purchase
              warrants for Series H notes, 2,000,000 (2005 - 8,000,000) common share-purchase
              warrants for Series I notes and 1,900,000 (2005 - nil) common share-purchase
              warrants for Series J notes.
 
 *b)*
                    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.
 
 During
              the year ended December 31, 2002,the Company
              issued
              2,000,000 common share-purchase warrants, with an exercise price of
              $0.45 per
              warrant, to a key customer as part of a strategic marketing
              agreement.  These warrants, of which 1,250,000 had vested, expired
              unexercised on January 5, 2005 and were accordingly cancelled.
 
 Also
              during the year ended December 31, 2002, the Company issued 50,000
              common
              share-purchase warrants, with an exercise price of $US 0.35 per warrant,
              as
              partial consideration for funding and due diligence services.  These
              warrants expired unexercised on April 25, 2005 and were accordingly
              cancelled.
 
 On
              June 13, 2005, the Company extended the expiry date of the 2,733,000
              common
              share-purchase warrants, with an exercise price of $0.40 per warrant,
              that were
              issued on June 26, 2003.  The original expiry date of June 26, 2005
              was extended to September 26, 2005.  These warrants expired
              unexercised on September 26, 2005 and were accordingly cancelled.
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-22
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 
 **13.**
                    **STOCK
                        OPTIONS**
  *a)*
                    Stock
                        options are comprised of the following
                        components:
 **2006**
                    
                    
                    **2005****Number**
                    
                    
                    **Amount**
                    
                    
                    **Number**
                    
                    
                    **Amount**(in
                        thousands of options and dollars)Employees
                        (Note 13 (b))
                    
                    
                    2,220
                    
                    
                    $
                    1,136
                    
                    
                    
                    2,997
                    
                    
                    $
                    975Non-employees
                    
                    
                    -
                    
                    
                    
                    116
                    
                    
                    
                    -
                    
                    
                    
                    116Total
                    
                    
                    2,220
                    
                    
                    $
                    1,252
                    
                    
                    
                    2,997
                    
                    
                    $
                    1,091
  *b)*
                    **Employee
                        Stock Options**
 
 The
              Company has a stock option plan which provides for the issuance of
              stock options
              to employees, which may expire as much as 10 years from the date of
              grant, at
              prices not less than the fair market value of the common shares on
              the date of
              grant. A total of 5,350,000 options has been authorized by the Company’s
              shareholders for issuance under the stock option plan.
 
 The
              aggregate exercise price for employee options outstanding at December
              31, 2006
              was approximately $392,000 (2005 - $678,000).  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 2011.
 
 A
              summary of changes in the employee stock option plan for the two years
              ended
              December 31, 2006 is as follows:
 **2006**
                    
                    
                    **2005**
                    
                    
                    **2006**
                    
                    
                    **2005****Number
                        of Options**
                    
                    
                    **Weighted
                        Average Exercise Price**(in
                        thousands)Opening
                        balance
                    
                    
                    2,997
                    
                    
                    
                    853
                    
                    
                    $
                    0.23
                    
                    
                    $
                    0.35Granted
                    
                    
                    550
                    
                    
                    
                    2,575
                    
                    
                    
                    0.15
                    
                    
                    
                    0.20Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    (1,327
                    )
                    
                    
                    (431
                    )
                    
                    
                    0.28
                    
                    
                    
                    0.28Closing
                        balance
                    
                    
                    2,220
                    
                    
                    
                    2,997
                    
                    
                    $
                    0.18
                    
                    
                    $
                    0.23Exercisable,
                        end of year
                    
                    
                    1,827
                    
                    
                    
                    1,498
                    
                    
                    $
                    0.18
                    
                    
                    $
                    0.27
 
 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, 2006.
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-23
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 On
              June 21, 2006, the Company granted 50,000 stock options to certain
              employees of
              the Company.  The options have an exercise price of $0.15 and expire
              on June 21, 2011.  These options 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 vest quarterly over a six-quarter period.
              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.  Approximately 450,000 of these
              performance-based options have vested as at December 31, 2006.
 
 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, 2006.
 
 A
              summary of the status of the Company’s outstanding options at December 31, 2006
              is as follows:
  **Exercise
                          Prices**
                      **Number
                          of Options Outstanding****(in
                          thousands)**
                      **Remaining
                          Contractual Life in years**
                      **Number
                          of Options Exercisable**
                        **(in
                          thousands)**$   0.15
                      550
                      4.6
                      321$   0.16
                      900
                      4.0
                      850$   0.17
                      75
                      1.9
                      75$   0.22
                      695
                      3.1
                      5812,220
                      
                      1,827
  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:
 **2006**
                    **2005**
                    **2004**Dividend
                        yield
                    -
                    -
                    -Risk
                        free interest rate
                    4.21%
                    3.86%
                    -Volatility
                    87.27%
                    86.66%
                    -Expected
                        term, in years
                    5
                    4.07
                    -
 
 The
              Company records a compensation expense for stock options granted to
              employees
              and directors based on the fair value method of accounting.  For the
              year ended December 31, 2006, the employee stock option expense was
              $137,000
              (2005 - $105,000, 2004 - $27,000).  The weighted average grant date
              fair values of the options issued during the year was $0.11 (2005 -
              $0.16, 2004
              - $nil)
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-24
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 
 **14.**
                    **OTHER
                        OPTIONS**
 
 During
              the year ended December 31, 2005, the Company issued 747,000 compensation
              options with a fair value of $193,000 relating to the issuance of Series
              I
              secured subordinated notes (See Note 8 (b)).  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 8 (d)).  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 the December private
              equity
              placement (See Note 10 (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.
 
 
 **15.**
                    **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, 2006, the Company incurred foreign exchange losses in
              the amount of
              $8,000 (2005 - $11,000, 2004 - $24,000).
  **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
              2006, three customers accounted for 34 percent, 18 percent and 12 percent,
              respectively, (2005 - two customers accounted for 31 percent and 29
              percent,
              respectively, 2004 - two customers accounted for 32 percent and 15
              percent,
              respectively) of total revenues from continuing operations.  At
              December 31, 2006, one customer accounted for 64 percent of total accounts
              receivable from continuing operations.  At December 31, 2005, there
              were three customers that accounted for 27 percent, 24 percent and
              21 percent,
              respectively, of total accounts receivable from continuing
              operations.
 
 **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 G, H, I and J notes as it is not practical
              to
              determine the fair value of the notes as at December 31, 2006, considering
              that
              they are not publicly traded.
 
 
 
 **Northcore
                    Technologies Inc.  2006 Annual Report**F-25
 
 **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
 
 **16.           COMMITMENTS
              AND CONTINGENCIES**
  (a)
                    Minimum
                        payments under operating leases during the next five years
                        and thereafter
                        are as follows:
  **Year**
                      
                      **Amount**
                        (in
                          thousands)2007
                      
                      $
                      1782008
                      
                      
                      1602009
                      
                      
                      1282010
                      
                      
                      -2011
                      
                      
                      -
  (b)
                    The
                        Company has entered into compensation arrangements with certain
                        of its
                        employees.  In the event of involuntary termination, the Company
                        may be liable for potential payments totaling $127,000 to
                        these
                        employees.
  (c)
                    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
                        US $100,000
                        annually up to a cumulative maximum of US
                        $5,000,000.
  
 **17.         CHANGES
              IN NON-CASH OPERATING WORKING CAPITAL**
 
 The
              following table sets forth the changes in non-cash operating working
              capital
              items resulting from the inflow (outflow) of cash in the year.
 **2006**
                      
                      
                      **2005**
                      
                      
                      **2004**(in
                          thousands)Accounts
                          receivable
                      
                      $
                      130
                      
                      
                      $
                      250
                      
                      
                      $
                      178Deposits
                          and prepaid expenses
                      
                      
                      52
                      
                      
                      
                      70
                      
                      
                      
                      (83
                      )Accounts
                          payable
                      
                      
                      (320
                      )
                      
                      
                      380
                      
                      
                      
                      48Accrued
                          liabilities
                      
                      
                      211
                      
                      
                      
                      112
                      
                      
                      
                      415Deferred
                          revenue
                      
                      
                      (23
                      )
                      
                      
                      15
                      
                      
                      
                      39$
                      50
                      
                      
                      $
                      827
                      
                      
                      $
                      597
  The
              following table summarizes the non-cash financing activities of the
              Company.
 **2006**
                    
                    
                    **2005**
                    
                    
                    **2004**(in
                        thousands)Issuance
                        of common shares in settlement of interest payments (Note
                        10(d))
                    
                    $
                    84
                    
                    
                    $
                    -
                    
                    
                    $
                    -Issuance
                        of common shares in settlement of accounts payable (Note
                        10(c))
                    
                    
                    -
                    
                    
                    
                    24
                    
                    
                    
                    118Issuance
                        of common shares in return for prepaid services (Note
                        10(c))
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    82Reduction
                        in debt from conversion of secured subordinated notes (Note
                        8(k))
                    
                    
                    (447
                    )
                    
                    
                    (226
                    )
                    
                    
                    (830
                    )Reduction
                        in conversion feature from conversion of secured subordinated
                        notes (Note
                        8(k))
                    
                    
                    (845
                    )
                    
                    
                    (146
                    )
                    
                    
                    (550
                    )Issuance
                        of compensation options relating to issuance of secured subordinated
                        notes
                        (Note 14)
                    
                    
                    -
                    
                    
                    
                    (193
                    )
                    
                    
                    (59
                    )Issuance
                        of compensation options relating to equity private placement
                        (Note
                        14)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19
 **Northcore
                      Technologies Inc.  2006 Annual Report**F-26
  **Notes
                    to the Consolidated Financial Statements**
 **Years
                    ended December 31, 2006, 2005 and 2004**
 **(in
                      Canadian dollars)**
 **18.**
                    **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.
 
 
 **19.       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, and was reflected on the consolidated balance sheets
              as an
              acquired agreement.  This acquired agreement was fully amortized as of
              December 2004.
 
 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**
                      
                      **2006**
                      
                      
                      **2005**
                      
                      
                      **2004**(in
                          thousands)**Consolidated
                          Statements of Operations**Operating
                          revenue
                      
                      $
                      72
                      
                      
                      $
                      9
                      
                      
                      $
                      -Operating
                          expenses
                      
                      
                      (3
                      )
                      
                      
                      (1
                      )
                      
                      
                      -Net
                          income
                      
                      $
                      69
                      
                      
                      $
                      8
                      
                      
                      $
                      -**Consolidated
                          Balance Sheets**Current
                          assets
                      
                      $
                      15
                      
                      
                      $
                      35
                      
                      
                      $
                      -Current
                          liabilities
                      
                      
                      (35
                      )
                      
                      
                      (27
                      )
                      
                      
                      -Net
                          investment
                      
                      $
                      (20
                      )
                      
                      $
                      8
                      
                      
                      $
                      -**Consolidated
                          Statements of Cash Flows**Operating
                          activities
                      
                      $
                      77
                      
                      
                      $
                      35
                      
                      
                      $
                      -Financing
                          activities
                      
                      
                      (97
                      )
                      
                      
                      -
                      
                      
                      
                      -Net
                          cash (outflow) inflow
                      
                      $
                      (20
                      )
                      
                      $
                      35
                      
                      
                      $
                      -
  **Northcore
                    Technologies Inc.  2006 Annual Report**F-27
  **Notes
                  to the Consolidated Financial Statements**
 **Years
                  ended December 31, 2006, 2005 and 2004**
 **(in
                    Canadian dollars)**
  **20.         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****2006**
            
            
            **2005**(in
                thousands)Cash
                and marketable securities
            
            $
            475
            
            
            $
            73Accounts
                receivable
            
            
            154
            
            
            
            284Deposits
                and prepaid expense
            
            
            63
            
            
            
            115Current
                assets from discontinued operations
            
            
            -
            
            
            
            1,114Capital
                assets
            
            
            80
            
            
            
            45Deferred
                charges
            
            
            110
            
            
            
            460Long
                term assets from discontinued operations
            
            
            -
            
            
            
            56Accounts
                payable and accrued liabilities
            
            
            (1,075
            )
            
            
            (1,285
            )Due
                to related parties
            
            
            -
            
            
            
            (137
            )Deferred
                revenue
            
            
            (68
            )
            
            
            (92
            )Current
                portion of secured subordinated notes
            
            
            (1,450
            )
            
            
            (367
            )Current
                liabilities from discontinued operations
            
            
            -
            
            
            
            (894
            )Secured
                subordinated notes
            
            
            (747
            )
            
            
            (2,401
            )Non-controlling
                interest
            
            
            -
            
            
            
            (3
            )Shareholders’
                deficiency
            
            $
            2,458
            
            
            $
            3,032






**Consolidated
                Statements of Operations****2006**
              
              
              **2005**
              
              
              **2004**(in
                  thousands, except per share amounts)Net
                  loss for the year as reported under Canadian GAAP
              
              $
              (648
              )
              
              $
              (3,501
              )
              
              $
              (5,104
              )Adjustments:Accretion
                  of interest on secured subordinated notes (Note 20 (d))
              
              
              454
              
              
              
              405
              
              
              
              266Amortization
                  of deferred charges relating to secured subordinated notes under
                  Canadian
                  GAAP (Note 20 (d))
              
              
              62
              
              
              
              63
              
              
              
              32Amortization
                  of deferred charges relating to secured subordinated notes under
                  U.S. GAAP
                  (Note 20 (d))
              
              
              (350
              )
              
              
              (148
              )
              
              
              (81
              )Amortization
                  of beneficial conversion feature (Note 20 (d))
              
              
              (698
              )
              
              
              (117
              )
              
              
              (126
              )(Income)
                  loss from discontinued operations (Note 4)
              
              
              (2,122
              )
              
              
              8
              
              
              
              1,505Net
                  loss from continuing operations for the year as reported under
                  U.S.
                  GAAP
              
              $
              (3,302
              )
              
              $
              (3,290
              )
              
              $
              (3,508
              )Income
                  (loss) from discontinued operations (Note 4)
              
              
              2,122
              
              
              
              (8
              )
              
              
              (1,505
              )Net
                  loss for the year as reported under U.S. GAAP
              
              
              (1,180
              )
              
              
              (3,298
              )
              
              
              (5,013
              )Other
                  comprehensive income (loss) (Note 20 (b))
              
              
              (90
              )
              
              
              (22
              )
              
              
              6Comprehensive
                  loss as reported under U.S. GAAP
              
              $
              (1,270
              )
              
              $
              (3,320
              )
              
              $
              (5,007
              )Basic
                  and diluted loss per share from continuing operations
              
              $
              (0.04
              )
              
              $
              (0.05
              )
              
              $
              (0.08
              )Basic
                  and diluted net loss per share
              
              $
              (0.01
              )
              
              $
              (0.05
              )
              
              $
              (0.08
              )
 **Northcore
              Technologies Inc.  2006 Annual Report**F-28
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(in
              Canadian dollars)**
  **(b)**
                **Comprehensive
                    Income**
 
 Financial
          Accounting Standards Board Statement of Financial Accounting Standards
          No. 130,
          "Reporting Comprehensive Income," requires disclosure of comprehensive
          income,
          which includes reported net earnings adjusted for other comprehensive
          income.  Comprehensive income is defined as the change in net assets
          of a business enterprise during a period from transactions and other events
          and
          circumstances from non-owner sources.
 
 Under
          Canadian GAAP, gains and losses from foreign exchange translations of
          subsidiaries classified as self-sustaining are included in the foreign
          cumulative translation account component of shareholders’
deficiency.  Under U.S. GAAP, these gains and losses are included as a
          component of comprehensive income (loss).
 
 **(c)**
                **Marketable
                    Securities**
 
 U.S.
          GAAP requires that the Company disclose marketable securities into one
          of three
          categories: held to maturity; available for sale; or trading.  As at
          December 31, 2006 and 2005, the marketable securities held were classified
          as
          follows:
 **2006**
                
                
                **2005**(in
                    thousands)Available
                    for sale
                
                $
                -
                
                
                $
                13
 
 **(d)**
                **Financial
                    Instruments with Liability and Equity
                    Elements**
 
 Under
          Canadian GAAP, the secured subordinated notes (See Note 8) are recorded
          based
          upon the relative fair values of the liability and equity components of
          the
          instruments.  The liability component is accreted to the face value of
          the subordinated notes over the term to maturity until the underlying notes
          are
          converted into common shares.  Under U.S. GAAP, upon issuance, the
          secured subordinated notes would have been recorded as a liability and
          reclassified to equity only upon conversion.  Accordingly, the
          interest accretion of $454,000 (2005 - $405,000, 2004 - $266,000) 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 financing costs associated with the liability
          component of the notes are deferred and amortized over the term of the
          underlying debt (See Note 6).  The financing costs associated with the
          equity component of the notes are charged to shareholders’
deficiency.  Under U.S. GAAP, all of the financing costs are deferred
          and amortized over the term of the underlying debt.  As a result, the
          2006 amortization expense under U.S GAAP is $128,000 (2005 - $125,000,
          2004 -
          $58,000) compared to an amortization expense of $62,000 (2005 - $63,000,
          2004 -
          $32,000) 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 $222,000 (2005 - $23,000, 2004 - $23,000),
          representing the unamortized financing charges associated with the conversion
          of
          the Series G and I notes (2005 - Series H notes, 2004 - Series F notes),
          is
          expensed.  The unamortized financing charges under Canadian GAAP, in
          the amount of $53,000 (2005 - $12,000, 2004 - $13,000), were allocated
          to
          contributed surplus upon the conversion of the Series G and I notes (2005
          -
          Series H notes, 2004 - Series F notes).
  **Northcore
              Technologies Inc.  2006 Annual Report**F-29
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(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 $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.  In 2004, the Company recognized
          beneficial conversion features of $20,000, $90,000 and $49,000 relating
          to
          Series F subordinated notes, Series G subordinated notes and Series H
          subordinated notes, respectively.  An interest expense of $698,000
          (2005 - $117,000, 2004 - $126,000) 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.
 
 **(e)**
                **Investment
                    in Jointly Controlled
                    Company**
 
 Canadian
          GAAP requires the proportionate consolidation of investments in joint
          ventures.  Proportionate consolidation is 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 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.
 
 **(f)**
                **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, 2006, includes an allowance
          for
          doubtful accounts in the amount of $nil (2005 - $59,000).
 
 U.S.
          GAAP requires the disclosure of accrued liabilities that exceed five percent
          of
          current liabilities.  Included in accrued liabilities at December 31,
          2006 are accrued interest payable of $574,000 (2005 - $363,000), accrued
          vacation pay of $nil (2005 - $293,000), and accrued audit fees of $95,000
          (2005
          - $140,000).
 
 U.S.
          GAAP requires the disclosure of non-cash interest components incurred during
          the
          year.  In 2006, the Company incurred $698,000 (2005 - $117,000, 2004 -
          $126,000) in non-cash interest expense associated with secured subordinated
          notes.
 
 Under
          U.S. GAAP, EITF 01-09 requires, in certain circumstances, that the warrants
          issued to customers be recorded as a reduction of
          revenue.  Accordingly, in 2006, depreciation and amortization and
          revenue were reduced by $nil (2005 - $nil, 2004 - $150,000) under U.S.
          GAAP.  During 2005, comparable guidance was issued in Canada, which is
          effective in 2006.
 
 **(g)**
                **Impact of New Accounting
                    Pronouncements**
  In
          December 2004, the FASB issued SFAS No. 123(R), "Share-Based
          Payment".  SFAS No. 123(R) requires employee stock options and
          rights to purchase shares under stock participation plans to be accounted
          for
          under the fair value method, and eliminates the ability to account for
          these
          instruments under the intrinsic value method prescribed by APB Opinion
          No. 25,
          as allowed under the original provisions of SFAS No. 123.  SFAS No.
          123(R) requires the use of an option pricing model for estimating fair
          value,
          which is amortized to expense over the service periods.  The
          requirements of SFAS No. 123(R) are effective for the first fiscal year
          beginning after June 15, 2005. SFAS No. 123(R) allows for either prospective
          recognition of compensation expense or retrospective recognition, which
          may be
          back to the original issuance of SFAS No. 123.  The above standard did
          not have a significant impact on the financial position, results of operations
          or cash flows for the year ended December 31, 2006.
 
  **Northcore
              Technologies Inc.  2006 Annual Report**F-30
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(in
              Canadian dollars)**
  In
          June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
          in
          Income Taxes, an Interpretation of SFAS 109.  This interpretation
          prescribes the measurement and recognition criteria of a tax position taken
          or
          expected to be taken in a tax return.  This interpretation is
          effective for the Company beginning January 1, 2007.  The Company is
          currently assessing the impact of this standard.
 
 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.
 
 In
          2006 the Company adopted Staff Accounting Bulleting No. 108, "Considering
          the
          Effects of Prior Year Misstatements when Quantifying Misstatements in Current
          Year Financial Statements" ("SAB 108").  SAB 108 clarifies the way that a
          company should evaluate identified unadjusted errors for materiality.  SAB
          108 requires that the effect of misstatements that were not corrected at
          the end
          of the prior year be considered in quantifying misstatements in the current
          year
          financial statements.  Two techniques were identified as being used by
          companies in practice to accumulate and quantify misstatements - the "rollover"
          approach and the "iron curtain" approach.  The above standard did not have
          a significant impact on the financial position, results of operations,
          or cash
          flows for the year ended December 31, 2006.
 
 
 **21.**
                **SEGMENTED
                    INFORMATION**
 
 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 3rd party
          customer.
 
 The
          Company operates in the following reportable geographic segments: North
          America
          and Ireland and the United Kingdom.   Information about the
          Company’s geographical net revenues and assets is set forth below:
 **Long
                    Term Assets by**
                
                **2006**
                
                
                **2005****Geographic
                    Regions:**
                
                **Capital
                    Assets**
                
                
                **Other
                    Assets**
                
                
                **Capital
                    Assets**
                
                
                **Other
                    Assets****(Restated
                    - note 4)**(in
                    thousands)North
                    America
                
                $
                80
                
                
                $
                41
                
                
                $
                42
                
                
                $
                156Ireland
                    and U.K.
                
                
                -
                
                
                
                -
                
                
                
                3
                
                
                
                -Assets
                    from discontinued operations (Note 4)
                
                
                -
                
                
                
                -
                
                
                
                56
                
                
                
                -$
                80
                
                
                $
                41
                
                
                $
                101
                
                
                $
                156
 
 
 
 **Net
                    Revenue by Geographic Regions:**
                
                **2006**
                
                
                **2005**
                
                
                **2004**(in
                    thousands)North
                    America
                
                $
                661
                
                
                $
                657
                
                
                $
                797Ireland
                    and U.K.
                
                
                412
                
                
                
                628
                
                
                
                681Revenue
                    from discontinued operations (Note 4)
                
                
                2,399
                
                
                
                4,490
                
                
                
                3,452$
                3,472
                
                
                $
                5,775
                
                
                $
                4,930
 
  **Northcore
              Technologies Inc.  2006 Annual Report**F-31
 **Notes
            to the Consolidated Financial Statements**
 **Years
            ended December 31, 2006, 2005 and 2004**
 **(in
              Canadian dollars)**
  
 **22.         
          SUBSEQUENT EVENT**
 
 The
          Series G secured subordinated notes with a face amount of approximately
          $1.6
          million matured on June 15, 2007.  In connection with the refinancing
          of the Series G notes, on June 19, 2007 the Company announced the completion
          of
          the private placement issuance of the new Series K secured subordinated
          notes
          with a face amount of approximately $1.36 million, to existing holders
          of $1.36
          million of the Series G secured subordinated notes.
 
 In
          addition, the Company also completed a private placement issuance of
          approximately 2.99 million common shares, at $0.15 per share common share,
          to
          holders of $1.36 million of the Series G secured subordinated notes, in
          payment
          of the related accrued interest on $1.36 million of the Series G secured
          subordinated notes of $449,000.  This private placement received
          approval from the Company’s board of directors and conditional approval from the
          TSX, and closed by June 19, 2007.
 
 The
          Series K notes were issued for a two year term with 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.
          For
          the purposes of the interest calculation the share price shall be the greater
          of
          $0.15 and the volume weighted average trading price of the common shares
          over
          the 20 day trading period ending at the close of business on the day prior
          to
          the date on which the interest payment is due, reduced by the maximum percentage
          discount permitted by the Toronto Stock Exchange (“TSX”). 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 private placement received approval from the Company’s board of
          directors and conditional approval of the TSX, and closed by June 19,
          2007.
 
 The
          Company is currently negotiating with the remaining Series G debt holder
          to
          undertake a similar transaction.  As a result, the Company continues
          to record the remaining $240,000 of the Series G secured subordinated notes
          and
          related accrued interest of approximately $79,000 as current
          liabilities.
   **Northcore
              Technologies Inc.  2006 Annual Report**F-32